Investment Philosophy

Right Thinking

Investment Philosophy: Fact vs. Fiction

The foundation of our investment philosophy is simple and irrefutable: intelligent 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, political and fiscal policies, etc.). Variables that drive returns in one period may not drive returns in another. The complexity of predicting their impact on 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 fee structure and use of passive, low-cost funds 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. Cost matters. The all-in fees (expense ratios, trading, and taxes) of active mutual funds are a large reason they consistently underperform.  The hypothetical example below shows how a small percentage compounds against your money over time.

“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expense) delivered by the great majority of investment professionals. Seriously, costs matter.”

– Warren Buffet

An artful lack of fee transparency prevails in the industry. 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. The example shows a seemingly small 1% erodes substantial value over time. At CVA we take great pride in full and true disclosure of all fees that go into managing your account. 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 advisers sell the dubious virtues of “index beating funds” to justify high expense ratios and adviser fees for skill in fund selection. The pitch variations are many; the common theme touts some kind of proprietary advantage. Think about that one: 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 risks to your goals. Years of sound saving and investment can be lost or diluted if you haven’t planned well. 

 

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