Reasonable > Rational

Blog post #465

As investment and financial advisors, we often say that we are rational and not emotional, as we provide you with advice. We hope that is accurate, as we provide you with financial advice on the various matters that you deal with throughout your life.

As I continue to read The Psychology of Money, by Morgan Housel, he raises the concept of being rational v. reasonable.

As much as I have written in the past about us being rational….and striving to provide you with rational advice, I think that it is better to be reasonable, than to be completely rational.

Rational may mean that we only deal with the numbers, the hard facts of a situation or portfolio decision. Being rational may lead one to think that there is only one correct answer to some issues. Being rational may mean that advice and decisions should be made strictly based on only the facts and numbers.

Being strictly rational is not always realistic. People have emotions and attitudes….and these must be factored into our advice and your decision making. The world is constantly changing. Many decisions are gray, not clearly A or B. I don’t think we as a firm have provided advice that has been strictly rational, but thinking about “rational v. reasonable” provides some very good insights about each of our relationships with money.

During the financial crisis in 2008-09 and again during the major decline in February-March 2020 at the onset of COVID, nearly all our clients adhered to their asset allocation plans. That means that we, and our clients, were both rational and reasonable, as we had worked with you to set an allocation to stocks that we thought was both financially proper for your long-term financial interests and goals, as well as a stock allocation you could stick with during good and bad times.

However, for those clients that could not stick to their stock allocation and talked to us about making changes, we worked with them to make changes and develop what was reasonable for them during that time period. It is more important that you can sleep at night, as long as you don’t make financial decisions that we think would impair your financial future.

Since the onset of Covid, we have also had discussions with some clients who wanted to re-evaluate their asset allocations. Some have reduced their stock exposure, as we (us and the client) realized they did not need or want to take on as much stock market risk as they had. This is being both rational and reasonable.

The expected future returns for stocks is greater than the expected future returns for bonds (fixed income). Over the long term, you should expect to create much more wealth by having a 100% stock portfolio than a 60% stock /40% fixed income portfolio. A 100% stock portfolio may be rational based on financial history and data, but it is not reasonable for most people to endure and live through. Thus, we provide reasonable advice so that you can reach your financial goals without enduring the extreme volatility that would come with a 100% stock portfolio.

Past financial history teaches us that over the long term, meaning decades not years, small company stocks outperform large company stocks, International stocks outperform US stocks, and value stocks outperform growth stocks. Based on past history, and the assuming the same expected differences in future returns, it would be rational to structure a portfolio with the highest expected returns. This would mean structuring a portfolio consisting of primarily the smallest value company stocks in International and Emerging countries, as they have the highest expected future returns.

Such a portfolio, with the highest expected future returns could be considered rational, but not one we would recommend, as its not reasonable. Very few investors would be able to stick with such a portfolio.

As we have all experienced, markets and asset classes are not predictable. Asset classes may have expected future returns, but actual returns do not always show up in a consistent manner. Like with other financial recommendations that we provide to you, we recommend portfolios that make sense (are reasonable). And sometimes we change or adjust our recommendations and advice, as the world and financial markets change.

We rely on broad diversification among many different types of asset classes to develop reasonable portfolios. We still believe that factors such as small company stocks, value stocks and global diversification will provide long-term financial benefits. We structure portfolios that include these asset class factors, but importantly we recommend including other asset classes as well, so your stock portfolio will benefit from growth and value, large and small companies. This should help you reach your long-term financial goals and maintain your lifestyle (and be able to sleep well too!).

We feel that being broadly diversified for the long term is both reasonable and rational. Just as the “all small value company International portfolio” is not reasonable or rational, we do not think for most people a US Large company-only portfolio (such as the S&P 500), would be rational for the long-term. It may be reasonable for some, but we would not recommend it for the long-term.

Having a portfolio that you can adhere to and stick with through all kinds of financial markets and future events is most important. That is both rational and reasonable.

We look forward to providing you, and others that you care about, with reasonable advice that is also reasonably rational!

How much is enough?

Blog post #465

“There is no reason to risk what you have and need for what you don’t have and don’t need.”**

This sentence from the excellent new book that I’m reading, The Psychology of Money, by Morgan Housel, really made me think.  And many other of his insights were just as thought provoking.

Housel’s book provides a different way to look at money than most financial or investment books.

To be able to think through the opening sentence of this post, which means that you shouldn’t take unnecessary risk for what you don’t have and don’t need, you must ask yourself how much money is enough? How much money do you need?

These can be difficult questions for some, and easy for others, depending on how much money you have, your age and your specific circumstances. It also has to do with the type of lifestyle you choose to live. And how important that lifestyle is to you.

If you really have enough money, do you need to take on additional risk? This is a worthwhile conversation to have with us, as your financial advisor.

