Investment Methodology

FutureAdvisor is an investment advisor that takes academically researched portfolio management principles and applies them to your situation. Our recommendation algorithms are based on these principles and academic works.

1. Index Investing: more effective than picking stocks

FutureAdvisor's algorithmic portfolio recommendations favor low-fee index funds. Not only do low-fee index funds perform better in the long run [1], academic research shows that they're also more tax efficient. This is because the frantic buying and selling that human fund managers do in a futile effort to time the market generate tax liability, which is then passed on to you the investor. One study found that over 20 years 92% of all mutual funds underperformed index funds after fees and taxes [2].

Bogle

2. Personalized Diversification: capture returns, lower risk

FutureAdvisor recommends a specific portfolio for your age, risk tolerance, and investment time horizon using industry-standard benchmarks such as Morningstar's Lifetime Allocation Indexes [3] and work by David Swensen, head of the Yale University Endowment [4]. As the famous Callan Periodic Table of Investment Returns shows [5], in some years stocks beat bonds, in other years it's emerging markets, or real estate, or some other asset class. Broad diversification helps capture these long-term returns of the market and reduces risk.

Bernstein

3. Keep Fees Low: you get what you don't pay for

FutureAdvisor makes your portfolio fees transparent and helps you pick lower fee options that will likely perform better as well. Investment fees significantly drag down your portfolio growth because the money you pay in fees never get a chance to grow and this compounds over time to be a significant loss. According to Morningstar, the best way to choose a fund that will do the best in the future is to look for low fees [6]. In short, any fees you pay now directly lower your wealth [7].

Swensen

4. Rebalancing: 10 minutes a year will increase returns

FutureAdvisor reminds you to re-balance your portfolio to produce higher, more stable returns by locking in gains and managing risk. Research has shown that quarterly re-balancing can produce smoother returns. For example, from 1992 to 2002 a rebalanced portfolio yielded 0.4% more return each year [8]. Re-balancing controls your portfolio's risk exposure rather than letting it drift with the market. Invariably, non-rebalanced portfolios suffer greater losses during market downturns [9].

Rosenbloom

5. Value and Small Cap: for even greater long term return

FutureAdvisor takes your portfolio beyond the basics for even greater expected return by helping you lean your portfolio towards Small Cap and Value funds, both in the United States and internationally. Seminal research by economists Eugene Fama and Kenneth French, now referred to as the Three-Factor model, showed that over the long run this leaning outperforms more traditional capitalization-weighted indices such as the S&P500 in the United States, and held true for 19 out of 20 international countries [10].

Horan

About Performance: Past success is no indication of future results

Active fund managers will often display their returns over the last X years and pick a window of time that makes them look good. The big myth here is that just because a fund did well last year, it'll do well next year too. In academic research on finance, plenty have been written to disprove this myth, and if you're interested a good place to start is Burton Malkiel's seminal paper "Returns from Investing in Equity Mutual Funds 1971-1991"[11]

Get Started
Get your FREE portfolio action plan in 2 minutes!

References & Citations

Don't just take our word for it, look through the research here.

  1. John Bogle, founder of The Vanguard Group: see his article in the Wall Street Journal and his speech at Columbia University for a fundamental discussion of index investing, the investment philosophy behind FutureAdvisor.
  2. Robert Arnott, Visiting Professor of Finance at UCLA: see his research showing that 92% of mutual funds underperformed index funds when taxes are taken into account. "Arnott, Robert. Berkin, Andrew L. Ye, Jia. The Management and Mismanagement of Taxable Assets." Investment Management Reflections No. 2" (PDF). 2000.
  3. Ibbotson SBBI 2010 Classic Yearbook, "Market Returns for Stocks, Bonds, Bills, and Inflation 1926-2009". This work on Lifecycle Asset Allocation is itself based on prior literature from, among others, Chen, Ibbotson, Milevsky, and Zhu [2006, 2007] as well as Bodie, Merton, and Samuelson [1992] and Viceira [2002].
  4. David Swensen, Chief Investment Officer, Yale Endowment: see his seminal book Unconventional Success: A Fundamental Approach to Personal Investment (2005) ISBN 0-7432-2838-3, Free Press
  5. http://www.callan.com/research/periodic/
  6. http://bucks.blogs.nytimes.com/2010/08/11/fund-expenses-more-important-than-five-star-status/
  7. This phrase is often attributed to John Bogle, the founder of Vanguard. For more, see http://www.vanguard.com/bogle_site/sp20050202.htm
  8. See Table 6.4 "Rebalancing Smoothes the Market Cycles". Swensen; page 196
  9. As bubbles form (whether it's the dot-com bubble or the housing bubble) those assets outperform other assets for a little while. During this period of outperformance, an unrebalanced portfolio becomes skewed towards this asset class. As such, when the correction occurs more of your portfolio than you had anticipated is exposed to that downturn.
  10. See "Value vs. Growth: The International Evidence" at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2358 For more, see Kenneth French's website of data and working papers at http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
  11. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=6119