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Investment Theory

Risk and Return Measures

We believe in the use of appropriate mathematical measures of risk and return. The primary measure of risk should be standard deviation. The primary measure of risk adjusted return is the Sharpe Ratio. Duration, not maturity, is the appropriate measure of a bond's exposure to interest rate risk (within narrow rate changes). Convexity is an important measure of a bond's sensitivity to large changes in rates.

Active Versus Passive

We believe that the choice between active and passive management is not either/or. We use both. In general, we believe that diversification among traditional, quantitative, and behavioral finance active strategies should be combined with passive strategies.

Asset Allocation

We believe that the portfolio policy is a significant determinant of long-term portfolio performance. Because we believe in the overriding importance of the strategic allocation, we reject managers who do not have clearly defined philosophies or who diverge from their stated policies. Because we do not believe in market timing, we reject sector managers.

We believe in maintaining a strategic allocation and only infrequently revise that allocation. We believe in rebalancing to the strategic allocation. However, the influence of taxes and transaction costs, leads us to conclude that contingent rebalancing with fairly wide bands is the most appropriate solution. We do not currently implement a tactical allocation overlay. However, we believe it is an appropriate strategy.


We believe that the mathematical optimization is the appropriate method for designing a strategic asset allocation model. We also believe that an optimizer is simply a tool to be used by a knowledgeable wealth manager. The primary controls over the optimizer are the development of logical input data (expected returns should not be historical projections), an awareness of the optimizer's sensitivities to the input and other appropriate constraints. The final recommendations should not be based on the optimizer's unconstrained optimal solution, but rather the optimal, sub-optimal solution.

Time Diversification

We believe that the relative risk of increasing equity exposure decreases as the time horizon of the goal increases. We do not believe that any 'investment' should be made for a goal with less than a five-year time horizon. Funds required in fewer than five years should be placed in money markets or fixed income securities (e.g., CD's, Treasuries) with maturity dates equal to or less than the goals' time horizons.

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