“Enough” is not too little. Housel writes that “the idea of having “enough” might look like conservatism, leaving opportunity and potential on the table…”Enough” is realizing that the opposite -an insatiable appetite for more-will push you to the point of regret.” *** Housel is implying that it is not wise to allocate more to stocks, or other types of investments that could be risky (even if they don’t seem risky when you initially invest in them), when you don’t need to take on the additional risk.

In other words, you may not need to take on additional risk when the potential for loss is not worth the upside. We strive as your financial advisor to develop a reasonable investment plan for you, so that you do not take on too much risk. 

If you have enough money, what is the  reasonable way to invest, so that you can maintain, preserve and grow your assets, without incurring the risk of major losses which would impact your financial lifestyle? Answering that question is what our firm, and our investment strategy, is all about.

Housel stresses the importance and value of long-term investing and the benefits of compounding, which happens by being a patient investor for decades and decades. Housel writes that “…good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild. The opposite of this-earning huge returns that can’t be held onto-leads to some tragic stories.”****

This is why our approach of building diversified portfolios is so important. We may not generate the returns you could get by buying the hottest individual stocks, but that is not our goal. We are striving to help you build long-term wealth in a manner that you can adhere to for the rest of your life.

In his 5th chapter, Housel explains that it is not just about creating wealth and becoming wealthy (which is an amount that each person/family must define for themselves), it’s about staying wealthy. “Good investing is not necessarily about making good decisions. It’s about consistently not screwing up.”

If you don’t yet have “enough” money or wealth, these concepts are just as applicable. Saving early, investing regardless of market conditions, not taking unnecessary risks and consistently making good financial decisions all contribute to your long-term financial growth. And then the benefit of compounding over decades can help you even further.

Housel feels that “survival” is the single word he would use to describe money success. I would have never thought about that term, but he makes sense. Getting money and keeping money are two different skills. He explains a survival mentality is key, as “few gains are so great that they’re worth wiping yourself out over.”

He writes that applying the survival mentality means understanding three things:
  • More than wanting big returns, it means to be “financially unbreakable.” If you are unbreakable, you will get the biggest returns (over the long-term), because you will be able to stick around long enough for compounding to work wonders.
  • Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.
  • Being optimistic about the future, but also paranoid about what will prevent you from getting to the future, are vital.

These concepts all make great sense to our firm. In Housel’s book, which I highly recommend, he uses many stories and analogies to further explains his ideas.

Here are a few ways that our investment philosophy is congruent with Housel’s way of thinking. 

We work with you to develop an asset allocation plan, which is our way to control the amount of risk that you “need” to take. When a client can meet all their financial needs with a 40% stock allocation, we don’t recommend an 80% stock allocation, just so they can try to get even wealthier. The potential upside is usually not worth the risk and the added stress of huge, temporary market declines.

The way that our firm diversifies your assets at many different levels is consistent with Housel’s thoughts. We diversify by recommending different asset class investments which own thousands of companies in many industries, in the US and throughout the world. We could own just a handful of stocks or bonds and not be as diversified. That may lead to huge gains in some periods but lead to large losses in other times. The risk is not worth the benefit, in our opinion.

We say that we are “rationally optimistic,” but we also realize that the unexpected happens all the time. Events occur that we don’t expect. We are living through that right now. Markets drop when we don’t see it coming. That’s why we often remind you that it is normal for stock markets to incur huge losses at least once every 5 years on average and that 10% declines occur at some point in almost every year, even if the annual results are positive.

I have not finished reading The Psychology of Money, but what I have read has been helpful to me. It has confirmed our overall philosophy in many respects. But maybe even more important, it has provided many new ways to think about, and to talk with you about money, risk and strategies to be financially successful. And that should be helpful to you.




Looking out for you

Blog post #464

When you work with our firm, we want you to feel like “we have your back.” We are looking out for you.

If you use a personal trainer or need a physical therapist, he or she will guide you. They will teach you how to do an exercise properly, so you get the maximum benefit and not injure yourself. They will develop a plan for you, monitor it and encourage you so you can get the results that you desire.

First, you must select a trainer or physical therapist that is best for you. And they are not all alike!

The same goes with selecting a financial advisor.

We provide valuable services and advice to you and your family.

We develop a financial plan for you. We monitor it regularly. We rebalance your accounts as needed. We provide you with discipline, so you don’t take on too much risk (if markets rise) or buy low, when markets decline. And we don’t just do this once a year. We do it as needed, which can be much more beneficial to you.

We recommend tax-managed mutual funds for your taxable accounts, which strive to reduce taxable distributions. We pro-actively monitor your accounts for tax-loss selling when markets decline. This also saves you taxes.

We look for things that you may not have thought of or implemented on your own. A second set of eyes, like a medical second opinion, can be worthwhile. When we review 401(k) plan choices, we frequently find that those accounts are not invested in a way that are aligned with your risk tolerance or adequately diversified.

All these are ways we provide you with competence in our advice.

