Our Investment Philosophy

At first glance, many financial advisors may seem alike. Your challenge is to tune out the distractions and find the Wealth Manager you can trust throughout life’s ups and downs, including through vulnerable transition times. At Cambridge, we are skilled at making investing and wealth management clear and uncomplicated, helping you think through and make smart decisions.

DD_Noise-Info-Wisdom

It’s our philosophy that investing can be simplified and made quite clear and straightforward. By cutting out the noise and focusing on some key concepts, we empower you to become an informed investor.

The Informed Investor—Rising above the Noise

In the investment world, there are many people clamoring for your attention. The popular financial media works hard to gain your viewership, win your trust, and make the investment world seem mysterious or complex through the use of complicated jargon. You are bombarded by futile attempts at predictions, dubious suggestions, and unsolicited inappropriate advice—in short, a lot of noise.

Fortunately, investing is fairly straightforward. We believe that by replacing noise with information and knowledge, you can make practical, realistic decisions.

Consider the following: no matter who you are, your position in the investment world can be identified by your response to these two beliefs:

  • The belief in “the ability to make superior security selections”
  • The belief in “the ability to time markets”
Investment Decision Matrix
Market Timing
YesNo
Security Selection
Yes
Noise: Quadrant 1
Most individual investors
Financial journalists

Noise: Quadrant 1

It’s composed of investors who believe in both market timing and superior investment selection. They feel that it is possible to consistently uncover mispriced investments that will deliver market beating returns. Also, they believe that it is possible to identify the mispricing of entire market segments and predict whether they will turn up or down. They rely on the same market to consistently misprice stocks and subsequently correct its mistake. As compelling as the idea of the “investment guru” is, the vast majority of active managers fail to even match the market, let alone beat it.

Conventional Wisdom: Quadrant 2
Financial planners
Stock brokers
Most mutual funds

Conventional Wisdom: Quadrant 2

While most individual investors and financial journalists fall into the noise quadrant due to its sensationalist appeal, most of the financial service industry falls into Quadrant 2, the conventional wisdom quadrant. They realize that they are unable to predict broad market swings with any degree of accuracy. However, they fail to realize that high tech information systems and market analysts are unable to do so as well. They believe that there are thousands of such individuals and systems that, through their intelligence and hard work, are able to find undervalued securities and add value for their clients. As un-American as it seems, in an efficient capital market this methodology adds no value. While there are debates about the efficiency of markets, most economists believe that, fundamentally, markets work.

Security Selection
No
Tactical Allocation: Quadrant 3
Pure Market Timers
Asset allocation funds

Tactical Allocation: Quadrant 3

Quadrant three is the tactical allocation quadrant. Investors in this quadrant believe that, even though individual securities are priced efficiently, they (and only they) can see broad mispricing in entire market sectors–the same market sectors that are composed of efficiently priced individual securities. They think they can add value by buying when a market sector is undervalued and waiting to sell until other investors realize their mistake and return the market sector to its fair value. No prudent investors are found in this quadrant.

Information: Quadrant 4
Academics
Many institutional investors

Information: Quadrant 4

Quadrant four is the information quadrant. This is where most of the academic community and many institutional investors reside. Investors in this quadrant dispassionately research what works and follow a rational course of action based on empirical evidence. Academic studies indicate that investors in the other three quadrants, on average, do no better than the market after fees, transaction costs and taxes. Because of their lower costs, passive investments–those in quadrant four–have higher returns on average than the other types of investments.

Our goal is to help investors make smart decisions about their money. To accomplish this, we help investors move from the noise quadrant to the information quadrant. We believe this is where you should be to maximize the probability of achieving your financial goals.

Investment Decision Matrix

Information: Quadrant 4

Security Selection: No
Market Timing: No
Academics
Many institutional investors

Quadrant four is the information quadrant. This is where most of the academic community and many institutional investors reside. Investors in this quadrant dispassionately research what works and follow a rational course of action based on empirical evidence. Academic studies indicate that investors in the other three quadrants, on average, do no better than the market after fees, transaction costs and taxes. Because of their lower costs, passive investments–those in quadrant four–have higher returns on average than the other types of investments.

Our goal is to help investors make smart decisions about their money. To accomplish this, we help investors move from the noise quadrant to the information quadrant. We believe this is where you should be to maximize the probability of achieving your financial goals.

Tactical Allocation: Quadrant 3

Security Selection: No
Market Timing: Yes
Pure Market Timers
Asset allocation funds

Quadrant three is the tactical allocation quadrant. Investors in this quadrant believe that, even though individual securities are priced efficiently, they (and only they) can see broad mispricing in entire market sectors–the same market sectors that are composed of efficiently priced individual securities. They think they can add value by buying when a market sector is undervalued and waiting to sell until other investors realize their mistake and return the market sector to its fair value. No prudent investors are found in this quadrant.

Conventional Wisdom: Quadrant 2

Security Selection: Yes
Market Timing: No
Financial planners
Stock brokers
Most mutual funds

While most individual investors and financial journalists fall into the noise quadrant due to its sensationalist appeal, most of the financial service industry falls into Quadrant 2, the conventional wisdom quadrant. They realize that they are unable to predict broad market swings with any degree of accuracy. However, they fail to realize that high tech information systems and market analysts are unable to do so as well. They believe that there are thousands of such individuals and systems that, through their intelligence and hard work, are able to find undervalued securities and add value for their clients. As un-American as it seems, in an efficient capital market this methodology adds no value. While there are debates about the efficiency of markets, most economists believe that, fundamentally, markets work.

