[et_pb_section fb_built=”1″ _builder_version=”3.22″][et_pb_row _builder_version=”3.25″ background_size=”initial” background_position=”top_left” background_repeat=”repeat”][et_pb_column type=”4_4″ _builder_version=”3.25″ custom_padding=”|||” custom_padding__hover=”|||”][et_pb_text _builder_version=”4.6.6″ header_2_line_height=”1.3em” background_size=”initial” background_position=”top_left” background_repeat=”repeat”]As a young professional, your career is taking off, your income is steadily growing, and you\u2019re probably looking for ways to save for your important future goals \u2013 starting a family or saving for college, buying a first home or perhaps a vacation retreat and, of course, putting away enough for retirement. Maybe you\u2019re even hoping to retire early?<\/p>\n
You know that these goals can be expensive, and that you\u2019ll need to save and invest in an intelligent way to reach them all on your timeline. But if you\u2019re relatively new to investing, you may be unsure about the best way to invest your savings, so that you generate enough return without taking any unnecessary risks.<\/p>\n
If you believe the financial media \u2013 whether it\u2019s CNBC on cable television, Marketwatch online, or Kiplinger\u2019s or Money magazines on your newsstand \u2013 the key to a happy and successful investing experience is picking the right stocks or funds at the right time.[\/et_pb_text][\/et_pb_column][\/et_pb_row][et_pb_row column_structure=”1_2,1_2″ _builder_version=”4.6.6″ _module_preset=”default”][et_pb_column type=”1_2″ _builder_version=”4.6.6″ _module_preset=”default”][et_pb_image src=”https:\/\/springwaterwealth.com\/wp-content\/uploads\/2020\/10\/Money-Magazine-Jan-2016-Cover.jpg” alt=”Money Magazine Jan 2016 Cover” title_text=”Money Magazine Jan 2016 Cover” _builder_version=”4.6.6″ _module_preset=”default”][\/et_pb_image][\/et_pb_column][et_pb_column type=”1_2″ _builder_version=”4.6.6″ _module_preset=”default”][et_pb_image src=”https:\/\/springwaterwealth.com\/wp-content\/uploads\/2020\/10\/Kiplingers-Oct-2016-Cover.jpg” alt=”Kiplingers Oct 2016 Cover” title_text=”Kiplingers Oct 2016 Cover” _builder_version=”4.6.6″ _module_preset=”default”][\/et_pb_image][\/et_pb_column][\/et_pb_row][et_pb_row _builder_version=”4.6.6″ _module_preset=”default”][et_pb_column type=”4_4″ _builder_version=”4.6.6″ _module_preset=”default”][et_pb_text _builder_version=”4.6.6″ _module_preset=”default” header_2_line_height=”1.3em” hover_enabled=”0″ sticky_enabled=”0″]At Springwater, we\u2019ve heard this media referred to only half-jokingly as \u201cinvestment pornography\u201d. The publishers are supported by advertisers, many of which are companies trying to sell viewers and readers financial products, and the stories are meant to titillate and entertain more than inform and educate. Sounds bad, right? And, by and large, it is.<\/p>\n
Instead, let\u2019s explore, in a bit of detail, the concept of asset allocation. It\u2019s one of the foundations of successful investing. It\u2019s key to your investing growth, and it will help you redefine what you consider the best investments for young professionals.<\/p>\n
Academics have been studying financial markets since the 1960s. One of the most important conclusions to come out of that research is that your asset allocation decision is the most important factor in explaining your portfolio\u2019s performance.<\/p>\n
This means that how you choose to divide your savings up between categories (like stocks, bonds, real estate, cash, etc) is more important than which good (or bad) funds you pick in each of those categories.<\/p>\n
Let\u2019s say you\u2019re an engineer at Intel in Hillsboro, Oregon or Folsom, California, an executive with Nike in Beaverton, Oregon, or a doctor with Oregon Health & Science University in Portland, Oregon, and you\u2019re chatting with a colleague about the relative performance of your 401(k) accounts. If you find that you\u2019ve had different results, it\u2019s almost certainly due to the fact that your asset allocations were different, rather than because you picked Fund A in US Large Cap Stocks and your colleague picked Fund B.<\/p>\n
Once you understand that most of your return will be determined by your asset allocation decision, you no longer need to worry about trying to find the best active manager for each asset class you\u2019ve selected for your portfolio.<\/p>\n
