Process vs. Outcome

Recently a well known financial advisor wrote a very good article concerning the difference between investing process and investing outcome.  It is easy to read and he provides some great examples so I encourage you to check it out:

https://www.washingtonpost.com/business/get-there/youre-obsessed-with-outcomes-heres-why-attention-to-process-pays-off/2016/01/22/f03828a4-bebe-11e5-bcda-62a36b394160_story.html

I think his final paragraph summarizes the concept very well:

“We never really know what the source of a good outcome is; however, we have a high degree of confidence what the probabilities are for a good process. A strong process is a guarantee — not of outcome or results, but of the highest probability of obtaining desired results. That’s why it is so important to investors.”

Academic Based Investing

Here at Legacy Financial Group we have always been proponents of academic based investing.  Our goal is to design portfolios based on what we know from academic research and empirical data about how markets work and where returns comes from.  As a result of this philosophy we have used mutual funds from Dimensional Fund Advisors (DFA) as the core of most of our portfolios.  They have a long history and strong foundation in building investment vehicles that maximize the use of our knowledge of financial markets.  Below is a video highlighting the academic pedigree of DFA and some of the key academic finding that are incorporated into all their funds.

And The Winner Is....

The best performing developed market of the past 20 years will come as a surprise to most.  The fact that an investment in this country nearly doubled the return of the US during this time will be even more surprising.  But the most interesting aspect about this country's performance is how it became the best performing developed country over the last two decades.

Understanding Investor Bias: International Markets Edition

Last year was a very clear example of how investors can be blinded by biases.  2014 was unique in that most major equity markets performed well below average except for the U.S. large cap market (as measured by the S&P 500).  The S&P 500 was up 13% last year while international markets were negative and very little else returned more than about 4%.  Many investors immediately became nervous over their portfolios.  Some even mulled over the idea of completely getting out of anything outside the U.S.  There were a lot of strong reactions to just a single year of performance.

Every year out of all the major assets classes there is going to be a top performer and a bottom performer.  It is rare that anyone ever questions why they did not own only the top performer.  No one knows which asset class will be the best performer on any given year, and it is universally agreed that diversification can help reduce risk and increase long term return.  So why did last year seem to get some investors so riled up? 

Successful Investing: Warren Buffett Wisdom

Every year tens of thousands of people make the pilgrimage to Omaha, Nebraska to listen to arguably the most successful investment manager of all time, Warren Buffett. The extremely popular event starts this Monday. Undoubtedly, some are hoping to glean some investment secret or word of wisdom that they can turn into investment gold. And who can blame them? In a world where we are constantly bombarded with hot investments, market forecasts, and pundit predictions it seems nearly impossible to ever be sure what to do with our money. Thankfully, Warren Buffett does dispense some great advice and it is actually much different than what you might expect.

Investing Lessons from the 2014 Sugar Bowl

I have a client who is a big OU Sooner fan.  I mentioned to him my hope that OU would stand a chance against the heavily favored Alabama Crimson Tide to which he responded in jest, "I hope you aren't putting MY money on an upset." After the game I could not help but see the parallel to this year's outcome and how people actually think about investing for retirement.

I went to cash because..

"I went to cash because..."  Fill in the blank.  This is a common phrase uttered by market pundits, advisors, and amateur investors everywhere.  And there always is a seemingly very smart reason to justify putting your investments in cash instead of the market.  However; what appears on the surface to be a good investing idea often stands in sharp contrast to the actual results.

Biased Brains and Bubble Talk

If you are a human and an investor there is good news and bad news.  The bad news first.  Your brain sucks.  It operates in almost every way possible to encourage you to make bad investing decisions.  It is also why you care a lot more about the Fed’s actions than you really should.

A test will easily demonstrate your faulty brain at work.

It’s Déjà Vu All Over Again: 1994

The volatility in the stock market AND bond market over the past few days has everyone concerned.  Forget that the US market is still up over 10% for the year. We all tend to get very myopic in our vision when the stock market starts to waiver.  Especially when bonds, which are supposed to protect us in down markets, are also losing money.  It can make the thought of just selling everything and going to cash seem appealing.  But as history reveals, that can be a very costly mistake.

The 4% Safe Withdrawal Rate Misconception

There has been much discussion lately on the reliability of the suggested 4% withdrawal rate.  It has long been held that withdrawing 4% from your retirement assets per year was a “safe” withdrawal rate.  “Safe” means if the retiree starts taking 4% out of their portfolio when they retire and increase that amount by inflation each year then that income will last them the rest of their life.  4% became a rule-of-thumb even though it actually has strong academic backing.  Recently, however, online articles and general advisor talk have suggested that given the current low rate environment or due to big market collapses like 2008 and 2009 a 4% withdrawal rate is no longer feasible.

The “Safe Dividend Stock” Illusion…

It is very common today to get a client or prospect asking about high dividend paying stocks.  It is perhaps even more common for many advisors today to include dividend stocks as a part of their lead pitch.  “We focus on high quality dividend paying stocks,” they might say.  This will undoubtedly lead to affirming head nods from the prospective clients.  And therein lies the problem.  This idea that high quality dividend paying stocks are a guaranteed smart investment with great upside and limited downside potential has become an axiom of sorts in the eyes of the general public.  No further data is needed; the safety of dividend stocks is self-evident.

