Investment Approach
Our portfolios strive to deliver exceptional value and performance by focusing on comprehensive diversification, systematic rebalancing, cost efficiency, and tax management.
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.
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.
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?
The road to investment success
We build in-depth relationships with our clients by offering experienced guidance within the setting of a smaller, more personalized firm.
Insights
The Impact of Rising Interest Rates
The U.S has been in a period of low rates for nearly a decade. As the economy is now approaching full employment and higher inflation, interest rates have been rising from their historic lows. As rates rise, the value of existing fixed-interest bonds falls. What...
Volatility: Same as It Ever Was
February 7, 2018 When people say “volatility is back”, what they really mean is that downside volatility is back. Most people would not have called it “volatility” if the market was up 6.1% over 2 days at the beginning of this February, instead of down. At Plum...
Financial Roles of a Non-Profit Board Member
Financial Roles of a Non-Profit Board Member By David Dirks and Jamie Osborn, Plum Street Advisors LLC As a non-profit board member, you take on a wide range of oversight responsibility. Non-profit board members are expected to set and guide the mission and strategy...