Investing today is both easier and harder than it has ever been before – and for the same reasons! Easy access to information, sophisticated analysis tools and e-trading have all contributed to the 'democratization' of investing by making products and tools accessible to all. But have these developments made investing any easier? Or made investors more successful?
One could argue that in fact the opposite has occurred. Many investors seem to have trouble sorting through the vast quantities of information available. They may fall victim to 'analysis paralysis', and studies have proven that en masse they consistently get the timing wrong. We seem to buy in too late to profit, but on time to lose!
Identifying relevant facts in order to craft a meaningful investment policy, applying a disciplined strategy for portfolio construction and maintenance, and executing the strategy over the long term with patience and discipline continues to be the 'never-fail' recipe for investing success. Sounds easy, right? So why are so many investors chronically disappointed with their portfolios and performance?
We see four key reasons why investor's portfolios and investment results fail to match their expectations.
Firstly, the overall portfolio allocation must be in line with the investor's objectives with regard to risk and return. The crafting of a meaningful statement of investment policy is the first step towards creating a meaningful portfolio! The key here is to understand and identify the relevant variables and inputs, and then to ensure that the strategic asset allocation is fully integrated with the other aspects of the investor's financial and estate plan. Both the psychology of risk taking (willingness to assume risk) and the more quantitative data resulting from a comprehensive financial and estate plan (ability or need to assume risk) should be analyzed and will have an impact on the final asset allocation decision. You must have both the right ingredients, in the right amounts!
Secondly, the ongoing management of the portfolio and adoption of risk minimizing strategies in order to continually reflect the investor's risk and return preferences is crucial to investing success. Strategic asset allocation based on Modern Portfolio Theory, regular rebalancing, dollar cost averaging of contributions or percent averaging of withdrawals, and regular review meetings are all important ways to ensure that your portfolio continually matches your goals and objectives. You should always carefully follow the directions that your recipe calls for!
Thirdly, look for all possible "improvements at the margin". By that we mean that regardless of what markets do, certain factors about your portfolio performance are firmly within your control. Recognize that there are two components to portfolio design: asset management and portfolio strategies. There are several strategies that can be employed to build tax efficiency into your portfolio design such as:
- optimum asset location
- prudent product selection for tax effective forms of income
- effective use of leverage
- Use of tax deductible fee structures
All of these strategies and many others can have a significant impact on the net rate of return you earn. So take advantage of all possible planning opportunities (which are distinct from asset management) to lower the taxes that you pay, thereby improving portfolio performance. Consider colors, flavors and presentation when planning your menu!
And lastly, once you find an advisor that you trust and who brings expertise to the management of your portfolio, don't hesitate to consolidate your portfolio. While no one would argue that diversification is an effective way to manage risk, diversifying by advisor only limits the ability of your advisor to see the whole picture, and to give their best advice based on a comprehensive view of your goals and objectives. The recommendations of your advisor can only be as good and as thorough as the set of facts they are based on. This 'never-fail recipe' requires the freshest ingredients! |
