Our Comment by J. David Lewis - As Zweig often does, this column helps his readers put the current investments events into a much longer and more meaningful context than most people are able to see.
By Jason Zweig
They might not have had a choice. The investing mind comes with built-in machinery that sizes up the future based on a surprisingly short sample of the past. Neuroscientists say the human brain probably evolved this response in a simple environment in which the cues to basic payoffs like food and shelter changed slowly and rarely, making the latest signals most valuable—nothing like what todays investors face with electronic markets in a constant state of flux.
Experiments led by neuroscientist Paul Glimcher of New York University found that cells deep in the brain calculate a sort of moving average of past events, giving the greatest weight to the most recent outcomes.
When the latest rewards turn out to be better than the long-term pattern, these neurons fire unusually quickly, spreading a burst of dopamine—the neurotransmitter that triggers the pursuit of reward—throughout the brain. Thus, after a decade of mostly dismal stock returns, even a month or two of outperformance might prompt you into an impulsive
Read Jason Zweig’s column via The Intelligent Investor: This Is Your Brain on a Hot Streak – WSJ.com.
Contact J. David Lewis directly with dlewis@resourceadv.com or share your thoughts on this topic below. He founded Resource Advisory Services in 1985. National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986. He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 57739
February 12th, 2012
by J. David Lewis -
There is more to money than money®. Investment performance is only one of many factors that influence growing financial strength. Even during the best market conditions, the far more significant influences for improving wealth are investment contributions, withdrawal management and debt management. No investment return can produce meaningful progress without these disciplines. This has been particularly true since 2000. Yet, we know people who have surprisingly good financial growth through these years. In How Financial Advisers Get Clients to Take Action – WSJ.com, a Wall Street Journal article highlighted Resource Advisory Services’ unique methods for helping clients with this sort of thing. I wrote about tools you can use yourself to manage these factors in “A ‘One Task a Year’ New Year Resolution”. I will now discuss a couple of our investment performance observations that appear to be at play recently.
We describe our use of actively managed mutual funds on our website in Investment Philosophy. We believe carefully selecting these managers can produce returns that exceed the expenses within the mutual funds. They “fine tune” the asset allocations for us. Our rebalancing is generally less overt than it would be with indexed mutual funds. By this, we mean a large part of our rebalancing is accomplished by having mutual funds pay cash distributions instead of reinvesting. We can then make conscious reinvesting decisions. This year, Bryan Hankla and I have been discussing a subtle and interesting asset allocation phenomenon that has been developing for a good while.
The mutual fund data service, Morningstar, attempts to classify mutual funds according to many traits – probably too many to be useful. Two of the major divisions are the growth investment style versus the value investment style. In reality, each of these styles is defined by philosophies and methodologies of investment managers. Growth investing is about finding companies that have grown in the past, with a high probability they will continue that growth. Value investing is about finding companies that have underlying value greater than the current stock price reflects. One would be hard pressed to prove either method is better than the other over the long term. In the short term, one or the other often prevails. There are outstanding experts using each style. Very few are able to effectively shift from one style to the other. So, we like to keep a balance of mutual funds committed to each style.
Instead of attempting to quantify these abstract approaches, Morningstar attempts to consider some companies growth and some value using mathematical techniques. Then, they deduce the growth or value mutual fund management style by the preponderance of these styles in mutual funds. It is not at all uncommon to hear investment managers adamantly object to the style Morningstar has assigned it. We follow the “corporate personalities” of mutual funds we use enough to judge whether we believe these objections are well founded. They usually are.
For at least a year, we have noticed that Morningstar has been reclassifying a number of mutual funds from value to growth. Have these mutual fund managers changed their management disciplines? Have companies Morningstar once considered value companies become growth companies? Should we sell and buy mutual funds to restore our allocations between growth and value based only on Morningstar assignments?
I have not forgotten a couple of dinners with Chuck Royce, in the 1980s, when his mutual fund offering was much smaller than now. He talked about the importance of developing a style and methodology that you can believe strongly enough to stick with it through thick and thin. For him, it was small cap value. More than twenty years later, his firm seems to have never drifted from that approach, although it has been severely out of favor at times. Other managers we follow appear equally committed to their unique styles of management. If we believe one changes its philosophy, we are more skeptical than we are after a year or two of weak performance relative to the general market.
So, when we see that Morningstar has moved a mutual fund from one category to another, we pay more attention to whether the manager is still approaching its job the way we expect than the label given by Morningstar. To be sure, we pay attention to the Morningstar categories. We also pay attention to other sources of information about our choices. A dose of judgment is important. We want to know as much as we can about the mutual fund managers’ investment styles and let those professionals do the job our clients’ pay for in mutual fund fees. This is a reason Bryan has visited a few mutual fund companies in recent years, to see how committed they are to their styles.
There is another interesting asset allocation observation we have not heard discussed. It is the difference between performances for U.S stocks versus international stocks. At the end of October, the twelve-month return for the S&P 500 Index was +8.09%. The comparable return for Vanguard Total International Index Fund was -6.54%. This helped us understand how much impact our international mutual funds were having on total portfolio returns. By January 31, 2012, the disparity of 14.63 percentage-points had widened for a couple of months and then narrowed slightly to 13.20 percentage-points. It was 4.22% for the S&P versus -8.98% for international stocks as of January 31, 2012. How should we feel about our allocations to international stocks?
