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August 6, 2018

Things We Don’t Believe


The practice of overseeing and caring for the financial well-being of clients and their families is serious business, and yet our industry is driven by sales and marketing as much as any other line of work. Things are changing for the better though. Investors are becoming better informed and more financially literate about the big differences in which advisors deliver financial advice and investment management.


Evidence Based Investing” is a term that we use quite a bit. And while it may not be a mainstream phrase, it accurately describes how we think about our investing approach. So perhaps that begs a question: what are the other approaches? There really isn’t a specific name for them but maybe they fall under the categories of “Conventional Wisdom”, or “Evidence Free Investing”.


These are ideas, notions, and beliefs that pertain to investing that have been around for a long time. Many of these have been sold and marketed by the industry for years and decades and used at the basis for brokers and certain financial advisors to manage their clients’ investments. And some of these sound right; they make intuitive sense in some cases. That’s why the industry has had such success selling based on some of these ideas.


So here’s a few things we don’t believe, followed by a brief comment that is grounded in evidence:


Focusing on beating market averages is more important than minimizing costs and taxes

Markets are not at all predictable in the short term, and remembering to control what can be controlled is of paramount importance. Avoiding mistakes is more effective than obsessing over beating a benchmark, index, or your neighbor.


Returns can be generated without assuming risk

On the contrary, risk is the price that must be paid in order to enjoy higher returns. No exceptions. 


Close monitoring of news and headlines is an important part of managing investments

Paying attention to the markets and the news of the day is obviously important. But people make the mistake of assuming that developments in politics, economic data, and other current events should dictate constant changes to investment portfolios. 


Choosing the right funds is more important than controlling behavior

Behavioral mistakes can destroy any financial plan, regardless of the specific investments. 


It is reasonable to expect to be able to consistently identify which managers will outperform in the future

It is foolish to assume that past winners will continue to beat the competition. Evidence shows that the reverse is usually the case. 


Concentrated portfolios are superior to diversified ones

Diversification reflects an acknowledgement of the basic premise of unpredictability. It also provides a natural buffer during market turmoil that increases the chances of sticking with an investment plan. 


Correctly timing the markets is a critical task for investors to accomplish in order to achieve solid returns

Getting the proper allocation among the various asset classes and maintaining discipline is by far the most important part of an investment plan. As Peter Lynch said, “more value has been destroyed anticipating corrections than has been lost in the corrections themselves.”


Wall Street analysts have special insights into where the markets are headed

The only thing to say about Wall Street’s market predictions is how predictably bad they are. One of the most pervasive myths in the investing business is that there is such a things as the character from the infamous E.F. Hutton commercials from the 1970’s and 1980’s. There is not wizard behind the curtain. 


We now have much more widespread dissemination of research, data, and various studies that have been eye opening for a lot of investors. The result of this has been overwhelmingly positive for those investors and practitioners that remain open minded to challenging the conventions that for a long time were assumed as truths.


For further reading on this topic: A Guide to Understanding Investment Basics


As always, thank you for your trust and confidence in us. Your feedback is always welcome.


Michael Traynor CFA®

Chief Investment Officer


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July 26, 2017

Chalk Talk: Owning Future Winners (Yes, and Losers Too)

 “Avoid acting on what may appear to be unique insights that are in fact shared by millions of others.”

– Jack Bogle

Like Comparing Fresh Apples to Orange Preserves

We talks a lot around here about the benefits of diversification in an investment portfolio. When properly constructed, diversified investments can provide some insulation against severe market declines in a particular market segment, sector, or asset class. Markets are going to go up and they are going to go down, but a well thought out investment mix of various asset classes is not likely to end up at the extreme upside or downside.

It’s tempting to look at the best performing assets over the short term (such as large technology stocks most recently) and compare that to a diversified portfolio of stocks and bonds with a variety of differing characteristics. But this is apples to oranges, to use a tired cliché.


When Average is Better Than Average

A main object of diversification is to smooth out the variability of returns in a portfolio, with a resulting outcome that will not perform better than the best asset type or sector, but also one that will not underperform the worst ones. Being diversified also implies an acknowledgement that nobody can predict short term winners and losers; and that owning a piece of everything can deliver perfectly acceptable returns over the long term. Some criticize this approach as merely accepting “average” returns, but those investors who actually stay disciplined to accept those “average” returns do better than the vast majority of investors who can’t help themselves but to attempt timing exit and entry points or selecting tomorrow’s big winners.


Some criticize this approach as merely accepting “average” returns, but those investors who actually stay disciplined to accept those “average” returns do better than the vast majority of investors who can’t help themselves but to attempt timing exit and entry points or selecting tomorrow’s big winners. 


But being diversified (owning everything) offers something more than just smoothing our the ride — it has another important purpose that doesn’t get a lot of attention.


Consider This:

An interesting study points out that during the time period 1989 to 2015, the disparity between the winners and the losers is massive. Over 4 our of 10 stocks had a negative return for the period, while the S&P 500 increase in value by 1,200%.


Total lifetime returns individual U.S. stocks, 1989-2015

Source: Eric Crittenden at Longboard Funds


Here’s the data shown another way: 80% of all stocks had a collective return of zero. This means that just 20% of all stocks accounted for the entire market’s gain (1,200%) during this time frame.


Attribution of collective return, 1989-2015

Source: Eric Crittenden at Longboard Funds



Creative Destruction

These charts illustrate the cost of missing out on the best performers, which are such powerful drivers of overall market returns. Competition in business and markets sets creative destruction in motion, where winners win at the expense of losers.

Given this, you could try to do of either of the following:

– Buy the best performing 20%, avoid the other 80%, and outperform the average

– Own the whole market with the exception of the very worst of the worst and outperform the average

In theory, it sounds like what all investors should be doing. Many stock pickers historically have attempted to do this, or some version of this but the difficulty in persistently succeeding is enormous. So one option is to roll the dice and try to pick on the expected future winners and avoid future losers, but this is exceedingly difficult in a world where information is available everywhere and asset prices are generally reflective of the world’s future expectations. The other option is to take advantage of what diversification gives you — near certainty that you will own future winners (yes, and losers too) so that you can be in a good position to capture overall market returns, including those driven by the very best.


As always, thank you for your trust and confidence in us. Your feedback is always welcome.

Michael Traynor CFA®

Chief Investment Officer

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June 29, 2017

Coach’s Corner: Defining the Role of a Custodian

What is a Custodian?

Meghan Tait breaks down the role of a custodian and highlights the safety features of the Customer Protection Rule


Learn more about The Customer Protection Rule

Watch more discussions at the Coach’s Corner on YouTube!

“Defining the Role of a Custodian”, Hosted by Meghan Tait, Filmed May 31, 2017; This is video 2 of a 3-part series, “The Right Basket For My Eggs”

Coach’s Corner is a Financial Coach video blog series. © 2017 Financial Coach.