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Invest Smarter

Six Smart Steps

Whether you’ve been investing for decades or are just getting started, at some point on your investment journey you’ll likely ask yourself if you are making the right decisions to help your odds of success. Trying to find the answer to this question may be intimidating, but know that you’re not alone. We can help you begin or continue your journey with a smarter approach to investing. Our Six Smart Steps shed light on the key investment principles that help improve your odds of success.

STEP 1Embrace Market Pricing
Let the markets work for you. Speculating and forecasting are not reliable strategies. Even when they seem out of control, the markets deliver returns over the long term. Invest, rather than speculate.

STEP 2Determine Your Target Asset Allocation
The make up of your portfolio is the most important determinant of investment returns. The more risk you take, the higher will be your expected reward; however, you’ll have to endure more frequent and more turbulent portfolio dips and swings. Seek risk with stocks, comfort with bonds. Match your portfolio allocation of stocks and bonds to your risk tolerance and time horizon.

STEP 3Diversify Wisely
Diversification helps reduce risks that have no expected return, but diversifying only within your home market may not be enough. By holding a globally diversified portfolio, you’ll reduce your risk and be well positioned to seek returns wherever they occur.

STEP 4Minimize Costs
Costs drain your wealth. The only thing that higher costs guarantee is that more wealth will trickle up from your account to the pockets of your broker/advisor. Minimizing your costs should be one of your main goals.

STEP 5Remain Disciplined
Ignore market headlines, stick to your plan during market dips and swings, and occasionally rebalance your portfolio. Allowing emotions or opinions about short-term market conditions to impact your investment plan can lead to disappointing results.

STEP 6Focus Only on What You Can Control
You can’t control the markets. And you can’t control the news, information, and expectations that will impact market behavior. To help your odds of investment success, focus on Step 1 through 5. They are the actions that add value and that you can control.

Low-management fee index funds can help you diversify, minimize costs, stay disciplined, and capture market returns.

Where do our Six Smart Steps come from?

Science is based on data, research, and evidence. Financial science is no different. We don’t have to wonder which actions improve the odds of investment success because we already have a history of evidence and conclusions from peer-reviewed research, Nobel Prize-winning ideas, and real-world data. The following key questions are based on the conclusions from financial science and help define our smarter investment approach–Our Six Smart Steps.

What sort of competition do you face as an investor?

 

The market is an effective information-processing machine. Millions of market participants buy and sell securities every day and the real-time information they bring helps set prices. This means competition is stiff and trying to outguess market prices is difficult for anyone, even professional money managers. This is good news for investors though. Rather than basing an investment strategy on trying to find securities that are priced “incorrectly,” investors can instead rely on the information in market prices to help build their portfolios.

Daily Average Of World Equity Trading In 2015

Number of Trades Dollar Volume

98.6 Million

$447.3 Billion

Do you have to outsmart the market to be a successful investor?

Financial markets have rewarded long-term, disciplined investors. People expect a positive return on the capital they invest, and historically, the equity and bond markets have provided growth of wealth that has more than offset inflation. Instead of fighting markets, let them work for you.

When you try to outwit the market, you compete against the collective knowledge of all investors. By harnessing the market’s power, you put their knowledge to work in your portfolio.

What are your chances of picking an investment fund that outperforms?

Flip a coin and your odds of getting heads or tails are 50/50. Historically, the odds of selecting an investment fund that was still around 15 years later are about the same. Regarding outperformance, the odds are worse. The market’s pricing power works against fund managers who try to outperform through stock picking or market timing. One needn’t look further than real-world results to see this. Based on research, only 17% of US equity mutual funds and 18% of fixed income funds have survived and outperformed their benchmarks over the past 15 years.
Outsmarting Other Investors Is Tough. Few Conventional Mutual Funds Survive and Beat Their Benchmark. Above: US-based Mutual Fund Performance, 2002-2016.

What if you choose a fund based on strong past performance?

Persistance is Difficult. Few Conventional Mutual Funds Continue to Outpeform.

Some investors select mutual funds based on past returns. However, research shows that most funds in the top quartile (25%) of previous five-year returns did not maintain a top-quartile ranking in the following year. In other words, past performance offers little insight into a fund’s future returns.

Will making frequent changes to my portfolio help me achieve investment success?

It’s tough, if not impossible, to know which stocks, funds, or market segments will outperform from period to period. Accordingly, it’s better to avoid market timing calls and other unnecessary changes that can be costly. Allowing emotions or opinions about short-term market conditions to impact your long-term investment plan can lead to disappointing results. Instead, rather than guess, gamble, or speculate, diversifying your portfolio can improve the odds of holding the best performers while reducing the uncompensated risk from individual securities.


Is international investing for you?

Diversification helps reduce risks that have no expected return, but diversifying only within your home market may not be enough–the US equity market rarely outperforms other developed markets. Instead, global diversification can broaden your investment opportunity set. By holding a globally diversified portfolio, investors are well positioned to seek returns wherever they occur.

Percent of world market capitalization as of December 31, 2015

Is there a better way to build a portfolio?

Academic research has identified equity and fixed income dimensions that point to differences in expected returns among securities. Dimensions must first be well documented in markets around the world and across different time periods. And they must be sensible, backed by data, and cost effective. Instead of attempting to outguess market prices, investors can can pursue higher expected returns through a low-cost, well-diversified portfolio that targets these dimensions.

 

Are fees and costs squandering your returns?

Investors cannot control the markets, but they can control what they pay to invest. The only thing that cost-generating gimmicks like market-timing, stock picking, frequent trading, and other conventional strategies guarantee is that more wealth will trickle up from your account to the pockets of your broker/advisor. No one has a crystal ball. Don’t pay for gimmicks and proven myths. And research has actually shown that disciplined investing with lower cost investments, like a globally diverse portfolio of index mutual funds, has in the long run outperformed conventional, speculative strategies.

Let’s assume that your portfolio averaged 10% annually over the last 25 years. If you payed 2% in fees and commissions each year, your financial services firm, broker, and advisor would have pocketed almost half (43%) of the total investment returns. Even though you put up 100% of the capital and take 100% of the risk, you end up with only half (57%) of the returns.

 

Commissions
Sales Loads
Advisor Fees
Management Fees
Expense Ratios
Account Maintenance Fees
12B-1 Fees
Frequent Portfolio Transactions
Trading Costs
Hidden Fees

So, what should you be doing?

Markets work. They will inevitably go up and down. When they are turbulent, markets may seem irrational and out of control. Think of volatility in a way that is more applicable to your portfolio. Without volatility there would be no risk. And without risk there would be no expectation for reward. The growth of wealth is a much more important measure rather than short-term market fluctuations.

Since you can’t control or predict market outcomes, try instead to focus only on actions that add value:

  • Embrace market pricing
  • Structure a portfolio that is based on your risk tolerance
  • Use diversification to maximize portfolio efficiency
  • Minimize turnover and expenses
  • Ignore market headlines
  • And manage your emotions when markets go up and down

Focusing On What You Can Control Can Lead to a Better Investment Experience

GET YOUR STARTER TOOLKIT
See Appendix for sources and additional information. Past performance data are always backward-looking and can not predict nor guarantee future results. Diversification does not eliminate the risk of market loss. There is no guarantee investment strategies will be successful. This information is for illustrative purposes only.
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