Investment Methodology

Most traditionally managed portfolios have failed to match or exceed market returns. Of the relatively few "winners," most fail to beat the market over subsequent three and five year periods.¹

Yet most investors are unaware that their chosen approach to managing their money is destined to fail. Conventional “active” strategies (stock picking and market timing, for example) are characterized by an ongoing series of speculative decisions. Forecasts are made in a perpetual environment of randomly fluctuating stock prices and constantly changing interest rates, economic and political developments, and man-made and natural disasters.

At Equius, we know that it’s not necessary to accurately predict the future to have a successful long-term investment experience. Wealth is neither created nor preserved by merely moving money from stock to stock, from sector to sector, or from one money manager to another. Instead wealth is created by millions of entrepreneurs, laborers, and managers who together with capital build companies and help the economy grow.

A consistently effective way to capture your fair share of wealth creation is to deploy your capital throughout the public equity and debt markets in a broadly diversified manner. This is likely to result in a global capital markets rate of return (net of costs) that exceeds the return realized by the vast majority of traditional investment advisors and individual investors over time—often with less risk.

Our underlying philosophy is based on one of the seminal ideas in investment management and financial economics: the “Three-Factor Model” developed by Eugene Fama Sr. and Ken French. When these prominent academics analyzed the connection between risk and return in the equity markets, they discovered that approximately 95% of a portfolio’s return can be explained by three factors:

Three-Factor Model

At Equius, we use these insights to develop a portfolio for you that is diversified globally across as many as 7,500 different securities.

Thanks to the unique risk and return behavior of each of the three factors, our broadly diversified portfolios offer expected returns that exceed the market (S&P 500) return with similar risk (annual volatility). This is due to the fact that the movements of the asset classes are not perfectly correlated. Therefore, investors in well-constructed and broadly diversified asset class portfolios can realize the weighted average of the asset class returns with less than the weighted average of their risk.

Portfolio Comparison: Risk and Returns (1973 - 2010)

See Source and Description of Data. Risk = standard deviation of annual returns.
Past performance does not guarantee future returns.

In contrast, portfolio concentration; rotating allocations among industries, sectors, or countries; following market, economic, or interest rate forecasts; frequent changes of money managers or mutual funds; or reliance on other speculative strategies are generally much more costly and risky alternatives to asset class investing.

The portfolio above is for illustration purposes only and does not represent an actual Equius Partners client portfolio. Sample allocations are to Dimensional Fund Advisors (DFA) and MSCI indexes, not actual mutual funds. This simulation begins with the severe "bear" market of 1973-1974 for a more realistic view of theoretical expected returns than that provided by most investment advisors. The simulation does not include international small value and emerging markets stocks due to lack of data for the total period.

Equius Partners recommends allocations among the best structured and managed asset class mutual funds only after careful consideration of each client’s personal risk and return objectives.

¹ "Debunking some misconceptions about indexing," The Vanguard Group, December 2010. "Does Past Performance Matter,The S&P Persistence Scorecard," Standard & Poors, June 2010.