Tweet

10 + 1 Things to Degrade Your Investment Outcome

Posted by: Tom McKeon on April 27, 2018

blog image

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.

 

Allocate Inefficiently

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.

 

Diversify Inadequately

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


Recent Posts

10 + 1 Things to Degrade Your Investment Outcome

PremiumPoints 1Q-2018 Issue

Alpha, Schmalpha and the Persistence of Sub-Optimal Business Models and Investment Advisory Offerings

PremiumPoints 4Q-2017 Issue

Of Dot-Com's, Internet Bubble and Pseudo-Currencies

Cryptocurrencies, Intrinsic Value and Greater Fools

The Pain in Active Management Land Must Be Unbearableā€¦

PremiumPoints 2Q-2017 Issue

Asset Allocation vs. Stockpicking: No Contest

Options Update: Getting Paid to Wake Up

PremiumPoints 1Q-2017

ETFs Ascendant

Back to Blog Home Page