Our Investment Philosophy

Successfully Proven Investment Strategies

Our investment philosophy embraces investment strategies that have been proven successful through academic studies such as Modern Portfolio Theory.

Financial Planning, Financial Advisor, Retirement Planning, Carlsbad, San DiegoOur investment philosophy adheres to the four basic premises of Modern Portfolio Theory. In 1952 Harry M. Markowitz published his ideas on portfolio design, having completed his studies at the University of Chicago and joining the Rand Corporation. His dissertation explained models for applying mathematical methods to the stock market. Later publication of his groundbreaking book on portfolio theory earned him the Von Neumann Prize in Operations Research Theory in 1989 and then a Nobel Prize in 1990 that he shared with Merton Miller and William Sharpe. His body of work has become known as Modern Portfolio Theory (MPT). Although Professor Markowitz’s ideas were far ahead of the capabilities of computers to apply the theory at that time, the computer hardware and software advances of the past two decades have changed this so that we may now actually apply the principles of Modern Portfolio Theory in our client’s portfolios. Professor Markowitz’s theory held four basic premises:

Markets are basically efficient

Markets process all available information so rapidly to determine the price of any security that it is statistically improbable to gain a competitive edge by exploiting the occasional anomalies. This means that to “beat the market”, an investor would have to possess not only the correct insight or information regarding a specific security, he would have to be the only investor to possess it, and he would have to do this consistently over time. With advances in information technology and more sophisticated investors, the markets are likely to become even more efficient.

Exposure to risk factors determines investment returns

Numerous, well-documented academic studies have confirmed that an investor’s return is overwhelmingly dependent on the amount of exposure to the specific risks associated with the various asset classes. Over time, riskier assets provide higher expected returns as compensation to investors for accepting the greater risk. This is the basic concept underlying the Nobel prize-winning strategy that has become the new legal standard for prudent investing by fiduciaries.

Diversification reduces portfolio risk, and increases expected returns

Adding low-correlating asset classes, even if they carry a higher risk on their own, can actually reduce overall volatility on a portfolio level, and increase expected rates of return. By intentionally designing portfolios to incorporate various degrees of exposure to different asset classes, we can help investors to create the most efficient (highest expected return) portfolio for the level of risk they are willing to assume.

Passive portfolio management is less costly, thus increases expected returns

Financial Planning and Retirement Planning for Carlsbad, San DiegoActive management is expensive and these expenses reduce investment returns. Active managers are expensive in terms of fees and salaries. The associated high turnover of securities creates trading costs and higher tax liabilities that are also passed along to the individual investors. Active portfolio managers are also susceptible to style drift, a commonly observed trait of skewing a portfolio’s asset allocation to chase recent high performance of specific securities.

While it is tempting for investors and professionals to focus entirely on investment returns, Markowitz emphasized risk and its relationship to investment return. Further, he focused attention on the overall composition of the portfolio rather than the traditional method of analyzing and evaluating the individual components. He discovered that you could design portfolios based on specific risk-reward descriptions and on the identification and quantification of portfolio objectives.

Markowitz’s theory has been proven by studies of actual portfolios. The studies found that efficiently allocating capital to specific asset classes is far more important than selecting the “right” components of those asset classes. A study by Merrill Lynch in 1979 showed that in a typical diversified investment portfolio, diversification eliminates so much of the specific risk that roughly 90 percent of all the portfolio risk is market risk and only 5 to 7 percent is specific risk, (specific risk being the risk associated with a specific issue – stock, bond or property).

The most famous study, conducted in 1986 by Brinson, Hood & Beebower, determined that on average 93.7% of the variability in the risk and returns of a portfolio could be explained by the asset allocation policy.

These studies have dramatically supported the concept that asset allocation is the primary determinant of portfolio performance, with market timing and security selection playing minor roles. In other words, it’s more critical to be in the “right asset class” than the “right investment.”


Once an allocation is established, we use a process of rebalancing which brings the portfolio back to the original percentages by selling a portion of asset classes that have appreciated and buying additional portions of asset classes that have depreciated. In this way we’re following the old adage of “Buy Low and Sell High.” This also helps us to overcome the emotional tendency to do the opposite.

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Frequently Asked Questions

What period will my money be invested?

Investment time horizon refers to the amount of time between now and when you expect to use the money from an investment. As an example, if one intends to buy a house in five years, their time horizon for that purpose is five years. Conversely, a 25-yr old person saving for their retirement has a time horizon of at least 35 years for those assets. It is usually appropriate for the amount of risk/volatility in one’s portfolio to be proportional to their investment time horizon. This is because, in the long run, one tends to be rewarded with higher returns if one accepts higher risk/volatility. But if one needs the money soon, one can less withstand the dramatic short-term downturns that are expected from more risky/volatile investments. Frank Financial Services considers investment time horizon to be a central component in assessing an appropriate asset allocation.

Will we discuss investment types before they are purchased?

Absolutely. We can provide a detailed asset allocation analysis based on our prior meetings, your ability to take risk, and your goals and objectives. Prior to implementation of the analysis, we can discuss, in detail, the specific recommended investments.

Can I trade in my investment account with you?

Generally, we do not recommend that a client trades in their investment account. We will however, be happy to open a trading account for our clients so they can make their own investment selections and trades.

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About the Author
Todd Frank, President & CEO, Frank Financial Advisors in San DiegoTodd E. Frank, CPA/PFS, MBA is the President and CEO of Frank Financial Advisors, a Registered Investment Advisory Firm (RIA) serving clients nationwide from our headquarters in Carlsbad, San Diego, California. As an RIA, Frank Financial Advisors is able to offer truly independent, fee-only financial advisory services.