Dealing with this situation

Blog post #435


The world has changed significantly, which has affected health concerns and investors’ finances.

What has happened?

The coronavirus outbreak was the first negative to impact global, then US stock markets, in past weeks.

On Monday, US and International stock markets were dramatically impacted by the unprecedented steps taken over the weekend by Saudi Arabia, to both increase oil production and reduce the price they charge for oil. These actions, along with the already reduced global demand for oil due to the coronavirus, caused the price per barrel of oil to plummet from $63 per barrel at the beginning of 2020 to around $33 at mid-week.

As this week has progressed, stock markets continued declining sharply as the reality of the Covid-19 outbreak and the lifestyle changes that will be required, have taken hold.  The economy will slow dramatically and many economic sectors will be greatly impacted.

Interest rates, which were already at historic lows, have fallen even further. Credit markets are concerned about weakening economies, companies that may have difficulties due to lack of demand due to coronavirus, as well as energy companies and their lenders, due to the huge decrease in oil prices.

What do we think going forward?

Clearly the world has changed significantly over the past few months, and even over the past week.

We do not know when financial markets will stop failing, when the coronavirus outbreak will be contained or mitigated, or when oil prices will return to rationale levels.

What we do know is that we must focus on key things…such as what we can control and what matters to each of us.  I will be blunt, the health issues are very concerning. I have tried to keep this mantra in mind, as I try to focus on what we can control, and not control. Our everyday lives are going to be disrupted for a period of time…and none of us know for how long. The health issues have now been compounded with financial concerns, due to the drop in stock values. Hopefully, our federal, state and local leaders, both medical and political, as well as those leaders across the globe, take serious, appropriate and necessary actions in the immediate future.

In terms of your portfolio, the pain of losing money is not pleasant for anyone. I am invested in similar or identical stock funds and fixed income securities as our clients, so my family has lost money in stocks and been cushioned by fixed income, just like you have.

To be a successful long term investor requires resiliency, which nearly every client we have has shown over the past weeks.  The coming weeks and months may continue to be very challenging. To reap the long-term rewards of the stock market, you need to remain invested during both good and bad markets.  No matter how difficult, this will be temporary.  There will be medical solutions and an economic recovery from this health outbreak.

When we meet with clients at or near retirement age, we frequently discuss their allocation to fixed income and their withdrawal rate. We remind them that their fixed income assets should last them for many years, and in many cases, for 10 or more years.  We call this your foundation. This means that if you can live off of your fixed income assets for a long time, you have a strong foundation and you don’t need to be as worried about what the stock market is doing today, or even over the next few years.

The reality of living through a sharp and scary decline like we are experiencing can still be difficult, so let’s go through the scenario and then some history. These are important concepts.

For example, if someone has a $3 million portfolio and is allocated 50% to stocks and 50% to fixed income, they would have $1.5 million of fixed income investments. If this hypothetical client was withdrawing $150,000 per year from this portfolio, that is a 5% withdrawal rate. That is realistic. The $150,000 per year is 10 years of their fixed income assets ($150,000 / year x 10 years), not including any interest earned on the fixed income. Thus, they don’t need to actually use the stock market investments for at least 10 years. There will be time for the stock investments to recover from periods of decline, such as we are incurring now. This is the type of portfolio and mentality that we want to develop with all of our clients.

If you are younger, and in the accumulation and savings phase of your life, you should continue to invest and save for the long term.  You should want to buy when others are scared and are selling. Keep adding to your retirement and regular savings plan. Make contributions now, for retirement plan contributions that may be due later in 2020 or even 2021.

We don’t know when global stock markets will recover, but we are confident that they will. We are quite confident that 3-5-10+ years from now, diversified holdings of global stock markets will be higher than they are today.

Some facts and history….

Since 1979, the US Russell 3000 Index (the 3,000 largest US traded companies) has averaged about a 14% decline at some point during each year (called an “intra-year” decline). While we invest in a globally diversified portfolio and the 2020 intra-year decline has now far exceeded 14%, this data is still instructive.

  • About half of the years since 1979 have had declines of more than 10%.
  • About 1/3 of the years had declines of more than 15%. (Significant declines are not fun, but more normal than most of us realize).
  • However, calendar year returns were positive for 34 of the 41 past years.**

This shows that intra-year declines are normal, but positive years and recoveries are even more the norm. While the cause for the steep decline is different this time, as it is health related,  we don’t think the long-term effect will be different….there will be a recovery.  You will need to be patient and are advised to adhere to your asset allocation plan.

