How the Salsa is made
We like to think that the way we build better portfolios is like how salsa is made. It’s the interaction of the ingredients, in certain proportions that make the whole. Tomatoes are a key ingredient in traditional salsa. Trying to pick the best varietal of tomato in the best inside of the varietal may not lead to better tasting salsa. It will be more time-consuming and likely more costly. We base our philosophy on academic research, but we recognize that implementation with the right ingredients, recipe, and technique.
We seek to control what we can control with management fees, trading costs, and taxes. These can reduce the likelihood of our investors meeting their goals. With regard to investment factors that we cannot control, we expect to be rewarded over the long term. This does alter the thought that we don’t necessarily believe that there is one best recipe.
We are constantly on the lookout for investment strategists, recipe makers, that bring a new evidence-based or research-based answer. Sometimes combining different philosophies may bring about better results, especially in the area of reducing portfolio volatility, the up and down movement of your account balance.
We call this process Risk-Adjusted Return Enhanced™ (RARE™) investing. Our experience has taught us that most people react not so much to news of the market, but to seeing their account balances move up and down. It is the downside that often has people sell when they should be buying and buying when they should sell.
We see our job as clarifying goals, assessing and guidance on prudent risk-taking, targeted investor education, and behavioral coaching. We believe it is the upfront work in guiding to the appropriate portfolio that is key to behavioral coaching. Vanguard’s research quantifies that half of the value of an investment advisor comes from behavioral coaching.
We combine various evidence-based portfolio design structures. These all have in common the core principles of Nobel Prize-winning modern portfolio theory. Evidence shows that focusing on the mix of the investment picks rather than selecting picks hoping they will outperform is a more consistent approach.
The investment picks are based on how they best fulfill a role in the portfolio. We find benefits in diversifying from large companies to small, US, and international companies including government bonds. Depth of diversification the role in the portfolio rather than investment selection. Broad diversification helps to minimize the potential for not capturing the returns of stocks and bonds left out because they were not hot at the time.
Familiar with active and passive investing?
Passive investing sometimes called indexing focuses on investment selection rather than the investment recipe or the portfolio mix. It focuses primarily on keeping costs ultra-low. While in principle we believe in low-cost implementation, we believe in an active approach to investment recipe aka portfolio construction.
This is especially important when seeking to incorporate one’s personal values into investing. Introducing screening for particular values such as private prisons, women on boards, and carbon, some entities must do the research. This extra layer will increase costs over say just investing me into the largest 500 companies in the US, the S & P 500.
Our research has uncovered risk-reducing effects by adding certain values overlays such as social justice, climate change, etc. We call this Values Integrated Portfolio™ (VIP™) investing. This has led us to recommend a values-based choice even when that is not a stated goal of our clients as it simply may offer a smoother path to the goal.