Picking Your Investment Strategy is Just the Start

Investment strategy is one small part of financial planning. Generally people should be thinking about their budget, emergency funds, insurance, retirement savings, putting the kids through college, and titling all their accounts so the correct people get their stuff if something happens. But even today choosing your investments is getting more difficult.

The investment universe is crowded with options. Today there are around 4,000 stocks that trade on major exchanges, and over 22,000 ways to invest in them (through mutual funds, UIT’s, ETF’s and closed-end funds). In 1999, there were just 34 ETFS; today there are over 3,400 of them (a literal 100x increase!).

As you run through your investment options, every question you answer can lead to 10 more: 

Are ETFs for me? If yes, which ETF should I use and how should I buy it? Is it active or passive and what’s the difference? What are the fees? Should I buy through an online trading site or a financial advisor? In the event you want to sell, which one has enough liquidity that you’ll get a fair price?

You want to buy an index fund? Great. Which one? Should you own small, mid and large cap and how much of each? Russell, Wilshire, MSCI, S&P, Bloomberg, Dow Jones all offer dozens of indices, which hundreds of index funds try to track. Which fund has the lowest expense and tracking error?

Each question you ask yourself can lead to a new question. These can compound other portfolio questions, like how much of your portfolio should be in US stocks, international stocks, bonds and cash? How can you make sure you’re taking the right amount of risk?

Research shows that more investment options 401(k) users have, the less likely they are to join the plan or increase their contributions. The amount of options out there is staggering, and the noise can be deafening.

What many people need help with isn’t whether they want to invest or not. It’s the which ones of investment selection, along with why, how, where and when they want to own it.