Say It Ain’t So, Joe – Again

“No large-cap, mid-cap, or small-cap funds managed to remain in the top quartile at the end of the five-year measurement period.”

This is one of the findings out this week from S&P / Dow Jones related to “the ability of top-performing funds to maintain their status” and persist as top performing funds.1

For many of us who have been in the industry for many years, this type of finding is hard to take. As I wrote in a 2015 piece titled Say It Ain’t So, Joe, sometimes I feel like the little guy in the movie “Field of Dreams”.

Until founding Fiduciary Wealth Partners in 2012, I spent my career promoting actively managed funds. I believed in them. I was quite good at selling them. I received an award one year for selling record amounts of active equity for the firm I worked for at the time.

Now, I sometimes wonder:

Was I wrong all those years?   How can this be?”

Like the little boy, who had learned of Shoeless Joe Jackson’s involvement in throwing the 1919 World Series, negative news about something we have believed in for many years is hard to take.

In the past, active management was the only game on Wall Street, and managers with hot hands were put on pedestals. Many of us grew up in an investment world that was dominated by reports of star active portfolio managers such as Warren Buffett or Peter Lynch.

Like most anyone, I believe that people who work harder should have an advantage. As with many things, however, it is not all about working harder. You need to work smarter, not let emotion get the better of you, and stay focused on the evidence about what works consistently over multiple long-term periods.

What does the evidence now consistently show?

“The best way to own common stocks is through index funds.”
– Warren Buffett, Berkshire Hathaway 1996 Shareholder Letter

And

“All the time and effort people devote to picking the right fund, the hot hand, the great manager, have, in most cases, led to no advantage.”
– Peter Lynch, Beat the Street, 1993

I have been drafting another piece, which I will publish soon, that might dispel some myths about index funds and counter the active managers who are sure to continue protesting loudly about how the promotion of index funds is worse than the “misuse of antibiotics.”

I’ll keep this short and simple this time, however, and just finish with a 2016 quote from another well-respected data analysis firm, Morningstar.

“In most cases, the odds of picking a future long-term [active management] winner from the best performing quintile in each category aren’t materially different than selecting from the bottom quintile.”2

Yes, it’s hard for many alpha-oriented investment personalities such as me to swallow, but the evidence in favor of index funds is real and consistent.

Stay it ain’t so, Joe. Say it ain’t so.

 

  1. S&P Dow Jones – Does Past Performance Matter? – The Persistence Scorecard
  1. Morningstar – Performance Persistence Among Mutual Funds

 

Preston McSwain is a Managing Partner and Founder of Fiduciary Wealth Partners, an SEC registered investment advisor committed to forming fiduciary wealth partnerships with clients, professional colleagues, and the community. To see more of his posts, and follow him on social media, please visit the following:

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Linked In

About.me

Personal Blog

Wall Street Journal Columnist Joins FWP

An outside columnist for the Wall Street Journal and wealth management veteran with over two decades of experience, Norb Vonnegut, has joined Fiduciary Wealth Partners (FWP) as a Partner.

“Based on my experience writing about wealth management and working as a Managing Director at a leading advisory firm, I know the industry well,” said Vonnegut. “The most important thing I considered when joining a firm was the commitment to putting client interests first and acting as a true fiduciary. Fiduciary Wealth Partners’ commitment to these values and to transparency impressed me, and I am proud to join them as a Partner.”

Vonnegut will focus on helping FWP share its message more broadly, educating investors on the advantages of keeping investing simple and on the importance of disclosure of conflicts and transparency.

“With his years of experience commenting on the industry and watching trends affecting the future direction of wealth management, we are thrilled that Norb decided to partner with Fiduciary Wealth Partners,” said Preston McSwain, a founding partner of FWP.  “He shares our fiduciary standards, commitment to providing investors the approach and values behind our trademark, Transparency, Simplicity, Peace of Mind ®.”

In addition to his experience as a financial adviser and columnist, Mr. Vonnegut is also a published author and recently completed his first non-fiction work, a defensive handbook for investors, which probes issues of trust, transparency, and indexing relative to active money management.  He has appeared on Bloomberg, MSNBC, and has given a TEDx talk about how to avoid financial predators.

Norb is a graduate of Harvard College and Harvard Business School and has spent considerable time serving on non-profit investment committees.

To learn more about Fiduciary Wealth Partners, please visit our website by clicking here or call us at 617-602-1900.

Our Fiduciary Commitment to Put the Best Interests of Clients First

“Put the investor first. It’s not that complicated,” says Jack Bogle, the founder of Vanguard and a leading fiduciary advocate.

Bogle made these types of comments again, speaking at a recent press conference hosted by The Institute for the Fiduciary Standard.

