The most important favor that long-term investors can do for themselves is to invest in the right kinds of assets, or asset classes. Examples of asset classes are stocks and bonds. More specific examples are U.S. large-cap value stocks, emerging markets stocks, foreign small-cap value stocks, etc.
Dimensional Fund Advisors studied the returns of 44 institutional pension funds with about $450 billion in assets over various time periods averaging nine years. The study concluded that more than 96 percent of the variation in returns could be attributed to the kinds of assets in the portfolios. Most of the remaining 4 percent was attributable to stock picking and the timing of purchases and sales.
Stated another way, 96 percent of investing is about understanding the job that needs to be done. The other 4 percent is about picking the very best tools to get that job done. Do this right, and you’re most of the way there. Do this wrong, and at best your money is not working hard for you; at worst, you’re taking too much risk and you could get clobbered by the market. When I analyze portfolios for potential clients, this is by far what I find most frequently.
Ironically, most investors spend most of their time on the decisions that make just 4 percent of the difference and very little time on decisions that make 96 percent of the difference. That's not unusual for investors who turn to the media or brokers or traditional planners for advice, simply because that's what the they focus on as well.
That is not to say that the 4 percent is inconsequential. Once you understand asset allocation and understand what asset classes you need, you should find the most efficient, lowest-cost, least-risky and most productive mutual funds for your money.
But begin by stepping back and looking at the forest instead of the trees. If you or your current "advisor" is focused on stock-picking, market-timing, and/or track-record investing, you're staring at the trees.
Chances are you've never had an objective analysis of your portfolio. An analysis that actually quantifies the risk you're taking, and historically the return associated with that risk. If you've never had a second opinion on your investments, you're risking your financial future unnecessarily. There's no reason not to do what's in your best interest, and every reason to find out the truth about your portfolio. Get in touch with us today, by whatever means you prefer. If we can't help you, we won't waste your time our ours. But if we can help, we should start today.
