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RW in the News

Remaining Steadfast

Once in a great while, there comes a year in the economy and the markets that serves as a tutorial for the principles of successful long-term, goal-focused investing.  Two thousand twenty was just such a year.

On December 31, 2019, the S&P 500 stock index closed at 3,230.78.  This past New Year’s Eve, it closed at 3,756.07, some 16.26% higher.  With reinvested dividends, the total return of the S&P 500 was +18.4%.

From these facts, you might conclude that the equity market had a good year.  And you would be right.  What should be instructive to the long-term investor is how it got there.

From a new all-time high on February 19, the market reacted to the onset of the greatest public health crisis in a century by going down roughly a third in five weeks.  The Federal Reserve and Congress responded with massive intervention, the economy learned to work around the lockdowns, and the S&P 500 fully recovered by mid-August.

The lifetime lesson here is:  At their most dramatic turning points, the economy can’t be forecast, and the market cannot be timed.  Instead, having a long-term plan and sticking to it—acting as opposed to reacting—once again demonstrated its enduring value.   Waiting for a “pullback” once a market recovery gets under way, and/or waiting for the economic picture to clear before investing, turned out to be formulas for significant underperformance in 2020.

The American economy, and its leading companies, continued to demonstrate their fundamental resilience through the balance of the year, such that all three major stock indexes reached multiple new highs.   And despite headwinds caused by the coronavirus pandemic and subsequent lockdowns, companies in the S&P 500 paid out a dividend of $58.28 per share in 2020, surpassing the 2019 record of $58.24 and setting the ninth consecutive annual record.

Meanwhile, at least two vaccines were developed and approved in record time and were going into distribution as 2020 came to an end.  There seems to be hope that the most vulnerable population groups could receive vaccines by spring, and that everyone who wants to be vaccinated can do so by year-end, if not sooner.

The second lifetime lesson of 2020 had to do with the presidential election cycle.  To say that it was the most partisan in living memory would not adequately express it.  Supporters of both candidates were genuinely convinced that the other would, if elected/reelected, result in the end of American democracy.  For investors who exited the market in anticipation of the election, they were surprised only to realize the enduring historical lesson which is: Never get your politics mixed up with your investment policy.

As we begin 2021, there remains more than enough uncertainty to go around.  Is it possible that the economic recovery has been largely discounted in soaring stock prices, especially those of the largest growth companies? If so, perhaps the coming year could be lackluster or even a declining year for the equity market?

Yes, it’s possible.  But how do we, as long-term, goal-focused investors, make investment policy out of that possibility?   Our answer:  We don’t, because one can’t.  Our strategy, as the new year dawns, is driven by the same steadfast principles as it has always been.  It is goal-focused and planning-driven, as sharply distinguished from an approach that is market-focused and current-events-driven.

The Federal Reserve has assured that it is prepared to hold interest rates near current levels until such time as the economy is functioning at something close to full capacity, perhaps as long as two or three more years.  As investors, this makes it difficult to see how we can pursue our long-term goals with fixed income investments.  Equities, with their potential for long-term growth of capital, and especially their long-term growth of dividends, seem to be a more rational approach.  Therefore, we must tune out “volatility” and act as opposed to react.  This proved to be the most effective approach in 2020.  We believe it always will be.

May this year bring peace and joy to you and your families.  As always, we thank you for the trust and confidence you have placed in us and we look forward to serving you in 2021!

Charitable Giving

Charitable donations are a great way to show your support for an organization and, at the same time, provide tax-saving opportunities.  Not only does the charity benefit when an investor makes a gift, but the taxpayer may also be eligible to receive a tax deduction.

Earlier this year, the Coronavirus Aid, Relief, and Economic Security Act, better known as the CARES Act, was signed into law.  Among the provisions provided for in the Act is an incentive to encourage charitable giving.  The provision is available for cash contributions and provides a benefit for both types of taxpayers:  the itemizer and the non-itemizer.

