Book Review: The Behavior Gap

The Behavior Gap, by Carl Richards

If a picture is worth a 1000 words, then the sketches drawn by Carl Richards are certainly valuable. Richards’ newly published book, “The Behavior Gap,” is even more valuable and highly worthwhile reading.

Richards has created a very unique and elegantly simple way of conveying financial thoughts by drawing sketches, using a Sharpie pen. These sketches are featured in weekly blog posts in The New York Times. Richards is a financial planner based in Utah.

In The Behavior Gap, Richards has done an excellent job of combining numerous sketches with a very forthright narrative of financial topics and life lessons. The book is well written and full of excellent advice, a lot of which is much deeper and more meaningful than they initially appear.

Richards clearly writes about topics ranging from the importance of the process of financial planning, as opposed to getting a thick financial plan, to happiness, money, and great conversations, and how all of these are so interrelated.

Richards writes: “Simplicity is both beautiful and functional. And yet, people are often disappointed when I propose a simple solution to their investment or financial planning problems. Such solutions can often be reduced to a simple calculation on the back of a napkin… Our attraction to complexity distorts the way we approach our financial goals. The simple options that have the largest impact and your financial success require discipline, patience, and hard work.”

We have a number of Carl’s framed prints in our office already. This book will be a valuable addition to accompany those sketches.

How a Financial Advisor Can Add Value

These are some of the ways that we provided value for our clients during 2011:

• Listened. We have listened and talked with them, to help them handle the volatility of the stock markets. As a result, they have strived to maintain their investment plans, which should benefit them in the long run.

• We have adhered to our cornerstone investment fundamentals: recommending globally diversified stock portfolios, holding very high quality fixed income investments, focusing on asset allocation, and the use of Investment Policy Statements.

• We have rebalanced our client portfolios throughout the year, focusing on the discipline of buying asset classes when they are low and selling them when they are higher. Similarly, we have done tax loss selling throughout the year, as applicable, not just at year end.

As we have strong CPA backgrounds, we have provided financial advice about many topics to our clients, such as:

• We have advised numerous clients on various aspects of their mortgage refinancing decisions, so they could take advantage of historical low interest rates.

• Made recommendations for our clients’ 401(k) plan investments, as we consider those retirement assets part of their overall investment portfolio.

• Assisted clients with college tuition planning, which ranged from evaluating section 529 plan decisions and investment options, to advising grandparents who wanted to make major prepaid contributions.

• Advised a number of clients on significant Roth conversions, which should have huge long-term benefits for these individuals, as well as future generations of their families.

• Helped a number of clients with charitable planning, including the planning, establishment and investing for charitable family foundations. These will benefit both the families now, as well as numerous charities in the future.

• Required minimum distribution planning, for clients who are older than 70 ½, who are required to take distributions from their various retirement accounts.

Other things we have done, which benefit our clients:


• We have attended numerous national conferences, as well as participate in biweekly peer group phone conversations with fellow advisors, to learn, share ideas and become better advisors.

• Read. We are voracious readers, of everything from the Wall Street Journal and the New York Times, both in paper and digital forms, as well as trade publications, books, blogs, Twitter and podcasts. We are continuously reading and learning.

• Blogging and Twitter: this will be the 28th blog post that I have written during 2011. Writing blog posts is a great way for us to communicate our thoughts and views on a timely basis, which we hope is valuable to our clients and prospects. Brad is also very active on Twitter, which is a terrific way for us to communicate with others, both in terms of sharing information that we find valuable, as well as connecting with numerous people throughout the country that we learn from every day.

Part of our core investment philosophy is recognizing that we do not have a “crystal ball” and cannot predict the future. We focus on what we can control, to the best of our ability, on behalf of our clients.

As financial advisors, our guiding principle is to try to provide our clients with a greater sense of comfort and security, so they can enjoy and focus on the other aspects of their life.

We are truly appreciative for our clients and the many referrals that we have received in 2011, as our firm has continued to grow. We hope that you and your family have a very enjoyable holiday season and that 2012 brings you good health and happiness!

