Asset Management

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Risk and return are related.  The only acceptable risk is that which is adequately compensated by potential portfolio returns.

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Markets work.  Capital markets do a good job of fairly pricing all available information and investor expectations about publicly traded securities.  “Mispricings” do occur but not in predictable patterns that can lead to consistent outperformance.  It is virtually impossible to anticipate the future direction of the market as a whole or of any individual security.  It is, therefore unlikely that any portfolio will succeed in consistently “beating the market.”

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Portfolio structure explains performance.  The design of the portfolio as a whole is more important than the selection of any particular security within the portfolio.  The appropriate allocation among asset classes (stocks, bonds, cash, etc.) will have far more influence on long-term portfolio results than the selection of individual securities.

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Diversification is key.  Diversification helps reduce investment volatility.  The proportional mix of asset classes determines the long-term risk and return characteristics of the portfolio as a whole.

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Minimizing investment costs is important to long-term success.  The use of passively managed index funds, mutual funds and exchange traded funds (ETFs) tend to reduce management fees and trading costs compared to actively managed strategies.  Actively managed strategies cannot consistently add value through security selection and market timing to compensate for their additional fees and tend to increase capital gain taxation.