During this event, which we attended with Bogle, the Institute named Fiduciary Wealth Partners as a member of the founding class of firms that have agreed to conduct themselves according to its “Best Practices: Professional Conduct Standards.”

Here’s why we think it matters to our clients and all investors:

The Institute’s Best Practices clarify exactly what it means to “put the investor first” and how you can identify whether you’re working with a fiduciary, who puts your best interests first.

At Fiduciary Wealth Partners (FWP), we are proud to commit to the Institute’s Best Practices for Professional Conduct. We believe these third-party standards further define how we can deliver Transparency, Simplicity, and Peace of Mind® to our clients.

Not All Fiduciaries are Created Alike

“Put the investor first” is a principle. It sounds good. It’s clearly the right thing to do. But it’s subject to interpretation. The words might mean one thing to one firm and something completely different to another.

This is clear: Not all wealth managers deliberate about what it means to “put the investor first.” Nor do they routinely scrutinize their own behavior for delivery on the promise.

In a recent study, the CFA Institute interviewed more than 200 investment management leaders and surveyed approximately 3,300 investment professionals. Researchers found that:

  • Only 28% of respondents report staying in the investment industry to help clients.
  • Another 36% believe that acting in their clients’ best interests implies taking on career risk.

The implication is clear. You might think you’re dealing with a fiduciary, but the CFA’s findings suggest you could be working with an advisor who is not focused on your best interests (please click here to read a story that our Managing Partner, Preston McSwain, wrote on this subject that was published by the CFA Institute).

Best Practices Define What to Expect from Fiduciaries

At FWP, we constantly assess what actions are mission critical to putting investor interests first. Prior to committing to the Institute’s Best Practices, we had already pledged the following fiduciary practices to our clients:

  • We don’t accept any payments from any investment firm (“pay to play”) or have any fee sharing arrangements of any type with an outside firm.
  • We don’t have arbitration clauses in our agreements
  • All performance is calculated by independent third parties
  • We are not affiliated in any manner with a third-party investment firm, broker-dealer, or custodian.
  • No outside firm has any ownership interest in our firm.
  • We don’t accept gifts from any third-party vendor or provider of any product or service.
  • We have given up the securities licenses that would allow us to take commissions from the sale of an investment fund, product or security.

Related to this last point, as Preston McSwain, the Founder of Fiduciary Wealth Partners says, “If we are honest with ourselves, it is the lack of opportunity that often keeps us out of trouble,”and by not being registered with a broker-dealer, FWP can’t accept commissions for the sale of a product or security to our clients, 12b-1 selling incentive fees or participate in “pay to sell” product offering schemes that are quite common on Wall Street.

We are proud of our fiduciary standards, but we respect the fact that independent third parties sometimes identify specific behaviors that improve what we are already doing and clarify what it means to “put the investor” first.

With this new set of fiduciary standards, FWP has formally updated our SEC advisor ADV form. It serves notice that we will now be governed by and held accountable to the Best Practices that Knut Rostad, the President of the Institute for the Fiduciary Standard, says, “demonstrate that [advisors] deserve clients’ trust, with guidance that is distinguished by clarity, transparency and honesty in both word and deed.”

Best Practices Show How You Can Identify Fiduciaries

The Institute released its list of 12 Best Practices on March 17, 2017, and FWP was one of the first advisers in the nation to subscribe. Hopefully these standards supported by top industry leaders such as Jack Bogle will create a blueprint that investors can use to evaluate whether wealth managers are putting their interests first.

To see the full list of Fiduciary Best Practices, to which FWP has subscribed to further our commitment to transparency, please click on the following link:

Our Fiduciary Standards

If you have any questions about fiduciary best practices or know of anyone who might have doubts about an investment advisor’s commitment to fiduciaries best practices, please call us at (617) 602-1900 or email Preston McSwain at preston@fwp.partners.

Perhaps Fiduciary Wealth Partners can help. If not, or if we feel that you are currently in good fiduciary hands, we’ll tell you.

More of our views on this subject can also be found by clicking on the following:

Transparency:  Does the Industry Protest Too Much?

How Should You Invest Now?

Trump wins unexpectedly.

What are we reminded of from an investment standpoint?

The chart above that we posted after the Brexit vote and will probably publish again someday.

We’re also reminded that uncertainty is relatively consistent and that, consistently, emotion leads us to make investment changes in the face of uncertainty at the wrong time.

Before the market opened on the day after the election, we had received at least 10 invitations to hear from leading Wall Street analysts and strategy professionals about what their crystal balls suggest investors should do now (more continue to come in and yes, the post-election-day stock market down 800 points before the open and rally to finish up approximately 260 points is creating graphs that look just like the emotion chart).

