Investing Isn't Just about Markets, Stocks and Bonds - By Branden Côté

Jennifer Hester |


Investing is all about people. It is understanding your financial & life goals in order to increase your probability for long-term success. It is not attempting to “time the market” or pick the “hottest stocks.” In fact, making investment decisions purely on emotion only yields an under performed result. The average investor under performed the Standard & Poors by 2.9% repeatedly each and every year, for the past twenty years.a A somewhat deceptive small variance that has a large real impact over time, especially when we are living longer. This increased longevity only adds to the complexity of ensuring our money will live as long as we do. How you choose to invest your money for the long term, has a major implication for your overall success in the future. There are two fundamental ways to invest, where the difference of the two comes down to one thing. Results.

Active management, is speculative by approach where managers try to beat the market through buying what they believe to be the right investments and avoiding the wrong ones, “market timing”. If your plan is built using historical market return assumptions, would you implement your plan with these odds?

How about a plan that has precise exposure to market segment, flexible trading to enhance value, & operated by academic research on factors of return? This is Asset Class Investing where managers operate by Passive Management strategy. This strategy is market based where managers don’t attempt to beat the market, but do aim to capture the market’s returns. This allows for the ability of maximizing diversification and focus on keeping costs low in order to achieve greater potential returns.

For example, take a portfolio built with asset class funds, a moderate portfolio that is 65% equities and 35% fixed income, vs. the S&P 500 with the following assumptionsb:
• Hypothetical portfolio value for both the moderate portfolio along with S&P of $500,000 invested in January 2000
• Stayed invested through December 2016 (during two major market corrections and a “great recession”) while taking a 5% withdrawal beginning of each year
• Withdrawal amount increases 3% per year for inflation pace

Over this time period we experienced:
• 4.51% return on S&P 500 d
• $0.00 End Value of S&P
• 5.24% returned on Moderate Portfolio Mix
• $300,000 End Value of Moderate Portfolio Mix

From a holistic view, we are able to see the significant financial implications your plan can have over the long-term. You need an approach that you can believe in and understand; one based on research, analysis and evidence. Not luck. You can’t control the market, but you can control how you position yourself to have the highest probability of capturing market returns. We believe “steady plodding brings prosperity; hasty speculation brings poverty.” This is done by a number factors in addition to Asset Class Investing c but one that MUST be included - working together with the guidance of a dedicated wealth manger & counselor. Need to start a discussion? Give us a call!

Credits, Disclosures, & Sources

*a Average stock investor and average bond investor performances were used from a DALBAR study, Quantitative Analysis of Investor Behavior (QAIB), 03/2017.

*b Source: Morningstar Direct 2017. Hypothetical value of $500000 invested on January 1, 2000 and kept invested through December 31, 2016. Withdraw is 5% of initial hypothetical value ($25,000 of initial $500,000 starting value) taken out at start of each year, growing by 3% per year. Allocation is 100% S&P 500 TR, and 65/35 Mix represented by: 2% (Cash), 16% (DFA One Year Fixed Income DFIHX), 17% (DFA 5 Year Global DFGBX), 15% (DFA US Core Equity 1 DFEOX), 12% (DFA US Large Cap Value DFLVX), 8% (DFA US Small Cap DFSTX), 4% (DFA REIT DFREX), 14% (DFA Intl Value DFIVX), 7% (DFA Intl Small Cap DFISX), 5% (DFA Emerging Markets Value DFEVX). The performance data quoted represents past performance. Past performance does not guarantee future results and principal value

*c Asset Class Investing does not guarantee a gain or protect from a loss and involves risks, including the loss of principal.

*d The S&P data are provided by Standard & Poor’s Index Services Group. CRSP data provided by the Center for Research in Security Prices, University of Chicago. International Value and Growth data provided by Fama/French from Bloomberg and MSCI securities data. International Small data compiled by Dimensional from Bloomberg, StyleResearch, London Business School, and Nomura Securities data. MSCI EAFE Index is net of foreign withholding taxes on dividends; copyright MSCI 2017, all rights reserved. Emerging markets index data simulated by Fama/French from countries in the IFC Investable Universe; simulations are free-float weighted both within each country and across all countries.

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