PORTFOLIO MANAGEMENT
= RISK MANAGEMENT
We seek to maximize the odds of reaching your investment goals (without keeping you awake at night)
Our Investment Process in a Tiny Nutshell
Now
Goal
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1. Goal Estimation
We estimate the future dollar amount you will need to fund your goal, with current prices, inflation, and time as the primary factors for doing so.
2. Portfolio Construction
We construct a risk/return efficient portfolio by estimating the required return to fund your goal, analyzing your risk tolerance and ability, and investing in a custom made portfolio that meet your needs and reflect your values. In addition, we also ensure your assets are located in accounts that minimize taxation.
3. Management and Monitoring
We continually monitor and manage the portfolio, making tactical deviations from policy if market extremes or other external factors warrant it. For taxable investors, we also manage tax loss harvesting to minimize portfolio taxation.
Our Key Investment Principles
1. Risk is the probability of not meeting your stated goal
The only risk that matters is the risk of falling short of your goals. Large drawdowns and inflation are the primary factors that prevent this from happening, not the little short-term day-to-day price fluctuations.
2. The longer your time horizon, the less risky investing is
Although daily price movements cause discomfort, the longer you're invested the more those fluctuations smooth out, reducing drawdown risk. In addition, inflation erodes the value of your dollar over time so keeping your money in cash is detrimental to meeting your investment goals.
So paradoxically, investing aggressively over long-time horizons to meet your goals is the least risky action you can take.
3. It's extremely difficult for active managers to beat the market over the long-term
Money, prestige, and status attracts some of the brightest minds to Wall Street. However, studies show that over 85% of U.S. active managers have underperformed their benchmark over the past decade. Beating the market is a brutally competitive zero-sum game and higher relative fees don't help active management's cause.
4. It's extremely difficult to pick winning active managers
Even if you pick an active manager that's previously outperformed, given the complex, adaptive nature of markets and human nature, they are less likely to do so going forward. Outperformance attracts capital which makes it harder for a manager to exploit their inefficiency, entices competitors to copy their winning strategy, and brings about manager hubris. Add the additional layer of complexity of knowing when to "buy or sell" a manager and active management quickly becomes a difficult game to win.