3 factor seeks the best real­is­tic after-tax per­for­mance — with min­i­mal increased risk — via tax opti­miza­tion, opportunisitc portfolio re-bal­anc­ing, low fees, and customized portfolio asset allo­ca­tions informed by the research of leading invest­ment and aca­d­e­mic lumi­nar­ies. By mak­ing your tax­able accounts more IRA-like, our stud­ies show that your tax sav­ings more than pay for our low fees1.

As a registered investment advisor and wealth manager, 3 factor  provides a sophisticated long-term portfolio management service for our clients.  We refer to our investment approach as “Three Factor Indexing” with our goal being to deliver the best, realistic after-tax returns for the client portfolios which we manage.

Like many suc­cess­ful invest­ment advi­sors, we believe that mar­kets are by-and-large effi­cient and that try­ing to ‘beat the mar­ket’ is a fool’s errand.  Most top advi­sors take only two con­crete steps to improve per­for­mance for their clients: set up a diver­si­fied equity and fixed income allo­ca­tion, and use best-in-class, low-cost index funds. But where the advi­sory indus­try stops, 3 factor  begins.

Small Advan­tages Add Up: Incre­men­tally Improv­ing Returns

Small advan­tages add up, so much so that money man­agers eval­u­ate returns to a pre­ci­sion of 1/100th of a per­cent (known as a “basis point”). Com­pound inter­est, what Albert Ein­stein is said to have called “the most pow­er­ful force in the uni­verse,” makes even small advan­tages yield sig­nif­i­cant results. For exam­ple, say an invest­ment port­fo­lio grows at an annual rate of 7%. If the rate is only 20 basis points (0.2%) higher, or 7.2%, a $1M port­fo­lio will pro­duce an extra $31K after 10 years, $68K after 15 years and $132K after 20 years . The secret to suc­cess­ful invest­ing is to pay atten­tion to these small advantages.

At 3 factor, we seek to improve returns, basis point by basis point, via the 3 factor Engine™. We employ sophis­ti­cated, tax sen­si­tive portfolio re-balancing tech­niques, includ­ing opportunistic re-balancing, whole-portfolio re-balancing, and optimal asset lcoation.. Indi­vid­u­ally, each of these tech­niques add a hand­ful of basis points to after-tax per­for­mance; when applied in aggre­gate over the years, the effect is pro­nounced. Our analy­sis shows that over the past 15 years, a 3 factor-managed $2 mil­lion port­fo­lio would have out-performed the typ­i­cal advi­sor by $771K1. For more details on the analy­sis, see our method­ol­ogy.

Index­ing: An Applied Sci­en­tific Approach to Investing

An applied sci­en­tific approach to invest­ing can yield results that sur­pass con­ven­tional, active investing. Decades of aca­d­e­mic stud­ies con­clude that try­ing to beat the mar­ket is a los­ing propo­si­tion and that a sim­ple, glob­ally diver­si­fied port­fo­lio of stocks and bond index funds will serve most investors best2.

While there have been thou­sands of arti­cles and books writ­ten about the fail­ure of active man­age­ment, we think that the words of two titans of finance say it best:

“After costs, the return on the aver­age actively man­aged dol­lar will be less than the return on the aver­age pas­sively man­aged dol­lar…. they depend only on the laws of addi­tion, sub­trac­tion, mul­ti­pli­ca­tion and divi­sion. Noth­ing else is required. ”

~ William F. Sharpe, Pro­fes­sor of Finance, Nobel Laureate

“I’d com­pare stock pick­ers to astrologers, but I don’t want to bad-mouth astrologers.”

~ Eugene F. Fama, Finance Professor,University of Chicago

If you have a long hori­zon, a bal­anced port­fo­lio of stock and bond index funds is the best defense against the bogey­man of infla­tion. Sim­ply put, mar­kets — and capitalism — work.

Please see active ver­sus pas­sive invest­ing for a more com­plete dis­cus­sion of the advan­tages of pas­sive invest­ing and the fail­ure of active investing.

Better Returns Through Research

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(1) Analy­sis com­par­ing after tax per­for­mance of other advi­sors (or a self-managed, sophis­ti­cated investor) to 3 factor Indexing based on a glob­ally diver­si­fied port­fo­lio with a 60% equity, 40% fixed income allo­ca­tion. Ini­tial port­fo­lio val­ues assume the fol­low­ing: (a) $750K tax­able and $250k IRA with yearly addi­tions of $20k to tax­able account and $5k to IRA. (b)Taxes deducted via shares each April, assum­ing the high­est tax bracket for a Cal­i­for­nia investor. 

3 factor has con­ducted exten­sive analy­sis con­cern­ing port­fo­lio per­for­mance. See “impor­tant dis­clo­sure” for details and dis­claimers regard­ing our state­ments con­cern­ing per­for­mance, and the var­i­ous assump­tions we have made in our analy­sis.
(2) While the aca­d­e­mic start­ing point is the sem­i­nal works by Nobel lau­re­ates Sharpe, Markowitz (Nobel prize 1990) and Fama (Uni­ver­sity of Chicago, 1965), there are many books and arti­cles on the ben­e­fits of index invest­ing. See the case for pas­sive man­age­ment in our library.