The Research Behind Portfolio Strategy
Your investment portfolio is the engine of your financial journey—it helps move you down the path towards your long-term goals. Each piece plays an important role in reaching the outcomes you desire.
Whether you need help growing your wealth or protecting it, an approach backed by evidence involves designing your portfolio so that each investment has unique characteristics and will react differently to economic, political and societal influences. This is part of the diversification process and it’s one way to use research rather than guesswork.
The Pillars of Evidence-Driven Investing™
Portfolios are designed to help you achieve your financial goals. Risky practices like trying to time the market, anticipate trends or identify mispriced investments may be highly unreliable ways to build wealth.
Instead, the Evidence-Driven Investing™ approach is fueled by data and over 70 years of research, and rooted in diversification and tax-aware investments.
Evidence-Driven Investing™ Portfolios Are Built on Five Pillars
Markets Are Highly Efficient
Billions of dollars are traded daily where buyers and sellers come together and agree on a price. Given so much competition, Evidence-Driven Investing™ believes the current price reflects both the latest news and the latest outlook for the investment and the economy. This approach presumes the investment’s price is the best estimate of the current value, and don’t try to outsmart the market.
Risk & Expected Reward Are Related
If you want the potential for more returns, you’ll need to accept more risk and likely greater fluctuations in value. Sometimes these risks pay off with more return, but sometimes they result in losses. Although adding more unique sources of risk and return can create a portfolio with steadier growth, you shouldn’t take more risk than you’re comfortable with.
Diversification Is Essential
Diversification has been called the only free lunch in investing. This is because using a single stock, strategy or investment type is riskier than mixing lots of different types of investments. Holding multiple investments reduces the risk that any single investment will cause a drag on portfolio performance.
Pursue Factors Of Returns
Research has shown that allocating more of your portfolio to companies that share certain characteristics can increase your potential for return. Although these investments typically bring more risk, Evidence-Driven InvestingTM portfolios are built to most efficiently allocate across multiple sources of risk — even if it means performing differently than headline indexes.
Focus On What We Can Control
Don’t try to predict interest rates, anticipate the impact of government actions or outsmart other traders. Instead, focus on the areas that can be controlled — such as setting a thoughtful investment strategy and following a disciplined review process.
Your Portfolio Building Blocks
The Evidence-Driven Investing™ approach is applied across all different types of investments. Instead of attempting to predict where the markets will go, this approach focuses on building a portfolio that increases the probability your plan will be successful.
Each part of your portfolio, whether stocks, bonds or alternatives, plays a unique role in the risk and return profile of your portfolio. When combined, they create a path towards achieving your personal financial goals.
Stocks
Investing in companies can increase the growth potential of your overall portfolio. Any prudent stock portfolio should be invested in companies, both big and small, all around the world.
Bonds
High-quality bonds are the bedrock of your portfolio and can preserve what you’ve worked hard to achieve. A reasonable allocation to high-quality bonds can help reduce the amount you lose in market downturns and help you recover faster.
Alternatives
Alternatives can be used to improve overall portfolio results. These assets can cushion the portfolio from declines in stock markets while offering greater chance for portfolio growth compared to bonds.
An Evidence-Driven Investing™ Approach
While many professionally designed portfolios will use a combination of stocks and bonds, this approach uses financial research to look beyond traditional investment labels to better understand both the risks that drive performance and how to effectively capture those risks – all with the goal of providing true diversification to help improve your investment journey.
Your portfolio is different in these ways:
- Uses decades of research to understand the risks that drive returns within each asset class
- Captures returns more effectively given your tolerance for different types of risk
- Strategically blends your investments and tilts towards higher returning assets based on your risk tolerance
- Balances stock risks with generally less risky high-quality bonds and fixed income securities
The Benefits of Portfolio Tilts
Stocks | Bonds | Alternatives | Portfolio
Tilt Stocks To Improve Your Outcome
Use stocks to grow the portfolio. Every portfolio designed with this approach starts by investing in companies, both big and small, around the globe.
