Philosophy | Financial Harvest Wealth Advisors

Philosophy

Our philosophies dictate our thinking, strategies and action. Weak, incomplete or flawed philosophies lead to weak ineffective action and strategies for caring for our concerns. We have philosophies for how we care for our marriages, our parenting, our careers, our health, and our investments for our future. When we do not examine our philosophies, we are often blindsided with failures or breakdowns that do not give us the freedom to live the life we want.

Most investors are not even aware that there are two fundamental investment philosophies: Active versus Passive. Active philosophies are commonly employed and touted throughout the industry by large Wall Street firms, large investment banks, the media and most brokers and advisors. Due to this ingrained myth, investors are unaware of the devastating impacts that these active management tactics and strategies have on their ability to growth wealth and take care of their fundamental concerns for financial survival.

	Active Philosophy	Passive Philosophy

Belief	Fundamental belief that one can find markets or securities that are miss-priced	Fundamental belief that markets are efficient and impossible to predict

Thinking	“The market is over valued and set to fall.” “We expect XYZ to outperform.”	All knowable information is already factored into the market price The randomness of the market makes it impossible to consistently predict price movements to capture additional return

Your investment philosophies dictate your investment strategies and action…

Active Strategies

Harvest (Passive) Strategies

1. Stock Picking (security selection)

2. Market Timing (sector rotation, going to cash)

3. Track Record Investing (using past performance to pick managers

1. Capture market return efficiently

2. Structured Portfolios of market segments with dissimilar price movements

3. Three Factor Model (three dimensions of return in markets)

4. Rebalancing (Buy low, sell high)

Your strategies and resulting action (or lack of action) produces deterministic outcomes called consequences. The consequences are in three categories: risk (volatility), return and costs.

Active Strategies Risk

Passive Risk

Difficult to measure or control due to turnover, allocation changes, style drift within portfolio.

Measurable and identifiable allowing your advisor to give range of risk for selected portfolio.

Active Strategies Return

Passive Return

Dalbar Research in their annual Quantitative Analysis of Investor Behavior reports less than 3%.

Enhanced by Three Factor Model tilt towards small and value.

All investing has costs. Efficiencies in costs dramatically impact investors’ ability to grow and maintain wealth. There are two types of costs investors must work to minimize: Execution Costs (costs to building, maintain and harvest from a portfolio) and Behavioral Costs (costs of imprudent behavior).

Execution Costs
Active	Passive
Paying active manager results in average expense ratio of ~1.0 – 1.5%	No active manager fees means average expense ratio of ~ .1 - .6%, or almost 1% less than active funds
Average active fund turnover (buying and selling) is 106% which increases: · Bid/ask spread costs · Transaction costs · Moving the market costs	Minimal buying and selling due to turnover of ~15%, or about 1/5th the costs of active
The frequent buying and selling due to high turnover and market timing often trigger unnecessary tax consequences	Tax efficient: little turnover, no market timing and reduced dividend / cap gain distributions

Behavioral Costs
Active	Passive
Market timing: Dalbar Quantitative Analysis of Investor Behavior reports average investor returns of 3% during last 20 years due to poor investor behavior.	Avoids market timing giving market rates of return instead of the average investor’s return of 3%.
Track record investing: A John Bogel (founder of Vanguard) study shows that 60-80% of active funds underperform their benchmark or market.	Bogel study shows ~70% chance of passive outperforming active
Stock picking produces devastating loses such as Enron, BP, Lehman, AIG	Avoids Stock picking and devastating loses

Meaning and Relevance to You

Constituting your true purpose for money, having philosophies of care and utilizing uncommon, prudent and disciplined investment strategies are paramount for having enough to survive, be free and live a good life. In order to avoid the threats of running out of money, making compromises and living with undesired constraints, investors must exploit opportunities available by harnessing the power of free markets, Modern Portfolio Theory and The Three Factor Model.

Avoiding the high costs of active management and exploiting the opportunities of Passive investment philosophies and Harvest Investment Strategies can impact performance as much as 2% just in execution costs while maintaining the same risk. While 2%, as an example, may not seem important, wise investors know that the difference between 6% and 8% on a $1 million portfolio over 25 years is $2.5 million. With this additional capital, investors can avoid unwanted and unhealthy constraints, compromises, obligations and relationships to freedom and produce financial capacities to live a good life.

Winter Park FL based Financial Harvest is a full service independent certified retirement & financial planning, investment advisory, and wealth management firm serving clients throughout Central Florida and the nation. Our financial services help investors in, but not limited to, Orlando, South Orlando, Winter Park, Maitland, Lake Mary, Heathrow, Windemere, Bay Hill, Tampa, Ocala, the Villages & Jacksonville.

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Philosophy

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