Based on proven academic research, our advice has helped hundreds of thousands of Americans grow their investments.
Nobel-Prize Winning Academic Research
Peer reviewed academic research offers a strong foundation on which to develop investment principles. Our tenets are primarily based on firmly established academic theories, backed by data and logic. We believe analysis of historical performance, over long periods of time and across geographies, lends useful insight when projecting future performance.
Passive, Long-Term Strategy
Under semi-strong efficient markets, the average retail investor cannot generate outsize returns (through security analysis, etc.) – take into account the value of one's time, trading costs and taxes, and you may be at a net loss. A passive, long-term index investment strategy is therefore optimal for most retail investors. Low-fee index funds perform better in the long run (Bogle, 2009).
Low-Cost ETF Investing
Investment fees significantly erode portfolio growth. In fact, fee level is the best predictor of fund performance (Morningstar, 2010). Passive low-fee exchange traded index funds (ETFs) tend to perform well in the long run due to relatively low expenses, tax efficiency, and minimal transaction costs at the portfolio level.
MPT-Based Asset Allocation Model
FutureAdvisor employs a hybrid model, combining several academic principles. Modern Portfolio Theory (MPT) heavily informs portfolio construction, as FutureAdvisor portfolios are created at the efficient frontier – optimized for the maximum expected return for a given level of market risk. Portfolio selection and personalization is determined by an investor's age, risk tolerance, and investment time horizon. Asset allocation is further influenced by the Fama-French Three Factor Model, which observes a persistence of relative higher returns at a given level of risk for both small capitalization stocks as compared to large capitalization stocks, and value stocks as compared to growth stocks.
Equities are an attractive asset class for investors with long time horizons – such as those saving for retirement. Historical analysis over time periods and across geographies demonstrates that equities typically provide persistent, attractive returns in most geographies. Historically, stocks have outperformed bonds over any holding period (Siegel, 2002). While equity markets are volatile, by enduring short term market declines, investors with long time horizons may enable capital growth for retirement.
Rebalancing maintains a portfolio's target allocations and risk exposure, correcting drift due to market movements. Rebalancing should both increase and smooth returns. To illustrate, from 1992 to 2002, periodic rebalancing increased a portfolio's returns by 0.4% per annum (Swensen, 2005). Typically, portfolios that are not rebalanced may suffer greater losses during market downturns.
Tax loss harvesting helps increase performance by deferring taxes – sometimes indefinitely – to reduce your tax burden. Losses are realized during temporary market downturns to be used to offset gains elsewhere in your portfolio, or up to $3,000 of other taxable income. Additional losses are saved for use in future years.
The views expressed herein are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results, and clients may lose money. Past performance is not indicative of future results. The tax loss harvesting strategy discussed should not be interpreted as tax advice and it does not represent in any manner that the tax consequences detailed will be obtained or that its tax loss harvesting strategy will result in any particular tax consequence. Clients should consult with their personal tax advisors regarding the tax consequences of investing. Read more about this in our full disclosure.
- Bogle, John. (2009). Six Lessons for Investors. The Wall Street Journal.
- Kinnel, Russel. (2010). How Expense Ratios and Star Ratings Predict Success. Morningstar.
- Siegel, Jeremy. (2002). Stocks for the Long Run. McGraw-Hill.
- Swensen, David. (2005). Unconventional Success. Free Press, 196.