From July, 1926 until December 2019, for almost 100 years, the broad US stock market has returned around 9.6% per year, before fees and trading costs. Obviously, there has been great year-to-year variability (many up and down years) to reach that 9.6% per year average.

As the chart below shows, after declines of 10%, 15% and 20%, the broad US stock market (comparable to the Russell 3000 Index) has generally performed better than average in the 1, 3 and 5 year periods following such declines. Stocks generally show strong returns after steep declines.*** This is the reward for the risk and volatility you need to endure.

What are we doing and recommending?

Most importantly, we are here for you, if you want to talk to us. Please call or email us. We know this is a difficult time, and may likely continue to be, especially with both health and financial concerns.

To save you future taxes where possible, we have placed trades all week to recognize tax losses, especially for newer clients and those that have added money to their accounts this year and in recent years, depending on the specific investment. We are not waiting until later in the year or until year end to do this. We aggressively monitor your taxable accounts for these opportunities…..providing a silver lining to the market turbulence, whenever possible.

We will be reviewing client accounts for stock purchasing opportunities, by rebalancing or if you add new money to your investments. For the long term, the coming weeks and months offer times to buy. We can never know when the market bottom will be. But just as investments were very profitable for those that had the courage to buy during the declines of 2008-09, we expect those that buy over the coming days and weeks will be rewarded in the long term. We call this rebalancing, as your fixed income allocation has increased and your stock allocation has decreased in the past month, we would recommend to sell fixed income and buy stocks.

As interest rates have dropped, if you have a mortgage that is above 4-4.5% and you plan to stay in that home for at least 3-5 years, you should consider refinancing. If you want to discuss this with us, please contact us.

If other tax or financial changes are enacted in response to this situation, we will update you on those as they occur.

We are prepared to work remotely, if that is recommended or required. If that becomes a reality, we will provide clients with the necessary contact information. We have procedures in place and each member of our firm has worked and done business remotely many times in the past, within a secure technological environment. We have also discussed these scenarios with our business partners and are confident that we can function property and be able to provide you with excellent service, remotely.

We hope each of you and your families stay in good health.


** Recent Market Volatility, Dimensional Fund Advisor’s, Issue Brief, March 4, 2020.

***US Equity Returns Following Sharp Downturns, Dimensional Fund Advisors, March 9, 2020.

Why we recommend the direct, not alternate route

Why we recommend the direct, not alternate route

We recommend investments which generally meet the following criteria. They should be:

  • Understandable and transparent
  • Diversified
  • Low cost
  • Tax efficient, if needed
  • Not dependent on one or a few managers
  • Not dependent on someone’s attempts to make forecasts or predictions, to be successful
  • Liquid, so you can get your money when you want to

For fixed income investments, this would mean high quality individual bonds or other securities, or bond mutual funds, depending on one’s portfolio.

For stock investments, we recommend asset class mutual funds of various types, which together provide a globally diversified portfolio, such as US Large Company, US Small Cap Value or International Large Value, just to name a few.

Diversification is critical in developing a portfolio, as research shows that with both stocks and bonds, a diversified portfolio can provide greater expected returns along with less volatility, over the long term. This can be accomplished very effectively at a very low cost.

However, many people are attracted to “alternative” investments, in search of even greater returns or the promise of reduced volatility and good returns.

Alternative investments have many names and types. Examples include hedge funds, private equity, and strategies with names like market neutral, absolute return, long/short equity or managed futures.

We base our philosophy on research and evidence. And the evidence is that it is nearly impossible to identify an alternative investment in advance that will consistently outperform over the long term, after factoring in costs and taxes.

Based on research compiled by Dimensional Fund Advisors, the primary stock mutual fund provider we utilize, publicly available alternative strategy mutual funds have performed horribly over the past 10 years ending December, 2017, as compared to the broad US stock and bond markets. See Exhibit 2* below, which details these results:

This shows that these alternatives had annualized returns of less than 1% per year, versus stock and bond returns of around 8% and 4% per year, respectively. Clearly most publicly available alternatives were not beneficial investments over the past 10 years. The exhibit shows the alternative investments net of their fees, whereas the indices are not reflective of fees. Thus, I’ve stated the indices returns as less in this paragraph, to account for some approximate fees.

