7 Factors of Investment Success, Ranked

Jeff Scruton - Sep 24, 2018
As humans, we are unfortunately hard-wired to focus on the variables of investing that produce the least results.  A lot of this isn't our fault.  With the constant onslaught of information and news through the continually increasing number of media

As humans, we are unfortunately hard-wired to focus on the variables of investing that produce the least results.  A lot of this isn't our fault.  With the constant onslaught of information and news through the continually increasing number of media channels imposed on us and at our fingertips, it's no wonder.  Moreover, my own industry isn't much help either. Turn on CNBC or BNN any time and you'll most often see any supposed expert on XYZ, talking about their market forecast or top picks for the coming year.  These people sound smart and informed...and they are.

All of this noise, however, in connection with our natural tendencies as human beings, continually directs our attention away from what really matters towards achieving the results we need with our hard-earned savings.

If we can train ourselves toward focusing more on the factors that have the largest input toward success, as investors, we can significantly increase the likelihood of achieving whatever the real objectives of our investment portfolios - never running out of money, cash-flow in retirement, leaving a legacy to the next generation, etc. - what really matters.

As advisors, we aim to implement the tools and infrastructure necessary to engage these most important elements.  The good news is that it's not complicated.  Complexity in investing does not equal success...actually quite the opposite.  I am a strong believer that keeping things simple will always produce much better results.

So what are these inputs that produce the desired outcomes of our investment portfolios?

The article below outlines them in a concise way, ranked in order from least important to most important, in terms of proportional contribution toward successful results.

Source: The Big Picture - Hierarchy of Portfolio Success, Barry Ritholtz


No. 1. Security selection: Stock picking is what many individual investors and much of the media like to focus on. It’s a rich vein to consider, with traditional elements of narrative and storytelling, winners and losers.  No doubt, better stock pickers will see commensurate portfolio gains. But that is merely one element of many, and not surprisingly, subject to other factors.

Consider the universe of active stock-picking mutual funds. The range of outcomes due to skill or luck is fairly broad. However, the net gains attributable to selection on average can easily be offset by any of the following.

No. 2. Costs and expenses: The overall cost of a portfolio, compounded over 20 or 30 years, can add up to (or subtract) a substantial amount of the returns. One Vanguard Group study noted that a 110 basis-point expense ratio can cost as much as 25 percent of total returns after 30 years. That does not take into consideration other costs such as trading expenses, capital-gains taxes or account location (i.e., using qualified or tax-deferred accounts).

The rise of indexing during the past decade is a tacit acknowledgment that on average, cost matters more than stock-picking prowess.

No. 3. Asset allocation: What is the optimal ratio of stocks, bonds, real estate investment trusts, alternates and cash in a portfolio? Academic studies have proven (see this, this and this) that allocation is much more important to returns than stock selection. You can imagine all sorts of scenarios where allocation trumps selection. The greatest stock-picker in the world with a 20 percent equity exposure won’t move the needle very much. 

No. 4. Valuation and year of birth: Valuations will fluctuate over the life cycle of any bull or bear market. However, for the long-term investor, valuations are less about expected returns of pricey stocks, and more about when they a) start investing and b) start to withdraw in retirement.

Much of this is a random and beyond your control. Imagine the market crashing just before your prime saving and investing years; that should have a positive impact on net returns over time. What about someone who retired in 2000, and began withdrawing capital after the market got shellacked? That will also have an impact.

Those people born in 1948 not only managed to have their peak earning and investing years (35-65) coincide with multiple bull markets and interest rates dropping from more than 15 percent to less than 1 percent. They also lucked into a market that tripled in the decade before retirement.

No. 5. Longevity and starting early: Having a long investing horizon is determined by many factors, including your longevity. How long you live is going to be a function of genetics, lifestyle and dumb luck.

But when you begin saving for retirement is not a function of genetics or health. The sooner you begin, the longer compounding can work its magic.

No. 6. Humility and learning: We all begin as novice investors. Everyone makes mistakes — even the greats like Warren Buffet and Jack Bogle. The key question is how quickly you can figure out all of the things you are doing wrong. Self-awareness and ego is a significant thread in this context. The sooner we learn to learn from our mistakes, the better our investment portfolios.

No. 7. Behavior and discipline: Nothing has a bigger impact than the behavior of investors under duress. I stumbled upon this observation early in my career as a trader; everything I have learned since has served to confirm it.

We see this again and again in the data — just look at DALBAR’s Quantitative Analysis of Investor Behavior. Investors continue to be their own worst enemies when it comes to investment performance. On average, their actions lower their returns significantly, but in the worst cases they demolish them. Even worse, behavior is (or at least should be) within their own control.


Being knowledgeable and aware of these facts are the first step towards better investment results.  The next step is implementing the necessary tools and infrastructure so that your activity is focused more around the biggest contributors.  This is where I feel our biggest value, as advisors, is found and our process is designed with this in mind.

Sounds simple, right?  Well, it is.  The only problem is that most people can't do it on their own and many advisors are part of the problem, not the solution.


Please contact us if you'd like to learn more about our process and the tools we use to increase the likelihood of success.


Have a great weekend!