Oil, innovation and your financial future

Innovation is having a tremendous impact on capping the future price of oil and gas, which is very positive for the economy and your financial future.

The national average of gas is around $2.40 per gallon. A large increase in the price of gas would have a significant negative financial and psychological effect on US consumers and the US economy.

However, due to technological innovations, we do not think there will be permanent or long term significant increase in the price of gas.

Throughout the economy and world, we continue to stress the importance of innovation, and the resilience and abilities of companies and industries to adapt and change. We are rational optimists. What has occurred within the oil industry is another positive example of this.

The recent range of around $45-55 per barrel of oil is likely to remain or be capped on the upside. There may be temporary periods above this range, but technological innovation and cost cutting in hydraulic fracking, horizontal drilling and other techniques continue to make US producers more profitable, even at lower oil prices. If the price of oil increases suddenly, then US producers will increase their production and prices would fall.

What does this mean to you and your financial future?

  • If the price of oil and gas are not likely to increase significantly, that limits a major potential factor of future inflation. Gasoline is a major cost for most individuals. Oil and related products are key raw materials for many industrial and consumer products.
    • This is all positive for your financial future in the long and short term.
  • When we invest in stocks, we recommend broad diversification. We do not recommend placing major bets on specific industries or sectors.
    • The significant innovations in the oil industry and the resulting reduction in oil prices increase the risk, or limit the relative upside, of many oil and gas-related stocks and master limited partnerships.
    • While oil and gas companies may be profitable, stocks in other industries may outperform oil related stocks over the long term, as other industries may have greater pricing power or growth potential.

The background

In past decades, OPEC countries could dictate and control the price of oil, and thus the price of gasoline. This caused major inflation and very negative economic impacts in the 1970s. This may no longer be feasible, as US producers are part of a free market economy.

The price of oil has been in a range around $50 per barrel since August, 2015, almost 2 years. OPEC countries want to gradually raise oil prices. They have been trying to cut back production to raise oil prices in recent months, but their efforts have been mitigated by US producers.

US technological innovation in fracking and shale production are offsetting the OPEC countries efforts to increase the price of oil. The major benefit of this to the economy and you is a “cap” on oil and gasoline prices has developed. If correct, this limits future inflation, as oil and gas are key components of inflation.

US oil production has been increasing in recent years and has surged to a record of almost 10 million barrels per day. If OPEC tries to cut their production to cause oil prices to rise, then US producers will pump more oil, as it becomes more profitable for them to do so. As oil prices are based on supply and demand, if OPEC cuts and the US producers pump more, then oil prices are likely to stay within a range or even go down.

From an investment perspective, rapid technological innovation has drastically changed the nature of the energy sector and investing in this area. Rapid change and innovation are impacting so many other industries. Trying to predict these changes and which companies will succeed or face challenges is difficult or many times impossible, especially over the longer term.

The rapid pace of change makes our investment philosophy of asset class investing and broad, global diversification all the more applicable and appropriate.

Change and innovation will continue. Our investment style is consistent with your goal of having a successful investment experience and meeting your financial priorities.

We want to wish each of you a happy and peaceful Memorial Day weekend. We hope that you take time to consider the sacrifices of current and past service members, who enable us to have so many of the freedoms that the United States uniquely enjoys. 

For further reading on this topic, I highly recommend the following articles (paywall may be in place):

 “OPEC, Fighting Market Forces, Extends Productions Cuts” The New York Times, May 25, 2017 Stanley Reed

“How American Shale Drillers Flipped OPEC’s Script” The Wall Street Journal, May 24, 2017

Lynn Cook and Benoit Faucon

Why You Should Have A Written Investment Plan

This is a financial recipe for long term investment success.

  • Have a written Investment Plan.
  • Understand it.
  • Make sure it is adequately diversified
  • Stick to it, in both up and down stock markets.
  • Rebalance and review as needed.
  • Repeat.

All our clients have a written investment plan, which they have signed and agreed upon.

A written investment plan does not need to be extremely long, but they serve many purposes. We call ours an Investment Policy Statement (IPS).