In a nutshell, active managers believe it\u2019s possible to consistently earn returns that are better than those of the market (or a particular benchmark against which their performance is measured), by attempting to identify mis-priced securities and\/or timing the market. Passive or index-oriented managers, in contrast, believe that the market is fairly efficient in pricing securities, making out-performing the market consistently very difficult. <\/p>\n
There have been literally hundreds of peer-reviewed research papers written on the subject of the performance of active managers over the past several decades, a number of which have earned their authors Nobel Prizes<\/strong><\/a> for their work. What does the research show?<\/p>\n First, on average, active managers under-perform the market. In a well-known 1991 article in the Financial Analysts\u2019 Journal<\/strong><\/a>, William Sharpe showed that in an investing world filled with active and passive (or index) investment managers, the combined performance of the active managers has to equal the passive managers\u2019 performance, less the difference in fees charged by the managers. Why? Because before fees, passive\/index managers will by definition own a pro-rata share of all investments in the market, and so earn the exact same return as the market itself. That leaves the exact same for the active managers, in aggregate \u2013 they also get the market return, before fees.<\/p>\n Second, even if you manage to find an active manager who\u2019s beaten the market for several years in a row, it\u2019s basically impossible to tell whether that out-performance is due to luck or skill. Imagine that instead of picking stocks, the active manager was instead just flipping a coin. If he managed to land on heads 5, 10 or even 15 times in a row, you\u2019d still attribute that to luck, and not to some unique coin-flipping ability. It\u2019s the same with investment results. Consistent market- or benchmark-beating performance is uncommon, and so infrequent that being able with certainty to attribute it to skill isn\u2019t possible. Bill Miller, formerly a fund manager at Legg Mason, is one of the most recent examples of a fallen star active fund manager<\/strong><\/a>.<\/p>\n Third, while it\u2019s easy to identify market-beating performance after the fact, it\u2019s very difficult to do so in advance. As the saying goes, \u201cpast performance is no guarantee of future results\u201d. Standard and Poors, a leading investment resource for index and benchmark data, regularly assesses the performance of active investment managers. In their December 2019 report<\/strong><\/a>, they again concluded that \u201c\u2026historical performance is only randomly associated with future performance\u201d.<\/p>\n One of the keys to successful investing is understanding what diversification is<\/strong><\/a>, and why it\u2019s important. <\/p>\n In a nutshell, diversification is all about owning a variety of investments that are expected to perform differently over time. Think about stocks doing well when the economy is growing, with bonds and cash performing better when the economic cycle slows down. Now, if you had perfect foresight \u2013 or a crystal ball \u2013 you would obviously only own investments that are going to perform well. But, as we know, active management in general has a dismal track record.<\/p>\n A properly diversified portfolio will include a mix of stocks, bonds, real estate and cash, and, within each of those broad categories, allocations to sub-categories (or \u201casset classes\u201d) \u2013 like US small company stocks, international value stocks, US government bonds, and so on.<\/p>\n By combining a number of asset classes together in your portfolio that have different risk and return characteristics, you\u2019ll optimize your portfolio\u2019s risk\/return relationship. You\u2019ll earn the most return for a given amount of investment risk taken. That\u2019s why diversification is sometimes called the only \u201cfree lunch\u201d in investing \u2013 it costs nothing, and improves your results.<\/p>\n By choosing not to pick individual stocks and instead opting to use mutual funds or exchange-traded funds that own hundreds or thousands of securities in a given asset class, you can effectively diversify your portfolio with zero effort.<\/p>\n Investors are increasingly interested in expressing their values, and their commitment to environmental and social causes, through their investing. Fortunately, the financial services industry has recognized this demand and has responded. At Springwater Wealth, for example, we can implement our low-cost, broadly diversified investment strategies with socially responsible, sustainability, or carbon-free overlays applied. With a growing number of asset class-oriented and index funds available in this area, you don\u2019t need to sacrifice investment performance or suffer high fees to invest with your values.