Prospective clients often come to us with investment holdings consisting of high-cost mutual funds, individual stocks, small bond holdings, insurance products sold as investments, and other high-commission products. The result is an expensive, poorly conceived portfolio rather than one that efficiently captures the upside of market returns. To the average investor, it can be very difficult to see the difference.
The good news is there are simple ways to remedy this “junk drawer” dilemma. Here are three objectives to which Grand Capital Advisors directs its attention: diversification, asset class weights, and hidden costs. By combining these three, we help our clients enhance their investment portfolios and reduce risk.
Diversification: Don’t turn down a “free lunch”
There’s a reason diversification is referred to as the “free lunch” of investing— it’s a simple concept proven to enhance your portfolio. Spreading money across multiple securities and sectors ensures your portfolio isn’t overly reliant on any specific company or part of the market. It also ensures that you are always invested in the next hot area of the market instead of chasing yesterday’s winners.
Most portfolios lack in diversification. Many people consider a portfolio with 12-18 stocks or holding an S&P 500 index fund to be well-diversified, but as many studies have shown, that’s not enough. True diversification requires exposure to thousands of securities over multiple asset classes to reduce the risk of major losses and enjoy an efficient portfolio.
Diversification equals improved performance and reduced risk. That’s a great combination. And luckily, there are pooled funds available that provide this level of diversification.
Asset class weights: Pay attention to percentages
An asset class is a grouping of similar investments. Weight is the percentage each of these hold in an investment portfolio. Proper asset class exposure (investment) and strategic weightings is essential for an efficient portfolio and reduced risk.
The difference between mediocre and excellent performance can be exposure to international companies, including those of emerging markets, small & micro-cap stocks, real estate, high-yield bonds, and the proper mix of value and growth stocks.
Hidden costs: Understand them, minimize them
Investment products have hidden costs that can drastically erode performance of a portfolio. Mutual funds have built-in fees and additional costs associated with the turnover or amount of trading inside the fund. Individual securities have bid-ask spreads and often trading commissions. Structured notes and annuity products carry high and difficult-to-determine fees.
These costs add up quickly. When it comes to poor investment performance, costs are second only to behavioral investment decisions.
Three objectives working together
So, what do we invest in to accomplish these three objectives? Through research and experience, Grand Capital Advisors find exchange traded funds (ETFs) to be the superior investment vehicle. ETFs efficiently capture market returns without undue risk or costs.
Thirty years ago, a portfolio with 20 individual stocks and five bonds was considered prudent. Twenty years ago, mutual funds were the vehicle of choice because they added diversification and the ability to invest in smaller companies and international markets. Today, ETFs offer all of this but at a lower cost, more tax efficiency, and more robust trading options. This evolution of investment options benefits you, the investor, considerably.
Need help cleaning your “junk drawer”? Let us guide you in setting up a more efficient portfolio!