All investors should have a written investment plan because they provide clear direction, guidance and discipline for all of your investable assets, including assets in a 401(k) plan.

Having a written investment plan provides you with confidence and a greater sense of peace of mind. Our clients can understand why we are structuring their portfolio as we do, as we have already discussed it with them. We do not make major moves because some analyst in NY thinks now is the time to get into energy stocks or invest more Europe. We have a plan. We have talked about it. And we adhere to it.

Rather than accumulate a bunch of overlapping mutual funds or a collection of individual stocks over the years, buying this hot one and that sector the next year, having a written plan allows you to have a comprehensive, well diversified portfolio for the long term that is aligned with your financial goals.

As a traveler going to a new city, you would use your phone’s mapping app or car’s GPS to guide your way from point A to point B. For an investment portfolio, an investment plan provides similar benefits.

The IPS that we develop provides an agreed upon asset allocation of how much to invest in stocks, fixed income and cash, based on each client’s specific personal needs.

The investment plan describes how the portfolio will be very diversified by asset classes, both within the US and globally. We set limits for each asset class, to minimize the risk of over exposure to certain sectors or asset classes. For example, through the investment plan and the underlying mutual funds we utilize, a client would not incur the unnecessary risk of too much exposure to a certain industry, market sector or geographic region.

A written investment plan provides discipline for buying and selling decisions. We “rebalance” a portfolio when a certain asset class, such as US small value, performs very well, such as in 2016. If that asset class exceeds it target allocation, we consider selling a portion. We would then evaluate the overall portfolio to reallocate those dollars into fixed income or a stock asset class which is below its target weighting. This discipline of rebalancing, which we have adhered to since we started our financial advisory firm, leads to buying low and selling high, without the guessing.

We revise Investment Policy Statements over time as events occur in your life or as you progress towards your financial goals. As you get older, you may become more conservative or accumulate adequate assets so that less stock exposure is prudent. These are valid reasons to change your overall investment policy.

We do not recommend changing one’s investment plan because of market conditions or predictions about the future of the stock market. All too often, this is emotionally driven and not in your best interest. These may be reasons to have discussions with us, but not necessarily to make major changes to your long term financial plan.

Some investment concepts are fads. Having a written Investment Policy is not a fad, it is an important, evolving document for your entire financial life.

Like a great recipe, if an Investment Policy Statement is prepared well and followed, it will provide a good outcome.


Being Adequately Prepared

Boaters prepare and practice for emergencies. The Boy Scouts motto is: be prepared.

As investors, we all need to be prepared.

As we discussed last week, the long-term average annual return of US large company stocks is 10%

However, each year’s return generally varies from this 10% average. One year may be up, the next may be down. There are years of small gains and others with large losses. Stocks can go down for month after painful month, with seemingly no end in sight.

This is the inherent risk in owning stocks. This is the fear factor. The reality is that broad stock markets can lose 20%-30%-40% or more in a year or two. Individual stock losses can be even worse.

This is why we work with you to develop an appropriate asset allocation to stocks, so that you can emotionally and financially handle the temporary losses (stock market declines) that will be incurred over time.

Let’s focus on two key points:

  • Temporary losses (declines)
  • Declines will occur at various times.

To be a successful long term investor, you need to be prepared for the extent of the declines which will likely occur in the future, just as they have in the past. The timing of the declines are not predictable, just as it is not possible to accurately predict when the gains will occur.

         We do not recommend doing this.

The declines will only be temporary, even though it does not feel this way in the midst of a significant market downturn…unless you panic and sell all of your stocks and go to cash.

Despite periods of temporary losses, the long-term trend of broad stock market averages is clearly positive. To get to that 10% average annual return I cited earlier, the down years are included.

Historically, there are far more positive years than down years. This is why it is rewarding to remain invested in stocks.

However, at some point during most years, there are intra-year declines of (10-14%), on average. This happens even in years which turn out to be very good ones. For example, last year was a good year for stocks and there were two periods of significant declines. You need to be prepared to handle these types of declines every year.

