There are many philosophies when it comes to investing. And investors are often looking for the investments that promise the greatest return.
These are folks who are looking to do better than average in the securities markets. In our experience in the industry, we at WealthChoice have worked with both exotic and exciting investments, and plain and boring. What we’ve determined is that sexy and exciting tends to come with a whole lot of challenges and costs, while the simplicity of plain vanilla investments has actually led to significant outperformance.
If the goal of investing is to help our clients reach their goals, we have to say that simple may be best.
DON’T GIVE CHASE
In the past few years, with record low interest rates, investors in search of yield have been chasing returns and searching for investments that promise high returns. This has led many of them to invest in private assets and hedge funds. The thought was that by investing in assets with low or no correlation to the market, and by fighting market volatility, they could provide positive returns over time regardless of the market environment and outperform the averages.
These can be complicated investments with high management fees, illiquid, low tax efficiency, opaque pricing and only available to a select group of investors based on net worth. They require detailed forecasting and research and in order to be profitable due to high costs, returns must consistently be high. It seems like a plausible strategy and some of the best minds of Wall Street subscribe to it.
SLOW AND STEADY WINS THE RACE
Interestingly enough, in 2008 brilliant investor Warren Buffett challenged this investment theory. He challenged well known hedge fund Protégé Partners to outperform his strategy of passive investing over a ten year period. His premise was that passive investors, who incur much lower costs, use investments that are more tax efficient and liquid, and are able to provide a disciplined process to investing would, in fact, outperform the sexy hedge funds.
So how is that going? As of December 31, 2015, Warren Buffett, having chosen to invest in the index of the S&P 500, had returns of 65.67%. Over this same period of time, Protégé Partners and the portfolio of hedge funds they chose had returned 21.87%.
So what does this tell us? It tells me that simple may be best and that the expensive, complicated hedge funds are not necessarily the silver bullet.
This isn’t to say that buying an index fund and walking away is the answer. We do believe that securities are fairly priced in liquid and competitive markets. Diversification is essential, and investing involves trading off risks and costs with expected returns. But these are time-tested strategies based on academic research.
When we were creating WealthChoice, we set out to partner with a firm that was selected by Dimensional Advisor Funds to utilize their passive investments for our portfolios. This led us to choose to partner with Laurel Wealth Advisors. Our Chief Investment Officer Johnny Chuchen creates and manages portfolios utilizing these funds and others that have been in this space for over 30 years.
WHAT SIMPLE INVESTING MEANS FOR WOMEN
I think investments can be far more simple than many advisors and firms have made them. If, as life planners, our goal is to guide clients through life successfully, and if we can do this by utilizing simple, inexpensive, tax efficient investments that help clients reach their goals, then more time is freed up to focus on what matters most to you, and that is your financial life.
If you have any questions about how WealthChoice may be able to help you with your investment strategy, then please do get in touch and we’ll be happy to discuss things further.
