Our overriding investment philosophy at Aptus is “keep it simple.” We believe simplicity beats complexity, not just in investments but in many facets of life. Your retirement outcome is more likely to be determined by your income level and savings rate than it is to be driven by clever stock picking or crafty asset allocation decisions.
We often help our clients “break up” with financial advisors, and it’s common to see advisor-designed portfolios of 50+ individual stocks and bonds, with constant trading in and out of positions. This gives the aura of sophistication. Wow, the client is supposed to think, this advisor must be doing something really cool because I sure don’t understand it. There must be some kind of secret sauce, right? Nope. The reality we find is typically poorly designed, under-performing hot messes.
We approach the markets with both great confidence, given our deep experience in stock research, and complete humility, in light of the overwhelming evidence suggesting it’s incredibly difficult to outsmart the market. We don’t believe you can beat the market. Somebody might be able to. Not you. If you could beat the market, you wouldn’t be reading this blog. You’d be figuring out ways to spend your billions, ha!
If you can’t beat the market, be the market. We encourage our clients to capture broad market returns across a range of asset classes utilizing low-fee index funds. Especially for younger investors, we principally focus on stocks and bonds. Older and higher net worth investors might use sub-classes of stocks and bonds—like inflation-protected bonds—and/or alternative investments like real estate.
We also try to capture the wisdom of markets to determine an appropriate mix of stocks and bonds. Our asset allocation recommendations are informed by the averages of a host of target-date fund families. These funds incorporate the collective wisdom of investment strategists from the biggest mutual fund companies in the world, including Fidelity, BlackRock, JPMorgan, T. Rowe Price, Vanguard, American Funds and State Street. We consider the average of these target-date funds a good starting point when estimating risk-neutral, age-appropriate allocations. We are not trying to make bets.
These average allocations are only a starting point. There are several factors that might impact risk/return trade-offs and allocation decision. While age and time horizon are important factors, an individual’s current or expected level of wealth—relative to their spending levels—is another critical factor in determining asset allocation. Increased wealth enables an investor to accept higher risk. We also take into account an individual’s risk psychology. While we encourage a dispassionate approach to investing, it may not be wise for someone to invest primarily in stocks if they know they will panic-sell on market dips.
One obvious option is to just buy a target-date index fund, which adjusts and becomes less volatile as you get older. That’s great for most individual investors who are saving into tax-advantaged retirement plans. If target-date funds don’t fit your circumstance, you can consider a “target-risk” portfolio like a Vanguard LifeStrategy fund with static allocations. If you want a little more control and precision with even lower costs, you can buy individual index funds like the Vanguard Total Stock Market Index (VTSAX or VTI), Vanguard Total International Stock Index (VTIAX or VXUS) and Vanguard Total Bond Market Index (VBTLX or BND). For those in the 32% federal tax bracket or higher and investing in a taxable account, we’d consider a tax-exempt bond fund (e.g., Vanguard Tax-Exempt Bond Fund, VTEAX or VTEB). instead of, or in conjunction with, a broad, total bond market index fund.
Ultimately, we believe you can do it yourself. But we don’t want you to feel like you have to do it alone. We can provide guidance, education and a 2nd set of eyes to support do-it-yourself investing. We help our clients determine the most appropriate asset allocations for their circumstances. And we help them keep it simple, understandable and effective.