Putting Financial Science to Work
We build portfolios based on the science of capital markets, in order to deliver better a better investment experience for our clients.
Decades of academic research clearly demonstrates which investment approaches are most likely to succeed, as well as those that involve unnecessary risk and are more likely to fail. Even though this research exists and is virtually irrefutable, most investors do not make their investment decisions based on the evidence. Instead, fear and greed – rather than evidence – drive most investor decisions.
Springwater’s approach, referred to as “evidence-based investing”, is intended to provide our clients with optimal outcomes, based on compelling scientific evidence and ongoing research. We’ve highlighted below the evidence and conclusions that form the foundation of our approach.
Invest in stocks for long-term growth
- Investments in stocks have a long history of delivering consistent growth.
- While returns from stocks are more volatile in the short-term, over the long-term they have historically generated higher returns than bonds and most other investments.
Small cap stocks outperform large cap stocks
- Small cap stocks are generally defined as those of public companies whose market value (or “cap”italization) is at the smaller end of the full spectrum of stocks.
- The only way to capture the returns of the entire stock market is to include small cap stocks in an allocation, as they comprise the majority of stocks (by numbers).
- Small cap stocks are more volatile than large cap stocks (like the S&P 500 index), but they have historically generated higher returns both in the US and internationally.
Value stocks outperform growth stocks
- Value stocks are generally defined as those whose price is low relative other measures, such as book value, cashflow, sales, etc.
- Since 1927, value stocks have outperformed growth stocks.
- Investing exclusively in value stocks is not advisable, as there have been long periods – such as the 1990s – when value underperformed growth.
- So while value stocks can be expected to generate higher returns, a portfolio allocation that includes both value and growth provides the diversification needed to reduce risk.
Invest internationally for diversification
- Non-US stocks make up more than half of global market capitalization.
- Foreign stocks behave differently than US stocks, making them a good tool for diversification.
- A globally diversified portfolio has historically produced higher returns with less risk than either an all-US or all-international portfolio.
Markets are efficient – use asset class-focused investments
- Actively-managed mutual funds generally underperform their benchmarks.
- The costs associated with trying to “beat the market” (manager overhead, trading costs, taxes, etc) make it very difficult for active managers to consistently outperform their relevant benchmarks on a risk-adjusted basis.
- Active managers generally underperformed even during the most recent market downturn, when the widely-touted benefits of their flexibility – timing the market and avoiding the “worst” stocks – should have been evident.
A Successful Investment Experience
At Springwater, we know that it’s not necessary to be able to predict the future to have a successful long-term investment experience.
We’re committed to sharing with you our knowledge of markets, investor behavior, the financial services industry, and all facets of our investment philosophy and strategies. This commitment begins with our initial consultation and continues throughout our relationship with you.
At Springwater, we offer our clients knowledge and guidance, not hype. By ignoring the “noise” from short-term market movements and the guesswork of market speculators, we’re able to focus on ensuring that the markets reward you over time.