Investment Philosophy

Investment Philosophy: Fact vs. Fiction

The foundation of our investment philosophy is simple and irrefutable: intelligent, taxwise diversification reduces your risk and containing cost lets more of your money grow for you. Many variables can impact portfolio asset value: (war, inflation, interest rates, taxes, political and fiscal policies, etc.). Variables that drive returns in one period may not in another; the complexity of predicting asset prices has proven an unrewarding and risky exercise.  The chart below illustrates that actively managed funds who try to outwit the market have been abject failures.

The fact that is constant in unbiased studies of asset returns is that low fees enable higher returns and allows your value to more readily compound. It’s common sense: if more money stays in your account, more of your money is working for you and your goals.  These studies have been performed over different time periods, different geographies, and different asset classes with remarkably consistent results (see Investment Philosophy: The Why of Our Index Approach).

Our use of low-cost funds and personalized planning is a proven strategy to put the odds of compounding value strongly in your favor. Standard industry models amongst other RIAs, hybrids, and broker/dealers, impose a confusing array of fee structures, expense ratios, loads, and commissions. Insist on transparency and take care to understand your “all-in” cost. In the investment equation, cost matters. The all-in fees (expense ratios, trading, and taxes) of active mutual funds are a large reason they consistently underperform.

An artful lack of fee transparency has prevailed in the industry. It’s gotten better in the last 3-4 years. Still, compensation incentives very often conflict with the key purpose of the client/adviser relationship: to compound your value. If your adviser doesn’t engage you in a candid and clear look at fees, take your money elsewhere. True disclosure of all fees that go into managing your account should be a starting point. For the unsuspecting, ignorance can be a very expensive bliss.

High fees drive incentives and create conflict. Do you get more value when you pay more? In the “active vs. passive” debate, expert pitchmen sell the dubious virtues of “index beating funds” to justify high fees (expense ratios) for skill in fund selection. The pitch variations are many; a common theme touts some kind of proprietary advantage. Think about that: an advantage over the rest of the highly educated, highly compensated, highly competitive, institutional dominated money management industry? We prefer the facts: in almost any given year 70% of active funds fail to beat their index; with time, this increases to 80%-90%. The skill is in the pitch; not in the “index beating funds” selection.

The good news is that participation in this expensive game of fiction is optional. CVA is focused on keeping your money on the winning side of the “active vs. passive” debate.

Investing right is important. It’s of equal importance to plan right and minimize the specific risks to your goals. Years of sound saving and investment can be lost or diluted to poor or ill-conceived planning.