At Perkins Wealth Advantage, we practice an evidence-based approach to investing. As PWA is built on this foundational principle, it also aligns with my engineering training gained from Purdue. Facts and evidence should drive decision making, which we believe leads to a successful investing experience.
This means understanding the investment best practices and body of knowledge defined by the last 50+ years of academic and practitioner research. This research is ongoing and will continue to inform the recommendations we make to our clients.
Importantly, our investment strategy guidance is not defined by what I "think" the markets, the economy or interest rates are going to do in the short-term. For example, if you were visiting a doctor for some ailment or issue, you’d want him/her to recommend or prescribe something to you based on what he/she read in the Journal of New England Medicine, not what he/she read in Men’s/Women’s Health.
This is the same way we think about it at Perkins Wealth Advantage. We believe there are six key tenets associated with Evidence-Based Investing:
1. Outperforming the market is difficult.
While we do believe there are ways to build portfolios with higher expected returns than the overall stock market through strategic allocation decisions informed by academic evidence, we never lose sight of the fact that outperforming the market is not easy. Given this fact, we recommend portfolios that are diversified, are tax efficient and follow the academic evidence while maintaining reasonable costs.
2. Additional size, value and profitability exposure can increase expected return.
There is significant academic evidence showing that small-cap stocks have generated higher long-term returns than large-cap stocks, that value stocks have outperformed growth stocks and that highly profitable stocks have outperformed low or negative profitability stocks. We try to capture these long-term return premiums through the stock and alternatives funds we use to give our clients the best possible chance of generating returns equal to or better than the overall market.
3. Global stock market diversification is the starting point.
The academic evidence shows that investors should own U.S., international and emerging market stocks, not concentrating solely on U.S. companies. This research shows that diversification across countries makes sense in the same way that diversification across companies does.
4. The primary role of fixed income is to reduce volatility.
We believe that the academic and practitioner evidence shows that the most effective way to build portfolios is by taking risk through the stock and alternatives portion of the portfolio and using fixed income to reduce portfolio risk.
5. Academic evidence supports modest use of alternative investment strategies.
While we are generally skeptical of most alternative investment strategies, we believe there are a couple alternative strategies accessed in mutual fund form that can enhance portfolio expected return and/or reduce portfolio volatility. Allocations, however, should be relatively modest since some of these strategies have high expense ratios and may be tax inefficient.
6. Evidence-Based Investing slowly evolves over time.
Importantly, Evidence-Based Investing is not static. Our investment strategy recommendations will evolve as academic and practitioner evidence evolves.
Each client has a dedicated Investment Plan and Policy Statement (IPS) that encompasses these principals in building client portfolios. This document brings consensus on how we manage your hard-earned retirement and legacy money. Be on the lookout for a future blog post on how we build and implement an evidence-based portfolio.