Over the past 10 or so years, the investing world has transformed tremendously. Before we get into our investment philosophy and approach, we’d like to acknowledge some of these changes.
New Investment Options: There are so many new investment options. You still have funds that invest in the S&P 500 and other traditional areas, but there are funds that reach the farthest edges of the investment world like MicroCaps and Frontier Markets. There are funds that invest in specific themes like robotics, 5G technology and electric vehicles. Some try to reduce your risk (low volatility funds and defensive sectors) while others try to expose you to more risk (leveraged funds that try to provide 2X and 3X market returns). There are more ESG funds that invest based on personal values (environmentally, socially conscious, religious beliefs). There are funds that provide for a certain outcome (downside protection and growth potential up to certain thresholds. There are even bond funds that mature at specific dates in the future.
The Growing Popularity of ETFs: Exchange-Traded Funds (ETFs) have grown wildly popular. ETFs are responsible for a lot of the innovation and new investment options that have come to market recently. You can pretty much find an ETF for anything you want to invest in. As a play on a popular saying, we often use the phrase – “there’s an ETF for that”. Mutual funds are not dead, but they are under pressure from these newer kids on the block.
Lower Investment Costs: Competition among funds and ETFs have helped lower investment costs. It used to be pretty standard that mutual funds had expense ratios around 1.25% or even higher. Now, it’s common to find funds under 0.50% and some even below 0.05%. Another dramatic change was from the brokerage industry themselves. In the Fall of 2019, Schwab and TD Ameritrade were the first to cut their trading fees on stocks and ETFs to $0. Several others followed suit. Investors who used to pay $5 - $15/trade are now able to trade those investments for free, further enhancing the popularity of ETFs.
Less Commission-Centric Advisors: Outside of a movie, when was the last time you heard of a stockbroker? These days people call themselves financial planners, financial consultants, financial advisors and wealth advisors. They’re all basically the same thing. A key differentiator though is how they earn their money. The industry used to be very commission-based. A financial rep would recommend a product (like a fund, annuity or insurance) and then be paid a commission if you bought it. More and more financial reps have shifted to being paid fees as well for their work. This is called “fee-based”. A fee-based advisor charges fees for financial planning and/or managing an investment portfolio; but can also collect commissions for selling products. Most financial advisors are fee-based, which is not to be confused with “fee-only”. A fee-only advisor is only paid fees for their work and does not collect any sort of commission. While it is good that more financial reps work on fees, it has also blurred the lines between fee-based and fee-only.
For all the changes that have occurred in the industry, there are still certain principles that have not changed:
- We don’t know what the market will do tomorrow, next week, or a year from now. Even with all the technology available, we still cannot consistently predict what will happen in the market.
- Proper diversification can reduce risk.
- Lower costs are better than higher costs.
- Minimizing taxes is still important.
- You need to save a lot of money for retirement, especially with the decline of pensions.
- You need to cautious with your withdrawals in retirement. You may need to fund 20, 30 or even 40 years of retirement.
- Take the emotion out of investing. Do not make decisions based on fear or greed.
- Your goals and comfort level shouldn't adjust to fit a portfolio; your portfolio should adjust to fit your goals and comfort level.
We incorporate these principles into our investment philosophy. We may adapt our strategies to newer funds and techniques, but our overall approach remains the same.