At On the Trail, I take a balanced and pragmatic approach to investment management using low-cost, diversified funds and ETFs. Research has shown that in the long-term, it is nearly impossible to choose investments that will beat comparable market indexes after expenses and taxes are considered. The data shows that trying to figure out which investment will beat the market or trying to time when markets will go up or down is challenging even for the most skilled money managers or economists. A better strategy is to accept that markets will go up and markets will go down. Predicting when and by how much is virtually impossible. Instead, focus on the things that we can control; save an appropriate amount for your age and goals; invest regularly over time; diversify your investments; reduce fees and minimize taxes; allocate your assets appropriately for your age and risk tolerance; and re-balance your portfolio regularly.
Key concepts I put into practice:
Diversification: Within each broad asset class (bonds, stocks, real estate etc), you have many investment choices. For example, bonds can be categorized by credit rating and whether government or corporate. Stocks can be categorized by valuation, whether foreign or domestic and size. In a given year, some of these segments will perform better and some will perform worse. But it’s impossible to predict when each category will outperform, so ideally you construct a portfolio which contains many different asset classes.
Discipline and Time: The compounding of returns over time is a huge part of what makes long-term investing strategy so successful. Taking a disciplined approach and investing regularly over time has been shown to be an effective way to handle the ups and downs of the market. Without a plan in place, many investors buy and sell at exactly the wrong times. When the market is going up, it can feel like it will continue to rise forever. When the market is falling, it can feel like it will never recover. Fear and greed are powerful forces that drive many investing decisions. Sticking to your investment plan in good times and bad can prevent you from making mistakes that can hurt your portfolio.
Fees: Market returns are impossible to predict, but costs are a constant. Keeping your investing costs low is one of the best ways to maximize your long-term portfolio value. There are many different fees associated with investing. Some, like trading commissions and taxes, are visible, while others, like mutual fund expense ratios and bid-ask spreads, are hidden. Taxes are one of the biggest costs of investing and can be a drag on returns if you’re regularly trading stocks in a taxable account. Index funds and index ETFs tend to be very tax efficient. A buy and hold strategy will also reduce your tax bill over time.
Asset Allocation: Asset allocation – the mix of stocks, bonds, and cash in your portfolio is a key component of your investing strategy and is directly correlated with your potential returns. We work with you to determine the asset allocation that makes sense for you based on your risk tolerance and goals.
Rebalancing: Different investments will experience different returns in any given year. Rebalancing is the process of adding additional funds to the under-performing investment in order to get back to your target asset allocation. Rebalancing forces an investor to “buy low and sell high”, the opposite of what many people do when investing without a plan.
Please feel free to reach out if you have any questions.