Better Investment Experience
Many investors regularly experience anxiety related to investing. They wonder:
Am I doing this right?
Am I doing it at the right time?
Am I going to reach my goals?
Am I going to miss out on something big?
At BCR®, our goal is to build successful wealth management plans that remove the anxiety, mitigate risk, and capture returns. We do this using an approach to investing that is based on academic research and the belief that the markets are efficient.
Dimensional Fund Advisors shares this philosophy, as well as the desire to help investors have a better investment experience. To that end, they produced an infographic, “Pursuing a Better Investment Experience,” which thousands of investment advisors have posted to their websites. Since the advice it gives is integral to our investment philosophy, I want to go a step further and explain a bit more about why we believe and practice these principles to help our clients achieve a better investment experience.
- Embrace market pricing. On average, there are 82.7 million equity trades placed worldwide every day totaling an average of over $346 billion. The real-time information from those transactions helps set prices. If you or your advisor is trying to time the market and you aren't getting the earnings you desire, this is a likely reason. There is no need to time the market; prices are what they are.
- Don't try to out-guess the market. Over the past 15 years, only 48% of US equity mutual funds have survived, and only 17 % have outperformed their benchmark. Even people who are highly compensated to actively pick funds and time the market don't know how to beat the benchmark. The market’s pricing power makes it too difficult to do, so embrace the market for what it is.
- Resist chasing past performance. Funds that have outperformed in the past do not always continue to perform well. The "past performance is no guarantee of future results" disclaimer mutual funds companies and investment advisors print on their materials is there for a reason, and it isn’t just legalese they use to protect themselves. Past performance truly isn’t a reliable indicator of what a fund will do in the future, so only choosing funds that have outperformed in the past is not a sound investment strategy.
- Let the markets work for you. One dollar in 1926 had the same purchasing power as $13 has today. The growth of a dollar in the US Small Cap index compounded monthly over the same period was $20,544. The financial markets have a history of providing returns that are more than enough to offset inflation. It pays to be a long-term investor.
- Consider the drivers of returns. Returns on equities are driven by market area (stocks vs. bonds), company size, relative price (value companies vs. growth), and company profitability, while fixed income returns are driven by the term and credit premiums. Both can be used in cost-effective portfolios to give you the return you need. A sound investment approach considers these drivers and does not involve attempting to predict which stocks, bonds, or market areas are going to outperform. The goal is to put together a well-diversified portfolio that emphasizes drivers of higher expected returns and has low turnover.
- Practice smart diversification. Many people think they are well-diversified if they have 15 or 20 U.S. stocks, but true diversification requires going beyond your home market. To illustrate, the S&P 500 Index is comprised of 500 stocks, all in the U.S. But the global MSCI ACWI Investable Market Index is 8,628 stocks in 46 countries. With an investment universe this broad, global investment is essential for a truly diversified portfolio.
- Avoid market timing. There is no way to predict what type of investments will perform the highest in any given year. Accept the market as it is, commit to taking the ups and downs, and stay in it for the long term.
- Manage your emotions. Humans are hard-wired to behave in a way that's detrimental to our financial health. In a crisis, people tend to react the opposite of how they should when it comes to investments. Your initial reaction may be an urgent desire to cash out, but that doesn’t really protect you -- it only guarantees that you realize a loss. History shows that portfolios bounce back in a reasonable time for those who keep a cool head and stay in the market.
- Look beyond the headlines. The news is riddled with reports and commentary that can challenge your discipline. Some will make you nervous, and others make you want to chase after the latest big fish. Always consider the source of the messages you are consuming, and don’t be dissuaded from keeping a long-term perspective.
- Focus on what you can control. You know what your needs and your risk tolerance are. Create a plan that fits those needs with a truly diversified portfolio, while reducing expenses and turnover, and minimizing taxes.
Statement 1: In US dollars. Source: World Federation of Exchanges members, affiliates, correspondents, and non-members. Trade data from the global electronic order book. Daily averages were computed using year-to-date totals as of December 31, 2016, divided by 250 as an approximate number of annual trading days
Statement 2: The sample includes funds at the beginning of the 15-year period ending December 31, 2016. Each fund is evaluated relative to the Morningstar benchmark assigned to the fund’s category at the start of the evaluation period. Surviving funds are those with return observations for every month of the sample period. Winner funds are those that survived and whose cumulative net return over the period exceeded that of their respective Morningstar category benchmark. US-domiciled open-end mutual fund data is from Morningstar and Center for Research in Security Prices (CRSP) from the University of Chicago. Index funds and fund-of-funds are excluded from the sample. Equity fund sample includes the Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Value, Miscellaneous Region, Pacific/Asia ex-Japan Stock, Small Blend, Small Growth, Small Value, and World Stock. Fixed income fund sample includes the Morningstar historical categories: Corporate Bond, InflationProtected Bond, Intermediate Government, Intermediate-Term Bond, Muni California Intermediate, Muni National Intermediate, Muni National Short, Muni New York Intermediate, Muni Single State Short, Short Government, Short-Term Bond, Ultrashort Bond, and World Bond. See Dimensional’s “Mutual Fund Landscape 2017” for more detail. Benchmark data provided by Bloomberg Barclays, MSCI, Russell, Citigroup, and S&P. Bloomberg Barclays data provided by Bloomberg. MSCI data © MSCI 2017, all rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Citi fixed income indices © 2017 by Citigroup. The S&P data is provided by Standard & Poor’s Index Services Group.
Statement 4: In US dollars. US Small Cap is the CRSP 6–10 Index. US Large Cap is the S&P 500 Index. Long-Term Government Bonds is the IA SBBI US LT Govt TR USD. Treasury Bills is the IA SBBI US 30 Day TBill TR USD. US Inflation is measured as changes in the US Consumer Price Index. CRSP data is provided by the Center for Research in Security Prices, University of Chicago. The S&P data is provided by Standard & Poor’s Index Services Group. Long-term government bonds and Treasury bills data provided by Ibbotson Associates via Morningstar Direct. US Consumer Price Index data is provided by the US Department of Labor Bureau of Labor Statistics.
Statement 6: Number of holdings and countries for the S&P 500 Index and MSCI ACWI (All Country World Index) Investable Market Index (IMI) as of December 31, 2016. The S&P data is provided by Standard & Poor‘s Index Services Group. MSCI data © MSCI 2017, all rights reserved. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks.