Successful investors have three attributes. They follow a sensible investment philosophy, create a prudent portfolio strategy for their needs, and stick to their plan with die-hard discipline. It takes all three traits to succeed long-term.

Passive verses Active

Philosophy is an investor’s underlying core belief about how markets work and how to best invest in them.

Rick’s passive investment philosophy is based on years of study and three decades of direct experience working with thousands of investors. His research supports a view that market returns are good returns, and investing to capture market returns at the lowest available cost is a prudent investment strategy for most people. This includes selecting and diligently maintaining a well-diversified portfolio of index-tracking mutual funds or exchange-traded funds (ETFs).

The benefits of the passive philosophy are universal. The opportunity to earn market returns extend to every person and organization. Most investors who follow a passive philosophy will achieve superior returns over those who follow an active philosophy.

This became evident to Rick in the 1990s when he worked as a Wall Street broker. He spent several years at Kidder, Peabody & Co. and Smith Barney, two large brokerage firms in existence at the time. Each quarter, Rick would calculate the performance of every client portfolio and benchmark them to appropriate market averages. He was struck by the large gap that persisted between investor performance and the returns of the stock and bond markets. Rick’s detailed analysis led him to discover fundamental flaws in the way most people invest.

There was clear evidence the losers in the marketplace followed an active philosophy. They believed they (or their advisers) knew things that would lead to superior investment performance. Although considerable time and money was spent attempting to “beat the markets”, Rick’s analysis showed the results of an active philosophy were underwhelming. After structural costs (fees, expenses, commissions) and behavioral costs (poor security selection and timing errors), the net result of active portfolios fell far short of market returns. In total, there was no benefit to investors who believed in active management.

Rick showed his research to the managing partners of the brokerage firm and was quickly shushed. He was told his conclusion was likely accurate, but wasn’t in the best interest the company’s shareholders. One senior partner did tell Rick he never invested in any of the firm’s recommendations. All his money was in index funds!

Create a Portfolio Strategy

Strategy extends philosophy from theory to practice. It is the very personal way each investor employs the passive philosophy in their own portfolio.  Every investor should customize their portfolio strategy to their needs and ability to handle risk.

Strategy starts with an assessment of an investor’s financial situation, long-term goals, and ability to withstand short-term losses. This leads to a prudent asset allocation among risky assets, less risky assets and risk-less assets, and to an asset location plan for tax purposes when applicable. From there, a portfolio of index funds and ETFs is constructed to achieve market returns in each asset class. These products offer low-cost, full transparency, tax efficiency and can be traded anytime. This process is discussed in detail in Rick’s books and blogs.

Quality investment advice from a professional may be helpful at this stage. Fees are important when selecting an adviser; however, what’s more important is the investor and adviser be on the same page with the investment philosophy and the portfolio strategy.

Discipline means Simplicity

Maintaining discipline is the hardest part of investing. Distractions are everywhere. Something bad is happening someplace and something good is happening somewhere else. Trying to adjust a portfolio to keep up with the “news” is futile. Poor relative performance usually results when an investor attempts to trade on information that’s already known and widely disseminated in the marketplace. Nonetheless, it’s  easy to get caught up in the hype and break discipline, even as an index investor.

There are ways to improve discipline. Rick has found that keeping a portfolio strategy simple is good way to stay focused and stay invested. The less complexity in a portfolio the better. Hold a few, low-cost, broadly diversified funds in a portfolio helps maintain discipline. Rick’s Core-4® strategy is a good example.

Investing in a single balanced index fund is another way to stay disciplined. The portfolio allocation is managed among different asset classes inside a balanced fund. All an investor has to do is select the fund with a proper allocation for their needs and put the money there. Everything else happens automatically.

A qualified adviser and personal portfolio management service can also help maintain discipline. An as-needed adviser provides assurance and assistance to a do-it-yourself investor. For those who prefer someone else do it, the fee for personal portfolio management has come down considerably in the past 10 years due to competition and technology advances.