The Six Tenets

by Jeff C. Johnson

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In my university class, I teach students how to invest with a “generic” approach they can use to develop the right portfolio for themselves based on their circumstances.

Frequently, after class I’m approached with student requests for specifics about how to invest. When asked, I am happy to share the actions I take for clients, what I think of as six tenets of Buckingham Strategic Wealth’s investment philosophy.

These six points represent a solid foundation that supports a repeatable process built on academic research and backed up by real-world practitioner results.

  1. We invest based on the evidence that the Efficient Market Hypothesis does work and build on academic research. Using structured asset class mutual funds, principally from Dimensional Fund Advisors, we build low-cost equity mutual fund portfolios.
  2. Over-weighting or “tilting” the portfolio toward the highest expected return asset classes, we increase the volatility but also the long-term expected return. This allows many investor portfolios to reduce over-all exposure to stock market based investments.
  3. The evidence is conclusive that long-term investors should overcome “home country bias” and be invested globally for the benefit of diversification as well as potentially greater return, over time. Note: Nearly half of the world’s equity market value is composed of non-US stock market values.
  4. Because the portfolio is tilted toward equity investment with greater return potential as well as increased volatility and unpredictability, the need for a secure bond or fixed income portfolio is certain. We use bonds to anchor the portfolio for the unknown financial storm that lingers in the future and use the highest-quality fixed income investments.
  5. Additionally, to reduce risks and increase stability of portfolio values, only shorter-term bonds are selected for the portfolio, predicated on the client’s need, with consideration to the yield of bonds based on the length of time until the bond matures.
  6. Using tax-wise “asset location” enhances the long-term after-tax return of a portfolio and, in some cases, is significantly different from how many people are actually invested.

If you are managing your own money, you should have a clearly articulated philosophy that is repeatable and built on evidence, not on guesses about the future.