We provide you with coaching and support to help you stay in the market, as we did this winter, when Covid hit.

We can save you time and provide you with convenience by simplifying your financial matters. We can help you tackle tough issues, such as estate planning.

We also provide you with continuity. As we learn about your goals and wishes, we can help preserve your legacy. We can support and protect those people and organizations who you care about if anything happens to you.

A number of clients have named members of our firm as Trustees in their estate plans, to help ensure that their wishes are carried out. Not all financial advisory firms are willing to provide this vital role, but we are honored to do so.

We also provide continuity through our firm, as we have had minimal turnover. Keith and Brad have worked together for over 20 years, since before this firm was founded in 2003. With our firm, you will know your advisors and support staff, and know they will be here for you in the future.

Choosing a financial advisor is one of the most important decisions you can make.

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

Source:  *27 Principles Every Investor Should Know, by Steven J. Atkinson (Illustrations by Dan Roam) July 2019


What’s your end goal?

Blog post #463

Do you have goals you are trying to reach? These goals could include fitness, financial or be health related.

Once you have these goals in mind, do you adjust your lifestyle to accommodate or reach these goals?

I decided to set a goal to run at least 1 mile without stopping. Once that goal was reached, I moved on to run at least 2 miles without stopping. While this may not seem like a huge milestone to you, it was for me. I have been running outside all summer as part of my exercise routine and will keep running outside until the temperatures prevent me from doing so.

I have never liked running. It was like this phrase, if you see me running, you should too because something is probably chasing me! All joking aside, we can all set intentions to reach our goals.

It takes perseverance to keep pushing toward our goals. Perseverance is doing something regardless of the difficulty or delay in achieving success.

Just like running, building your wealth is a commitment and needs a solid strategy. Think of investing as a marathon and not a sprint.

Along with running, I also lift weights and train with an app called Volt athletics. It gives me weekly functional fitness workouts with weight and rep instructions. I also use a fitness tracking app, Whoop, to keep track of my activity strain and calories burned. This app also helps me know my body better by balancing daily recovery, strain and sleep and should help me better perform during my workouts. These apps assist me with my fitness goals, just as a financial advisor (WWM) helps you with reaching your financial goals.

I love this quote that Brad sent me from a Peloton instructor. “Working out is not like Amazon Prime, you don’t get results delivered in 2 days.” This is very true. It takes WORK and a long time to achieve many of our goals. Just like saving or investing takes discipline. It doesn’t happen overnight. You set goals that you want to reach along or at the end of your financial roadmap.

I have a long way to go to reach my goals. It is never a straight line to get there. There will be failures and successes along the way, like stock market ups and downs. But it is important to start, even if you start exercising 20 minutes a day or save a small amount of every paycheck. If you start small and build on your achievements/savings, you will make progress towards your goals, whatever they are.

I had MANY failed attempts along the way. But I kept working and recently accomplished running 3 straight miles! We can reach our goals if we continue to look forward to what we want to accomplish.

Running 3 miles didn’t happen overnight and I didn’t do it alone.  My husband runs with me and encourages me along the way.  Just like WWM is there to support you, our clients, along your financial journey.



Interest Rates and Your Financial Future

Blog post #462

Interest rates have been quite low for over a decade and are not likely to increase in the next few years. This has important implications for all investors.

The 10-year US Treasury bond yield has been below 4% since 2008, in the 2-3% range for most of 2009-2019, and has been well below 1% since the Covid pandemic hit in March of this year. (see the chart below).

The Federal Reserve on Wednesday provided forward guidance that they project short-term interest rates to remain near zero well into 2023. Eventually they predict short-term rates of around 2.5%, but they do not provide any guidance as to when that may occur. While their forward guidance (projections) have generally not been accurate, they are basing these predictions on the impact of Covid on the economy and the lack of current and expected future inflation.

What is the impact of continued low interest rates mean to you?

When we do investment planning for you, one of the most important decisions is how much to allocate to stocks and how much to allocate to fixed income (bonds, CDs, bond mutual funds, cash, etc.).

This high level asset allocation decision is based on several factors, which include your need and willingness to take risk, how much growth you need from your investments to meet your financial goals and your investment timeframe.

As we review these items with you, that will guide our recommendation of how much of your portfolio should be in stocks and how much should be in fixed income.

The key concept that we want to stress is that even though interest rates are very low, and may remain that way for a while, this should not significantly change how much you should allocate to fixed income. 

Why? Shouldn’t the prospect of continued lower interest rates make someone want to increase their stock allocation, as the fixed income returns will be very low? Let’s look at some examples and discuss this further.

If you are in your 20s or 30s and have decades of work and savings ahead of you, we may recommend a stock allocation of 80% or even more.

If you are in your 40s or 50s and need growth from your portfolio to provide for the retirement you desire, your asset allocation may be 60-70% in stocks, with the remainder in fixed income.

