Investing Lessons from 2018

I spend a lot of team each year researching investment strategies for my firm. It’s fun to look over the marketing materials from fund companies. My job is to determine what actually offers substantial improvement over what we are using today and what is just marketing BS. Most of it is marketing, but I am always learning things. Here’s what I learned in 2018:

  1. Mutual funds look more and more like dinosaurs every year. We still use them because one of our favorite investment managers only offers mutual funds for the strategies we want, but I would rather use an exchange traded fund (ETF) hands down. Both mutual funds and ETFs are wrappers that let you pool stocks together, but ETFs have better tax advantages.
  2. We find more and more low cost strategies that replace the old way of investing by targeting stocks with certain characteristics (factors). Let me give you two examples:
    • Old way – Use utilities funds to deliver less risky stocks.
    • New way – Use a low volatility fund that targets stocks that have been less risky over the past year in many different sectors. These had comparable returns and less risk than utilities funds over the past 3- and 5-years.
    • Old way – Use a manager who scours financial reports to find undervalued stocks.
    • New way – Use a rules-based low cost value fund to do the same thing for 1/4 the cost (or less).
  3. Good strategies (such as value stocks and small cap stocks) can fail to deliver premium returns for periods longer than 10 years. Many people still focus on three-year historical returns as if they prove an investment strategy’s worth. Investing takes patience. You need to understand how your investment strategy works in order to believe in it through long periods of underperformance. The alternative is to chase last year’s winning strategy, which doesn’t lead to long-term success.

 

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