We generally do not recommend alternative investments for many reasons.

  • They are almost always very costly, with expense ratios of 1.4% for public alternatives and 2% or higher for private hedge funds, whereas we can build a globally diversified stock portfolio for around .30%-.40%, depending on the allocation of the stock portfolio. That would mean an alternative strategy would need to outperform our recommendations by over 1%-1.7% per year, just to be even due to costs. That is hard to do.
  • Many alternative investments are hard to understand. They can be like a black box. We want to understand what we are investing in. With many alternatives, you don’t know what the strategy is…and it can change very frequently. What stocks are they shorting today (which means they are betting that stock will go down)? They may only report their holdings a few times a year, so there is a lack of transparency.
  • Another factor is often portfolio turnover. Greater portfolio turnover generally leads to higher tax costs for investors. The Liquid Alternatives in the study* above had a turnover of 200% per year, which means the portfolio is replaced twice a year. If they were successful, and turned over the portfolio that often, gains would be short-term capital gains, which are taxed at the higher, ordinary income rate. Again, a bad result.
  • Liquidity. We want you to have access to your money when you want it. With our current investments, you can get access to your money within a few days. Many alternatives, even some real estate investment funds, limit your ability to withdraw your money to quarterly or even a certain dollar amount per quarter or year.

While there may be some good alternative funds, the benefits they tout do not usually pan out over time.

When evaluating alternative investments, you should consider if it will add a beneficial element, that you don’t already have in your portfolio.

If it meets that criteria, can it really reasonably increase your expected returns or reduce your expected volatility? If so, how confident can you be of these assumptions?

And, will it be cost and tax effective?

We are confident that the criteria we stated at the beginning of the post are solid, reasonable and in your best interest. We evaluate new and different concepts, but any new investment we would recommend must pass those standards, at least as of today.




Whitepaper, Alternative Reality, Dimensional Fund Advisors, August 2018.


*Exhibit 2: Past performance is no guarantee of future results. Results could vary for different time periods and if the liquid alternative fund universe, calculated by Dimensional using CRSP data, differed. This is for illustrative purposes only and doesn’t represent any specific investment product or account. Indices cannot be invested into directly and do not reflect fees and expenses associated with an actual investment. The fund returns included in the liquid alternative funds average are net of expenses.  Please see a fund’s annual report and prospectus for additional information on a specific portfolio’s turnover and the expenses it incurs.

Liquid Alternative Funds Sample includes absolute return, long/short equity, managed futures, and market neutral equity mutual funds from the CRSP Mutual Fund Database after they have reached $50 million in AUM and have at least 36 months of return history. Dimensional calculated annualized return, annualized standard deviation, expense ratio, and annual turnover as an asset-weighted average of the Liquid Alternative Funds Sample. It is not possible to invest directly in an index. Past performance is not a guarantee of future results. Source of one-month US Treasury bills: © 2018 Morningstar. Former source of one-month US Treasury bills: Stocks, Bonds, Bills, and Inflation, Chicago: Ibbotson And Sinquefield, 1986. Barclays indices © Barclays 2018. Russell data © Russell Investment Group 1995-2018, all rights reserved.

Standard deviation is a measure of the variation or dispersion of a set of data points. Standard deviations are often used to quantify the historical return volatility of a security or a portfolio. Turnover measures the portion of securities in a portfolio that are bought and sold over a period of time.

A Life Changing Decision

Austin, TX

I was seated at the far end of the counter at the Counter Cafe in Austin, Texas. The small restaurant was busy, as to be expected on a beautiful Sunday morning.

The gentleman next to me and I started talking, as he was midway through his great looking “house special,” and I was contemplating my order (one incredible and very large blueberry pancake, if you’re interested).

Eventually, he asked why I was in Austin. I told him I was here for a number of meetings, including a learning group seminar with other financial advisors, which Keith was also attending, to be held at the offices of Dimensional Fund Advisors’ (DFA).

He had actually heard of DFA, which is rare, as they don’t advertise, even though at $600 billion in assets, they are the 7th largest mutual fund firm in the US. I told him DFA was the primary mutual fund company we use for our stock investments.

We talked further and in response to a question, I told him that “deciding to work with DFA 15 years ago was one of the best decisions of my life. It has changed my life, the life of my family, my clients and the future generations of my clients.”

How could this be true?

