Joseph Hebert, a planner and co-founder of Seattle-based trueNorth Financial Services, loosely subscribes to an investment and diversification philosophy of “no pain, no gain.”
In managing his clients’ portfolios, Hebert, an independent financial planner with an academic bent, relies on the theories of Eugene Fama, a University of Chicago Booth School of Business Professor of Finance and 2013 Nobel Prize winner.
“I’m always looking for new and different approaches that enable our investors to be compensated for taking risk,” Hebert explains. “We started using these principles because this proves out that over a long time people do get compensated and receive a premium for taking risks.”
Fama’s work has an impressive academic lineage. He was awarded this year’s Nobel Prize in Economic Science together with colleagues Lars Peter Hansen of the University of Chicago and Robert J. Shiller of Yale University for research that lays the foundation “for the current understanding of asset prices,” according to the Royal Swedish Academy of Sciences, relying “in part on fluctuations in risk and risk attitudes, and in part on behavioral biases and market frictions.”
Along with Kenneth French, who is the Carl E. and Catherine M. Heidt Professor of Finance at Dartmouth College’s Tuck School of Business, Fama extensively studied the relationship between risk and return and their implications for portfolio management. All of which gave trueNorth’s Hebert a new set of tools for boosting his clients’ portfolios.
Fama’s theories basically comprise a passive management approach to investing, Hebert says. This approach holds that “Investors will be better off not just indexing, but looking to tilt their portfolios towards where they are rewarded for taking risks,” he explains.
In particular, this means angling the portfolio towards value-oriented stocks and small caps. Notes Hebert, “If you put a disproportionate share of your investments into value and small-cap stocks, it’s been proven that over long periods of time investors will be compensated for taking on additional risk.”
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