  • For taxpayers who do not itemize deductions: these taxpayers are permitted an above-the-line deduction for a cash contribution of up to $300.  The goal is to help increase donations from those who otherwise may not choose to make a charitable contribution. This charitable giving benefit extends beyond the 2020 tax year.
  • For taxpayers who itemize: these taxpayers can deduct up to 100% of their adjusted gross income (AGI) in cash contributions, raised from 60%. This charitable giving benefit applies to tax year 2020.

Other beneficial charitable donation options remain in place from previous years including:

  • Qualified Charitable Distribution (QCD)
  • A distribution that would normally be taxable from an IRA owner who is eligible to receive a required minimum distribution and is paid directly to the qualified charity.  The distribution lowers the IRA owner’s adjusted gross income, effectively reducing his/her income taxes.
  • Donor Advised Fund
  • A donor can create an account and make a contribution of cash, securities or other appreciated assets.  The donation is eligible for a current-year tax deduction for the gift.
  • In-kind Stock Donation
  • Consists of gifting highly appreciated securities directly to a charity.  The charity can sell the securities and use the proceeds without having to pay tax on the gain.  The donor generally receives a deduction for the fair market value.

The benefit of a charitable gift can be significant. In order to maximize your giving and potential tax saving opportunities it is important to plan carefully and consult with your financial, tax and legal professionals.

As always, we are available to discuss these and any other planning goals in your life.

RW Investment Management, LLC dba R|W Investment Management (“RWIM”) is a Registered Investment Advisor.  This document is solely for informational purposes.  Advisory services are only offered to clients or prospective clients where RWIM and its representatives are properly licensed or exempt from licensure.  Past performance is no guarantee of future returns.  Investing involves risk and possible loss of principal capital.  No advice may be rendered by RWIM unless a client service agreement is in place.  The Firm is not a legal or tax advisor.

Investing During Election Years

The 2020 Election and Market Implications

2020 has been a notable year for stocks and the global economy. On February 19th, the S&P 500 reached an all-time high of 3,386 and was immediately followed by one of the quickest declines in history — falling 34% from its peak by March 23rd. The bear market resulting from the coronavirus pandemic, and the fact that 2020 is an election year, has caused many investors to question whether they should take a more conservative approach with their investment allocations.

What should you as an investor do to protect your assets?  Should you sell your stocks now and wait to see how the election turns out? Do you stay the course and hope your desired party is elected?  These are questions that investors are wrestling with as November approaches, but the truth is that none of us know what the result of the election will be this fall, or what its immediate impact will be on the market.

Let us look back at what has happened with the market since January 1926 under the various presidential parties.  The top line of the chart represents the growth of $1 invested in the S&P 500 from January 1926 through December 2019.

Markets Have Rewarded Long-Term Investors under a Variety of Presidents

Growth of a Dollar Invested in the S&P 500:  January 1926-December 2019

As evidenced in the chart above, the political affiliation of the party in office does not necessarily influence the long-term result of stock returns.  And while the market does experience periods of downside volatility, investors should not base their investment strategy on the unknown, such as the perceived outcome of an election.

Take, for example, the following news headline from September 2016: “Mark Cuban Predicts a Stock Market Crash if Trump Wins the White House.” Mark Cuban, a successful entrepreneur and billionaire, predicted the stock market would crash if Trump were to be elected in 2016.  Unfortunately, investors who heeded Mr. Cuban’s advice quite possibly missed out on all, or some portion, of the 47% increase in the S&P 500 since then.

Historically, there is no evidence that supports a correlation between the party holding the office of president and stock market returns.  While selling equities in anticipation of the unknown may feel good for a while, the decision to sell will eventually turn to regret when the market resumes its upward trend.

 In US dollars.
Past performance is no guarantee of future results. Declines are defined as months ending with the market below the previous market high by at least 10%. Annualized compound returns are computed for the relevant time periods after each decline observed and averaged across all declines for the cutoff. There were 1,115 observation months in the sample. January 1990-Present: S&P 500 Total Returns Index. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. January 1926-December 1989; S&P 500 Total Return Index, Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago. For illustrative purposes only. Index is not available for direct investment; therefore, its performance does not reflect the expenses associated with the management of an actual portfolio. There is always a risk that an investor may lose money.

