Institutional investors have implemented broad strategies to help grow wealth over time. Retail exchange traded fund investor can also take a page from the big league’s book and invest in a methodical manner.
Individual investors can benefit from institutional investment strategies, such as following a broad asset allocation strategy based on an investment objective or risk tolerance, including passive fund strategies, diversifying a portfolio and rebalancing a portfolio to follow through with one’s objective, writes Sheyna Steiner for Bankrate.
For starters, in a broad asset allocation strategy, investors can utilize noncorrelated asset classes that do not move in lock-step to diminish risk. For instance, investors can spread their investments across all domestic market capitalizations to diminish volatility, instead of relying solely on large-cap stocks. Moreover, after the multi-year rally in U.S. equities, investors may consider looking into international markets for potentially cheaper opportunities.
“The big endowments have been the best investors over the past quarter century,” Mebane T. Faber said in the article. “That means very broad diversification not just focusing on domestic assets but foreign assets, and of course paying as little for investment management as possible.”
Speaking of paying as little as possible for an investment, pensions have also utilized passive investing strategies to cut down on long-term costs. For instance, CalPERS have allocated a significant portion of its portfolio in passive investments, such as index funds or ETFs.
“Today, only maybe 15 percent of individuals adopt passive investing versus about 40 percent of institutional money,” Larry Swedroe, lead director at Buckingham Family of Financial Services, said in the article.
Investors would pay less for passive ETFs as the funds passively track a benchmark index, instead of forking over more to pay for management fees in an active fund strategy.
“The fees investors are paying can easily erode a third to half of their account over time,” Mitch Tuchman, CEO of MarketRiders, said in the article.
Diversification is also an important aspect in managing an investment portfolio as it helps lower risks. Instead of putting all your eggs in one basket, it is important to spread your money around.
Lastly, institutional investors follow through with an investment plan and rebalance allocations whenever their portfolio diverges from the target. This way an investor keeps emotions out of the equation and invests on a predetermined strategy.
“Why do people begin investing without an investment plan? They need to identify their goals and risk tolerance and write up an asset allocation plan and establish what their minimum and maximum targets are for each asset class,” Swedroe added.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.