But wait. There’s more. And it’s worse. On average, there have been major declines of greater than 20% every 5-6 years since World War II.

So why are we reminding you of this vital historical information?

We are providing you with this information so you will be better able to handle the future temporary declines when they occur, as they can’t be predicted. But we know they will occur. We know there will be some kind of crisis. It may be caused by a political or economic event. It may be a “correction,” which is just a natural decline in stocks, on the stock markets’ long-term climb to higher and higher new highs.

We want you to be emotionally prepared for these temporary declines, so you can follow our advice and remain invested according to your investment plan. Remember, US stock markets, as well as International and emerging country stock markets, are made up of individual companies. These companies have real worth, assets, earnings and the ability to adapt.

When the markets declined in 2007-2009, some companies did go out of business. But in a broadly-based globally diversified portfolio such as we recommend, the broad decline was temporary. The vast majority of public companies and their stocks recovered and rebounded to much higher levels than before the crisis. The rebound began much before most people were confident in the economic recovery.

When the next downturn or crisis occurs, we must remember these lessons and facts.

And when the downturns do occur, and they will, we will be here to discuss and reinforce these concepts. We will provide you with the confidence to stay invested. That is exactly what we did for our clients during 2007-2009.

This is our role. This is our value. We are here to be truthful and realistic with you. We want you to be prepared.

We hope this is truly helpful to you and your family, today and in the future.

A better way to invest in stocks

Our goal as a financial advisory firm is to provide you with a positive investment experience so you and your family can meet your unique financial and life goals.

To assist you as a successful investor, our firm has a set of investment philosophies and beliefs which we adhere to. These principles are based on evidence and historical data, not on forecasts or crystal balls.

It is important that you understand that the structure of your stock investments is based on the following evidence, which guides our advice:

  • Large US company stocks have averaged approximately 10% annual returns over many decades.
  • Small US company stocks have averaged approximately 12% annual returns over many decades.
    • Thus, as small company stocks return more than large company stocks, we allocate or tilt towards small stocks, to provide you with greater expected returns over the long run.
  • Value stocks outperform growth stocks over the long term.
    • Thus, we allocate more towards value stocks than most others, as this should provide you with greater expected returns over the long run.
    • Further, we recommend small value stocks and allocate away from US large company stocks based on this data of greater expected returns.
  • International stocks (companies based outside of the US in developed countries) outperform US large company stocks over the long term.
  • Emerging market stocks, which are companies based in lesser-developed countries of the world, outperform US and developed company stocks over the long term.
    • As International diversification provides greater expected returns as well as smooths out the volatility of just owning large US company stocks, we recommend a healthy allocation of non-US based stocks.
      • See blog post dated April 13, 2017 on the benefits of global diversification.
  • We implement our stock investment strategy primarily using asset class mutual funds because the type of funds we use give you the best chance to perform better over the long term. In an uncertain world, these type of stock funds provide you a greater chance of better returns than “actively” managed mutual funds, hedge funds or a set of stocks that most people hold.
    • See blog post dated April 6, 2017 for recent data on the underperformance of active money managers.

This does not mean that small stocks will always outperform large stocks. This does not mean that value stocks will always outperform growth stocks. We know and expect that these expected return premiums will not occur every year.

But we do know that these asset class return premiums have existed over many decades of historical data, some dating back to the 1930s.

For example, small and value stocks vastly underperformed large company stocks in the late 1990s. Then small company and value stocks far outperformed large growth stocks for years after.

Last year, US small value stocks far outperformed large US company stocks. This year, International and emerging markets are outperforming all US asset classes.

We cannot predict which asset classes will do the best over a year or even over a number of years. No one can.

We will monitor and follow the historical data and academic evidence which should provide you with the greater expected investment returns over the long term. We will remain disciplined and regularly rebalance your portfolio, so that your exposure to these asset classes remains in line with the investment plan we develop for you.

We are confident that managing portfolios in this manner provides our clients with significant benefits and leads to successful investment experiences.

