A Guide For The Do-It-Yourself Investor

A Guide For The Do-It-Yourself Investor

In our last post, we touched on the challenges of outperforming the market. We know the vast majority of money managers do not beat index returns, and the ones that do rarely repeat the feat.

The average investor, rightfully, might be tempted to think, ‘hey, I could probably do this myself.’ You would not be entirely wrong.  However, it would be important to be cognizant of several studies (Dalbar and Morningstar in particular) that validate most individuals achieve poor investment results due primarily to chasing performance and emotional decision-making.

While we think well-chosen, professional advice can enhance the performance of a simple index fund portfolio – that is the ‘smart portfolio’ concept of our previous post – we also think there are more tools and resources available to the do-it-yourself investor willing to put in the time to do their homework.

In our opinion, a sensible approach starts with selecting and sticking with a globally diversified, multi-asset-class portfolio that’s customized to your goals and risk tolerance. That doesn’t mean you can simply buy some index funds and put your head in the sand.

If you do plan to do it yourself, consider these 15 questions:

  1. What is the difference between my risk tolerance and my capacity for risk? How will that influence my portfolio construction?
  2. How do I optimize my portfolio allocation (bonds versus stocks) for my given level of risk and return objectives?
  3. What is my allocation between passive and actively managed investments?  What is the difference in cost?
  4. How will I monitor and know if there are overlapping risk exposures in my various investments?
  5. How much duration, credit, or interest-rate risk should I take in my bond portfolio?  What about international and emerging market bonds?  Should TIPS be considered?
  6. Do long-maturity bond funds make sense when interest rates are at historical lows?
  7. What type of stock index funds should I invest in? Fundamental, equally weighted, dividend weighted, market-cap weighted, or some combination?
  8. How much should I allocate to international investments? And of that amount, how much should I invest in international developed, emerging markets, international small caps, and frontier markets?
  9. How much currency risk am I exposed to? Do I want investments that will hedge that risk or not?  What about leverage?
  10. Should real estate be in my asset mix?  Should I invest only U.S. real estate, or can my investments include global real estate?
  11. Is it appropriate to include natural resources and commodities in my portfolio like copper, wheat, or natural gas?
  12. Should hedge funds be used to enhance return and lower volatility?
  13. Does it matter what types of investments are held in retirement plans vs. taxable accounts?  Do I manage each portfolio the same?
  14. Should I rebalance my portfolio periodically, if so, how often?
  15. Are my investments highly correlated to each other?  What should I expect to happen to my portfolio when market volatility increases?

Even if you plan to invest on ‘auto pilot’ with a package of solid index funds, you still have to look comprehensively at your entire financial situation when making decisions, and connecting all the dots.  Taking the time to answer these questions for yourself can increase the probability of achieving a better long-term result.

Ben Johnson
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