Two Words That Could Impact Your Returns

Investing is often made to seem very complex and opaque. It's actually quite simple. The compliments I appreciate most are from readers who say they appreciate the brevity of my Smartest series of books. In that spirit, this will be my shortest blog post ever.

Here are two words I want every investor to say to their broker or advisor: "No alpha." "Alpha" is the excess return of a fund over its benchmark index. Nothing has caused investors more harm than the often futile pursuit of alpha.

Want proof? According to research done by Morningstar, the average fund investor underperformed the returns of the average mutual fund over the past 10 years by a total of 0.95 percent annualized. In some fund categories, the difference was much larger. International equity investors lagged the returns of the typical international fund by a whopping 3.11 percent annualized. That's a lot of negative alpha!

Instead of pursuing alpha, tell your broker or adviser you simply want to capture the returns of a globally diversified portfolio in an asset allocation suitable for you. The best way to accomplish this goal is to purchase low-management-fee index funds, passively managed funds or ETFs.

Just to be sure your broker or adviser fully understands your instructions, put them in writing. Something like this will do just fine: "I am not interested in pursuing alpha. Please construct a globally diversified portfolio, with an asset allocation suitable for me, that will capture the dimensions of returns of the financial markets."

Ignore the deer-in-the-headlights look you will get in response.

Dan Solin is the director of investor advocacy for The BAM ALLIANCE and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.