Trump’s Tax Plan: Our Initial Thoughts

President Trump and his economic advisors released broad outlines of their tax plan on Wednesday. Our purpose in this blog is to provide an overview of the potential changes and some planning concepts that may be applicable.

  • This is a very preliminary plan which does not have many specific details. More importantly, to get tax legislation passed and enacted into law is a difficult process. The actual law, if enacted, may be quite different than these concepts. You should not make actual decisions or actions based on this plan, until a law is enacted or legislation is much closer to reality.
    • Planning point: there has not been a discussion of an effective date of these proposals. We assume it would apply to 2018, but we will keep you informed. In general, if tax reductions are enacted that apply to 2018, specific strategies would make sense by this year-end.
  • Tax rates should be dropping: They have proposed three individual tax rates (10%, 25% and 35%) from the current seven tax brackets, but have not defined at what taxable income levels they will apply to. The top rate would drop to 35% from the current rate of 39.6% for married couples with income above $470,000.
    • Planning point: if applicable beginning in 2018, you would want to defer income, if possible, to 2018 and move deductions forward into 2017.
      • If rates do drop for 2018, and your income is expected to be unusually high in 2017, you may want to consider strategies like large charitable contributions in 2017 to a charitable foundation or specific charities.
  • The key are the details, what goes away: While tax rates are expected to decline, deductions such as state and local income taxes, property taxes and miscellaneous itemized deductions are eliminated in the proposal. Some of the reduction in tax rates may be offset by eliminating deductions.
    • Planning point: if the above items are eliminated for future tax years, it would make sense to prepay state income taxes, property taxes and itemized deductions in 2017.
    • As proposed, deductions for mortgage interest and charitable contributions will remain the same.
  • Increase in standard deductions: The plan would double the standard deduction, so fewer taxpayers would need to itemize. This simplification makes sense.
    • Planning point: If this was enacted and impacted you, we would encourage you to pre-pay items which would not be deductible in the future, to get the tax benefit in 2017.
  • Repeal of Investment income tax: There is a 3.8% surcharge tax for couples with taxable income over $250,000 on investment income, such as dividends, interest and capital gains. This is proposed to be eliminated. If enacted, this would be another significant tax reduction to those taxpayers.
    • Planning point: As this gets discussed further, the timing of capital gain transactions should be monitored. If enacted for next year, it would make sense to take losses against gains this year and delay some capital gain sales until 2018. However, we would caution anyone to delay stock sales into the future just to save a 3.8% tax, as stock prices are much more volatile and the price movement is more relevant than the change in this tax rate.
    • There has not been any proposal discussed to change the actual capital gain tax rate, which is 20%, not counting the net investment income tax above.
  • Repeal of AMT: This would benefit those who have high deductions or large capital gains, which tend to reduce their federal tax below the AMT tax base. Both the House and Trump plan call for the AMT repeal.
  • Repeal of Federal Estate Tax: Both the House and Trump plan call for the repeal of the Federal estate tax. However, based on how the legislation is enacted, this could likely be temporary for only 10 years, if the legislation is not “revenue neutral” and passes Congress through the reconciliation process. We have not seen any discussion as to whether the step up in basis of assets upon someone’s death will be changed.
    • Planning point: If the estate tax repeal is not permanent, depending on your age and health, you should not make major changes to your estate planning. Remember, the estate tax could be repealed and then enacted again in the future.
    • Planning point: If repealed, for those with large estates (couples with estates above $11 million), there may be planning opportunities if you are impacted by the Generation Skipping Tax or would consider gifts to grandchildren.
  • Reduction in corporate tax rate: The Trump plan calls for lowering the corporate tax rate from 35% to 15%. The House plan calls for a 20% corporate tax rate.
    • A major topic will be the impact on pass-through entities, such as partnerships, master limited partnerships and LLCs, whose income is passed through to individuals and taxed at each person’s respective tax rate. If enacted, this pass-through income may be taxed at much lower corporate rates than the higher individual income tax rates.
    • Planning point: If enacted, this will be an area of significant tax planning for all types of businesses and earners.

