Research is the foundation of investment success
All great long-term investment strategies are built on the foundation of great research. The research that resulted in our Super-Diversification investment strategy took decades to do and was done entirely by our founder Mark Patton.
It’s unlikely you’ve ever met a research geek as passionate about his work and the impact it can have on you as Mark! Not only is he an investment geek but he is also a computer programmer. The combination of these two skillsets allows Mark to do research that tends to be far more efficient and comprehensive than many others.
There are many ingredients required to conduct valid and useful research when developing an investment strategy. Some of those key ingredients are the following:
a lengthy time period must be tested so that the research covers a variety of market conditions. Research that only considers a short period of time has a high risk of failure during longer periods of time. Mark gathered data, much of it dating back to 1962, from a wide variety of sources. He then incorporated all of this data into a proprietary computer database that serves as the foundation of much of his research.
the same strategy must be implemented over the entire testing period. Problems occur when a strategy has to be “tweaked” to work during one period and “tweaked” a little differently to work in another for example. The investment strategies Mark has developed maintain consistent disciplines during the multiple decades of time covered in the research demonstrating their potential for long-term success through many different market environments.
an investment discipline must be based inherently on good logic to have a reasonable probability of being successful long-term. For example, a strategy based on which team won the Super Bowl may have worked historically but is not based on any logic that would suggest it will work in the future. Mark’s investment strategies are all built around proven mathematical principles and basic well-documented human behavior.
great long-term investment strategies will always go through shorter periods of time when they don’t work best. This is a simple reality of investing. Research can help us understand when to expect a strategy to work better or not. Mark’s strategies certainly do not produce the best returns during all shorter periods of time. His strategies have been designed to position investors for great long-term performance knowing and having the confidence to weather through some periods that will be disappointing.
Knowing where to focus research efforts that may have the greatest potential to add long-term value for clients as well as utilizing sound research principles typically requires decades of experience such as Mark has.
frequently asked questions
We must first understand what is an index. An index is something that measures the value and performance of a particular type of investment. For example, the Dow Jones Industrial Index is an index of 30 stocks that tends to be used to measure the performance of the U.S. stocks market (in particular large U.S. stocks).
There are hundreds of indexes to measure the performance of nearly any type of investment. Some of the more popular indexes are the following:
- S&P 500 (U.S. large stocks)
- Russell 2000 (U.S. small stocks)
- MSCI EAFE (International developed country stocks)
- Barclays Aggregate Bond Index (U.S. bond market)
Again, there are hundreds of indexes for all types of investments. These indexes are only mathematical calculations and not actual money. For example, the S&P 500 is an index of 500 U.S. stocks. The price of each of the 500 stocks is used to calculate the value and performance of the index.
An index FUND is simply a fund that is designed to replicate a given index with real money. For example, an S&P 500 index fund typically owns all 500 stocks in the S&P 500 index. Therefore, its performance is going to be virtually identical to the performance of the mathematically calculated S&P 500 index. These funds are considered to be passively managed meaning that they simply are designed to replicate the index and there is no manage actively trying to buy and sell securities.
Today there are 100’s of index funds…funds that are designed to replicate the performance of nearly every type of investment.
Not all indexes funds are created equally. As one example, there are many S&P 500 index funds and some will have very low fees and some will not.
An Exchange Traded Fund, or ETF, is a fund similar to a mutual fund. The primary difference is that an ETF is traded on an exchange like a stock while a mutual fund is only bought and sold at the close of trading once a day.
The majority of ETFs are also index funds (addressed in a separate FAQ). The advantage of ETFs over mutual funds is that ETFs are sometimes a little less expensive than a like-typed mutual fund and ETFs sometimes offer access to more types of investments.
There are generally two types of funds, passively managed (index funds) and actively managed. A passively managed index fund (addressed in a separate FAQ), such as an S&P 500 index fund, simply owns all 500 stocks in the S&P 500 and intends to replicate the performance of the S&P 500 index. An actively managed fund is own where there is a manager or team of managers whose job it is to try to buy and sell the right securities and the right time in an effort to perform better than an index.
The fact is that actively managed funds on average underperform like-type index funds. Higher costs, both higher expense ratios and other additional costs associated with operating the fund, are generally to blame for this poorer performance.
A custodian is the entity that holds your money or investments (your account). Brokerage firms and banks are typically the custodian of investors’ accounts. The custodian is responsible for the safekeeping and reporting on your account.
One way to dramatically reduce the risk of fraud is to separate the role of custodian and manager. This provides investors with a good checks and balances and makes it nearly impossible for a manager to fraudulently take your money.
Determining your risk tolerance is one of the very most important things you can do. Your risk tolerances is simply determining how much risk you are willing to take with your investments. Most often risk tolerance is determined by completing a questionnaire. These questionnaires are often very good tools.
Risk tolerance is both a combination of financial risk and emotional or psychological risk. Many investors can financial afford higher risk but emotionally they cannot handle the ups and downs that come with that higher risk.
Once an investor knows his risk tolerance, a portfolio then needs to be designed that is expected to deliver the desired level of risk.
An independent investment advisor, often a Registered Investment Advisor (RIA), is one who does not work for a brokerage firm. Independent advisors tend to be less motivated to sell products and instead focus on giving the best advice to their clients.