How do we pick the right investments to recommend? Start with Data

How do we pick the right investments to recommend? Step One: Start with Data.

Hi, it’s your Money Mavens – can we talk about what’s happening in the markets?

You’ve likely seen the news: the stock markets seem to be getting crazier by the day.

Big events are always happening – that’s the world for you.

But, does it seem like there’s an extra level of uncertainty lately?

Between geopolitical threats, rising inflation and interest rates, recessionary fears, and lingering COVID concerns, life may feel especially daunting right now.

The market’s volatile reactions to all of this is what we’re feeling.

That’s leading more and more people to feel uncertain, restless, and in many cases, scared about what that means for their investment accounts.

Whether it’s concentrated tech stock that’s lost 40% of its value or a rather simplistic pick of an S&P 500 index fund, which most investors agree looks pretty over-priced right now – folks are worried.

(And you might be, too. Can we say it’s okay to feel uncertainty as an investor? That means you’re human.)

It’s probably why you opened this email: you want to know what we’re doing about it and if everything is going to be okay.

That’s why we’re here: to help you.

But… while we’ll always be your Money Mavens, we’re still limited by the federal government from giving you specific investment advice if you’re not our client.

However, we can certainly let you in on the ‘how we make the soup’ secrets and wisdoms we’ve gathered over the past few decades of building incredible investment portfolios for our amazing clients.

How Does a Professional Wealth Manager Choose Funds During Uncertain Times?

Our clients trust us to position their investment portfolios based on a number of evidence-driven factors.

What we’re about to show you is a summary of our investment selection process.

Our approach prioritizes looking past today’s unsettling news in light of your greater, long-term goals (that’s correct: we ignore short term volatility, because, so far, it resolves itself 100% of the time).

There are three core steps involved in choosing the funds we use.

Step One: Eliminate the Gamblers, Identify the Potentials

Did you know there are currently more mutual funds (or ETFs) than publicly traded companies?

Imagine having more meal combo options on a restaurant menu than the actual number of entrees!

It’s confusing, at best, and even more stressful when we’re talking about real money, not some food options.

Anyone who tries to build a good investment portfolio certainly has their work cut out for them.

The good news is we can promptly eliminate most mutual funds or ETFs from consideration based on which ones are speculative or traditionally active funds.

(Much of their approach treats investing like a game, and we prefer not to play any games with our clients’ accounts.)

Speculative, or active, investors try to predict what’s going to happen next in the market with specific industries, sectors, or even individual companies.

They place trades with the hope (read: guess) they’re right before their competition gets there.

Whether these traders are individuals or well-pedigreed analysts, the competition is fierce and in many ways, a high-stakes gamble.

Now, many of these traders work hard to analyze financial conditions and economic indicators. They may even be correct occasionally.

But that pricing ‘curve’ they’re trying to trade ahead of is always blind to the next price-altering news, because all the information we have about a company now is baked into the price of its stock almost instantaneously.

Over the long run, it’s practically impossible to consistently surpass the prices and long-term expected returns already available in highly efficient markets.

In fact, no one the world is aware of has managed to outpace a simple buy-and-hold of a diversified basket of stocks over the long run (we promise: it’s true).

So, What Do We Do After Eliminating Speculative Funds?

This leaves us with a much smaller, yet still sizable pool of potential selections: a nice ‘problem’ to have.

We need to narrow the field further by identifying the best of the best.

We also must periodically revisit our selections, as new or existing providers offer potential enhancements over time.

(This is the part where we try not to give you too much technical info or else it may seem like geeky gobbledygook. Here’s why this matters…)

As wealth managers, we add considerable value through our upfront and ongoing due diligence.

Our team looks for providers who provide a good balance between innovation and a reliable consistency in how they perform in the market.

This involves finding the most robust factors, or expected sources of return, and understanding how they interact with one another across various market conditions.

The most robust sources of return come from investments that are:

  • Evidence-based: They rely on the same growing body of evidence we use to create a more reliable investment experience when compared to how the market moves.
  • Persistent: They are deliberate, patient, and thrifty, with an eye toward offering more than just a menu of popular products and short-term ‘pops’.
  • Visionary: They’ve been around for a while and carry a strong track record for capturing known and newly identified dimensions of expected returns.
  • ‘Plays Well With Other Funds’: Yes, we like funds that get along well with other funds in an investment portfolio. We look for solutions that we can combine with other funds in several ways as low-cost, sensible building blocks to help you reach your greater financial goals.

This first step is one of the more involved parts of our process, but the payoff is often well worth the work as we often eliminate many of the usual headaches that can happen with investment portfolios.

Step 2 is where we get to have a bit more fun. we could tell you all about it now, but we’ll save that for next week…

(Okay, we can’t wait to share just a tiny bit: Step 2 is about building a portfolio that’s ideal for your goals and risk tolerances.)

(Oh, and Step 3 is about focusing on how you want to package your portfolio. Oops! we’ve said too much!)

To your prosperity,

Your HWM Money Mavens