For this post, I want to start by sharing what has taken place in financial markets this year. There’s no shortage of opinion articles on the consequences of prolonged geopolitical tensions or the impact that AI advancements will have across industries. Even if you tune out the media, you likely feel the effects of current events, such as it costing nearly double to fill up your car with gas or mortgage rates shooting up over 0.5% right as you’re starting your home search. Despite these events, the stock market has performed quite well this year. As of Friday’s market close, the three major U.S. stock indices were all positive, with the Russell 2000 (small and mid-sized companies) being up nearly 12% year-to-date. Stocks outside of the U.S. have continued the trend of outperforming U.S. stocks both in developed and emerging markets.
My approach to building investment portfolios is to invest 70% of your stock allocation to U.S. stocks and the remaining 30% to stocks outside of the U.S. Within these allocations, you have slightly more exposure to smaller companies and companies with higher profitability, both of which have benefited investors this year.
One interesting fact to share that you may not be aware of is that through the first quarter of the year, all of these indices were negative. Since March 30th, all three indices are up double-digits, with the Nasdaq 100 (large tech stocks) up 16% over the past three weeks!
Three weeks ago, not many people would have expected double-digit returns from the stock market. I know I sure didn’t. This is a prime example of why I don’t invest my own money or your money based on opinion. While the stock market has averaged ~10% annualized returns throughout history, it hasn’t been a smooth and steady climb. These sudden rallies are actually quite common and they often come when you would least expect. That is why staying invested is so important for building wealth to capture these returns when they occur.
Refresh Wealth Investment Process – Look Under the Hood:
Now that I’ve covered what is going on in markets, I want to give each of you a look under the hood for how I evaluate new investment opportunities. To start, I evaluate investment funds on a quarterly basis. A few of the questions in my evaluation process include the following:
Are the funds performing as I would expect?
Are these funds still the best option to get the targeted exposure from a total cost perspective?
Are there opportunities to increase the tax efficiency of the investment portfolio?
My investment philosophy has remained consistent, though I continue to look for opportunities to improve how it’s delivered across your investment accounts. I believe in the primary benefits of indexing, which include low costs, broad diversification, tax efficiency and a rules-based approach. I pair these benefits with academic research of what drives stock returns over the long term, which include a company’s profits and the price you pay for those profits. This combined approach has proven to deliver better returns than purely indexing. The two primary fund companies that I use within client accounts are Avantis and Dimensional Fund Advisors. Neither of these companies attempt to “time the market” or speculate on which stocks will be “winners”, which is how traditional “active” managers approach investing. Instead, they start with the entire index and then take a data driven approach to screen for companies that generate above average profits and companies that are trading at below average prices relative to these profits. Based on these screenings, they slightly overweight their positions to companies that have higher expected returns relative to their weight in the index.
This approach aligns with my belief of not attempting to “outsmart the market”, rather to take the best of financial science and apply it through thoughtful implementation within these funds. This approach does have slightly higher expense ratios compared to index funds, however, I believe the benefits of this approach outweigh the additional costs. To reflect this, I’ve included a comparison of both returns and costs for Avantis ETFs relative to the closest Vanguard equivalent ETF. Dimensional has a similar cost and return profile to Avantis, however, their ETFs don’t have as long of a track record as Avantis.
While I don’t often make changes to the portfolios, which is intentional to minimize taxes and trading costs, I do continuously review the investments and research other fund companies to ensure these funds are still the best method to implement the target strategy.
Hope this post helps give you a glimpse into my thought process and the intentionality that goes into constructing and monitoring investment portfolios at Refresh Wealth.