Posted by: Tom McKeon on April 27, 2018
If you want to keep a lid on your chances to meet your investment objectives, pursue one or more of the activities listed below, and you will likely suffer lower returns, accept too much risk and pay too much for the privilege.
Pay Too Much
This one is elemental. Investors earn returns net of fees. Keeping investment costs down is the surest path to better net returns—full stop.
Through the geographic diversity, wide range of asset classes, liquidity and low-costs of ETFs and index funds, portfolios can be allocated more efficiently than ever. Investors not doing so are missing the boat.
Diversification is the free lunch in investing. Portfolios that are concentrated within one asset class accept far too much company-specific risk.
Maintain a Home Country Bias
We see too many portfolios with investments concentrated or exclusively in the US. This home country bias limits potential returns and accepts greater risk than a globally allocated portfolio.
Pay for Active Management
Active management is the gift that keeps on giving—the managers, in the form of excess fees. Mountains of evidence prove that active management fails to outperform passive exposures (index funds & ETFs). Many an active manager crafts an enticing story, but precious few ever reliably deliver the goods. How much is active management costing you?
Engage Too Many Layers
Many wealth managers ply a multi-layer investment offering which include: wealth manager, technology platform and mutual fund or separate account manager. Other wealth managers outsource the allocation process to a consultant or portfolio strategist. Moreover, many wealth managers think it is their birthright to charge a 1.0% to 1.5% annual asset-based fee, and then ship your account on down the line to some platform. All the layers take a fee. How many layers & fees are there between your money, your investments and your goals?
Don’t Work With a Fiduciary
Some financial professionals accept fiduciary responsibility, some do not. Fiduciary responsibility is simply the pledge to put client interests above their own interests at all times. If you need investment advice, guidance or management, do you really want to work with someone who does not pledge to put your interests first?
Fail to Rebalance
Inactivity is generally a benefit to portfolios, reducing the frictions of transaction costs and avoiding pointless activity. However, the markets are dynamic and periodic, rules-based rebalancing an allocation back to policy targets has the effect of selling relatively expensive assets and redeploying to relatively cheap assets. Sometimes, markets present an opportunity to benefit from extreme recent movement. Discipline allows prudent investors to take advantage.
Invest in Hedge Funds
Hedge funds are active management on steroids: super expensive and in aggregate, grossly underproductive. The managers get rich regardless. Investors get fleeced. And a “fund of funds” is what Bloomberg calls a “twofer of terribleness.”
Let Your Emotions Influence Decisions
Get overexcited about market rallies, terrified by market swoons, and chase the latest mania like cryptocurrencies. Pull back at market lows, get aggressive after long market rallies. Legions of investors still follow the emotional herd, degrading their returns all along the way.
Disregard Portfolio Rules, Protocols and Structure
Structure IS the Strategy: asset allocation, investment policy, rules-based strategies, diversification. Structure is how returns are captured, risk is managed and mitigated, costs are limited and investor outcomes are maximized.
Want to work with an advisor that understands how to maximize client outcomes? Clothier Springs Capital Management helps private and institutional investors meet their objectives with greater certainty, less risk and low-cost.
For more: www.clothiersprings.com
New Highs, Party Poopers & Financial Engineering
August 30, 2018
PremiumPoints 2Q-2018 Issue: "Structure IS the Strategy"
July 19, 2018
We’re in the Client Outcome Business, Not the Investment Performance Business
May 23, 2018
10 + 1 Things to Degrade Your Investment Outcome
April 27, 2018
PremiumPoints 1Q-2018 Issue
April 19, 2018
Alpha, Schmalpha and the Persistence of Sub-Optimal Business Models and Investment Advisory Offerings
March 19, 2018
PremiumPoints 4Q-2017 Issue
January 23, 2018
Of Dot-Com's, Internet Bubble and Pseudo-Currencies
December 7, 2017
Cryptocurrencies, Intrinsic Value and Greater Fools
November 1, 2017
The Pain in Active Management Land Must Be Unbearable…
October 9, 2017
PremiumPoints 2Q-2017 Issue
August 17, 2017
Asset Allocation vs. Stockpicking: No Contest
July 14, 2017Tweets by @clothiersprings