Value Investing
Hi, I’m Jay Hutchins with the Wealth Conservatory. You’ve heard me speak about the Conservatory’s focus upon risk, taxes, and expenses in the management of investment portfolios. Today, I’d like to spend a few minutes describing how we control risk through strategic asset allocation.
There are lots of different types of investments that provide attractive long-term returns. Unfortunately, the higher the return the greater the volatility and short-term downside-risk. That prevents us from simply picking one and investing all our money there.
Fortunately, many of these asset classes behave differently from one another in the short run. While one is up, another is down. So, combining them tends to smooth returns and reduce volatility. We can own lots of attractive investments with significant individual volatility without experiencing the full brunt of that volatility in our overall portfolio.
I won’t go through all the asset classes Conservatory Members typically have in their portfolios. But, I will briefly touch upon Equities in general.
Academic studies have demonstrated that value stocks, those whose stock prices are near or below their book values, perform better over time per unit of risk than do growth stocks – those with stock prices significantly higher than their book value. To us and many others, it makes perfect sense therefore to own more value stocks than growth stocks.
However, popular stock indexes such as the S&P 500 are structured with the very opposite weighting. They’re growth stock heavy. We therefore team up with folks like Dimensional Fund Advisors, who develop funds with a tilt toward value stocks.
Now, neither we nor they attempt to pick individual stocks or time the market. We know that doesn’t work. We instead us very low-cost, index-like funds that have been developed by academics who have spent decades studying financial markets.
The same rationale applies to small companies, which have historically generated greater returns per unit of risk than larger companies, which also dominate popular indexes. So, we again tilt our portfolios a little more in their direction.
This is all a small but meaningful part of how we endeavor to squeeze more return out of each unit of risk. By generating more return for each unit of risk we hope to achieve member objectives with lower risk than other investors would incur by simply investing in popular indexes.
Until the next video, peace and prosperity!