<\/p>\n If you make the smart choice to prioritize asset allocation as part of your investing growth strategy, you\u2019ll relieve yourself of a lot of the stress, pressure and unnecessary activity that comes along with an actively-managed approach.<\/p>\n You won\u2019t need to monitor every holding in your portfolio on a daily basis, because you\u2019ll probably own no more than a dozen or so mutual funds or ETFs, each of which will represent an asset class, and will own hundreds or thousands of stocks. So, you won\u2019t need to worry about the latest earnings announcement, product flop, or management reshuffle at a particular company. By building out your portfolio with funds, you eliminate these types of company-specific risk.<\/p>\n Your initial asset allocation should reflect your goals, your investment horizon, your risk tolerance, any need for liquidity, and perhaps some other, personal constraints. But you really won\u2019t need \u2013 or want \u2013 to change your target asset allocation unless there\u2019s a significant change in your circumstances. Asset allocation shouldn\u2019t be influenced by short-term market fluctuations or other temporary economic conditions.<\/p>\n You will want to rebalance your portfolio periodically, ideally as part of a disciplined, structured process. In short, rebalancing is nothing more than the process of systematically bringing your portfolio\u2019s actual allocation \u2013 which, because of differing performance from the asset classes you own, will have drifted away from its target \u2013 back in alignment.<\/p>\n Embracing asset allocation as the foundation of your investment strategy gives you the best odds of meeting your goals, and of enjoying a successful investment experience.[\/et_pb_text][\/et_pb_column][\/et_pb_row][\/et_pb_section]<\/p>\n","protected":false},"excerpt":{"rendered":" As a young professional, your career is taking off, your income is steadily growing, and you\u2019re probably looking for ways to save for your important future goals \u2013 starting a family or saving for college, buying a first home or perhaps a vacation retreat and, of course, putting away enough for retirement. Maybe you\u2019re even […]<\/p>\n","protected":false},"author":2,"featured_media":5536,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"on","_et_pb_old_content":"As a young professional, your career is taking off, your income is steadily growing, and you\u2019re probably looking for ways to save for your important future goals \u2013 starting a family or saving for college, buying a first home or perhaps a vacation retreat and, of course, putting away enough for retirement. Maybe you\u2019re even hoping to retire early?\r\n\r\nYou know that these goals can be expensive, and that you\u2019ll need to save and invest in an intelligent way to reach them all on your timeline. But if you\u2019re relatively new to investing, you may be unsure about the best way to invest your savings, so that you generate enough return without taking any unnecessary risks.\r\n\r\nIf you believe the financial media \u2013 whether it\u2019s CNBC on cable television, Marketwatch online, or Kiplinger\u2019s or Money magazines on your newsstand \u2013 the key to a happy and successful investing experience is picking the right stocks or funds at the right time.\r\n\r\n\r\n[IMAGES]\r\n\r\nAt Springwater, we\u2019ve heard this media referred to only half-jokingly as \u201cinvestment pornography\u201d. The publishers are supported by advertisers, many of which are companies trying to sell viewers and readers financial products, and the stories are meant to titillate and entertain more than inform and educate. Sounds bad, right? And, by and large, it is.\r\n\r\nInstead, let\u2019s explore, in a bit of detail, the concept of asset allocation. It\u2019s one of the foundations of successful investing. It\u2019s key to your investing growth, and it will help you redefine what you consider the best investments for young professionals.\r\n\r\n3 \u2013 With Asset Allocation, You Can Both Diversify and Simplify<\/h2>\n
Do you have questions about investing, or about making smart choices in your 401(k) plan at work? Contact us today to see how our team at Springwater Wealth can help you develop a solid plan for your financial future.<\/a><\/strong><\/span><\/h2>\n
4 \u2013 Asset Allocation Doesn\u2019t Require Constant Management<\/h2>\n
