We have two articles this month tackling the issue of how to manage a portfolio from a very different angle. The first, an interview with Larry Swedroe, discusses using factors in the context of a diversified portfolio. The second, by Brian Portnoy, takes a bigger picture approach to portfolio management. I could include in the discussion a third article from this month’s issue, written by Michael Batnick, about mistakes investors commonly make.

Regardless of which article strikes a chord with you (and hopefully all three will), there are a few key concepts to remember when reading about portfolio strategies.

The first and most important is to pick a strategy you can stick with no matter what the market is doing. This is a concept I have discussed in the past and one I will reiterate in the future. The best strategy is the one you can financially and psychologically adhere to. Discipline plays a far larger role in investing success than people give it credit for. One investor can be skilled in terms of selecting investments while another can be mediocre. The latter investor will end up with better long-term returns if they are more able to stick with their plan than the former investor is.

The second is that there is nothing wrong with getting the market’s return. Commentators, strategists and traders love to bash plain-vanilla S&P 500 index funds. Such negativism ignores the simple fact that the large-cap index has a long history of being a tough benchmark to beat. Can you do better? We at AAII believe the answer is yes. In the book “Investing at Level3,” AAII founder Jim Cloonan argued that passive investors would realize higher returns by buying the Invesco S&P 500 Equal Weight ETF (RSP). This fund differs from the traditional index funds by equally weighting stocks instead of using a market-capitalization weighting. Over the long term, it has outperformed. You can do even better if you’re willing to own a portfolio that looks different than the S&P 500, such as our Model Shadow Stock Portfolio.

You don’t have to be different if you’re uncomfortable doing so. For those investing through 401(k) plans, a plain-vanilla S&P 500 fund may be the best option. I personally have 20% of my 403(b) contributions going to the Vanguard S&P 500 Index fund, the first such index fund. (I own the Admiral shares, which trade with the ticker VFIAX.) You can also mix tracking the market and being different. For example, in one of my IRA accounts, I own RSP.

The third key concept is being willing to underperform over the short term. If you want to beat the market over the long term, you better get comfortable with seemingly long bouts of underperformance. The characteristics associated with higher long-term returns—value, size, momentum, etc.—don’t always work over short periods of time. In fact, sometimes they’ll leave you feeling like you’ve made a big mistake. This is where discipline comes into play. Professional money managers face being fired by their clients for straying too far from the norm; we individual investors don’t have this risk. We can afford to look out 10 years or longer because we’re not required to report our results. Never underestimate the advantage this gives you. Are shorter-term needs for cash and income a concern? Yes, but we can adjust for those with our allocation choices by holding adequate amounts of cash and income-producing investments.

Shifting gears, I want to call your attention to two other articles in this month’s issue. The first is by John Horn and Dera Johnsen-Tracy. The two estate attorneys discuss beneficiary-directed trusts, which can be useful for those of you who want to help protect your heirs from losing their inheritance to lawsuits, divorce or bankruptcy. The second is by Morningstar’s Karen Wallace. Wallace explains why 529 plans are an attractive option for college savings. We purposely included both in this month’s issue because October is National Financial Planning Month and Estate Planning Awareness Week runs from October 15 to 21.

Finally, with the holidays soon approaching, I would like to encourage you to consider gifting AAII membership to a relative or a close friend. For as little as $29, you can share throughout the year the investment education, insight and understanding that you’ve found useful. Simply call Member Services at 800-428-2244. A personalized welcome card announcing your generous gift will be included.

Charles Rotblut, CFA
Editor, AAII Journal
@CharlesRAAII