Investment Approach

Our portfolios strive to deliver exceptional value and performance by focusing on comprehensive diversification, systematic rebalancing, cost efficiency, and tax management.

The key to a well-constructed portfolio is a thorough understanding of how the components of the portfolio interact, in order to achieve the right balance of risk and return for each client. Studies have shown that a portfolio’s asset allocation has the potential to increase investment returns and lower overall portfolio volatility.

We build low-cost, tax-efficient diversified portfolios of index or asset-class mutual funds and exchange traded funds.  Our portfolios are tailored to the client’s individual financial goals and risk tolerance.

Building properly diversified portfolios can be hard, but it is one proven way for investors to earn higher returns relative to risk. Indeed, the author of the basic concept of the “diversification effect” was awarded the Nobel Prize in economics.

At Plum Street Advisors we build intelligently diversified portfolios.  We want to gain the positive risk/return improvement from combining uncorrelated investments that tend to go up and down at different times and rates, but as we saw in 2008 during a crisis (when you need diversification most), previously uncorrelated assets have a tendency to start moving together.  Therefore, we look at correlation in a variety of economic periods, not just an “average” correlation, to help your portfolio weather the elements.

Are there other ways to earn higher returns?
We believe that there are. Studies have shown that three other strategies consistently impact returns – cost management, systematic rebalancing, and tax management.

Cost Management

Lower fees mean more money in your pocket –
we think this should apply to both investment costs and advisory fees

Controlling costs is the only certain way to impact investment performance because unlike market returns, we can know what costs are going to be in the future. Investing can be expensive, and often many costs of investment are hidden from the typical investor.

Indeed, the average investor pays 1.17% of assets under management in advisory fees (according to a 2019 study by RIA in a Box), plus an average of 0.50% for equity mutual fund expense ratios (according to an Investment Company Institute study in 2020), meaning a total of 1.67% for a stock fund. None of this takes into account other types of fees often charged to investors such as transaction costs, sales fees, and spread costs.

Lowering fees to significantly below average therefore implies higher returns, and more money in your pocket. That’s not rocket science. But just how much of an impact this can have is stunning. In the example below, we compare the impact of a hypothetical 1.5% in costs to, say, half of that (0.75% in costs). In the simplified example, we show a $296,204 difference in portfolio value from an initial investment of $1 million, invested over ten years (from 12/2011 to 12/2021) in an S&P 500 fund:

Our goal is to keep both our advisory fees and the internal costs structure of our portfolios very low so that the total investment costs remain very competitive when compared to other advisors in the industry.

Systematic Rebalancing

Remove the guesswork with math and discipline.

When we build you a portfolio we target portfolio allocations which are consistent with your desired long-term return and level of risk.  This involves allocating different percentages of your portfolio to different types of investments; for example, a particular percentage to high quality bonds, another percentage to U.S. stocks, another percentage to foreign stocks, and so on.  If we have done our job right, those percentage allocations represent the optimal allocations for achieving your financial goals.

But over time, as some investments may increase or decrease in value, the mix of investment allocations in your portfolio will change. It is important to systematically rebalance the portfolio back to its optimal allocations at periodic intervals. Not only does this ensure that your portfolio will continue to reflect the best path to achieving your financial goals, but it also has been shown to actually increase the return of the portfolio relative to risk compared to portfolios which are not systematically rebalanced. It is a complicated process, which often involves other issues (such as the realization of unwanted capital gains), so it needs to be done carefully.

Tax Management

Navigating the complex labyrinth of the tax code.

When you realize a gain on the sale of an investment, or receive an interest or dividend payment, it is normally taxed, and the taxes you pay reduce your net after-tax return.  However, in order to encourage certain economic activities, the government does not tax, or gives favorable tax treatment to certain types of investments or accounts, such as municipal bonds or many retirement savings accounts.  This creates opportunities for increasing your net after-tax return by taking advantage of these favorable tax treatments.

The tax code is a labyrinth of complex and often confusing regulations, so once again, it is not an easy process to effectively optimize the tax efficiency of investment accounts.  It often involves the deferral of capital gains, the harvesting of tax losses, the use of tax-exempt or tax-deferred investments, the allocation of different types of investments to different types of accounts to maximize the tax advantages, and so on.  At Plum Street Advisors, we will guide you through this complexity, because doing so will likely increase your after-tax return.

Are there investment strategies that don’t increase returns?

Yes, and unfortunately they are strategies often pursued by inexperienced investors.  The two primary ones are stock picking and short-term market timing.  Their allure is their simple logic:  the most successful investor must be someone who can pick which stocks will go up the most, or can foresee the short-term swings in the market.  But large liquid markets of publicly traded securities, like the U.S. stock and bond markets, don’t work that way.  They price securities very accurately at or close to their intrinsic values.  That means attempts to stock pick or short-term time the market are futile, and studies have shown time and again that these strategies don’t work.  In fact, these strategies usually decrease returns because they increase costs.

The road to investment success

There is no easy road to investment success.  It involves time and hard work.  You only will be successful as an investor if you have a clear plan of where you are going and how you are going to get there.  You only will be successful if you do the hard work of building an efficient diversified portfolio; if you continually work to understand and control costs; if you systematically rebalance your portfolio to its optimal ratios; and if you take advantage of favorable tax opportunities.  It requires time, knowledge, discipline, perseverance and patience.  There is no magic answer. Consistent, disciplined, research-based investment management can help maximize these opportunities. That’s how we can help.

We build in-depth relationships with our clients by offering experienced guidance within the setting of a smaller, more personalized firm.


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