If you are in your 70s or 80s and have saved enough so that you can live comfortably, your stock allocation may be well below 50%.

We don’t think the prospect of continued very low interest rates should materially change your overall asset allocation plan because most people don’t want to significantly increase their stock market risk more than they need to.

If you feel that because of expected continued low interest rates you should decrease your fixed income allocation and increase your stock exposure, you must be prepared for the increased volatility (short term risk) that comes with owning more stocks.

Fixed income provides you with some income, but we view the fixed income allocation primarily to provide stability to your portfolio. Thus, you don’t have as much temporary volatility that comes with owning stocks. If you have the stomach to own more stocks, and can handle the swings and volatility, then your expected returns could be much greater over the long-term, say 10 or more years. But for most investors, they need the ballast of fixed income in their portfolio.

As we remind clients, it is normal for stock markets to decline at least 20-30% every 3-5 years. That is the type of temporary volatility that is to be expected in order to earn the long-term rewards of owning stocks.

  • If someone had a $2 million portfolio with a 50% stock / 50% fixed income portfolio, they would have $1 million invested in stocks. If that portfolio incurs a 35% decline, as happened in the S&P 500 earlier this year, the stocks would decline by $350,000.
  • But if the stock allocation had been increased to 75% because of lower expected interest rates on the fixed income allocation, they would have had $1.5 million invested in stocks. If a 35% stock market decline occurred, the temporary decline would be $525,000, which is far greater than the $350,000 temporary drop of a 50/50 portfolio.

The question you must ask yourself: Is the additional volatility of the stock market worth the increased exposure to stocks? Will you be able to maintain a higher stock market exposure through the down periods? This is so important, because the worst result would be to increase your stock market exposure now, then panic when a major stock market decline occurs.

We plan to remain consistent with our long-term principles regarding fixed income.

  • We will only invest in high quality fixed income, as the return of your principal is most important.
  • We will not reach for yield by buying junk bonds. If a bond fund says high yield, that means it is holding less than investment grade securities, which have a much greater chance of defaulting. We don’t recommend junk or high yield bond funds for our clients.
  • Diversification is vital in fixed income. For those who invest in municipal bonds, we recommend holding bonds of many states, not just your home state.
  • We regularly monitor your fixed income holdings of corporate and municipal bonds for any downgrades or credit risk exposure. We would rather sell today than take the chance on a default in the future.

The financial world is continuously changing. We are here for you, if you have any questions about this or other financial matter. 

We would be pleased to assist you, your family members and friends.




Investing for Long Run

Blog post #461

We invest for the long run. For long-term financial goals like college and your retirement.

Think of your investment horizon as nearing and then crossing a bridge, such as the Mackinaw Bridge or Golden Gate Bridge.

The investment horizon while you are saving is the period while you drive towards the bridge.

When your kids enter college or you near/begin retirement are comparable to after you have crossed the bridge.

These are serious financial goals and we make our investment recommendations accordingly. We don’t take unnecessary risks. We diversify. We recommend building a globally diversified portfolio that contains thousands of stocks, across industry sectors and geographic regions. We invest in large and small companies, in the US and across the globe.

As we build your portfolio, if you consider it like driving over the bridge, we think it is better to drive in the middle (having a broadly diversified portfolio) than riding the edges of the bridge with no guardrails (owning few stocks or very risky stocks concentrated in one sector or region).*


Why do we structure our portfolios in this diversified manner? Wouldn’t it be better to just load up on high tech stocks? Because the less diversified you are, the closer you may get to the edge of the bridge. Sometimes, this can mean higher returns, but it also may mean greater losses. Owning huge positions in individual stocks can lead to large losses which are unnecessary and hard to recover from.

With a globally diversified portfolio, you will have fewer reasons to worry about poor returns from a single stock or asset class. This does not mean that we recommend 50% or more outside of the US. We generally recommend holding 20-30% of your stocks outside of the US, depending on your personal circumstances. Because there have been many time periods in the past when non-US (International stocks) outperform US stocks for long periods of time, we feel this is prudent in the long-term. And that will keep you in the center of your financial road.

As you approach a bridge, there is frequently a backup. You are stuck in traffic. You may want to change lanes to get in the best toll booth lane. But once you switch lanes, your new lane becomes the slow lane. If you keep changing lanes, you will usually get more and more frustrated.

Investors do similar things. They can be impatient. They may want to get out of the stock market when the road gets scary. They may want to eliminate certain sectors of the stock market from their portfolio (such as small value and International stocks) because they are underperforming other asset classes, even though long-term historical data shows that they outperform or add important diversification benefits over long periods of time.

While we do not have a clear roadmap of the future, we feel that being disciplined and relying on historical financial evidence is better than guessing and continuously changing lanes.

We provide you with objective, rational advice. We do not give in to panic or make hasty, emotional decisions.

For most of us, whether crossing a bridge or investing, we want to follow a safer and prudent path. Your future is too important to risk.

