How to Build Investment Portfolios for Long-Term Success
We're often asked about the secrets to building a successful investment portfolio. If you've ever felt overwhelmed by financial jargon, market fluctuations, or simply wondered where to start with your investments, you're not alone. In this post, we share our firm's core principles of investing, which you may find helpful to confidently build your financial future.
Do-It-Yourself or Hire an Advisor?
The first decision you need to make is whether to manage your own investments or work with a financial advisor. Fun fact: Most of the clients we work with were previously DIYers. Most did a solid job managing their own investments, but understood the complexity of navigating retirement planning was different than simple portfolio management. Most people underestimate the benefits of working with a fee-only financial planner. Research from Vanguard and Morningstar suggests that most investors benefit from working with a fee-only certified financial planner.
Asset Allocation: The Foundation of Your Portfolio
Asset allocation is where the real meat of investing happens. It's how you divide your investments between stocks, bonds, and other asset classes. Various studies in academic finance have determined that it's the mix of your assets—not the individual stocks you pick—that determines over 90% of your investment returns over time. Small advantages, like using low cost funds, tax loss harvesting and rebalancing compound over time. Having an asset allocation strategy that is by design, not default, is one of the keys to retirement planning.
Diversification: The Only Free Lunch in Investing
At Ark Royal, diversification isn't just a buzzword—it's the core of smart investing. We use low-cost ETFs for portfolio diversification; you'll own thousands of global companies. Why? Because you can't predict the future, and owning many different asset classes greatly reduces your exposure to a downturn. Consider the "Lost Decade" from 2000-2010. While the S&P 500 was essentially flat for that period, a diversified portfolio would have experienced a positive annual return. As Nobel prize-winning economist Harry Markowitz said, "Diversification is the only free lunch in investing!"
Capturing Market Returns vs. Beating the Market
If you went to Las Vegas, would you rather be the bettor or the house? Most people would prefer to be the house because the house has a mathematical advantage. The investment equivalent is whether you should try to beat the market or capture the market return.The evidence is overwhelming: most investors underperform the market, especially after fees. Those who beat the market over the short term rarely continue to do so. At Ark Royal, we prefer to put the odds of a successful investment experience in your favor by focusing on capturing market returns rather than trying to beat them.
Rebalancing: Maintaining Your Strategy
Markets move, and so does your portfolio. That's why rebalancing matters. Let's say stocks perform well and now make up more of your portfolio than planned. Rebalancing means selling some stocks and buying more bonds to return to your target allocation. It's a disciplined way to buy low, sell high—and control risk.
Managing Investor Emotion: Behavioral Finance Principles for Individual Investors
When the market is booming, it's tempting to throw caution out the window and chase returns. When the market drops, our instinct is to get out—and fast. But here's the truth: Our instincts are wired for survival, not for smart investing. We feel losses twice as intensely as we feel gains. That's called loss aversion—and it leads to some very expensive decisions. According to DALBAR, the average investor drastically underperforms the market—not because of fees or bad funds—but because of poor timing decisions.We often say your portfolio is like a bar of soap – the more you handle it, the less you have.
The Keys for Investment Success
To sum it up, a successful investment experience isn't about uncovering great stocks or predicting the future – it's about putting the power of capital markets to work for you. If you'd like to learn more about how we help clients achieve success, give us a call.