Noise: Quadrant 1

Security Selection: Yes
Market Timing: Yes
Most individual investors
Financial journalists

It’s composed of investors who believe in both market timing and superior investment selection. They feel that it is possible to consistently uncover mispriced investments that will deliver market beating returns. Also, they believe that it is possible to identify the mispricing of entire market segments and predict whether they will turn up or down. They rely on the same market to consistently misprice stocks and subsequently correct its mistake. As compelling as the idea of the “investment guru” is, the vast majority of active managers fail to even match the market, let alone beat it.

The five key concepts of financial success

Investing can seem overwhelming at times, but we find it’s often simplified ideas that consistently work. Academic research can be distilled down into what we call the Five Key Concepts of Financial Success. An informed investor can reduce noise and find greater success by focusing on these basic concepts.

It is important to note here that while these concepts are designed to maximize return, it is impossible to eliminate risk. No strategy can eliminate risk entirely. Nothing comes without risk in the financial world; in the absence of risk there is no potential for return. The level of risk is directly proportionate to the possible level of return.

Concept 1: Leverage Diversification to Reduce Risk

Most people are familiar with the concept of diversification—don’t put all your eggs in one basket. However, putting all your eggs in similar baskets is just as dangerous. When an investment group or industry class suffers, you are in for an emotional rollercoaster ride if all your equities belong to that class. Truly diversified investors—those who invest across a number of different asset classes—can lower their risk without necessarily sacrificing return. Because they recognize that the performance of specific asset classes is impossible to predict accurately, diversified investors take a balanced approach and stay the course despite volatility in the markets.

Concept 2: Seek Lower Volatility to Enhance Returns

If you have two investment portfolios with the same average or arithmetic return, the portfolio with less volatility will have a greater compound rate of return. By choosing the portfolio with less volatility you, as the investor, not only have a smoother emotional ride but you will also be more able to create the wealth needed to reach your financial goals.

Concept 3: Use Global Diversification to Enhance Returns and Reduce Risk

Investors in the U.S. tend to favor U.S. securities—it is much more comfortable emotionally to invest in known or familiar firms. Unfortunately, this emotional reaction restricts these investors to less than half of the world’s investible capital markets. By investing in overseas markets, you greatly increase your opportunity to invest in superior global firms that can help you grow your wealth faster. Global diversification in your portfolio also reduces its overall risk. The price movements between international and domestic asset classes are often dissimilar so investing in both can increase your portfolio’s diversification.

Concept 4: Employ Asset Class Investing

An asset class is a group of investments with similar risk and return factors. In the past these were only available to large pension plans and ultra-wealthy individual investors, but for many years institutional class asset funds have been accessible to our wealth management clients. Asset class funds are attractive for four major reasons:

  • Lower operating expenses
  • Lower turnover resulting in lower costs
  • Lower turnover resulting in lower taxes
  • Consistently maintained market segments

Concept 5: Design Efficient Portfolios

Since 1972, major institutions have been using a money management concept known as Modern Portfolio Theory. It was developed at the University of Chicago by Harry Markowitz and Merton Miller and later expanded by Stanford Professor William Sharpe. Markowitz, Miller and Sharpe subsequently won the Nobel Prize in Economic Sciences for their contribution to investment methodology. Through the application of Modern Portfolio Theory and ongoing capital markets research, we design custom portfolios for our wealth management clients to capture better risk-adjusted returns. As information about Investing evolves and changes over time, we also adapt our methodologies. Eugene Fama (DFA), with whom we have been associated for over a decade, won the Nobel Prize in Economics in the Fall of 2013.

Open element in lightbox

This page will be redirected in 50 seconds to the new website or you can click here to go now.

Modera

Cambridge Wealth Counsel Has Merged!

We are pleased to announce that effective July 1, 2016, we have merged with Modera Wealth Management, LLC (“Modera”), an independent, fee only wealth management firm with offices in Georgia, Florida, Massachusetts and New Jersey. The merger brings together two growing firms with a common set of values and wealth management philosophies. Both share a deep dedication to being a fee-only fiduciary, providing objective advice in the best interests of their clients, remaining independent and continue to deliver exceptional service.

The resources and expertise we can provide to our clients are enhanced; the combined group results in a team of 51 employees, including 25 holding the CFP ® certification, 5 with the CFA designation, 3 CPAs, one JD, one CDFA, one EA and one CFTA. Along with your current wealth management team, we may, depending on your needs, introduce other specialists in our expanded group.

The name “Modera” stands for “to manage, to moderate”, with various roots in Latin, Italian and Spanish. Given that we are creating long-term financial plans and managing assets for the long-term with emphasis on risk management, the name Modera embodies our core beliefs. It is up to date and forward looking, yet grounded in the principle of “take no more risk than one needs to achieve one’s goals”.

Please click here to be redirected to the ModeraWealth.com website. If you would like to have a conversation about the merger, please do not hesitate to reach out to us. We are reachable at the same unchanged phone number (770) 506-7377

We are so grateful for the trust and confidence of you, our clients. We look forward to continuing to serve you and your families in the years ahead.

Rob, Barry, Brandy, Tana, Salome and Doreth

The New Georgia Office of Modera Wealth Management