SEED believes in the Modern Portfolio Theory that non-diversifiable risk and returns are linked. That does not mean that we adhere to any single model or index. Asset pricing models are just that, models. As such, we require that they be not only theoretically sound and supported by empirical data, but also sensible for the unique situation of each investor. A value bias across all asset classes typically meets these tests. Likewise, minimizing fees and taxes are also both academically supported and common sense strategies, and we are thus often just buy and hold — a simple, straightforward approach championed by such investment luminaries as Warren Buffet, consistent with academic research, as well as tax and cost effective. However, unlike most otherwise passive value funds who trade in order to track their corresponding index, we manage and trade to optimize tax and fee efficiency .
We focus on keeping fees and taxes low. Whatever your opinion on the topic of market efficiency — both sides of the debate can provide both empirical and anecdotal evidence — one fact is clear: costs matter. Reams of academic studies have shown that fees are the largest determinant of relative performance, yet fees still often approach 1% of assets. Moreover, very few active managers pay close attention to taxes, perhaps the only other variable that comes close to fees when calculating relative after-tax returns.
Thankfully, a growing number of investors are discovering the low fee, tax efficient benefits of passive index funds and ETFs. Although SEED uses passive index funds as they often avoid generating capital gains, index funds are not nearly as efficient at harvesting losses for an investor who owns the underlying stocks directly. For those accounts where it makes sense, SEED can capture the benefits of recognizing the inevitable losses within a basket of stocks. These benefits include not only the modest tax write-off to income, but also the very real benefit of delaying capital gains, often permanently. By owning the individual stocks in the basket versus owning the fund, we can also very sensibly allocate the highest tax generating investments (mainly fixed income and high dividend paying stocks) to tax deferred accounts such as IRAs, not a possible option within a fund.
Index funds and ETFs also often fail to provide many individuals proper diversification. Along with keeping fees and taxes low, investors should disperse risk through diversification. When contemplating diversification, many investors in index funds forget about legacy assets and their most valuable asset, their own human capital. For most, the present value of their own future expected income dwarfs any other asset, yet seldom do investors think about the risks associated with that hoped for income (e.g., commodity prices, technology trends, government regulation or price controls). Should an investment banker at Credit Suisse own shares in UBS? No. This is not just science; this is common sense.
SEED also appreciates Warren Buffett’s adage to “be fearful when others are greedy and greedy when others are fearful”. To put it in academic parlance: risk premiums likely vary over time. Although ETFs and index funds are suitable investments for a simple buy and hold strategy, most are market value weighted and thus remain fully exposed to all fads and passively sit throughout all market dislocations – and for the most part, rightfully so. While plenty of gurus will tout their record on picking stocks, spotting bubbles and foreseeing market bottoms, it is nearly impossible to separate the lucky from the skilled. We are not blind to value measures like PE multiples and yield when allocating assets. But, we never fool ourselves (or our clients) into believing we possess 20/20 vision into the future. We thus pursue only the most tax efficient means toward value focused asset allocation.
Our common sense approach to applying Modern Portfolio Theory is not rocket science, and we don’t charge our clients pretending it is. In fact, at 0.30% of non-cash assets, our fees are often lower than many ETFs. If you are a high net-worth investor who doesn’t have either the time or temperament to implement our strategy yourself, please contact us at email@example.com so we can share more.
For academic references and more fleshed out arguments for the concepts laid out above, explore the pages and sub-pages within this website. Each page buttresses the three pillars of our approach: low fees, tax efficiency, and personalized diversification.
Seed Wealth Management, Inc. Takes a Common Sense Approach to the Modern Portfolio Theory of Maximizing Returns While Minimizing Risk by Keeping Fees Low, Optimizing Tax Efficiency and Customizing Diversification