 

Timing Market Cycles

In the last 2 decades, there have been 3 notable market corrections that have sent the global economy spiraling into economic recessions. In 2000 we saw the S&P 500 drop nearly 50% due to the technology bubble. In 2008 the financial crisis caused an even larger drop of 57%. And now, a little over a decade later, the 2020 Covid-19 pandemic resulted in yet another 30+% decline.

Most investors are willing to accept the inherent volatility that comes with owning equities in exchange for the higher potential return they will receive.  However, wouldn’t it be nice to experience all the market upside and avoid the downside?  The strategy of selling equities now and waiting to get back in at the bottom of a market decline can be tempting.  And while it seems reasonable, there is a problem with this approach: Timing market bottoms is next to impossible.

Take a look at this chart illustrating market trading days over the past 27 years. Each line represents the daily percentage gain or loss of the S&P 500. Equities have historically had a 55% likelihood of going up and a 45% likelihood of going down on any given day. They also have historically had a 70% chance of being up in any given year.

Note that big down days are often followed by large up days — and therein lies the problem of attempting to time the market. When investors exit the market they take on an enormous amount of risk by potentially being out of the market on the large up days.  The chart below refers to the deviation in returns that resulted from being out of the market for various periods of time from 1990 – 2019.  Remaining invested throughout the entire period yielded the highest annualized compound return.

During a bear market, some investors believe that selling out or exiting the market will relieve them of the stress that results from riding the up-and-down rollercoaster of owning equities. But this stress is often immediately replaced by the new worry of trying to decide when to get back in.

Trying to time markets is not an investment strategy – taking an evidence-based approach and systematically rebalancing your allocation periodically is. Sticking to your long-term investment plan will have a far greater impact on long-term results than trying to win this losers game.

Information provided by Dimensional Fund Advisors LP.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.In US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero.  S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. “One-Month US T- Bills” is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values.

Timing Isn’t Everything

Over the course of a summer, it’s not unusual for the stock market to be a topic of conversation at barbeques or other social gatherings.

A neighbor or relative might ask about which investments are good at the moment. The lure of getting in at the right time or avoiding the next downturn may tempt even disciplined, long-term investors. The reality of successfully timing markets, however, isn’t as straightforward as it sounds.

Outguessing the Market is Difficult

Attempting to buy individual stocks or make tactical asset allocation changes at exactly the “right” time presents investors with substantial challenges. First and foremost, markets are fiercely competitive and adept at processing information. During 2018, a daily average of $462.8 billion in equity trading took place around the world.1   The combined effect of all this buying and selling is that available information, from economic data to investor preferences and so on, is quickly incorporated into market prices. Trying to time the market based on an article from this morning’s newspaper or a segment from financial television? It’s likely that information is already reflected in prices by the time an investor can react to it.

Dimensional recently studied the performance of actively managed mutual funds and found that even professional investors have difficulty beating the market: over the last 20 years, 77% of equity funds and 92% of fixed income funds failed to survive and outperform their benchmarks after costs. 2

Further complicating matters, for investors to have a shot at successfully timing the market, they must make the call to buy or sell stocks correctly not just once, but twice. Professor Robert Merton, a Nobel laureate, said it well in a recent interview with Dimensional:

“Timing markets is the dream of everybody. Suppose I could verify that I’m a .700 hitter in calling market turns. That’s pretty good; you’d hire me right away. But to be a good market timer, you’ve got to do it twice. What if the chances of me getting it right were independent each time? They’re not. But if they were, that’s 0.7 times 0.7. That’s less than 50-50. So, market timing is horribly difficult to do.”

Time and the Market

The S&P 500 Index has logged an incredible decade. Should this result impact investors’ allocations to equities? Exhibit 1 suggests that new market highs have not been a harbinger of negative returns to come. The S&P 500 went on to provide positive average annualized returns over one, three, and five years following new market highs.

