We believe that all clients desire peace of mind. This requires both clarity around their finances and the confidence that their investments are tailored to their goals and their individual situation. As investors, we are often excited about the prospect of growing our wealth (a.k.a. reward) but are unsettled at the thought of our portfolio losing value (a.k.a. risk). Since investing ALWAYS involves risk, is there a way to bring a better balance between risk and reward and thus improve the odds of achieving investing success over the long term?
Impact Advisors Group is committed to providing investors with their desired peace of mind. Our preferred approach, rooted in academic theory and years of experience, is to equip clients with the knowledge and tools to improve their odds of achieving investing success over the long term with the least amount of risk. Our approach to asset management is driven by four core convictions:
What is the Efficient Market Hypothesis ("EMH")?
The Efficient Market Hypothesis was developed by Eugene F. Fama. Mr. Fama is an American economist, a distinguished professor at the University of Chicago, as well as the recipient of the 2013 Nobel Prize in economics. Mr. Fama is best know for his empirical work on portfolio theory, asset pricing, and the Efficient Market Hypothesis. Mr. Fama explains EMH like this:
“An efficient market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants. In an efficient market, competition among the many intelligent participants leads to a situation where, at any point in time, actual prices of individual securities already reflect the effects of information-based both on events that have already occurred and on events which, as of now, the market expects to take place in the future.”
Impact Advisors Group adheres to the strong form of the Efficient Market Hypothesis. We believe that all knowable and predictable information is already priced into securities and that no investor can gain advantage over the market as a whole.
What is Modern Portfolio Theory ("MPT")?
Modern Portfolio Theory proved that portfolio diversification, or holding a broad range of asset classes, can improve portfolio returns without incurring additional risk (as measured by the standard deviation of returns). The key insight of this theory is that an asset’s risk and return should not be assessed in isolation, but by how it contributes to the overall risk and return of the entire portfolio. The 1990 Nobel Prize in Economics was awarded to Harry Markowitz, Merton Miller, and Myron Scholes for their collaboration on Modern Portfolio Theory.
The work of Markowitz, Miller, and Scholes has had a lasting impact on the way that we invest. MPT assumes that most investors have an aversion to risk. If given the choice between two portfolios with equal expected returns, most investors will select the portfolio that carries less risk (is less volatile). When Markowitz introduced MPT in 1952, he proved that bundling different investment types together can reduce overall portfolio risk. When adding an asset class that is less correlated, portfolio risk declines as some assets “zig” while others “zag”. If a portfolio has the highest return for a given level of risk, it is said to be on the “efficient frontier”.
What is the Three-Factor Model?
Eugene Fama and his University of Chicago colleague Kenneth French developed the Three-Factor Model. Working from the Efficient Market Hypothesis, they concluded that the a material portion of a portfolio’s long-term performance originated from three factors:
By running econometric regressions on historical stock prices, Fama and French found that small-cap and value stocks have tended to perform better than the market as a whole. Adding these two factors to the standard Capital Asset Pricing Model they found improved the explanatory power of the model to as much as 95% of a diversified stock portfolio.
We believe that investor behavior plays a crucial role in achieving long-term investing success. Financial markets are complex, fast moving, and often intimidating. To make matters worse, our brains are literally wired so as to work against making rational investment decisions. We believe that a lack of investing confidence is in large part due to an information gap between the client and his/her investment advisor.
Making a long-term investment plan and sticking with it are crucial to investing success. However, it takes discipline and will power to stick with an investment plan in a bear market. Or, as the boxer Mike Tyson put it: “Everyone has a plan until they get punched in the face.” Uninformed or misinformed investors are more likely to engage in behaviors (shown below) that we believe are detrimental to achieving long-term investing success.
Because investor behavior has a material impact on investing outcomes, we prioritize education and coaching to equip and empower clients to overcome these temptations.
Impact Advisors Group believes that odds of achieving long-term investing success are highest when we build a portfolio that is based upon academic principles, globally diversified, and supported by ongoing investor education.
Academic Foundations + Global Diversification + Investing Confidence = Investing Success!
For Your Business, For Your Family, For You
Impact Advisors Group LLC (“[IAG]”) is a registered investment advisor offering advisory services in the State of Massachusetts and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The information on this site is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This information should not be relied upon as the sole factor in an investment making decision. Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal any performance noted on this site. The information on this site is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Impact Advisors Group disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose. IAG does not warrant that the information on this site will be free from error. Your use of the information is at your sole risk. Under no circumstances shall IAG be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided on this site, even if IAG or a IAG authorized representative has been advised of the possibility of such damages. Information contained on this site should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.
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