Active Management believes that the advisor can create value for the client by helping them either time the market or pick the right stock, mutual fund, money manager, IPO, bond issue, or whatever. The believers of this philosophy include: Wall Street firms at-large, the financial media (CNBC, CNN, Fox News, Bloomberg), all major mutual fund companies, all major brokerage houses, and my guess is that unless you’re working with a financial coach, we can put your financial advisor in this group as well. Active Management is built upon the foundation of Timing, Selection, and Track Record Investing.
The second investment philosophy believes just the opposite. It believes that Timing and Selection is a fool’s errand; that the markets are efficient, diversification is essential to long-term success, and asset allocation is the reason why your portfolio gets what it gets. Believers include me, my money manager, (Matson Money), Dimensional Fund Advisors (DFA), Nobel Prize winning economists, and world-renowned academics. Structured Investing is founded upon the principles of Academics and Economics.
Neither investment philosophy is right or wrong. It’s what you believe works FOR YOU. But I do think you need to enter this game knowing the rules and with your eyes wide open. So know this: there is not one shred of evidence to support Active Management as a successful long-term investing strategy–NONE whatsoever. (In fact, all the evidence supports the use of Structured Investing). There is no academic paper, research, dissertation, or theory that proves someone can know IN ADVANCE which investment will be the winning one. There is only anecdotal “evidence”.
Our portfolios are made up of Structured Funds. Unlike traditional mutual funds (or index fund funds for that matter), Structured Funds are specifically designed and engineered to capture risk-return dimensions identified in the Three Factor Model. These are the premiums that exist in the small cap and value arenas which have been identified through academic research.
Also, any trading within the portfolio is pre-defined by our Investment Policy Statement (IPS) and is usually triggered by rebalancing. Mutual Fund trading is at the mercy of the mutual fund manager’s predictions and index funds are forced to buy and sell specific securities as they fit (or do not fit) the criteria of the specific index. This adds costs by incurring trading commissions and bid-ask spread costs. Because Structured Funds are never forced to buy or sell any security nor are they at the mercy of the manager’s prediction, they usually lower trading costs and increase tax efficiency.
We believe that there’s a better way and that’s the Investor Coaching model. Investor Coaching is made up of two parts. The first is Investor Education which is really the prerequisite to investment success. This is the foundation upon which your portfolio needs to be built. Quite simply, there are a number of questions that investors need to answer about their portfolio before they can achieve complete peace of mind regarding their investments.
The second part of our process relates to Coaching Investor Behavior. Proper Investor Behavior trumps all other factors in investing. Research shows that equity investors overall get only about one-third of market returns—mainly due to improper behavior—either their advisor’s or their own. Investor behavior is more important than portfolio construction, lowering costs, using Structured Funds, proper diversification or even education. Nothing works without proper behavior. It is THE critical function, THE critical factor, THE critical ingredient in successful investing. Without it, nothing works. Without proper behavior, you’re setting yourself up for failure.
To that end, we conduct Investor Coaching Workshops, conference calls, special events, and meetings throughout the year designed to increase awareness, answer ‘The 20 Must Answer Questions’, and encourage proper Investor Behavior.
In conclusion, my hope is that you are starting to realize what makes us different from Wall Street and other advisors. It all starts with the investment philosophy. This in turn drives portfolio construction, which then is supported by educational and behavioral coaching.
This is what makes us different.
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Investment advisory services offered through Pegasus Wealth Coaching LLC, a Registered Investment Advisor. Quraishi Law Firm, PLLC and Pegasus Wealth Coaching LLC are separate and distinct business entities and their fees are independent.