Conversations You Should Have

Blog post #484

Hopefully many of you will gather with your family or extended families this Memorial Day weekend. The discussions at these gatherings are generally the same: updates on kids, grandchildren and relatives, health, politics, sports, food and restaurants. We can even include future travel plans this year!

In most families, however, the topic of money is rarely discussed. These types of discussions should be occurring.

We all have unique and different family backgrounds and stories about money. I did not get an education about money or investing from my parents. We grew up as a lower-middle income family. I know that my mom struggled financially and worked very hard to support me and my three sisters. As there was no extra money to invest, I did not get the opportunity to learn about investing from my parents.

While in high school, I often talked with my mom about how I would pay for my college education, how much I had to work and save for my college education.

Fast forward 40+ years… and now I advise people professionally about their money. We have many discussions about your finances, your goals and how to deal with the volatility of the world and financial markets. These discussions are critical, and the educational aspect of these conversations hopefully makes you, our clients, better and more successful investors.

I want to emphasize having conversations about money between generations. These can be uncomfortable discussions, but they don’t need to be. Start gradually. Find a topic to begin with. Dip your toe in the water. If these discussions take place, great sharing and important long-term benefits can result. They can be some of the most memorable family conversations you can have.

  • Talk to your children or grandchildren about your financial successes, as well as your financial mistakes. Be willing to share the good and the bad.
    • Be vulnerable.
  • Share with them how you were able to save money. When did you start saving?
    • What kind of sacrifices did you make, for your long-term future?
    • We gave up extravagant trips when my children were young, in order to save money for their college educations. They have benefited from that today, which we have talked about, as they don’t have student loans.
  • Talk about what types of investments have worked out (individual stocks or mutual funds?) and what types of financial advisors you have used.
    • Why were some successful and some not as good? What was the difference?
  • You can talk about credit cards, reward points or password security. Just begin the conversation.

A possibly harder, but important conversation, deals with talking about your estate planning. Once an estate plan is completed, it usually becomes a set of documents that remains locked in a cabinet. Depending on your age, and the age of your next generation of family, you could discuss your estate plan. This can be done in broad terms, without focusing specifically on the numbers.

If this kind of estate planning discussion is relevant to your stage of life, I’m suggesting that parents and grandparents sit down with their next generation, or generations, and talk about their “family finances.” What is your intent? How will things be handled? By whom? I’m encouraging you to make your estate plan real. Make it a living, breathing document and set of plans. Do it now, while you are healthy and able to have the discussion.

Not everyone is comfortable with this type of estate planning discussion. If you want to have this conversation with your family and would like our assistance, we would be pleased to join your family for this discussion.

The telling of stories is how family histories are remembered and past down to future generations. Discussions about money, how you saved and possibly sacrificed, are worthwhile. Sharing the good and the bad, the mistakes and the successes, are important as well. Parents and grandparents should share their financial and investment lessons with their next generations. These would be very valuable, memorable and impactful.

Do it sometime. Anytime. But sooner rather than later.

The Benefits of Small, Value and Patience

Blog post #483

Since our firm was founded in 2003, we have been strong believers in holding widely diversified portfolios, with significant exposure to factors that have historically provided greater expected returns.

In practice, this means building client portfolios with additional weighting of small company asset classes, as well as to value stocks, both in the US and Internationally.

One thing that we can all agree upon is that none of us could have predicted the events, technological and political changes and even a global pandemic that have occurred since 2000. We have experienced 9/11, the Great Financial Crisis in 2007-09, changes in Presidents and Congress, tax increases and tax cuts, iPhones and other technologies, as well as Amazon and changes in shopping.

How has this investment strategy worked over the past 21+ years, through all these changes?

As the data below shows, adding small and small value companies to a portfolio provided significant benefits since 2000, versus a portfolio consisting of only the S&P 500 (US Large companies). Please note that for purposes of this post, we are using indexes, rather than the actual mutual funds we recommend, for compliance reasons. We feel that our investment recommendations would show similar results. Also, this illustration is for US stocks only, and all references below are only to US asset classes.

From January 1, 2000 to March 31, 2021, as the chart below shows, the Russell 2000 Value index (US small company value index) grew from $1 million to $7,662,000, whereas the S&P 500 Index (US large company index) grew to $4,076,000 over the same time period. US small company stocks, as represented by the Russell 2000, would have also significantly outperformed the S&P 500 during this period, as $1 million grew to $5.8 million.

Some of the key takeaways from this chart are:
  • Despite all the events that have occurred over the past 20+ years, staying invested in stocks, large and small, growth and value, was rewarding to investors. It pays to be patient and remain invested for the long-term.
  • Owning US small value stocks was very beneficial, and more rewarding over the 20+ years, than only owning the S&P 500.
  • Owning small company stocks, not just small value stocks, was rewarding.

However, there is much more to this story. It is really three different stories, as the 2nd chart below shows. During the first decade beginning with 2000, small and small value stocks far outperformed US Large company stocks, as represented by the S&P 500. The Russell 2000 Small Value Index grew by 121% from 2000-2009, while the S&P 500 had a NEGATIVE 9% return for the same 10 years.

  • From January 1, 2000 – December 31, 2009, $1 million invested in these indices would have been worth the following as of December 31, 2009:

  • For a decade, those who only owned US Large company stocks were not rewarded with the expected returns from stocks, which averages around 8-10% per year.
  • The expected returns of each asset class does not always appear for extended time periods. That’s why we diversify and own many different asset classes.
  • Around 2010, small and value seemed liked winners and large company stocks were trailing badly.

The next decade, 2010-2019, was very different, as US Large company stocks (+257%, $3,567,000) far outperformed small (+206%, $3,058,000) and small value stocks (+173%, $2,730,000). While all these asset classes were rewarding, some investors were questioning whether owning small and small value made sense, as the technology heavy S&P 500 was doing so well due to stocks like Apple, Amazon, Facebook, Google and others.

To us, and for you, our clients, the real evidence is in the far-right column of this chart. The returns for 21 years plus 3 months, from January 1, 2000 to March 31, 2021 are:

If you were disciplined and patient and kept an exposure to small and small value stocks, you were very well rewarded over the long term. 

We believe in having various exposures to most stock asset classes.

Technology:  we recommend owning them.

Growth stocks:  We recommend owning them.

Mid-cap stocks:  we recommend owning them.

Dividend paying stocks:  we recommend owning them.

You get the idea. All of these are components to a well-diversified portfolio, that we believe should include exposure to small and small value companies, as they have greater expected returns than the above asset classes.

As these charts explain, over varying time periods, certain asset classes will not always perform as expected or provide the best returns. But over the long-term, financial data and real market returns have shown that following these recommendations for building a diversified portfolio can be quite rewarding. 

These are strategies that can provide for your future growth for your retirement, or provide you with the funds to live and have the type of retirement that you desire.

Talk to us. We want to listen. We want to assist you, your family members and friends.

Important disclosures: See disclosures beneath each chart. Additional information provided by Dimensional Fund Advisors. This data does not include costs of the investments or any investment advisory fee, such as WWM would charge a client. WWM did not begin to provide investment advisory services until 2003, but we feel this information is relevant and consistent with our investment recommendations since 2003.