Weigh House Common Sense Rules for Successful Investing

Rule # 1: Plan Ahead and Stick With a Process

  1. Be clear on financial goals and have a financial plan (like a roadmap) that shows how to achieve them.
  2. Understand that the investing process is more important than the investment products. The process can be simple; it just requires rules and discipline.
  3. Use an Investment Policy Statement (IPS) to document your target asset allocation, the range for each asset class, and your rebalancing strategy. These decisions must be written down; otherwise your emotions may lead you astray.
  4. Higher trading activity usually means lower returns. A portfolio is like a bar of soap; the more it is handled the smaller it gets.

Rule # 2: Allocate, Diversify, and Rebalance

  1. Be diversified and control your exposure to market risk. Choose an asset mix for the portfolio as a whole that gives the best balance between risk and reward. Individual accounts can have different asset mixes, if the mix for the portfolio as a whole is correct.
  2. Avoid overdiversification. With more than ten mutual funds you may be over-diversified. If you own almost every stock in the market you can’t do better than the market, so you will always underperform by the annual management fee which could be over 2%.
  3. Don’t be a buy and hold investor – rebalance at least once a year and consider making tactical shifts to the upper or lower end of your target range; however, never go beyond the upper or lower limits as set out in your IPS.
  4. Make your portfolio tax efficient. To the extent possible, hold your interest bearing investments in your sheltered accounts and your growth investments in your nonregistered accounts.

Rule # 3: Manage Your Costs

  1. Use low cost investment solutions (low cost mutual funds or ETFs). You can’t control the market but you can control the fees you pay. Know how much you pay in fees, including the management expense ratios of your mutual funds.
  2. Avoid a fee based brokerage account if you only make a few trades each year. Usually it is better to pay commissions rather than an annual fee if you trade only a few times each year.
  3. Most investment portfolios should include both stocks and bonds. A pure bond fund plus a pure equity fund make an overall balanced portfolio at a lower cost than a single balanced mutual fund.
  4. Understand the enormous cost of underperforming the benchmark by 1% per annum. If the average individual stops underperforming by 1% it will mean enough to retire 5 years earlier or buy a second home in a warm climate.

Rule # 4: Choose Your Investment Professional Wisely

  1. If you have more than $500,000, consider using investment counsellor firms instead of stock brokers, mutual fund salespeople, or financial advisors. Investment counsellor firms offer a fiduciary relationship, professional management, lower fees, and better performance reporting.
  2. Insist on receiving performance information. You need to know how you’re doing compared to the proper benchmark. If your advisor does not provide this essential information you should assume you are under performing and get a new advisor.
  3. Don’t expect that financial advisors are able to consistently beat the market without taking higher than market risk. If financial advisors could do this they would be retired.
  4. Understand whether your advisor works as a fiduciary (required by law to put your interest ahead of his own) or as a salesperson where the firm’s interest comes first, and the only obligation to you is that the investment meets a suitability standard.

Rule # 5: Keep It Simple and Ask For Explanations

  1. Keep the whole portfolio simple; don’t invest in products you don’t understand.
  2. Don’t be afraid to ask questions. Investing does not have to be complicated; if your advisor can’t explain an investment product and the related risk to you, don’t buy what they try to sell you.
  3. Trust your common sense and intuition. If it sounds too good to be true, it is too good to be true.

Rule # 6: Understand Risk

  1. Don’t take more market risk than is necessary to achieve your goals. Your financial plan will show the rate of return required to achieve your goals, and this required return should drive the asset mix decision.
  2. A ‘risk tolerance’ questionnaire is an unreliable way to determine the asset mix required to achieve your goals. A risk tolerance questionnaire is designed primarily to protect your financial advisor.
  3. Understand the risks you are taking; while it is easy to understand higher returns it is much more difficult to see the associated higher risks.
  4. Address and understand your exposure to inflation, deflation, currency, interest rate, longevity, and credit default risk.
  5. Avoid leverage unless you fully understand the magnified risk exposure that comes with it.

Rule # 7: Talk to Weigh House Investor Services

We will guide you through the process of making the Weigh House Rules work for you.