If you’ve been keeping up with us here at Ellevest, you’ve probably noticed we’re not your dad’s old investing firm — and we’re not a tech-bro startup either. Forget jargon-laden talk about beating the S&P or beer-drenched ping pong tables. They can keep that. We’re busy waging war to help you close your personal “gender investing gap” and take control of your financial future.
We’re also super proud of what we’ve built behind the scenes. The kind of research, projections and assumptions that go into building your customized investment portfolio. The rigor with which we select the investment funds in your portfolio. Our innovative approach to risk. And how we make all of it happen so fast (getting your Ellevest plan literally takes minutes) that many of you think you may have missed something.
Well, you did and you didn’t. We respect your time and the way you tell us you’ve been spoken to before by some financial advisors out there, so we don’t bark a bunch of acronyms at you and tell you what you “should” be doing. Instead, we incorporate your specific life factors, and our crazy-fast algorithm builds an investing plan for you. (It’s an investing plan, but face it, it’s like a life plan with dollar signs next to it.) It looks and feels easy — by design — but read through the 17-page summary of our methodology, and you’ll see it’s anything but simple.
Oh, reading an investment manifesto written by our Stanford Ph.D Chief Investment Officer isn’t one of your hobbies? Here’s a breakdown of the Ellevest investment methodology — sort of a cheat sheet on how we’re turning investing on its head. In this first installment we’ll take a look — sans jargon — at the concepts that will help you better understand what’s at work in your Ellevest portfolio.
MPT (Modern Portfolio Theory)
The first topic in Portfolio 101 is modern portfolio theory (MPT). This theory states that it’s possible to maximize expected returns for a given level of risk in a portfolio by selecting the right mix of investment assets. That risk-return tradeoff is known as the “efficient frontier” in finance circles, and the gist of it is, “the higher the risk, the higher the potential return.”
When you construct portfolios around MPT, you’re focused on one thing: trying to reach the efficient frontier — and you do this with the help of several tools and techniques.
MVO (Mean Variance Optimization)
One of these tools is Mean Variance Optimization, or MVO for short. (I know, short doesn’t make it sound any less complicated.) MVO means you look for a combination of asset classes (stocks, bonds, and alternatives) that delivers the maximum return for each level of risk. This is widely used throughout the investing world. Only issue: MVO is best suited for building portfolios purely focused on long-term investing that don’t take specific goals into consideration.
Ok, so that’s a pretty big issue since goal-based investing — investing to get you to your goals, such as starting your own business — is what Ellevest is all about. So other advisors might be content with just using MVO, but that’s not going to cut it for us. We build investment portfolios with the intention of reaching a goal target — instead of outperforming some index — so our focus is also on minimizing the risk of you missing your goal target, not solely on maximizing returns. So we have to take factors beyond MVO’s scope into consideration to do that.
LDI (Liability Driven Investing)
That’s why we use Liability Driven Investing (LDI), and this is where the Ellevest Difference comes in.
LDI builds on MVO by considering liabilities, as well as assets, in its combinations; this matters because the goal targets you set up with Ellevest are actually financial obligations you hope to have down the line. For example, if you’re looking to buy a home in six years and plan to make an $80,000 down payment, that’s a future liability you “owe” yourself at that time.
But it doesn’t stop there: LDI also treats risk differently than MVO. Instead of viewing risk in terms of exposure to fluctuating prices — which is what the industry typically does — LDI sees risk as failing to meet your liability (or goal).
This MVO and LDI tag team means each of your customized investment portfolios has been constructed in a way that aims to minimize the risk of your falling short of your goals while maximizing your returns.
There’s another important tool we use to manage the risk in your portfolio: the closer you get to your goal date, the less investment risk we have you take in your portfolio. It’s called a “glide path,” and we create a unique one for each of your goals to decrease the possibility that your portfolio — which you’ve contributed to and presumably watched grow over the years — will be wiped out by a market correction right before you’re ready to retire, buy that house, or follow through with another goal. Also, unlike other digital advisors, we factor the glide path into your projections, so that goal target you see is what you’re likely to hit (or better) in 70% of market scenarios.
So there you have it. These are the industry-tested, Ellevest-enhanced concepts and tools at the heart of every customized portfolio. And you didn’t even need a Ph.D to understand them.
The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.
The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.
Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.