When we founded our firm, we were searching for an investment philosophy and strategy that was different and better than others were using. The investment philosophy that DFA utilizes provided the consistent foundation for the stock investment advice we have given and implemented over the past 15 years.

Our firm has adhered to this core investment philosophy through good markets and very difficult downturns. This discipline has been rewarding for our clients.

Clients decide to work with us to help them solve their financial issues and concerns. They expect good investment performance. They want advice from advisors whom they can trust and rely on for the long term. They want excellent service and reliability.

For us, DFA has provided one manner of how to provide investment implementation. DFA’s funds have provided solid performance over the long term. They offer very tax efficient mutual funds for those with taxable accounts and the internal costs of their funds are far below industry averages. They rely on academic data and evidence, not guess work and forecasting. They are strong advocates of diversification at many levels. Their funds stick to what they are intended to do. This means that a small company fund does not have large company stocks in it. They do not rely on a few star portfolio managers. Their funds are managed by teams. All of these are important factors in successful long term investing.

While DFA has been a critical part of our success and to the benefit of our clients, we are continually monitoring their performance. We are always challenging ourselves to ensure that we are looking at other alternatives and ideas which are consistent with our principles and your best interest.

We are fortunate for the strong relationships we have developed with our clients. We have worked hard to earn your trust, through good and bad financial markets. We spend time to educate you about financial markets and to have realistic expectations about downturns and market corrections.

We are fortunate that many of you have involved us in important discussions in your lives, including estate planning and major life decisions.

While we are totally independent of DFA and not compensated by them, we are thankful that we made the decision to use some of their funds years ago.

Regardless of how or why you became a client of our firm, we have tried to provide you with a greater sense of financial security and peace of mind about your financial future. DFA has played a role in this. For this we are thankful.

The January Effect: Myth or Reality?

The first few days of January, 2018 have been positive for financial markets. What does that mean for the rest of the year?

There are some who believe that as January goes for the S&P 500 (an index of 500 large US companies), it may be a signal whether that index will rise or fall for the remainder of the year.

In other words, the theory suggests if the return of the S&P 500 in January is negative, this would predict that a decline in the general US stock market for the remainder of that year, and vice versa if returns in January are positive.

Has this been an accurate and reliable indicator in the past?

Exhibit 1 shows the monthly returns of the S&P 500 Index for each January since 1926, compared to the subsequent 11 month return (from February-December). A negative return in January was followed by a positive 11-month return about 60% of the time, with an average return during those 11 months of around 7%. So, no, this is not an accurate indicator, at least when January is negative.

What other observations can be made from this data? The lessons of patience and discipline are clear.

January, 2016 was a good example of this. The first two weeks of January, 2016 were the worst ever for the Index, down (7.93%). The full month of January 2016 ended down (4.96%), the 9th worst January since 1926. However, the return of 18% for the next 11 months of 2016 resulted in a positive calendar year 2016 return of almost 13%.

Over the past 20 years, 10 of the January’s were negative. In 15 of these 20 years, the succeeding 11 months of the year were positive, not negative.

We do not believe that sound investment policy should be based on “indicators” such as this. You should not make investment decisions for a year, or the long-term, based on the market movements of any one month.

Over the long-term, the markets (both US and overseas, and across various asset classes, as we recommend) have rewarded investors who are patient and disciplined, who can look beyond indicators such as this.

Frequent changes to your portfolio or investment strategy can hurt performance. Rather than trying to beat the market based on your emotions, hunches, headlines or indicators, investors who remain disciplined, patient and calm can let the markets work for them successfully over time.

We are here to provide you with sound, reliable guidance and advice, so you can meet the financial goals of you and your family. And not just in January!


Source: Dimensional Fund Advisors LP

Decisions: Past, Present and Future

What do you have from 2002 or 2003 which you still value?

What relationships? Any investments? Any stocks or stock funds?

What did you acquire or begin 15 years ago which are still important to you?

Remember, in 2002, the iPhone and Facebook had yet to be invented, Netflix came by DVDs in the mail and Blockbuster stores were still everywhere. Lots has changed since then!

In October 2002, I attended my first BAM National Conference, when we were initially investigating how to provide investment advisory services. I quickly realized BAM Advisor Services was the right group of people with the right tools and ideas for us. BAM would be the source for the investment philosophy and intellectual resources we would need to advise our future clients.

