How do you know your investments are right for you? It’s a fair question to ask, and one your investment advisor can and should answer. Here’s a six-point checklist to evaluate what you own.
The Reliable Six
Below are the six standards we use to vet client investments, with examples to clarify how they apply. These measures work especially well for passive index investments, but also for actively managed investments.
1 – Representation – does the investment do exactly what it says it will do? State Street’s SPY, Vanguard’s VOO, and BlackRock’s IVV all represent that investors will get the performance of the S&P 500, minus a few basis points for costs. And that’s what they do, consistently.
A counter-example of disastrous misrepresentation is Warren Buffett’s former favorite value mutual fund, Ruane Cuniff. RC disclosed last Fall that 30% of the $30 billion fund was invested in Valeant, by then down 90%. Say again? A value fund’s largest investment selling at 100x earnings? A third of the assets in one stock? Burned RC investors found out too late about “the difference between what they say and what they do.”
2 – Validation – have investors voted with their investment dollars? Again, using the S&P 500 ETF examples above, investors have “voted” $180b, $236b and, $72b respectively. Clearly, good products attract dominant dollars. How do yours compare to their peers? Beware lesser known funds – there may be a reason investors are not lining up. Maybe those funds are inferior.
3 – Tax Efficiency – is the investment avoiding unnecessary tax bills for me? ETFs are the gold standard here. For example, SPY, has never made a capital gains distribution in more than 20 years despite having gone up 4X. No capital gains distributions means no current taxes to pay. Active managers often generate significant tax bills each year. How much? Ask and compare. Subtract taxes payable from your investment return to get your true investment return.
4 – Cost – am I getting good value for the costs incurred? The best predictor of future performance is cost, according to Vanguard. Lower cost funds tend to outperform their peers… by approximately the difference in costs. A 50 basis point cost fund is highly likely to outperform its peer group of 125 basis point cost funds by 75 basis points. No magic or mystery there. See The Future of Advice to compare industry standard costs to your portfolio costs. Chances are high you are paying too much for what you don’t get.
5 – Liquidity – can the investment be sold when you want to sell? Your investments should offer you ample liquidity in all market environments. Measuring liquidity is very doable but gets pretty technical. Simply put, the more exotic the investment, the more difficult it may be to sell quickly at the market price.
We’ve seen some managers run afoul of regulators when it became apparent they were limiting liquidity. First Avenue “suspended liquidations” of its junk bond fund last December, leaving investors trapped. That’s not liquidity. Likewise, Betterment made a similar unilateral rule change during Brexit Friday by suspending trade execution for three hours without telling customers. Betterment attracted the attention and wrath of our Secretary of State, Bill Galvin, for good reason. Beware ‘lobster trap’ funds where you can get in, but can’t get out.
6 – Structure – is the investment structured in my interests? Be sure you understand what you own. Don’t own mutual funds (you are buying everyone’s tax bill). Don’t own any exchange traded anything unless it is a fund. ETNs are notes – general obligations of the issuer. Lehman Brothers ETNs went to zero in 2008 because Lehman was bankrupt. Major league money, rookie investor mistake.
Beware triumphs of marketing over structure. OIL, the Barclays ETN purports to track the price of oil, but bears hardly any resemblance, price-wise. Be skeptical and get confirmation from your advisor about what you really own.
What does it mean to have the investments that are right for you? It means someone did all the research, vetting and independent fact-checking. A fiduciary does all of this routinely. It’s a lot of work, and good research matters. Be confident, ask questions and raise your expectations.
John Osbon – firstname.lastname@example.org
This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”
“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.
Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.
Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.
This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.
While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.
Adviser does not endorse the statements, services or performance of any third-party vendor.
Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Any IPO alerts are purely informational and should not be construed as recommendations to invest.
Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.
Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.