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


Source:  *27 Principles Every Investor Should Know, by Steven J. Atkinson (Illustrations by Dan Roam) July 2019

It’s Hard to Stay on Top

Blog post #460

The Covid outbreak has caused each of us to adapt and change.

Adapting and dealing with change is not a new concept. In order to succeed over a long time period, organizations and companies must adapt and change to remain on top.

Very little stays constant. We know that change happens over time. Sometimes change is gradual and sometimes it’s sudden. Change can happen for many reasons.

Companies that are successful over long periods must be able to adapt and change, or they will be less successful or less profitable or shrink and possibly even go out of business.

The chart below shows the top 10 US stocks based on market capitalization by decade from 1930 to 2020. The data is based on their overall stock market value at the end of the calendar year, preceding the decade. For example, for 2020, Apple was the largest stock based on market cap as of December 31, 2019 (see the far right column, at the top).

Suggestion….if you can look at this chart on a device where you can enlarge it, the chart is much more informative.

Key takeaway: While some companies remained in the top 10 list for decades, this chart shows how much change there has been over the long term and how hard it is to remain in the top 10.

Based on this past evidence, it is hard to know with confidence if a top 10 stock today will be a top 10 stock in 2030 or 2040.

Exhibit 2, from DFA Article, “Large and In Charge? Giant Firms atop Market Is Nothing New”.

Some observations from this chart:

  1. From 2000, only 2 stocks that were in the top 10 are still in the top 10 as of the beginning of 2020. That is a significant amount of change in 20 short years. What 2 companies do you think these are? Think about this.  The answer is at the bottom.
  2. Apple was not in the top 10 until 2010. It is now #1.
  3. Of the top 10 in 2020, 5 of those companies were not in the top 10 at the beginning of 2010. That is an amazing amount of change in 10 years. And since the beginning of the year, JPMorgan would be out of the top 10 today, and either Tesla or Walmart would be #10. Tesla was far from the top 10 at the beginning of the year.
  4. What decade did Amazon begin in the top 10? The answer is at the bottom.
  5. What stock was in the top 10 every decade from 1930 through 2010, was #2 at 2000, but dropped out after 2010 and is now only about 110-120th largest as of June 30, 2020? General Electric.
  6. The chart by decade shows how the economy and world have changed significantly.
    • Energy stocks were 5 of the top 10 in 1980. There are no energy stocks in the top 10 now.
    • There were 5 technology stocks in 2000 (Microsoft, Cisco, Intel, Lucent and IBM) and 5 technology stocks on the list at the beginning of 2020. However, only Microsoft remains on the list from 2000 to 2020. And none of the other 4 stocks have done well in the 20 years since 2000, compared to the S&P 500 index.
      • Today’s leaders may not be the leader’s a decade or two from now.
      • To show how hard change is, Cisco was #3 in 2000. Its current price is still lower than it was at December 31, 1999. In 2007, Cisco purchased a company called WebEx, a web conferencing start-up. In 2011, a VP of Engineering pitched an idea for a smartphone-friendly conferencing system to Cisco executives. They rejected the idea and Eric Yuan left to establish Zoom Video Communications, which is now worth over $100 billion. Cisco is worth about $174 billion but could be worth so much more.
    • Since 1990, it appears that change is even more frequent, or that is even harder to remain in the top 10 list. At the beginning of each decade, these are the number of companies that appear on the list for the first or only time:
      • 1990:  4 companies
      • 2000:  5 companies
      • 2010:  1 company
      • 2020:  5 companies

While many of the current top stocks have performed extremely well in recent years, you should remember that expectations about future operational performance of a company should already be reflected in it current price. Positive developments that occur in the future that exceed current expectations (such as Covid’s positive impact so far on Amazon and Walmart) may lead to further gains in its stock price. However, unexpected changes are not predictable.

Historical data on the performance of the top 10 stocks following the year in which they joined the list of the 10 largest firms shows much less positive results. As Exhibit 3 below shows, these stocks outperformed the total stock market (this is not compared to the S&P 500) by 0.7% per year in the subsequent 3-year period. Over the subsequent 5- and 10-year periods, these stocks underperformed the total stock market on average by greater than 1% per year. This data was compiled for each calendar year between 1927-2019, not just by decade in the prior chart.



The only constant is change and this clearly applies to the dominant stocks in the market. It remains impossible to systematically predict which large companies will outperform the stock market and which will underperform it. This reminds us of the importance of having a broadly diversified portfolio that provides exposure to many companies and industry sectors.

Answers from above:

1. Microsoft (#1 in 2000, and #2 at the beginning of 2020) and Walmart (#4 in 2000 and #9 at the beginning of 2020).
4. Amazon was not in the top 10 in 2000 or in 2010. The first decade that Amazon appears in the top 10 was in 2020, ranking #3 at the beginning of 2020.



