Diem Wealth Management

INVESTMENT WEEDS. PULL THEM NOW.

While most of us don’t have to worry about weeds in our gardens for some time, we all have to be careful about the weeds growing in our investment portfolios. Like weeds in a garden, portfolio weeds work to strangle the life out what we have set out to do. In the case of our investments these weeds lower our chances for a successful retirement. In helping my wife with weeding she had to educate me about differentiating weeds from flowers. I learned that weeds have different characteristics from flowers not in bloom. In the same way every investor must be skilled to determine what is a weed and what is not.

WEED: Active Investment Management

CHARACTERISTICS: Best identified through any attempt by either or both the Investment Manager and the Investment Adviser to alter the composition of the portfolio based on a forecast.

WHY THIS IS BAD:

“Where Do I Start? I Feel Like a Mosquito at a Nudist Colony”   Thomas Sowell

First of all, don’t feel bad when you almost invariably will identify this aspect of your portfolio. Almost 90% of investment portfolios today use active management strategies. Active management strategies as a whole are over 90% likely to underperform a diversified portfolio of either indexed or structured funds. The evidence supporting this bold statement is immense. This probability is based on historical evidence. Unlike a short-term performance track record, historical evidence utilizes data as far back as 1926.

FLOWER: Passive Investment Management

CHARACTERISTICS: Best identified by the use of globally diversified portfolios utilizing indexed or structured funds. Only changes made are annual rebalancing or risk model changes due to changing needs of investor.

WHY THIS IS GOOD:

 “Most People Would Be Better Off Avoiding Managers Like Myself and Just Buy Index Funds”

Warren Buffett

Any investor can and should rely on Evidence Based Investing. Rather than being dependent on research beholden to a broker’s market making activities, the savvy investor can benefit from Nobel Prize winning research, all while enjoying significant cost savings. The investor can more easily turn the tables on Wall Street’s Active Management game simply by opting out and adopting a Passive strategy. Using a Passive strategy offers investors the highest probability of success when compared to active strategies. The best part is that it’s a whole lot easier to do than weeding a garden.

The other problem I have consistently seen lies within the investors, themselves. Many people are conditioned to have faith in their advisors. Whatever the advisor says, no matter how unsubstantiated it may be, clients readily accept it. Most investors are simply unable to identify what strategy is being used in their own investments. It is understandable, considering there are limited resources allocated to personal finance as a whole, let alone investments, in our education system. It’s not just investors suffering from this affliction. Most advisors have never had an accredited college level investment class. At most universities one can get an MBA without the requirement of even one course dedicated to investments.  Compounding this problem is information put forth by the financial industry and their friends, the financial media.

Markets have been going up, and more investors than ever, mistakenly feel they are doing well. Most have no idea how to measure their performance using proper benchmarking techniques.

So how is one to know if they are doing well, or not? First, investors have to really want to know. Next is to have an academic review utilizing reputable third party data of their current portfolio and situation.

Click Here to learn more about our Portfolio MRI™ . This process helps people better understand the risks they are taking, the fees they are paying (both disclosed and undisclosed), their expected returns and whether or not they are expected to perform well. All is done using academic standards.