A Winning Investment Approach

Timothy Brown |

Why Market Investing Works

winning-investment-approachMarkets throughout the world have a history of rewarding investors for the capital they supply. Companies compete with each other for investment capital and millions of investors compete with each other to find the most attractive returns. This competition quickly drives prices to fair value, ensuring that no investor can expect greater returns without bearing greater risk.

Traditional managers strive to beat the market by taking advantage of pricing "mistakes" and attempting to predict the future. Too often, these efforts prove costly and futile. When predictions go awry, these traditional managers miss the strong returns that markets provide by placing the wrong bets on too few individual securities. Meanwhile, market investors thrive, benefiting from growth of the market as a whole.

Investors are rewarded in proportion to the risk they take. If you are willing to assume more risk and have more invested in the stock market, you will be rewarded with higher long-term returns. If you are more risk averse, a higher proportion of bonds in your portfolio will lower your risk while also providing lower long-term returns. When considering your portfolio allocation, time frame is very important. "Long-term" should be considered 10 to 20 years or longer. Creating a portfolio allocation that is right for you given your circumstances and time horizon is critical to your investment success.


Diversification enables investors to capture broad market forces while reducing the risk associated with investing in individual securities. Research shows that you can use diversification to reduce portfolio factors that do not increase expected returns and increase factors that increase expected returns.

Six Things to Do Now

  1. Stay invested in the markets: If you are not in the market, you will not benefit when the markets rebound or generate positive returns.
  2. Diversify your portfolio: Minimize risk within your current portfolio allocation. Don't hold too few securities, bet on countries or speculate on interest rate movements.
  3. Keep investment expenses low: If there are two similar funds investing the same way, choose the less expensive fund. We prefer low-cost index funds and exchange traded funds (ETFs).
  4. Determine your appropriate asset allocation: Because no two investors are alike, there is no single "optimal" asset allocation. Each investor has his or her own risk tolerances, goals and life circumstances that dictate the holdings in their portfolios. The greater the proportion of stocks a portfolio holds, especially small-cap and value stocks, the more "aggressive" its risk and the greater its expected return. 
  5. Maintain an appropriate liquidity: This can be through the maintenance of an emergency fund, bond ladder or fixed-income portfolio. You want to know that you have the funds available when they are needed.
  6. Rebalance: When prices go up, trim some of those holdings that have done well, and buy more of those that are "on sale." This is a disciplined process that enables you to sell when prices are high and buy when prices are low. Review your portfolio at least annually for rebalancing opportunities.

We challenge you to follow these six steps and experience a much better investment experience. Tell us what's on your mind. What are your questions or fears relating to investing today?

Additional Resources

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