Almost all of the modern investment industry is built on the idea that smart investors can use today's limitless informational resources, powerful analytical tools, and the opinions of experts to beat the market.

It makes sense: By picking the right stocks, the right broker, the right manager or the right time to buy or sell, investors can earn returns that not only beat the averages, but also beat their less informed, less discerning peers.

We agree that it's an appealing, even reasonable, concept. But we do not believe it.

We do not believe that investors (neither individuals managing their own portfolios nor professional money managers) can systematically beat overall market returns over any significant time period. In fact, we believe the harder they try to do so, the less likely they are to be successful.

What we believe

The members of Bright Sky Group share clear convictions about the nature of markets and what it means for portfolio creation and management:

• Active management adds no value. We believe market timing, stock picking, manager picking, style picking, chart reading and other active management techniques fail to beat overall market returns over time.
• Markets work. We believe that markets price securities so efficiently that it is not possible to systematically earn above market returns by buying or selling based on any available information — not earning reports, not past performance, not economic data.
• Diversification is key. We believe that holding a broadly diversified portfolio representing many different asset classes reduces overall risk and allows favorable performance in a variety of market conditions.
• Costs and taxes matter. We believe that the erosion of returns caused by transaction costs, management fees expenses and tax exposure is far greater than most investors realize. Controlling costs and taxes is essential to producing desirable investment outcomes.
• Risk and return are related. We believe the exposure to risk factors, not selection of individual securities, is the primary determinant of expected return.

Asset class investing

We are proponents and practitioners of asset class investing. We help clients meet their personal and financial goals by:

• Focusing on asset allocation and global diversification
• Utilizing distinct asset classes, each with its own risk and return characteristics, to deliver the highest level of expected return for any given level of expected risk
• Building portfolios primarily with institutional style, low cost, tax-efficient mutual funds that capture the returns of diverse asset classes
• Employing bond funds or laddered bond portfolios to represent fixed income asset classes
• Following a disciplined buy-hold-rebalance strategy, avoiding frequent transactions that drive up costs and tax burden
• Integrating all investment decisions with long-term financial planning

Asset class investing is rooted in Modern Portfolio Theory, a groundbreaking financial model that seeks to minimize expected risk for any level of expected return. The math is complicated, but the idea is simple — thorough diversification protects returns and mitigates (but never eliminates, of course) risk levels.

Although widely used by many institutional investors, including pension plans and university endowments, asset class investing is still the exception to the rule. Despite considerable research evidence to the contrary, many advisors and investors cling to the idea that they can outsmart and outperform the market. We believe the time spent in that pursuit is better applied to asset allocation, diversification, and the pursuit of personal, family and business interests.