Exhibit 1Average Annualized Returns After New Market Highs
S&P 500, January 1926–December 2018

look ahead period text for RW InvestmentConclusion

Outguessing markets is more difficult than many investors might think. While favorable timing is theoretically possible, there isn’t much evidence that it can be done reliably, even by professional investors. The positive news is that investors don’t need to be able to time markets to have a good investment experience. Over time, capital markets have rewarded investors who have taken a long-term perspective and remained disciplined in the face of short-term noise. By focusing on the things they can control (like having an appropriate asset allocation, diversification, and managing expenses, turnover, and taxes) investors can better position themselves to make the most of what capital markets have to offer.

[1]. In US dollars. Source: Dimensional, using data from Bloomberg LP. Includes primary and secondary exchange trading volume globally for equities. ETFs and funds are excluded. Daily averages were computed by calculating the trading volume of each stock daily as the closing price multiplied by shares traded that day. All such trading volume is summed up and divided by 252 as an approximate number of annual trading days.
[2]. Mutual Fund Landscape 2019.

 

Summer Homework

We know you’re enjoying summer! But how’s your retirement plan doing?

Summer can serve as a preview of your retirement — long days in the sun and spending time with your loved ones. So what better
time to do a routine check-up on your retirement plan? Protect your loved ones and ensure you are keeping up to date with your
retirement plan with our summer homework assignments.

  • Update or Assign Beneficiaries
    Did you experience a major life change this year, such as marriage, divorce, birth or death? Consider updating your
    beneficiaries when you go through a major life change.
  • Review Cyber Security Best Practices
    Retirement plans are a major target for cyber attacks. Retirement plan participants often have weak passwords and can
    unknowingly fall for phishing schemes. Educate yourself on cyber security best practices to ensure you are keeping your
    information and assets safe.
  • Increase Contributions
    Raise your plan contributions once a year by an amount that’s easy to handle, on a date that’s easy to remember —for example,
    2 percent every Fourth of July. Thanks to the power of compounding (the earnings on your earnings), even small, regular
    increases in your plan contributions can make a big difference over time.
  • Revisit Asset Allocation
    Rebalance your portfolio back to the original asset allocation by selling assets that have outperformed and use the proceeds
    to those that have lagged behind. This discipline ensures you adhere to your investment strategy based on your risk
    tolerance and time horizon.
  • Remember Sunscreen!
    Wearing sunscreen reduces your risk of developing skin cancer, it keeps your skin looking younger and protects you from UVB
    rays. What other reasons do you need to wear it?

Four Ways to Increase Employee Retirement Contributions

As a retirement plan sponsor, you want your employees to save the most they can in order to reach their maximum retirement potential. A significant amount of research says that you can improve both employee participation and their saving rates. Here are four ways you can help your employees start building a confident retirement:

Boost employee participation with automatic enrollment. Choosing to automatically enroll all new employees in your retirement plan can dramatically improve your participation rates. According to the Center for Retirement Research (CRR) at Boston College, in one study of automatic enrollment, participation increased by 50 percent, with the largest gains among younger and lower-paid employees.1 While auto enrolled employees are allowed to opt out of the retirement plan, most generally stay enrolled.

Set the initial default contribution rate higher. Many companies who use auto enrollment set their default contribution rate relatively low at 3 percent, according to the CRR, which is lower than the typical employer match rate of 6 percent. Workers who might have contributed more to their savings passively accept the lower default rate, which means they’re sacrificing employer matching funds along with saving less of their own pay.

Adopt auto escalation. Plans that use auto escalation automatically increase their participants’ contribution rate every year, typically by 1 percent. Over time, that can significantly improve savings rates among workers. The CRR cites a 2013 study of Danish workers where the majority of workers who experienced automatic increases simply accepted them, and savings rates dramatically increased.

