Markets Work. Capital markets are efficient and have a long history of rewarding investors for the capital they supply. Even though market inefficiencies exist in the short term, they are extremely difficult, if not impossible, to consistently exploit. Ultimately, research, including the insights from Eugene Fama and Ken French, shows that attempts to exploit these inefficiencies or 'pricing mistakes' will most likely reduce expected portfolio return. Philosophically, at Copiam Wealth Management, we see markets as an ally, not an adversary. Rather than attempt to take advantage of market pricing mistakes, we leverage what markets do right – compensate investors. Our Advanced Portfolio Management strategies are designed to do just that. Copiam does not attempt to time the market or utilize market forecasts.
Focus on Risks Worth Taking. Investing involves taking risks. While risk and return are related, not all risks are expected to compensate the investor equivalently. An intentional and disciplined focus should prudently be made on those risk factors expected to highly compensate the investor over long time periods.
Organize Investment Portfolios Around Relevant Investment Factors. Over the long term, Nobel Prize winning research shows that global capital markets efficiently reward investors for the risks they take. The Fama-French Three Factor Model brings applicable academic research to bear with regard to organizing a globally diversified portfolio around factors having higher expected returns over time.
These factors are:
Equity Premium (Beta): Equities tend to outperform bonds over long time periods.
Small Cap Premium: Small companies tend to outperform large ones over long time periods.
Value Premium: Value companies tend to outperform over long time periods.
Momentum: Companies with strong stock price appreciation tend to continue for a while.
Profitability Premium: Profitable companies tend to outperform over long time periods.
Factors related to portfolio volatility (risk) reduction are:
Term Premium: Shorter maturity bonds vs longer ones.
Credit Premium: Higher credit quality vs lower quality.
Structure Drives Expected Return. Asset class selection and structure explain over 90% of a portfolio’s performance over time; while individual stock selection, market timing, and other techniques combined only explain roughly 8.4%. Source: Ibbotson and Kaplan, 'Does Asset Allocation Policy Explain 40%, 90% or 100% of Performance,' Financial Analysts Journal, April 1999. Past performance is not indicative of future results.
Diversification is Essential. Diversification reduces uncompensated risk associated with owning individual securities. Avoidable risks include holding too few securities, betting on countries or industries, following market predictions, speculating in areas like interest rate movements, and relying solely on information from third-party analysts or rating services. Diversification does not eliminate the risk of market loss; however, it can position your portfolio to capture global capital market returns that are available. Source: Diversification and Portfolio Risk, Harry Markowitz [Nobel Prize in Economics, 1990].
