Portfolio construction is not generally the reason that most people hire me.
I know this because I don’t advertise it.
When I’m giving presentations or talking to new people, I talk about the power of financial planning - figuring out where you want your life to go and laying out the steps that need to be taken to get there.
Along the way, we cover things like debt, taxes, insurance, estate documents, and investments.
Investments are an important part, but they tend to get oversold, so I don’t talk about them much.
With that being said, it’s important to be able to build a strong portfolio, and a sound investment philosophy is an integral piece of that puzzle - and who am I kidding? I love investment analysis and building portfolios.
Here are a few of my underlying beliefs when it comes to investing. Keep in mind, these are underlying beliefs, not rules, so I don't always follow them.
A well-diversified portfolio will underperform some stocks over the long run, but it will outperform MOST of them, and that’s the bet I like to take (the one that has the highest probability of winning). Sure, you can point to some stocks that have outperformed the market for long periods of time, but what are the chances you’ll find them? (I’ll give you a hint: it’s low).
There are a number of studies out there that indicate that active managers underperform the benchmark they track. That is, if a mutual fund manager is actively buying and selling stocks to try to beat the S&P 500, they rarely achieve their goal. This is true of almost every area of the market. There are myths out there that active management makes sense for bonds, small cap stocks, or emerging market stocks, but the fact of the matter is that passive investment strategies tend to perform better over time than active. SPIVA has a great report about this if you’re interested.
The US stock market has outperformed a globally diversified portfolio for the past 15 years. But the 10 years before that? Being globally diversified won. Diversification means that you’ll have some holdings that you wish you didn’t and some you wish you had bet the farm on. It’s better to take a balanced approach so as not to risk long periods of severe underperformance, like that seen from 1999-2009 in US Large Cap.
4.
Not all investments need to be stocks and bonds. In fact, investing in alternatives, like private real estate, direct lending, private equity, commodities, and even cryptocurrency can enhance returns and reduce volatility for a portfolio. It’s important to understand, however, that while alternatives may reduce short-term volatility, they add different risks and potentially higher fees. I routinely use private real estate, direct lending, and cryptocurrency in portfolios, but with small allocations.
5.
Most people have heard that if you have a long time before retirement, you should be more aggressive with your portfolio, and that you should get more conservative as you near retirement. That’s because the stock market is volatile in the short-run - over longer periods of time, its returns are actually fairly stable (ignoring the fluctuations in between). If we have a long time-horizon, I tell the people I work with that we should be aggressive. But if there’s a goal to purchase a house in a few years, we should carve out any funds that may be used for that purchase to take less risk with them.
6. After all of that, you probably think I’m no fun. Where’s the trading and buying the hot stocks?! If you’re someone who enjoys trading and trying to find the hot stocks, I generally just try to get people to keep it to 5-10% of their portfolio. We can be reasonably certain of what a diversified portfolio’s risk and return will be over the next several years, but we really have no clue when it comes to single stocks. For that reason I’m not a fan of self-managing by trading.
Conclusion
At the end of the day, it’s always your money. You can do with it as you please. I’m just here to try to provide some direction and help make data-driven decisions.
Note: The charts used were all from JP Morgan. Most were from the Guide to the Markets report, with the exception being number 4, which came from the Guide to Alternatives report.
As always, keep in mind that you don't have to go it alone. I’m Austin Preece, a financial planner in Eau Claire, Wisconsin, and I work virtually with people across the US. Check out my website to see what it's like to work with me and reach out if you have any questions.
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