There are studies that show even a bad investment philosophy executed consistently will outperform the average investor. Why? Because the average investor tends to be swept up by emotion and headlines and follows the herd. This behavior often results in buying high and selling low.
What we seek, however, is a recipe for buying low and selling high. While some investment strategies can ‘beat the market’ in the short-term, we have seen no credible evidence that any strategy can do so consistently over time.
During the course of an economic cycle, we have observed that each asset class ‘has its day in the sun’. We don’t know, however, in advance, which day that will be. However, we do know that asset classes tend not to move together. Some will be going up while others are going down. By creating a diversified long-term portfolio across different asset classes based upon your risk tolerance, we create the opportunity to relatively buy low and sell high. When an asset class rises, we harvest gains from that asset class and redeploy that cash to an under-performing asset class.
In addition to the strategy above, when markets decline, we harvest tax losses** in non-retirement accounts that will directly reduce your tax liability. We then redeploy that cash immediately back into the market in the same asset class to maintain your overall strategic asset allocation. But, you now have an additional ‘asset’ to offset future capital gains and/or up to $3,000 per year of ordinary income. And, your portfolio balance remains the same as it was before the harvesting exercise. Finally, when deploying new cash to your long-term portfolio, we seek to fund the asset class(es) that are furthest below their target allocation.
Of course, part of the success of this model is to be disciplined about its execution in good times and bad. Our strategy helps us and you do this by keeping the emotional brain in-check, therefore, implying the rational brain stays in-charge.
** Tax loss harvesting is not suitable for all investors. Please consult your personal tax advisor as to whether tax loss harvesting is a suitable strategy for you, given your particular circumstances. The tax consequences of tax loss harvesting are complex and uncertain and may be challenged by the IRS. You and your tax advisor are responsible for how transactions conducted in your account are reported to the IRS on your personal tax return.