As we are financial advisors who are also CPAs with strong tax backgrounds, we are uniquely qualified to provide you with comprehensive financial advice during periods of significant tax law changes.

We will keep you updated through this blog, as these proposals become closer to legislation which may be enacted. If you have specific questions, please contact us.

10 Things You Should Know

  • Economic forecasts and stock market movements are often not the same. Even though most people think the US economy is stronger than Europe’s, International stock markets are doing better than US stock markets so far in 2017.
  • Expect the unexpected. Conventional wisdom frequently is wrong.
    • It does not look like corporate or individual tax reform is going to get completed in the coming months. There are no real proposals on the table. The initial goal of Labor Day looks unlikely. Will this get done by year end?
  • To be a successful investor over the long-term, it helps to have a clear and consistent investment philosophy. This is why we develop written investment policy statements for all of our clients.
  • Interest rates are very hard to predict. Short term rates have increased. Longer term rates have gone down, despite nearly all forecasters predicting the opposite at the beginning of 2017. This is why we don’t make interest rate bets with your fixed income investments.
  • The price of oil continues to fluctuate around $50-55 per barrel. There was a large price decline this week, as US shale oil production continues to increase. Output is expected to rise by 124,000 barrels a day in the US during May. Rig count has risen 13 weeks in a row and is at a 2 year high.
    • US production puts a cap on oil and gasoline prices, which is good for US consumers and companies that use oil to produce goods. Not so good for oil and related companies.
  • Uncertainty is the only certainty. By investing in broad based index-like funds which we recommend, you are better able to handle uncertainty.
  • The following statistics are startling and provide further confidence in our stock investing philosophy of using globally diversified asset class funds, which track various benchmarks:
    • In a just released SPIVA US Scorecard** report, during the 5 years ending December 31, 2016, 88% of large-cap managers, 90% of mid-cap managers and 97% of small-cap managers underperformed their respective benchmarks.
    • During the 15 years ending December 31, 2016, the same report showed 92% of large-cap managers, 95% of mid-cap managers and 93% of small-cap managers underperformed their respective benchmarks.
    • If you are not a client, do you know if your fund managers or your individual stock portfolio are underperforming or out-performing their respective benchmark?
  • Some investors hold individual stocks long-term because they value the high dividends the companies pay. However, the dividends can come at a huge opportunity cost, if the underlying stocks vastly underperform major benchmarks over the long term. Investors in IBM, Verizon, American Express, Coke, many utilities, and energy related stocks and limited partnerships would have been far better off financially with broader investments, even though they would have received less in dividends.
    • For example, these companies have dramatically underperformed the S&P 500 over the past 5 years: IBM (15%) per year, Verizon (4.2%) per year, American Express (6.6%) per year, Coke (7.6%) per year and Enterprise Products Partners, a major oil and gas infrastructure firm (7.5% per year).
  • Sometimes stock market valuations do not make sense. Tesla produces a tiny fraction of the cars made by Ford or GM, yet Tesla’s stock market capitalization is more than each company. Tesla’s Gigafactory being built in Nevada will be the world’s biggest building, with over 5.5 million square feet, or approximately 100 football fields. We won’t know for many years whether Tesla will be successful or not, or the future direction of its stock. By being broadly diversified, you can benefit from its success or not be dramatically hurt if the stock does poorly.
    • One of the benefits of our investment strategy is broad diversification and not having to make individual stock decisions like this. Around 1999-2000, when Amazon was taking off, I never thought its stock price made sense. It always seemed highly overvalued. However, through the phenomenal growth of its Amazon Web Services and online sales, it became profitable and investors have benefited.
  • The long-term historical perspective which we provide as advisors can help you to be more financially successful. It is how you can be rational in the face of uncertainty and deal with the onslaught of news events and the rapidly changing world.
    • Perspective, planning, discussions and comprehensive advice on topics such as investments, tax management, charitable giving and estate planning all provide you with peace of mind and security.
**Source: Spiva US Scorecard Year-End 2016, produced by S&P Dow Jones Indices.

Benefits of Global Diversification

Are you globally diversified? We hope so.

