Five Excellent Investment Characteristics

We prefer investments that are simple, low-cost, tax efficient and diversified. These five characteristics are often a problem for investors. These five characteristics are generally not very appealing, but they have proven to be profitable over the years. It is not necessary to act immediately on a hot story. They are often associated with them. These types of investments are generally not supported by the financial services industry because they yield very little profit. Our goal is to maximize wealth for our clients and not the financial industry. This list does not include all investment characteristics. You should also look out for attractive valuation and low correlation to other investments, nice dividend yields or interest income, a tilt towards markets that have generated higher returns, such as value stocks, and a suitable risk level.

Low cost. Low cost exchange traded funds (ETFs) and index funds are the most common investments. Our funds have an average annual expense ratio of just.30%. An average expense ratio for an actively traded equity mutual fund is 1% or higher. The expense ratio of investment funds is the best indicator of future relative performance. The lower the ratio, the better. Hedge funds usually have an annual expense ratio of 2% and 20% of any profits. Annual expenses can be as high as 2% for some variable annuities or permanent life insurance investments. We can help our clients save significant money every year by keeping an eye on their investments’ costs and help them get higher returns over the long-term (all other things being equal). You don’t get more performance from investment products if you pay more. In fact, you often get worse performance.

Tax Efficient. Our investments (index-based funds and ETFs) are very tax efficient. They allow investors to have some control over when taxes are due. This type of fund has low turnover (trading activity), which makes them tax-efficient investments. Due to their tax efficiency, we recommend that mutual funds with high turnover be avoided. Many active equity mutual funds now have capital gains that are “imbedded” in them, such as between 30% and 45% after the recent surge in the U.S. stock markets. You could end up paying capital gains tax if you purchase mutual funds that you have not owned during the increase. ETFs are not likely to generate capital gain distributions over a long period of time or have the same imbedded capital gains as active mutual funds. Due to their high turnover, hedge funds are often tax inefficient. We do more than just invest in tax-efficient products. We also help minimize our clients’ taxes by tax loss harvesting, keeping their turnover low, placing the right types of investments in the correct type of accounts (tax location), using capital gains to offset losses, gifting holdings, and investing in tax-free municipal bonds.

Diversified. Diversified funds are a good investment choice because they lower your stock specific risk and increase the overall portfolio risk. If bad news is released about one stock, it may drop 50%. This is terrible news if the stock makes up 20% of your portfolio. However, in a fund with 1,000 stock positions, it will barely be noticed. Funds with at least 100 holdings, and sometimes several hundred, are more desirable. These funds are diversified and can provide a broad representation of all asset classes you want to be exposed to. They also eliminate stock-specific risk. For example, we are unlikely to invest in the Solar Energy Company Equity Fund that has 10 stock positions. We do not believe in taking risks, such as stock-specific risk, that will result in lower expected returns.

Liquid. Liquid. We love investments that can be sold in a matter of minutes or days if necessary, and which are available at or very close the current market price. Liquid investments allow you to know every day the exact value and price of your investments. This standard is met by all of the investment funds that we recommend. We don’t recommend investing that you can’t get your money back within a reasonable time or with large exit fees. Annuities, hedge funds, private equity, annuities and tiny publicly traded stocks are all examples of illiquid investments. We prefer investments funds that are well-established, large in size, have high average daily volumes of trading, and have a long history.

Simple. Simple, transparent, and easily understood investments are what we prefer. Don’t invest if you don’t get it. Our investments are transparent and simple. We know exactly what we have. Complex investment products are usually designed to benefit the seller and not the buyer. They also often have high hidden fees. We avoid complicated, opaque investments such as hedge funds, private equity, structured products, and variable annuities. Keep it as simple as possible but not too complicated. -Albert Einstein.

These five characteristics are what we believe investors should be investing the majority of their portfolio in. This will help you avoid many mistakes, unexpected outcomes, and risk along the way. We believe that your after-tax investment returns will be greater over longer periods of time. These characteristics are not necessarily the best or smartest investment. Income producing property can be a great long-term investment, even though it is not liquid and often not diversified. Although your business may not be diversified and liquid, it can still provide a great way to build wealth. These five investment characteristics are even more important when you reach retirement. You may be more concerned about reducing risk and building wealth than you are about building it. In retirement, you might need liquidity to spend or gift part of your wealth. These five investment characteristics are a great screening tool for potential investments. They can also be good considerations when you start investing.

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