The Importance of Knowing What You Invest In….and Why

Blog post #457

We are very particular about what we invest in and recommend on your behalf, for good reason. Your financial future depends on these decisions.

We developed a philosophy when we began our firm in 2003. We still stick to that same general set of principles and criteria today. We feel that our philosophy has withstood the test of time, through some good as well as some very challenging times.

We utilize low cost investments, not products. We do not use investments that charge commissions or have front or back end loads. 

We know that fees matter. Generally, the lower the fees, the better your returns should be. There is extensive research that shows that in mutual funds, better long-term returns are correlated with lower costs. Thus, we strive to utilize funds that have good long-term investment records, as well as much lower costs (internal expense ratios) than industry averages.

We assume you want your doctor to give you the best medical advice possible, in an unbiased manner. You would not want to get your medical advice from a pharmaceutical sales rep, who can only sell a drug that their firm manufactures. The same goes with your financial advice. You want independent, unbiased advice that is in your best interest.

We try to provide advice and develop an investment plan that solves your needs. We are only compensated by the advisory fee that you pay us. We do not get any additional compensation from any investment that is in your portfolio. We are fiduciaries. This means that we must always put your interests ahead of ours.

We invest in stock and bond mutual funds or ETFs that are readily liquid, so you can access your money when you want or need it. We do not invest in products or alternative investments that restrict your liquidity for a period of years or you can only withdrawal a certain percentage of your assets each quarter or year. We feel that for nearly all our clients, these illiquid investments are not in your best interest. We want you to be confident and comfortable that you can get access to your money when you want to.

We want to be able to understand what we recommend….and be able to explain it very clearly to you, so you can also understand it. We want the funds that we recommend to you to invest in what they say they will and stick to that.  As we design your portfolio, we want the investments that we use to adhere to their stated objectives and asset class categories.

The mutual funds and ETFs that we use and recommend adhere to defined strategies, that are understandable. For example, if we recommend a US Small Cap mutual fund, that means that the fund will own the smallest companies that are publicly traded in the US. If smaller companies are underperforming larger companies in the US, this fund should be underperforming a US Large Cap fund. We can understand this and we can explain it to you. It is logical and rationale.

If we invest in a US Small Cap Value fund, we do not want a significant portion of that fund to be invested in large or mid-size growth companies, as the fund would then have different risk and return expectations.

We do not believe in utilizing alternative investments and hedge funds, because they do not meet many of these criteria. They are usually quite expensive, meaning their internal costs are usually way above 1% or 2% annually.  For the greater costs, we cannot determine in advance that their returns will make this higher cost beneficial.  The funds and ETFs that we recommend have expense ratios that are far below 1%, almost always well below 0.5% annually.

Alternatives and hedge funds can be like black boxes, as they may not provide current information on what they are invested in.  Their holdings and strategies may change frequently, so we cannot understand what they are doing.  Some alternatives use margin or leverage, which can significantly increase the risk of the investment.  We do not invest in funds that use margin in their ordinary course of operations.

After evaluating many alternative investments, we have chosen not to recommend any as of now. We do not believe that the stated goals and objectives (and their actual performance) provide you, our clients, with better expected and actual returns, after their fees. While they strive to provide greater diversification benefits, we are comfortable that we can provide you with broadly diversified stock and fixed income portfolios in a more effective and transparent manner.

We also have specific and disciplined criteria for purchasing and holding individual fixed income securities. Our goal for the fixed income portion of your portfolio is to provide safety and return of your principal, with whatever interest rate can be safely obtained for a given length of maturity. We do not believe in reaching for extra yield, for riskier bonds. We avoid certain sectors of corporate or municipal bonds, which evidence shows have greater default risk. We only purchase investment grade individual bonds or bond funds. For municipal investments, they must be very high quality and only in certain sectors and states.

We hope that understanding what we invest in, and what we avoid, makes you feel more confident and comfortable with our long-term investment strategy and philosophy.

Talk to us. We want to help you, and your family, deal with change, today and tomorrow.

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