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5 Steps to Investing Success in 2015 and Beyond
January 23, 2015
By Peter C. Thoms, CFA
Market volatility in on the rise early in 2015 and the world, both politically and economically, is as unpredictable as ever. In order to keep your investments on track through the uncertainty, you essentially need two things:
1. A sound investment plan with ample diversification and upside potential
2. The resolve to stick with your plan through market volatility
Here are 5 steps you can take to ensure your investment portfolio is working as hard for you as possible in 2015 and beyond.
1. Find your appropriate (and comfortable) asset allocation
Stocks have risen strongly in recent years, likely putting many investors in the position of having too high a percentage of their money in stocks. Ask yourself “If the market dove 15% this quarter, would I want to sell some of my stock holdings?” If your answer to this question is “Yes”, then you probably have too much in stocks and should cut back now. A good sign that your exposure to stocks is appropriate is that, in the case of a 15% market decline, you would instead be eager to buy stocks on the cheap to bring your stock allocation back up to its target weight. (Selling your stocks after the market has gone down is a losing strategy; adding to your stocks after they have gotten cheaper is a winning strategy.)
2. Focus your investments on market segments with higher expected returns
There are two segments of both U.S. and international stock markets that have historically delivered significantly better returns (albeit with more volatility) than broad market indexes: value stocks and small-cap stocks. To view our recent article about the historical outperformance of value and small-cap stocks, please click here. To tilt our client portfolios toward the value and small-cap stocks in the markets in which we invest, we use Dimensional funds. For more info about why we believe Dimensional funds offer the best value proposition in the investment industry, please visit the Why DFA? page of our website.
3. Increase the tax-efficiency of your portfolio
In the year just past many actively managed mutual funds paid out very large capital gain distributions, sticking many investors with unexpectedly large tax bills. Instead of investing in mutual funds whose frenetic buying and selling racks up big tax bills, instead consider low-turnover funds such as index funds or exchange-traded funds (ETFs). Both will treat you much better on tax day.
4. Transition out of high-cost funds
Many investors are unaware of the fees charged by their mutual funds because this fee is dripped out of their investment just a little each daythey never actually see an invoice. In 2015, resolve to get a handle on the actual costs of your investments. Ditch your high-cost mutual funds in favor of low-cost alternatives, as high fees correlate very strongly to poor investment performance over time. To see a compelling chart on this topic, request a copy of the Mutual Fund Landscape e-book and turn to Page 8.
5. Reduce Clutter, Organize, Streamline
Many investors have a fairly long list of funds and individual holdings spread out over multiple accountstaxable accounts, IRAs, 401(k)s, 529 Plans, health savings accounts, etc. In addition, many funds have overlapping holdings, making it very difficult for investors to figure out exactly what they own. In order to execute on a particular investment strategy, you have to get a handle on exactly what you own across all of your accounts. Then you should devise a way to track your portfolio allocation as a wholenot just by account.
Getting your portfolio squared away is something that may take many little steps, each one of which may have a small benefit. When you add them all up, however, they can have a very large, positive impact
As usual, I welcome your comments and feedback.
Peter C. Thoms, CFA
Orion Capital Management LLC
1330 Orange Ave. Suite 302
Coronado, CA 92118
Tel: 619.435.1701
Email: [email protected]
About the Author:
Peter C. Thoms, CFA, is the founder and managing member of Orion Capital Management LLC, an independent Registered Investment Advisor based in Coronado, California. The firm manages assets for individuals, families, trusts, corporate pension plans and non-profit organizations.
Disclosure:
This document is for informational purposes only. Nothing in this report is to be construed as a specific investment recommendation. This document does not constitute the provision of investment advice, which is only provided by Orion Capital Management LLC under a written investment advisory agreement and only in states in which Orion Capital Management LLC is registered or is exempt from registration requirements. Orion is not a tax advisor and does not provide tax advice. For tax advice individuals should consult their CPA.