We are dialing into many of the calls because, we want to understand and respect what are sure to be differing opinions.

What else are we doing?

Striving to avoid making changes.

Why?

Not because we don’t believe we shouldn’t constantly be asking ourselves how we can be better.

But, because being better often means resisting overly tactical moves and sticking to a long-term plan.

Very consistently, and again last night, the following holds true:

  • Analysts and strategists are never in doubt, but often wrong.
  • Individual and professional investors make investment changes at the wrong time.

We have written about this before, so we are keeping this relatively short, but please click on the following to read more of our thoughts on the points mentioned above:

What Should Investors Do About XXXX?
(Changed the title because we are sure the message will be appropriate sometime again soon – includes the same cycle of emotions chart and links to data in other articles)

Chicken Fried & Cold Beer On A Friday Night
(Adding a smile here for the day and includes a list of “Don’t” bullets for Wall Street and investors to consider)

Importantly, know that we are here and available to lend an ear or answer any questions you may have.

Please call us at 617-602-1900 or email us personally at preston@fwp.partners or james@fwp.partners

All the Best,

Preston & Jamie

What Should Investors Do Now About Brexit? – Focus On What You Can Control

What should investors do now about Brexit (the U.K. vote to leave the E.U.)?

We continue to suggest that they follow the advice we published the day the Brexit vote was announced: Keep Calm and Carry On (click the link to read our recommendations).

Reflecting back on this week’s events, however, maybe we should have titled the piece, Focus on What You Can Control.

Why?

First, the vast majority of the haloed prognosticators you see on CNBC, etc. got the Brexit vote wrong. As I have written about many times in pieces such as Groundhog Day, the accuracy, or maybe I should say inaccuracy, of Wall Street estimates consistently reminds me of the saying, “Never in doubt but often wrong.”  To reinforce this point, John Authers of the Financial Times wrote the following today: “Populations across the world have lost faith in the expert guidance of professional economists.” (click here to read his full piece).

Second, you are likely to damage both your mental state and your portfolio if you make investment decisions based on all too common yo-yo like financial headlines such as the following from this past week:

  • The Brexit Danger
  • Dow, S&P500 on Pace for Best Week in 2016 Post-Brexit
  • Reasons Not to Chase Rallies Post Brexit

They remind me of the titles of the articles below that appeared only two days apart earlier this year:

  • “Wall Street rallies as Yellen’s comments suggest that the Fed is unlikely to raise rates.”
  • “Wall Street falls as the strength of payroll data suggest that the Fed is likely to raise rates”

The moral of both those stories should have been:

Remember, “projections are based on estimates” (yes, estimates based on estimates) and “assessments have a considerable amount of uncertainty” (both are recent direct quotes from Janet Yellen, Chair of the Federal Reserve – for more see Should You Treat Wall Street Forecasts Like April Fool’s Day Jokes?).

So, what should you be focused on that is within your control?

Your long-term plan, not the models or projections of others.

I know it’s hard to not get caught up in the emotion of the market, but try to remember the old saying, “Investors create 50-year floods every few years” (yes, it’s OK to smile when you think about the words “investors create”).

As was the case this week, when Brexit-like floods happen, my firm gets calls asking for our opinion about where the market will go next.

We don’t have a crystal ball, but we are always willing to make this prediction.

Whenever you see large market swings you will see:

  • Sensational headlines that are designed to catch eyeballs and sell ads, but that are often not conducive to good investing
  • Wall Street, which loves volatility, not missing out on the opportunity to sell a trade or product when emotions are high
  • Investors being sold short-term ideas that harm long-term returns

If and when these predictions come to pass, you might be wise to remember the tag line of the drug-related public service announcement from the 1980s, “Just Say No”.

To help, below is a graph that illustrates what all investors feel from time to time (professionals included).

Cycle_of_Market_Emotions3

To highlight this cycle, this week more than one person called us to ask if they should sell (last weekend and Monday and Tuesday).  These calls were followed by calls and emails from some of the same people at the end of this week asking when they should buy.  Yes, as many studies show and the graph above illustrates, investors have the tendency to sell low and buy high.

We aren’t sure what the next few weeks or months will bring, but along the lines of the picture above, at some point more “alarmed” comments will be published again.

When this happens, try to remember that even though it can seem boring, if you resist emotion and stick to your long-term plan, the slow and steady tortoise often comes out on top.

If you kept calm this week, you would have been “relieved” to find that the value of your portfolio had likely gone up. In addition, you would have avoided “frightened” selling for a loss (see the below graph of the last five days of price movements of the DJIA – the red circle represents the panic selling early this week).