In addition, research has shown that investing more in companies that share certain characteristics, such as being smaller, of higher quality or less expensive, can change the risks of your portfolio, also increasing your potential for higher returns.
This is called tilting the portfolio.
Curious which types of companies tend to have better returns over time?
Disclosure
Source: Ken French Data Library, Morningstar Direct 2023.
Global Stocks is composed of 60% U.S. Stocks, 30% International Stocks, and 10% Emerging Market Stocks. Some Tilt is composed of 50% U.S. Stocks, 10% U.S. Small Value Stocks, 20% International Stocks, 10% International Small Value Stocks, and 10% Emerging Market Stocks. More Tilt is composed of 35% U.S. Stocks, 25% U.S. Small Value Stocks, 15% International Stocks, 15% International Small Value Stocks, and 10% Emerging Market Stocks.
U.S. Stock returns are represented by the total U.S. market return, from the Ken French Data Library. U.S. Small Value Stock returns are represented by the Dimensional U.S. Small Cap Value Index, from Dimensional Fund Advisors. International Stocks are represented by the total developed international market, from the Ken French Data Library. International Small Value Stock returns are represented by the Dimensional International Small Cap Value Index, from Dimensional Fund Advisors. Emerging Market Stock returns are represented by the total emerging market, from the Ken French Data Library.
For illustrative purposes only. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. The indices do not represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Index total return includes reinvestment of dividends and capital gains.
Key Factors in Your Evidence-Driven Portfolio
Academics and professional investors have documented over 400 factors that can improve your portfolio. Only a certain subset, however, are backed by data and evidence. In order to be considered, we believe each factor should be intuitive, persistent, pervasive, robust and cost-effective.
By strategically overweighting certain companies and underweighting others, we can improve the growth potential of your stock allocation. We tilt to the following types of companies to provide a better opportunity for returns:
- Smaller: Companies which have a lower value, or market cap, tend to generate better stock returns, on average, than larger companies. We call this the Size premium.
- Less Expensive: Companies which trade at a lower price relative to their earnings, book value or cash flow tend to generate better stock returns, on average, than their more expensive counterparts. We call this the Value premium.
- Better Financials: Companies with more consistent earnings, stronger profit margins and less debt tend to generate better stock returns, on average, than their weaker counterparts. We call this the Quality premium.
In other words: quality companies trading at good prices with plenty of room to grow tend to perform better than other companies.
Disclosure
Source: Ken French Data Library.
All U.S. Stocks represents the returns of a market-capitalization-weighted portfolio of all stocks that are incorporated in the US and listed on the NYSE, AMEX, or NASDAQ. Smaller Companies represent the returns of a market-capitalization-weighted portfolio of the smallest 30% of the aforementioned U.S. stocks universe. Value companies represent the returns of a market-capitalization-weighted portfolio of the 30% of the U.S. companies with the highest book value relative to their market value. Quality companies represent the returns of a market-capitalization-weighted portfolio of the 30% of the U.S. companies with the highest operating profitability relative to their book value. Operating profitability is defined as operating income before depreciation and amortization minus interest expense divided by book equity.
1964 was chosen as the start date because that is the earliest full calendar year that we have reliable financial statement data to segment companies based on their profitability, and therefore this is the longest period that all company groupings have performance information.
For illustrative purposes only. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. The indices do not represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Index total return includes reinvestment of dividends and capital gains.
The Benefits of Portfolio Tilts
Stocks | Bonds | Alternatives | Portfolio
Pinpoint Bonds that Offset Stock Market Risk
The main purpose of bonds is to protect the wealth you’ve worked hard to accumulate. The Evidence-Driven Investing™ approach focuses on only the most secure and creditworthy bonds, like those backed by the U.S. government. Including bonds that will be repaid (or mature) within the next 1 to 10 years helps insulate the portfolio from the larger price swings that stocks often endure.
The impact of including high-quality bonds in your portfolio can be significant, leading to a smoother ride and providing the cushion your portfolio needs to endure poor stock market performance.
