Frequently Asked Questions (FAQ) About Investing

This is the fun part. I love answering questions about investing. Let’s look at a few at a time.

How Do You Build a Better Portfolio Using an Academic Approach?
The single most important thing we learned from the work of academics is that diversification works. To build a more resilient portfolio using the academic approach, deploy your capital over global boundaries because we know that the U.S., European, United Kingdom, and Japanese markets don’t move together. Also, deploy your capital between fixed income and equity, small stocks and large stocks, and value and growth companies. We don’t know which stocks will go up or down at any specific time in the future, so owning them all reduces your risk of devastating losses.

How Do You Help the Average Investor Allocate as Little as $10,000 in a Portfolio?
Some of our smallest clients have portfolios that are as diverse as those of a Fortune 500 pension plan with billions of dollars. We recommend starting out by building a portfolio with the following:

  • 12,000 Holdings
  • 19 Different Asset Classes
  • 45 countries represented

Is It a Problem If I’m Eating into My Principal by Making Withdrawals from My Portfolio?
It’s normal for portfolios to occasionally undergo circumstances in which it’s necessary to dip into principal. When a portfolio is designed to outpace inflation, it’s going to periodically decline in value. Having some investments in bonds or fixed income investments gives you room for spendable income when markets are down. Diversification is key to ensuring that a portfolio can withstand occasional dipping into principal.

Can Index Funds Be Purchased With This Approach to Investing?
This approach can be used to invest in index funds, although it’s uncommon. Note there are a few drawbacks to using this approach on index funds. First, index funds are typically not diversified well with Small International or Small International Value Stocks, or Emerging Market categories. Second, index funds may not represent the asset classes you want. And finally, index funds can incur additional costs because stocks change regularly within the index.

If I Were to Invest in Gold, How Do I Use It? What Role Does Gold Play in This Investment Approach?
Because it’s a commodity, gold’s value rises and falls based upon supply and demand. We don’t recommend investing in commodities because our approach is founded upon the idea that someone should be paying you for use of your money. That is, when you put your money in the bank, you are paid in interest. When you invest in a company, you have the rights to a share of its profits. That isn’t the case with gold, and it’s usually much harder to sell than to buy.

Should I Seek to Get Out of the Market When the Economy Is Starting to Look Bad?
The market, like everything, has its ups and downs. It moves in cycles. If you want to get out when it takes a downturn, it’s typically an emotional reaction. The news and financial analysts have a way of creating fear and panic in investors that drives the kind of emotional decision making that leads to long-term portfolio erosion. Before making any changes, consult with your financial coach who can help you make sure you’re making logical, informed decisions about your money.

Is It a Good Time to Buy Stocks When the Market Takes a Big Drop?
The short answer is yes because generally speaking, after a big drop stocks will go through great growth periods. But this isn’t always true, and it’s hard to know when the drop has hit bottom or when the growth will occur. Making sure you have a diverse portfolio will help to ensure stability while the outcome reveals itself.

Is It a Good Idea to Have an Annuity to Protect My Principal?
Keep in mind that investing should be about getting a reward for allowing a company to use your money. Without some risk, the reward is low. The problem with annuities is that while they are a “safe” place to keep your money, their returns are usually restricted by tactics such as high fees and caps on returns. On top of that, as an annuity investor you don’t get to partake of dividends from the annuity’s underlying companies, making the annuity more lucrative for its manager than the investor.

I trust the investment firm I’m with because they’ve been around for a long time. Is my confidence in their qualifications justified?

If you do an internet search that includes the name of your investment firm and the words “settlement,” “misconduct,” or “lawsuit,” you’ll see that they’ve likely been accused of mishandling money at some point. Even if they are acting scrupulously, many times money is being managed by unsupervised people who have entered the industry with minimal education and experience. It’s crucial that you don’t have blind faith when it comes to your portfolio and that you have a solid understanding of investment tactics and options so you can be sure your money is being managed properly, whether it’s by a globally recognized firm or a local entity.

“This Has Never Happened Before.” What Do I Do?
The market will always be affected by dramatic world events; it’s nothing new. Looking back over the 20th century, we can see many wars, man-made catastrophes, and natural disasters that left investors and entire populations feeling insecure and unsure of what to do next. In times like these, it’s important to turn to your pre-established rules for investing so you aren’t making emotional decisions. One thing that’s certain is that things have always recovered, no matter how bad they seemed at the moment.

I’m New to Investing and the Amount of Information I Have to Take in is Intimidating. How Can I Get Started?
Before you get started, review everything you’ve learned from this book. Being able to see the difference between myths and truths, especially in advertising, will help you avoid investments that are too good to be true. Second, we recommend working with a fee-only advisor, which will prevent you from paying more than the amount necessary for his services. Continue to educate yourself because it’s entirely up to you to make informed decisions about who you will trust to advise you as you work to build wealth.

What is a Financial Coach?
A Financial Coach guides clients through a disciplined investment process. No matter how well the portfolio is put together, there may be periods of time when the market outlook is negative and fear could cause you to want to get out. A coach helps support you through the process of keeping a disciplined approach that’s based on knowledge. Peace of mind isn’t created from the portfolio, but through education and financial coaching.

What Makes Financial Planning Different from Financial Coaching?
Financial planning is often used as a marketing tool to sell financial products. An individual investor working with a financial planner generally has little way of knowing whether the recommendations made are in their best interest or in the best interest of the planner. They also have little way of knowing whether the financial products could have been obtained elsewhere at lower cost. The majority of planners work for brokerage firms or a broker/dealers, and don’t really work for the client. The brokerage firm also typically controls which products can be recommended. Finally, the traditional planning process does little to educate investors and help them deal with the emotional reactions that are at the root of many poor investment decisions.