At Mote Wealth Management, we employ a disciplined approach to investing that is based on the principles of Nobel Prize winning research. We strive to help you maximize your investment returns, while minimizing the ups-and-downs of the market. All of our portfolios are managed on an individual basis suited to your unique goals and values.
The major tenets of our philosophy are portfolio construction, diversification, cost minimization, disciplined rebalancing, tax efficiency, and simplicity. These are the areas of investment management that investors have the most control over, yet often they are neglected in favor of chasing hot funds or trying to time the market.
Research has shown that over 90% of the variation in a long-term portfolio’s returns are due to it’s asset allocation1– or the mixture of possible investments. When building portfolios, we are careful to be sure that the right mix of investments are chosen. Like a well cooked meal, the balance of ingredients is essential in ensuring that no one ingredient is overpowering.
“Don’t put all of your eggs in one basket.” – Proverb
This proverb is certainly true of investments, but it is also important to be sure that you don’t put all of your eggs in similar baskets. Too often, investors feel like they are diversified just because they are holding multiple funds, but these funds may actually be holding the same underlying investments.2 We create diversified portfolios for our clients that include investments that behave differently from one another. The result is steadier investment performance with less risk.
Costs can be a silent killer when it comes to achieving the best investment returns possible. Certain financial products, such as variable annuities, can have fees higher than 3% annually just for holding an investment. Other high cost culprits tend to be actively managed funds. A fund is considered actively managed if it is employing managers who are attempting to achieve above average returns. Unfortunately for these active managers, Nobel Prize laureate Dr. William Sharpe has shown why on average active managers under perform the market equal to what they charge in fees.3 Because we use a passive strategy and aren’t compensated through the cost of the funds we suggest, we are able to provide the lowest cost funds to our clients.
Perhaps the single most difficult part of investing is staying the course when times get tough. Researchers like Nobel Prize laureate Dr. Daniel Kahneman have shown that when it comes to making financial decisions, the human brain is poorly wired.4 We have urges and tendencies that if acted upon, can be devastating to accomplishing our long-term financial goals. To remove this human element, we make our investment decisions based on the policies we establish with each client relative to their individual needs.
Rebalancing refers to selling some funds and buying others to get back to the desired portfolio construction. This is necessary because over time a diversified portfolio will see greater growth in some areas than others. The greatest benefit of disciplined rebalancing is that it forces us to “buy low and sell high”.5 This behavior is contrary to our normal desire to get rid of the funds that have done poorly and buy more of the funds that have done well.
Nobody wants to pay more taxes than necessary. Taxes are an important consideration at both the account level and the fund level. Fund level tax efficiency is an often overlooked element to investing, and failing to understand the intricacies of different funds and how they operate can have a significant impact on overall investment performance. We help our clients select the best funds for their goals, in a tax efficient manner.
“Everything should be made as simple as possible, but not simpler.”
– Albert Einstein
We do everything we can to serve our clients in accordance to the wisdom of Albert Einstein. There is a certain level of sophistication that is required to take full advantage of the advances in investment research, but we will never add sophistication just for sophistication’s sake.
1 Brinson, G. P., Hood, L. R., & Beebower, G. L. (1986). Determinants of portfolio performance. Financial Analysts Journal, 39-44.
2 Baltussen, Guido, and Thierry Post. Irrational diversification. Working Paper, http://ssrn. com/abstract= 625942, 2007.
3 Sharpe, William F. “The arithmetic of active management.” Financial Analysts Journal (1991): 7-9.
4 Kahneman, Daniel, and Amos Tversky. “Prospect theory: An analysis of decision under risk.” Econometrica: Journal of the Econometric Society (1979): 263-291.
5 Buetow Jr, Gerald W., et al. “The benefits of rebalancing.” The Journal of Portfolio Management 28.2 (2002): 23-32.
Fama, Eugene F., and Kenneth R. French. “Common risk factors in the returns on stocks and bonds.” Journal of financial economics 33.1 (1993): 3-56.
The Callan Periodic Table of Investments is a resource that can help illustrate how much variability exists between different investments and how valuable proper diversification can be.
The Morningstar Tax Cost Ratio Methodology is a resource that helps explain the effects taxes have on fund returns similar to an expense ratio.