About Us: Investment Structure

Diversifying Within and Across Asset Classes

Capital markets are composed of many classes of securities, including stocks and bonds, both domestic and international. A group of securities with shared economic traits is commonly referred to as an asset class. We use index and asset class mutual funds to capture the characteristics of each asset class, instead of trying to beat the asset class. 

We believe investors should not only diversify across securities within an asset class, but also across asset classes themselves. Therefore we include a full range of asset class funds in our portfolios: small and large stocks, domestic and international, value and core (growth), "emerging countries," global bonds, real estate, and bonds. By combining asset class funds with historically different patterns of return our clients have the ability to achieve greater expected returns with lower volatility (variance drain) than they would in a less comprehensive approach. In other words, the whole is often greater than the sum of its parts.

Investment Factors

Our portfolio structure is based on the research of two of academia's leading researchers and members of Dimensional Fund Advisors’ investment management team, Eugene Fama of the University of Chicago and Kenneth French of Dartmouth College. Their analysis of the sources of investment risk and return has reshaped portfolio theory and greatly improved understanding of the factors that drive performance.

 Three Equity Factors

•  Market:  Stocks have higher expected returns than fixed income.

• Size:  Small company stocks have higher expected returns than large company stocks.

• Price: Lower-priced "value" stocks have higher expected returns than higher-priced "growth" stocks.

Research has shown that the three-factor model on average explains about 96% of the variation of returns among fully diversified professional US stock investment plans. Investing is therefore largely about deciding the extent your portfolio will participate in each of the three risk factors. The greater the risk exposure, the greater the expected return. The model helps bring sense and direction to an otherwise chaotic investment process. It offers a frame of reference that helps us navigate tough market conditions, set expectations, apply logic, and maintain discipline. The multifactor model helps us separate investing from speculating.

Because even a well diversified stock portfolio still contains a significant amount of risk, we add fixed income investments to our portfolios to further reduce volatility. We choose fixed income investments based on two basic factors.

 Two Fixed Income Factors

• Maturity: Longer-term instruments are riskier than shorter-term instruments.

• Default: Instruments of lower credit quality are riskier than instruments of higher credit quality.

While these two factors impact interest-sensitive investments, they do not result in substantially stronger long-term expected returns. Therefore, fixed income investments are best kept short in maturity and high in credit quality so risk exposure can be increased in the equity markets, where expected returns are higher.