The 10 Most Important Things I Tell Clients
Over the past couple of decades, I’ve told clients many very important things. Most of them are timeless, which is why I find myself saying the same things repeatedly. Here are the top 10, and I’ve saved my most important for last.
1. You can’t have it! This response is for when the client says something like, “I just want a respectable 7% return without taking any risk.” It’s easy to find risky investments (like futures) that have low- to no-expected returns, but I have yet to find a riskless, high-return investment. In fact, until recently, I couldn’t even find an investment that guaranteed a positive real (inflation-adjusted) return since cash loses out to inflation. But TIPS now guarantee a positive real return.
2. You have a lot of funds, but you aren’t diversified. New clients often send me statements that have dozens or even hundreds of pages reflecting that they own a host of individual funds and stocks. But it’s not the number of holdings that matter; it’s the number of underlying holdings within each fund. For example, two funds, a total U.S. and a total international stock index fund, can own over 10,000 companies across the globe.
3. Factor investing was never a free lunch. It started with the Fama-French three-factor model with small-cap and value giving a higher historic return. Then came smart-beta, and there are now over 500 factors. Neither Eugene Fama nor Ken French said any factor was a free lunch, but rather compensation for taking on more risk. That risk has shown up over the past decade with small value underperforming. Combine the extra costs and lower tax-efficiency, and I tell clients to take a tad more equity allocation but go with total market capitalization index funds, which virtually assures the client will best most investors.