The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd. - Warren Buffett
The longer I am in the industry (24 years and counting) the more the wisdom of the Buffett quote above resonates with me. In my experience the greatest challenges of successful investing are almost exclusively emotional.
If we take out emotions and look at the historical returns, we are left with a few key insights about how to allocate assets from 90 years of data:
1) Over time, stocks generally do better than bonds
2) Diversification is the only free lunch (reduces risk without reducing returns)
3) Value has historically out-performed growth
4) Small companies have historically out-performed larger ones
5) Profitable companies have historically out-performed unprofitable ones.
That's it. Professor Eugene Fama who developed the model with a colleague is a Nobel laureate in economics - largely for his work on the model. It is also the academic foundation for how Pillar puts together portfolios for clients.
However, investing in this manner creates an emotional challenge. For one, investing in this way means that you are not likely to have the majority of your portfolio in assets similar to that reported on the nightly news (S&P 500 and DOW are primarily domestic very large companies). You'll have international and emerging market exposure - in addition to owning a portfolio which has more small, inexpensive and profitable domestic stocks. Since stock prices for various asset classes diverge greatly from year to year - your very diversified portfolio could trail these highly visible indexes.
In the long run the differences in returns are GOOD news. Pillar's portfolios are designed to produce a higher expected return at a given level of risk. But, it will require patience for you to be the beneficiary.
Download this Perspective on Premiums
