As a financial advisor, one of the most common questions I hear is, “How should I invest for retirement?”
In fact, it’s probably a question you’ve asked yourself.
With all of the investments available today, it’s easy for the average investor to feel lost in the woods.
Fortunately though, there are really only three options when considering how to invest your retirement savings.
On the path to retirement (and beyond), these three options are…
- 1. Try to BEAT the market
- 2. Try to BE the market
- 3. Evidence-based investing
SPOILER ALERT: If you’re a current client or you’ve read this blog for any length of time, you already know what option I typically utilize in client portfolios.
But just for kicks, let’s explore all three options and illustrate why I think one of these options rises above the rest when asking yourself the question of how to invest your retirement savings.
Option 1 – Try to BEAT the market (Not so great)
Whether they realize it or not, this is how the majority of people invest their retirement savings.
They try to predict which way the financial markets and individual investments are headed based upon recent news stories, their intuition, or some “hot” tip from their neighbor’s, brother’s, cousin-in-law’s uncle.
They “actively” try to pick investments they hope (pray?) will do better than the rest of the financial markets, while also attempting to avoid those investments that they think will do worse than the rest of “the market.”
In other words, they try to pick the winners and avoid the losers.
After all, this is the American way.
You live in the land of the free and the home of the brave.
You can pick yourself up by your bootstraps and make a name for yourself.
As the lyrics go in the old song from the Broadway musical, Annie Get Your Gun…
♪Anything you can do I can do better….I can do anything better than you…♪
Unfortunately though, just like the song…
♪No you can’t…♪
At least not in the world of investing.
You see, research has proven over and over again that over long periods of time, it’s almost IMPOSSIBLE to outperform the collective knowledge of millions of market participants, except by chance.
This is true especially when you take into account the higher costs (and risks) that come along with this form of investing.
Not to mention the increased stress and lack of sleep that this strategy usually entails!
Option 2 – Try to BE the market (Better)
This reality has led a growing number of individuals to embrace something called “index fund” or “passive” investing.
You see, even when someone is really good at “picking the winners and avoiding the losers,” so to speak, over long periods of time, the increased costs of doing so almost always wipe out any excess return over and above the overall market’s rate of return.
With this “passive” strategy though, instead of trying to beat the market, the investor tries to BE the market.
In other words, they attempt to match the market’s rate of return by constructing an investment portfolio that attempts to track the performance of an overall market index (i.e. both winners AND losers).
This means that, hypothetically, they won’t hit a home run when it comes to their investments, but they shouldn’t strike out either, at least not compared to the “average” investor.
One advantage of this strategy is that the costs of implementing it are typically MUCH lower compared to the first option.
This means that, over long periods of time, the average “passive” investor should experience higher returns than the average “active” investor (i.e. option 1), if for no other reason than the lower fees involved with the “passive” strategy.
A big disadvantage of this option though is that the investor is tied to whatever commercial index their investments are attempting to track.
This restricts the list of securities held in their investment portfolio and it forces them to buy and sell those securities at times and prices that are out of their control.
In other words, they lose out on the possibility of a higher expected return than the overall market by giving up what some might consider to be a large degree of control over their investment choices.
So, maybe you’re wondering…
Is there a better way?
I’m so glad you asked!
Option 3 – Evidence-based investing (The Best)
With evidence-based investing, we gain insights about financial markets and investment returns from decades of Nobel-Prize winning academic research.
We then use this research to help us structure our investment portfolio along the dimensions of expected returns.
Instead of seeking to add value by trying to “BEAT the market”…
And instead of passively sitting on the sidelines trying to “BE the market”…
Advisory firms like SageOak utilize investments that seek to add value by integrating research, portfolio management, and trading strategies to increase expected returns.
Instead of wasting time on the things research has proven we CAN’T control, we focus on the things we CAN control such as…
- Asset allocation
- Taxes
- Costs
- Asset location
- Diversification
- And a variety of other important factors
Just like the other two options, this strategy does NOT guarantee investing success, but over time, it should lead to…
- A. Lower costs (i.e. more money in your pocket)
- B. Less stress (i.e. more sleep at night)
- C. A more rewarding investing experience
Yeah, I think I’ll go with option 3 too!
Take the next step…
As I’ve written about previously, investing is just a small piece of your overall financial life, but it’s an important one nonetheless.
If you’re a client, when it comes to investing for retirement, hopefully you realize why we invest your money the way we do here at SageOak.
And if you’re not a client, I’ve hopefully convinced you to at least consider the evidence-based investing approach when considering how to invest your retirement savings.
As always, if you’d like to talk about how to invest your retirement savings or are interested in a complimentary “second opinion” regarding your current situation, feel free to email me anytime at [email protected].
Or if you’d prefer to talk over the phone, click the button below to schedule a 15-20 minute initial phone call to see if it makes sense to explore a possible advisory relationship with SageOak.
