Movement Capital’s framework is summarized by these core principles:
Research shows that costs are the strongest predictor of future returns. Movement charges a flat fee, uses low-cost ETFs, and maximizes tax efficiency.
Avoid Big Mistakes
Your portfolio should be globally diversified, protected from inflation, and able to reduce equity exposure when there’s a high probability of recession.
Keep It Simple
An investment strategy should make sense. Simple portfolios are easier to maintain and more likely to stand the test of time than complex solutions.
Portfolios need to be built with facts based on evidence rather than subjective beliefs on how to invest.
Movement’s framework is based on 7 facts. Click on each one for a full description:
1. Lower fees = massive savings
An advisor’s job is to help clients reach their financial goals. High fees make this an uphill battle.
Consider two hypothetical investors with $1,000,000:
- Both earn 7% per year before fees.
- One investor pays an advisor the typical 1.0% per year.
- The other investor pays an advisor a flat $5,000 per year.
The flat fee investor saved $640,000 in fees over 30 years.
In addition to our flat fee, Movement only uses low-cost ETFs. The average expense ratio for funds that advisors use is 0.50%.1 The average expense ratio for funds that Movement uses is 0.07%. For the above example, that would mean saving an additional $100,000. We use ETFs because they’re more tax-efficient than mutual funds.2
2. Simple models outperform experts
People sometimes have a fight or flight response when faced with a hard decision – not the best mindset for investors. A solution is to defer investing decisions to data-driven models.
In a variety of fields, researchers have compared simple models against the forecasting ability of industry experts, with studies ranging from assessing wine quality to estimating the probability of business success.3 Across 136 academic papers, simple models beat or matched the forecasting ability of experts 94% of the time. Models reliably outperform experts because they are not prone to behavioral biases. This is why systematic models drive all Movement Capital portfolios.
One of Movement’s models is based on momentum, which is the tendency of investments that have performed well in the past to continue performing well in the future. Eugene Fama, winner of the 2013 Nobel Prize in economics, said:
“The premier market anomaly is momentum.”Eugene Fama
Momentum models have historically reduced risk compared to traditional buy and hold strategies. The graph below shows the drawdown reduction of a momentum model applied to U.S. and international stocks since 1987:
3. Diversification ensures a higher probability of success
A shipbuilder does not construct a ship for calm seas – they know that storms occasionally happen and build accordingly. Investment portfolios need to be built in a similar manner: positioned for the best but prepared for the worst.
Data shows that most stock market gains come from a small number of big winners:
The chance of picking these winners in advance are slim to none, so it makes sense to diversify. Diversification can be a frustrating strategy in the short run because you will lag behind the top performing asset in a given year. However, a diversified strategy provides a higher probability of long-term success. Movement uses globally diversified stock and bond funds.
“It’s waiting that helps you as an investor, and a lot of people just can’t stand to wait.”Charlie Munger
4. Stocks outperform bonds and cash (over the long-term)
Stocks have significantly outperformed bonds and cash:
You must take a significant amount of risk to capture stock returns. Would you panic if you invested $1,000,000 and lost $500,000 the next year? Most people would, and this is why most should not pursue a strategy only focused on stocks. Movement makes sure that each client’s stock allocation reflects their individual time horizon and risk tolerance.
5. Compound returns matter more than average returns
The difference between average and compound returns is called the “volatility tax”. If you lose 10%, it takes 11% to get back to even. If you lose 25%, it takes 33%. There is an asymmetric relationship between the losses and gains necessary to get back to even.
Consider two hypothetical investments shown below. One has an average return of 4.7% and the other 4.4%. Most people would guess the first option returned more money, but that’s not the case. A less volatile return path, despite having a lower average return, results in higher compound returns. Movement pursues less volatile strategies to minimize the volatility tax.
6. Home country bias leads to geographic concentration
The average U.S. investor has 79% of their stock exposure in U.S. stocks. People tend to invest more in their local markets because it’s the comfortable thing to do. Staying close to home is a constraint in today’s globalized economy.
Between 1899 and 2017, the value of U.K. stocks dropped from 25% of the global stock market to just 6%.4 U.S. investors shouldn’t look in the rear-view mirror and concentrate in the U.S. because it was the right thing to do decades ago. They should look forward, acknowledge that no one knows what the future will hold, and globally diversify. All Movement portfolios are globally diversified.
7. High inflation is a risk for traditional portfolios
Imagine that you bought a bond in 1968 that paid 5% a year in interest. Inflation was around 3%, so you were making 2% after inflation. During the 1970s, the bond actually lost money since annual inflation rose to 13%.5
Traditional stock and bond portfolios struggled in the inflationary 1970s and are just as vulnerable today. Movement Capital uses inflation-linked bonds and international stocks to protect against inflation.
Want more info?
We can talk on the phone, discuss your financial goals, and help you decide if we’re a good fit.