While asset allocation is generally regarded as the most impactful investment decision, security selection should not be overlooked as a key component of an investment strategy. Once the asset allocation has been developed, and the sub-asset strategy decisions have been made, securities must be selected to construct the portfolio.
With such a diverse investable universe tens of thousands of mutual funds, both active and passive, ETF’s, individual stocks, bonds, options, futures etc., the decision as to which underlying security to choose can be overwhelming.
Why does Security Selection matter?
As of this writing, there are over 14,000 Large-Cap Stock mutual funds available in the Morningstar database. When looking at annualized 10 year return figures as of December 31, 2016, the top 25% of funds in the space had an average annual return of at least 6.9%, compared to the bottom 25%, where returns were less than 5.4% per year. The difference of 1.5% may not seem like much, but when compounded over 10 years accounts for over 16%.
Take 2 investors each with a $100k portfolio, an identical asset allocation strategy, and identical sub-asset strategies. Investor A, chose the large-cap fund that returned 6.9% annually, and Investor B chose the fund that returned 5.4% annually. At the end of 10 years, Investor A would be ahead by $16k all else equal, solely because of superior security selection, and Investor B would be shopping for a new advisor. This simple example highlights the importance of not only getting the asset allocation strategy right, but also choosing the best underlying investments to execute on that strategy.
At FinTrust, we have access tens of thousands of products etc. Our process not only takes into account asset allocation and sub-asset strategy diversification, but also systematically analyzes thousands of securities so that we may utilize best-in-class products, whether active or passive, to build better portfolios for our clients. To learn more about our investment process or to speak with an expert, take the next step. Call us at 864-288-2849.