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Analyst puts his ‘probability bet’ on index funds

Ben Carlson, 31


Investment analyst for a large endowment fund

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The portfolio

Mostly low-cost index funds

The investor

When Ben Carlson left college in 2005 to work in the investment industry, he had a "nice foundation of textbook financial knowledge" but no idea of what to do with his own portfolio. So he "read every book, blog and article he could find on investing."

How he invests

"My approach is centred on the principle that less is more," Mr. Carlson says. "I like to make things simple by keeping costs low and having a disciplined investment plan. This includes a focus on asset allocation, dollar-cost averaging, rebalancing and diversification."

As he discovered through his reading, index funds beat the majority of investment professionals and active investors. That's mainly because of their low fees. So he has chosen to go with the higher probability bet, plus avoid all the work required to pick stocks.

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"Behavioural biases can affect investment results and having an investment plan in place is one of the best ways to minimize their impact," Mr. Carlson says. It begins with selecting an asset allocation that suits your risk tolerance (for example, the percentage of the portfolio in stocks versus bonds).

Another important component is "dollar-cost averaging into the market by making contributions on a periodic basis. Don't make your buy and sell decisions based on the level of the market or the performance of the economy."

Mr. Carlson additionally controls risk through rebalancing. At least yearly, he shifts money from his winning ETFs to the laggards in order to return his portfolio to its target asset allocation.

Diversification is crucial, as well. To illustrate, Mr. Carlson observes that investing in the S&P 500 from 2000 to 2009 resulted in an average annual loss of 1 per cent, whereas he calculates that investing equally across large-capitalization, mid-cap, small-cap, international and emerging-market stocks returned 5.2 per cent annually.

Best move

"Having a diversified portfolio with a regular rebalancing policy."

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Worst move

Starting out with actively managed mutual funds


Plenty more advice is offered on his blog, A Wealth of Common Sense.

For example, to highlight the importance of asset allocation over stock picking, he notes: "Many [studies] show that asset allocation could explain up to 90 per cent of the variation of your investment performance."

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