Investment Philosophy
Beacon Financial planning's Investment Philosophy
There is a model of investing based not on speculation but on the science of capital markets and the science of investor behavior. Decades of academic, peer-reviewed research guides the way. Over time, an approach focused on the factors that investors can control, based on financial science and the efficacy of capital markets will result in success with a higher reliability than an approach based on instinct and prophecy. Our mission here at Beacon Financial Planning, LLC is to deliver the performance of capital markets to our clients and increase returns through state-of-the-art portfolio design.
Capital markets are not perfect and prices are not always right, but markets are so competitive that it is unlikely an investor can systematically profit from mistakes in the market at the expense of other investors.
Following decades of empirical investigation of capital markets by literally thousands of financial economists, there is no widely accepted and conclusive evidence that market timing works. A successful timing strategy requires three correct decisions: when to get in, when to get out, and when to get back in again. When timing between stocks and cash, for example, the frequency of correct decisions must also be high enough to overcome the higher expected returns of stocks versus cash. The success rate required to beat a buy-and-hold strategy is unattainable for most investors.
Markets are drawn to a state of equilibrium where risk and return are related. Only non-diversifiable risks are rewarded with higher expected returns.
Although it seems almost counterintuitive, the most important investment decision you’ll make is not the specific investments you select, it’s your asset allocation—that is, the mix of stocks, bonds, and cash. Diversification is the closest thing there is to a free lunch. Proper diversification increases the likelihood of earning expected returns and may reduce risk by eliminating risks you are not paid for taking.
You cannot regard an approach based on short-term trends or performance as an “investment philosophy.” The risk of price declines in the stock and bond markets is too significant to hazard money that you will need for short-term goals. Therefore, consider as an investment only money that you won’t need for a minimum of five years, preferably ten to fifteen.
All investors in aggregate form the market. Therefore, it must be the case that the average investor earns the market rate of return less fees and expenses. Managing costs (management fees, operating costs, trading costs, taxes, etc.) allows investors to capture more of the capital market return that is there for the taking. Keeping costs down puts the odds of success in your favor.
Comprehensive Financial Planning Is our Passion
Comprehensive financial planning involves the detailed review and analysis of all facets of your financial situation including cash flow, retirement planning, risk management, investment management, tax management, and estate planning. It is only through comprehensive analysis that your true financial condition can be determined and the proper plan can be recommended.
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