Automate investment decisions with target date investment products. Investing is complicated, and many employees don’t want to take the time to learn how to manage their portfolios. Target date strategies automatically adjust an employee’s investment allocations over time, shifting them to a more conservative asset mix as the target date (typically retirement) approaches. The ease of use of target date funds means their popularity is increasing. The CRR notes that in 2014, nearly 20 percent of all 401(k) assets were in target date funds, and about half of plan participants used target date funds.2

      1http://crr.bc.edu/wp-content/uploads/2016/08/IB_16-15.pdf
      2http://crr.bc.edu/wp-content/uploads/2017/01/IB_17-2.pdf
About the Author, Michael Viljak
Michael joined RPAG in 2002 and has over 30 years of experience in the retirement plan industry, on both the wholesale and retail levels, focusing on retirement plans ever since their inception in 1981. Michael has an interest in fiduciary-related topics and was part of the team that created RPAG’s proprietary Fiduciary Fitness Program. He also authors many of the firm’s newsletter articles, communication pieces and training modules.

Déjà Vu All Over Again

Investment fads are nothing new.  When selecting strategies for their portfolios, investors are often tempted to seek out the latest and greatest investment opportunities.

Over the years, these approaches have sought to capitalize on developments such as the perceived relative strength of particular geographic regions, technological changes in the economy, or the popularity of different natural resources. But long-term investors should be aware that letting short-term trends influence their investment approach may be counterproductive. As Nobel laureate Eugene Fama said, “There’s one robust new idea in finance that has investment implications maybe every 10 or 15 years, but there’s a marketing idea every week.”

What’s hot becomes what’s not

Looking back at some investment fads over recent decades can illustrate how often trendy investment themes come and go. In the early 1990s, attention turned to the rising “Asian Tigers” of Hong Kong, Singapore, South Korea, and Taiwan. A decade later, much was written about the emergence of the “BRIC” countries of Brazil, Russia, India, and China and their new place in global markets. Similarly, funds targeting hot industries or trends have come into and fallen out of vogue. In the 1950s, the “Nifty Fifty” were all the rage. In the 1960s, “go-go” stocks and funds piqued investor interest. Later in the 20th century, growing belief in the emergence of a “new economy” led to the creation of funds poised to make the most of the rising importance of information technology and telecommunication services. During the 2000s, 130/30 funds, which used leverage to sell short certain stocks while going long others, became increasingly popular. In the wake of the 2008 financial crisis, “Black Swan” funds, “tail-risk-hedging” strategies, and “liquid alternatives” abounded. As investors reached for yield in a low interest-rate environment in the following years, other funds sprang up that claimed to offer increased income generation, and new strategies like unconstrained bond funds proliferated. More recently, strategies focused on peer-to-peer lending, cryptocurrencies, and even cannabis cultivation and private space exploration have become more fashionable. In this environment, so-called “FAANG” stocks and concentrated exchange-traded funds with catchy ticker symbols have also garnered attention among investors.

The fund graveyard

Unsurprisingly, however, numerous funds across the investment landscape were launched over the years only to subsequently close and fade from investor memory. While economic, demographic, technological, and environmental trends shape the world we live in, public markets aggregate a vast amount of dispersed information and drive it into security prices. Any individual trying to outguess the market by constantly trading in and out of what’s hot is competing against the extraordinary collective wisdom of millions of buyers and sellers around the world.

With the benefit of hindsight, it is easy to point out the fortune one could have amassed by making the right call on a specific industry, region, or individual security over a specific period. While these anecdotes can be entertaining, there is a wealth of compelling evidence that highlights the futility of attempting to identify mispricing in advance and profit from it.

It is important to remember that many investing fads, and indeed, most mutual funds, do not stand the test of time. A large proportion of funds fail to survive over the longer term. Of the 1,622 fixed income mutual funds in existence at the beginning of 2004, only 55% still existed at the end of 2018. Similarly, among equity mutual funds, only 51% of the 2,786 funds available to US-based investors at the beginning of 2004 endured.

What am I really getting?

When confronted with choices about whether to add additional types of assets or strategies to a portfolio, it may be helpful to ask the following questions:

  1. What is this strategy claiming to provide that is not already in my portfolio?
  2. If it is not in my portfolio, can I reasonably expect that including it or focusing on it will increase expected returns, reduce expected volatility, or help me achieve my investment goal?
  3. Am I comfortable with the range of potential outcomes?

