2 Investment Rules For Greater Profits

Diversification (not di-worse-ification) and analyzing net investment returns instead of gross returns are two rules every investor should live by. You may already think you know these ideas but few investors actually apply them correctly in their portfolios – and that is an expensive mistake.

A new research report published by Windham Capital Management highlights their Rules of Prudence For Individual Investors. What I like about this report is how they show you:

The bulk of the benefits from traditional asset allocation and diversification only accrue during rising markets – exactly when you don’t need and don’t want them. During severely declining markets asset correlations rise toward one destroying much of the value of diversification – the exact opposite of what you want.
Additionally, they show you how alpha ( investment return not due to market average return) resulting from active management is elusive at best after taking into account both expenses and taxes. While I don’t agree with their conclusion regarding passive management, I do agree with the principle they are teaching and feel it is important to understand.
To demonstrate the above principle they provide excellent tables clearly showing the negative effects of transaction costs, taxes, management fees, and performance fees on what appears on the surface to be positive alpha returns for active management. It is a very telling story well worth knowing.

This research report is a brief, free, and a very readable 5 pages while still clearly demonstrating two key investment rules that elude most independent investors. I include it in our “best of the web” series where I bring you the best education from other writers to help you reach that second level of investment knowledge where profits are more consistent and secure.

I hope this helps, and as always, please provide your feedback in the comments below.