Being Different Isn’t Easy

It’s a rainy afternoon on a Saturday, so I thought it would be a good opportunity to explain something that has certainly come to light in the past few weeks.

Sometimes it’s not easy being different.  2014 is proving to be a great example of that.

As of 10/3, the S&P 500 Index (a fairly good indicator of large US stock performance) is up a hair over 8%.  For the vast majority of the investing American public, they are experiencing a decent positive return on their fund’s this year, simply because of the fact their portfolios very much track this index.  Retail US investors own mostly Large US Company Stocks.  This is not a prudent or diversified strategy.  However, as blind luck would have it, this area of the global stock market is doing comparatively better than many others in 2014.

Take the Russell 2000 (a small cap stock index) for example.  That is down about 8% this year.  International stocks are also on the whole down a small percentage year to date.  That being the case, an investor that holds a diversified portfolio may feel some unease when comparing their portfolio to their neighbors’, or to the popular stock indexes quoted daily on the news.  Their stock portfolio has likely declined this year.

But this is kind of year when disciplined and educated investors earn their increased returns.  “Average” investors, those that hold undiversified portfolios, make poor choices, and invest like 98% of other investors, earn about 3-4% a year over time according to Dalbar’s yearly study of investor behavior.  It may be tempting to chase large cap stocks this year, but do you remember the “dead decade”?  The 2000s were horrible for large company stocks.  The truth is that every market segment will have its day in the sun- and its long stretches of underperformance.  Every year it’s a new winner- and that winner is not knowable in advance.

But you might think, “Doesn’t spreading myself out reduce my returns?  After all, if all my winners are always wiped out by losers, I will never get ahead”.  Well, that would be the case if the long term direction on all of the global stock markets were flat, or down, but it is our view that the long term direction on all developed stock markets is UP.  Some may go up more one year, and in some years some go up and some go down (like this year).  But by being more diversified, and owning more areas of the market, we tend to smooth out the long term volatility, versus placing all of our eggs in one proverbial basket.

Costs: Important Yes, but not the Whole Story

It is fairly well known among savvy investors that costs are one of the main things that can drag down your portfolio’s return over time. recently did a study that showed a fund’s expense ratio, relatively to other funds, was a better predictor of performance than their own star system.

This leads many numbers minded people to go on a search for the cheapest, least expensive funds, and them pile them in to their portfolios.  Unfortunately, while this may save on cost, it likely will not bring the desired returns.

The issue that is missed in this scenario, is that the other ingredient necessary in a good portfolio is the right mix.  If investing were like baking, getting right measurements would be like getting low expenses.  Baking, unlike cooking, requires fairly accurate measurements.  So, in investing, being cost conscious is good, and we certainly want to eliminate any unnecessary costs.

However, to complete the analogy, picking the right ingredients (like baking powder vs flour) in baking is like picking the right “asset classes” or investments in your portfolio.  If I made cookies and was perfectly exact in my measurements, but, used salt instead of sugar, or cumin instead of cinnamon, my cookies are not going to be very tasty. That is just like a portfolio with low expenses, but the wrong amount of money in the wrong areas.

Just take the VINIX, the Vanguard S&P 500 Index Fund, Institutional Class.  It’s expense ratio is only .04%.  Wow.  Almost nothing.  However, if you loaded up on that fund 15 years ago, you would have only enjoyed about a 4.62% return per year since then.  I don’t even know if that is better than what bonds did over that time.

Cheap doesn’t always mean good.  It’s important to understand all of the parts needed for a well diversified global portfolio.  Your portfolio’s construction will override the effects of cost every time.

Who is a Right Fit Client?

One size does not fit all.

In looking at what makes a successful long term client advisor relationship, a good long term fit is important.  Each firm, because of their own unique philosophies, views, and personalities, has an ideal “right fit” client.  To the extent a client is a right fit, the relationship should have all of the ingredients to be a benefit to all parties involved for many years.  If deep down the client and advisor are not a right fit, eventually down the line, the relationship will likely have some issues.  This article looks at what we look for in our “right fit clients”.


“One of the things Warren Buffet looks for is someone he enjoys spending time with.  How do we know as advisors, whether it is going to work out when we meet a new prospective client”?

That’s a very interesting question.  Here’s what I know: there must be a good fit for long-term success.  While you are evaluating an advisor for a good fit, they should be evaluating you as well.

We reviewed our most enduring relationships and have identified Seven Key Characteristics.


They Live Their Life by Principles

Principles like honesty integrity and hard work—to name just a few—are the foundation of everything that they do.  They do not sacrifice principles for results…the ends never justify the means.