Disclosure
Source: Ken French Data Library, Morningstar Direct 2024.
100% Global Stocks is composed of 60% U.S. Stocks, 30% International Stocks, and 10% Emerging Market Stocks. 60% Global Stocks, 40% Bonds is composed of 36% U.S. Stocks, 18% International Stocks, 6% Emerging Market Stocks, and 40% Intermediate Government Bonds.
Both portfolios are subject to the same withdrawal amount. The initial annual withdrawal is 5% of a $1 million portfolio, or $50,000, and is withdrawn equally at the beginning of each calendar month of the year (the portfolio is reduced by $4,167 at the beginning of each month). In January of each year, the annual withdrawal rate is increased by 2.5%, so in year 2 the total annual withdrawal would be $51,250 ($4,271 per month), year 3 would be $52,531 ($4,378 per month), and so on.
U.S. Stock returns are represented by the total U.S. market return, from the Ken French Data Library. International Stocks are represented by the total developed international market, from the Ken French Data Library. Emerging Market Stock returns are represented by the total emerging market, from the Ken French Data Library. Intermediate Government Bonds are represented by the Ibbotson Associates U.S. Intermediate Government Total Return Index from the Stocks, Bonds, Bills, and Inflation (SBBI) data, from Morningstar.
For illustrative purposes only. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. The indices do not represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Index total return includes reinvestment of dividends and capital gains.
The Benefits of Portfolio Tilts
Stocks | Bonds | Alternatives | Portfolio
Add Alternatives to Improve Your Portfolio
Alternatives are simply investments that have unique sets of risk compared to traditional stocks or bonds. Those who practice the Evidence-Driven Investing™ approach remain skeptical of most alternative strategies, but a small collection of alternatives can offer truly unique sources of risk and return.
Adding alternatives can cushion your portfolio from stock market fluctuations while offering a greater chance for growth compared to high-quality bonds. Even a small allocation to alternatives can soften the portfolio from stock market declines.
Disclosure
Source: Ken French Data Library, Morningstar Direct 2023.
60% Global Stocks, 40% Bonds is composed of 36% U.S. Stocks, 18% International Stocks, 6% Emerging Market Stocks, and 40% Intermediate Government Bonds. 60% Global Stocks, 15% Alternatives, 25% Bonds is composed of 36% U.S. Stocks, 18% International Stocks, 6% Emerging Market Stocks, 15% Market Neutral, and 25% Intermediate Government Bonds.
U.S. Stock returns are represented by the total U.S. market return, from the Ken French Data Library. International Stocks are represented by the total developed international market, from the Ken French Data Library. Emerging Market Stock returns are represented by the total emerging market, from the Ken French Data Library. Market Neutral is represented by CISDM Equity Market Neutral Index, from Morningstar. Intermediate Government Bonds are represented by the Ibbotson Associates U.S. Intermediate Government Total Return Index Index from the Stocks, Bonds, Bills, and Inflation (SBBI) data, from Morningstar.
For illustrative purposes only. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. The indices do not represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Index total return includes reinvestment of dividends and capital gains.
Alternative investments may not be suitable for all clients, individuals should speak with a qualified professional to review the risk characteristics of alternatives and determine their appropriateness based on each individuals circumstances. Alternatives have a unique set of risks including but not limited to limited ability to withdraw investment, higher complexity compared to traditional stock and bond investments, potential for significant equity-like losses, and higher expenses.
The Benefits of Portfolio Tilts
Stocks | Bonds | Alternatives | Portfolio
Tilt Your Portfolio to Create a More Secure Future
Combining these building blocks offers a portfolio with:
- More consistent outcomes and smaller average swings in value
- Better opportunities for growth and similar downside risks as a traditional stock and bond portfolio
Whether you’re saving or spending from your portfolio, these portfolio strategies are designed to help you along your journey.
See how these levers create a unique portfolio experience.
Disclosure
Source: Ken French Data Library, Dimensional, Morningstar Direct 2023.