What is going on with DJIA and S&P 500?

Blog post #459

We believe it is important that you understand how the S&P 500 Index works, the concentration that exists in the technology sector and among the top 5-10 stocks. The S&P 500 has not been this concentrated in any one sector in over 70 years. While the overall Index was up about 5% year to date through July 31, 2020 due to the performance of the top 5 stocks, the remaining 495 stocks were down about (6%) for 2020.

The S&P 500 Index is a widely tracked index, composed of generally the 500 largest public companies which are based in the US. The stocks in the Index change over time, as companies are bought, merge, grow and shrink. A company must be profitable to be added to the Index.

The S&P 500 Index has frequently been concentrated in the past but has become very concentrated in just the technology sector in recent years. The top 5 stocks comprise over 22% of the Index as of July 31, 2020. That is now likely to be 25% or more.  Information technology as a sector is now between 25% – 30% of the S&P 500 Index, as the chart below shows:


The S&P 500 is a market-weighted index, meaning that the market value (share price x number of shares outstanding) of the largest companies have the greatest impact on the index’ performance.

As of July 31, 2020, the following are the top S&P 500 stocks and their respective weightings:


Apple 6.40%
Microsoft 5.75%
Amazon 4.90%
Facebook 2.26%
Alphabet/Google 3.26% (A and C shares)


Apple, Microsoft and Amazon, because of their huge market valuation, have a much, much greater impact on the rise and fall of the Index than other companies. Apple’s price change has almost 6X greater impact than Visa, the 10th largest stock, (1.18% as of 7/31/20).

Two examples of large companies, but with much less impact on the Index’ performance would be:

  • Netflix, 22nd largest, but only a 0.781% weighting
  • Costco, 41st largest, but only a 0.522% weighting (as of 6/30/20).

It is widely believed that Tesla will be added to the S&P 500 in the near future. This may have a dramatic impact on the performance of the S&P 500 Index. To be eligible to be added to the S&P 500, a company must be profitable for four straight quarters. Tesla this reached profitability as of June 30th, primarily due to the sale of energy credits, not its core car making business.

Tesla has a market valuation of $400 billion, which exceeds that of Walmart, which is valued at $370 billion. It is rare that a company with a market cap as high as Tesla would initially be added to the S&P 500. Normally, a company with such a massive market cap would have been profitable much earlier and added to the Index before it became so large.

One measure of a company’s relative price valuation is called the P/E ratio, or Price/Earnings ratio. Generally, the higher the number, the more future growth is expected. A very high PE ratio is also viewed as a sign of greater risk. The overall S&P 500 Index currently has a PE ratio of around 24.Tesla currently has a PE ratio of greater than 1,100. Walmart has a PE ratio of 21. 

If Tesla is added to the S&P 500, it would be in the top 10-15 stocks. Tesla’s market cap of $400 billion would be just below the $461 billion market valuation of Visa (both values as of 8/26/20), which is the 10th largest company as of 7/31/20, at 1.18% of the Index. Thus, Tesla would carry a lot of weight in the Index, and it has been a very volatile stock. Tesla has experienced an incredible rise since June 2019. It has also had other periods of huge and fast declines. If it is added to the S&P 500 Index, Tesla would likely add a lot of volatility to this widely tracked index. 

I wrote a post in January 2018, explaining that only 5 stocks caused over 50% of the 2017 DJIA increase (Boeing, Caterpillar, UnitedHealth Group, 3M Co and The Home Depot). Please see this post, 5,000, 30, 5 and 2, for further information. The impact of the top 5 stocks on the S&P 500 Index and this example of the DJIA are why we stress that our broadly diversified portfolios will often act differently than these major market indices. We believe that broad diversification, and not just holding large growth companies, are important in the long-term.

Our goal for nearly all of our clients is to help you reach your financial goals, while taking an appropriate manner of risk. Thus, we feel it is in your best financial interest to own the S&P 500, but only as a portion of your overall portfolio. Historically, over the long term, a globally diversified portfolio has outperformed the S&P 500. This will certainly not be the case every year, or possibly for years at a time. And that is why investing requires discipline and an understanding of how markets and indices work.

Major impact: It is important to note that over $11 trillion dollars track the S&P 500 Index as of the end of 2019. Thus, changes to its composition and the weightings of the top stocks have major market impacts. While the DJIA is widely cited by the press, only about $31 billion in assets actually track the Dow, so the changes discussed below don’t lead to an immediate shift in investor behavior.

Apple stock split causing changes to the Dow

The Dow Jones Industrial Average (DJIA) is quite different than the S&P 500. The DJIA consists of only 30 stocks. The DJIA index is calculated in an unusual method, which emphasizes the actual price change of the highest priced stocks in the index. The Dow is a price-weighted index, meaning higher-priced stocks contribute more points to the index’s daily moves. It is not based on the percentage change of each company and the companies are not equally weighted. 

