Our Investment Philosophy:

Markets are efficient and fees matter!!

The market efficiency theory has been around since the 1967 . It suggests stock prices reflect all available information at any given time, making it difficult to predict future stock price movements. When new information becomes available it too is quickly priced into the stock.

Some dispute this theory, believing they can actively generate superior returns from stock selection and market timing. In fact, much of Wall Street and the popular media promote active stock selection, perhaps because it is in their best interest. But is it in yours? For investing purposes, we propose there is insufficient evidence that active investing is worth the additional cost and risk. There are too many academic studies that suggest otherwise.

By rejecting active investing, we seek to capture the returns of the unmanaged  market. The good news is that most of these unmanaged market returns can:

1. Be relatively easy to capture using low cost, tax-efficient index funds.
2. Offer disciplined investors the risk-adjusted growth they need to be successful.

The  theory of efficient markets lends itself to a passive approach to investing, where investors seek the unmanaged market returns, forgoing the additional costs and un-compensated risks associated with stock selection.

Passive investing is the cornerstone of the SensiblePortfolios investment philosophy.

Three components of sensible investing are:

1. Portfolio Design (asset allocation) has been shown via a number of studies to explain the vast majority of performance from your investment portfolio can be attributed to its design/ asset allocation.

   In 1986, Gary Brinson, L. Randolph Hood and Gilbert Beebower analyzed the returns of 91 large U.S. pension plans between 1974 and 1983. They concluded that asset allocation explained 90% of the variance in returns. That conclusion was confirmed by the same authors in 1991 after analyzing a larger database of returns.

   It is not the selection of individual stocks or bonds driving performance. It is the asset allocation or portfolio design that makes the difference in the long-term.

2. Diversification is a key component to sensible investing. And among the best ways to become properly diversified is to own a passively managed portfolio.Stock selection, by definition, is an exercise in owning a sample of a group. Investors are not expected to be compensated for taking on this type of stock-specific risk, at least not after expenses are considered. The passive approach, makes no selection efforts when building its portfolio. Instead it indiscriminately captures as many stocks as possible within a group, as it seeks to earn the returns of unmanaged market.

   A well-diversified portfolio also helps manage portfolio risk by removing the unnecessary (uncompensated) risk of individual stock selection from your portfolio.

3. Controlling investment-related costs is the third component of sensible investing.

   As evidenced in the diagram below, the cost of owning a passively managed portfolio is expected to be substantially less than the cost of a similar actively managed portfolio.

Mutual fund expense ratios as of December 2006. Data provided by Morningstar, Inc.