 

WSJ

Source: Wall Street Journal

In-line with this week’s focus on the U.K., as long as you have a well-diversified, long-term plan that is designed to meet your goals, keep in mind the following age-old investing quote from a well known British writer:

“My ventures are not in one bottom trusted,
Nor to one place; nor is my whole estate….
Therefore, my merchandise makes me not sad.”

- William Shakespeare, Merchant of Venice

For more on our thoughts, including a more contemporary quote from my 11-year old son following a 500+ plus point market drop last year, click on the following.  It also includes evidence of just how unwise investors’ timing decisions have been.

Keep A Steady Hand On The Tiller

 

Preston McSwain is a Managing Partner and Founder of Fiduciary Wealth Partners, an SEC registered investment advisor committed to forming fiduciary wealth partnerships with clients, professional colleagues, and the community. To see more of his posts, and follow him on social media, please visit the following:

Twitter

Linked In

About.me

Personal Blog

Why Do Warren’s Words Carry Weight?

“When [Warren Buffet] talks, people listen.”

Those who are old enough might know that this is a play on the old E.F. Hutton ad.

Related to this, someone recently asked me, “How did Warren Buffett attain the admiration of top investment professionals and the investing public alike?”

I smiled and responded:

“The old-fashioned way, he earned it.”*

Warren Buffett has unique personal I.P that can be summed up in two words.

Experience & Respect

He has seen it all.  The good, the bad and the ugly.

Buffett is also a proven investment superstar who has not just talked the talk, but has walked the walk.  Versus a theory or hypothetical model, behind his words is a solid track record of success over many market cycles, which even other investing outliers look up to and value.

This is why it’s so powerful when the person whom many consider to be one of the best active investment managers of both public and private equity of all time says the following with respect to how his family trust should be invested:

“Put 10% of the cash in short‐term government bonds and 90% in a very low‐cost S&P 500 index fund” because “the trust’s long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions, individuals—who employ high fee managers.”

- Warren Buffett

   (see Can I Do Better? for references to instructions Buffett has given to the trustee of his family trust)

People do listen to Warren Buffett, but in spite of his consistent recommendations (click here for more of his advice to other superstars such as LeBron James) and the evidence (click here for the facts on historical performance of investment funds), much time, and investors’ money, continue to be spent on the search for shiny, new, complex and high fee holy grail-promising investment funds.

Maybe the title of my next piece should be:

Why don’t more people follow Warren Buffett’s advice?

 

*  See below for one of the best investment ads of all time.  Now if only the evidence showed that Wall Street investment analysts’ recommendations were consistently accurate (for more read Ground Hog Day).

 

Preston McSwain is a Managing Partner and Founder of Fiduciary Wealth Partners, an SEC registered investment advisor committed to forming fiduciary wealth partnerships with clients, professional colleagues, and the community. To see more of his posts, and follow him on social media, please visit the following:

Twitter

Linked In

About.me

Personal Blog

Chicken Fried & Cold Beer On A Friday Night

Can Investors Learn A Few Things From A Country Song?

Those of you who know me well know that I am from Alabama and that I still have some Southern boy in me.

Those of you who know a little country music may also recognize that the title of this post is based on a Zac Brown Band song, Chicken Fried.

The part of the song that inspired me to write this piece is:

“Well, it’s funny how it’s the little things in life that mean the most
Not where you live, the car you drive, or the price tag on your clothes
There’s no dollar sign on a piece of mind; this I’ve come to know”

It goes with the following chorus about what really matters most in life:

“Cold beer on a Friday night
A pair of jeans that fit just right
And the radio up
Well, I’ve see the sun rise
See the love in my woman’s eyes
Feel the touch of a precious child
And know a mother’s love”

Beyond my fondness for good country music, why is a wealth management guy quoting Zac Brown?

Well, if you stay with me on this, I promise to tie it all together in the end.

I probably don’t have to remind many readers that, unfortunately, the market is off to a rocky start this year. Understandably, some investors are concerned.

Based on my past experience inside big investment firms, how are some investment product managers and sales professionals likely feeling?

Giddy.

As I have written about before, Wall Street likes nothing more than a little fear and is off to the races marketing the latest impressively presented strategies designed to protect investors. I am getting multiple emails a day from large investment houses and asset managers selling low volatility funds, down-side protection trades and absolute return funds. The pitches all have implied promises of significant down-side protection, and some are even being sold based on attractive hypothetical returns (yes, was smiling when I wrote “hypothetical”).

The vast majority have little transparency, however, and, you guessed it, high fees that drive high profit margins.

I am not suggesting that all of the presentations are improper.

