efficient markets

Park + Elm Investing Principle #5: Consider the Drivers of Returns

By Park-Elm|2026-02-11T18:53:37+00:00August 8th, 2018|Markets|

dimensions

Principle #5 is HERE!

Consider the Drivers of Returns!

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Throughout history, many of the greatest advancements in finance have come from Academia. Our investment philosophy has been shaped by decades of research by leading academics. We structure portfolios on the principles that markets are efficient; that returns are determined by asset allocation decisions, and that portfolios can be structured around dimensions of expected returns identified through academic research. It is through our strategic partnership with Dimensional Fund Advisors, a leading global investment firm that has been translating academic research into practical investment solutions since 1981, that we can pursue dimensions of higher expected returns through advanced portfolio design, management, and trading.
Much of what we have learned about expected returns in the equity and fixed income markets can be summarized in these dimensions.

Stocks have higher expected returns than bonds – it has been well documented over time that stocks outperform bonds, and that risk = reward
Among stocks, expected return differences are largely driven by company size – small companies have higher expected returns than large companies.

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Relative price – low relative price “value” companies have higher expected returns than high relative price “growth companies.

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Profitability – companies with high profitability have higher expected returns than companies with low profitability.

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Since 1981, Dimensional has incorporated rigorous academic research on the capital markets into the design, management, and trading of clients’ portfolios. Some of the major milestones in academic research shown in the chart below have had a profound effect on our investment philosophy.

Our enduring philosophy and deep working relationships with Dimensional and the academic community underpin our approach to investing. Over a long period of time, Academics have been able to identify dimensions of higher expected returns, and with Dimensional, we can structure portfolios around these dimensions in a very cost-effective manner.

Pursuing a Better Investment Experience #1: EMBRACE MARKET PRICING

By Park-Elm|2026-02-11T18:53:41+00:00July 22nd, 2016|General|

World Equity Trading

Many investors believe that there may be a way to predict when to buy and sell securities, and it’s possible that pricing errors occur in financial markets. But it’s clear that investors have a very difficult time consistently exploiting these errors. Over the last five years…

About 60% of actively managed large cap US equity funds have failed to beat the S&P 500
77% of mid cap funds have failed to beat the S&P 400
Two-thirds of the small cap manager universe have failed to outperform the S&P Small Cap 600 Index.
Across the thirteen fixed income fund categories, all but one experienced at least a 70% rate of underperformance over five years.

…and the underperformance rate increases over longer periods of time. Most investors have investment time horizons much broader than 5 years, so trying to anticipate market movements over decades adds extreme anxiety and undue risk, while drastically increasing management expenses. Although the promise of above-market returns is alluring, investors must face the reality that as a group, US-based active managers do not consistently deliver on this promise, and they charge significantly higher fees for this underperformance.

Consider the assumption that the price of a security reflects all available information, and the intense competition among market participants drives prices to fair value. This type of strong belief in markets frees us to think and act differently about investing. When you try to outwit the market, you compete with the collective knowledge of millions of investors. By harnessing the Market’s power, you can put their knowledge to work in your portfolio.

Markets throughout the world have a history of rewarding investors for the capital they supply, and persistent differences in average portfolio returns are explained by differences in average risk. Attempting to time the market creates periods of time when investors are out of the market. This lack of participation can prove very costly to long-term returns. At Park and Elm, we embrace the market, and put investors in a position to capture returns from market growth over time, by pinpointing an acceptable level of risk, for an acceptable long-term return. There are periods of good and bad in the stock market, but it is by far the BEST investment option we have. Understanding that the price of a stock is driven to fair value by the intense competition of companies and investors, allows us to focus on controlling risk, lowering fees and diversifying into the broader markets.

Pursuing a Better Investment Experience

By Park-Elm|2026-02-11T18:53:41+00:00July 22nd, 2016|General|

Allocation Image Stay tuned-in to our blog for our Ten Part Series highlighting TEN decisions that can help investors target long-term wealth in capital markets. We’ll cover topics from market pricing, efficient markets and diversification; to investing with your emotions, and the Media challenging your discipline. Check back tomorrow for the first of the series: EMBRACE MARKET PRICING

Enjoy this Ten principle guide to pursuing a peaceful and positive investment experience.