Date-based Performance

April 4, 2017

It’s hard to believe that spring is finally here. Spring “officially” began this year on March 20th, though here in the Detroit area, the temperature that day was only 38°F—barely spring-like. Friday of that week, the 24th, was decidedly more spring-like, with a high of 75°F. The difference between those temperatures is the topic of this month’s letter.

As investors, we often peg performance based on specific dates, whether it is the quarter or the year, usually beginning on the first day of the month. Last year provides an excellent example as to why the somewhat arbitrary nature of choosing the first day of the month can dramatically affect our perception of performance. Here’s an example using two clients with the same moderate portfolios (69% stocks 31% bonds): Client A has beginning date of January 1st through the end of last month and shows an increase in value of 8.71%--not bad. But Client B has a start date just 16 days later (eliminating the worst start for the Dow in history), and he would have seen an increase in value of 15.62%--nearly double the performance of our start date of January 1st. The portfolio is exactly the same, but by simply changing the day we begin, our perception of the portfolio’s performance is drastically altered.

Now some of you may counter, “You’re always telling us that we shouldn’t pay attention to short-term performance though.” And that’s true! But here is another important thing to consider: Regardless of performance going forward, over the next 5, 10, 20 years and beyond, Client A’s inception to date performance will never match that of Client B’s simply because of the difference of two weeks in their respective starting dates. The point is, constructing and evaluating portfolio has more to do with a long-term strategy than simply looking at performance, it should reflect your particular goals and situation.

Thanks for reading this month’s post. If you have any questions regarding this or any other investment related topic, or if you’d like to go over your portfolio’s performance, please get in touch—we love hearing from you. Have a great spring!

Disclaimer: Investments in securities do not offer a fixed rate of return. Principal, yield and/or share price will fluctuate with changes in market conditions and, when sold or redeemed, you may receive less than originally invested. No system or financial planning strategy can guarantee future results.

Buy Low, Sell High: Truth or Superstition?

October 24, 2016

Greetings and happy October, we hope this post finds you well. It seems that around Halloween, we tend to get a little superstitious. Black cats, full moons, and bats all become a little scarier this time of year. As investors, one thing that tends to spook people is when the market reaches an all-time high. Intuitively it seems logical to want to sell when the market is at its peak, after all “Buy Low, Sell High” is the mantra, but is there any truth to that, or is it simply superstition? Below is a table showing the performance of the Dow Jones Industrial Average following an average of all record high days vs. an average of all other days:

Dow Jones Industrial Average Performance (Annualized):
Time Period: 2 Months 3 Months 6 Months 1 Year 2 Years
After Record Highs 7.12% 7.23% 7.23% 7.39% 7.18%
After All Other Days 9.78% 9.54% 8.29% 7.64% 5.88%

As you can see, on average, during the short term (6 months or less), a non-record day outperforms a record day making it seem like maybe the superstition is true, but the gap narrows over time. Looking at 1 year after a record high day, on average the Dow is up 7.39% while the increase for all other days is 7.64%. Looking at 2 years after a record high day, the Dow actually performed better (7.18% higher) than a non-record day (5.88% higher).

What can we learn from this? A few things. One, markets are rational. A record high is only a record relative to where the market has been previously. Second, there is no lasting effect from what is an “all-time high” on any given day, we should always be looking forward not at past performance. Third, and most importantly, the right time to invest is today, regardless of where the market is on any given day. Trying to time the market on a low point or a high point may result in missing the growth the market can provide. Bottom line: Don’t fall for superstitions when it comes to Halloween or when it comes to investing.

If you have any questions, please don’t hesitate to get in touch.

Fiduciary Rule and Market Update

May 19, 2016

Despite the lobbying efforts of many in the financial services industry, we are happy to report that the Department of Labor has issued new rules taking effect in 2018 that will require financial advisors handling retirement account to act as fiduciaries. As you may recall we talked about this in 2015 and encouraged our clients to make their opinions known about these rules, so if you participated, congratulations are in order. We are proud to join with the Certified Financial Planner® Board as well as the Financial Planners Association in supporting this rule.

Clients that have been around long enough know that we started meeting the fiduciary standard for our advisory clients way back in 1997. The final details as to how this will affect our business going forward are still being hammered out by the DOL and the Obama Administration, but we don’t anticipate radical changes—unlike many brokers that are used to only meeting the suitability standard.

