[Recording] Three Key Investment Strategies Hidden In Plain Sight
When making investment decisions, most people likewise assume that the most eye-catching ink matters the most: an alarming economic forecast, an exciting Initial Public Offering, hot trading tips. But there’s a catch.
This evident assumption does not hold up under evidence-based scrutiny. In reality, you have little or no control over how the most obvious news impacts your investments. The most exciting action has already been priced into any trade you might make well before you decide to make it.
Instead of fixating on the headline news, consider that liberating financial white space. There, hidden in plain sight, you’ll find a number of powerful investment strategies that are freely available and far more within our control.
Consider These 3 Key Investment Strategies Hidden in Plain Sight:
We emphasize these—and we think that you should too—because (1) they’re simple enough to apply once you know they’re there, (2) they can have a significant impact on your investment experience, and (3) we see too many investors ignoring them at their peril.
Key Investment Strategy #1: Being There
To receive a return on your investment, first you must invest (and stay invested).
It’s relatively simple to accept the notion of no pain, no gain. To earn returns, you must put your assets at risk in ventures that are expected to compensate you for your faith that they will succeed … if they do. Then you must patiently await the desired success, knowing that it is expected but not guaranteed. The riskier the ventures, the less certain the outcomes, but the more you can expect to earn for enduring the uncertainty … if you do.
Instead, many investors panic when market risk arises and move their money to the proverbial sidelines. They also fret that they’re going to miss the boat when the market surges, so they pile into whatever is the latest success story.
By chasing and fleeing hot and cold markets, you’re undesirably buying high and selling low. You’re also disregarding decades of empirical evidence that informs us that one of the best ways to capture long-term market growth is to build a solid, individualized plan, and to then stick to your plan by riding out the market’s near-term ebbs and flows.
With this simple strategy, you’re trusting that the market will continue to do what it has done for many decades when viewed from a long-term perspective: It has grown.
Key Investment Strategy #2: Managing for Market Risks
Don’t take on more risk than you must.
There is no getting around the fact that the market does not deliver rewarding returns without periodically punishing us with realized risks. That is why it’s so challenging for most investors to “be there,” consistently capturing available returns by remaining invested over time. It’s also why it’s vital to avoid taking on more risk than you must in pursuit of your personal goals. For this, we have two powerful tools at our disposal, best used in tandem.
Diversification: Eliminating Unnecessary Risk
Diversification helps you spread your risks around. If you instead concentrate your portfolio in too few holdings, sectors or geographical locales, you may feel you’ve made smart selections when they happen to be doing well. But when bad news hits an undiversified portfolio, it often arrives without warning, and with a vengeance. That’s a real risk that investors too often ignore at their own peril.
Decades of academic inquiry has informed us that, despite the risks, there are no extra returns expected by trying to consistently predict individual winners and impending losers. Instead, you are best off eliminating this form of risk by putting diversification to work for you.
Asset Allocation: Minimizing Unneeded Risk
While some risks can be diversified away, some remain. These are expected to enhance your long-term returns if you build them into your total portfolio—and if you stay the course with them over time.
By blending a customized mix of riskier and less risky asset classes into your portfolio, you can seek to build wealth toward your personal financial goals while fine-tuning the risks involved. In contrast, chasing returns you don’t actually need can result in sacrificing what you’ve already accumulated if the risk is realized. Why go there?
Diversification and Asset Allocation: Your Double Defense
If there is such a thing as a free lunch for investors, it’s enjoyed by making best use of market risks and expected returns. Diversification helps you eliminate unnecessary risk – the kind that is not expected to improve your investment returns to begin with. Guided by your financial goals, asset allocation helps you diversify appropriately to minimize unneeded risk and to properly manage the market risks that must remain.
Key Investment Strategy #3: Controlling Costs
Don’t spend more than you need to.
Many investors don’t realize how seemingly modest costs can lead to significantly different outcomes over time. For example, this Securities and Exchange Commission (SEC) Investor Bulletin illustrates how a $100,000 investment earning 4 percent annually over 20 years would accumulate $220,000. If you calculate the earning power lost by removing instead of reinvesting a modest 0.25% annual expense, which is in the typical range for a low-cost index fund, you sacrifice about $10,000. Bump that to the 1% annual expenses (or higher) that are often found in higher-cost, actively managed funds, and you’re giving up closer to $40,000.
As an investor, you deserve full disclosures and clear explanations, so you can determine for yourself whether the costs are justified. If we could offer only one piece of advice on the matter, we would conclude by urging you to forever heed this familiar adage: If it sounds too good to be true, it probably is. Question everything, control what you can, and exercise patience.
As always, if you would like to talk about any of these key investment strategies with a CERTIFIED FINANCIAL PLANNER™ or learn more about how we help set our clients up for financial success, please don’t hesitate to get in touch.