The Value Funds Only model has an average ten-year annualized return of 12.47%, beating the Baseline Index Aggregate by 1.92% annually, and beating the S & P 500 index fund alone by 0.86% annually. The "worst three-year return" during the bear market dip was +4.14%. The ten-year standard deviation and beta are very low, alpha is moderately positive, the Sharpe Ratio is quite high, and the R-squared correlation is moderate.

The Best Diversification model has an average ten-year annualized return of 12.60%, beating the Baseline Index Aggregate by 2.05% annually, and beating the S & P 500 index fund alone by 0.99% annually. The "worst three-year return" was +1.86%. The ten-year standard deviation and beta are quite low, alpha is again moderately positive, the Sharpe Ratio is again quite high, and the R-squared correlation is moderately high.

The Smaller Market Caps model has an average ten-year annualized return of 13.24%, beating the Baseline Index Aggregate by 2.69%, and beating the S & P 500 index fund by 1.63%. The "worst three-year return" was +5.70% during the bear market dip, a whopping 11.38% better than the Baseline Index Aggregate, and 20.10% better than the S & P 500 index fund. The ten-year standard deviation and beta are quite low, alpha is very positive, the Sharpe Ratio is quite high, and the R-squared correlation is quite low.

The Focus Mix model has an average ten-year annualized return of 13.84%, beating the Baseline Index Aggregate by an outstanding 3.29% annually, and beating the S & P 500 index fund by a very impressive 2.23% annually. The "worst three-year return" produced during the bear market dip was +2.66%. The ten-year standard deviation and beta are moderate, alpha is very positive, the Sharpe Ratio is very high, and the R-squared correlation is high.

These value-oriented models demonstrate that investors could have chosen several different ways to proceed 10 years ago and still have beaten the passive index approach by wide margins. In most cases this would have been achieved with low relative long-term risk and very low bear-market risk. Value investors therefore could have lost less during downturns, made more overall, and paid less in the form of portfolio volatility during the roller-coaster ride stocks took in the last ten years. Although a few somewhat unorthodox value investors think standard portfolio and/or individual security statistics are relatively useless at the fund management level, these statistics in fact support a more diversified (i.e., less concentrated) value-oriented approach quite well. This is not a huge surprise, since Ibbotson Associates data have shown value stocks outperforming growth stocks by very wide margins over the last 75 years. But most asset allocation optimization models (and investors) continue to insist on equal weighting for growth stocks in each market cap category. The results presented here suggest we could justify seeking good value managers and ignoring or at least diminishing the so-called advantages of high turnover, price-driven growth stock investing in constructing portfolios. In a stock picker's market, which some believe we will be in for some time to come, this may serve our clients well.

Changing The Way You Advise Clients

It makes sense to divide clients into "defensive" investors who might do better with the more conventional or conservative portfolio approaches, and "enterprising" investors who could do well with a more disciplined value investing approach. The most sophisticated and disciplined investors in this latter group might even do well with a focused portfolio. The way to evaluate to which group people belong is to first know the client well, and second, use a very detailed risk profile. Good examples are the one produced by well-known advisor and author Deena Katz (website: www.evensky.com), and the one produced by the folks at ProQuest Ltd. (Web site: www.risk-profiling.com). Once you've figured out approximately what type of investor your client is, it makes sense to show them portfolios like these, or ones that are similar which you construct yourself. The most "defensive" type of investors could have their assets put in portfolios similar to the Baseline Index Aggregate or the High Dividend models. More disciplined "defensive" investors could be put in a portfolio similar to the Best Diversification model. Typical "enterprising" investors could be put in allocations similar to the Value Funds Only or the Smaller Market Caps models. The most sophisticated and disciplined investors could opt for a concentrated allocation similar to the Focus Mix model. It will be important for advisors to help all of their investors stay focused on things like value philosophy, turnover rates, P/E, P/B, earnings growth, earnings yield, etc., rather than just stock prices, momentum or market predictions. In so doing you will have fulfilled your primary duty to your clients, which is to "first, do no harm," or as some value investors have paraphrased it, "first, don't lose money."

Kevin M. Wilson, ChFC, is a financial consultant with M & I Financial Advisors in Minneapolis.

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