Lighthouse provides a disciplined, academically based investment experience tailored to each client’s needs. Investment portfolios are constructed to match each client’s willingness, need, and ability to accept market risk.
Lighthouse’s investment approach adheres to three core principles:
- Markets reflect the aggregate expectations of investors about risk and return.
- Diversification helps reduce uncertainty.
- Empirical research guides our portfolio construction.
Academic research has identified equity and fixed income dimensions that are associated with expected returns. In the stock market, premiums are associated with company size, relative price (value), and expected profitability. In the bond market, these dimensions are credit quality and term to maturity.
As an independent, registered investment advisory firm, we choose the appropriate financial solution for each of our clients and are not restricted in the investments we recommend.
Risk Management through Diversification
Diversification helps reduce uncompensated risks (for example, company-specific risks) and helps smooth out fluctuations in market returns.
Using evidence-based management, our investment methodology provides lower expense ratios, transaction costs, and turnover. We strictly avoid sales loads and other unnecessary fees.
Positioning asset classes appropriately, loss harvesting and prudent rebalancing are essential to tax efficient investing.
There is overwhelming academic evidence that the collective wisdom of all market investors produces highly efficient markets that reflect fair pricing almost instantaneously upon release of any news - good or bad, especially in today’s electronic era - that might affect a stock’s price.
The market’s pricing power makes it difficult for investors who try to outsmart other participants through stock picking or market timing. It is virtually impossible to anticipate the future direction of the market as a whole or of any individual security. You never know which market segments will outperform from year to year. By holding a globally diversified portfolio, investors are well positioned to capture returns wherever they occur. This approach is more cost and tax-efficient because there are fewer trades and, therefore, lowers transaction fees.
Conversely, an actively managed portfolio is built on trying to beat the market by selecting investments that are winners (or losers) and assumes that the market does not accurately reflect the price of securities. If the market were inefficient, clever individuals (or their fund managers) could regularly exploit market opportunities when stocks are trading for more or less than they are actually worth. These opportunities would need to be of sufficient frequency and value to cover the transaction costs and taxes from constant trading. As evidence, only 19% of US equity mutual funds have survived and outperformed their benchmarks over the past 15 years.
The design of the portfolio as a whole is more important than the selection of any particular security within the portfolio. The appropriate allocation of capital among asset classes (stocks, bonds, cash, etc.) will have far more influence on long-term portfolio results than the selection of individual securities. Investing for the long-term (preferably longer than ten years) becomes critical to investment success because it allows the long-term characteristics of the asset classes to surface.
Asset allocation is the process of selecting a mix of asset classes that closely matches an investor’s investment objectives, time horizon, and risk tolerance. Each individual’s strategy is built on the careful consideration of the key elements of their financial profile:
- Investment Objectives: What the investor hopes to achieve using their investment dollars e.g. improve current lifestyle, achieve capital growth, or fund a specific goal, such as a college education.
- Risk Tolerance: Reflects an investor’s psychological reaction to changes in the market.
- Time Horizon: The length of time an investor needs before the assets are used for their intended purpose.
A sound investment policy includes periodic reviews and portfolio adjustments that accommodate market movements and the changes in our client’s needs, preferences, priorities, and risk tolerance.
Research-based Mutual Funds
Lighthouse is part of a select group of investment advisors approved by Dimensional Fund Advisors (DFA), portfolio managers specializing in research-based mutual funds. Lighthouse has full access to Dimensional’s researchers, academics, and portfolio professionals gaining insight and inspiration from their work.