60% Global Stocks, 40% Bonds is composed of 36% U.S. Stocks, 18% International Stocks, 6% Emerging Market Stocks, and 40% Intermediate Government Bonds. 40% Global Stocks – More Tilt, 15% Alternatives, 45% Bonds is composed of 14% U.S. Stocks, 10% U.S. Small Value Stocks, 6% International Stocks, 6% International Small Value Stocks, 4% Emerging Market Stocks, 15% Market Neutral, and 45% Intermediate Government Bonds.
U.S. Stock returns are represented by the total U.S. market return, from the Ken French Data Library. U.S. Small Value Stock returns are represented by the Dimensional U.S. Small Cap Value Index, from Dimensional Fund Advisors. International Stocks are represented by the total developed international market, from the Ken French Data Library. International Small Value Stock returns are represented by the Dimensional International Small Cap Value Index, from Dimensional Fund Advisors. Emerging Market Stock returns are represented by the total emerging market, from the Ken French Data Library. Market Neutral is represented by CISDM Equity Market Neutral Index, from Morningstar. Intermediate Government Bonds are represented by the Ibbotson Associates U.S. Intermediate Government Total Return Index Index from the Stocks, Bonds, Bills, and Inflation (SBBI) data, from Morningstar.
For illustrative purposes only. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. The indices do not represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Index total return includes reinvestment of dividends and capital gains.
Alternative investments may not be suitable for all clients, individuals should speak with a qualified professional to review the risk characteristics of alternatives and determine their appropriateness based on each individuals circumstances. Alternatives have a unique set of risks including but not limited to limited ability to withdraw investment, higher complexity compared to traditional stock and bond investments, potential for significant equity-like losses, and higher expenses.
The Interaction of Portfolio Decisions
Toggle Levers to Explore the Interactions of Decisions on Your Portfolio
Disclosure
Source: Ken French Data Library, Dimensional, Morningstar Direct 2023.
60% Global Stocks, 40% Bonds is composed of 36% U.S. Stocks, 18% International Stocks, 6% Emerging Market Stocks, and 40% Intermediate Government Bonds.
60% Global Stocks, 15% Alternatives, 25% Bonds is composed of 36% U.S. Stocks, 18% International Stocks, 6% Emerging Market Stocks, 15% Market Neutral, and 25% Intermediate Government Bonds.
60% Global Stocks – Some Tilt, 40% Bonds is composed of 30% U.S. Stocks, 6% U.S. Small Value Stocks, 12% International Stocks, 6% International Small Value Stocks, 6% Emerging Market Stocks, 40% Intermediate Government Bonds.
60% Global Stocks – Some Tilt, 15% Alternatives, 25% Bonds is composed of 30% U.S. Stocks, 6% U.S. Small Value Stocks, 12% International Stocks, 6% International Small Value Stocks, 6% Emerging Market Stocks, 15% Market Neutral, 25% Intermediate Government Bonds.
50% Global Stocks – Some Tilt, 50% Bonds is composed of 25% U.S. Stocks, 5% U.S. Small Value Stocks, 10% International Stocks, 5% International Small Value Stocks, 5% Emerging Market Stocks, 50% Intermediate Government Bonds.
50% Global Stocks – Some Tilt, 15% Alternatives, 35% Bonds is composed of 25% U.S. Stocks, 5% U.S. Small Value Stocks, 10% International Stocks, 5% International Small Value Stocks, 5% Emerging Market Stocks, 15% Market Neutral, 35% Intermediate Government Bonds.
60% Global Stocks – More Tilt, 40% Bonds is composed of 21% U.S. Stocks, 15% U.S. Small Value Stocks, 9% International Stocks, 9% International Small Value Stocks, 6% Emerging Market Stocks, 40% Intermediate Government Bonds.
60% Global Stocks – More Tilt, 15% Alternatives, 25% Bonds is composed of 21% U.S. Stocks, 15% U.S. Small Value Stocks, 9% International Stocks, 9% International Small Value Stocks, 6% Emerging Market Stocks, 15% Market Neutral, 25% Intermediate Government Bonds.