\n1 \u2013 Most of Your Return is Determined by Asset Allocation<\/h2>\r\nAcademics have been studying financial markets since the 1960s. One of the most important conclusions to come out of that research is that your asset allocation decision is the most important factor in explaining your portfolio\u2019s performance.\r\n\r\nThis means that how you choose to divide your savings up between categories (like stocks, bonds, real estate, cash, etc) is more important than which good (or bad) funds you pick in each of those categories.\r\n\r\nLet\u2019s say you\u2019re an engineer at Intel in Hillsboro, Oregon or Folsom, California, an executive with Nike in Beaverton, Oregon, or a doctor with Oregon Health & Science University in Portland, Oregon, and you\u2019re chatting with a colleague about the relative performance of your 401(k) accounts. If you find that you\u2019ve had different results, it\u2019s almost certainly due to the fact that your asset allocations were different, rather than because you picked Fund A in US Large Cap Stocks and your colleague picked Fund B.\r\n\r\n
2 \u2013 Stock-Picking is a Loser\u2019s Game<\/h2>\r\nOnce you understand that most of your return will be determined by your asset allocation decision, you no longer need to worry about trying to find the best active manager for each asset class you\u2019ve selected for your portfolio.\r\n\r\nIn a nutshell, active managers believe it\u2019s possible to consistently earn returns that are better than those of the market (or a particular benchmark against which their performance is measured), by attempting to identify mis-priced securities and\/or timing the market. Passive or index-oriented managers, in contrast, believe that the market is fairly efficient in pricing securities, making out-performing the market consistently very difficult. \r\n\r\nThere have been literally hundreds of peer-reviewed research papers written on the subject of the performance of active managers over the past several decades, a number of which have earned their authors Nobel Prizes<\/strong><\/a> for their work. What does the research show?\r\n\r\nFirst, on average, active managers under-perform the market. In a well-known 1991 article in the Financial Analysts\u2019 Journal<\/strong><\/a>, William Sharpe showed that in an investing world filled with active and passive (or index) investment managers, the combined performance of the active managers has to equal the passive managers\u2019 performance, less the difference in fees charged by the managers. Why? Because before fees, passive\/index managers will by definition own a pro-rata share of all investments in the market, and so earn the exact same return as the market itself. That leaves the exact same for the active managers, in aggregate \u2013 they also get the market return, before fees.\r\n\r\nSecond, even if you manage to find an active manager who\u2019s beaten the market for several years in a row, it\u2019s basically impossible to tell whether that out-performance is due to luck or skill. Imagine that instead of picking stocks, the active manager was instead just flipping a coin. If he managed to land on heads 5, 10 or even 15 times in a row, you\u2019d still attribute that to luck, and not to some unique coin-flipping ability. It\u2019s the same with investment results. Consistent market- or benchmark-beating performance is uncommon, and so infrequent that being able with certainty to attribute it to skill isn\u2019t possible. Bill Miller, formerly a fund manager at Legg Mason, is one of the most recent examples of a fallen star active fund manager<\/strong><\/a>.\r\n\r\nThird, while it\u2019s easy to identify market-beating performance after the fact, it\u2019s very difficult to do so in advance. As the saying goes, \u201cpast performance is no guarantee of future results\u201d. Standard and Poors, a leading investment resource for index and benchmark data, regularly assesses the performance of active investment managers. In their December 2019 report<\/strong><\/a>, they again concluded that \u201c\u2026historical performance is only randomly associated with future performance\u201d.\r\n\r\n
