Discipline is a Key to Successful Investing

 Discipline is a key to success in so many facts of our lives.

Discipline is integral for exercise, diet and health efforts to be successful. Without discipline, they fail.

Being disciplined takes effort, courage and the ability to adhere to your plans and intentions. It is the ability to control your own behavior and make good decisions. Being disciplined is not always easy, but the rewards generally pay off in the long run.

As your financial advisor, we provide discipline for your financial life, through our investment strategy and guidance. We develop an investment plan for you, which is a guide that we adhere to, regardless of the volatility of the stock market or other world events which we cannot control. We do not follow fads, trends and “forecasts.” Being financially disciplined has had significant benefits and has helped us to avoid potential financial mistakes.

In 2008-2010, when the US was in the midst of the financial crisis, many economists and market forecasters were predicting that the US would face very high inflation in future years, due to the actions of the Federal Reserve. Fortunately, we did not make investment guesses on the direction of interest rates, based on these predictions. The “predicted” high inflation has not occurred. We stuck to our fixed income philosophy, of buying high quality bonds over varying maturities. We adhered to our fixed income investment discipline.

We remain disciplined to our core stock philosophy of investing in a globally diversified manner, which means to invest a significant portion of a stock portfolio outside of the US. While the US stock markets outperformed International stock markets in 2014, we knew that would not always be the case. In the first months of 2015, International stock markets have significantly outperformed the US stock market. Being disciplined and not trying to time the global markets is the right strategy. Our goal is to provide you with a good investment experience. Being globally diversified is a key element to reduce volatility, which allows you to have the discipline to stick with your investment plan.

It takes discipline and effort to write this blog every week. It is not always easy. But the effort is worth it. Writing every week encourages us to be aware of topics that are relevant to you. The practice of regularly writing enables us to provide you with our thoughts and analysis on current issues.

Writing these weekly blog posts gives us an opportunity to provide you with a greater understanding of our investment philosophy. The more you understand the investment strategy, the more confidence you will have. The more confident you become, the more likely you will be to adhere to your investment plan, especially in the face of the uncertainty and volatility that are always with us. And that will lead to successful investing and a better financial future for you and your family.

Are you investing the right way?

When we are young, we are taught in science classes that you should develop a theory, test it and see what the evidence shows. If the evidence is convincing, the theory is assumed to be correct.

If you continue to test your theory, you will gather more evidence. Over a long period of time, greater evidence should make you more confident in your theory.

In investing, the theory that most actively managed mutual funds and money managers do not consistently beat their respective benchmarks has been repeatedly been tested. The evidence is conclusive, over a long period of time and by many studies. (An actively managed mutual fund is one in which a manager picks stocks based on their research and predictions of the future.)

“Measure for Measure, Index Funds Rule,” in Sunday’s New York Times Business Section, highlighted more evidence. In his “Strategies” column, Jeff Sommer provided very convincing data based on the research studies performed by S&P Dow Jones Indices. This again confirms that our firm’s investment philosophy is more effective than using actively managed mutual funds. Some of the highlights:

  • Over the three years ended December, 2014, the S&P 1500 beat 76.8% of the actively managed US stock funds.
  • Over the five years, the index beat 80.8% of the actively managed US funds.
  • Over 10 years, the index beat 76.5% of the actively managed US funds.

Sommer concludes that “this underperformance (by actively managed money managers) has persisted year after year.”

Since our firm’s inception, we have consistently recommended very low cost index-like funds. The senior director of global research at S&P Dow Jones said “fund cost is the most important single factor predicting performance. It makes it harder to beat index funds, which tend to be cheaper.”

Sommer finished his column with this statement: “Some funds do beat the indexes each year. But, costs aside, it’s exceedingly difficult to pick the funds that will outperform in the future. Whether investors should even try remains an open question.”

This study, and many like it, continue to provide real-world evidence that to design a successful investment portfolio, you should structure a globally diversified portfolio based on the core principles that we adhere to.

This should give our clients confidence.

If you are not a client, and you are using actively managed mutual funds, should you be questioning your investment strategy? What more compelling evidence do you need to change?


How to Deal with Uncertainty

Uncertainty is part of our life. We do not know what the future will bring. Uncertainty can be very stressful. How can you best deal with uncertainty?

There are many issues in our lives which result in uncertainty.

  • You may be concerned if you will have enough money to retire and still live the life that you want.
  • You may be concerned about whether you will need to go into a nursing home or similar-type of facility, and what the cost of that will be.
  • You may be uncertain if you are saving enough for your children’s college education.
  • You may be concerned about the stock market, which is full of uncertainty, especially in the short term.

The best way to deal with these types of uncertainty “issues” is to work through the specific issue with us. Begin a process. Start the discussion.

Let’s take the issue of “retirement savings,” for example. Will you have saved enough?

If we met with you to discuss this topic, we would identify the factors that begin to answer this question. We would ask you the following, and more:

  • When will you be retiring?
  • How much do you think you be spending annually, during retirement?
  • How much do you think you will be saving each year, from now until you retire?
  • How much will you be collecting from Social Security and any other type of retirement or pension plan?
  • What can we assume that your investments will earn throughout your lifetime?
  • What will future tax rates be?
  • What is a safe amount to withdraw each year from your retirement savings?
  • What changes will you be making in your lifestyle and where will you live?

It should be pretty clear that many of these questions cannot be answered with certainty. There are lots of variables and unknowns. Working through this issue will require many assumptions, which will change over time.

This is a critical part of the financial planning process. It is ongoing and it is a process which will be revised and adjusted. As your life and other external factors change and become known, such as stock market returns, we will review and update this analysis. We have software specifically for long term retirement planning.

By going through this process, this will go a long way to relieving some of the stress of uncertainty. The more that we analyze and discuss each of these components, the more confident you will feel. The uncertainty will begin to decrease.

We cannot completely remove the uncertainly of life. Discussing and analyzing whatever issues concern you, will help you feel more comfortable and confident. That is our goal.