What I am saying is that our industry tends to make things too complex and does not give investors enough information about how products are created (translation, the real ingredients) and about how they work, especially when you need them the most (example: many broke down during the last financial crisis).

To be fair to the industry, many of these strategies, which are literally created by rocket scientists, are based on complex investment and economic theories. What is the key word in this sentence?

Theories.

The products tend to be designed based on models that strive to price how multiple investments, which themselves are priced based on multiple factors such as earnings estimates, interest rate and currency projections, and emotion, will perform in various market cycles.

Whew, yes, that was a mouthful.

What could possibly go wrong with complex models that rely on key words such as “estimates”, “projections”, “emotion”, “likely” and “multiple factors”?

Among the things that make me pause is that, when pressed over “a cold beer on a Friday night”, my ex-rocket scientist investment friends from MIT admit that their theories can, and likely will, break down from time to time based on market dislocations that can’t be fully factored into their models.

Getting back to Zac, my hope is that this is all starting to spark a few questions about what’s really important and what really adds value.

When I founded my firm almost four years ago, I spent a lot time asking questions about what adds the most value to clients. During conversations with many wealthy individuals and investment professionals, I was routinely reminded of the following comment from a long-time client:

“Preston, I hired you to help our family develop and implement an investment plan. I am very happy with the management of our investments but do you know what I have come to realize that I really pay you for? Transparency, simplicity and peace of mind.”

Yes, some might think I’m a broken record on this but, as an adviser to President Kennedy is rumored to have told him when he thought he was saying the same things over and over again:

“When you are at the point that you think you are going to get sick if you say it one more time, you have finally reached the point when many people hear it for the first time.”

Some folks seem to be hearing what the evidence consistently says:

Keep-it-simple index strategies can perform just as well, if not better, than complex approaches.

Investors are following the advice of Warren Buffet and David Swenson, the Chief Investment Officer of Yale*, and putting record amounts into index funds (see links to articles on Buffet and Swenson at the bottom of this post).

It seems that our industry still has some listening to do, however, as it continues to spend an enormous share of its time and money promoting complex products, such as multi-factor models, that are designed to protect against market down-turns and defaults (if this doesn’t sound familiar, go see the movie or read the book The Big Short).

To hopefully help, the following are a few “Don’t” bullets points for Wall Street to consider.

Don’t Make Investing A Competitive Sport

  • Each individual is different and can have unique goals
  • Winning in investing is reaching client specific goals, not beating the other guy who might have different objectives or appetite for risk

Don’t Sell Crystal Balls or Be A Sheep

  • As we all know, but don’t want to admit, Wall Street predictions are often wrong (see our recent Groundhog Day or Talking Heads blogs)
  • Resist the urge to run with the herd and easily sell what has been hot in the past or whatever is being currently promoted as the next great New New Thing

Don’t Avoid Conversations About The Bad or Ugly

  • Fully disclose the Good, the Bad and the Ugly
  • If clients understand the pros and cons of a strategy before implementing it, they will be less likely to change course at the wrong time when the going gets rough, which it will from time to time

Don’t Forget Taxes, Especially With Hedge Funds

  • Remember that a very large portion of hedge fund returns tend to come back to clients in the form of short-term capital gains
  • If your client is in the highest tax bracket, please adjust your return projections down by approximately 50% before making your pitch

Don’t Underestimate the Advantage of Liquidity

  • Individual clients are not endowments and generally have periodic liquidity needs for large purchases, gifts, and regular income
  • Place a premium on fully liquid investments
  • Remember that during the financial crisis many endowments found out the importance of liquidity the hard way when they did not have access to funds that they needed

Don’t Sell Anything That You Don’t Fully Understand

  • Do we really understand how complex strategies will perform over various market cycles?
  • No additional comments really needed

As you can sense, I am little cynical about how Wall Street sells the fear of missing out by helping to create what data suggest are relatively unproductive competitions to find and sell alpha.

Rather than taking the easy way out and simply selling relative performance and relative risk metrics, let’s spend more time listening to what clients want to achieve, and implementing strategies that are designed based on their goals, not industry models.

Related to this, I am not a big fan of active management, but as I recently wrote in What’s In A Name, if investing in an active strategy or working with a large brand makes a client feel more comfortable, and will allow him or her to stick to a plan more easily then, regardless of the relative performance versus an index, these might be the correct choices.

At Fiduciary Wealth Partners, we believe that by focusing on transparency and simplicity, our clients will benefit by being more comfortable with their investments, which in turn will increase the likelihood that they’ll stick to long-term plans during good times and bad (what many studies show is the key to long-term investing success).