Should you be? Yes, we strongly recommend it.

What does globally diversified mean?

If you own only large US based companies, with business operations around the world, does that count as globally diversified? No, as stocks based outside the US sometimes perform differently than US based stocks. 

  • Being globally diversified means owning companies throughout the world which are based in other countries.
  • We recommend that approximately 30% of your stock portfolio, depending on your personal circumstances, should be invested in companies based outside of the US.

Why is this so important? Because based on data since 1970, the returns of a globally diversified portfolio, allocated to various asset classes and with approximately 30% of the portfolio based outside of the US, would have outperformed the S&P 500 by a margin of 4 to 1.** 

Let me explain that again, so it is very clear.

  • If you had invested $1 in the S&P 500 in 1970, you would have had $100** at the end of 2016.
  • If you had invested $1 in the “Dimensional Global Balanced Equity Strategy (the Diversified Portfolio) in 1970, you would have had $400** at the end of 2016.
  • Don’t you think broad global diversification is worth the difference between $400 and $100?

Diversification requires discipline. Diversification means that some years the S&P 500 will outperform such a Diversified Portfolio. But being broadly and globally diversified, with exposure to small, value, international and emerging market stocks means you will have a greater opportunity for a more desirable outcome.

  • Based on this analysis, the S&P 500 did better than the globally diversified portfolio in 18 years.
  • However, the globally diversified portfolio outperformed the S&P 500 in 29 years, or nearly 62% of the annual time periods.
  • The globally diversified portfolio outperformed the S&P 500 in 84% of the overlapping 10 year periods between 1980 and December, 2016.**
  • While the expected returns of a diversified portfolio should be beneficial, the rewards sometime require patience.
    • During the 1970s, the globally diversified portfolio outperformed.
    • During the 1980s, the globally diversified portfolio outperformed.
    • During the 1990s, the S&P 500 far outperformed.
    • From January 2000-December 2009, the globally diversified portfolio outperformed.
    • From January 2010-December 2016, the S&P 500 slightly outperformed.

The globally diversified portfolio in this analysis is representative of the portfolios we recommend for our clients, which means they include asset classes like the S&P 500, as well as significant allocations to US large cap value, US small cap and small cap value, US real estate, international value, international small cap value, emerging markets and emerging markets value and small value. The portfolio would also be regularly rebalanced, to maintain the appropriate allocations between asset classes.

While this presentation may be new, the concepts are not. These are some of the guiding principles we have used to construct portfolios since founding our firm in 2003. We have adhered to these principles of global diversification and allocations to small and value stocks. They have proven the test of time, both in the real world as well as in academic data.

Information like this should give you confidence, as we base our recommendations and advice on real data, not on crystal balls or guesses about the future. As the world is changing so rapidly, our approach to investing should help you feel more secure. And be financially rewarding.

We know there is no such thing as a free lunch. But in the financial markets, being globally diversified across asset classes is as close to a free lunch as you can get.


**Source: For this essay, all data presented is based on Dimensional Fund Advisor presentation titled “The Case for Global Diversification” which is available upon request. Various indices were used for this analysis. Fees have not been deducted and the performance does not reflect the expenses of an actual portfolio. See this report and its Appendix for full disclosure information.


What are the right Investments?

The Wall Street Journal stated that 45% of all actively managed stock, bond and other mutual funds were beating their benchmarks as of February 28 (for 2017).

However, that means 55% of these funds failed in their attempt to beat their benchmark. Not too impressive!

Eight years ago, in 2009, was the last year that even half of all active funds beat their benchmarks, according to Morningstar.

In 2016, only 31% of actively managed funds beat their benchmarks.

Let’s explain this, just so you are clear. Active management means that professional money managers who are paid from their clients’ assets try, but cannot consistently outguess and outperform their respective benchmark.

Based on years of industry data like these statistics is why we recommend investing by NOT using active managers. It is a losing game.

Also, if you invest in individual stocks, you should check your portfolio’s performance against an appropriate benchmark, to see how well you are doing.