If investors are left with doubts after asking any of these questions, it may be wise to use caution before proceeding. Within equities, for example, a market portfolio offers the benefit of exposure to thousands of companies doing business around the world and broad diversification across industries, sectors, and countries. While there can be good reasons to deviate from a market portfolio, investors should understand the potential benefits and risks of doing so.

In addition, there is no shortage of things investors can do to help contribute to a better investment experience. Working closely with a financial advisor can help individual investors create a plan that fits their needs and risk tolerance. Pursuing a globally diversified approach; managing expenses, turnover, and taxes; and staying disciplined through market volatility can help improve investors’ chances of achieving their long-term financial goals.

Conclusion

Fashionable investment approaches will come and go, but investors should remember that a long-term, disciplined investment approach based on robust research and implementation may be the most reliable path to success in the global capital markets.

Source: Dimensional Fund Advisors LP.
Past performance is no guarantee of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities. There is no guarantee an investing strategy will be successful. Diversification does not eliminate the risk of market loss.
All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.
Eugene Fama is a member of the Board of Directors of the general partner of, and provides consulting services to, Dimensional Fund Advisors LP.

Key Questions for Long-Term Investors

Asking the right questions and following a few key principles can improve your odds of long-term investment success.

Whether you’ve been investing for decades or are just getting started, at some point on your investment journey you’ll likely ask yourself some of the questions below. Trying to answer these questions may be intimidating, but know that you’re not alone. Your financial advisor is here to help. While this is not intended to be an exhaustive list, it will hopefully shed light on a few key principles, using data and reasoning, that may help improve investors’ odds of investment success in the long run.

1. What sort of competition do I face as an investor?

The market is an effective information-processing machine. Millions of market participants buy and sell securities every day, and the real-time information they bring helps set prices. This means competition is stiff, and trying to outguess market prices is difficult for anyone, even professional money managers (see question 2 for more on this). This is good news for investors though. Rather than basing an investment strategy on trying to find securities that are priced “incorrectly,” investors can instead rely on the information in market prices to help build their portfolios (see question 5 for more on this).world equity training graph

Source: World Federation of Exchanges members, affiliates, correspondents, and non-members. Trade data from the global electronic order book. Daily averages were computed using year-to-date totals as of December 31, 2016, divided by 250 as an approximate number of annual trading days.

 

2. What are my chances of picking an investment fund that survives and outperforms?

Flip a coin and your odds of getting heads or tails are 50/50. Historically, the odds of selecting an investment fund that was still around 15 years later are about the same. Regarding outperformance, the odds are worse. The market’s pricing power works against mutual fund managers who try to outperform through stock picking or market timing. As evidence, only 14% of US equity mutual funds and 13% of fixed income funds have survived and outperformed their benchmarks over the past 15 years.

us based mutual fund performance

Source: *Mutual Fund Landscape 2017, Dimensional Fund Advisors. See Appendix for important details on the study. Past performance is no guarantee of future results.

 

3. If I choose a fund because of strong past performance, does that mean it will do well in the future?

Some investors select mutual funds based on past returns.  However, research shows that most funds in the top quartile (25%) of previous three-year returns did not maintain a top-quartile ranking in the following three years. In other words, past performance offers little insight into a fund’s future returns.

top ranked funds chart

Source: *Mutual Fund Landscape 2017, Dimensional Fund Advisors. See Appendix for important details on the study. Past performance is no guarantee of future results

 

4.Do I have to outsmart the market to be successful investor?

Financial markets have rewarded long-term investors. People expect a positive return on the capital they invest, and historically, the equity and bond markets have provided growth of wealth that has more than offset inflation. Instead of fighting markets, let them work for you.

growth of a dollar graph

US Small Cap is the CRSP 6–10 Index. US Large Cap is the S&P 500 Index. Long-Term Government Bonds is the IA SBBI US LT Govt TR USD, provided by Ibbotson Associates via Morningstar Direct. Treasury Bills is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. US Inflation is measured as changes in the US Consumer Price Index. US Consumer Price Index data is provided by the US Department of Labor Bureau of Labor Statistics. CRSP data is provided by the Center for Research in Security Prices, University of Chicago. The S&P data is provided by Standard & Poor’s Index Services Group. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.