Apple stock is around $500 per share. Apple is currently the highest price stock of the 30 Dow components, meaning that Apple’s price changes exert the most influence on the DJIA. However, next Monday Apple stock is being split of 4 to 1. This means that each Apple shareholder will receive 3 additional shares and the price will drop to around $125 per share, if the price does not change.

Thus, because of its price per share reduction, Apple will go from being the largest DJIA influencer to middle of the pack, as its approximate $125 share price would be in the middle of the 30 stocks in the Dow. The stock split will have no impact on Apple’s large influence on the S&P 500 Index, as the market capitalization of Apple is not affected by the stock split. United Health Group ($308 per share) will now be the highest price stock in the Dow, and its biggest influencer.

As a result of the Apple stock split, and the change to Apple’s stock price, Dow Jones is adding and deleting stocks to the DJIA, and will modify the divisor that it uses to calculate the DJIA, effective Monday August 31. The changes and prices of each, as of end of business day, 8/26/20:

Being Added to DJIA: $272 (increase from $216 a few days ago), technology
Amgen $250, biopharmaceutical
Honeywell $165, industrial

Being Deleted to DJIA:

Exxon $40, energy
Pfizer $38, pharmaceutical
Raytheon Technologies $61, defense and industrial

S&P Dow Jones Indices, which manages the benchmark, is adding Salesforce to add another technology component, as Apple’s influence will be less in the future. They are swapping two large pharmaceutical companies, likely to get a faster growing company and one with a higher price, in Amgen. Each company being added have high stock prices, so each will have significant impact on its daily movements.  Actually, each newly added company will have more influence on the Dow than Apple will, for now.

Deleting Exxon from the DJIA tracks the reduction of the energy sector in the broader economy. Exxon was the longest lasting member of the DJIA, first added in 1928. This leaves Chevron as the only energy company in the Dow, with just 2.1% of the price-weighted index. At the end of 2011, energy was 12% of the S&P 500. Energy is now only about 2.5% of the S&P 500, the smallest of the 11 industry sectors. Exxon and Raytheon were down at least 30% on the year, so this is a way to potentially add “better performers” to the DJIA.

The Dow and S&P 500 Index, though very different based on composition, number of components and how each is calculated, have behaved similarly over long periods of time. This year has been different, as the S&P 500 was up over 6% for the year as of a few days ago, while the DJIA was down about (1%) for 2020.

We feel that one of our roles is to provide you with helpful and timely information, so you can understand certain financial matters. As the S&P 500 Index and DJIA are mentioned in the press often, we thought this explanation would be beneficial, as well as inform you how concentrated the S&P 500 is in just a handful of technology stocks.


1. “Salesforce, Amgen, Honeywell to Join Dow Jones Industrial Average“, The Wall Street Journal, by: Michael Wursthorn, August 24, 2020
2. “Exxon’s Departure From Dow Highlights Market’s Retreat From Energy Bets“, The Wall Street Journal, by: Karen Langley, August 25, 2020

Beyond Investing….You Get More

Blog post #458

You must make many financial decisions during your life.

Some of these decisions are straightforward.

But many financial decisions or issues can be complex. Often, you may lack adequate information or the specialized skills necessary to make a fully informed decision. There is uncertainty. Laws changes. The financial markets and the world changes.

At what age should you begin to collect Social Security benefits? 62? 65 or 66? Or wait until age 70?

For many decisions and issues, there may not be one, perfect answer. Reaching a decision may depend on various facts, circumstances, judgments and assumptions.

In many cases, these types of decisions can be overwhelming. What you desire to be a rational, logical decision may really be partly an emotional decision. Or it may be an emotional issue, but you want to make a rational decision.

Should you pay off your mortgage early? Should you refinance from a 30-year mortgage to a 15-year mortgage?

When you first became a client, or if you are a prospective client, you most likely come to our firm because you want investment guidance and advice. And we will provide you with that.

Over time, most of our clients come to realize that we can provide you with far more than just investing advice. We help you find solutions to your other financially related issues, questions and concerns.

Our relationship usually begins with planning around investments. What is an appropriate allocation to stocks, based on your family’s goals and needs? Do you need to take more or less risk to meet your various goals? How should your investments be structured for the short and long term?

But at some point in the future…..questions arise…….

Do you need to have life insurance? What kind? Whole life or term life insurance? How much is necessary and what is most cost effective?

Later in life, you may ask if life insurance is even still necessary.

One of the most satisfying aspects of the relationships we have with our clients is to assist them with all these financially related issues. We have decades of financial experience, which you benefit from. Brad and Keith are both CPAs, with over 70 years of combined financially related client experiences. Our Associate Wealth Advisor, Bradford Newsome, is a Certified Financial Planner with over 10 years of helping clients with all kinds of financial matters. We also have resources and access to top financial planning experts within our back-office firm and others, to help work through these issues.

