ZAG firms believe that public markets work efficiently to integrate all available information into security prices. Consequently, they view a security’s current price as the best estimate of its underlying value.
This “fair pricing” assumption has major investment implications. For one, it suggests that no one can consistently capture value through stock selection, market timing, or other “active” money management techniques. These speculative approaches typically generate higher risk, increased costs, and lower investment returns. Fair pricing also suggests that choosing investments or managers based on past performance is not effective since future outcomes are unpredictable. Real world results validate this theory by showing that very few active managers have a long-term track record of market outperformance. For those that do, there’s no way to reliably identify them in advance.
ZAG firms view market efficiency as good news for the long-term investor. Successful investing does not require you to discover new information and use it to beat other investors. Rather, a successful investment experience involves structuring a portfolio to earn capital market returns over time. Asset allocation and global diversification are the main tools in this effort, and academic research provides the knowledge for designing a portfolio that reflects your specific investment goals and appetite for risk.
A well-grounded “passive” investment approach will take the best financial theories and research and create portfolio strategies that clients can understand and follow. ZAG’s approach brings clarity and direction to an otherwise chaotic investment process. This frame of reference helps clients set realistic expectations and implement a rigorous approach that endures changing markets.
A smarter investment approach incorporates these key principles into a practical long-term plan:
- Global diversification reduces risk and enhances returns.
- Lower expenses and increase investment returns.
- Effective tax management also impacts portfolio performance.
- Investors are best served by a “passive” or indexed approach.
- Active management adds speculative risk and does not work over time.
- An investment strategy should be integrated into an overall financial plan.