Portfolio Solutions® is a long-term, strategic investment manager that utilizes low-cost index funds (i.e. “index investing”) to build globally diversified portfolios.
We believe that diversification offers the best protection against risk and that investment markets are efficient over time. It does not make economic sense to pay higher fees in an attempt to time or outperform investment markets as high fees and poor investment selection, combined with the potentially negative tax consequences of frequent trading, create barriers to success and act as major detriments to returns. Rather, we seek broad-based exposure to desired asset classes by investing in low-cost index funds.
Some investors dismiss index investing (also referred to as passive investing) because they mistakenly see it as a “do nothing” approach. This could not be further from reality. There is no such thing as being completely passive when it comes to investing, and much work goes into the portfolio construction process as well as the ongoing monitoring and rebalancing execution when needed.
Markets can behave wildly and unpredictably in the short-term, but investment returns tend to behave much more predictably as the risk-return relationship plays out. All investments have a specific risk and return profile that they eventually follow. This concept is known as reversion to the mean. In practice, it is very difficult to time this reversion given how difficult it is to predict what could happen, or how markets would react to an event even if it were predicted and the timing was right.
The S&P Dow Jones Indices publishes a robust, widely-referenced research piece known as The SPIVA® Scorecard that compares actively managed funds against their appropriate benchmarks on a semiannual basis. SPIVA® research has shown with over 15 years of published data surveying more than 10,000 actively managed funds globally that active managers most often fail to outperform their benchmarks in any given year and are almost never able to deliver above-benchmark returns consistently over multiple annual periods*.
With a set of asset classes and a forecast of expected returns and risk factors, we can create observations of how these asset classes interrelate to construct portfolios that we believe will offer the highest return per unit of risk taken. The resulting model portfolios serve as our base recommendation and starting point – we honor reasonable constraints and make customizations when warranted.
The goal is to a build a portfolio that is tailored to your specific goals and objectives and that will function well under all market conditions.
As an independent investment manager, we screen the investable universe for appropriate investments and are not limited to any fund family. We build portfolios taking a top down approach selecting what we think are the best index funds to represent each respective asset class. This approach helps to minimize the risk of having overlapped or missing asset exposures. We also believe in and subscribe to the Fama-French Three Factor Model, which is an asset pricing model that considers the fact that value style and small-cap size stocks tend to outperform markets on a regular basis over a long-term time horizon. Thus, we overlay additional small and value exposure on the stock side of the portfolio to get to an overall 20-30% tilt to small and value factors.
When complete, you will end up with a globally diversified portfolio with exposure to more than 30,000 securities in 44 different countries and have a small-cap and value style factor tilt.
Rebalancing & Tax Loss Harvesting
After a portfolio has been constructed at Portfolio Solutions®, we monitor it daily using our rebalancing system looking for breaches in allocation tolerances. Specifically, we rebalance retirement accounts more frequently by allowing less variability in a holding before rebalancing. For taxable money, we allow greater variability in a holding before rebalancing. Our goal is to be tax-efficient and minimize turnover in an account in order to manage capital gains.
We do not employ a one-size-fits-all approach to tax-loss harvesting, as it does not always lead to optimal results. Rather, your Portfolio Solutions® Financial Advisor will take the time to understand your tax situation, coordinating with your tax professional when necessary, and develop a Custom Tax Loss Harvesting Strategy for your portfolio.
*Source: S&P Dow Jones Indices LLC