Clear Ridge Wealth Management is an independent member of Buckingham Strategic Partners (BSP), which allows us to leverage BSP’s Investment Policy Committee (IPC.) The focus of our shared IPC is understanding the investment best practices and body of knowledge defined by the last 50-plus years of academic and practitioner research. This research is ongoing and will continue to form the recommendations we make to our clients. Importantly, our investment strategy guidance is not defined by what any member of the IPC “thinks” markets, the economy or interest rates are going to do. This approach to investing, typically referred to as “active management,” has been shown to be counterproductive and a highly unreliable way to achieve financial goals.

Ability to take risk is most commonly a function of (1) the time horizon(s) of your investment objective(s), (2) whether you are working or retired, and (3) the stability of your job. Longer time horizons argue for more aggressive asset allocation strategies since a long-time horizon gives the portfolio more time to recover after periods of poor performance. If you are still working, you may be able to be more aggressive since the portfolio is likely not needed to support spending needs. Investors in more stable jobs generally have greater ability to take risk compared to investors with jobs that are more sensitive to the performance of the economy.

Willingness to take risk measures your tolerance for risk. Specifically, we measure the amount of portfolio loss you are capable of experiencing without it significantly affecting your quality of life or causing you to change portfolio strategy. This is a crucially important aspect of risk since changing portfolio strategy after you experience risk is something from which your portfolio may never recover.

Need to take risk is directly tied to your rate-of-return objective. If you need relatively high returns to achieve your goals, your need to take risk is high. But this will require a more aggressive asset allocation, which could be in conflict with your ability or willingness to take risk.

While we do believe there are ways to build portfolios with higher expected returns than the stock market through strategic allocation decisions informed by academic evidence, we never lose sight of the fact outperforming the market is not easy.

There is a large amount of research that shows that the real returns that investors receive are lower than the average returns of their investments. ¹ This is primarily due to behavioral investment mistakes such as trying to time the market, chasing returns, and a host of biases that unwittingly make us our own worst enemy when it comes to making decisions about our money. Our process is constructed to impart guidelines designed to avoid these mistakes.

1. Vanguard Article on Quantifying Advisor’s Alpha

There is abundant academic evidence showing that small-cap stocks have generated higher long-term returns than large-cap stocks, that value stocks — which are stocks with low prices relative to earnings — have outperformed growth stocks and that positive momentum stocks — which are stocks with high returns over the last year — have outperformed negative momentum stocks. We try to capture these long-term return premiums through the equity, alternatives, and fixed income funds we use to give our clients the best possible chance of generating returns equal to or better than the overall market.

Academic evidence shows that investors should own U.S., international and emerging markets stocks, not concentrating solely on U.S. companies. This research shows that diversification across countries makes sense in the same way that diversification across companies does. Over half of the world’s stock market value is located in non-U.S. companies. We have no way of knowing which particular country will generate the highest long-term returns (and we do not believe anyone else does either), so diversification is the right strategy.

We believe that academic and practitioner evidence shows that the most efficient way to build portfolios is by taking risk through the stock and alternatives portion of the portfolio and using fixed income to reduce portfolio risk. Our fixed income recommendations primarily emphasize U.S. government backed securities and high-quality municipal bonds since these securities tend to provide the most effective diversification of stock and alternative market risks.

Importantly, EBI is not static. Our investment strategy recommendations will evolve as academic and practitioner evidence evolves.

We are big believers that costs matter and that investors should avoid using actively managed funds where an individual person or management team is attempting to outperform the market. Instead, we use low-cost funds that try to capture the dimensions of return identified by decades’ worth of academic research. These funds are rules based and not reliant on an individual person or management team’s beliefs about the overall market or individual stocks.

We use strategic asset location to improve after-tax returns. We will look to place less tax efficient asset classes like alternatives and fixed income in tax-advantaged accounts. Over time, this should help reduce your tax burden and consequently improve after-tax return. It also means that each account will not be allocated the same since some asset classes may be held in one account but not in others. Focusing on achieving the overall allocation in a tax-efficient manner is the reason for this approach.

This is perhaps the most challenging part of any investment philosophy. Adopt a reasonable investment plan and stay the course. While good investment strategies can produce strong results, the same strategies can produce less than superb results for long periods of time, which can make sticking with the most well thought out philosophy difficult when markets are unstable. While there are differing market approaches that have historically produced strong returns, the one thing they all have in common is that you put the odds in your favor by sticking with them.