Posts filed under 'Investment Philosophy'
Note from J. David Lewis – This excerpt is from the New York Times article that should be good reading for anyone who thinks about the meaning of their resources to future generations. It has clear connections to our slogan – There is more to money than money®.
“What heirs should know and when is the question every parent wants answered, Mr. Williams said. “The biblical story about the prodigal son was really about a son who wasn’t prepared,” he said. “It’s the same problem today.”
The better question parents should ask themselves, he said, is what they want to accomplish with the money. Waiting may result in a higher tax bill but could avoid generations of family discord.” – By PAUL SULLIVAN; Published: July 20, 2012
Read the full article via What to Tell Children About Their Bequest and When – NYTimes.com.
July 31st, 2012
Our Comment by J. David Lewis - There is more to money than money®. And, there is more to investing than picking one (or a few) indexed mutual funds. There is still art and the need for judgment in putting together a good portfolio, no matter what instruments you use.
By Jason Zweig
“As a result, investors are equipped with the itchiest trigger fingers ever in one of the touchiest periods in history. To blame the rise in correlation solely on indexing, they argue, is shortsighted.
With active stock pickers still stinking up the joint, indexing remains the cheapest, most convenient and most reliable way to capture the returns of just about any market.
But if the only index fund you own is linked to the S&P 500, too much of your money may be riding on stocks that move in lock step. Think beyond the S&P 500 to baskets like the Russell 3000 index or “total stock market indexes” tracked by Dow Jones, MSCI, S&P or Wilshire, which hold a much broader selection of stocks.
Next, no matter how diversified you are, you probably arent as diversified as you think.”
Read the full column via The Intelligent Investor: Are Index Funds Messing Up the Markets? – 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.
February 24th, 2012
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
By J. David Lewis
There is little doubt virtually everyone who gets this email is well aware of recent turbulent markets. At the end of June 2011 the S&P 500 Index returns were 30.69% for twelve months, 2.94% for five years and 2.72% for ten years. Stock market values dropped sharply around the beginning of August and have been volatile since. When I started drafting this text, markets had been sharply down for several days. As I draft and edit, they have rallied. The bulls and bears are still in their struggle. These alternating good and bad days have been the nature of things for about sixty days. For September 30, S&P returns were 1.14% for twelve months, -1.18% for five years and 2.82% for ten years. It is not surprising a lot of people feel something must be done on the worst days of the down periods. There is more to money than money®. And, there is more to this situation than just making a few trades.
During the recent quarter I had a conversation with another investment advisor, in which my friend asked about our portfolio adjustments in light of the markets. This is not an unusual question. I see several broadcasted emails a week from reporters wanting the same kind of commentary. When I told my friend we believe in building portfolios we are satisfied to hold through tough times, he concurred that our philosophy is correct in terms of investment management. The disturbing part of the conversation was his explanation for their recent portfolio changes.
My friend was concerned about calls from distressed clients. He felt compelled to show them account activity to maintain their relationships. In effect he said, “I don’t know whether what I am doing will improve investment returns or not – probably not.” I felt he was noticeably uneasy that he was making changes solely to soothe clients. When I described the conversation in our office, we all felt gratitude for our client relationships. We do not feel the pressures that seem to prompt many advisors’ departure from their belief that well diversified portfolios should not be disturbed based on recent market events. Unfortunately, I think many advisors do a lot of things to appease clients’ moods instead of well informed investment reasoning.
We think it is important to help clients consider their securities portfolio in the context of all their resources. It is not unusual to see someone very concerned about stock market events when all the stocks they own are a relatively small portion of their total assets. For some fortunate people, pension and social security income cover a large percentage of their day-to-day cash needs. Therefore, the cost of their lifestyle does not require much from their portfolio, and probably never will. Yet, they feel considerable emotional stress from market volatility, without considering whether the portfolio is already prudent for their situation. Possibly you can feel at least some relief by just putting your exposure to stocks into perspective relative to the rest of your resources. Try to understand the true significance of market volatility to your personal situation.
With this line of thinking as our context, we consider ways to create portfolios we are comfortable holding during tough market conditions. Periods of volatile markets are virtually a certainty in the future. They are also generally some of the worst times to change investment allocations. Facing the fact that there will be tough markets helps develop better portfolios.
Regularly, we merge all a client’s accounts into one portfolio listing, where mutual fund names and categories are together in a logical order. This yields a rough impression of the client’s exposure to stocks in general and various types of mutual funds. At this level of review, we consider diversification and portfolio behavior characteristics we can reasonably expect. Other times we create more sophisticated reports to understand allocations from different perspectives. Because mutual funds that appear to hold U.S. stocks almost always have bonds and non-U.S. stocks, it is important to see allocations to specific types of instruments without regard to the mutual funds that hold them. Often this deeper research reveals different allocations among instruments than the mutual fund names imply.