Investing: Can an Advisor Add Value?

Do you want this person/fund to manage your money?  Is this the right fund for you?


  • Beat the S & P 500 every calendar year from 1991-2005
  • Named “Portfolio Manager of the Decade” in 1999 by Morningstar
  • Barron’s included him on its “All-Century Team” in 1999
  • Fortune Magazine desribed him as “one of the greatest investors of our time” in 2006 profile
  • And then there is this fact:  For the five year period ending December 31, 2010, this fund was LAST among 1,187 US large cap stock funds, as tracked by Morningstar.

The fund and fund manager described above is Bill Miller, manager of the Legg Mason Capital Management Value Trust for 30 years, who recently announced his retirement, effective in April 2012. The facts of this stock mutual fund performance clearly shows why it is nearly impossible to consistently predict the “best” fund managers over a long period of time.

After his great track record and much publicity, his fund was in the 98th or 99th percentile in 4 out of the last 5 calendar years, through 2010.  Through October, 2011, his fund is in the 82nd percentile. (per Morningstar data).

How can someone who is so “good,” then become so unsuccessful?

This is a key question, which every investor must consider, in determining their advisor and investment philosophy. Was Miller lucky?  Did he lose his touch?  How do you know if your advisor or mutual fund manager will do the same?

Understanding what occurred with this fund, and how common this inconsistency in mutual fund performance is, is the basis for one of the fundamental investment philosophies that we adhere to. We recommend this strategy for your investment success, over a long period of time.

To describe the different philosphies, Bill Miller picked stocks for his fund that he thought were “value” stocks. He believes in active investing; that he could identify the best stocks to own that were undervalued. We believe that no one has the ability to consistently identify fund or money managers that can outperform a respective benchmark, over a very long period of time. Thus, we adhere to a “passive” strategy, which means that we recommend a very globally diversified set of stock mutual funds that hold a set of stocks in each “asset class,” without making predictions or claiming to have a crystal ball.

It would have been very reasonable in 2000 or 2005 to put money into Bill Miller’s fund, based on his past track record. Let’s see how his fund did, and compare it to one of the funds that we use, in a similar asset class. Bill’s fund is a large company value fund, so we will compare it to Dimensional Fund Advisor’s (DFA)US Large Cap Value III fund (DFUVX).

For the 10 years ended 11/29/11, $10,000 invested would have grown as follows (per

  • Legg Mason Fund:           $8,363 (a loss of $1,637)
  • DFA US Large Value      $15,388 (a gain of $5,388)
  • Vanguard S&P 500         $12,627  (a gain of $2,627)

By using the appropriate long term strategy, as your investment advisor, we can add significant value. We can provide you and your family with a solid investment strategy, that will result in greater comfort and sense of security.

Other Conclusions:

The Lost Decade:  There has been much written about how the past 10 years ended in 2010 were considered the “lost decade,” where investors made no money. This was true for many investors. While the  figures above are for the 10 years ended in November 2011, the DFA US Large Value fund was very profitable over this period. This shows the importance of diversification and owning more than just the S&P 500 as the basis of your portfolio.

Costs and expenses: 

We believe to be most successful, you should focus on the things that you can control. Thus, evaluating mutual fund expense fees should be an important part of your investment approach.

Bill Miller’s fund charged various up-front fees, depending on which “class” of the fund that an investor used. None of the funds that we recommend charge such fees.

The annual expense ratio of Miller’s fund is 1.75%. This means that each year, the fund subtracts 1.75% in fees, from whatever the actual performance is. The comparable DFA fund that we utilize, DFUVX charges .14%, one of the lowest expense ratios in the industry, for this fund category.

There are many other lessons to be gained from reviewing the experience of this fund and this fund manager, as well as carefully evaluating most mutual funds, or your own investment portfolio.  
Important notes:  The above examples are illustrative only. No one fund should constitute an investment portfolio. The above figures do not include an investment advisory fee, which our firm charges, separate from mutual fund fees. Legg Mason’s fund would have charged a load, which is not included in this information.

