Investing is like dieting. Yes, dieting. I realized this an appropriate metaphor shortly after joining the investment industry after almost a decade practicing law. During and after the switch, I did what any self-respecting lawyer would do and researched all things investing. I read every authoritative source I could; attended lectures at Rice University twice a week—sitting in the back as the noticeably older guy nobody knew (my partner, Dr. Julio Cacho, was the professor so it wasn’t completely weird); read client letters from some of the giants in the field (see, e.g., Buffet, W.; Dalio, R.; Marks, H.); and consumed all manner of blogs, websites, and YouTube videos. I wanted to drink from the fountain of investment knowledge. I bought lots of leather-bound books—I kid, they were mostly paperback. I did this, because, to me prior, the investment world was an enigma. Lots of terms of art I didn’t really know or understand. Complicated . . . a little too complicated.

With 2020 just behind us, it’s time to reflect on what the markets did last year, the risks ahead, and how you should think about positioning your portfolio for the years to come. 2020 was obviously a year that will never be forgotten in the markets for myriad reasons—huge drawdowns; lots of uncertainty, which caused gut-wrenching volatility; and unprecedented socio-political upheaval. Nevertheless, if you had the fortitude to withstand the volatility and were adequately diversified, your portfolio should have grown at a respectable clip.

Many who aspire to be prudent investors have a portfolio they view as diversified, or passive, or both—when their portfolio is anything but.

It’s easy for the individual investor to allow hidden risk to sneak into his or her portfolio. Similarly, many investment products sold and promoted as being passive are, on closer inspection, making active bets on the market. There’s nothing wrong with making an active bet if you’re aware of your choice, conduct your due diligence, and know what you’re doing. But thinking you have a passive and diversified portfolio when you do not can lead to a false sense of complacency.

Today’s investors have multiple options when it comes to investments. Many have shifted their mindset to “passive” funds. These are a form of public equity, where publicly available stocks are easily bought or sold, have low fees, and can be run by a computer.

Private equity, on the other hand, is an investment of capital into private companies. The capital enters a private market that offers sparsely traded, higher fee assets that are not listed on public exchanges and are run by humans.

The idea of using leverage (in other words, debt) as part of an overall investment strategy scares most individual investors. Most of us are cautious about debt and for good reason. High student loan debt is currently preventing many young people from saving for the future. Another form of debt, the home mortgage, is the pathway to homeownership for many people; however, our memory of the 2008 financial crisis reminds us that home mortgages can go terribly wrong.

Successful investors are usually confident, and that can be a useful quality... up to a point. They research a potential investment, and once they have made a decision, they stick with it and don’t constantly second-guess themselves. They don’t worry unnecessarily about the normal ups and downs of the market. They aren’t afraid to go against the grain of popular opinion and buy when others are selling, or sell when others are buying.

As investors, entrepreneurs face a special set of needs and challenges. An entrepreneur who wants to become a smart investor (or an advisor trying to help him or her do so) faces a fundamental problem: Investing in one’s own business and investing in capital markets are two very different things. The skills that make you good at the first don’t necessarily make you good at the second. In fact, they can be a liability.

That may sound like a wishy-washy answer to a common question: Is it worth it to pay a financial advisor to help me with my investments? But it’s true—there is no cut-and-dry answer. It really does depend on a handful of key variables nicely summarized in a recent Morningstar column. Here I’ll present my own summary, along with a few additional thoughts.

According to one recent study from the University of Oxford business school it was concluded that, on an equal-weight basis, the average returns for suggested funds are actually around 1% lower than those of other funds.

Confidence is a double-edged sword, at once an asset and a liability—especially when it comes in that extra-strength version called overconfidence. On the one hand, it appears that overconfidence can at times be our friend, and may even be an evolutionary advantage. Without it, human beings wouldn’t take the risks necessary for great progress. On the other hand, by blinding us to the long odds and high risks of certain activities, it can set us up for disappointment, or even disaster.

Most people are familiar with large commercial banks and common investment banks. Less familiar are with custodian banks. What is a custodian bank, you ask?

The US has encountered many stock market crashes over the past 100 years. We take a look back at some of the worst to remind investors of the importance diversification across asset classes makes.

When soliciting financial advice from an independent financial advisor, we often trust that we are being told information that is in our best interest. But how do we know this is always the case? We can have confidence knowing that the fiduciary rule exists to protect us from disingenuous activity.

Many of today’s investors are familiar with the high-achieving FAANG stocks. For the majority of investors, it’d be a big mistake to ignore the FAANG stocks just because lots of people invest in them. These stocks - comprised of Facebook, Amazon, Apple, Netflix, and Google – are the driving force behind the current S&P 500 gains.

You should only invest in broad-based indexes. But don't take our word for it...