Our Investment Philosophy

Before getting into investment mechanics, we want to be clear about one important point: Unlike some firms, we do not take ownership of any of your assets. Your assets remain in your name, in the custody of a third-party custodian.

Our Investment Process blends the academic work of both quantitative and behavioral Nobel Laureates. We strive to follow our process in a highly disciplined manner so that our clients can clearly understand what we do – and don’t – do. Over the years, we have refined our process to accommodate real-world limitations so that we can apply our process more effectively. We start with risk (or loss) and try to determine how much of a loss you can withstand. Then we mutually develop your customized allocation of asset classes so that you know the theoretical risk/return characteristics of your portfolio. We begin with a two-pronged measure of your Risk Profile.

Risk Tolerance – your emotional willingness to accept loss, which is developed using six different measurements.

Risk Capacity – your ability to prudently take risk based on your goals, time horizon, family situation and investment behavior.

Our next step is to develop a customized portfolio composed of 8 – 12 asset classes using our optimization software. Here are some of the key concepts involved in the process:

Asset Allocation – The Brinson – Beebower studies, first conducted in the 1980s and replicated by other researchers, uncovered the powerful force of allocation selection. Using attribution analysis, Brinson and Beebower measured such factors as market timing (predicting the direction of the market), security selection ("stock picking"), asset allocation and a few other factors. Their results were surprising. Essentially, they determined that 93.7% of the variability in the risk and returns of a portfolio could be explained by the asset allocation policy. In other words, it’s more critical to be in the "right asset class" than the "right investment." We use Modern Portfolio Theory to help us determine appropriate asset classes for each of our clients.

Modern Portfolio Theory – In 1952 Harry M. Markowitz published his ideas on portfolio design, after completing his studies at the University of Chicago and joining the Rand Corporation. His dissertation explained models for applying mathematical methods to the stock market. Later publication of his groundbreaking book on portfolio theory earned him the Von Neumann Prize in Operations Research Theory in 1989 and then a Nobel Prize in 1990. His body of work has become known as Modern Portfolio Theory (MPT). Here are the four basic premises of his work:

• Investors are inherently risk-averse. Investors will not accept risk except when the level of returns generated will fairly compensate for that risk.
• Markets are basically efficient. With advances in information technology and more sophisticated investors, the markets are likely to become even more efficient.
• Portfolio characteristics, not individual security selection, are the key to performance. The focus of attention should be shifted away from individual securities analysis to consideration of portfolios as a whole, predicated on explicit risk-return parameters and the identification and quantification of portfolio objectives.
• An optimal portfolio exists for any given level of risk. There is a maximum rate of return that should be achievable in the long run for any level of risk that one is willing to accept. Quantitative methods are used for measuring risk and diversification, making it possible to create efficient and theoretically optimal portfolios.

Behavioral Finance – A body of thought referred to as Behavioral Finance furthered Markowitz’s premise of "Risk Aversion." The work of Professors Kahnemann, Tversky, Thaler and Statmann advanced the concept of Risk Aversion into what is now known as "Loss Aversion." This concept meshes with MPT in that the potential short-term loss a portfolio is likely to experience can be precisely defined. This allows the individual investor to select that portfolio based on his own individual Risk Tolerance, which is defined as "the percentage of an investment portfolio that an investor is willing to risk to achieve a specific rate of return."

Your Optimal Portfolio – Finally, we develop your customized Investment Policy Statement that governs the actions we will take on your behalf. We want to minimize the surprises you might experience with your portfolio. We believe that the only way you will achieve your goals is by selecting a rational, disciplined course of action and sticking with it.

Rebalancing: The Secret Weapon – We create your allocation, but do not stop there. We use a discipline of conditional rebalancing. Over time, conditional rebalancing brings the portfolio back to the original percentages by selling a portion of asset classes that have appreciated and buying additional portions of asset classes that have declined in relative value. In this way we are following the old adage of "Buy Low and Sell High."

We rigorously apply this process with great discipline. Our objective is to help you eliminate emotionalism from your financial decision-making. We execute the trades necessary to keep your allocation consistent with your Investment Policy. This offers you peace of mind, knowing the agreed-upon process will be executed in your interest.