Sources:  Morningstar website, 11/30/11; article by Weston Wellington, Dimensional Fund Advisors, dated 11/29/11

11 Wealth Management Tips for 11/11/11

1. Have a written investment plan, based on your need, willingness and comfort to take risk. It does not have to be fancy. But it is extremely important.

2. Regularly rebalance your portfolio. Be disciplined about this. It will help you to buy low and sell high.

3. Evaluate your portfolio performance against a set of benchmarks, at least annually.

4. A significant part of your stock portfolio should be invested in international and emerging markets.

5. Recognize that you do not have a crystal ball and cannot predict the future. Recognize that no one else can predict the future either. If you are using an advisor, and he or she regularly makes predictions or “bets,” you may need to make a change. Do not focus on past performance, as it is not an indicator of future performance.

6. Diversification. Always. For everything. You should own large and small companies. Growth and value companies. In many countries and industries. Understand the reason to own smaller and value companies.

7. Know when it makes sense to own municipal bonds. Know which municipal bonds sectors to avoid, due to higher historical default statistics. If you own municipal bonds, they should be diversified across many states, not just the state you live in.

8. If you have significant fixed income investments, like bonds or CDs, you should not own bond funds. And definitely not long term or low credit quality bond funds.

9. Focus on what you can control. Focus on costs and your asset allocation. You cannot control or influence any company, industry or the stock market.

10. Review your estate plan documents and retirement plan beneficiary designations, to make sure they reflect your wishes and are accurate. If you have a revocable trust, make sure that it is actually funded.

11. Use a fee-only financial advisor. Their interests will be aligned with your interests. Find an advisor that can provide many benefits and value. They can help you plan for the future. They can listen to you, so you can handle volatile markets and prevent big mistakes. They can save you time, improve your investment experience and provide your family a greater sense of comfort and security.

I hope this list is helpful and provides you with real value. If there are items on this list that you are not familiar with, or would like to discuss further, please contact us.

Financial Markets Don’t Come with Traffic Signals

It is unfortunate, but true. There are no financial traffic lights that signal “green.”  It’s all safe now…enter the stock market with no risk.

There are no reliable financial traffic lights that signal “red” and you should exit the stock market now.

So, how to handle the volatility that seems to face us? These are things we have been discussing with our clients. For years. Because in our view, “this time is not different.” Just the dates and issues have changed.

You must have a plan. It does not need to be fancy. Working with us, we will help you adhere to your plan. But you need to develop a written plan that provides for an asset allocation that makes sense for you and your family. We help to develop this plan, and how much to allocate to fixed income (cash, bonds, CDs) and how much to invest in stocks, and where, such as US, international, emerging markets and real estate. And we discuss with you the importance of “value” investing.

So what about now? What is going on?

Part of our philosophy is recognizing that we do not have a crystal ball and that we cannot predict the future. That being said, we are realistic and we are optimistic, for the long term. History teaches us that if we are patient, globally diversified investors, we will be rewarded. Most problems will get resolved. Companies, people and countries innovate and are resilient.

We recognize that there are many problems in the world, today. Right now, the financial markets are focused on Greece and European debt. Last year, the markets fluctuated with every drop of news from China. The US debt crisis and the “supercommittee” that is working on the US budget will be the focus in November.

We take a longer view. There are many positives. As Warren Buffett has stated, Mr. Market is usually too optimistic or too pessimistic. We feel that the markets’ decline this summer was overstated and caused more by emotional fear, than financial reality. We don’t think that future corporate earnings expectations have dropped by 15-20%. Many companies are reporting stronger earnings, have healthy balance sheets (corporate cash is at all time highs), have used record low interest rates to borrow cheaply and oil / gas prices have dropped or stabilized. These are all positives.

We also recognize that there are many problems. Governments of all types will need to reduce spending, to reduce their deficits. That reduction in spending will hurt economies and certain sectors. Uncertainty is a hot topic, especially in the press. Some type of uncertainty always exists. That will not change. We focus on what we can control.