We want to help you. We strive to provide you with much more than just investment advice.

Should you have a long-term care policy? Does it make sense for you and your family?

What is the best way to fund a college education?

How should we save for retirement? How much do we need to save? How do we pick between all the 401(k) choices?

One of the most important roles that we can provide as your advisor is to help you deal with these issues. We can help you with matters which are frequently emotional or complex, so that you can make decisions more rationally.

Throughout our relationship, we encourage you to talk to us about financial issues that are important to you and your family, beyond just your investments.

We provide you with guidance, so you can meet your goals, deal with uncertainty and have a greater sense of comfort and security. We can provide you with guidance, to help you make better decisions. We can teach and explain things to you in an understandable manner. We can save you time and help you to be more organized. We can help you deal with financial complexity, so you can focus on other things that matter to you.

It all starts with a conversation and a good relationship. We are ready to talk with you.

The Importance of Knowing What You Invest In….and Why

Blog post #457

We are very particular about what we invest in and recommend on your behalf, for good reason. Your financial future depends on these decisions.

We developed a philosophy when we began our firm in 2003. We still stick to that same general set of principles and criteria today. We feel that our philosophy has withstood the test of time, through some good as well as some very challenging times.

We utilize low cost investments, not products. We do not use investments that charge commissions or have front or back end loads. 

We know that fees matter. Generally, the lower the fees, the better your returns should be. There is extensive research that shows that in mutual funds, better long-term returns are correlated with lower costs. Thus, we strive to utilize funds that have good long-term investment records, as well as much lower costs (internal expense ratios) than industry averages.

We assume you want your doctor to give you the best medical advice possible, in an unbiased manner. You would not want to get your medical advice from a pharmaceutical sales rep, who can only sell a drug that their firm manufactures. The same goes with your financial advice. You want independent, unbiased advice that is in your best interest.

We try to provide advice and develop an investment plan that solves your needs. We are only compensated by the advisory fee that you pay us. We do not get any additional compensation from any investment that is in your portfolio. We are fiduciaries. This means that we must always put your interests ahead of ours.

We invest in stock and bond mutual funds or ETFs that are readily liquid, so you can access your money when you want or need it. We do not invest in products or alternative investments that restrict your liquidity for a period of years or you can only withdrawal a certain percentage of your assets each quarter or year. We feel that for nearly all our clients, these illiquid investments are not in your best interest. We want you to be confident and comfortable that you can get access to your money when you want to.

We want to be able to understand what we recommend….and be able to explain it very clearly to you, so you can also understand it. We want the funds that we recommend to you to invest in what they say they will and stick to that.  As we design your portfolio, we want the investments that we use to adhere to their stated objectives and asset class categories.

The mutual funds and ETFs that we use and recommend adhere to defined strategies, that are understandable. For example, if we recommend a US Small Cap mutual fund, that means that the fund will own the smallest companies that are publicly traded in the US. If smaller companies are underperforming larger companies in the US, this fund should be underperforming a US Large Cap fund. We can understand this and we can explain it to you. It is logical and rationale.

If we invest in a US Small Cap Value fund, we do not want a significant portion of that fund to be invested in large or mid-size growth companies, as the fund would then have different risk and return expectations.

We do not believe in utilizing alternative investments and hedge funds, because they do not meet many of these criteria. They are usually quite expensive, meaning their internal costs are usually way above 1% or 2% annually.  For the greater costs, we cannot determine in advance that their returns will make this higher cost beneficial.  The funds and ETFs that we recommend have expense ratios that are far below 1%, almost always well below 0.5% annually.

Alternatives and hedge funds can be like black boxes, as they may not provide current information on what they are invested in.  Their holdings and strategies may change frequently, so we cannot understand what they are doing.  Some alternatives use margin or leverage, which can significantly increase the risk of the investment.  We do not invest in funds that use margin in their ordinary course of operations.

After evaluating many alternative investments, we have chosen not to recommend any as of now. We do not believe that the stated goals and objectives (and their actual performance) provide you, our clients, with better expected and actual returns, after their fees. While they strive to provide greater diversification benefits, we are comfortable that we can provide you with broadly diversified stock and fixed income portfolios in a more effective and transparent manner.

We also have specific and disciplined criteria for purchasing and holding individual fixed income securities. Our goal for the fixed income portion of your portfolio is to provide safety and return of your principal, with whatever interest rate can be safely obtained for a given length of maturity. We do not believe in reaching for extra yield, for riskier bonds. We avoid certain sectors of corporate or municipal bonds, which evidence shows have greater default risk. We only purchase investment grade individual bonds or bond funds. For municipal investments, they must be very high quality and only in certain sectors and states.

We hope that understanding what we invest in, and what we avoid, makes you feel more confident and comfortable with our long-term investment strategy and philosophy.

Talk to us. We want to help you, and your family, deal with change, today and tomorrow.