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Portfolio Theory

We construct our globally diversified Disciplined Wealth Portfolios using a multi-factor approach that takes strategic “tilts”, or increased exposure relative to the index, toward risk factors including (but not limited to):

  • Size: (Premium for exposure to small stocks vs. large company stocks)
  • Relative Price: (Premium for exposure to value vs. growth company stocks)
  • Profitability: (Premium for exposure to high-profitability vs. low-profitability stocks)
  • Volatility: (Premium for exposure to low-volatility stocks vs. high volatility stocks)
  • Momentum: (Premium for exposure to stocks with positive recent price momentum)

The stock market, the media, and popular culture, by and large, encourage behavior consistent with the belief that the market is inefficient. You must understand that there is a choice to be made about how you believe the market works.

We believe that markets are efficient, so much so that it is one of our Core Values.

Modern Portfolio Theory

A solid component of Free Market Portfolio Theory is Modern Portfolio Theory (MPT), which earned the Nobel Prize in Economics in 1990 for the collaborative work of Harry Markowitz, Merton Miller and William Sharpe.

Essentially, MPT demonstrates that for the same amount of risk, diversification can increase returns. The task is to find assets with an academically proven risk premium and low correlations.

Source: Malkiel, Burton. “A Random Walk Down Wall Street”. 1973
Fama, Eugene; French, Kenneth. “The Cross-Section of Expected Stock Returns”. Journal of Finance, 1992

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