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THE 3 D’S OF INVESTING

There’s a whole science to investing and many advanced degrees, but there are three fundamental things that investors can control that are the primary determinants of success. We call these “The 3 Ds of Investing.”


01.

DIVERSIFICATION

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WHAT IS IT?
Diversification is combining many “risky” assets (that are not alike) to create a portfolio of assets with less risk.

WHY IS IT IMPORTANT?
Diversification is the only “free lunch” when it comes to investing. Why? Because when one asset “zigs” and another “zags,” the result can be higher return with lower risk than the individual components. Who wouldn’t want that?

WHEN DO INVESTORS GO ASTRAY?
The three most common mistakes: 1) focusing on home runs (Apple, Amazon...), 2) owning employer stock (if the employer fails, you lose your job and your wealth…Enron anyone?), and 3) owning companies in the same industry.

HOW DOES NORTH RIDGE DIVERSIFY?
We use index funds as the building blocks of our portfolios because they offer complete diversification (over 15,000 stocks and bonds). This includes domestic and foreign stocks and bonds as well as real estate. Because bonds are held for wealth preservation, we own government-issued treasuries (foreign & domestic) as they perform best during stock market crises—precisely what you want from the “safe” part of the portfolio.

 

02.

DRIVING DOWN COSTS

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WHAT IS IT?
An investment’s total cost can be comprised of many factors: expense ratio, distribution fee, sales load, transaction fees, and taxes. According to the Investment Company Institute, the cost of the average fund in 2017 was 0.70%.

WHY IS IT IMPORTANT?
It’s simple math. Every dollar you pay is one less dollar in your pocket. “But, I’m paying an expert to deliver superior returns.” Do you know 80-90% of “experts” underperform their benchmark over time? Fund expenses, it turns out, are the best predictor of future performance. When it comes to investing, you often get what you don’t pay for.

WHEN DO INVESTORS GO ASTRAY?
Investors often succumb to the temptation to chase performance—investing in funds with a recent hot streak, regardless of the high expense ratios, redemption fees, sales loads, or taxes involved.

HOW DOES NORTH RIDGE DRIVE DOWN COSTS?
We use low-cost, tax-efficient index funds as the building blocks of our portfolios. The weighted average cost of our balanced portfolios are ~0.20%—less than 1/3 the cost of the average fund! We also locate assets in whichever type of account—taxable, tax-deferred, or tax-free—that minimizes lifetime taxes for a client.

 

03.

DISCIPLINE

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WHAT IS IT?
Discipline is having a sound investment strategy and sticking to it, even when it feels like the wrong thing to do.

WHY IS IT IMPORTANT?
It helps you avoid the perils of stock-picking and market-timing in the endless pursuit (at least until you go broke) of chasing performance. Both are an exercise in futility, though Wall Street will never admit to it.

Your portfolio is like a bar of soap. The more you handle it, the smaller it gets.
— Unknown

WHEN DO INVESTORS GO ASTRAY?
Unfortunately, way too often. Studies consistently show that the average investor underperforms the market. Why? Because they let emotions dictate their actions, chasing that elusive hot fund manager or the next Amazon.

HOW DOES NORTH RIDGE STAY DISCIPLINED?
We employ rebalancing thresholds around asset classes to ensure we buy low and sell high over time—precisely what you want to do as an investor, but so few do. That, and we ignore the noise coming from CNBC and their ilk.

 

IN SUMMARY…

If you remember nothing else from your visit here, remember this concept—it’s the key to your success!

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Are you a data geek like us and curious about the science of investment management? If so, we’d be more than happy to nerd out with you and talk asset allocation, asset location, size & value, rebalancing, Roth conversions, withdrawal sequencing, economics, and more. We live for this stuff (…oh man, did we just admit to that?).