Our introduction to BAM and their investment philosophy led us to the investment approach of a major and growing mutual fund group, Dimensional Fund Advisors (DFA), which would become the primary stock mutual fund provider for the vast majority of our clients’ stock investments. We have been pleased with this decision.

For the 16th straight year since 2002, I will be traveling this weekend to attend the BAM National Conference in St. Louis.

Have you done anything for 16 straight years? If you have, and you were not going under duress, it must be very worthwhile, right?

As we are nearing our 15th year of providing investment advisory services, we realize the critical importance of these early decisions. These decisions have had a direct and very positive impact on each of you, our clients.

We often say that we cannot predict the future. It’s true….we can’t!

However, you rely on us to help you assess and deal with an uncertain future. You expect us to make good decisions, even with uncertainty, which will have long and important implications for you and others close to you. You judge us by the advice and decisions we make.

When it comes to the quality of these vital decisions, selecting BAM, DFA and our investment principles, we are confident that we selected firms and concepts that would, and have, withstood the test of time, through good and bad markets.

As we look back, and forward, our relationship with BAM and use of DFA funds have been integral in the development of our investment philosophy.  BAM is also a key factor in our firm’s delivering excellent, accurate and responsive service to our clients.

DFA’s stock mutual fund philosophy was new to us in 2002. Today, we feel that DFA is the foundation for the best way to invest serious money for the long term. They have consistently beaten or out-performed their asset category averages over the 15 year period ended September 30,2017.** They are reliable. They are very low cost. They offer tax-efficient funds, whichlower your tax bills for non-retirement accounts. They are not dependent on one or two star money managers or analysts for their results. They have a methodology and culture which we are confident will provide strong returns well into the future.

DFA confirmed their 15 year outperformance relative to benchmarks and similar competitor funds across a variety of investment categories in a chart this week. This data, available upon request,** shows that DFA funds we have utilized and recommended for the long-term have performed near the top of their respective categories, far above most other funds in respective categories and have outlasted the 30-50% of funds which existed 15 years ago that have not even survived the 15 year period ended September 30, 2017.

We are confident in the long term expected returns of DFA’s stock mutual funds. “Combining the category attrition and the surviving funds with lower net return ranks gives a better sense of how Dimensional’s equity funds have fared relative to their peers…The results suggest that investors in Dimensional’s equity funds would have enjoyed strong relative performance over the past 15 years in each of the equity asset classes shown.”**

We cannot predict the future, but we are confident in our decision making. As the world, and the financial markets specifically, are continuously evolving and changing, we and the firms we work with must also continue to grow, change and be continually learning. We are always open to new ideas and concepts.

This is why we continue to attend the BAM Annual Conference every year. These are not rah rah sales sessions. This is why Keith and I travel to participate in multiple peer-peer learning group sessions every year and peer calls throughout the year. We ask questions. We listen to top speakers across diverse topics. We discuss client issues. We gain knowledge we can bring back and use as we provide advice and guidance to you, our clients. That is part of what we will be doing from Saturday until Tuesday with our BAM investment peers from across the country.


This week’s takeaway: In 2002-03, we began the process of forming and starting what is now WWM, a thriving financial advisory firm. We partnered with BAM Advisor Services and began to invest and recommend DFA stock mutual funds. We expected that each of these firms would provide us and our clients some of the following characteristics: excellence, confidence, reliability, valuable information and consistency.We made the right decisions and they have delivered on our expectations.  For the benefit of our clients.


**Source: Dimensional chart and supporting data: “Relative Performance of Flagship Equity Funds,” as of September 30, 2017. Published October, 2017. Available upon request.

Benefits of Global Diversification

Are you globally diversified? We hope so.

Should you be? Yes, we strongly recommend it.

What does globally diversified mean?

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

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

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

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

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

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

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

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

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

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

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


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


Actionable Information

With the S&P 500 and other US stock market indices hitting new all-time highs and the Dow Jones Industrial Average (DJIA), an index of 30 US based stocks, nearing the 20,000 level for the first time, should this cause a change in your investment strategy?

History tells us that a market index being at an all-time high generally does provide actionable information for investors. History and US stock market data would recommend that as a long-term investor, you maintain your appropriate stock market allocation, even though markets may be at highs.

As financial advisors, we recommend a globally diversified portfolio of both US and International stock funds be held. For purposes of this essay, information on US stock markets is used, but the same logic can be applied to International stocks.

