An Investment Strategy Built to Last

January 30, 2014


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Investing is not the only factor contributing to your ability to accumulate and/or preserve family wealth, but it is clearly among the most important factors. How you invest can accelerate you toward your goals … or impede your desired progress.A solid investment strategy is based on three key points. First, it’s critical to have a strategy. Second, it should be a strategy based on reason and evidence guided by the durable science of capital markets. Third, any relationships you form with an advisory service should be grounded in your advisor’s fiduciary obligation to serve your highest financial interests.

Having a Strategy

By first having a clear strategy for managing the market’s ever-unfolding uncertainties, you can stay focused on the right processes, the right tools and the right mindset to guide you toward your most heartfelt goals.

As we’ll describe in a moment, we believe in the simple elegance of what we call evidence-based investing. You may also hear of it referred to as “passive investing.” The first step in establishing a solid evidence-based investment experience is to recognize the critical difference it makes when you have a solid strategy to depend on during your life-long decision-making.Ultimately, to make money in the markets, you must buy low and sell high. But what should you buy and sell? And when should you act? With no overarching strategy, your choices become a random act, with the likelihood of achieving your goals more a matter of luck than disciplined strategy.That’s a stressful way to go about managing your money.

Having a Strategy Built to Last

If your strategy isn’t built to last, then you may as well not have one to begin with.

The next step is to choose a strategy that you can apply with confidence through volatile markets. Investors are otherwise too often react to the volatility, veering off-course to chase skyrocketing trends or flee sickening drops, forever second-guessing themselves and “starting over” whenever current events test or tempt their resolve.To that end, our recommended investment strategy:1. Relies on the evidence. How have the markets actually worked in the real world? Decades of peer-reviewed inquiry by scientists and practitioners around the globe helps us continuously hone our understanding.2. Makes sense. The strategy you adopt should be intuitively logical – not only to financial economists but to you, too.

The Moving Parts

There’s a quiet power in understanding how to already be there to capture available market returns – rather than forever chasing after them, as most investors do.

While ongoing inquiry and new insights continue to add to our understanding, a core of essential tenets has emerged to withstand the critical tests of time and multi-disciplined scrutiny.1. The best way to capture market returns is to participate in expected long-term growth. This insight comes from the evidence indicating that markets are functionally efficient as they drive our capital economy, delivering wealth to its body of participants over time.You can try to outperform others by speculating on individual securities or hot trends. But your odds are poor, to say the least. The added effort is not expected to deliver more than what the market already delivers to its body of participants. It’s far more likely to generate increased costs and complexities, eroding your ability to remain true to your own plans.A Solid Strategy: To efficiently capture the market factors that are expected to contribute to your personal wealth over time, structure your investment portfolio plainly and sensibly. If you are working with a professional advisor, seek someone who explains both the parts and the whole of your portfolio fully and openly – so you can stick with your plans throughout market risks and uncertainties.2. Because risk and reward are strongly related, they need to be deliberately managed to reflect your unique goals. While the market as a whole is expected to deliver wealth to its body of participants, clearly, there are individual winners and losers. The greater the expected return you seek, the more market risk you must accept … but only to the extent that it makes sense for your personal needs.Are you still aggressively building wealth? Beginning to spend it down in retirement? Preparing for a durable legacy? You want to strike a fitting balance between your needs to preserve the wealth you’ve achieved versus accumulating more over time.A Solid Strategy: Your custom investment portfolio should be designed to expose you to an appropriate mix of market factors that reflect your financial goals.· Balance the factors that are expected to earn less but perform more reliably, with those that are expected to be a wilder, but higher-returning ride.· Your asset mix can include stocks versus bonds, as well as stocks that exhibit particular factors (such as those representing value versus growth companies, small-company versus large, and developed versus emerging economies).· The right mix depends on your particular circumstances within the cycle of your life-long investment journey.3. Diversification helps dampen market risk. Diversification is another powerful ingredient in managing market risk. Through broad and deep diversification (i.e., not just holding a number of securities but ensuring they are spread among a number of market factors), the sum of your whole risk can actually be lower than its individual parts.A Solid Strategy: First, allocate your assets among various market factors, as described above. Then, within each factor, spread your assets among thousands of individual securities. To accomplish this, we typically turn to a handful of providers who manage their mutual funds according to the same strategy we espouse (most notably, Dimensional Fund Advisors and The Vanguard Group). Their practical, low-cost solutions allow investors to apply sound financial theory to their investment activities.

Cost Management and Fiduciary Care

Cost management is among the most important ways we fulfill our fiduciary relationship with you.

An undercurrent throughout our recommended investment strategy is the notion (based on copious academic findings) that eliminating unnecessary expenses is one of the best – and arguably most obvious – ways to make the most of your investment opportunities. After all, any dollar spent in a wasted effort is a dollar you don’t get to apply toward your personal goals.And yet, consider this:· The largest swath of the financial community earns its living on the commissions made when you place trades – whether or not those trades make any sense for you.· Many others build their financial business by selling complex products such as hedge funds, variable annuities and privately traded securities that require extreme, buyer-beware scrutiny. These risk-laden products and their hidden costs may or may not reward you, but they almost certainly will reward those peddling them.Given the conflicting incentives found along the food chain of financial market players, it’s no wonder there’s so much misleading information filtering down to individual investors, especially when it comes to costs they needn’t incur.A Solid Strategy: If you choose to work with an advisor to help you plan, build and maintain your investments, seek an independent, fee-only Registered Investment Advisor firm (such as Grand Wealth Management), as they are obligated to serve as your fiduciary advisor, strictly representing your highest financial interests. Your advisor should demonstrate the skills and desire to maintain a constant eye toward aggressively eliminating unnecessary costs on a number of fronts, as well as fully disclosing those that remain, so you can proceed with informed clarity.

A Strategy to Lead the Way

Now that you know those essentials, the next step is to turn them inward. Has the bulk of your portfolio traditionally been kept aloft with attempts to move in and out of the market, its sectors or particular stocks? Are you forever rushing to catch up with rapidly moving returns or bypass troublesome turbulence?Advancing instead according to the science of investing is the equivalent of harnessing the wealth-building power of capital markets (while carefully managing its accompanying risks) to accelerate you toward your desired destination. Let us know if we can provide you with additional information.