Our approach to using equities (common stocks) as part of a well diversified portfolio is based on decades of research broadly known as Modern Portfolio Theory (MPT). This approach to portfolio construction is based in objective, empirical and continually evolving economic research conducted by academic researchers throughout the world.

This research has led us to adopt certain fundamental tenets as we design portfolios:
a) Markets are in equilibrium
b) Diversification is essential
c) Risk and return are related
d) Focus on what you can control – long term time horizon, tax efficiency and cost of implementation

As applied to equities in particular, research has uncovered some powerful underlying forces which determine a portfolio’s overall expected return, namely:

1) Equities have a higher expected return than fixed income
2) Small Company stocks have higher expected returns than large company stocks
3) Value stocks have higher expected returns than growth stocks

By using these facts to our advantage, we can structure the equity portion of our portfolios to maximize return per unit of risk taken. By avoiding “unpaid risk”, our portfolios benefit in a number of ways, including increased returns and a reduction in overall portfolio volatility.