For evidence, let’s look at the S&P 500 Index for the last 90 years. As shown in Exhibit 1, from 1926 through the end of 2016:

  • Over the 1,081 months during the period, 319 months, or 29% had new closing highs.
  • After a new monthly high, there were positive returns 80.5% of the time over the next 12 months.
  • For all 1,081 months, there were positive returns 74.7% of the time over the next 12 month period.S&P 500 Total Return Index Highs 1926-2016 chart


While this data does not help us predict future returns, especially in the short-term, it validates the importance of remaining invested over the long-term. It shows that the S&P 500 has been higher 12 months later around 75% of the time over the past 90 years. Staying invested and not making changes based on your emotions and current news events increases your likelihood of long-term investing success.

Many studies document that professional money managers have been unable to deliver consistent outperformance by outguessing market prices. In the end, prices set by market forces are difficult to outguess. This is why we have adopted, and consistently adhere, to our investment strategy of using index-like mutual funds.

It is reasonable to assume that the price of a stock, or the price of a basket of stocks like the S&P 500 Index, should be set so their expected return is positive, regardless of whether or not that price level is at a new high. This helps explain why new index highs have not, on average, been followed by negative returns. At a new high, a new low, or something in between, expected future returns are positive.

So while expected future returns are positive, that does not help us know the future direction of stocks, especially in the short term. Historically, however, the probability of equity returns being positive increases over longer time periods compared to shorter periods. Exhibit 2 shows the percentage of time that the equity market premium (defined for this purpose as the Total US Stock market, over the short term US Treasury bill return) was positive over different rolling time periods going back to 1928.

Historical Performance of Equity Market Premium over Rolling Periods


When the length of the time period measured increases, so does the chance of the stock market premium being positive. As an investor’s holding period increases, the probability of a negative realized return decreases. This is why it is important to choose a level of equity exposure that you can stay invested in over the long term.

We can certainly not predict how the stock market will do in the next few months or even the next few years. We know it is normal for there to be ups, as well as regular declines of 10% or more within a year, even if a year turns out to be positive (like 2016). However, we remain rationally positive that over the long-term, you will benefit if you remain invested in a diversified portfolio which is appropriate for your personal situation.
Source: Dimensional Fund Advisors LP


Disclosure A: The S&P data is provided by Standard & Poor’s Index Services Group.  For illustrative purposes only.  Index is not available for direct investment.  Past performance is no guarantee of future results.


Disclosure B:  Information provided by Dimensional Fund Advisors LP.  Based on rolling annualized returns using monthly data.  Rolling multiyear periods overlap and are not independent.  This statistical dependence must be considered when assessing the reliability of long-horizon return differences.  Fama/French indices provided by Ken French.  Index descriptions available upon request.  Eugene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP.  Indices are not available for direct investment.  Past performance is not a guarantee of future results.



An Extraordinary Guide

Imagine swimming 2.4 miles, biking 112 miles and then running a marathon, 26.2 miles, without stopping. This is an Ironman Triathlon*.

Now consider the challenge of being blind, and having the goal of competing and finishing an Ironman Triathlon.

Caroline Gaynor has enabled female blind athletes to accomplish this incredible goal, by acting as their guide. In 2010, she became the first female to guide a female blind triathlete in an Ironman Triathlon*. Subsequently, Caroline has guided 10 blind female triathletes in over 30 triathlons,** including 6 Ironmans. She has guided in 2 Ironman Triathlons in the past month alone.biking guide pic

I heard Caroline’s very moving story of acting as a triathlete guide at the BAM Alliance Annual Conference, which I attended this past Sunday – Tuesday. Caroline’s inspiring speech captivated the audience. Beyond her obvious physical accomplishments, was Caroline’s view of her role in assisting blind triathletes. Caroline’s goal is how she can best enable the blind triathlete to reach their goal. She feels it is their race, not her event. Her role is to do whatever she can to enable the blind athlete to succeed.

Consider the incredible level of trust which the blind triathlete is placing in Caroline, as her guide. The two are tethered together during the swimming and running parts of a triathlon, and ride a tandem bicycle for the biking portion. For an Ironman competition, Caroline and the blind triathlete are connected and working together for up to 17 hours.

