Our investment philosophy, rooted in academia and nurtured by real world experience, is designed to provide "optimal" before and after tax returns to investors. We use the term "optimal" because our investment philosophy has at its origin the widely accepted Modern Portfolio Theory, developed in 1951 by Nobel Prize winning economist Harry Markowitz. Modern portfolio theory says that for every level of risk an investor is willing to assume there is an optimal asset allocation that is expected to produce the highest result. Mr. Markowitz is not affiliated with EMA.
Modern Portfolio Theory
Efficient Market Hypothesis
We also subscribe to The Efficient Market Hypothesis originally attributable to economist Alfred Cowles, III. The Efficient Market Hypothesis proposes that security markets are efficient at distributing and incorporating information into security prices. Simply put, the current price of any security incorporates all information currently known about the security and that no one individual can (unless he posesses inside information) know more than any other individual about the future performance of any security. Therefore the theory asserts that no one can predict accurately over a statistically significant period of time, changes in stock prices.
We utilize Exchange Traded Funds (ETF's) in our client accounts. ETF's are very tax efficient because their holdings are not actively traded, thereby minimizing realized gains which must be distributed. ETF's are constructed to perform nearly identically to an unmanaged index. Trading activity may occur occasionally in an ETF when securities are added or removed from an index. Because our clients own ETF's exclusively they can expect little in the way annual capital gains distributions. We also review each account annually to identify possible "swap" opportunities. A swap opportunity occurs when an investor is carrying a position at a higher cost basis than the current market value. For example, if an investor owns one Large Cap ETF and his/her cost basis is above the market value, then we may swap it for another Large Cap ETF which tracks a similar but not identical index. This is known as "tax loss harvesting". When rebalancing occurs in a client account, we will be selling off some shares of the asset class that has risen the most in their portfolio. This may result in a tax liability for a taxable account.
Investors often overlook the internal expenses of a mutual fund they own. Typically expenses of actively managed mutual funds run in the neighborhood of 1.5% per year. What most people do not know is that the expense ratio published by your mutual fund in its prospectus and elsewhere does not fully account for all expenses. The commissions that a mutual fund pays to buy and sell securities are not included in the expense ratio. These commissions if included can add substantially to your expenses. Exchange Traded Funds not only carry low expense ratios but because they trade their securities infrequently, incur very little in the way of internal commission costs. When you add in the typical fees charged by brokers to administer your account your total expenses can approach four percent.
The website of the Financial Industry Regulatory Authority (FINRA) offers a free Mutual Fund vs. ETF Expense Analyzer.