Philosophy

Efficiency

It is well established that the optimal or most efficient investment strategy strives to deliver market rates of return while reducing risk. This strategy is not commonly known or employed in the investing community due to long-held active management myths of stock picking, market timing and track record investing. More disturbing is that most investors are unaware of the devastating impacts that these active management tactics and strategies have on their ability to growth wealth and take care of their fundamental concerns now and during retirement.

Uncommon Knowledge

Investors need uncommon knowledge and learning to stay on purpose and disciplined with their investment strategies. Building a prudently diversified portfolio containing appropriate capital market segments with dissimilar price movements is only the beginning. Design requires both (1) minimizing the high costs resulting from active management tactics that cause tax inefficiencies, high turnover, transaction costs, bid / ask spread costs and market movement costs, and (2) maximizing portfolio risk / return efficiency with the mix of capital market segments. While Modern Portfolio Theory (MPT) is commonly spoken, very few have command of the knowledge to avoid the threats of unwanted and unnecessary volatility, capital losses, panic, confusion and lack of purpose. Even fewer exploit return premium opportunities established by Fama and French with the Three-Factor Model.

High Costs of Active Management:

• Tax inefficiency
• High turnover
• Transaction costs
• Bid / Ask spread costs
• Moving the market costs

Free Market Portfolio Theory:

1. Free Markets Work: Markets are effecient and are the greatest wealth creation tool known to mankind.
2. Modern Portfolio Theory: Diversification and asset allocation are the positive determinants of portfolio performance.
3. Three Factor Model: Kenneth French and Eugene Fama's research determined which sources of risk the market systematically rewards with higher returns.

The Three Factor Model:

1. Market Factor: Equities are riskier than fixed income but historically provide higher rates of return.
2. Size Factor: Smaller companies are riskier than large companies but historically provide higher rates of return.
3. Value Factor: High book-to-market (value) stocks are riskier than low book-to-market (growth) stocks but historically provide higher rates of return.

Meaning and Relevance

Constituting your true purpose for money, having philosophies of care and utilizing uncommon, prudent and disciplined investment strategies are paramount for having enough to survive, be free and live a good life. In order to avoid the threats of running out of money, making compromises and living with undesired constraints, investors must exploit opportunities available by harnessing the power of free markets, Modern Portfolio Theory and The Three Factor Model.

Avoiding the high costs of active management and exploiting the opportunities of Free Market Portfolio Theory can impact performance as much as 4% while maintaining the same risk. While 2%, as an example, may not seem important, wise investors know that the difference between 6% and 8% on a $1 million portfolio over 25 years is $2.5 million. With this additional capital, investors can avoid unwanted and unhealthy constraints, compromises, obligations and relationships to freedom and produce financial capacities to live a good life.