While swimming, the blind triathlete cannot hear (due to being in the water). Caroline functions as her eyes and ears, protecting the tethered blind athlete from other swimmers. Throughout the event, Caroline’s role is to anticipate challenges and obstacles, such as curves, bumps, elevation changes and other competitors while on the road. Caroline must determine and communicate the challenges and problems which the blind triathlete cannot do on her own.

Caroline has to adapt to the different styles and abilities of each triathlete she guIronman picides. The blind triathlete and Caroline usually do not train or practice together prior to Caroline acting as her guide. Caroline must act quickly and decisively, but in a calm, confident and reassuring manner throughout the event.

Caroline is an associate for Dimensional Fund Advisors (DFA), providing support to investment firms such as ours. DFA is the primary investment firm we recommend and use for stock investments. DFA has grown to become one of the 10 largest mutual fund companies, with approximately $400 billion under management. Our firm has a fiduciary responsibility to put our client’s interest first, ahead of our own interest. DFA and Caroline have been successful by understanding their clients (and triathletes) and helping them to achieve their goals.

Caroline understands the blind triathlete’s goal, which is to complete the event safely and successfully. For an Ironman event, where each part of the event is far longer than in a triathlon, the goal is to finish in 17 hours and to hear the event announcer’s words, “Mary Smith, you are an Ironman.” That means the teamwork, trust and effort were successful.

When functioning as a guide, Caroline will not hear her name called at the end of an Ironman competition. Caroline’s role is to assist the blind triathlete in reaching their goal, to hear their name called out. Caroline enabled someone else to compete, she earned their trust and confidence, she anticipated issues that arose throughout the event and protected her triathlete.

Caroline Gaynor is an extraordinary guide, incredible athlete and role model. We can all learn from her.

To learn more about Caroline Gaynor, see or on Twitter, @carolinebikes

*Ironman Triathlon: A sequence of long-distance triathlon races consisting of a 2.4 mile swim, a 112 mile bicycle ride and a 26.2 mile marathon run.

**Olympic Triathlon: A sequence of standard distance triathlon races consisting of a 0.93 mile swim, a 24.8 mile bicycle ride and a 6.2 mile run.

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?


What is Quality Financial Advice?

Determining quality can be easy or difficult, depending on what is being evaluated. After you finish a restaurant meal or have had a new watch, sweater or television set for a while, you can determine if you have experienced good quality. But how do you evaluate the quality of financial advice or an investment portfolio?

Defining the quality of financial advice can be more challenging, as it is not a tangible item that you can touch, feel and see. The time perspective is also very different, as financial advice and its benefits occur over a long period of time.

Financial advice can be measured in various ways. The quality of finance advice can be measured from a wide angle lens or perspective. Is the advice that you are receiving moving you towards your life and financial goals? Are the conversations that you are having with your financial advisor addressing your needs and concerns?

Is your advisor understanding you? Is your advisor assisting with issues beyond just investments, to provide you peace of mind with insurance, estate planning or charitable giving matters (depending on your personal issues)?

Do you feel that you and your advisor have developed a trusting relationship, in which your advisor is acting solely with your best interest in mind? Is your advisor making recommendations based on what is best for you, and not providing advice that is influenced by any commissions or fees that he or she may receive? (Note: we are not compensated by any commissions or fees, other than our advisory fee).

In terms of implementing your financial plan, you can then evaluate the quality of the advisor’s recommendations by using a different perspective, which is more quantifiable. You can measure and track the performance of the investment recommendations, against appropriate benchmarks. This should be done over a long period of time, which would be years, not months or quarters.

In evaluating our investment recommendations, we monitor how the mutual funds that we recommend perform against their respective benchmarks over various time periods. As independent advisors, we recommend many DFA mutual funds (Dimensional Fund Advisors). We don’t recommend them because we are compensated by DFA; we are not. We do not recommend them because DFA has grown to become the 7th largest mutual fund company in the US. Our recommendations are based on adherence to a disciplined investment philosophy. The funds deliver what they promise to do, which is to consistently perform well in each asset class that it is invested in, over a long period of time.

To measure quality, you will need to use different perspectives to evaluate different things. In measuring an investment advisor relationship, there are many components. We strive to continuously learn, to improve, to understand our clients and to provide them with the best investment and financial planning recommendations that are appropriate for their personal needs.

Note: Thanks to Jason Womack, who’s excellent Leadership Retreat I attended last weekend. Jason provided the context to think about quality and the different perspectives of measuring quality.