How Guideline chooses its investments
A sound investment strategy means adhering to rock solid principles and empowering savers with the recommendations they need to make good decisions. Big businesses have always received this expertise and guiding hand with their 401(k) plans. We think it’s time small businesses get an investment roadmap, too.
Modern portfolio theory
Never put all your eggs in one basket. In addition to being good life advice, it’s a sound investment strategy. The first principle that drives how we select investments is modern portfolio theory (MPT). This time-tested theory simply states that investors can maximize returns while mitigating risk by diversifying their portfolio.
Having a diverse portfolio doesn’t just mean holding stocks in a few different industries. That’s a good start, but there are other dimensions to portfolio diversity. It also means mixing up the kinds of investments you hold — like stocks, bonds, commodities, and other alternative investments.
MPT acknowledges that, no matter what, investing always comes with risk. While this “systematic” risk is inevitable, you should always be working to reduce to another kind—unsystematic risk, which is risk inherent in a particular company, sector, or asset class. In other words, the kind of risk you can avoid with proper diversification. We’ve visualized this dynamic below.
Bottom line? We’re big fans of MPT. It’s a tried and true strategy for long-term investing, which is exactly what saving for retirement is. If you’re looking for a high-risk, “get-rich-quick” scheme, this isn’t the strategy for you. But if retirement is still a ways off, investment experts believe MPT represents the one of the safest bets in an arena where risk is always a factor.
When it comes to the day-to-day management of your retirement portfolio, what do you think is the better move: being hands-on or hands-off?
Thanks to Wall Street’s portrayal in pop culture, you might opt for the former—believing the most successful investors are those who have somehow “cracked the code” of investing, researched their stocks, and know exactly when to buy or sell. In other words, a day trader. This approach is referred to as “active investing.”
At Guideline, we’re believers in the opposite approach: passive investing. Instead of actively trading individual stocks, passive investors buy into index funds—baskets of stocks that are meant to represent the market at large. Rather than try to “beat” the market, index funds seek to mirror it and benefit from its gradual, upward growth over time. To benefit from this approach, you need to hold firm and resist the temptation to respond to market volatility.
This slow but steady approach isn’t just prudent, it can lead to higher returns. A 2019 Morningstar analysis found that only 23% of actively-managed funds outperformed their passive counterparts over the last decade.
What’s more, because active investing can require significantly more overhead and day-to-day trading, it often comes with substantially more fees and tax liability. Passive investing’s lower costs mean that savers can see more of their savings grow over time.
Our investment committee
You know what our guiding principles are—but who makes sure we’re practicing what we’re preaching? That’s the responsibility of Guideline’s investment committee.
Guideline’s investment committee is made up of three members with over four decades of experience in the financial industry: Jeff Rosenberger, PhD (Chief Operating Officer), Qian Liu, PhD (Chief Data Officer), and Liz Mastrobattisto (Chief Compliance Officer). The committee has four key responsibilities:
1. Select and maintain investment options: The committee decides what kind of assets are beneficial to our investors’ portfolios. In total, we offer four asset classes: equity (stocks), fixed income (bonds), money markets (cash), and alternatives (real estate). We purposely steer clear of overly-risky assets like life insurance, private equity, and commodities.
2. Offer diversified managed portfolios: Naturally, most investors don’t feel comfortable calling the shots about how their 401(k) account is structured. That’s where our managed portfolios come in. The committee manages six different portfolios that take participants’ age, time to retirement, and risk tolerance into account. Roughly 95% of Guideline participants opt for one of these managed portfolios.
3. Provide investment education: We won’t deny that 401(k) terminology is notoriously complex. Our committee’s goal is to empower investors with the knowledge they need to make sound choices that will lead up to a secure and fulfilling retirement. That means publishing content on our blog, hosting webinars, and embedding other educational materials in our product.
4. Follow fiduciary and due diligence requirements: By federal law, it’s our responsibility to work in your best interest. Guideline’s fiduciary responsibility is something the committee takes very seriously, and the committee regularly reviews its strategy to ensure we’re meeting that high bar. We revisit our investment policy statement (IPS) and our investment “rulebook” annually. The committee also works to ensure we’re compliant with ERISA and that we’re refraining from prohibited transactions that benefit anyone other than plan participants or their beneficiaries.
How we support participants
Our priority is ensuring 401(k) plan participants are set up for retirement success. When participants log into Guideline for the first time, they take a quiz that assesses their retirement goals and risk tolerance. With this information, we can recommend one of our six managed portfolios. Since financial and personal circumstances can change over time, we encourage participants to retake the quiz every year.
Even after opting into one of our managed portfolios, the breakdown of your overall holdings can shift over time. Because stocks usually outperform bonds, participants who started with a blend of 65% stocks and 35% bonds may see that percentage change over the course of a year—exposing them to more risk than they signed up for.
In cases like these, Guideline automatically rebalances participant accounts. We’ll sell excess stock holdings and buy back into bonds, aiming to ensure everyone has a retirement portfolio they’re comfortable with.
Our investment philosophy is simple: keep fees low, diversify investments, and ensure they align with age and risk tolerance. As fiduciaries, it’s our responsibility to ensure that every investment decision is made in the best interest of plan participants.
To learn how we can help you (literally) invest in your employees’ retirement security, schedule a call with one of our representatives today.
The information above is provided for educational purposes only and should not be construed as personal investment advice or a guarantee of performance. All investments involve risk and your investments could lose value. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.