Millions of intelligent and highly motivated investors compete in the marketplace each day for the highest possible returns. Some believe they have an advantage over others in the effort to "beat the market," despite the fact that no investor has consistently and continually profited at the expense of all other investors year after year. Yet some still try: these individuals falsely believe that through skill, analysis, intuition, or some combination thereof, they can outperform the market. Such an investment philosophy is known as "active-money management" and is practiced by stockbrokers, bankers, money managers, mutual fund managers, and trust companies.
Kibble & Prentice believes that such attempts are futile: market timing does not work, and attempts at doing so have been academically proven to increase risk and lower returns when compared to a globally diversified portfolio of tax-efficient and low cost structure funds.
Diversification, when done correctly, can be an investor's best friend. It reduces the uncertainty of expected returns, otherwise known as risk, without changing the expected return. Concentrating investments - for instance, holding a portfolio of individual stocks rather than utilizing diversified funds - only adds risk, and does not increase expected return. This comes as a surprise to some investors, but can be demonstrated with the following simple example using, for instance, the S&P500 Index. Any one stock in the S&P 500 has an expected return of about 10% per year, plus or minus about 50% two thirds of the years. The S&P 500 Index itself, however, has the same 10% expected return - but it only has a risk of plus or minus 20% two thirds of the years. 10% plus or minus 20% is far superior to 10% plus or minus 50%.
Taking the above example a step further, consider the returns of highly efficient, globally diversified equity structured fund portfolios: such a portfolio of funds has returned 14.3% per year with risks of only 15.6% over the last 34 years, and that's after the advisory fees were subtracted. Such returns were created using academically structured fund portfolios that held 16,000 different individual securities from 40 different countries, and demonstrates why buying a diversified universe is usually better than trying to find "the next great stock."
It is worth noting that not all non-actively managed funds are created equally. While there are many companies offering structured fund products to investors, Dimensional Fund Advisors (DFA) is the premier provider of capital markets research, historical risk, return and correlation data, and mutual fund products that reflect and implement leading academic research. Their complete range of low cost, tax efficient and structured funds are unequaled, and allow investors to engineer portfolios that capture the returns of each asset class more effectively and efficiently than even Vanguard Funds. Unfortunately, DFA's fund offerings are not available to the retail investor, brokerages, trust companies, and banks: they are an "institutional only" offering of mutual funds, and are made available only to investors working through a select group of fee-based advisors that DFA has pre-approved. Proudly, Kibble & Prentice is one of those advisory companies.
At Kibble & Prentice, we are proud to offer our clients the finest passively managed fund strategies available in globally diversified portfolios, complete with other investment opportunities which include individual bond & CD portfolios, private offerings, mortgage notes, and even actively managed funds or strategies for those so inclined.