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We favor investments that are low cost, tax efficient, diversified, liquid and simple. Many investors often have problems when they invest in things that do not have these five characteristics. Investments with these five characteristics have been profitable over time, but are generally not very exciting. There is usually no “hot story you need to act on now.” associated with them. The financial services industry generally does not favor these types of investments because they generate very little profit from them. We are in the business of helping our clients maximize wealth, not in the financial services industry. Please note that this list of investment features is not exhaustive. Other factors to look for in investments may include an attractive valuation, low correlation to your other holdings, a good dividend yield or interest income, a bias toward areas of the market that have produced higher returns, such as value stocks, a level right risk for you. , etc.
Low cost. We typically invest in low-cost index funds and exchange-traded funds (ETFs). The funds we invest in have an average expense ratio of just 30% per year. The typical actively traded stock mutual fund has an average expense ratio of 1% or more. With mutual funds, the best predictor of future relative performance is the fund’s expense ratio; the lower the better. Hedge funds typically have annual expense ratios of 2% plus 20% of earned profits. Some variable annuities and permanent life insurance “investments” may have annual expenses of 2% or more. By keeping a close eye on the costs of our investments, we are able to save our clients significant amounts of money each year and help them achieve higher returns over time (all other things being equal). With investment products, you don’t get a better return on a higher-cost product, in fact, you typically get a worse return.
Efficient tax. Our investments (index funds and ETFs) are extremely tax efficient and allow the investor some control over tax timing. These types of funds have low turnover (commercial activity), which is a common characteristic of tax-efficient investments. We recommend avoiding high turnover mutual funds due to their tax inefficiency. After the recent big rise in the US stock market, many active stock mutual funds have “built-in” capital gains of as much as 30%-45%. If you buy those mutual funds now, you may end up paying capital gains taxes on those implicit gains, even if you didn’t own the fund during the increase. ETFs generally do not generate short- and long-term capital gains distributions at the end of the year, and they do not have built-in capital gains like active mutual funds. Hedge funds are often tax inefficient due to their high turnover. In addition to investing in tax-efficient products, we also do many other things to help minimize tax for our clients, such as collecting tax losses, keeping our turnover/trade low, putting in the right type of investments in the right type of accounts (tax location), using losses to offset capital gains, using shares with large capital gains to give away, investing in tax-free municipal bonds, etc.
Diversified. We like to invest in diversified funds because they reduce the specific risk of your stocks and the overall risk of your portfolio. Bad news about a stock can send it down 50%, which is horrible news if that stock makes up 20% of your total portfolio, but it’s hardly noticeable in a fund of 1,000 stock positions. We tend to favor funds that typically have at least one hundred shares, and often several hundred shares or more. These diversified funds give you a broad representation of the entire asset class you’re trying to expose yourself to, while eliminating stock-specific risk. We are not likely to invest in the newer Solar Energy Company Stock Fund with 10 stock positions, for example. We do not believe in taking any risk (such as stock-specific risk) for which you will not be paid with a higher expected return.
Liquid. We like investments that you can sell in a minute or a day if you choose, and those that you can sell at or very close to the going market price. With liquid investments you always (daily) know the exact price and value of your investments. All mutual funds we recommend meet this standard. We don’t like investments where you’re locked in for years without the ability to get your money back or pay large exit fees. Examples of illiquid investments would be hedge funds, private equity funds, annuities, private company stocks, small publicly traded stocks, start-up company stocks or debt, illiquid dark bonds, structured products, some life insurance “investments” , private real estate companies, etc. . We prefer mutual funds that have been around for some time, are large in size, and have a high average volume of daily transactions.
Simple. We prefer investments that are simple, transparent and easy to understand. If you don’t understand it, don’t invest in it. All our investments are simple and transparent; we know exactly what we own. Complicated investment products are designed in favor of the seller, not the buyer, and often have high hidden fees. Examples of complicated and non-transparent investments that we generally avoid are hedge funds, private equity funds, structured products, some life insurance “investment” products, variable annuities, private company stocks, startup stocks or loans, etc “Make everything as simple as possible, but not simpler.” -Albert Einstein.
We believe that most investors should have the majority of their portfolio invested in things that have these five great characteristics. By doing so, you will avoid many mistakes, negative surprises, and risks along the way. In addition, we believe that your after-tax investment returns will likely be higher over long periods of time. Of course, not all smart or good investments will have all of these features. For example, income-producing real estate is illiquid (and often not diversified), but can be a great long-term investment if purchased and managed properly. Owning your own business is not liquid and not diversified, but it can also be a great way to build wealth. We believe these five investment characteristics become even more important as you enter retirement, since at that point you may be more focused on reducing risk and preserving your wealth than building it, and you may need liquidity to spend and Give away part of your wealth during Retirement. These five great investment characteristics can be a good screening device for potential investments and good factors to think about when investing.