With this array of tools, we can analyze how a portfolio would have behaved through the ups and downs of the past ten years, which has an unusually rich assortment of ups and downs. This sense of portfolio resilience can go a long way toward revealing how damaging market events might really be. We know there will be tough markets that will affect our clients’ securities portfolios. The issue is to develop a sense for how much they will be affected. We believe strongly that the perspective and judgment these rigors bring is far more significant than the latest news stories. In our view, changing portfolios to imply we are reacting to recent events and news seems deceptive.
I hope this summary of our philosophy helps you understand how significant this, or any, turbulent market is for your total resources – not just your 401(k) and other investments. It is likely you are personally less vulnerable than you may feel. Of course, we will welcome the opportunity to give our professional opinion of your specific financial strength.
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. 55585
October 6th, 2011
Markets with Bulls and Bears Pondering an S&P Downgrade
by J. David Lewis
It is time again to write about my thoughts on current events. When I started these newsletters, I promised myself I would not write them unless I felt I had something significant to say. For a few months I have not felt my comments warranted space in mailboxes. There was too much noise for a coherent opinion.
The line was, if a debt ceiling deal was not reached, our credit rating would fall, interest rates would rise and markets would react badly. On July 28, a journalist asked for my thoughts with two primary questions (“Knoxville Advisers Tell Investors to Hold Fast” by Josh Flory). What am I telling clients to help understand what it all means? And, what should they do about it? Frankly, despite all the noise in the media, we have not had that many clients asking these questions. When the article appeared, the two other advisors it quoted seemed to have many such calls. Our office discussed the contrast.
The article did a good job conveying advice to maintain portfolios developed in more rational times. I had told Flory we know there will be market crises. I have seen many in very personal ways. We do all we can to build portfolios we are willing to live with through whatever happens and commit to helping clients maintain strength. We publish this in Our Investment Philosophy and Disclosure – Form ADV Page 8 on our website with these words:
“Resource Advisory Services has an extraordinary commitment to holding portfolios through whatever market conditions prevail at any given time. There have been at least six market crises since the formation of Resource Advisory Services. It has been steadfast through all of those. It has weathered days when people were convinced stocks had to be sold, and then watched as markets recovered in ways that were far more dramatic than could be imagined on the worst days. When Resource Advisory Services felt pressures to “move into tech stocks,” in the late 1990s, it resisted very strongly. Resource Advisory Services does not restructure portfolios quickly under pressure.”
We avoid saying “if there is a market downturn” by using “when.” We do not want any false hope anyone might avoid frightening times. Appropriate asset allocation can affect portfolio volatility. Low risk allocation does not seem to help clients feel comfortable when there is disturbing noise. The owner of our most conservative portfolio was once very concerned about a relatively minor market event. We need to help anyone we can understand that shocking times are a part of life.
Near the end of my interview, to illustrate the effect of noise, I said a lot of people are talking about a debt downgrade increasing interest rates. For several years I have believed interest rates are almost certain to rise from current levels, without regard to the debt ceiling deal. They are far below my perception of normal. I remember economic volatility when studying finance during the 1960s. In 1980 I was a student again with the turbulent economic events of the 1970s and my banking experience as my background. Interest rates were much higher then. More reasonable interest rates are higher than now. Current rates are too low to sustain. This idea made it into Flory’s article.
The debt deal was reached. The next morning I read an S&P report about July’s exceptional corporate earnings, followed by news that General Motors profits increased 92%. Then the stock market collapsed. Interest rates went lower for now. The week ended with unbelievably good employment information. I remembered telling Flory that a bad deal on the debt is probably worse than no deal. The markets expressed their immediate reaction to the deal and seemed to ignore the good news.
Now, S&P has downgraded our country’s debt. On Sunday morning (August 7) I heard two political parties say the other had made the debt deal bad and S&P was not giving us justice. It is like fighting siblings when parents try to stop them.
S&P is only one of many organizations making judgments about our debt. China’s expressed their doubts clearly. I doubt China considered the S&P view. China did independent research, much as quality portfolio managers do independent research.
There are many bulls and bears in the markets for our bonds. S&P may influence some. The most important buyers and sellers want proof we can unwind our emergency and social excesses. It will not help to blame political parties or the bulls and bears. We have to actually do something. The markets, like good parents, are not much interested in excuses, whining or other noise.
Last September (2010), at Mount Rushmore, I heard a park ranger talk about the immense problems those presidents faced. He quoted Jefferson on a government that gives its people the ability to change the government as situations change, even to the point of replacing the form of government if needed. It is probably not time to talk about replacing this government. It is time to do all we can to insure that the leaders we pick will actually work on the issues that make our country stronger.
We are the people. We have the votes. We elected the politicians we have and should accept our personal responsibility in this. Prove to the bulls and bears of the world that we will now vote for those who can solve problems. Given the problems those presidents faced and solved, the current problems can be solved if the people have a coherent vision and really want the fundamental problems solved. In the meantime, I expect Resource Advisory Services to stand by the portfolios we have.
Click here for the original “Markets with Bulls and Bears.”
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. 54564
August 7th, 2011
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