These are Structured Asset Management, Inc.'s core beliefs and are the basis for formulating your plan:
The difference in returns among portfolios is largely determined by relative exposure to the market, small cap stocks, and value stocks. Stocks offer higher expected returns than fixed income due to the higher perceived risk of being in the market. Many economists further believe that small cap and value stocks outperform large cap and growth because the market rationally discounts their prices to reflect underlying risk. The lower prices give investors greater upside as compensation for bearing this risk.
Investors who want to earn above-market returns must take higher risks in their portfolio. The cross-hair map illustrates that tilting a portfolio toward small cap and value stocks increases the exposure to risk and expected return. Decreasing this exposure relative to the market results in lower risk and lower expected return.
Active managers seek to beat the market through stock selection and market timing. They generally charge higher fees than passive managers as compensation for their perceived “skill.” These fees can inflict a significant penalty on net investment returns and terminal wealth, as the above graph demonstrates for various cost levels.
Discipline Is Important
This slide shows the performance of a balanced investment strategy following a few historical crises. Each crisis is labeled with the month and year that it occurred or peaked. The subsequent one-, three-, and five-year annualized returns start from the first day of the month following each crisis. Although a global investment strategy would have suffered losses immediately following most events, the financial markets recovered over time, as indicated by the positive three- and five-year cumulative returns. Negative events such as these may tempt investors to flee the financial markets. But diversification and a long-term perspective can help investors apply discipline to ride out the storm.
A defined investment policy helps maintain the discipline needed to achieve your goals in light of market gyrations and the continuous assault on your senses by the financial news media. Discipline will help keep you strategically focused on rebalancing and risk tolerance issues while allowing you to tactically implement your plan in a cost effective manner.