Wiser Investing 101
A non-commission based look at how to obtain the maximum potential from your investments.
OUR INVESTING PHILOSOPHY
- Maintain a Diversified Portfolio
- Keep the cost of investing low
- Always invest for the long-term
DIVERSIFICATION
Through diversification, an investor can reduce 1 of the 2 kinds of investing risk:
- Systematic risk is the risk of the entire world stock market and can not be reduced.
- Non-systematic risk (business risk) is the risk of owning individual securities. This risk can be eliminated through diversification.
Examples of business risk: Enron’s bankruptcy, World Com’s accounting fraud, Overpriced tech stocks during the technology bubble, etc.
Wiser Wealth Management believes proper diversification is obtained by allocating assets across many different asset classes. Optimizing the type of funds in a portfolio is essential to reducing risk. This is why we create our portfolios to capture the entire world market. The most effective way to gain exposure to market diversification is through index funds via Exchange Traded Funds (ETFs).
WHAT IS AN INDEX?
An index is a basket of securities that represents a segment of the stock market.
For example:
The S&P 500 represents the 500 largest companies in the United States
The MSCI EAFE Index is a foreign index that holds companies incorporated in Europe, Australia and the Far East, totaling over 1,400 securities.
WHY INDEX?
A recent study shows that between 1975 and 2006, 99% of active Domestic US Mutual Fund Managers failed to beat the S&P 500.* Indexing removes human behavior, inaccurate market timing and poor stock picking (from lack of knowledge and impulse) which leads to the under performing of fund managers. Through indexing we can obtain less business risk through diversification and higher returns from lower cost.
INDEXING THROUGH EXCHANGE TRADED FUNDS (ETFs)
An ETF (Exchange Traded Fund) is an investment vehicle that allows investors to invest directly into an index, at a much lower cost than traditional mutual funds. Since 1993, the ETF industry has responded to the incompetence of active fund managers and the limitations of index mutual funds. ETFs have experienced tremendous growth in assets under management compared to mutual funds since their introduction in 1993.
MAJOR DIFFERENCES BETWEEN MUTUAL FUNDS & ETFs
Mutual Funds are traded at NAV (Net Asset Value) after market close and only have to report their holdings quarterly. ETFs trade during market hours just like a stock and their holdings are reported virtually real-time. Mutual Funds depend on a fund manager to pick stocks, where an ETF simply purchases and holds the stock in its assigned index. The average cost of an ETF is .50% where the Mutual Fund average is 1.5%.
WHAT MUTUAL FUNDS DON’T TELL YOU!
Mutual Funds incur additional unreported fees from trading securities in the market place. These transactions are deducted from the funds master account.
HOW MUCH DOES THIS COST YOU?
It depends on the turnover rate of the fund. For example if a fund manager turns over the securities in the portfolio 100% during the year, this means he never held a security for more than 12 months. 100% in turnover can equal roughly 1.0% in additional fees. A 25% turnover ratio will equal .25% in additional fees, as would a 300% turnover ratio cost an investor 3% in more fees. In contrast, Exchange Traded Funds usually have no to very little turnover, making your cost much lower.*
*”Mutual Fund Costs: Risk Without Reward” Personalfund.com
WHAT DOES AN INDEX PORTFOLIO LOOK LIKE?
Here is a sample Moderate Risk portfolio:
- Short Term Government Bond Index
- Barclays Aggregate Bond Index
- High Yield Bond Index
- Emerging Market Bond Index
- S&P 500 Index (Large Companies)
- S&P 400 Index (Mid Size Companies)
- S&P 600 Index (Small Companies)
- International Treasury Bond Index
- MSCI Europe Australia Far East International Index
- Emerging Markets
- Dow Jones Commodity Index
DIVERSIFICATION THROUGH INDEXING WINS!
This Moderate Portfolio has an annualized 9.5 year rate of return of 8%. In contrast, the S&P 500 has had an annualized rate of return of 1.5% over the same period.
* Return calculated from January 1999 to July 2008
INDEXING IS FOR INCOME INVESTING TOO
Most financial institutions will place you in expensive annuities, undiversified bond holdings or mutual funds to achieve income. Wiser Wealth Management purchases indexes holding High yield stock, bonds, REIT’S, and or Preferred Stock, creating income for those in search of diversification and regularly scheduled withdrawals.
IF I INDEX, AM I JUST GOING TO BE AVERAGE?
We use an indexing strategy because history tells us it performs better than stock picking and market timing over the long-term. We invest in indexes across many different asset classes. This allows us to either track the S&P 500 with less risk, or beat the S&P 500 over the long run with the same amount of risk. If you only buy the S&P 500 index, you will just be average, but the average is what the mutual fund managers can’t seem to consistently beat over the long-term.
Remember: Keep Cost Low, Stay Diversified and Invest for the Long-Term.
ABOUT WISER WEALTH MANAGEMENT, INC.
Wiser Wealth Management, Inc is a private fee-only investment firm located in Marietta, Georgia just off the Historic Square. As a Fee-Only investment firm, we do not receive commissions from any financial products. Wiser Wealth Management is a registered investment advisory firm licensed in the State of Georgia, and therefore we have a fiduciary responsibility to act in the best interest of our clients.
FIDUCIARY
Fiduciary responsibility is what sets Wiser Wealth Management, apart from other advisors. This mandates that Wiser Wealth Management:
- Finds the most efficient and cost effective investment options
- Acts prudently in the client’s best interest
- In contrast, brokers are not held to the same standards
WISER INVESTING
Indexing is certainly not as thrilling as picking a stock your friend or colleague said is the next Google, but in the long run, academic and professional research shows us that diversification and a long-term time horizon wins the race.
Have more questions? Email us at [email protected] or Contact Us.