3 \u2013 With Asset Allocation, You Can Both Diversify and Simplify<\/h2>\r\nOne of the keys to successful investing is understanding what diversification is<\/strong><\/a>, and why it\u2019s important. \r\n\r\nIn a nutshell, diversification is all about owning a variety of investments that are expected to perform differently over time. Think about stocks doing well when the economy is growing, with bonds and cash performing better when the economic cycle slows down. Now, if you had perfect foresight \u2013 or a crystal ball \u2013 you would obviously only own investments that are going to perform well. But, as we know, active management in general has a dismal track record.\r\n\r\nA properly diversified portfolio will include a mix of stocks, bonds, real estate and cash, and, within each of those broad categories, allocations to sub-categories (or \u201casset classes\u201d) \u2013 like US small company stocks, international value stocks, US government bonds, and so on.\r\n\r\nBy combining a number of asset classes together in your portfolio that have different risk and return characteristics, you\u2019ll optimize your portfolio\u2019s risk\/return relationship. You\u2019ll earn the most return for a given amount of investment risk taken. That\u2019s why diversification is sometimes called the only \u201cfree lunch\u201d in investing \u2013 it costs nothing, and improves your results.\r\n\r\nBy choosing not to pick individual stocks and instead opting to use mutual funds or exchange-traded funds that own hundreds or thousands of securities in a given asset class, you can effectively diversify your portfolio with zero effort.\r\n\r\nInvestors are increasingly interested in expressing their values, and their commitment to environmental and social causes, through their investing. Fortunately, the financial services industry has recognized this demand and has responded. At Springwater Wealth, for example, we can implement our low-cost, broadly diversified investment strategies with socially responsible, sustainability, or carbon-free overlays applied. With a growing number of asset class-oriented and index funds available in this area, you don\u2019t need to sacrifice investment performance or suffer high fees to invest with your values.\r\n\r\n
Do you have questions about investing, or about making smart choices in your 401(k) plan at work? Contact us today to see how our team at Springwater Wealth can help you develop a solid plan for your financial future.<\/a><\/strong><\/span><\/h2>\r\n\r\n
4 \u2013 Asset Allocation Doesn\u2019t Require Constant Management<\/h2>\r\nIf you make the smart choice to prioritize asset allocation as part of your investing growth strategy, you\u2019ll relieve yourself of a lot of the stress, pressure and unnecessary activity that comes along with an actively-managed approach.\r\n\r\nYou won\u2019t need to monitor every holding in your portfolio on a daily basis, because you\u2019ll probably own no more than a dozen or so mutual funds or ETFs, each of which will represent an asset class, and will own hundreds or thousands of stocks. So, you won\u2019t need to worry about the latest earnings announcement, product flop, or management reshuffle at a particular company. By building out your portfolio with funds, you eliminate these types of company-specific risk.\r\n\r\nYour initial asset allocation should reflect your goals, your investment horizon, your risk tolerance, any need for liquidity, and perhaps some other, personal constraints. But you really won\u2019t need \u2013 or want \u2013 to change your target asset allocation unless there\u2019s a significant change in your circumstances. Asset allocation shouldn\u2019t be influenced by short-term market fluctuations or other temporary economic conditions.\r\n\r\nYou will want to rebalance your portfolio periodically, ideally as part of a disciplined, structured process. In short, rebalancing is nothing more than the process of systematically bringing your portfolio\u2019s actual allocation \u2013 which, because of differing performance from the asset classes you own, will have drifted away from its target \u2013 back in alignment.\r\n\r\n
\r\n\r\nEmbracing asset allocation as the foundation of your investment strategy gives you the best odds of meeting your goals, and of enjoying a successful investment experience.","_et_gb_content_width":"","_mi_skip_tracking":false,"footnotes":""},"categories":[3,5,7,11],"tags":[13,14,17,21,81,86,87,107,140],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts\/5534"}],"collection":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/comments?post=5534"}],"version-history":[{"count":0,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/posts\/5534\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/media\/5536"}],"wp:attachment":[{"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/media?parent=5534"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/categories?post=5534"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/springwaterwealth.com\/wp-json\/wp\/v2\/tags?post=5534"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}