Market Peak

The stock market recently surpassed two very meaningful price points.  The Dow Jones surpassed 14,000 and the S&P 500 reached 1,500 for the first time since 2007.  Many people are now starting to wonder whether we are “due for a correction” or are we at a market peak.  As I write this article the market indeed has pulled back from these highs.  But what, if any, influence should these index levels have to do with investing long term?

I think there are at least a few important questions to consider when this type of thinking creeps into our heads.

Predictably Unpredictable

By Eric Burkholder, Portfolio Manager

A 2012 review of market outcomes and the “experts” who failed to predict them.

“Prediction is very difficult, especially if it's about the future.” - Niels Bohr, Danish physicist

The world of investment advice and market forecasting is very profitable.  Let me rephrase that.  The world of investment advice and market forecasting is very profitable for those selling the advice.  The outcome for those who invest on said advice is not quite as rosy.  So each year I make a point to track all the “expert” predictions and highlight some of the more pronounced failures.  2012, as expected, did not disappoint.

Market Returns: A Presidential Prediction

With only a short time left until we select the 45th President of the United States of America many investors are in a state of panic.  Many believe the market is waiting for the outcome and if the "correct" candidate is selected the stock market will immediately surge on the news.  Or, if the "wrong" candidate is selected the market will tank the next day. Fortunately, history provides a guide on this matter and it suggests that, when it comes to U.S. Presidents, the market is a true Independent.

2013 IRS Inflation Adjustments

The IRS just announced inflation adjustments for 2013.  These rules affect many things such as your retirement plan contributions, gift tax exclusion, and the "kiddie" tax.  Make sure to bookmark this link as a handy reference.

 http://blogs.wsj.com/totalreturn/2012/10/18/irs-announces-2013-inflation-adjustments/

What Investment Returns Can $200 Billion Buy?

The last siren call of investment managers is an appeal to your ego.  This is how it goes:

“Yes, we know most managers fail miserably to outperform the market after they pay themselves hefty fees, but those guys are for the small accounts. You have a million dollars! This will get you access to the next level of managers.  The really good ones.”

Or: “Oh, of course, accounts below a million dollars are better off investing in asset classes, but you have 5 million dollars! We have proprietary research just for you.  Our investments trounce the market.”

Or: “Well sure, if you only had $5 million it might make sense to keep expenses low. But you have 10 million dollars! You can pay for our quantitative algorithm that picks the best stocks based on how loud Jim Cramer yells the ticker symbol.”

Joking aside.  The trend is clear and you can see the allure.  At every wealth level it seems you have just enough to get you access to the real managers.  So how do you know how much you really need to get the best managers?  Maybe there is a way to find out.  Maybe there is an investor out there so large that they trump every other investor and truly have access to the very best managers.  And maybe this investor makes their returns public so you can see exactly how well their access to the “best” managers turned out for them.

The Mark Cuban Effect

Mark Cuban recently was quoted in a Bloomberg article reaffirming his dislike for the stock market.  He restated his view that most people should keep their investments in cash and "keep your money anywhere but the stock market."  While Mark is not a world renown stock picker he does have high visibility in the news and for some reason keeps popping up with investment advice.  As it turns out it appears that Mark has an uncanny ability to call market reversals.  Unfortunately he has historically made the OPPOSITE call.

It is something I have termed "The Mark Cuban Effect."

“I Am Not a Great Fool” – Investing Lessons from The Princess Bride

The Princess Bride can teach us a valuable lesson about investing.

I never imagined I would make such a statement until recently when I was pondering the futility of market participants trying to predict the next market downturn or pick the next big stock. 

For me it brings to mind the movie The Princess Bride.  One of my favorite scenes is the Battle of Wits between the characters Wesley and Vizzini.  For anyone who has not seen the movie the Battle of Wits is structured as follows: There are two wine glasses on the table.  One of which has been poisoned by Wesley.  Vizzini does not know which glass has been poisoned and must deduce which glass is deadly. Once Vizzini selects a glass they both must drink their wine and the loser will die.  Part of Vizzini’s thought process is as follows:

“Now, a clever man would put the poison into his own goblet, because he would know that only a great fool would reach for what he was given. I am not a great fool, so I can clearly not choose the wine in front of you. But you must have known I was not a great fool, you would have counted on it, so I can clearly not choose the wine in front of me.”

Hyped Headlines

Just about three weeks ago the market was in another panic.  It was a situation very similar to August of last year.  Job numbers were concerning and the markets were reacting dramatically to every headline.  The same point we made then applies this time around.  These numbers are a distraction and will only reveal something in hindsight.  For example, the confidence level of the jobs report is between -50,000 and +150,000 jobs.  This means the true number of jobs gained or lost could be up to 150,000 different than what was reported.  That is a HUGE swing when it comes to monthly figures.  Monthly figures are very volatile and the only thing you can be sure to get from following these numbers is a stomach ulcer.

Market Pullback

Another well-written blog was recently posted by Dan Wheeler concerning the recent market pullback. Click Here.  The main idea of this great perspective can really be summed up in two points:

• Trying to time the market during these pullbacks is a futile exercise that almost always leads to more losses.
• A long-term investing focus with emphasis on diversification and low costs is clearly the best way to have a successful investment experience.

A third point may be a useful addition for the especially nervous investor:

• We cannot successfully time the market reversals, but we absolutely do try to predict them to happen.  One popular risk measure of the market, called volatility, is always a key input in determining a client’s portfolio and retirement projections.  If the market did not experience this volatility then that would be the real surprise.  The market swings can be disheartening if we have a short-term perspective, but some reassurance should come from thinking “I am glad my advisor already planned for this to happen.”