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Will You Create Portfolios that “Beat the Market”?

We don’t build portfolios that are designed to “beat the market”. In fact, industry wide research has shown that trying to beat the market is one of the primary causes of poor performance since this generally results in higher taxes and fees than a less active portfolio. Historically, 80%+ of pros fail to beat an average indexing strategy and individual investors perform even worse. The pursuit of “alpha” or market beating returns is in fact a highly destructive pursuit.

Our focus is not on building the best performing portfolios, but the most appropriate personalized portfolios. This means that we try to generate high risk adjusted returns within the parameters of someone’s personalized risk profile. Our research has found that the investor who reduces taxes and fees in a diversified portfolio while maintaining an asset allocation and plan that they can stick with through thick and thin, will on average outperform the investor who is consistently changing their plan in an attempt to “beat the market”.

This problem is often exacerbated by asset managers with a conflict of interest. For the manager who is targeting “market beating” returns their career risk is that they fail to do this consistently. But the data shows that in order to beat the market you need to take more risk. If the manager is taking more risk then they look great in bull markets and very bad in bear markets. This creates a conflict between the manager and the investor because the investor views risk as the potential for permanent loss. If the manager is exposing the investor to more downside risk in bear markets then they are increasing the behavioral risk of permanent loss for the investor. We eliminate this risk entirely by being transparent and clear about our goals.

Most importantly, “beating the market” is not a financial goal. Instead, most asset allocators should focus less on generating the highest return and more time on trying to achieve the appropriate return that will help them achieve their financial goals within the scope of their personal needs.