One of the benefits of an investment philosophy is that it can provide your clients with more consistent experiences and help them feel more confident in your advice. But if your philosophy is based on forecasting which stock or market sector will be “hot” then those client experiences might not be very consistent.

When building a portfolio we want to maximize the returns the capital markets offer while lowering the ups and downs along the way and we can lean on the work of academic legends to help with our process.

To oversimplify the work of Eugene Fama, a Nobel Prize winner and one of the “fathers of modern finance” from the University of Chicago, the efficient markets hypothesis essentially states that the markets are pretty efficient at setting prices of securities and investors should act as such, because attempting to outguess the market is darn near impossible.

In fact, two of the most impactful inventions in the mutual fund landscape were the index fund in the early 1970s and the creation of the first asset class fund in 1981. Both index funds and asset class funds are built on the academic principles of keeping costs low and being diversified enough to have the potential of delivering the return of the index or the market asset class.


My investment philosophy doesn’t depend upon what’s going on with the markets or the economy today, or next month or next year. Those are things I can’t control, and I’d rather focus on things I can control—like helping clients create a long-term plan to meet their most important goals. My philosophy is based on academic research and vetted theories.

First: Start with the entire global market and buy as many companies within reason of cost to get a diversified mix to help manage non-systematic risk. With more than 20,000 publicly traded companies in the U.S., international developed countries and emerging markets, it’s not reasonable to own every single one, but it is possible to own close to 10,000 of them through asset class mutual funds.

Second: Emphasize the companies that carry risks that are generally compensated through higher returns. Academic research identifies at least three categories of such risk: small stocks, value stocks, and higher expected profitability stocks. Now these companies are already held in the 10,000 referenced above, but based on normal market weights they are relatively small positions. This step consciously makes the decision to own a higher-than-market weight in these riskier asset classes in order to increase the expected long term rate of return. Because these asset classes are riskier, it's imperative to carefully consider a client's risk tolerance when deciding on allocations.

Third: Add short-term, high quality fixed income to help dial down the portfolio’s potential maximum drawdown to a level that the client is comfortable with.

Lastly: Rebalance the portfolio at least annually, keeping in mind the potential tax consequences.
And don’t forget that the resulting portfolio must match what the client needs in their long-term financial plan. Some additional planning decisions may be required to keep them in alignment.
So what is your investment philosophy based on? It just might be someone’s opinion, and we all have those.

Steve Atkinson is EVP and head of advisor relations at Loring Ward, a third-party asset management program (TAMP). His team is dedicated to helping the independent advisors who partner with Loring Ward to grow their businesses through ongoing support and coaching.

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