Category Archives: Investing

Net Worth & Investment Results

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 –, 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 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


6 Crucial Steps To Take When Hiring A Financial Planner

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 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

Why I Dont Know Is Often Your Best Money Answer –

Our Comment by J. David Lewis – This is a great article, which speaks to the importance of regular review of financial progress, or lack thereof. It is important to add up all asset and all liabilities regularly to take an objective look at your success.

Why ‘I Don’t Know’ Is Often Your Best Money Answer

Accepting the fact that we just don’t know allows us to let go of any anxiety around the idea that we should be able to find someone who does know. And let me share a secret with you about that: There isn’t anyone who knows what the next week, month, year or even decade will look like in the stock market. Anyone who says they do is someone you should run from.What are some other things we just don’t know?

Read the full artical via Why I Dont Know Is Often Your Best Money Answer –

How Worried Should You Be?

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 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

The Intelligent Investor: Are ETFs a Menace? –

Our Comment by J. David Lewis – This is another interesting column by Jason Zweig.  For a very long time, I think I have understood many of the virtues of EFTs. Yes, their expense ratios are extremely low and they seem bound to hold exactly what they say they will hold.  So far I have not been very interested in using them for client portfolios.  Zweig calls our attention to an issue that may or may not influence our future usage.  

If one chooses to build a well diversified portfolio from ETFs, they can, with sufficient knowledge, create relatively precise allocations.  In my experience, most consumer-level investors do not seem to really understand the intricacies of managing portfolio allocations.  If the fund implies it is an ETF, they might buy it without understanding the role it could or should play in their portfolio, other that being inexpensive.  The missing piece is a clearly defined portfolio philosophy.  Having and keeping a clearly defined portfolio philosophy is the first and most important issue.   

So, with a portfolio philosophy defined, we believe we can effectively and prudently build the allocations for that philosophy with actively managed mutual funds.  For 25 years, we have built an evolving list of actively mutual funds that demonstrate their ability to perform better than their peers in unique categories.  Then, we build asset allocations with mutual funds that represent the better performers of the categories, generally based on at least five years of impressive results.  It is the active managers who make the indexes work as a reasonable representation of the markets they represent. The indexes values depend on a robust community of analysts searching for situations where the markets have not recognized value.  

I think I agree with Zweig’s conclusion that the Kauffman Foundation report may not be relevant to the individual EFT investor. Yet, I am not sure what this means for the markets in general.  The report is probably worth reading, no matter where one investor stands on using EFTs.  We should avoid closing their mind to information that challenges their beliefs.  I will put this on my reading list and see if I get to it.  Thanks again Jason.     

 Are ETFs a Menace—or Just Misunderstood?  By Jason Zweig

“Could exchange-traded funds blow up and take the markets down with them?

A report released this week argues that ETFs are “radically changing the markets,” raising the prospect of a “panic-driven market meltdown.” ETFs are funds that hold all the securities in an index and themselves trade like a stock.”

Contact J. David Lewis directly with 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. 50508