There are differing approaches to investment management such as evidence-based asset class investing, passive index investing, and the conventional 'speculative' approach to investing. We believe that evidence-based asset class investing provides our clients with the highest probability for success.

Evidence-based Asset Class Investing

Evidence-based investing is a different and unique approach which provides our clients with the best odds for success. Insights of evidence-based investing comes from Noble Prize winning researchers Eugene Fama and Kenneth French among others. Their research has shown that we can capture higher returns through building portfolios with value stocks. They also found we get higher returns with small-capitalization stocks.

There are no free-lunches in investing. Capturing higher returns is only achievable for those investors committed to the strategy for the long-term.

An evidence-based investment strategy is applied to our clients’ portfolios in conjunction with other financial planning and tax minimization services which helps to add value to the client at each step. Broad diversification and patient, flexible trading leads to lower turnover and costs. Evidence-based investing requires no obligation to replicate a particular commercial index, therefore we seek to maintain consistent risk exposures to small and value factors and exclude companies or sectors that may alter or change that risk exposure. Companies or sectors that may be excluded include:

• Investment Funds (publically traded closed-end mutual funds)

• Recent IPOs

• Share classes with foreign restrictions (i.e. Chinese A shares)

• Companies in extreme financial distress or near bankruptcy

• Merger or acquisition targets

• Highly illiquid companies

Simply put, an evidence-based approach aims to own all of the meaningful stocks in the world, reduce the weighting of some stocks (large, growth, unprofitable), and increase the weightings of others (small, value, profitable). 

Passive Index Investing

A passive approach does not try to beat the market, but aims to capture the market’s returns by replicating the performance of a commercial index – i.e. S&P500. Passive managers seek to maximize diversification while focusing on keeping costs low in order to achieve greater potential returns. 

An index is constructed from a set of rules. The rules define the criteria for selecting the securities to include in the index, how to weight the securities, and how to maintain the index. The construction of an index, and index investing requires tradeoffs which include:

•    Higher costs due to mandatory index reconstitution 
•    Security migration leading to inconsistent exposure to sought-after risk characteristics

Conventional “Speculative” Approach to Investment Management 

Active managers try to predict the future as they believe they have a proven system for picking stocks. They frequently act on impulse, place bets on tips and hunches, and are swayed by media. In practice, typically you observe managers trying to beat the markets through buying what has performed well recently, until it no longer performs that way, at which point the manager switches to their new “best idea”. This process is repeated indefinitely. 

Strong performance among a few stocks accounts for much of the market’s return each year. There is no evidence that managers can identify these stocks in advance—and attempting to pick them may result in missed opportunity. 

What we have learned and what we know is that many of the great advancements in finance and markets have come from Academia – not from the talking heads on TV. Together we know more than we do alone, as markets instantly integrate the combined knowledge of all market participants, eliminating the advantage or “proven stock picking” edge that any one individual or advisor may claim to possess. We know that the Conventional "speculative" approach has low odds of success on average it generates higher expenses, trading/research costs, and risks to the investor.