Servo Wealth Management
Eric Nelson is the founder and Managing Principal at Servo, a Registered Investment Advisor (RIA) in Oklahoma City with clients throughout the United States. Eric is a recognized expert in the areas of retirement planning and asset class investing. Eric’s intense spirit of independence, his passion for helping his clients to achieve and maintain financial independence, and belief in the virtue of “simplifying complexity” is what led him to start Servō, where he is responsible for developing investment policies, managing the firm’s clients, and ongoing communication and research efforts.
Eric graduated from Hobart College with a degree in Economics and had a successful basketball career that placed him among the all-time leading scorers in school history. Eric's career in finance began during the "go-go growth" era of the 1990s, as he started out working for a full commission brokerage firm and subsequently the investment group of a large regional bank. It was here that Eric learned about the significant conflicts of interest that plague the investment industry. His experience dealing with clients and the damaging effects of the tech bubble and eventual collapse is a major influence on Servo’s diversified approach to managing portfolios.
In 2002, Eric moved to Oklahoma City and went to work for Charles Schwab, the firm that still serves as the primary custodian for Servo's clients. While at Schwab, Eric attained the prestigious Chartered Financial Analyst (CFA) designation and began working with many individuals and families who remain Servo clients today. Prior to co-founding Servo, Eric worked for two independent Registered Investment advisory firms (RIAs), one in Oklahoma City and another outside of San Francisco, California.
Eric is a recognized expert in the areas of retirement planning and "asset-class" investing. His newsletters and blog articles are regularly published on Real Clear Markets and profiled on Think Advisor and Sensible Investing TV. His commentary has appeared on Advisor Perspectives, Morningstar, Reuters and Newsmax. He has also contributed to the Amazon Money & Markets financial website.
Assets Under Management:
This content is provided for educational purposes and is not intended to be a recommendation or endorsement of any particular investment or strategy. You should always consider your personal financial objectives and tax situation, and if necessary, consult your investment advisor or tax planner before making financial decisions. Past performance is not a guarantee of future results.
I would suggest you take a longer-term view of investing. We cannot predict the short-term future of markets, and trying to do so risks underperformance, excess taxation and a greater overall level of anxiety. I suggest you ignore the Presidential elections, no one can predict how they will play out or what their impact on markets will be. And long-term investors don't need to worry about these things.
Eric D. Nelson, CFA
No, no, don't do that. REITs are a sector. A sector who has done well recently, of course, but a sector none-the-less. You want to start with a broad market index (say Vanguard Total Stock Index) and include Vanguard Small Value Index. Then, when you've built enough up, include Vanguard Total Int'l Stock Index. There's REITs (and a lot more) in the broad-based indexes. Stick with those and you'll be fine. Sector investing ultimately leads to performance chasing and poor investor returns relative to investment returns.
This is a great question. And it depends on the company's investment philosophy. Some mutual fund families offer index funds, like Vanguard. These funds buy all of the stocks or bonds in a given asset class. Another fund company (who only is available through some RIA firms) is Dimensional Fund Advisors; they own all the stocks and bonds in the market so there's no point in diversifying beyond that.
Where you need to diversify is if you are using "actively managed" mutual funds, like American Funds, T Rowe Price, Dodge and Cox, etc. Reason being, they invest in a particular "style" in most cases. And you need additional diversification beyond that style. So you'd need to combine the value funds from Dodge & Cox with the growth funds from T Rowe Price, for example.
But you probably know where I'm going with this...that's a lot of work and there's no real benefit. These active managers don't do any better than the indexes, but they are more expensive and it's more complicated.
I am a wealth manager, and I personally only invest my money (highly diversified) in one fund family, DFA. Most of my clients' assets are also in DFA. We own 10,000 stocks in 45 different countries and a few thousand bonds. You can see why you don't need to diversify beyond that.
The real reason to diversify mutual funds is if one fund family's approach blows up. But when you own virtually everything, it's all not going to go bad. Does that help? Diversifying fund families is one of the most overrated and unnecessary activities investors do. You diversify investments, not investment companies.
There's no advantage to ETFs over index funds, especially when the ETF and index fund track the same index, like the S&P 500 or Total Stock Index. ETF proponents will claim they are more tax efficient (they aren't if you're looking at tax-efficient or tax-managed index funds) and your benefit from being able to trade more regularly (that's not a benefit, you should be trading as infrequently as possible). What's more, in market crises, we've seen some dislocations in pricing in ETFs, especially at market opens. Some ETFs are also thinly traded and you could pay hidden market spreads. With a mutual fund, you get the closing day's NAV, no matter what.
I don't own any ETFs, I am 100% in passive, index-like mutual funds, and I do this for a living, have a CFA, etc.
Eric D. Nelson, CFA
I personally don't see a role for high-yield bonds in a diversified portfolio. Here's why:
I think you start with stocks. Diversify globally and across sources of expected return (include smaller stocks, more value-oriented stocks and highly-profitable stocks).
If this portfolio has a return that is unnecessarily high or short-term volatility that is too much for you to bare, then you should add short and intermediate investment grade bonds to dampen the risk and enhance portfolio liquidity. Add just enough to get you to your sweet spot in terms of return and risk.
So where to high-yield bonds fit in? I don't know, they're a lot riskier than investment grade bonds, but don't have returns nearly as high as stocks, especially small/value tilted portfolios. But they correlate highly with stocks, meaning when stocks go down, they'll go down too. If that's the case, why not just hold stocks? Sure, they're a little safer than stocks, but adding a smaller amount in really safe bonds will accomplish the same thing.
One other consideration on high-yield bonds: they are very tax inefficient, all of their return comes from taxable coupons. A stock and low-risk bond portfolio is much more tax efficient as most returns come from long-term capital gains.