I believe in
2) passive investing in a
3) strategic asset allocation with a
4) globally diversified approach,
5) a tilt towards value, and a focus on
6) tax-efficiency and
7) keeping costs low.
Each of these core principles is described in more detail below, using excerpts from other great resources.
Goals-based investing simply refers to the idea that investing is best pursued with a clear purpose in mind. Investing merely for profit or gains creates an attitude of “chasing returns” and results in a deviation from the principles and strategies described below. But investing for specific life goals and future events naturally leads an investor toward a strategy that balances risk, optimizes returns, and leads to a high probability of realizing life goals.
“Passive investing is an investment strategy that aims to maximize returns over the long run by keeping the amount of buying and selling to a minimum. The idea is to avoid the fees and the drag on performance that potentially occur from frequent trading. Passive investing is not aimed at making quick gains or at getting rich with one great bet, but rather on building slow, steady wealth over time.”
Strategic Asset Allocation
“Asset allocation is both the process of dividing an investment portfolio among different asset categories, and the resulting division over stocks, bonds, and cash. This process of determining which mix of assets to hold in a portfolio is a personal one. The asset allocation that works best at any given stage in an investor's life will depend largely on the need, ability and willingness of the investor to take risk. These depend on the investment time horizon and on both the investor's financial capacity and emotional capacity to tolerate risk and to stay the course.
“While this may sound like a daunting task, there are straightforward guidelines to help in selecting an appropriate asset allocation.
“How much in bonds? How much in Stocks? That's the basic question of asset allocation. The more risk you can handle, the less bonds you need. When you are young, your prime earning years lie ahead, and it will be decades before you need to access the money. So, higher stock allocations may be suitable since big drops in stock prices will not hurt as long as you do not flee the market. John Bogle advises that ‘as we age, we usually have (1) more wealth to protect, (2) less time to recoup severe losses, (3) greater need for income, and (4) perhaps an increased nervousness as markets jump around. All four of these factors suggest more bonds as we age.’ "
“Global diversification essentially means purchasing asset classes and sectors both inside and outside the U.S. One of the easiest ways to do that is by purchasing shares in an ETF or mutual fund that gives you exposure to overseas securities.
“By diversifying globally, you can potentially balance the performance of your portfolio. For example, some economists and other financial experts believe the value of U.S. stocks may be too high, after years of steady gains, according to a recent story in Forbes.
“At the same time, some analysts forecast that western Europe is poised for growth in the coming years, after many years of recession and sluggish stock market growth.
“Similarly, emerging markets have the potential for important stock market gains–by some estimates, as much as three quarters of global growth and consumption could be driven by emerging economies in the coming years. While stocks in emerging markets have taken a trouncing in recent years, there are indications they’re making a comeback in recent months.
“If growth in U.S. stocks levels off or decreases, it’s quite possible you’ll find increases in other countries.”
“Value investing is based on the principle of buying companies at a discounted price from their perceived intrinsic values.
"Similar to how a bargain hunter searches multiple department stores to find the lowest price on a high-quality cashmere label, value investors look to buy high-quality companies at discounted prices.
"Supported by decades of academic and practitioner research, value investing has historically offered a premium over the market.”
“Tax-efficient fund placement, [also known as Asset Location], is an issue facing investors holding assets in multiple accounts, both tax-advantaged and taxable accounts. The tax code recognizes different sources of investment income which are taxed at different rates, or, are taxed at a later time (tax "deferred"). An asset's tax efficiency (the impact of taxes on an investment) is affected by both its expected return and the tax rate on such return.
“Some fund types, like total market stock index funds, are extremely tax-efficient, because they produce low dividends (that are mostly qualified) and capital gains. By contrast, bond funds can be extremely tax-inefficient, because the interest they produce every year is taxed at your full marginal tax rate. Other tax-inefficient investments are REITs, small value funds, and actively managed funds that frequently churn their holdings. Put tax-inefficient funds into tax-advantaged accounts to the extent possible."
Keep Costs Low
Keep costs low: “The difference between an expense ratio of 0.15% and 1.5% might not seem like much, but the effect of the compounding over an investing lifetime is enormous. After 30 years, a fund with a 1.5% expense ratio will provide an investor with several hundred thousand dollars less for retirement than a 0.15% index fund with the same growth. And remember that most managed funds actually underperform index funds. Costs matter, and investors need returns compounding for their own benefit, not the benefit of fund companies who skim unnecessary fees off the top.”
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