Timing the market does not work. While worldwide stock markets declined in the third quarter, much of that decline has been recouped in the first few weeks of October. Just as no one could have predicted the steep decline on July 1 that subsequently ensued, no one could have predicted on October 1 the rally that has occurred.

We wish we had a crystal ball. We wish we had the perfect financial traffic light. Instead, we have a solid investment philosophy (which is not based on predictions and guess work) and financial planning skills that provide our clients with comfort and financial security. What do you have?

Dieting, Exercise and Investing. What’s the Lesson?

How do you succeed at dieting, exercise and investing?

Are these unrelated? Not really.

Success at all three requires discipline, consistency and a program that you can stick to over the long term.

So how does this relate to investing? As advisors, we have adopted an investment philosophy that can be adhered to over the long run. It is rational, and provides our client’s with peace of mind, so they can stick with it.

In the past few weeks, the financial world has provided further evidence of why our approach makes sense, which gives us even greater confidence in our long term philosophy regarding stock investing. The markets have been very volatile since July, and our clients with stock investments have incurred losses, as have most others. But there is a distinct difference in approach.

We recognize that we cannot predict the future. We do not believe that we can identify which fund or money managers will do the best over the long run. Thus, we have adopted a philosophy which recognizes this.

A few weeks ago, Fidelity Magellan replaced the manager of this very large mutual fund, after years of underperformance. Over the last 10 years, this fund, once the largest in the world, ranked in the 95th percentile (1 being the best), trailing its benchmark and the S & P 500 by approximately 2.7% per year.

Fidelity, and this manager, have vast resources and a huge, global staff to assist in the research and stock picking for this fund. Despite all these resources, Fidelity’s staff was unable to outperform or come close to its target benchmark on a consistent basis, or even a majority of the time. The lesson: it is hard to pick a good money manager, in advance, that will outperform its respective benchmark, on a consistent basis over a long period of time.

The second example has been a number of reports of hedge funds reporting huge losses or funds that are simply shutting down, due to underperformance or dissatisfied investors. John Paulson, a hedge fund “titan” was an investment hero in 2008, as he placed huge bets against mortgage and financial stocks, and he was right.

Now fast forward to 2011. The WSJ reported today that two of his funds are down 32% and 47% for the year, far worse than market averages. He has placed huge bets on Bank of America, Hewlett-Packard and China’s Sino-Forest Corp. He has been very wrong in 2011. His funds have also lost billions on investments in gold and gold related stocks. Many of his clients are impatient and not willing to wait for his next great idea.

The lesson: There are many. Making huge, concentrated bets are risky. Sometimes they work, sometimes they don’t. When they don’t, and your bets are very concentrated, the results can be horrendous.

Diversification, and not making concentrated bets and predictions, does work, which is why that is one of our core philosophies.

Our next post will further explain our investment philosophy.

Sources: Morningstar, for Fidelity Magellan; WSJ for Paulson information, 10/11/11 online

Financial Advisors Keep Learning

As the world is continuously changing, and the financial markets certainly are, it is important that we as financial advisors continue to learn, listen and interact with top industry experts.

Keith and I recently attended a series of programs in late September, as we do multiple times a year. I participated in a “Masters Forum” study group on Friday and Saturday, September 23-24th. This group of 20-25 members, which started in 2006, meets twice a year, once in the fall and once in the spring. We also talk in smaller groups every two weeks, to discuss topical issues. Keith participated in a similar study group on Sunday, and also talks to members of his peer group on a regular basis throughout the year.

These sessions were followed by the BAM Annual National Conference, which is a 3 day event featuring top speakers from across the country. This conference is attended by approximately 125 firms, representing $14 Billion in assets under management.

