Our Investing Principles
NEWCASTLE ADVISORS INVESTMENT PRINCIPLES
When choosing a financial advisor, it’s critical that you agree on a common set of beliefs to ensure that proper expectations are set. Therefore, we felt it would be helpful to make our specific planning & investing principles available.
Your Financial Plan Determines Your Portfolio
We build financial plans with your goals as our primary compass. Once we’ve established what you would like to achieve and how closely you’re tracking toward those goals, we will set portfolio expectations. We will be clear about our portfolio assumptions that include a combination of conservative historical market performance and your comfort level with regard to various investing risks. We will then develop specific portfolio recommendations.
Evidence-Based Investing
We believe in data-driven, rules-based investment strategies. Consequently we seek to capture the return provided by the market. In some cases (generally for low investment balances), we do not believe in hiring active fund managers, as historically their performance has not warranted their fees. A recent American study (that includes data over the 15-year period ending Dec. 2016) stated in short, 92% of large-cap, 95% of mid-cap, and 93% of small-cap managers trailed their respective benchmarks. Therefore, as a general rule, we seek to save cost and taxes by utilising funds that are not actively managed. This belief system removes the “underperformance discussion” that is so common in our industry. We favour history over luck and evidence over narrative.
Costs Matter
We believe that a diversified portfolio of low-cost funds and ETFs will serve you better in the long run. Our goal is to maximize your net return on investment.
Taxes Matter
Taxes and transaction costs can also place a significant drag on performance. If a fund has an average turnover of 25% of the fund per year, this means that on average the fund will turn over 100% every four years. There are two costs associated with this turnover, transaction costs and taxes. Transaction costs are those costs that it takes to buy and sell securities which are passed on to you as the investor and likely does not show up anywhere in a prospectus. But an even larger cost is the taxes associated with this turnover. When managers sell positions with capital gains, this tax liability is passed on to you.
Using the right structures is crucial in your investment strategy. For example, if you are investing for your retirement or long term wealth accumulation, investing within your own personal name, you can be taxed at up to 47%. Whereas if you were investing via the superannuation structure, you may be taxed at a maximum of 15% or potential 0% when you reach retirement (and are over the age of 60). This is a huge tax differential that will make a significant impact on your investment returns.
Behaviour Matters
The greatest portfolio in the world won’t do you any good if you can’t stick with it. As such, we will not chase performance or try to time the market. Making constant changes to your portfolio is more likely to impede performance rather than help it. This is also why aligning your portfolio with your financial plan and risk tolerance is so important.
I have worked with financial planners & stock brokers in the past, that have made changes to portfolios to justify their fees. This is not in your best interest and any portfolio changes made need to be aligned with your financial plan and overall vision.
Simple Over Complex
There are many firms that want to convince you that you need a more sophisticated or complex portfolio. These “sophisticated portfolios” often cost much more and are rarely worth it to the client.
I have seen one financial planner that stated that “this portfolio is more for me, as the index or core/satellite approach bores me and I can charge more for the complexity of this portfolio and illustrating how smart I am.”
Diversify Your Portfolio
Owning a diversified portfolio is often referred to as “the only free lunch in investing”. While that statement warrants merit, it is important to understand that there will be times that owning a diversified portfolio will look foolish. We do not know when those times will be, but we know that chasing performance and trying to predict when certain assets will “outperform” is not a viable portfolio strategy.
We are Forecast-Free
While we certainly have views on the relative health of the markets, we do not attempt to forecast the market. There are thousands of very smart people that have tried and been proven wrong time and time again. Instead, we use rates of return that are conservative by historical standards and then construct financial strategies that you can feel comfortable owning.
Ignore the Noise
Market news is almost never worth acting on. Our sincere hope is that due to our collaborative approach and planning first philosophy, that you might be encouraged to turn the market news off and enjoy life a little more. If your portfolio is in alignment with your goals and time horizon, then there should be little reason to make changes regardless of what’s in the news at the moment.
One of our biggest bugbears is the 6pm news bulletin each night. When the market goes down, the newsroom will lead with this. Normally they will not mention the percentage and state how much money has been “wiped off” the share market. However, if the market was to increase in value, this will be articulated as a percentage, within a short 5-10 seconds clip, squeezed in between sport and the weather. Fear sells!
Your Strategy Should Pass the “Sleep Test”
If what you are invested in keeps you up at night, then you probably need to revisit your portfolio strategy. Knowing your comfort level toward a specific strategy is critical to your long-term success.
I Follow My Own Advice
As a steward of many of my client’s entire financial lives, I think it only makes sense that the entirety of my own investable net worth is invested in accordance with these investing principles as well. So, that’s exactly what I do.
Given that you may work with your advisor for decades, knowing what to expect from your advisor and their belief system is a defining factor in the success of that relationship. This is why our first meeting is simply a meeting to get to know each other and see if we can agree philosophically. To see if we are a match for each other. Assuming that is the case, we can proceed into discussing specifics of your financial situation.
