What is Strategic Indexing?

Capital markets are composed of many classes of securities, including stocks and bonds, both domestic and international. A group of securities with shared economic traits is commonly referred to as an asset class. There are several asset classes, all with average price movements that are distinct from one another. Investors can benefit by combining the different asset classes in a structured portfolio.

A full range of asset classes includes small and large stocks, domestic and international, value and growth, emerging market countries, global bonds, real estate, and even municipal bonds. Because the asset classes play different roles in a portfolio, the whole is often greater than the sum of its parts. Investors have the ability to achieve greater expected returns with less price fluctuation and more consistency than they would in a less comprehensive approach.

From research conducted by industry-recongnized companies such as Ibbotson and Vanguard, asset allocation is considered to be the single largest factor of a portfolio's performance.  Allocation is more important than the actual security selection and market-timing combined.  The allocation should be based around each client's financial objectives, time horizon, and risk tolerance.

Setting an allocation that is too conservative for your client's financial situation is just as bad as being too aggressive.  Some risk-free securities had negative calendar-year inflation-adjusted returns just as frequently as stocks.  To help an investor choose the perfect mix, we utilize an investment method called Strategic Indexing. Strategic Indexing is a passive investment strategy that utilizes index funds in conjunction with a portfolio allocation based on the Efficient Frontier of multiple asset classes. The Efficient Frontier is an upward sloping curve that is created when you graph return rates and standard deviations of different asset classes. The individual points of the Efficient Frontier curve represent portfolios that possess the optimum rate of return for a specific amount of risk. This process is known as Portfolio Optimization.

The following articles are on what some industry experts had to say:

Can You Beat the Market? by The New York Times

Asset Management - Active vs Passive Management by Rex A. Sinquefield

The New Indexing by Eugene F. Fama Jr.