Tuesday, May 30, 2023

Five Excellent Investment Characteristics

We favor investments that are low cost, tax efficient, diversified, liquid and simple. Many investors often run into trouble while investing in things that do not have these five characteristics. Investments with these five characteristics have been profitable over time, but usually aren’t very exciting. There usually isn’t a “hot story” you need to act on right now! associated with them. The financial services industry generally does not support these types of investments because they generate very little profit from them. We are in the business of helping our clients maximize their wealth, not the financial services industry. Keep in mind that this list of investment characteristics is not comprehensive. Other factors to look for in an investment can include attractive valuations, low correlation to your other holdings, a good dividend yield or interest income, a tilt toward sectors of the market that have produced high returns, such as value stocks, a good fit for you. Risk level is produced. , etc.

Less cost. We generally invest in low cost index based funds and Exchange Traded Funds (ETFs). The average expense ratio of the funds we invest in is only 30% per annum. Typical actively traded equity mutual funds have an average expense ratio of 1% or higher. With investment funds, the best predictor of future relative performance is the fund’s expense ratio; the less the better. Hedge funds typically have annual expense ratios of 20% plus 2% of profits earned. Some variable annuities and permanent life insurance “investments” can have annual expenses of 2% or more. By keeping a close eye on the costs of our investments, we can save our clients significant amounts of money each year and help them generate higher returns over time (all else being equal). With investment products, you don’t get better performance than you would with a higher cost product, in fact you usually get worse performance.

tax efficient. Our investments (index based funds and ETFs) are highly tax efficient and they allow the investor to have some control at tax time. These types of funds have low turnover (trading activity), which is a common feature of tax efficient investments. We recommend avoiding mutual funds with high turnover due to tax inefficiencies. Following the recent big rally 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 pay capital gains tax on those underlying gains, even if you didn’t own the funds when they grew. ETFs typically do not generate long- and short-term capital gains distributions at the end of the year, and they do not have capital gains like active mutual funds. Hedge funds are generally tax inefficient due to their very high turnover. Apart from investing in tax-efficient products, we also do many other things like tax loss harvesting, keeping our turnover/business low, right kind of investments in right kind of accounts to help our clients keep taxes to a minimum. (tax haven), using losses to offset capital gains, using holdings with large capital gains for gifting, investing in tax-exempt municipal bonds, etc.

various. We prefer investing in diversified funds as they reduce your stock specific risk and the overall risk of your portfolio. Bad news released about a stock could cause it to drop 50%, which is terrible news if that stock is 20% of your entire portfolio, but would be hardly seen in a fund of 1,000 stock positions. We favor funds that typically have at least a hundred holdings and often several hundred holdings or more. Eliminating stock specific risk, these diversified funds give you broad representation of the entire asset class you are trying to gain exposure to. For example, we are unlikely to invest in the latest Solar Energy Company Equity Fund with 10 stock positions. We do not believe in taking any risk (such as stock specific risk) for which you will not be paid in high expected returns.

liquid. We prefer investments that you can sell in a minute or a day if you decide to do so, and that you can sell at or very close to the prevailing market price. With Liquid Investing you always (daily) know the exact price and value of your investments. All the investment funds we recommend meet this criteria. We don’t like investments in which you are locked in for years without the ability to get your money back or without paying huge exit fees. Examples of illiquid investments are hedge funds, private equity funds, annuities, private company stock, small publicly traded stocks, startup company stock or debt, illiquid illiquid bonds, structured products, certain life insurance “investments”, private real estate partnerships, etc. Will be We give priority to investment funds that have been around for a while, are large in size, and have high average daily trading volumes.

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 have. Complicated investment products are designed to favor the seller rather than the buyer, and usually have high hidden fees. Examples of complex and non-transparent investments that we typically avoid are hedge funds, private equity funds, structured products, certain life insurance “investment” products, variable annuities, private company stock, startup company stock or debt, etc. . As simple as possible, but not simpler.” -Albert Einstein.

We believe that most investors should invest the majority of their portfolio in things that have these five excellent characteristics. By doing this, you will avoid a lot of mistakes, negative surprises and risks along the way. Furthermore, we believe that your post-tax investment returns are likely to be higher over the long term. Of course not every smart or good investment will have all these characteristics. For example, income producing real estate assets are illiquid (and often not diversified) but can be an excellent long-term investment if purchased and managed properly. Owning your own business is illiquid and not diverse, but can be a great way to build wealth as well. We believe these five investment characteristics become even more important as you enter retirement, because at that point you may be more focused on reducing risk and preserving your wealth than on building it. There are times, and you may need liquidity to spend and gift part of your money during this time. retirement. These five excellent investment characteristics can be a good screening tool for potential investments and good factors to consider when investing.

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