We favor low-cost, fiscally efficient, diversified, liquid and simple investments. Many investors often have problems when they invest in things that do not have these five characteristics. Investments with these five characteristics have been profitable over time, but they are usually not very interesting. Usually there is no “hot story you need to act on now.” associated with them. The financial services industry generally does not favor these types of investments because they generate very little return from them. Our goal is to help maximize the wealth of our clients, not the financial services industry. Please note that this list of investment features is not exhaustive. Other factors to look for in investments may include an attractive valuation, a low correlation to your other holdings, a good dividend yield or interest income, a bias towards areas of the market that have produced higher returns, such as value stocks, an appropriate level of risk for you. etc.

Low cost. 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 30% per year. The typical actively traded stock mutual fund has an average expense ratio of 1% or more. With mutual funds, the best predictor 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 their earnings. Some variable annuities and “investments” in permanent life insurance can have annual expenses of 2% or more. By closely monitoring the costs of our investments, we can save our clients significant amounts of money each year and help them achieve higher returns over time (all other things being equal). With investment products, you do not get a better return with a higher cost product, in fact, you usually get a worse return.

Tax efficient. Our investments (index-based funds and ETFs) are extremely tax efficient and allow the investor to have some control over the timing of taxes. These types of funds have a low turnover (business activity), which is a common characteristic of tax-efficient investments. We recommend avoiding high-turnover mutual funds due to their tax inefficiency. After the recent big spike in the US stock market, many active equity mutual funds have “built in” capital gains of up to 30% -45%. If you buy those mutual funds now, you may end up paying capital gains tax on those built-in earnings, even if you didn’t own the fund during the raise. ETFs generally do not generate short- and long-term capital gain distributions at the end of the year, and they do not have built-in capital gains like active mutual funds. Hedge funds are often ineffective from a tax point of view due to their very high turnover. In addition to investing in tax efficient products, we also do many other things to help keep our clients’ taxes minimized, such as collecting tax losses, keeping our turnover / trading low, placing the right kind of investments in the right type of accounts (tax location), use losses to offset capital gains, use large capital gains for donations, invest in tax-free municipal bonds, etc.

Diversified. We like to invest in diversified funds because they reduce the specific risk of your stocks and the overall risk of your portfolio. Bad news posted on a stock can cause it to drop 50%, which is horrible news if that stock is 20% of your entire portfolio, but it will hardly be noticeable in a fund of 1,000 stock positions. We tend to favor funds that typically have at least a hundred shares and often several hundred shares or more. These diversified funds give you broad representation of the entire asset class you’re trying to expose yourself to, while eliminating equity-specific risk. We are not likely to invest in the latest Solar Energy Company stock fund with 10 stock positions, for example. We do not believe in taking any risk (such as equity specific risk) for which you will not be paid with a higher expected return.

Liquid. We like investments that you can sell in a minute or a day if you choose, and those that you can sell at or very close to the current market price. With liquid investments, you always (daily) know the exact price and value of your investments. All investment funds that we recommend comply with this standard. We don’t like investments that you are stuck in for years without the ability to get your money back at all or without paying large exit fees. Examples of illiquid investments would be hedge funds, private equity funds, annuities, private company stocks, small publicly traded stocks, startup stocks or debt, illiquid dark bonds, structured products, some life insurance “investments” , private real estate companies, etc. . We prefer mutual funds that have been around for some time, are large in size, and have high average daily trading volumes.

Simple. We prefer investments that are simple, transparent and easy to understand. If you don’t understand it, don’t invest in it. All of our investments are simple and transparent; we know exactly what we own. Complicated investment products are designed in favor of the seller, not the buyer, and often have high hidden fees. Examples of complicated and non-transparent investments that we generally avoid are hedge funds, private equity funds, structured products, some life insurance “investment” products, variable annuities, private company stocks, startup stocks or loans, etc. . “Make everything as simple as possible, but not easier.” -Albert Einstein.

We believe that most investors should have the majority of their portfolio invested in things that have these five great characteristics. By doing so, you will avoid many mistakes, negative surprises, and risks down the road. Additionally, we believe that your after-tax returns on your investment will likely be higher over long periods of time. Of course, not all smart or good investments will have all of these characteristics. For example, income-generating real estate is illiquid (and often not diversified), but it can be a great long-term investment if properly purchased and managed. Owning your own business is neither liquid nor diversified, but it can also be a great way to build wealth. We believe these five investment characteristics 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 donate part of your assets during Retirement. These five great investment characteristics can be a good screening device for potential investments and good factors to think about when investing.

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