Hopefully this will also increase peace of mind and allow all to enjoy a little more

“Cold beer on a Friday night
A pair of jeans that fit just right
And the radio up
Well, I’ve see the run rise
See the love in my woman’s eyes
Feel the touch of a precious child
And know a mother’s love”

 

*  Both Warren Buffett and David Swenson have repeatedly discussed the evidence in favor of index funds and consistently recommended index investing to individual investors.  See the following links for more information:

Warren Buffett To His Heirs: Put My Estate In Index Funds

Warren Buffett’s Advice to LeBron James: Index Funds

Unconventional Success: A Fundamental Approach to Personal Investment – David F. Swensen

 

Preston McSwain is a Managing Partner and Founder of Fiduciary Wealth Partners, an SEC registered investment advisor committed to forming fiduciary wealth partnerships with clients, professional colleagues, and the community. To see more of his posts, and follow him on social media, please visit the following:

Twitter

Linked In

About.me

Personal Blog

 

Don’t Let Your Portfolio Get Sacked

Are you ready for the big game?

Super Bowl 50.

The seasoned star, Peyton Manning, in what could be his final game, versus the new star, Cam Newton.

The only improvement from my New England perspective would be watching our Patriots this Sunday, but I am sure I will enjoy the excitment on the field and off, with the TV commercials and halftime show.

Beyond the entertainment of the Super Bowl, the NFL runs a business that generates exceptional returns. If marketing is your game, you could do a lot worse than to follow the lead of the NFL.

In investing, we can also learn a lot from some NFL stars.

How not to invest.

Star players run up impressive records on the field, but many stories exist of even combined Heisman Trophy, College National Champion and Super Bowl stars like Tony Dorsett failing in finance (Cam, if you win Sunday, read here and don’t let this be you).

Some might think spending is the problem, and in some cases you would be correct. More often than not, however, professional athletes make the same mistakes as many other investors.

A good article on this was published in Forbes titled, How To Lose $20 million. In the piece, a top sports agent made the following quote:

“What really gets these guys are not the cars, jewelry, or even houses, it is the big three – divorce, poor tax planning, and bad investments.”

I won’t make any comments on family issues, and I am not an accountant, but I will make a few quick comments on investing.

In our last post, Groundhog Day, I talked about the halo effect, which is a documented psychological bias we have to place confidence in people who are better known and deemed to be more intelligent, better looking, or more respected.

What marketing machine knows this well?

Wall Street.

Evidence consistenly shows that low cost, boring, simple investments such as index funds often outperform more complex strategies, but our defenses are constantly rushed with CNBC spots presented by professionals with halos. In the morning someone might say “buy”, but in the afternoon someone might say “sell”.

It is no wonder studies show that the average investor significantly underperforms the market due to emotional selling or buying at the wrong time.

According to research from Morningstar, the 10-year return of the average balanced fund (mix of stocks and bonds) for the period ending 12/31/13 was almost 7%.

What was the average return of investors in balanced funds over this same time period?

Approximately 5%, which represents a gap of 2% on average per year for 10 years.

The gap for investors in sector funds, which tend to attract more active traders, was even higher at over 3% on average per year for 10 years (click here for the full report and see the below chart).

morningstarSo, why so much focus on new investing plays?

Just as exciting calls on the field drive sales of TV ads and profits for the NFL, transactions and new products quarterbacked by haloed investment managers drive Wall Street profits.

I am not a fan of market predictions, but I did recently go on the record with the following:

If you see the market continue to have a difficult time, you will see

  • More sensational headlines that are designed to sell ads, but not conducive to good investing
  • Wall Street, which loves volatility, not missing out on the opportunity to sell a trade or a product when anxiety is high
  • Sales pitches for expensive downside protection products and hedging strategies

As I wrote about in Your Brain On The Market, if an investment coach is constantly recommending new schemes, especially during volatile times, “Just Say No”.

Next, as your own best general manager, consider firing the coach.

To help you defend again aggressive offensive moves, consider the following quote:

“Preston, what you need to understand is that I get paid to publish ideas that we can sell for a profit. If I don’t, the transactional brokers and management complain. I then lose my job. I learned a long time ago that it pays to feed the Street.”

I heard this one night over dinner from the Global Chief Investment Officer of a large international wealth management firm. I got to know this person well over the years and even though it was his job to help pitch active investment strategies, ironically he often said his belief in investing skill was very low. What did he quietly admit was often the best choice for investors?

Index funds.

Crazy you might say. Top investors don’t invest passively. They are active stars who have access to the best talent and top MBA draft picks. With their years of training and resources, surely they believe they can consistently post record stats.

Well, it has been my experience that many in the industry, especially off the record after an adult beverage, consistently say the following:

No.

What have a few investing superstars said on the record?

First, consider David Swenson, Chief Investment Officer of Yale’s Endowment.