This is why we utilize asset class stock mutual funds, which for simplicity sake are a version of index funds, and not actively managed stock mutual funds.

Our investment philosophy provides you with a better, proven method to achieve higher returns, at a lower cost and are more tax-efficient, in an uncertain world.

These are some of the advantages of using the asset class stock funds we recommend, over actively managed stock funds:

  • They perform better. Over the long-term, they generally meet or exceed their benchmarks, which is excellent comparative performance. Once you do the research we have done for years, you will appreciate that these type of funds provide you with long-term top tier performance.
  • The mutual funds we utilize provide tax management to provide you with better after-tax returns. It’s not just about performance; it’s about what stays in your pocket, or after-tax performance.
    • Most actively managed stock funds are not cognizant or actively managed to reduce your taxes. The funds we recommend for your taxable accounts are actively taking steps to reduce the tax impact of the fund, if it is tax-managed.
  • They are significantly cheaper than most active mutual funds, generally by at least 1/3 the cost. We can structure a globally diversified stock fund portfolio for approximately .30%. The mutual fund average is 1-1.25%.
    • Why not start with lower costs, if you can, especially if the funds already provide excellent long-term performance records versus their peers?
  • They have far lower turnover. The funds we recommend generally turnover their portfolios far less than industry averages. A fraction of most actively managed funds.
    • Active funds with higher turnover mean more trading costs and it is likely a fund may generate more taxes for their shareholders.
    • Also, if you think about it, if a fund starts the year with a set of “picks” and has 100% turnover during the year, this means they replaced most/all of their holdings. Does that make sense to you?
  • The funds we utilize have a team management approach. Most actively managed funds rely on one or a few managers and unnamed analysts. You may not know when a manager or analyst, who generated ideas, has left or been replaced. The team approach utilized by our funds helps to ensure better long term management, training and experience.

There is a better way. If you are a client, you know that our recommendations give you the best opportunity for long-term success, by providing you with investment funds that have very good long-term performance, at very low costs and are tax-efficient, as applicable.


Source, Wall Street Journal, “Active Managers Make a Comeback,” dated April 3, 2017, which cited Morningstar data.

Investment Change for the Better

Change. Progress. Risk.

Gradually, typewriters became word processors and computers. That was progress and made our lives better.

Phones used to be stationary, immovable objects. They were tethered to a desk or attached to a wall. Then phones were introduced which you could walk around your house with. This did not involve much risk, so most people quickly adopted them. They made your life easier and better.

Bag phones were introduced. These were the first “car” phones most people used. They were large and bulky. Then came flip phones, which were used only for calls. In the past 10 years, cell phones became smart phones, with the introduction of the iPhone and similar devices.

Technology gradually evolves. Progress occurs. Our habits change. We get used to the new innovations. They have made our lives better (mostly!) and enabled us to communicate, share information and always be in touch.

In terms of investing, some people have long held individual stocks and watched these stocks grow over the decades. They rely on the dividends these large US companies regularly pay. Others invested in actively managed mutual funds, which have investment managers and researchers to hopefully outperform others, or at least to try to beat an appropriate benchmark or index.

The investment industry has changed over the last few decades. Academic research regarding stocks and investment management has spurred on these changes.

One of the implications from extensive research is that professional money managers cannot consistently outguess and beat the stock market. This is supported by years of industry performance data. (See further data below**) This is one of the core investment principles which we believe.

Our firm adopted this philosophy, based on evidence and much research in 2000-2003, that using globally diversified asset class mutual funds, similar but different than index funds, was better than holding individual stocks or actively managed stock mutual funds.

If you have always held individual stocks, this may seem counterintuitive. Like transitioning to new technology or other innovations, it may at first seem risky or uncomfortable. Over time, you will realize that our investment approach will provide you with greater returns and less risk through better diversification.

