There are five key things to understand about our general approach to building your portfolio:
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- We use low-cost, evidence-based funds to implement the stock allocation. We are big believers that costs matter and that investors should avoid using actively managed funds where an individual person or management team is attempting to outperform the market. Instead, we use low-cost funds that try to capture the dimensions of return identified by decades' worth of academic research. These funds are rules based and not reliant on an individual person or management team's beliefs about the overall market or individual stocks.
- We use either low-cost bond funds or individual bonds to implement the fixed income allocation. Whether you are best served by owning a fixed income mutual fund (or funds) or a customized individual bond portfolio, we believe the proper role of fixed income within a portfolio is to reduce overall portfolio risk or to provide an ongoing, stable income source (or some combination of both). To accomplish this vital role, our approach to fixed income investing is entirely evidence-based regardless of the vehicles used. We do not believe in selecting mispriced securities, timing the market, guessing either the direction of interest rates or the future shape of the yield curve, or making similar attempts to beat the market.
- We may use alternative strategies for a modest portion of the overall allocation. Academic evidence has uncovered the benefits that some alternative strategies can add by either enhancing portfolio diversification or improving expected return. The alternative strategies we use are typically held in mutual fund form. We also do recommend modest allocations since these strategies have higher expenses and are typically less tax efficient.
- We use strategic asset location to improve after-tax returns. We will look to locate your assets in an optimal manner. Your specific asset location recommendation is on the following page.
- We look for other ways to improve the tax efficiency of your portfolio through the use of core funds, tax-managed funds and municipal bonds when appropriate. For a portion of the portfolio we like to use core funds that hold stocks across all size and valuation ranges but have higher weights in small-cap and value stocks when compared to the overall market. In addition, we may use tax-managed funds and municipal bonds in taxable accounts. Tax-managed funds are mutual funds that explicitly look to harvest capital losses and defer gains to improve tax efficiency.
