We favor investments that are low cost, tax efficient, diversified, liquid and simple. 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 generally not very exciting. There’s usually 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 profit from them. We’re in the business of helping our clients maximize wealth, not in 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, low correlation to your other holdings, a good dividend or interest income yield, a bias toward areas of the market that have produced higher returns, such as value stocks, a right risk for you. , etc.

Low cost. We typically invest in low-cost index 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 earnings earned. Some variable annuities and permanent life insurance “investments” may have annual expenses of 2% or more. By keeping a close eye on the costs of our investments, we are able to save our clients significant amounts of money each year and help them achieve higher returns over time (all things being equal). With investment products, you don’t get a better return with a higher cost product, in fact, you typically get a worse return.

efficient tax. Our investments (index funds and ETFs) are extremely tax efficient and allow the investor some control over tax timing. These types of funds have 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 surge in the US stock market, many active stock 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 taxes on those implied gains, even if you didn’t own the fund during the raise. ETFs generally don’t generate short- and long-term capital gains distributions at the end of the year, and they don’t have built-in capital gains like active mutual funds. Hedge funds are often tax inefficient due to their high turnover. In addition to investing in tax-efficient products, we also do many other things to help minimize our clients’ taxes, such as collecting tax losses, keeping our turnover/trade low, putting the right type of investments in the right kind of accounts (tax location), use losses to offset capital gains, use large capital gains shares for gifts, invest in tax-free municipal bonds, etc.

Diversified. We like to invest in diversified funds because they reduce the specific risk of your stock and the overall risk of your portfolio. Bad news published about a stock can cause it to drop 50%, which is horrible news if that stock represents 20% of your total 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 a broad representation of the entire asset class you’re trying to get exposure to, while eliminating stock-specific risk. We are not likely to invest in the newer Solar Energy Company Stock Fund with 10 stock positions, for example. We do not believe in taking any risk (such as stock-specific risk) where you will not be paid out of 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 mutual funds we recommend meet this standard. We don’t like investments where you’re locked in for years with no ability to get your money back or paying huge exit fees. Examples of illiquid investments would be hedge funds, private equity funds, annuities, private company stocks, small publicly traded stocks, startup stock 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 a high average daily transaction volume.

Easy. We prefer investments that are simple, transparent and easy to understand. If you don’t understand it, don’t invest in it. All 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, start-up stocks or loans, etc. “Make everything as simple as possible, but not simpler.” -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. In addition, we believe that your after-tax returns on your investments are likely to be higher over long periods of time. Of course, not all smart or good investments will have all of these characteristics. For example, income-producing real estate is not liquid (and often not diversified), but can be an excellent long-term investment if properly purchased and managed. Owning your own business is illiquid and undiversified, 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 liquidity to spend and give away some of your wealth during retirement. These five great investment characteristics can be a good screening device for potential investments and good factors to think about when investing.