Another core investment belief is derived from academic research done in the 1980 and 1990s, which showed that stocks have higher expected returns than bonds, that small companies have higher expected returns than large companies and “value” companies have higher expected returns than “growth” companies.  Subsequent research showed that these concepts apply also to international stocks. This research, done by Eugena Fama, led to him being awarded the Nobel Prize in Economic Sciences in 2013. He is a co-founding member of the DFA Board of Directors and he serves on DFA’s Investment Policy Committee. DFA is the primary mutual fund firm we use to implement our stock investment philosophy.

If you own mostly large US “legacy” stocks, which I refer to as some of the large US companies of the past 10-40+ years, this research and our real world interactions over the past 15 years shows that you are missing out on significant long-term growth opportunities in your portfolio. You would be missing higher expected returns by not having allocations to small, value and international asset classes. You are also missing investments in other companies, by not diversifying your legacy holdings.

When I considered starting this firm around 2000, I was not aware of this research and manner of investing. These concepts and others have changed my life and the lives of our clients, for the better. We adopted concepts that were different than how most people then invested. When we first began working with DFA in 2003, they were large, maybe the 38th largest mutual fund company in the US. Today, DFA manages $460 billion in the US, and more globally, and DFA is the 8th largest mutual fund company in the country.

We were curious back then. The more questions we asked, the more we read, the more logical and rational this approach appeared. Now we are quite confident. We still ask questions. We still challenge conventional wisdom. That is part of our job.

Just as technology and the world changes, the financial world is continuously changing. We keep learning, researching and monitoring, all with the goal of providing you and your family with a better investment experience.

Have you and your investments evolved and changed for the better over time? Are you using the optimal method?

Are you using a “bag phone” or a “smart phone”?

**From Dimensional Fund Advisors website, only 15% of US equity and fixed income funds that were around in 2000 beat an industry benchmark, 15 years later. Over the same time period, 82% of US equity and fixed income Dimensional funds outperformed their benchmarks.

Source: Some of the above information is from DFA’s book, 35 Quotations on a Better Way to Invest.


Why our philosophy makes sense

A number of examples in the past week again confirm why our investment philosophy makes sense.

In Tuesday’s Wall Street Journal, a “Streetwise” column stated that “the overwhelming consensus before Christmas” was the dollar would take off, the euro would fall and emerging stock markets “needed to brace for turmoil…”

“Three months later, the dollar’s weaker, the euro is up strongly,…” and emerging stock markets are showing triple the gains of the broad US stock market.

The consensus predictions were all wrong.

We remained invested in emerging stock markets for those clients which they are appropriate and our clients have benefited. We don’t make bets on currencies, as they are too hard to predict.

Last Wednesday, the Federal Reserve increased short term interest rates by .25%. Most would have predicted or thought that the 10 year Treasury note would have risen that day. Not only did the 10 year rate decrease on Wednesday, it has continued to fall from around 2.5% to 2.398 as of Wednesday.

Predicting the direction of interest rates is very difficult. This is why we do not make bets on interest rate movements. When we purchase fixed income investments for our clients, we buy varying maturities of high quality bonds. We are investing to provide the portfolio stability, not to gamble on the direction of interest rates.

In March of 2010, when the Affordable Health Care Act, or Obamacare, was enacted, few would have recommended investing in managed health care stocks. As discussed in a New York Times column in Sunday’s business section, this conventional wisdom would have been very wrong.

“The numbers are astonishing. The Standard & Poor’s stock index returned 135.6 percent in those seven years through (last) Thursday…But the managed care stocks, as a whole, have gained nearly 300 percent including dividends…UnitedHealth, the biggest of the managed care companies, with a market capitalization that is now more than $160 billion, returned 480 percent, dividends included. An investment of $100 in the company’s stock when Obamacare was signed into law would be worth more than $580.50 today.”

We do not let political views influence our decision making. We do not generally recommend individual stock picking and this is why. Because we recommended that our clients own broad asset classes, one of which is large US company stocks, our clients benefited by owning these managed health care stocks and they reaped the rewards.

We cannot predict the future. We don’t try to. It is not a winning strategy.

We can help your long term investment performance by avoiding making bets and predictions. We will continue to invest for the long-term in a disciplined, rational and low-cost manner, which has been successful in an always uncertain future.