In other news, 2016 has been an interesting year so far as investing goes. The year got off to a pretty ugly start, with the first 10 days of the year being the worst in the Dow’s history. Since then we’ve seen strong performance in nearly all asset classes, although we seem to be nearly overdue for international equities to begin outperforming domestic ones. It is not a question of if the current cycle of U.S. stocks outperforming International ones, it is a question of when. There is no denying that since 2011, U.S. stocks along with a strong U.S. dollar have kept returns from International Equities below U.S. Equities since 2011, and is being felt in all of our portfolios and has been a concern of many clients recently. From 2013-2015, Large U.S. stocks vastly outperformed International ones which for many clients has led to a belief that their own portfolios will continue to underperform because of their international holdings. But we don’t have to look back very far to see the flip side of this argument. Going back just a few years, from 2003-2007, just the opposite was true. And by the same token, that performance is reflected in our clients’ portfolios that have been around long enough—a pattern we are confident will repeat itself. Trying to anticipate when one cycle will end and another will begin is where many investors (amateur and professional) make their mistake. One can get lucky occasionally, but not consistently over time which will ultimately affect returns. We remain steadfast in our belief that patience with broad diversification and asset class investing will prevail over the long-term which is why as investors ourselves, we are not making changes to our own portfolios that are invested the same way as our clients.

In behavioral finance (the study of why investors make the decisions they do), there is a concept called Recency Bias, which is the tendency to think that trends or patterns we observe in the recent past will continue in the future. This bias can cause irrational behavior and even advisors are not immune to its effect. We know our investment philosophy works. We have the data to prove it. Yet when we look at portfolio performance over the last couple of years, it does make us question whether we are doing the right thing or not. That’s Recency Bias at work. We feel the need to do something and we know our clients (even if they don’t contact us) are expecting us to react, but what times like this prove is that being passive is not the same as being weak. To give in to that bias, to react irrationally, to try and chase after returns in other asset classes is weak. Strength and discipline are what will prevail, and as your advisors, we remain committed to providing that to you.

My apologies for the length of this month’s post, we felt that this was important enough of a topic to justify it. As always we are more than happy to discuss this or any other investment related topic with you, please feel free to get in touch. Thanks for reading and have a great May.


March 24, 2016

Greetings. We hope you’re keeping warm this month, hopefully we are across the halfway point for winter weather. Once a week, I try to attend an early morning yoga class. I’m pretty terrible at it to be honest, but one of the things that I do like is that I get to work on is balance. And it just so happens that’s the topic of this month’s letter, though in this case I’m referring to re-balancing. The interesting thing about trying to balance in yoga (for me, at least—I’m sure any experts may disagree), is that I find it to be much easier to instead of looking at my feet or the ground, to instead look at the horizon. Focusing on a point in the distance makes it much easier to hold those poses for longer which (surprise!) is also true when it comes to our portfolios.

For those that don’t remember, re-balancing is what enables us to follow the Investing 101 principle of “Buy low, sell high.” In its most basic form, this is how it works: Suppose you have a hypothetical portfolio worth $200,000. This portfolio is allocated with 50% stocks, 50% bonds, so $100,000 in each asset class. Over the course of a year, suppose stocks have a good year and go up by 10%, so now there is $110,000 in stocks and $100,000 in bonds. Intuitively we might say, “Well, stocks are doing well so we should put more money in stocks, right?” But would that follow the Investing principle listed above? The answer is clearly, no. Rebalancing enables us to bring our portfolios back to their intended allocation, in this case selling stocks (selling high) and purchasing bonds (buying low) to bring us back to a 50-50 mix.

What does this mean to you? Many clients often ask during times of market volatility, shouldn’t we do something? The answer is yes, and we are. As your portfolio drifts we are of course monitoring market conditions, but more importantly, we are rebalancing. Stocks are priced lower than their previous highs, so what do we do? We buy more. Instead of fleeing to the “safety” of bonds, we sell them to purchase stocks and restore our intended allocation. Over time this will help reduce our exposure to risk and can even offer potentially increased returns. Just like in yoga, focusing on a distant point (our long-term investment goals) helps us maintain our balance.

Thanks for taking the time to read this month’s letter. If you have questions about rebalancing or any other investment topics (but please not about yoga), please feel free to get in touch.