Decluttering: Evidence Based Versus Active Management

Cut through all the clutter and you’ll find there are really only two ways to participate in the markets.

Evidence-based investing is driven first and foremost by your personal goals. It’s grounded in more than a half-century of academic inquiry on how the markets deliver returns. Different “asset classes” (broad categories of investments that share similar characteristics) have delivered different amounts of risk and reward over time. By custom-blending a mixed balance of asset classes within your portfolio, we seek to expose you to the right level of expected risk and reward for you. We also help you stay true to that mix — while controlling the costs involved— so you can earn and keep your wealth on your terms

Predicated on the “Efficient Markets Hypothesis” pioneered by a renowned University of Chicago economist in the mid-1960’s, this approach asserts that current securities prices reflect all available information and expectations. This framework has several implications for investors. If current market prices offer the best available estimate of real value, stock mispricing should be considered a rare condition that cannot be systematically exploited through fundamental research or market timing. Moreover, only unanticipated future events will trigger price changes, which is one reason for the apparent short-term “randomness” of returns. The hypothesis states that investors may be best served through passive, structured portfolios. An evidence-based investor looks to asset class diversification to manage uncertainty and position for long-term growth in the capital markets.

Active investing is reactionary, driven by attempts to forecast future winners and losers, and time your trades accordingly. The problems here are at least two-fold: First, your future is determined more by random fate than your personal goals. Plus, we’ve seen no evidence that anyone can consistently profit by forecasting the markets’ future, particularly after the costs involved in trying. Costs matter. Returns of a portfolio are directly affected by all cost associated with the design, implementation, trading and day to day operations of the investments used in a portfolio. William Sharpe states in his Nobel laureate winning paper “The Arithmetic of Active Management” that, “after cost, the return on the average actively managed account will be less than the return on the average passively managed account for any time period.”