Five great investment characteristics

We favor investments that are low cost, tax efficient, diversified, liquid and simple. Many investors often get into trouble when investing in things that don’t have these five characteristics. Investments with these five characteristics have been profitable over time, but typically not very exciting. There is generally no such thing as a “hot story to act on now!” connected to them. The financial services industry generally does not favor these types of investments as they get very little profit from them. Our business is maximizing the wealth of our clients, not the financial services industry. Note that this list of investment features is not exhaustive. Other factors to look for when investing could include an attractive valuation, low correlation to your other holdings, nice dividend yield or interest income, a bias towards areas of the market that have produced higher returns such as stocks. B. Value stocks, and an appropriate level of risk for you, etc.

Inexpensive. We typically invest in low-cost index-based funds and exchange-traded funds (ETFs). The funds we invest in have an average expense ratio of just 0.30% per year. The typical actively traded stock fund has an average expense ratio of 1% or more. For mutual funds, the best indicator of future relative performance is the fund’s expense ratio; the lower the better. Hedge funds typically have annual expense ratios of 2% plus 20% of profits made. Some variable annuities and permanent life insurance “investments” can have annual costs of 2% or more. By keeping a close eye on the cost of our investments, we are able to save our clients significant amounts of money each year and help them generate greater returns over time (all else being equal). With investment products, you do not achieve better performance with a more expensive product, but usually poorer performance.

tax efficient. Our investments (index-based funds and ETFs) are highly tax efficient, allowing the investor some control over when taxes are levied. These types of funds have low turnover (trading activity), which is a common feature of tax-efficient investments. We recommend avoiding high turnover mutual funds due to their tax inefficiency. After the recent sharp rise in the US stock market, many active equity funds have “embedded” capital gains of up to 30% to 45%. If you buy these mutual funds now, you may pay capital gains taxes on those embedded gains even if you didn’t own the fund during the raise. ETFs typically don’t generate long and short-term capital gains distributions at year-end, and they don’t have embedded capital gains like active mutual funds. Hedge funds are usually tax inefficient due to their very high turnover. Besides investing in tax efficient products, we also do many other things to help minimize our clients’ taxes such as ), using losses to offset capital gains, using stocks with high capital gains to give away, investing in tax-free municipal bonds etc.

diversified. We like investing in diversified funds because they reduce your stock-specific risk and the overall risk of your portfolio. Bad news released about a stock can cause it to drop 50%, which is terrible news when that stock makes up 20% of your entire portfolio but is barely noticed in a fund with 1,000 stock positions. We tend to favor funds that typically have at least a hundred holdings and often several hundred holdings or more. These diversified funds give you a broad exposure to the entire asset class you want exposure to while eliminating stock-specific risk. For example, we probably won’t invest in the latest Solar Energy Company Equity Fund with 10 stock positions. We do not believe in taking risks (such as stock-specific risk) that you will not be paid for in a higher expected return.

Liquid. We like investments that you can sell in a minute or a day if you choose to, and those that you can sell at or very close to the prevailing market price. With liquid investments, you always know (up-to-date) the exact price and value of your investments. All investment funds recommended by us meet this standard. We don’t like investments that leave you locked in for years with no way of even getting your money back or without paying hefty exit fees. Examples of illiquid investments would be hedge funds, private equity funds, annuities, private company stocks, small publicly traded stocks, startup company stocks or debt, illiquid obscure bonds, structured products, some life insurance “investments”, private real estate partnerships, etc. We prefer mutual funds that have been around for some time, are large, and have a high average daily trading volume.

Easy. We prefer attachments that are simple, transparent and easy to understand. If you don’t understand it, don’t invest in it. All our investments are simple and transparent; We know exactly what we own. Complicated investment products are designed for the benefit of the seller, not the buyer, and typically have high hidden fees. Examples of complicated and opaque investments that we generally avoid are hedge funds, private equity funds, structured products, some life insurance “investment” products, variable annuities, stocks in private companies, stocks or loans from startup companies, etc simple as possible, but no simpler.” – Albert Einstein.

We believe that most investors should invest the bulk of their portfolio in things that share these five great qualities. This way you avoid many mistakes, negative surprises and risks along the way. In addition, we believe that your after-tax investment returns are likely to be higher over long periods of time. Of course, not every smart or good investment will exhibit all of these qualities. For example, income-generating real estate is illiquid (and often undiversified) but can be an excellent long-term investment if bought and managed properly. Owning your own business is illiquid and undiversified, but it can also be an excellent way to build wealth. We believe these five investment characteristics will become even more important as you enter retirement, as at that point you may be more focused on reducing risk and preserving your wealth than building it, and you may need the liquidity to spend and give away some of your wealth during this retirement. These five great investment characteristics can be a good screening tool for possible investments and good factors to think about when investing.