You Can’t Predict The Future
While this may seem obvious, Wall Street and the financial media would like us to believe otherwise. We are constantly bombarded by brokers, advisors, and the financial media attempting to convince us that they have a crystal ball for determining market direction.
“Wall Street” wants us to pay attention to their economists, analysts, earnings estimates, sales projections, etc. Yet they have no proven track record of using this information to “beat the market.” In fact, major studies by Morningstar/Ibbotson show that the vast majority of Wall Street Mutual Fund managers don’t beat the market. And the ones that do often don’t repeat.
While the financial media often portrays itself as being a bastion of intellect and reason, they have a major conflict of interest. Journalists are taught to lead with bad news, as this appeals to our voyeuristic curiosity. Knowing we all respond to the car wreck across the street, the girl abducted from her home, the plane crash, etc., financial journalists version of this technique is too often interview the most outrageous personalities with the boldest predictions. Unfortunately the accuracy of these predictions are rarely confirmed. Advertisers want eyeballs, it’s better for their bottom line. So while they might like to offer great long-term investment advice, this major conflict of interest often gets in the way. Good solid advice has little chance of winning out in this environment. For these reason you must limit the influence the media has on your investment strategy. When it comes to investing, The media is not your friend.
Control Risk First
For successful investors, this is their mantra. Understanding the risks you face is essential as numerous unpredictable forces create risk for investors. These forces include inflation, deflation, interest rate changes, normal business risk, political risk and market risk. While we know there is no way to eliminate risk, we believe investing in a broadly diversified portfolio gives you the best opportunity to minimize the risk inherent in any one economy.
Markets Work
Markets reflect the vast information available to the public, including investor sentiment and their expectations. This constant competition of information drives prices; therefore no investor can expect greater returns without bearing greater risk.
Markets are the most efficient mechanism currently available to incorporate all known information about a security. Bottom line, they work. Therefore we believe stock picking and market timing add little value. Academic studies indicate the structure of your portfolio is the primary determinant of return. According to the landmark study of researchers Fama, French and Davis, the three risk factors that explain 90% of returns are markets, size and value.
Diversification is Essential
We reduce your risk by investing in thousands of securities across six major asset classes. They are Cash, Bonds, Domestic Equities, International Equities, Real Estate (REITS), Gold/Commodities. This gives you the peace of mind of knowing that all your eggs aren’t in one basket. By having a diversified portfolio, you will be able to capture broad market performance while reducing the risk and volatility of a concentrated portfolio.
Keep your Balance
Even though we have the safety of maximum diversification we take it one step further to reduce your risk. Over time, some of your investments may move above or below target allocations. By rebalancing, you’ll ensure that your portfolio does not overemphasize one or more asset categories, and you’ll return your portfolio to the appropriate level of risk.
Our rebalancing process reduces your exposure in asset classes if they have increased significantly above target allocations, and increases your exposure in asset classes which have gone down in value– thereby providing a disciplined approach to “selling high, buying low.”