There is substantial market history that speaks for long term international investing. We continue to believe it is important to maintain appropriate international allocations. Since January 31, 2002, the S&P 500 Index return was 3.52%. This compares to 7.11% for the Vanguard Total International Index Fund – roughly double the S&P return. Other evidence clearly indicates one-year performance is a very poor predictor that a category, like international stocks, will continue the same trend through the next year’s performance. So, we continue to believe we should maintain international allocations essentially as we have in the past.
My years of experience with this sort of thing have convinced me that Chuck Royce was and is right on the matter of maintaining discipline. To the extent investment performance has influence on net worth, our tendency to use international, mid-cap and small-cap funds in larger percentages than the S&P has helped our clients’ net worth over the longer-term.
Contact J. David Lewis directly with DLewis@ResourceAdv.com or share your thoughts on this topic below. He founded Resource Advisory Services in 1985. National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986. He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 57427
February 6th, 2012
Our Comment by J. David Lewis – When I read this tonight, I was struck by how timely it is. Late in 2011, we prepared a relatively complex Recommendations Report for a couple interested in retiring a few years from now. Less than six months later, we learn the retirement date may be very soon, due to changes by the employer. No one could have predicted this change of expectation when we were working on the project. I am convinced the decisions were sound when they were made. Now, we are deciding what needs to be reconsidered. In our world, this sort of thing is not exceptionally unusual.
By Carl Richards
“Whether we like it or not, life is not static. We don’t live in bubbles. And even though one day may look very much like another, life is rarely the exact same every week let alone from year to year. Perhaps the basics stay the same — work, school, relationships — but little things change, and we learn to adapt to those changes.
We need to think the same way about money. Even after we make smart decisions life will continue to happen.
The decision to save money each month may need to change if someone loses a job. The decision to have another child may mean that you need to buy a new car sooner than planned. The decision to retire early may be put on hold after a health emergency. In each example, no one did anything wrong; life happened.”
Read Carl Richard’s article via There Is No Perfect or Permanent Financial Plan – NYTimes.com.
Contact J. David Lewis directly with david.lewis@resourceadv.com or share your thoughts on this topic below. He founded Resource Advisory Services in 1985. National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986. He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 57375
January 23rd, 2012
Our Comment by J. David Lewis – If you believe you do not have enough to find a good fee-only, fiduciary financial advisor, this is the article for you. It gives good research tips.
by Mark Miller, Morningstar
“Resolved for the New Year: I will not make a financial plan for my future in 2012.
Thats the disturbing finding of a survey showing that 80% of Americans wont focus on financial planning this year–the highest percentage found since Allianz Life Insurance of North America started asking about this three years ago in an annual New Years resolution survey.
Why? The largest group of nonplanners–35%–said they “dont make enough to worry about it.”
Read the steps via 6 Crucial Steps To Take When Hiring A Financial Planner.
After you read this article and followed its advice, talk with us. We do not have minimum investment accounts for new clients. We do expect serious commitment to improving your financial strength. There is more to money than money®. With that commitment, we will quote fee arrangements that should make sense for your particular situation.
Contact J. David Lewis directly with david.lewis@resourceadv.com or share your thoughts on this topic below. He founded Resource Advisory Services in 1985. National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986. He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 57279
January 16th, 2012
We feel very fortunate Mary Davis has joined us to assume Kyries role. With East Tennessee roots, her 1986 entry into financial services was with brokerage firm operation departments, leading to a Charles Schwab & Company retail client service position in Birmingham, Alabama. Yes, for some reason she is an Alabama fan. Those brokerage firm positions required significant testing for several securities licenses. More recently, Mary was Chief Compliance Officer at Sovereign Wealth Management in Memphis. This means she was their liaison with the Securities and Exchange Commission for regulatory matters. To prepare for these responsibilities, Mary earned the IACCPsm designation, awarded by National Regulatory Services.
Now, Mary’s position is Client Services/Administrative Assistant with us at Resource Advisory Services. Much of her work at Sovereign was astonishingly similar to Kyrie’s at Resource Advisory Services. In a nutshell it involves three complex software and electronic communication systems, plus extensive direct communications with other financial institutions. These functions make our personally written Quarterly Reports feasible. When you are in contact with Mary, take a few minutes to get acquainted. Her father was an Air Force dentist, which had Mary living in Alaska for many years. She has also lived in a number of other interesting places.
Read more via Mary K. Davis Has Joined Resource Advisory Services.
January 13th, 2012
It was great to find my quote published this morning. —- J. David Lewis
How Financial Advisers Get Clients to Take Action – WSJ.com by Jaime Levy Pessin
“Writing It Down
David Lewis, president of Resource Advisory Services, a money-management firm in Knoxville, Tenn., has taken the opposite approach—he has eliminated regular meetings with clients.
Mr. Lewis says he initially built his practice by working with doctors, who “legitimately didnt have time to set aside for meetings unless we really had something significant to discuss.” Eventually, he realized that instead of quarterly meetings, he could write a “net-worth letter” explaining the changes in a clients account. Mr. Lewis staggers the reports, so he doesnt have to write to all his clients at once; when a clients report is coming up, his office emails the client to see if theres anything specific he or she would like addressed.”
I can be much more thoughtful, much more thorough [in writing] than if the issue comes up and I have to talk about it,” he says.
If clients have a question stemming from or unrelated to their quarterly letter, they are encouraged to call and either discuss it on the phone or come in for a meeting, Mr. Lewis says. Letting the clients come in on their own terms makes for more productive meetings, he says.
Mr. Lewis is a planner who has discretion over his clients……”
Read the article via How Financial Advisers Get Clients to Take Action – WSJ.com.
January 9th, 2012
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