Investment Management

At Golden Years Financial,LLC we believe in the principles of Modern Portfolio Theory and in the importance of educating our clients regarding healthy investment practices.   We’ve realized the more people learn about the principles and processes involved in our investment management, the more confidence they gain and the more they appreciate our work in their behalf.

Investment success results primarily from the allocation of assets within a portfolio and the investor’s self-discipline in buying equities, diversifying widely, and re-balancing their portfolio regularly to remain consistent with their original objectives.  It’s been said the problem with a well-diversified portfolio often has less to do with the portfolio itself than with the natural human behaviors that drive investors to engage in self-harming behaviors.

Our management style is based upon our belief in “Free Market Portfolio TheoryTM “, a synthesis of three academic principles: Efficient Market Hypothesis, Modern Portfolio Theory, and the Three-Factor Model. Together these concepts form a powerful, disciplined and diversified approach to investing.  Through our co-advisory relationships, this synthesis results in globally diversified portfolios that include more than 32,000 stocks spread across forty-five countries,  engineered to capture market rates of return.

Following is a summary of these three principles:

Efficient Market Hypothesis

A fundamental component of Free Market Investing is the Efficient Market Hypothesis, first explained by 2013 Nobel Prize winner, Eugene F. Fama, in his 1965 doctoral thesis:

"In an efficient market, at any point in time, the actual price of a security will be a good estimate of its intrinsic value."  (Eugene F. Fama)

The stock market, media, and popular culture generally encourage behavior consistent with the belief that the market is inefficient. It’s therefore critical that, as investors, we recognize a choice is to be made about how we believe the market works.

At Golden Years Financial, we believe markets are efficient.  In fact, that’s one of our Core Values. We focus on capturing market returns utilizing asset-class or structured funds, diversifying prudently, and eliminating stock picking, track record investing and market timing from the investment process.

Source: Markowitz, Harry. "Portfolio Selection". Journal of Finance, 1952

 

Modern Portfolio Theory

The second component of Free Market Portfolio Theory is Modern Portfolio Theory (MPT), a concept that earned the Nobel Prize in Economics in 1990 for the collaborative work of Harry Markowitz, Merton Miller and William Sharpe.

Essentially, MPT demonstrates that for the same amount of risk, diversification can increase returns. The task is to find assets with an academically proven risk premium and low correlation levels. With this understanding, the Efficient Frontier allows individuals to maximize expected returns for any level of volatility.

Source: Malkiel, Burton. "A Random Walk Down Wall Street". 1973 
Fama, Eugene; French, Kenneth. "The Cross-Section of Expected Stock Returns". Journal of Finance, 1992.

 

The Three-Factor Model

Investing is uncertain. Until recently, much of investing involved guessing what matters in returns.  This changed, however, in 1991, when Eugene F. Fama and Kenneth French, two leading economists, conducted an investigation into the sources of risk and return.  Grounded in Efficient Market Hypothesis (EMH), their research revealed that a portfolio’s exposure to three simple but diverse risk factors determines the vast majority of investment results. These three factors are referred to as the Three-Factor Model.

The Three Factors are . . .
  1. The Market Factor: the extra risk of stocks vs. fixed income
  2. The Size Effect: the extra risk of small-cap stocks over large-cap stocks
  3. The Value Effect: the extra risk of high book-to-market (BtM) over low BtM stocks

The portfolios we offer utilize the Three-Factor Model when engineered to determine the allocation between equities and fixed income, small and large equities, and value and growth equities within each model.

Source: Fama, Eugene. "Random Walks in Stock Market Prices". Financial Analysts Journal, September/October 1965.