Philosophy

.

At the core of our investment philosophy is our unwavering belief in the efficacy of passive (index) investing. Why? Mutual fund managers routinely under-perform the passive index benchmarks because stock and bond markets are very efficient and nearly impossible to beat. Based on this financial and economic science, Common Cents Wealth Management uses a passive discipline by developing customized portfolios of low-correlated assets that reliably deliver the asset class returns of the components with less overall risk. We engineer a proper portfolio for your needs and unique to your risk tolerance and time horizon.

To help protect our clients’ assets and achieve our goal of wealth preservation with long-term growth, we focus on controlling costs. Common Cents Wealth Management primarily uses passive investments composed of Index Funds and ETFs. Why? They are no-load mutual funds which are tax efficient, have low turnover, no 12b-1 fees, and very low fund expenses. The savings from these funds have historically given investors better overall performance. Some bond funds may not be index funds.We firmly believe that long-term planning and a consistent approach to investing drives maximum results. We encourage you to work with us to define an appropriate strategy, commit to that allocation, and make changes only when necessary(typically as life milestones are reached or your risk-tolerance and capacity changes).

MARKETS WORK

Common Cents Wealth Management’s core belief is that markets work. We believe that markets are efficient for most stock and bond exchanges. That’s not to say that some managers can’t outperform the markets but rather far fewer managers outperform than statistics would indicate. It is virtually impossible to identify these managers in advance. It is only with hindsight that we can identify the few managers who beat the market. Past performance is no guarantee, nor an indication, of future results.

According to the 2011 Quantitative Analysis of Investor Behavior (QAIB) research study, the average investor under-performed the average investment by around 4.32% per year. This is a big deal and a wide gap. Your portfolio should at least be able to capture the investment return that is available for the taking. Our financial advisors will help you understand, and close, the gap between investment performance and investor performance.

We invite you to see how Common Cents Wealth Management, LLC is different than advisors, who like most of Wall Street chase returns instead of sticking to a disciplined investment strategy.

So ask yourself, can you consistently beat the average market index return? Can you always pick the winning managers year-in and year-out?

Now ask yourself, wouldn’t it be better to match the market return of each asset class, and build a globally-diversified portfolio that fits your needs? This strategy would reduce your financial worries and give you the freedom to pursue other areas of life more interesting than watching the markets.

You can do this with passive investments and the help of a fee-only adviser.

PASSIVE INVESTING

Stock and bond markets are extremely efficient. It is nearly impossible to “beat the market” by picking individual securities. Even the market “professionals” cannot do it consistently. Most mutual fund managers under-perform the passive index benchmarks they are trying to beat. As such, Common Cents Wealth Management believes that “markets work” and believes in the efficacy of low-cost, passive investing.

Common Cents Wealth Management focuses on controlling costs and ensuring proper asset allocation primarily using passive Investments such as index funds, exchange traded funds. Why? The savings from no-load products, no 12b-1 fees and lower fund expenses will give the client better investment performance, all else being equal. We apply this philosophy when constructing investment portfolios and developing appropriate asset allocations for each client.

HOLISTIC ADVICE – COMPREHENSIVE – LIFE INTEGRATED

Holistic advice means making your investment decisions in conjunction with the big picture of your long-term plan. For example, tax planning affects your investment selections and estate planning affects your insurance choices. At Common Cents Wealth Management, we take a holistic approach to helping our clients achieve their personal and financial goals.

DIVERSIFICATION MATTERS

Investors can reduce their potential for loss through diversification. The concept is simple: holding only one stock in your portfolio makes you directly susceptible to its price changes. If its price plummets, so does your entire portfolio. Holding two stocks is preferable to one and, unless they both tank, the portfolio is still afloat.

Now hold more than 15,000 stocks in your portfolio and you have reduced risk significantly. The key to diversification is the age old adage, “don’t put all of your eggs in one basket.” An important point, don’t forget that diversification doesn’t guarantee against investment loss, just reduces the risk.

REDUCING RISK

The main point of diversification is to reduce risk rather than improve expected return. Many investors believe that the holding an S&P 500 index fund or ETF give appropriate diversification…not true. The S&P 500 is a good proxy for large US growth companies, but it is not exposed to small cap, international or fixed income.

Therefore we build a portfolio of assets that make sense for that unique investor that contains 10-15 different asset classes.

MODERN PORTFOLIO THEORY

Modern portfolio theory is the philosophical opposite of traditional stock picking. It is the creation of economists, who try to understand the market as a whole, rather than Wall Street analysts, who look for what makes each investment opportunity unique.

With MPT, investments are described statistically, in terms of their expected long-term return rate and their expected short-term volatility. The volatility is equated with “risk”, measuring how much worse than average an investment’s bad years are likely to be. The goal is to identify your acceptable level of risk tolerance, and then to find a portfolio with the maximum expected return for that level of risk.

ADDING ASSET CLASS EXPOSURE

Investors can significantly reduce risk by adding exposure to other asset classes. For example, compare a portfolio that holds just US stocks to a portfolio that holds just Japanese stocks to a portfolio that holds 50/50. The diversified portfolio has not only provided the highest historical return, but it has done so with fewer negative quarters (reduced risk).

As we construct a clients’ portfolio, we include more asset classes to reduce risk further. We use 10-15 different asset classes to construct a risk-appropriate, globally-diversified, tax-efficient portfolio of low cost funds. Common Cents Wealth Management develops a portfolio that is efficient – one that maximizes return and minimizes risk for that unique investor.

MARKET EFFICIENCY

The efficient markets hypothesis portends that markets are full of intelligent people trying to predict the future values of securities for a profit. When trading a stock, the price they strike is the participants’ consensus about the stock’s value based on all available information about the security. Since the market price is the same for everyone, from a purely financial standpoint, so is its value. In this sense, markets assemble and evaluate information so effectively that the current price of a stock is usually the best estimate of its intrinsic value.

Security prices are not always perfectly correct, nor are correct prices a condition for market efficiency. Behavioral factors of investors can greatly affect the price of a security (e.g. market bubbles).

The consensus view of all market participants can result in prices well above or below a securities’ intrinsic value. However, these prices tend to be temporary and self-correcting (e.g. bubble bursts). More importantly, since “mis-pricings” tend to occur in both directions and managers seem to over- and under perform with random frequency when adjusted for risk and costs, markets seem to be efficient.

When trading costs are not adjusted, active managers tend to under-perform the market significantly more than expected.

WHAT THE EXPERTS SAY ABOUT PASSIVE INVESTING

I do not believe that they (investment advisers) can identify, in advance, the top-performing managers – no one can! – and I’d avoid those who claim they can do so. – John Bogle, Common Sense on Mutual Funds

“By periodically investing in an index fund…the know-nothing investor can actually outperform most investment professionals.” – Warren Buffet

“If index funds look great before taxes, their performance is almost unbeatable after taxes, thanks to their low turnover and thus slow realization of capital gains.” – Jonathan Clements, Wall Street Journal