THEORY

Efficient Markets Hypothesis

Eugene Fama, a leading American financial economist, is referred to as the “father of the efficient market theory.” His quantitative analysis of decades of market performance showed that stock prices tend to reflect a company’s underlying value—accurately and quickly. Therefore, it’s very difficult to outsmart the market.

Modern Portfolio Theory

Harry Markowitz, who went on to win the Nobel Prize in Economics in 1990, introduced modern portfolio theory, which forever changed the way people invest. His research illustrated that the most desirable investments strike an optimal balance between maximizing rewards and minimizing risks, a balance he called the “efficient frontier.”  Markowitz showed that to achieve that balance, you shouldn’t concentrate your investments in a few stocks you hope will be in favor but rather diversify across all types of stocks.

Optimize rewards by better assessing risks

A fundamental part of investing is that risk and reward are related. Diversification within and across asset classes reduces unnecessary risk. But we also identify those risks that appear to pay off over time. Academic research demonstrates a seemingly counter intuitive principle—that adding certain types of risk to a portfolio can maximize returns.

Fama-French Three Factor Model

Over time, certain asset classes tend to outperform others.

•    Factor 1: In general, stocks have delivered higher returns than bonds.

•    Factor 2: Across investing styles, value stocks have beaten growth stocks.

•    Factor 3: Across market capitalizations, small caps have outpaced large caps.

In fact, research from Eugene Fama and Kenneth French, leading American financial economists, shows that a weighting toward these three “riskier” asset classes can actually help maximize long-term returns.

PRACTICE

Engineer highly efficient portfolios

We do more than design our portfolios to be highly diversified. We engineer them to be highly efficient. We attempt to minimize returns lost to income taxes, transaction costs, and other management inefficiencies. This is how our Active Passive approach differs from traditional index investing or any other type of passive investing.

As a New York State Registered Investment Advisor we have a fiduciary responsibility to put your needs first, above all others.  We are dedicated to  low cost, fee transparent investment management solutions. Contact us today.