One way to define our investment approach is by comparing it to what it is not, that is, the opposite of “active” investing. Active investors assume that the market is generally “inefficient”. If the market were inefficient, it would mean that investors or their brokers could regularly exploit opportunities when holdings were trading for more or less than they were actually worth. Opportunities would need to be of sufficient frequency and value to cover the costs of consistently seeking and executing such trades.
There is overwhelming academic evidence indicating that the collective wisdom of all market players (especially in today’s electronic era) results in highly efficient markets that reflect fair pricing almost instantaneously upon release of any news (good or bad) that might affect a holding’s price.
Asset Class vs. Indexing
Another way to describe passive asset class investing is by comparing it to “indexing”. As your financial advisor, we add value not only by introducing a passive approach, but by taking the extra step to incorporate holdings that capture the higher expected returns of asset class funds as well as index funds.
Passive Risk vs. Active Risk
Let’s also dispel a myth that we frequently deal with; a passive approach does not necessarily mean a conservative approach. A passive investor can still be quite aggressive in pursuing long-term exposure to demonstrated risk factors in the market. For example, a passive portfolio can (and often does) contain components from these riskier asset classes:
- Small companies’ stock ( U.S. and international)
- ‘Value’ (distressed) companies stock ( U.S. and international)
- Sector Funds
- Emerging Markets
Over the years, these riskier asset classes have delivered excess returns when compared to large-cap and growth stocks, as compensation for taking added risk over time.
Asset Class Investing
- An asset class is a group of assets with similar risk and reward characteristics.
- Cash, fixed income instruments and equities are examples of asset classes
- Within a general asset class, such as equities, there are more specific asset classes, such as large and small companies, U.S. and international companies, and growth and value companies. With respect to fixed income instruments, there are short and long term maturities, as well as higher and lower grade securities.
- Specific asset classes enable us to design portfolios to meet your individual objectives and risk tolerance.