Yale and other Ivy League schools might not produce as many NFL stars as my favorite SEC schools, but they do have some of the top endowment returns in the nation, and Yale consistently leads the division.

What does Swenson say in his book on personal investing?

“A serious fiduciary with responsibility for taxable assets recognizes that only extraordinary circumstances justify deviation from a simple strategy…”

You can read more on this in a piece that I wrote titled What Would Yale Do If It Was Taxable (yes, as Swenson and the NFL agent mention, don’t forget to factor in taxes).

Second, how about Warren Buffett?

Recently, he gave the following advice on CNBC to the NBA star, LeBron James.

“Everybody’s got an idea… [but] usually simplest is the best”

Buffett went on to say that athletes are often approached with investment ideas but that LeBron should “just make monthly investments in a low-cost index fund” (click here to read the full story). As an FYI, he also wrote in a 2013 Berkshire annual letter to shareholders that the trustee of his estate should do the following for the benefit of his heirs:

“Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals…”

So, before rushing onto the investing field, consider taking a time-out.

Don’t get by getting caught up in Super Bowl type investing hype, and don’t make investing a competition.

Is winning really defined by outperforming the other guy or is it about reaching goals on behalf of your family?

To avoid getting sacked by Wall Street’s marketing blitzes, stick to your long-term game plan and consider following the advice of investing superstars such as Buffet and Swenson.

As they have said, the evidence is clear on how to consistenly produce goal winning investment scores.

Keep it simple and consider more index funds.

 

Preston McSwain is a Managing Partner and Founder of Fiduciary Wealth Partners, an SEC registered investment advisor committed to forming fiduciary wealth partnerships with clients, professional colleagues, and the community. To see more of his posts, and follow him on social media, please visit the following:

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Groundhog Day

Crowds gather early in the morning to watch for what the future will bring.

The media is on hand for the latest predictions and they run stories with sensational headlines to engage their audience.

Men in coat and tie confer, hoist prominent prognosticators on high and loudly sing praises about their ability to predict the future.

Beyond the Punxsutawney Phil ceremony illustrated in the picture above, what was I just describing on this Groundhog Day?

Wall Street and the endless daily stream of chatter about morning futures and estimates about the direction of the financial markets.

Unfortunately, research suggests that the wizards of Wall Street often have about as much predictive power as the Wizard of Oz and as much success in predicting the future as groundhogs.

Just as it is might be hard to resist clicking on stories about Punxsutawney Phil and his predictions of Spring, it is hard to not get caught up in the emotion and allure of economic and market predictions.

As Patrick O’Shaughnessy recently wrote in his blog, The Investor’s Field Guide, “our brains evolved to recognize patterns, which creates the side effect that we are pattern junkies.” As he writes, “this pattern-addiction makes us obsessed with the future”, which is only “enhanced by the psychological bias known as the halo effect. The better known, more intelligent, better looking, or more respected an expert forecaster is, the greater the confidence we have in their predictions.”

As I have written about before, even Federal Reserve Governors and their economists are poor soothsayers (see the bottom of this article for related posts and research).

Below is a quote from a report published in February of 2015 by the Federal Reserve Bank of San Francisco based on a study of the Federal Reserve Open Market Committee’s Summary of Economic Projections (SEP):

“Over the past seven years, many growth forecasts, including the SEP’s…, have been too optimistic. In particular, the SEP forecast (1) did not anticipate the Great Recession that started in December 2007, (2) underestimated the severity of the downturn once it began, and (3) consistently over-predicted the speed of the recovery that started in June 2009.”

Some might say, “well, this not unexpected, the best minds are not in the public sector but in the private sector inside the best investment banks.”

My halo bias wants to believe this, but independent analysis of investment analysts’ estimates and projections paints a consistent picture.  They are also often wrong at the wrong time.

As an example, McKinsey & Company produced a study in 2001 about the accuracy of earnings estimates, which was then updated in 2010.  The following quote summarizes their findings:

“Analysts, we found, were typically overoptimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined.  On average, analysts’ forecasts have been almost 100 percent too high.”

The chart below is from the most recent 2010 McKinsey & Co. research paper. The light green line represents Wall Street earnings forecasts. The blue line reflects what actually happened.

Capture 3

Like Bill Murray could not believe during his groundhog day experience, surely we learned something during the last financial crisis and are not repeating things over and over the same way.

Well, just as recent experience has shown that political predictions are difficult, research on the accuracy of investment estimates continues to disappoint.

CXO Advisory recently published a report based on over 6,500 predictions made by 68 investment gurus covering the time period 1998 – 2012.

What did they find?

