Philosophical Overview
Asset allocation is the primary driver of investment returns.
The “total return” approach is superior to investing for income / yield in most cases
Within traditional asset classes (domestic and international equity, for instance), index, passive, or low-cost active funds are generally preferred in most cases.
We believe in tilting toward the Fama / French factor premiums in equities (value and small cap). Cost includes consideration of transaction costs on the respective custodian.
We believe in global diversification in any asset class where the opportunity exists.
We prefer not to hedge currency in more volatile asset classes like equity or REITs, but hedging exposure in foreign bonds. We start with the global market portfolio, and then make tilts from there
We keep non-traditional allocations to no more than 5% (at the position level) of equity allocation though this is not ironclad.
Some examples include: Global REITs Frontier Markets
We believe in regular rebalancing but infrequent trading.
This keeps turnover low and reduces the urge to replace managers due to short-term performance. Rolling 36-month periods are the preferred minimum for performance evaluation. Rebalancing is primarily a risk-control mechanism
Wherever applicable, taxes should be considered.
There are a number of ways to do this: Asset location, ETFs or Tax-managed funds wherever applicable and/or at least low turnover funds. Fewer holdings to obtain as close to desired exposure as possible. Even less frequent rebalancing / transaction activity. Muni bonds where appropriate.
Cash that will be needed in the foreseeable future (within three years) should be considered carved out of the portfolio.
There are a number of ways to do this: Asset location, ETFs or Tax-managed funds wherever applicable and/or at least low turnover funds. Fewer holdings to obtain as close to desired exposure as possible. Even less frequent rebalancing / transaction activity. Muni bonds where appropriate.
Individual bonds may be appropriate
Individual bonds may be appropriate in some instances, especially when there are known cash needs in the short- to intermediate- term.
Non-traditional investments may be suitable
(or as some would call “alternative”) investments may be suitable in certain circumstances, but only after due diligence is performed.