Investment Philosophy

Investment Philosophy

Invest to achieve long-term goals: When analysts look at stock and bond market returns, we are generally looking at results over the long term. The assumption is that investments will be held for a long time frame in order to experience an average return. For bonds, the appropriate time frame is 3 to 5 years and for stocks, it is 5 to 10 years. Whatever money you will need within the next three years, that money should be held in relatively safe investments like CDs and money market funds.

Broad diversification, with exposure to all parts of the stock and bond markets, reduces risk: A portfolio should hold a mixture of stocks, bonds, international stocks, and perhaps some commodities and emerging markets stock. These are the traditional asset classes. The riskier asset classes should be held in smaller amounts as they are meant to be a diversifying agent rather than the engine for the portfolio. By holding a basket of assets classes, the premise is that all the “eggs” in the basket will be performing differently.

An investor’s most important decision is selecting the mix of assets to be held in a portfolio: Research shows that 90% of portfolio returns are directly related to the asset allocation. That is the percentage of stocks vs. the percentage of bonds in the portfolio. The actual stocks, bonds, mutual funds or ETFs you choose are a minuscule factor in the long term performance of the portfolio.

Consistently outperforming the financial markets is extremely difficult: Even though an investor or manager may outperform the market in the short run, in the long run it is nearly impossible to consistently outperform the market. So why pay a high fee to a manager if he/she really can’t do better than just owning the market? This is the argument for index funds.

Minimizing cost is vital for long-term investment success: Minimizing investment costs, both fees charged within mutual funds, and trading costs, is money you keep in your pocket: and more money that can be invested. Over long periods of time, the compounding effect of high fees is really quite astounding.

Market-timing and performance-chasing are losing strategies: Studies have consistently found that the average investor buys when the market is high and sells when the market is low. One study showed that while the average mutual fund returned 10.8% in the 20 years ending in 2007, the average mutual fund investor only earned 4.48%. If you or anyone you know did outperform the market, it’s due to sheer luck which is unlikely to continue for long periods of time.

The most important thing an advisor can do is keep an investor from making mistakes by reacting emotionally to the market. The advisor is your reality checker to make sure your behavior is in line with attaining your long term goals.

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