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Investing for a Lifetime: Managing Wealth for the "New Normal" by Richard C. Marston

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CHAPTER 15 Best Practices for Investing

It’s all well and good to discuss portfolios of stocks and bonds or individual assets like foreign stocks and real estate. Yet how do investors make sure that investment returns on their portfolios are as good as they should be? How does an investor monitor the performance of fund managers over time? How does the investor track how well the portfolio as a whole is doing over time? Are there some asset classes where active managers should be replaced by index funds? This chapter will discuss these and other aspects of the actual investment process.

Let’s begin with an unpleasant subject—the drags on returns with which all of our portfolios contend. Returns lag behind market averages because of the fees and expenses incurred in investing and because our managers often underperform the market averages.

DRAGS ON RETURNS

Investors saving for retirement have to pay attention to investment returns. Of course, they are at the mercy of markets. The market will go up some years and down others. That’s as true of the bond market as it is of the stock market. All that investors can do is to make sure that they earn market returns. There are at least two ways that returns can fall short. First, investors may be invested in funds that underperform the market indexes. Second, investors may find their returns are dragged down by fees or other investment expenses. Let’s begin this chapter by showing how these two factors matter.

Suppose that an investor ...

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