Asset Class Investing
For years, the traditional approach to wealth management has been to buy an individual stock, collect the dividend, and then try to sell the stock at a profit. But studies show that the potential for excess returns diminishes rapidly as the number of stock positions exceeds a dozen. In fact, the potential added performance almost entirely evaporates if more than 20 positions are owned because the entire portfolio is much more similar than not to an index fund. Because most investment management firms have U.S. stock portfolios in excess of 20 positions, most are managing what are effectively index funds at fees that are far in excess of what it would cost to simply invest in an index fund.
Studies also show that the overwhelming majority of so-called active managers, those buying and selling stocks in the hope of beating an index like the S&P 500, consistently fail to do just that. In fact, according to the widely-respected S&P Dow Jones Indices SPIVA (S&P Indices Versus Active) Scorecard, through June 2020, more than 87% of all domestic stock fund managers had underperformed the broad S&P Composite 500 Index since June 2005.
There’s a better way to manage wealth than expensive, underwhelming stock picking: asset class investing. Today investors can choose from literally thousands of low-cost, tax-efficient index funds (“exchange-traded funds (“ETFs”))” that replicate an incredible range of stock indices, including the S&P 500 and the NASDAQ 100. By focusing on asset classes - not individual stocks - we are free to spend significant time determining what percentages of clients’ accounts should be invested in which asset classes. This is a critical analysis because it is the overall stock allocation - not the stocks owned - that historically has driven both performance and risk.