The elements of investing.

Let us sum up the key elements of sensible portfolio construction in six short words. Markets are efficient and fees matter. Let us repeat that: Markets are efficient and fees matter.

Way back in 1967, some smart financial economists came up with this theory called the Efficient Market Hypothesis, which describes how stock prices reflect available information quickly and accurately. Whenever new information becomes available, good or bad, the collective market almost instantly adjusts prices accordingly. Given this highly efficient market pricing, it’s nearly impossible to consistently outperform market returns -- especially after the costs involved in trying.

Still, many investors like to test their luck by engaging in “active investing.” They believe they can actively generate superior returns by stock selection and market timing. A lot of Wall Street and popular media do this. Why? Because it’s good for them. But at SensiblePortfolios, we ask, is it good for you? We believe no.

Passive investing is good investing.

Passive investing is not fancy or complicated, it’s just solid market performance for those who remain steadfastly invested in the markets over the long run. It’s investing according to the academic evidence rather than by trying to predict an essentially unknowable future.

At Sensible Portfolios, we help you capture market returns according to three sound investing principles:

1. Portfolio Design (asset allocation) – The vast majority of portfolio performance is explained simply by the broad asset classes you hold (such as stocks versus bonds, blue chip versus distressed company stocks, domestic versus international stocks, etc.), rather than the particular selections within those asset classes.


2. Diversification – After determining your portfolio’s appropriate asset class mix, the next step is to diversify as widely as possible within each asset class, to dampen the risks inherent to individual holdings. For example, if you own one company’s stock and that company goes bust, you’re in big trouble. If you hold 100 companies’ stock and one company goes bust, you’re in a lot better position to absorb the loss.


3. Cost control – After you’ve achieved diversified asset allocation, any additional costs only detract from rather than contribute to your end returns. The good news is that there are solutions available in the form of low cost, tax-efficient index funds, passively managed to offer disciplined investors a way to invest according to the demonstrated academic wisdom.

Want to learn more? Read our e-book, "A Case for Sensible Investing."