Investment strategies for human engineering
Human engineering through strategic portfolio design
When markets turn stormy, structure beats speculation, and confidence comes from knowing your plan was designed to withstand all kinds of weather.
Strategic portfolio design provides the foundation. Human engineering makes it yours.
High-net-worth households present planning challenges that make them ill-suited to rule-of-thumb financial planning. Here is how we use strategic portfolio design to create a resilient portfolio specifically for you.
We believe that the most important investment decision you make is your asset allocation, meaning, how much are you investing in stocks vs. bonds, and how much specifically are you investing in different kinds of stocks—large cap, small cap, value, growth, sector funds, and so on. Your asset allocation will largely determine both how much return your investments will provide and how large the ups and downs will be along the way.
For high-net-worth households, this includes accounting for assets that Rain Dog does not directly manage—real estate, concentrated stock positions, active 401(k) plans, and other assets.
Asset location refers to where you hold different kinds of assets. Should you hold growth stocks in an IRA and income stocks in a taxable account, or vice versa? A study by Vanguard found that allocating investments to the best locations could increase an investor’s effective returns by as much as 0.6%.*
Cookie cutter approaches do not work very well in this area because the best location for an asset depends on numerous factors that are unique to you: different types of assets you own, proportions of your assets in different tax categories, how far you are from retirement, your level of income, and so on.
The subtleties of locating assets for your maximum benefit is part of why it is important to make investment plans based on your specific circumstances. For examples of how this varies by household, see our Field Note: The Value of Asset Location.
*Source: “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha.” Vanguard, July 2022.
Our process looks across the universe of investment options to implement your strategic asset allocation. Investment options can include direct indexing, funds that minimize tax exposure, individual securities, structured products, select active strategies, private equity, and low-cost index funds.
While we consider all options, the more esoteric options often come with considerable drawbacks, which applies to direct indexing, structured products, and private equity. We usually settle on low-cost index funds for core investments because their performance is relatively predictable and they tend to outperform actively managed funds. (For example, the 2025 SPIVA U.S. Scorecard from S&P Global found that 96% of actively-managed US equity funds underperformed their risk-adjusted benchmarks over a 10-year period.*)
Every strategic portfolio designed by Rain Dog is based on the client’s specific circumstances, and we include any option when it adds value to the portfolio overall.
*Source: SPIVA U.S. Scorecard Year-End 2025
Our attention to detail goes well beyond asset allocation, asset location, and investment selection. Our Investment Forecast Model performs portfolio optimization with numerous capabilities that cannot be matched by retail financial planning tools—including fully tracking tax implications of investment decisions over the full investment horizon, tax-smart Roth conversions, tax-smart withdrawals, and exhaustive evaluation of how planning options perform based on your specific goals, priorities, and constraints.
Our retirement-spending plan is an institutional practice that we have adapted for household use. Our fixed-income strategy supports safer withdrawals during market downturns and more optionality for longer-term bond holdings. Together, these practices support more sophisticated investment decisions, especially for higher-net-worth households.
Your strategic portfolio design is integrated with plans for retirement income, Roth conversions, estate planning, cash needs, and your other objectives. Over time, these strategies are affected by changes in your income, changes in investment values, changes in tax laws, reductions in concentrated stock positions, and changes in life circumstances.
Each of these practices can improve investment outcomes, and their combined effects can be substantial.
The role of index investing
While we consider all types of potential investments in designing custom portfolios for Rain Dog’s clients, index investing occupies a special place in our strategy: it minimizes investment costs and tracks close to well-defined benchmarks.
The most recent SPIVA US Scorecard from S&P Global reported that 80% of actively managed US equity funds underperformed their relevant benchmarks (aka indexes) in 2025.* On a risk-adjusted basis, 96% of actively managed US equity funds underperformed their benchmarks over the 10-year period ending in 2025. This basic pattern has been true for decades.†
Moreover, there is little consistency in which actively managed funds perform well. A Vanguard study reviewed actively managed funds that had performed in the top 20% for a 5-year period.‡ The vast majority of those funds did not maintain their position in the top 20% for the next 5-year period—81.7% fell to a lower performance category.
*Source: “SPIVA® U.S. Scorecard, Year-End 2025,” S&P Global, 2026.
†Source: “The Arithmetic of Active Management,” Financial Analysts Journal, William F. Sharpe, 1991.
‡Source: “The case for low-cost index fund investing,” Vanguard Research, May 2022.
For investments in taxable accounts, indexing provides the additional advantage of tax efficiency.
The typical actively managed portfolio turns over (sells) 50-100% of its holdings each year. A commonly cited average turnover figure for active funds is 63% with averages ranging from 70-91% depending on the fund.* That means investors in actively managed funds end up paying short-term capital gains or long-term capital gains on a large portion of their investments each year.
With index funds, the portfolio changes only when the index itself changes—for example, when a new stock is added to the S&P 500 or removed. Indexes change relatively infrequently, and the changes affect only small portions of the index composition, so index funds have low turnover. Vanguard’s S&P 500 index fund has a turnover ratio of 2.1%. Index funds are not tax-deferred investments per se, but, because only very small portions of the fund are turned over each year, only very small portions of the gains are taxable each year. The vast majority of gains in index funds are reinvested and grow tax-deferred until the funds are sold.
Russell Investments summarized the tax drag of actively managed funds like this: the average tax drag on large cap funds was 1.77%, on small cap funds was 1.78%, and on fixed income funds was 1.29%.†
*Sources: “Turnover ratios and fund quality,” Investopedia, retrieved 1/24/2024; “US Mutual Fund Turnover and Returns, 1991-2020,” Gene Hochachka, SSRN, December 10, 2021.
†Source: “What is the tax-cost ratio and why does it matter?” Ryan Pogodzinski, November 22, 2022, Russell Investments Blog, retrieved 1/24/2024.
Investors sometimes believe funds that charge higher fees will provide higher gains, but that is not usually the case. Studies by Vanguard, Morningstar, and other companies have found that the single factor that best predicts a fund’s performance is its expense ratio, meaning, the lower the expense ratio, the more likely the fund is to perform well.*
The average actively-managed fund’s expense ratio is about 0.59%, whereas the index funds we use have expense ratios of about 0.05%–0.15%.† These differences might seem small, but they compound and become significant over time.
*Source: “The case for low-cost index fund investing,” Vanguard research, May 2022.
† Source: “2022 U.S. Fund Fee Study,” Morningstar Manager Research, August 2023.
Our investment strategy is based on using historical performance data to predict how funds—and more important, specific combinations of funds—will perform over time. Every fund’s performance will vary over time, of course, but, because index funds are based on indexes, their investment philosophies will stay consistent.
That same analysis does not apply to actively managed funds. For example, a fund that claims it is outperforming the market in large company stocks might actually be achieving its outperformance by investing in small company stocks. A 2024 study by S&P Global reported that fewer than half of all US equity funds maintained the same style over the 10-year period ending in 2023.* This style drift creates problems for modeling the performance of actively managed funds over time, but with index funds the phenomenon is negligible.
We integrate index solutions into your broader design so you can trust the structure, not fear unpredictability.
*Source: “SPIVA® U.S. Scorecard, Year-End 2023,” S&P Global, 2024.
With most index funds, you are betting on segments of American or international business—large companies, medium-sized companies, small companies, companies that are trying to grow, established companies focused on value, and so on.
With actively managed funds (funds that do not track an index), you are making a more specific bet—you are betting on the capabilities of the fund managers who pick the stocks.
We strongly believe that betting on broad business segments is safer than betting on the judgment of particular fund managers or their investment approaches—which is one reason we are bullish on index investing.