The following are some of the items from these meetings:

  • Investor behavior is critical to investment success. That was the message of Carl Richards, of This NY Times weekly writer and sketch artist, has developed a series of sketches to explain and discuss complex financial issues in a simpler manner. We now have 4 of his sketches in our office, and will soon have a fifth. Visit us to see them!
    • Carl emphasized the importance of investors’ behaviors and emotions, which cause huge gaps (differences) between market returns and what most people actually earn on their own (usually much less!).
  • We interacted with a number of portfolio managers and mutual fund executives, regarding updates on the financial markets and the strategies that we utilize. We are very confident in our long term investment philosophy, which for stocks is primarily implemented through Dimensional Fund Advisors (DFA) mutual funds.
  • Hedge funds: we continue to not recommend them, as they are hard to evaluate, costs are huge (relative to mutual funds that we recommend), a substantial numbers of these funds fail, which makes historical analysis very difficult, as the poor performing funds drop out of the databases.
  • We heard one of the top national speakers on retirement distribution strategies.
  • Portfolio rebalancing is critical for long term investment success. Having the discipline to rebalance (to buy certain stocks when they are low, and sell certain stocks when they are high) remains a key part of our philosophy and value we provide to our clients.
  • We discussed the importance of communication skills and truly listening to our clients. One of the speakers, Mitch Anthony, has written a book titled “Defining Conversations.” He stressed the importance of real conversations, about deep issues and concerns, not just having superficial discussions. I started this book and highly recommend it.
Throughout the five days, we had the opportunity to share ideas and discuss various topics with both industry experts, as well as our peers throughout the country. This strong network of fellow advisors is an important component of our firm, as being able to discuss both specific client situations and general financial issues is critical to maintaining our discipline and add intellectual value on behalf of our clients.

How a Financial Advisor Adds Value

The financial markets have been turbulent again in recent days. But does this really affect you, today?

Asset Allocation
A financial advisor should determine what the appropriate amount of your money should be invested in stocks, while at the same time providing you with a solid cushion of cash, CDs and bonds. This way, you can sleep well at night, without worrying about the everyday movements of the stock market.

We all realize that it is easier to be an investor when stock markets are going up, but it is times like these, where major decisions (and major mistakes) can be made.

For example, we work with clients so that they have many years of cash and bonds available, so that if the stock portion of your investments goes down (temporarily), you will not be impacted (today) and need to sell the stocks right now.

Time Frame and Faith
A key component of the above planning, is that we understand what a client’s time frame is. For someone with a long time frame, or does not need to withdraw money from their investments right now, a decline in the stock market should be viewed as temporary. As Warren Buffett often says, Mr. Market is always setting a new price, and it is usually either too high or too low.

We clearly recognize that there are many economic issues facing the US and the world currently. However, the same could be said about most time periods of the past, as well. The economies of the US and the world are resilient. The issues and challenges change, but there is always uncertainty.

We are realistic in our concerns, but longer term, realize that history teaches us that stocks do well in the long run, and particularly after down markets. The current volatility can be viewed as an opportunity.

If the economy looked terrific, and that was clear to everyone, then the markets would be at a high….and maybe you should be considering selling some stocks (we call this disciplined rebalancing).

At times like this, when there is uncertainty and fear, there can be a number of reactions. To freeze and not make any decisions is not in your best interest. If you feel you have not done good planning, or do not feel comfortable with your investments, then NOW is the time to act, to be decisive, or to get a “second opinion” of your investments.

The US Govt Debt Downgrade, Debt Ceiling and You

As I write this on Sunday evening, August 7th, the financial markets and economic news have been extremely volatile and mostly negative over the past 10 days. As always, it is important to take a step back and try to look at events with perspective.

First, the US Government spent weeks haggling over raising the Federal debt ceiling. What is normally a routine process became a very tumultuous one.

The impact: in the short run, the uncertainty of whether the issue would be resolved caused the stock market to decline, prior to the agreement between Congress and the President. In the longer run, the process and agreement has heightened the public awareness of the need for national fiscal responsibility, which is good. (Similarly, Ross Perot raised this awareness before Bill Clinton’s first election, which resulted in many economic positives, such as lower interest rates and good stock markets).

