Steven Evanson has a doctorate in statistics and behavioral sciences. As it turns out, such a combination has led to an unconventional approach to investment theory.

Now an advisor based in Carmel, Calif., the 61-year-old former clinical psychologist made a career switch more than 20 years ago to helping people put together investment portfolios. The basis for his strategy is a strong belief that nobody can forecast long-term economic and asset class movements.

"We don't trade or time markets once we're in positions for our clients," said Evanson. "Our major focus is for people to own a little bit of everything within their individual risk levels and specific financial situations."

He says studies show that the less you make changes, such passive approaches using index mutual funds over time will beat stock traders and the hefty costs associated with such a process.

It's a low-maintenance approach, Evanson says, that sports low turnover and low costs. His average charge for managing portfolios is around 0.10%, although for the firm's smaller-sized accounts of $1 million or less, it might reach twice that amount. "I really don't like charging more than 20 basis points," Evanson said.

Keeping costs low is critical to passive investing. And Evanson's a big believer in holding down costs. "A lot of people in my business charge 1% or more. The problem is that sucks up most of the advantages of using passive funds over active funds," he said. "The name of the game is to keep advisory costs, tax costs and fund costs as low as possible. Costs do matter."

Big On Style 

Evanson uses index funds from Vanguard. But he strongly recommends Dimensional Fund Advisors funds for stock investors. "Vanguard offers great funds, but they're index-based. DFA is constructing portfolios based on style factors, which isn't the same as having an index, which in a sense, is like a semi-momentum fund," Evanson said.

That difference in methodologies results in somewhat different portfolios in different asset classes. But he says that the biggest differences come in capturing value-styled stocks. "My preference is to equally weight equity asset classes," Evanson said. "None of the past data is strong enough to guarantee future results over the next 40 years. To me, you need to be soberly grasping the potential for loss."

In a typical portfolio, he might use 10 funds. For example, on the domestic side, Evanson prefers to hold the DFA U.S. Large Company Fund (DFLCX) with the DFA U.S. Large Cap Value Fund (DFLVX). While the first one is growth-oriented, the second adds value stocks and provides overseas exposure. He also likes to provide exposure for his clients to small-cap value; small-cap growth; and U.S. real estate investment trust funds.

For small-growth stock funds, Evanson likes to use the DFA U.S. Micro Cap Fund (DFSCX). But it's closed to new investors, so he goes with the DFA U.S. Small-Cap Fund (DFTSX) for those clients seeking access to small-cap growth stocks without positions in DFSCX.

"These are called building blocks that are inter-correlated to some degree. But they're still discrete enough to consider them a different investment meal, mixed together in different flavors," Evanson said.

DFA has started coming out with so-called core vector funds. These include large- and small-growth and value stocks in one portfolio. "I want to know how much chili powder we're putting into the beans and meat, so to speak," Evanson said. "I prefer to use my own building blocks."

But he adds that there are many different ways to configure portfolios, based on personal preferences and situations. "The key decision is the ratio of equities to fixed income," Evanson said. "That's the best measure to figuring out how much pain you're willing to accept in exchange for possibly higher returns."

He stresses to investors that although predictions of future gains are based on the best available data using statistical modeling techniques, they're not anything to bank on. "They can give us some hints and clues," Evanson said. "But as far as being definitive and certain, there's no way."

A case in point he says is bullish forecasts by analysts this week for a rise in corporate earnings by large companies. But the veteran investor also notes that at the same time, the trailing price-earnings ratio on the S&P 500 is running around 25.8—historically quite high.

And such discrepancies aren't unusual when trying to use past results to predict future returns, Evanson adds. As a result, he doesn't put much weight in any such forecasts. "Predicting the future is all about marketing," he said. "As soon as you learn that you can't predict what's going to happen, the sooner you become a much more focused and realistic investor."

Key Objectives 

Keeping his clients focused on their long-term financial goals as well as their keeping their emotional health strong during market slumps is an essential part of any motivated advisor's job, Evanson says. And that could become even more important in coming years.

"Investors have been spoiled by 25-26 years of relatively short periods of downturns and relatively long periods of healthy gains. So in my opinion, people have become spoiled and expect continuous gains. Based on history, that's fairly unrealistic," Evanson said.

What if that doesn't happen again? "You're going to see a decrease in the number of investors who believe that stocks can make them money," Evanson said. "The psychology of investing is going to change."

At the top of bull markets, more than half of Americans own stocks. That has dropped to as low as 10% in 1982, Evanson says. "If the market crashes, someone with a very long investment horizon should applaud. They can buy stocks very cheaply and hold on through any downturn," he said. "But if you're retired and need money now to live on, that demands a different approach. The key is tailoring a plan that fits your particular needs and allows you to emotionally survive periodic downturns in the stock and bond markets."