Invest Smarter

In the investment world, the perception of "smart" investors can often be misleading. Financial Advisors (FAs) commonly rely on a flawed risk assessment approach during client onboarding. Throughout my career, I've observed that less than 5% of clients grasp the true essence of risk, defined as the potential of losing all invested capital. If you were to survey 100 FAs on the concept of risk, substantial discrepancies in understanding would likely emerge.

A critical aspect lies in comprehending historical investment returns. Over the past decade, commodities have exhibited a negative annual return of 3.5%, contrasting with the S&P 500's positive 11.5% annual growth. Additionally, a long-term tax-exempt municipal portfolio has shown an annualized total return of 6.62% over a decade, aligning with data sourced from ChatGPT.

These figures align closely with my practical experience. Notably, David Rubenstein highlighted during a luncheon that stock market returns throughout his career average 10%, while Private Equity stands at 16%. These figures are not only pertinent but also verifiable.

When constructing a portfolio, adherence to these metrics is advisable unless a client specifies alternative directives such as a laddered bond portfolio or a tax-exempt portfolio. Given commodities' consistent underperformance over time, primarily due to associated costs, the rationale behind their inclusion in any portfolio remains perplexing, given their guaranteed long-term loss.

Considering small caps' historical 10-year annualized return at 6.79% versus the S&P's over 10%, investing in a riskier asset class seems counterintuitive. Despite claims of diversification by many investment managers, this approach essentially translates to earning less for assuming more risk, diverting from better investment opportunities to inferior ones.

I believe Private Equity, which is basically small cap stocks, should replace this allocation. Why not earn 16% owning better companies that may never become public. To miss this opportunity, now that PE is available in smaller increments, is foolish. Most FAs have no understanding of this hence there clients will perform poorly relative to smart investors

If you keep it simple and adjust portfolios more on age based metrics than risk based metrics the results will outperform over a cycle