40% Global Stocks – More Tilt, 60% Bonds is composed of 14% U.S. Stocks, 10% U.S. Small Value Stocks, 6% International Stocks, 6% International Small Value Stocks, 4% Emerging Market Stocks, 60% Intermediate Government Bonds.
40% Global Stocks – More Tilt, 15% Alternatives, 45% Bonds is composed of 14% U.S. Stocks, 10% U.S. Small Value Stocks, 6% International Stocks, 6% International Small Value Stocks, 4% Emerging Market Stocks, 15% Market Neutral, 45% Intermediate Government Bonds.
U.S. Stock returns are represented by the total U.S. market return, from the Ken French Data Library. U.S. Small Value Stock returns are represented by the Dimensional U.S. Small Cap Value Index, from Dimensional Fund Advisors. International Stocks are represented by the total developed international market, from the Ken French Data Library. International Small Value Stock returns are represented by the Dimensional International Small Cap Value Index, from Dimensional Fund Advisors. Emerging Market Stock returns are represented by the total emerging market, from the Ken French Data Library. Market Neutral is represented by CISDM Equity Market Neutral Index, from Morningstar. Intermediate Government Bonds are represented by the Ibbotson Associates U.S. Intermediate Government Total Return Index Index from the Stocks, Bonds, Bills, and Inflation (SBBI) data, from Morningstar.
In the “Spending” scenario, both portfolios are subject to the same withdrawal amount. The initial annual withdrawal is 5% of a $1 million portfolio, or $50,000, and is withdrawn equally at the beginning of each calendar month of the year (the portfolio is reduced by $4,167 at the beginning of each month). In January of each year, the annual withdrawal rate is increased by 2.5%, so in year 2 the total annual withdrawal would be $51,250 ($4,271 per month), year 3 would be $52,531 ($4,378 per month), and so on. In the “Saving” scenario, each portfolio is assumed to start with a $1 million investment with no additional outside contributions.
For illustrative purposes only. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. The indices do not represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Index total return includes reinvestment of dividends and capital gains.
Designed for Better Outcomes
All investments will go through periods of decline. The Evidence-Driven Investing™ approach doesn’t chase the latest trend, try to keep up with an index or sell before the next decline. Instead, it focuses on designing portfolios to let the power of the markets work for you.
By combining multiple sources of risk and return, tilting stock portfolios to companies with a higher potential for future returns and protecting your wealth with high quality bonds, you can be confident that you are taking a research-backed approach to achieving your financial goals.
Above Confidence Zone
Disclosure
A Probability of Success is based on a Monte Carlo Simulation. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Monte Carlo simulations are used to show how variations in rates of return each year can affect your plan results. A plan includes information about your assets, financial goals, and personal situation, as well as assumptions regarding the projected inflation rate and the projected return and volatility for various asset classes. A Monte Carlo simulation calculates the probability of success of a plan by running it many times, each time using a different sequence of returns. Some sequences of returns will give you better results, and some will give you worse results. These multiple trials provide a range of possible results, some successful (you would have met all your goals) and some unsuccessful (you would not have met all your goals). The Probability of Success is the percentage of trials where your Plan, with all its underlying assumptions, had at least $1 remaining in the financial accounts at the conclusion of the analysis. Analogously, the percentage of trials that were unsuccessful is the Probability of Failure. No portfolio allocation eliminates risk or guarantees investment results.
Driven by Evidence. Built for You.
An Evidence-Driven Investing™ approach to portfolio building can improve your experience and help put you on the right path to meet your financial goals. Leveraging decades of academic and real-world research, this approach will help you avoid unnecessary risk to provide you with a more dependable outcome. Your advisor is backed by a broad community of academics, researchers and advisors who are committed to continuously finding new ways to use research to better design and build dependable portfolios.
Because in the end, despite the inevitable ups and downs of the market, the Evidence-Driven Investing™ approach to your portfolio can increase your confidence along your investment journey.
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