Downgrading of US Government debt by Standard &Poors: The possibility of this action had been rumored, but not widely realized by the general public. Thus, it is likely that financial markets will react negatively to the news.

The impact: This is interesting to consider. If “Wall Street” had an inkling this was to occur, interest rates would have risen or would be rising. Interest rates have done the opposite. Interest rates have been steadily falling, particularly in the past few months. The 10 year Treasury has declined from 3% at the beginning of the year to around 2.45% as of last Friday.

The impact of the downgrade may be long-term positive, if it causes Washington leaders of both parties to realize they need to compromise their hard line positions. Standard & Poors was correct, as they cited the negative political climate and ineffectiveness of Washington in their reasoning. We don’t expect the US to default on any Treasury securities. However, the current deal does not make many specific decisions. The really tough decisions are handed to a committee. The huge reductions are delayed toward the end of the 10 year period. And most importantly, the actual deficit is not declining. The agreement is only slowing the rate of growth in the deficit. Thus, the downgrade may force US leaders to actually work on making those tough decisions, and making them stick. If that occurs, that would be real progress.

Oil prices have been declining, and sharply in the past week. The price of oil per barrel was recently in the $95-100 range and is now trading around $84/barrel. This is due to the anticipated decline in the economy, as well as trading factors (normal volatility). Thus, gas prices should remain well below $4, and may go below $3.50 per gallon soon. This is good for the consumer and will provide some needed stimulus to the economy.

Impact to investors:

In tough times, it is good to reflect on the basics, our core fundamental philosophies and consider the thoughts of those we respect the most. With that in mind….

We believe in focusing on the long-term and on matters that we can control. Thus, it is not a winning strategy to try to time the market in the short-term.

I don’t think Warren Buffett is waking up Monday ready to sell stocks because of the US debt downgrade. He often says, and has profited from, buying when others are scared (during market declines). It is better to buy when there is fear and sell when others are being greedy. Thus, we would be more inclined to be buyers than sellers now.

It is vitally important to be properly allocated and have a globally diversified portfolio. Properly allocated means having ample cash or fixed income assets, to financially and psychologically handle markets downturns. We work with our clients to have such written strategy plans in place.

One of the greatest benefits that we can assist our clients with is just talking to them, to discuss these events, so they can better understand them and the impact they can have on their personal lives. It is our goal that our clients be able to have greater financial comfort and security, as well as peace of mind.

Investing and the Debt Ceiling: Our Thoughts

As this is written, mid-day on Monday July 25, 2011, Congress and the White House are at an impasse on resolving the impending debt ceiling limit, which must be resolved by August 3rd.

How should an investor react to this situation?

As clients and readers of this blog know, we advise clients to focus on the “long term” and on events that are within your own control, when developing your personal investment plan/strategy.

There are always going to be events and issues that cause investors stress and uncertainty. The financial markets do not like uncertainty. As uncertainty rises, markets tend to fall. However, the “financial markets” are really made up of individuals each making decisions, either on behalf of their individual portfolios or individuals who work for large institutions or brokers and financial advisors.

It is nearly impossible to act in a profitable manner, by anticipating future events. For example, the financial markets rallied last week, as progress (unexpected good news) was made on the debt limit issue. As that progress turned into a stalemate over the weekend (unexpected negative news), many expected the financial markets to drop significantly this morning. As I write this, the US markets are down less than ½%, which would be a surprise to many.

We would not recommend adjusting your portfolio in reaction to this specific event, assuming that you have a proper asset allocation and financial strategy for the long term. It is reasonable to expect some additional stock market volatility (meaning losses), if no progress is made in the next few days. It is not a winning strategy to make significant portfolio changes in response to specific events. It is almost impossible to time the markets, to be able to sell stocks at the right time and then buy back in at the right time.

We are concerned that our elected officials are not able to resolve these matters until the last minute, which is unsettling. However, we feel that the need to resolve the issue will prevail, though it may be a bumpy process. In the long run, the increased focus on Federal fiscal responsibility is important and it is being addressed, regardless of one’s political views.