The accuracy of well-known investment strategy professionals, to include Jeremy Grantham and Abby Joseph Cohen, was only 47%, or worse than a coin toss (see the following for the complete study – Guru Grades).

Evidence suggests that market predictions aren’t worth much, but this doesn’t mean you should go into an investment hole during difficult, wintry market conditions.

If you have spent time developing a long-term plan that is based on your goals, and not the models of others, stay on course, or as we wrote about before, just Keep A Steady Hand On The Tiller.

So, if you see rough market shadows that make you feel like a groundhog, remember, history shows that market troubles eventually thaw, and that steady long-term investors are consistently rewarded.

And hey, if you want confirmation that I am correct, just read the stories out today about Punxsutawney Phil. He did not see his shadow, so the good times of Spring are definitely just a few weeks away.

 

More of Preston’s posts and research related to this article can be found at the following links:

Equity Analysts: Still Too Bullish – McKinsey Quarterly - April 2010

Prophets and Profits – McKinsey Quarterly – October 2001

If We Had A Chief Economist We Would Have To Pay Them – April 2015

Don’t Be A Sheep – May 2015

 

Preston McSwain is a Managing Partner and Founder of Fiduciary Wealth Partners, an SEC registered investment advisor committed to forming fiduciary wealth partnerships with clients, professional colleagues, and the community. To see more of his posts, and follow him on social media, please visit the following:

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Talking Heads

The picture in this post is from an album cover that was reportedly prepared for the band, The Talking Heads.

The theme of the blog is based on their album, Speaking In Tongues, and its hit single Burning Down The House (for an 80s throw back moment consider clicking on the previous link).

Earlier this month, the following headline came in on my email:

“Delusional Fed Could Trigger 40% Emerging Market Equity Correction”

I will avoid pointing out the well known investment professional who is reported to have made this quote, but as I just wrote in my last blog titled Your Brain On The Market, headlines like this from Wall Street talking heads don’t help investors make constructive decisions.  Often, they only create unneeded emotion and fuel irrational behavior that harms long-term returns.

As we have written about many times before, at the very least prognostications like this tend to be inaccurate (consider clicking on the following If We Had A Chief Economist We Would Have To Pay Them).

At worst, they are self serving.

How?

When I was a Managing Director at a large asset management firm, I sat in on media training with our senior portfolio managers.  What was the most important message PMs were told to reinforce in interviews?

“While in front of the camera, be sure to use the opportunity to talk up positions that you just bought to get the herd interested in buying them.”

Potentially along the lines of today’s “Delusional” comment, PMs were also told to talk down positions that they did not hold, which were part of their index or were large holdings of their competitors.  I actually witnessed portfolio management teams watch CNBC interviews and then cheer as they saw large numbers of buy or sell trades come across the ticker based on their colleague’s comments.

Related to this, consider the following two true stories from our Don’t Be A Sheep article:

#1 – The “Honest” Global Chief Investment Officer

Once, I was having dinner with the Global Chief Investment Officer of the firm for which I worked at the time. I was asking him why his monthly commentary and the first few sections of his team’s glossy monthly wealth management publication were becoming more and more short-term trade (consider the advantages of shorting currencies, etc.) and active manager oriented, especially based on the fact that he spoke often about how he had most of his personal money index funds.  After a little wine, he admitted that most of the pieces would likely not add any value and that some, such as hedging recommendations and currency calls, were quite risky.  He then said,

“Preston, what you need to understand is that I get paid to publish ideas that we can sell for a profit.  If I don’t, the transactional brokers and management complain.  I then lose my job.  I learned a long time ago that it pays to feed the Street.”

#2 – The “Honest” CEO and Global Head of Alternative Asset Management

In the process of trying to get good insight into a competitor’s hedge fund portfolio for a prospect presentation, I went to the CEO of my then-company. Previously, he had been the Global Head of Alternative Asset Management for the firm that had created the hedge fund portfolio I was analyzing. Perfect, I thought, he led the group that created all of the products.  After I gave him a brief overview, he smiled and said,

“Preston, you’re thinking too much.  You are correct, the performance of the portfolios has been bad.  We had a great brand though, an even better Ivy League MBA sales team, and we knew it.  So, we looked at products one way. If we could sell them, they were good.”

I could go on and on about this, but reaching back again to our last post, don’t let your brain get flamed up by stock market commentators or marketing presentations.  Remember, market flames fueled by sensational quotes and headlines can burn down your investment portfolio.

 

Preston D. McSwain is a Managing Partner and Founder of Fiduciary Wealth Partners, an SEC registered investment advisor committed to forming fiduciary wealth partnerships with clients, professional colleagues, and the community. To see more of his posts, and follow him on social media, please visit the following

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