They Know the Value of a Dollar

A local small business owner said it best when he said, “Every dollar that I have is valuable to me.  It came by the sweat of my brow and I risked everything I owned to start this business and keep it running.  I don’t want to pay one more dollar in taxes than I am required.”

They have worked hard to earn, save and accumulate their money.  They want investments vehicles that work as hard for them as they did to make it.

They Believe Wealth is More than Money

They know that True Wealth has many dimensions…including personal, social, spiritual, human, and intellectual capital.  They believe all wealth is worth preserving.

                “Relationships are more important than my money.  Of course, I want to have enough to secure my lifestyle, but I want to positively impact my family and my community.”

They Are Open to Learning about New Ideas & Abandoning Old

They approach ideas with an open mind and can make hard choices. They may believe they have a reasonable plan and good advisor…yet, they want to move to the next level.

They Know Science & Sound, Strategy Trumps Marketing Glamour

Their experience has taught them the value of strategy first: aim before you fire.  They also know that when a strategy is backed by sound academic research, it is most effective.  Even though this requires more time up front& personal investment, it pays off handsomely in the long run.

They avoid imprudent sales tactics and herd mentality.

They Know What They Do Well

By implication, they know what they don’t do well.  “I tried the do-it-yourself route with my money.  What a disaster!  I know enough to be dangerous… besides, I can make more money with my time than it costs to delegate.” shared a business owner who recently converted the wealth in his business to cash.

They Care about Value and Quality

They agree with John Ruskin when he said “There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man’s lawful prey.”

They hire, respect and reward talented specialist…and desire win-win relationships with people they enjoy.

These Seven Key Characteristics have been the foundation for every enduring relationship we have…and we look for them in everyone we work with…whether business owners, retired professionals or women on their own.


Is Volatility the Enemy?

From our upcoming newsletter:

After a few good years of market returns, it’s inevitable that the “c” word begins to be uttered throughout the investment world- and by that I mean “crash”. From cable news, to newspapers and magazines, to emails, people predict doom & gloom.

But is market volatility, especially negative volatility, our real enemy? Let’s look at an example based on the re-turns S&P 500. John Q, Investor, started investing in 2000. He invested, like clockwork, $10,000 on the first trading day of every year until January of 2014. But un-like most investors, he was given a choice to invest in the real stock market, or a magical one, where the direction was always up! The market genie told John, “Both stock markets will close at the same price on January 2nd, 2014, but the magical market will never lose. It’ll be a smooth ride up, the same positive return every year!” Given the opportunity to never agonize through a down year, John chose this market, as opposed to the “real” world, which saw major swings between Jan 2000- Jan 2014.

So, did John make the right choice by eliminating all downside volatility? In John’s magical stock market, he ended up with $168,050. He made about $18,000 on his investment and he never lost money in any year. He wanted to compare his results with his copycat brother in law Tom. (Tom matched John’s investments exactly, only he invested in the real world market). Tom had $221,793 by January of 2014. This beat John’s returns by almost 25%! Why? While market corrections may be no fun to live through, they do provide a period of time when our investment dollars go further. With lower stock prices, investors can buy more shares.

So if volatility is not our enemy, who is? I like to borrow a famous literary quote that says “We have met the enemy, and he is us”. Poor investor decision making (like John above), is the main cause of diluted portfolio re-turns.

Without risk, there is no reward.  Will the market “crash” again.  Most certainly.  It always has, and it will over and over again.  No one can predict with certainty when.  What matters is our response to it.  Wise investors will whether through them, and look at the bright side of the situation.  But this is not to say investing is without risk.  Each investor needs to answer the question, “how much market volatility am I willing to bear?”

Buffet vs the “Experts”

This post is largely taken from an article from NBC news, but I thought it would be worth commenting on it.  The article can be found at:

About six years ago, the famed Warren Buffet made a wager with a group of hedge fund managers.  Hedge fund managers are touted as the most sophisticated, nimble, and adept money managers on the planet.  They are not burden by the regulatory issues facing mutual funds, and they can employ a vast array of financial maneuvers.  Warren’s ten year wager was that he could outperform a group of hedge fund managers using a simple low cost index fund; meaning that for all their flash and sizzle, the masters of the financial universe would be unable to beat the market due to the market’s efficiency.

With four years remaining, Warren’s simple index fund has a commanding lead, earning 43.8% vs 12.5% for the hedge funds (as of the time of the article).  What is more telling is that Warren chose an index fund to compete against them, not his own company’s stock.