 

5. Is there a better way to build a portfolio?

Academic research has identified these equity and fixed income dimensions, which point to differences in expected returns among securities. Instead of attempting to outguess market prices, investors can instead pursue higher expected returns by structuring their portfolio around these dimensions.

dimensions of expected returns chart

Relative price is measured by the price-to-book ratio; value stocks are those with lower price-to-book ratios. Profitability is a measure of current profitability based on information from individual companies’ income statements.

 

6. Is international investing for me?

Diversification helps reduce risks that have no expected return, but diversifying only within your home market may not be enough. Instead, global diversification can broaden your investment opportunity set. By holding a globally diversified portfolio, investors are well positioned to seek returns wherever they occur.

index portfolio charts

Number of holdings and countries for the S&P 500 Index and MSCI ACWI (All Country World Index) Investable Market Index (IMI) as of December 31, 2016. The S&P data is provided by Standard & Poor’s Index Services Group. MSCI data ©MSCI 2017, all rights reserved. International investing involves special risks such as currency fluctuation and political stability. Investing in emerging markets may accentuate those risks. Diversification does not eliminate the risk of market loss. Indices are not available for direct investment.

 

7. Will making frequent changes to my portfolio help me achieve investment success?

It’s tough, if not impossible, to know which market segments will outperform from period to period.

Accordingly, it’s better to avoid market timing calls and other unnecessary changes that can be costly. Allowing emotions or opinions about short-term market conditions to impact long-term investment decisions can lead to disappointing results.

annual return index

US Large Cap is the S&P 500 Index. US Large Cap Value is the Russell 1000 Value Index. US Small Cap is the Russell 2000 Index. US Small Cap Value is the Russell 2000 Value Index. US Real Estate is the Dow Jones US Select REIT Index. International Large Cap Value is the MSCI World ex USA Value Index (net dividends). International Small Cap Value is the MSCI World ex USA Small Cap Value Index (net dividends). Emerging Markets is the MSCI Emerging Markets Index (net dividends). Five-Year US Government Fixed is the Bloomberg Barclays US TIPS Index 1–5 Years. The S&P data is provided by Standard & Poor’s Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Dow Jones data provided by Dow Jones Indices. MSCI data ©MSCI 2017, all rights reserved. Bloomberg Barclays data provided by Bloomberg. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.

 

8. Should I make changes to my portfolio based on what I’m hearing in the news?

Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad. If headlines are unsettling, consider the source and try to maintain a long-term perspective.investment chart for investment RW

9. So, what should I be doing?

Work closely with a financial advisor who can offer expertise and guidance to help you focus on actions that add value.  Focusing on what you can control can lead to be better investment experience.

  • Create an investment plan to fit your needs and risk tolerance.
  • Structure a portfolio along the dimensions of expected returns.
  • Diversify globally.
  • Mange expenses, turnover, and taxes.
  • Stay disciplined through market dips and swings.
Source: Dimensional Fund Advisors LP.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss.
There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision.
All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.

Is Your Financial Advisor a Legal Fiduciary (and Why is that Important?)

If you hire someone who goes by the title of “financial advisor”, you expect them to place your interests before theirs. After all, doesn’t the word advisor imply that they provide true advice?

Many investors are surprised to learn not everyone who uses the title “financial advisor” is legally bound to act in your best interest.  In 2018, the picture became muddier. In March, a Court of Appeals vacated the Department of Labor Fiduciary Rule. This Fiduciary Rule was proposed in order to require financial professionals who provide advice to retirement savers to act as a legal fiduciary.

What exactly does this mean? If you are a fiduciary, you are legally responsible to place the client’s interest before your own. It is much like the responsibility an attorney has to their client, or a parent has to his or her child. Negligence can and should come with legal consequences.  When it comes to professional advice about your money, implied consequence can be a very good thing. Unfortunately, the financial industry has made it confusing to know whether or not you are working with a fiduciary.

