We favor investments which are inexpensive, tax efficient, diversified, liquid, and straightforward. Many investors often encounter trouble once they put money into things which do not have these five characteristics. Investments using these five characteristics have already been profitable with time, but typically usually are not very exciting. There exists generally not really a "hot story you need to act on now!" related to them. The financial services industry generally will not favor these kind of investments simply because they generate hardly any benefit from them. We have been in the industry of assisting to increase the great deal of our clients, not the financial services industry. Remember that this listing of investment characteristics will not be comprehensive. Other elements to search for in investments might include attractive valuation, low correlation for your other holdings, a good dividend yield or interest income, a tilt towards regions of the marketplace which have produced higher returns like value stocks, a suitable risk level for you personally, etc. |
Inexpensive. We typically put money into inexpensive index based funds and exchange traded funds (ETF's). The funds we put money into come with an average expense ratio of just.30% each year. The standard actively traded equity mutual fund comes with an average expense ratio of 1% or even more. With investment funds, the very best predictor of future relative performance is definitely the expense ratio around the fund; the low the greater. Hedge funds normally have annual expense ratios of 2% plus 20% of the profits earned. Some variable annuities and permanent life insurance coverage "investments" may have annual expenses of 2% or even more. By maintaining a detailed eye around the costs of our own investments, we are able to save our clients significant quantities of money every year and enable them to achieve higher returns with time (everything else being equal). With investment products, you don't improve performance having a higher cost product, actually you typically worsen performance.
Tax Efficient. Our investments (index based funds and ETF's) are incredibly tax efficient plus they enable the investor to get some control of the timing from the taxes. These kinds of funds have low turnover (trading activity), which is actually a common manifestation of tax efficient investments. We recommend avoiding mutual funds with higher turnover because of their tax inefficiency. Following the recent big rise in the U.S. stock exchange, many active equity mutual funds have "imbedded" capital gains of just as much as 30%-45%. If you purchase those mutual funds you now might end up paying capital gains taxes on those imbedded gains even though you didn't own the fund throughout the increase. ETF's typically usually do not generate long and short-term capital gain distributions at yearend, plus they do not possess imbedded capital gains like active mutual funds. Hedge funds are usually tax inefficient because of their extremely high turnover. Along with purchasing tax-efficient products we do a number of other things to keep our client taxes minimized like tax loss harvesting, keeping our turnover/trading low, putting the best kind of investments within the right kind of accounts (tax location), using losses to offset capital gains, using holdings with large capital gains for gifting, purchasing tax-free municipal bonds, etc.
Diversified. We love to purchase diversified funds simply because they lower your stock specific risk, as well as the overall chance of your portfolio. Not so good news released about one stock may make it drop 50%, that is horrible news in the event that stock is 20% of the whole portfolio, and can be barely noticed inside a fund of one thousand stock positions. We often favor funds that normally have a minimum of one hundred holdings and frequently several hundred holdings or even more. These diversified funds provide you with broad representation from the whole asset class you are attempting to obtain contact with, while eliminating the stock specific risk. We have been unlikely to purchase the most recent Solar Power Company Equity Fund with 10 stock positions, for instance. We don't have confidence in taking any risks (like stock specific risk) that you simply will not earn money from in higher expected return.
Liquid. We love investments that you could sell in a single minute a treadmill day if you choose to do this, and the ones that you can sell at or not far from the prevailing selling price. With liquid investments you usually (daily) understand the exact price and worth of your investments. All the investment funds we recommend meet this standard. We don't like investments that you are locked into for a long time without the opportunity to get a refund whatsoever or without having to pay large exit fees. Types of illiquid investments will be hedge funds, private equity funds, annuities, private company stock, tiny publicly traded stocks, startup company stock or debt, illiquid obscure bonds, structured products, some life insurance coverage "investments," private property partnerships, etc. We prefer investment funds which have been around for a while, are large in dimensions, and also have high average daily trading volumes.
Simple. We prefer investments which are simple, transparent, and clear and understandable. In the event you don't comprehend it, don't put money into it. Each of our investments are pretty straight forward and transparent; we realize precisely what we own. Complicated investment items are designed in support of the vendor, not the customer, and often have high hidden fees. Types of complicated and non-transparent investments we generally avoid are hedge funds, private equity funds, structured products, some life insurance coverage "investment" products, variable annuities, private company stock, startup company stock or loans, etc. "Make everything as easy as possible, however, not simpler." -Albert Einstein.
We feel most investors must have the vast majority of their portfolio committed to stuff that have these five excellent characteristics. By doing this you are going to avoid lots of mistakes, negative surprises, and risks as you go along. Additionally, we feel your after tax investment returns will probably be higher over long amounts of time. Absolutely not every smart or good investment may have most of these characteristics. For instance, income producing property property is illiquid (and frequently not diversified) but is definitely an excellent long term investment if purchased and managed properly. Owning your personal company is illiquid rather than diversified but is definitely an excellent method to build wealth too. We feel these five investment characteristics become much more essential as you enter retirement, since when this occurs you might be more centered on reducing risk and preserving your wealth than building it, and you might require the liquidity to invest and gift a part of your wealth during retirement. These five excellent investment characteristics could be a good screening device for possible investments and good factors to consider when investing.
Parus Ventures Provides Business Development and investment scouting services. It was established by experienced professionals with background in investment banking, consulting, marketing, trade and research, and aims to give it's clients personal, one stop shop services. For more, simply visit http://www.parusventures.com
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