Five Excellent Investment Characteristics


We favor low-cost, tax-advantageous, diversified, liquid and simple investments. Many investors often face difficulties when investing in things that do not have these five characteristics. Investments with these five characteristics have paid off over time, but are generally not very attractive. There usually isn't a "hot story you need to act on right now!" associated with them. The financial services industry is generally not favorable to this type of investment as it generates very little profit from it. Our mission is to help maximize the wealth of our clients, not the financial services industry. Keep in mind that this list of investment characteristics is not exhaustive. Other factors to look for in investments may include attractive valuation, low correlation to your other holdings, good dividend yield or interest income, tilt towards areas of the market that have produced higher returns such as value stocks, an appropriate level of risk for you, etc.

At low price. We typically invest in low cost index funds and exchange traded funds (ETFs). The funds we invest in have an average expense ratio of only 30% per year. The typical actively traded equity mutual fund has an average expense ratio of 1% or more. In the case of investment funds, the best indicator of future relative performance is the expense ratio of the fund; the lower the better. Hedge funds typically have annual expense ratios of 2% plus 20% of all profits made. Some variable annuities and some permanent life insurance "investments" may have annual expenses of 2% or more. By closely monitoring the costs of our investments, we can save our clients significant amounts of money each year and help them achieve higher returns over time (all other things being equal). With investment products you don't get better performance with a more expensive product, in fact you usually get poorer performance.

Tax efficient. Our investments (index funds and ETFs) are extremely tax efficient and allow the investor to have some control over the tax schedule. These types of funds have a low turnover rate (commercial activity), which is a common feature of tax-efficient investments. We recommend that you avoid high turnover mutual funds due to their tax inefficiency. After the recent surge in the US stock market, many active stock mutual funds have 'built in' capital gains of up to 30% -45%. If you buy these mutual funds now, you could end up paying capital gains taxes on those embedded gains, even if you didn't own the fund during the raise. ETFs typically don't generate long-term and short-term capital gains distributions at year-end, and they don't have capital gains embedded like active mutual funds. Hedge funds are generally tax inefficient due to their very high turnover rate. In addition to investing in tax-efficient products, we also do many other things to help minimize our clients' taxes like collecting tax losses, maintaining our bottom line / low trading, placing the right kind of investment in the right kind of accounts (fiscal location), using losses to offset capital gains, using holdings with large capital gains for them donations, investing in tax-free municipal bonds, etc.

Diversified. We like to invest in diversified funds because they reduce the risk specific to your stocks and the overall risk of your portfolio. Bad news about a stock can cause it to drop by 50%, which is horrible if that stock makes up 20% of your entire portfolio, but will hardly be noticed in a fund with 1,000 equity positions. We tend to favor funds that typically have at least 100 stocks and often several hundred or more stocks. These diversified funds give you a broad representation of the entire asset class you are trying to expose yourself to, while eliminating equity specific risk. We are unlikely to invest in Solar Energy Company's newest equity fund with 10 equity positions, for example. We do not believe in taking risks (such as specific equity risk) for which you will not be paid with a higher expected return.

Liquid. We love the investments you can sell in a minute or a day if you choose to, and the ones you can sell at or very close to the going market price. With liquid investments, you always know (daily) the exact price and value of your investments. All of the investment funds we recommend meet this standard. We don't like investments that you are locked into for years without being able to get your money back at all or paying a large exit fee. Examples of illiquid investments would be hedge funds, private equity funds, annuities, private company stocks, small publicly traded stocks, start-up stocks or debts, illiquid obscure bonds , structured products, certain "life insurance investments", private real estate partnerships, etc. We prefer investment funds that have been around for a while, are large in size, and have high average daily transaction volumes.

Easy. We favor investments that are simple, transparent and easy to understand. If you don't understand it, don't invest in it. All our investments are simple and transparent; we know exactly what we have. Complicated investment products are designed in favor of the seller, not the buyer, and usually come with high hidden fees. Examples of complicated and non-transparent investments that we generally avoid are hedge funds, private equity funds, structured products, some life insurance 'investment' products, variable annuities , shares of private companies, shares or loans of start-ups, etc. as simple as possible, but not simpler. "-Albert Einstein.

We believe most investors should invest the majority of their portfolios in things that exhibit these five great characteristics. By doing this, you will avoid many mistakes, negative surprises and risks along the way. In addition, we believe your after-tax investment returns are likely to be higher over long periods of time. Of course, not all smart or good investments will have all of these characteristics. For example, income-generating real estate is illiquid (and often undiversified) but can be a great long-term investment if purchased and managed properly. Owning your own business is illiquid and undiversified, but it can also be a great way to build wealth. We believe these five investment characteristics become even more important as you retire because at that point you may be more focused on reducing risk and preserving your wealth than building. of it, and you might need cash to spend and donate some of your wealth during retirement. These five great investing characteristics can be a good way to filter out possible investments, and good factors to consider when investing.

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