Understanding the Fiduciary Role

Other professions regularly act as fiduciaries. If you retain an attorney or see a medical doctor, for example, they are each required to do what is best for you…not what is best for them. That means the attorney must make recommendations based on your best interest, not what will generate more fees for his or her practice. The doctor may not prescribe any procedures or medications that are not in your best interest.

Not all financial professionals are held to that same fiduciary standard. It is perfectly legal, for example, for a non-fiduciary advisor to recommend a more expensive mutual fund to you, as long as it is deemed “suitable” or appropriate for an investor’s objectives and risk tolerance.  This suitability can be documented simply by requesting the client complete a questionnaire.

As an investor, it is of the upmost importance that you know whether you are working with a fiduciary advisor or a commissioned broker. Investors may end up paying more simply because the suitable product pays a higher commission to the advisor.

Who’s Who of Fiduciary Financial Professionals

While most professionals these days go by the generic term of “financial advisor” or “wealth advisor” …the actual licensing and registration can tell you if they are a fiduciary or not.  Anyone who is licensed as a Registered Representative is not a fiduciary. In fact, they cannot charge you a fee for advice. Rather, Registered Reps will charge you a commission for product recommendations and implementation. Does this sound like an advisor to you? Actually, it sounds more like a salesperson. While Registered Reps may be competent and educated, it is critical to know if you are receiving true advice or product recommendations that result in a commission.

If you walked into a Ford dealership and asked which car they recommend, you are more than likely to drive away in a brand-new Ford. The salesperson is incentivized to sell you a Ford even if a used car or a different brand would have met your needs at a lower cost.  Registered Representatives are held only to a “suitability” standard. That means they must simply recommend something that could be appropriate for you. Even if the one they recommend pays them a (higher) commission, as long as it is documented as “suitable”, there is no problem.  In fact, a Registered Representative’s first loyalty is to their employer and shareholders…not you, the client.

Fortunately, not all financial professionals operate this way.  Those who are licensed as Investment Advisor Representatives (the employees) or Registered Investment Advisors (the firms) are held to the fiduciary standard. They must always place client interests before their own. A conflict of interest may not be present in the relationship. If they do not place your interests first, you have legal recourse.  Instead of receiving commissions from products, fiduciaries are only paid a fee for advice.

 The High Cost of Conflicted Advice

If a Registered Representative has placed a product in your account for the sole reason of making a commission, then you have experienced  a conflict of interest.  A White House Task Force estimated that this “conflicted advice” costs Americans about $17 billion per year.  While you still may end up with a solution that generally works, your investment expense will be greater as a way cover these commissions. Over time, these small expenses can have a real effect on your total return.  Ideally, investors should avoid conflicted advice altogether.

Always Find Out

It is not always easy to discern who is a fiduciary and who is not.  Some advisors are “dually registered” as both a Registered Representative and an Investment Advisor Representative acting as a fiduciary only some of the time.  Most investors are not in the habit of questioning the advice they receive or asking if the recommendation represents a conflict of interest.

Get it in writing

It is vital that you are confident in the financial advice you receive:  are you  dealing with a legal fiduciary, or not?  We always recommend clients visit the following websites to research potential financial advisors.

However, one easy way to find out is to ask the prospective advisor this one question:

Will you act as my legal fiduciary at all times?

And ask for that in writing.  If that isn’t happily provided, you just learned something very important. It is safer to keep looking and limit your search to those who will act as your legal fiduciary.

Photo of Ryan C. Warwick of RW Investment

Ryan Warwick is Principal of R|W , a Registered Investment Adviser. R|W is a fee-based financial planning and investment management firm headquartered in Boise, Idaho serving families nationwide. Our advisors hold the Certified Financial Planner™ designation and the Chartered Financial Analyst® charter and serve as trusted stewards to help families preserve and grow their wealth for over three decades. Visit us at https://investrw.com/.