Our Investment Philosophy
- Overview... Applying Academic Research and Ethics to Investing
- Asset Allocation
- Passively Managed Investments
- Why Avoid Actively Managed Mutual Funds
Copyright © 2018, Joel D. Bickford. All Rights Reserved.
Philosophy... Applying Academic Research and Ethics to Investing
Bickford Investment Management Services applies the latest academic research findings
to the intelligent construction and management of investment portfolios. Following is a
summary of key investment philosophies applied to ensure the best long-term risk/reward
return for our clients.
- Extremely broad and global diversification optimizes the risk/reward ratio.
Funds and ETFs enable much broader diversification than is feasible with
individual stocks. Our goal is to place client portfolios on the efficient frontier line.
- Fee-only service eliminates conflicts and aligns our interests.
- Passively-managed funds including index funds and ETFs from low-cost
leaders provide a greater likelihood of success than actively-managed funds.
- Patient trading and negotiated block trades gives Dimensional Fund Advisor
(DFA) funds an advantage over pure index funds and ETFs in many areas.
- Tax-managed holdings and choices are selected for taxable accounts in order to
maximize after-tax returns.
- Low-cost advisory services allow clients to retain more of their wealth.
- Small and value stocks have been shown to provide superior returns over
time and around the world. These asset classes are significantly represented in
domestic and international equity allocations of client portfolios.
- Attractively priced asset classes are overweighed relative to their less
attractively priced peers. Price to earnings ratios, price to book ratios and dividend
yields provide insight into the relative price attractiveness of various asset classes.
For example, these metrics can be compared between US small value, US large
value, international small value, emerging markets value, and others to avoid
overweighting expensive investment areas. A similar comparison can be made
among growth categories as well.
- Buy-and-hold strategies are applied to portfolios which are constructed for
best long-term performance in an unpredictable world. Market timing introduces
long-term risk by adding potentially poor trades. At Bickford Investment
Management Services (Bickford IMS) we take a scientific and academic approach
to constructing optimum investment portfolios from lowest-expense holdings.
In constructing portfolios, every mix of assets will provide a different anticipated
risk/return ratio with most of them being less than ideal. By changing investment
holdings and quantities we can simultaneously improve our expected return while
lowering the anticipated risk.. This field of study is referred to as Asset Allocation.
Asset allocation involves designing a diversified portfolio of assets such as stocks,
bonds, and real estate that don't behave in the same way so you can achieve more
predictable returns with less risk.. The goal is to select optimum percentages of the
available asset classes in order to achieve the best risk/return performance.
An ideal asset allocation is determined through mathematical calculation, simulation, the
study of history and scholarly academic literature, along with sound judgment.
At Bickford Investment Management, we combine these ideas with an individual investor's
financial needs and circumstances, risk tolerance, personality, and preferences in order
to create an appropriate and customized investment portfolio.
Passively Managed Investments
Academic studies strongly support the use of passively-managed stock and bond mutual
funds and ETFs in the construction of diversified portfolios. These funds have much
lower expense ratios and therefore higher expected returns than actively managed funds.
Passively-managed funds use simple rules to select the individual securities to be held in
a fund. They do not hire stock-picking “experts” which have been shown to add far more
cost than any value they deliver.
The most commonly known passively-managed funds are Index Funds and Exchange-
Traded Funds (ETFs), but there are other passively managed mutual funds.
For example, we rely heavily on passively managed mutual funds provided by
Dimensional Fund Advisors (DFA) in the construction of our efficient portfolios. DFA
bases their mutual funds on the science of capital markets and increases returns
through state of the art design and trading. Vanguard is a key index-fund and ETF
provider which is also well-represented in our portfolios.
Value, Growth, Small, and Large Company Stocks
Value stocks are Wall Street’s current dogs. They sell for a low stock price relative to
their book value per share. Growth stocks by contrast are Wall Street’s current darlings
and sell for a high stock price relative to their book value per share. Over time and
around the world, value stocks have outperformed growth stocks.
Small-company stocks have similarly outperformed large-company stocks over time. In
constructing intelligent portfolios, value and growth stocks may be over-allocated relative
to their stock market capitalization.
Why Avoid Actively-Managed Mutual Funds
The portfolio manager of an actively-managed fund tries to beat the market by picking
and choosing securities. The manager performs an in-depth analysis of many
investments in an attempt to outperform.
According to Vanguard, for the 10 years leading up to 2007, the majority of actively-
managed U.S. stock funds underperformed the index they were seeking to
outperform. For example, 84% of actively-managed U.S. large-blend funds
underperformed their index and 68% of actively-managed U.S. small value funds
underperformed. The case is even worse for actively-managed bond funds. In that case,
almost 95% of actively-managed bond funds underperformed their indexes for the 10
years leading up to 2007.
Why not invest with those managers who were able to outperform in the past? History
shows that past superior performance by active managers does not predict future
outperformance. Choosing actively managed funds from past winners has historically
been a losing strategy compared to selecting passively managed funds.
Questions to Ask An Investment Advisor
- Do you receive compensation from any sources other than the fees you charge
your clients? (No)
- If you are going to manage my account, will you get my permission every time you
buy or sell? (Yes, if desired)
- Has any professional organization, regulatory agency, or client ever charged you
with any ethical breaches? (No)
- Will I always work with you or might I get your partner or a subordinate? (Always