"The fees investors are paying can easily erode a third to half of their account over time," says Mitch Tuchman, CEO of MarketRiders, an online investment services company. "If you understand what indexing is and you understand how to put together a portfolio and take away the expense of trying to beat the market, anyone can manage their own portfolio and do that at very low cost."
DiversifyRisk is that unpleasant uncertainty that investors must deal with to get potentially higher rewards. The theory behind diversifying your portfolio is that it lowers risk. Rather than putting everything into one technology stock, investing in a technology sector fund will provide the same possible returns without the inherent risk.
"My line is that in a sea of uncertainty, diversification is the safest port. That eliminates the idiosyncratic or uncompensated risk, and it's uncompensated because you can diversify it away," says Swedroe.
"Markets don't reward you for higher expected returns for owning a single stock. That is more akin to speculating than investing. Instead of owning one or two stocks, you're better off owning 8,000 stocks," he says.
Plan and follow throughPension funds and endowments also follow an investing plan and rebalance their allocations when their portfolios veer off from their target percentage.
"Yale rebalances part of its allocation every day," says Tuchman of MarketRiders.
Arriving at the exact asset allocation for your own portfolio will take some soul searching and investigation into the various asset classes. The process involves assessing your objectives and risk tolerance.
Research and write an investment plan and then stick to it for the long term.
"That is one thing institutional investors are very good at -- they don't let their emotions get in the way. They don't panic and sell in bear markets. And then when asset classes are hot, like tech, pharmaceutical, health care or commodities, individuals tend to chase good performance so they buy high and then sell after lousy performance," says Swedroe.
Selling low is a losing strategy, but institutional investors do the reverse by selling asset classes that have done well to move back to their target allocation.
Investors who come up with a solid plan and adhere to it are almost always better off in the long run than those who experiment among various strategies.
"No rational person would start a business without a business plan. No one would take a trip to someplace they've never been without a map," says Swedroe.
"Why do people begin investing without an investment plan? They need to identify their goals and risk tolerance and write up an asset allocation plan and establish what their minimum and maximum targets are for each asset class," he says.
The most important distinction between the professionals and everyone else is that they have the ability to shut off their emotions and invest only with their brains.
If individuals want to emulate the big guys, divorcing the emotional issues from their money -- prudently -- will help them realize the same investing success.