ITA Wealth Management

Several other mistakes outlined on July 8th included mis-information surrounding index funds and portfolio/benchmark tracking. Let’s tackle this issue of using index funds or more specifically, ETF index investments as our primary equity investments. The vast majority of investors use stocks and bonds as their sources for populating portfolios. That majority is also the group that fails to perform better than the market. William Sharpe’s arithmetic paper on this subject lays out why this must be the case. The asset allocation approach, advocated in this blog, is no guarantee one will beat the market, and by that we mean outperform a benchmark such as the VTSMX. Over time, we do expect to outperform most mutual funds and individual investors because we are keeping costs low and we are building diversified portfolios.

One of my pet peeves is investors who say they are beating the market, yet they do not have an accurate method for either tracking their portfolio or accurately tracking the benchmark. Very few investors I know accurately track their benchmark as commercial software is not set up to do this. That is why we use the spreadsheets found over on the Premium Content side of this blog.

To increase the probability of finding success as an investor, invest in a broad number of index funds or ETF index vehicles. Keep costs low so look for ETFs with low expense ratios. Know what asset classes you want to include in the portfolio and find ETFs to cover those asset classes. Then learn how to properly track the performance of the portfolio and an appropriate benchmark. Also, pay attention to the risk you are willing to take to reach your portfolio performance goals. I’m sure these discussion points will come again as they are fundamental to good investing.

Lowell Herr

Photograph: Lake Oswego Street Art

Premium Content available for $6.99 per month. Take advantage of the seven-day offer for $1.00.