How Do We Choose the Funds We Use? Step One: Eliminate the Ineligible
Does it seem like there’s been an extra level of uncertainty lately, threatening your investment plans? Of course, there are always big events going on; that’s the world for you. But today’s brew of geopolitical threats, inflation trends, rising interest rates, recessionary fears, and lingering COVID concerns may feel especially daunting. The market’s volatile reactions to it all may have left you wondering whether, this time, seemingly heightened risks call for a higher-alert approach to your investment selections.
Seeking Clarity in Volatile Times
If you’re seeking clarity on how to position your investment portfolio, the daily spew of financial commentary won’t help. To cut past the clutter, let’s revisit our investment selection process, which speaks to the importance of looking past today’s unsettling news in pursuit of your greater, long-term goals.
Today, we launch a multipart series covering the five steps involved in choosing the funds we use. It all begins with Step One.
Step One: Eliminate the Ineligible
Chocolate or vanilla? Back in the 1970s, when Vanguard’s John “Jack” Bogle introduced the first retail index fund, there were similarly limited choices available to satisfy an investor’s tastes. For better and worse, the volume and variety of investment flavors has certainly changed over the years, with a glut of product providers adding to an ever-growing menu of selections.
Fortunately, out of the universe of investment products, we can promptly eliminate most of them. No, it’s not about how they’ve been performing lately. Instead, we weed out the speculative, or traditional active product providers who are playing an entirely different game from the one we have in mind.
Speculative, or active investors try to predict what’s going to happen next in markets or to individual securities, and place clever trades ahead of the curve. Be they individual traders or well-heeled analysts, the competition is so fierce and price-setting is so instantaneous, their efforts aren’t expected to add persistent value, especially after costs. They may work hard to decipher financial conditions and economic indicators. They may even be correct. But that “curve” they’re trying to trade ahead of is always blind to the next price-altering news. Over the long run, this makes it nearly impossible to consistently surpass the prices and long-term expected returns already available in highly efficient markets.
That’s it for today. By starting with a strategy for eliminating as much distracting noise as possible, it’s a whole lot easier to remain resolute when market turmoil blurs our view. Stay tuned to discover what we do during Step Two.