People who ask me to explain my firm’s investment philosophy—perhaps a guest at one of our seminars, a caller to my radio show or a prospective client making a private call—are sometimes surprised at the brevity of my answer.
I don’t have to give a lengthy discourse. I just tell them that our philosophy is centered on these three basic points:
- Extensive, global diversification
- A long-term perspective
- Strategic rebalancing
We typically recommend that our clients own a portfolio containing all or most of the 18 major asset classes and market sectors, featuring 6,000 or more securities from as many as 40 countries.
Read More Gen X needs financial help
This means a global mix of stocks, bonds, commodities, real estate, foreign securities, natural resources and precious metals—all with the right proportion of each based on the client’s particular situation.
We then recommend that the client maintain this portfolio for years—even decades—instead of frequently buying and selling based on the latest news headlines. This holds true even for those who are already retired, because if they’re healthy, they can expect to live decades longer.
Finally, because changing market values inevitably cause the portfolio’s allocation to drift from the original plan, we rebalance each client’s holdings as often as needed to keep it consistent with our design.
That’s it. That’s how we manage some $12.75 billion in assets for 24,000-plus clients nationwide.
Read More 529 plans not only game in town
Academic studies have proved time and again that this approach is the most effective. However, occasionally I’m asked why I don’t mention certain investment products and strategies that are touted by others. Essentially, my answer is: If you never hear me mention it, we don’t recommend it.
That’s why I sometimes say that the advice we don’t give is important—that clients should pay the same attention to what we’re not saying as they do to what we say. With that in mind, here are 15 investment products and strategies (in no particular order) that you would never hear my colleagues or me recommend:
1. Variable life insurance policies
2. Non-traded real estate investment trusts
3. Hedge funds
4. Commodities trading
5. Options and futures trading
7. PIPES (Private Investments in Public Equity)
8. Alternative investments
9. Viatical settlements (buying insurance on someone else’s life and waiting for that person to die)
10. Master limited partnerships investing in oil and gas
11. Fixed annuities
12. Equity-indexed annuities
13. Lottery tickets (seriously?)
14. Actively managed funds
15. Retail mutual funds (we prefer exchange-traded funds and institutional-grade mutual funds, both of which are far lower in cost.)
“Clients should pay the same attention to what we’re not saying as they do to what we say.”
If I mention any of these investment ideas at all, it’s only to explain why we don’t encourage them. I simply do not have the time or the space to do that here.
Read More Advisors bridge literacy gender gap
If you encounter other products and services and wonder what I think of them, just ask me. I’m not shy.
—By Ric Edelman, special to CNBC.com. Edelman is the founder and CEO of Edelman Financial Services.