Build and Preserve Wealth

By Charles Massimo

One Investment Model Has Outperformed the S&P 500 98.7% of the Time in Any 25-Year Period Since 1927? Has Yours?

When it comes to investing and building wealth, many physicians start off at a disadvantage. Their longer higher education delays their earning a salary, at the same time that they are incurring hefty medical school debt.  This column is intended to be a helpful tool in educating physicians about how to effectively build and preserve wealth.

Did you know there exists a “tried and true” investment model that has consistently outperformed the Standard & Poor’s 500 (S&P 500); specifically 98.7% of the time in any 25-year period since 1927? The historical and empirical data transparently provides for this statement. Only one percent (1%) of the 250,000 advisors in the nation uses this model, known as the Fama-French Three Factor Model. The reason for this is due to the fact that the Fama-French Model requires a vast scope of knowledge and work to predictably outperform the market over time, but generates less fees for firms than all other models. Most advisors in the major wire house firms are instructed to sell product of specific interest to their firms and not build balanced, sustainable portfolios.

The emphasis is on selling products that generate the greatest profit for themselves and the companies they work for, not on the long-term financial well-being of clients. Most brokers think that trading stocks is the route to investment success.  Nothing can be further from the truth. Real wealth, at least in the stock market, is created by building highly diversified, global portfolios targeting the dimensions that will enhance returns. Only the Fama-French Three Factor Model accounts for all of those dimensions.

The aforementioned investment model focuses on cost-effectiveness. The average fee for building a port-folio following this formula is 40-60% less expensive than that of the average Wall Street formula. For the big wire house firms, it doesn’t offer enough profit. So instead of following this model, these firms try to prove that they have brightest minds; individuals who can outguess the market. What history has proven, and what you will learn in this and future columns, is that no one is smarter than the market. You will learn the market has an “efficiency” that is predictable. Ninety six percent

(96%) of all fund managers cannot beat the S&P 500 over any five-year period.

The Fama-French Model is an investment model that has provided a highly useful tool for understanding portfolio performance, measuring the impact of active management, constructing a portfolio and estimating future returns. It has replaced the Capital Asset Pricing Model (CAP-M) as the most widely-accepted explanation of stock prices in the aggregate and investor returns. In a recent Forbes column, author Frank Armstrong wrote that, “This process takes a long step forward in turning investment management from voodoo science into a real discipline.” In future articles I will disclose the correlation that exists between the scope of the workload of the Fama-French Model as it pertains to both outperforming the S&P 500 and the reduction of work for its clients.

[In the next Wealth Management column, author Charles Massimo will delve more deeply into the principles of this investment model.]

CHARLES MASSIMO, author of Getting Off The Street –Sane Investment Advice from One of the Nation’s Leading Wealth Managers, is listed in the 2014 volume of “America’s Select Financial Advisors.” His firm was named “Premier Wealth Management Company on Long Island” by the National Association of Board Certified Advisory Practices (NABCAP).


New York Physician     Vol. 6 Issue 1   Wealth Management

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