A Different Way to Invest in Our Tumultuous World

Everyone loves a good story. It’s what keeps you hooked watching a movie or reading a book…it’s also what keeps investors committed to poor investment solutions. Investors like a good story that keeps them engaged, and that story usually involves a savvy manager. But there is a different narrative—written by financial scientists.

Now, academic finance isn’t exactly an engaging story. However, it has changed the face of investing and market analysis for every investor. In the 1960’s, University of Chicago romance-language-scholar-turned-economist Eugene Fama and his protégé’s (namely, Michael Jensen of Jensen’s Alpha performance measurement “fame”)  first used the power of advanced computing and the capital asset pricing model (CAPM) to price securities and study what impacts returns. Their breakthroughs in finance led to an understanding that, on average, mutual fund managers don’t outperform the market, as well as the idea that there are other factors in the marketplace that contribute to investment returns.

Enter: evidence-based investing

Evidence-based investing is about identifying the characteristics of stocks that have outperformed in the past, and building portfolio strategies that overweight stocks that have these particular characteristics. It’s about finding companies that have the right factors. Those factors are size, value (the price investors are willing to pay for a dollar of profit), and profitability. The investment industry spends far too much time and money chasing alpha (excess return) and not enough time paying attention to science. Ken French, professor of finance at Dartmouth, estimated in 2008 that over $100 billion is spent chasing returns that can’t be explained by the market. This pursuit is funded by investors in the form of high expense ratios and management fees.

So if financial science tells us what factors contribute to investment returns, and that the pursuit of excess returns through trading and stock picking doesn’t translate to consistent outperformance, how should an investor approach investing during times of tumult? While it is alluring to believe the story of the supposed savvy manager and view world events as if they will precipitate a cataclysmic downfall of the world and market as we know it (or the opposite, depending on the day), this is what we actually do for our clients.

1.   Eliminate Meaningless Questions

· What is the best way to capture market returns? Do professional money managers perform better than the index? Can timing the market improve returns?

2.   Ask Meaningful Questions

· What is the best asset allocation? Is international diversification advantageous? Are small and value stocks preferable to large and growth? Should a diversified portfolio invest in assets other than stocks or bonds? Is there a meaningful and consistent connection between the risk and return of an investment?

3.   Apply the Evidence

· Investment selection of broad-based market funds that are low-cost, transparent and tax-efficient.

· Regular rebalancing as a discipline to control long-term risk and enhance return.

4.   Proactively Monitor

· Robust investment oversight, paying attention to the current state of knowledge in financial economics.

Famed manager Peter Lynch once said, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” The evidence-based story can’t explain presidential election outcomes, international geo-political intrigue, or why the Fed isn’t raising interest rates. However, it is a story that keeps an investor grounded and successful over years of daily tumult across the globe. Everyone loves a good story…this one is ours, and we are compelled by the evidence to stick to it.

Sources: Research on Wealth, Spring 2017

Recession-Proof Your Retirement Portfolio

Sharon Allen, CEO and Co-Founder of Sterling Wealth Management was recently interviewed by Money Magazine about tips for investors to prepare their portfolios for retirement. Click here to read more: | Money http://swmi.co/moneymag-recession-proof-portfolio

Market High…Market Top?

In case you hadn’t noticed, the S&P 500 index has reached record territory, and the Nasdaq has crossed over the 5,000 level.  At 2,166.89, the S&P 500 finished above the previous high of 2,130.82, set on May 21, 2015.

We’ve waited more than a year for the market to get back to where they were before the downturn this January, before Brexit, before a lot of uncertainties in the last 12 months.  The market top itself is an uncertainty; after all, many investors regard market tops warily. green stock chart guy holding up

When stocks are more expensive than they have ever been, the talking heads begin to have heated discussions around whether or not it may be time to sell and take your profits.  However, if you followed this logic and sold every time the market hit a new high, you’d probably have been sitting on the sidelines during most of the long ride from the S&P at 13.55 in June 1949, which was the bull market high after the index started at 10.  New highs are a normal part of the market, and it is just as likely that tomorrow will set a new one as not.  In fact, overall, the market spends roughly 12% of its life at all-time highs.

We all know that the next bear market will start with an all-time high, but we can never know which one in advance.  Market highs do not necessarily become market tops.  Let’s see if we can all celebrate this milestone without the usual dose of fear that often comes with new records.

Sources:

http://www.forbes.com/sites/shreyaagarwal/2016/07/11/sp-500-closes-at-record-high/?utm_source=yahoo&utm_medium=partner&utm_campaign=yahootix&partner=yahootix#7f74bf29721d

Allen Addresses Advisers on Working with Breadwinner Women

This May Sharon Allen spoke at the national Financial Advisor Invest in Women conference in Dallas, Texas. She facilitated a panel of experts as well as shared her own expertise regarding the concerns and needs of Breadwinner Women in our society. Drawing from the national research from the Family Wealth Advisor’s Council, of which Sharon is a member, she focused on the resulting data highlighting the challenges and opportunities financial advisors need to be aware of when serving women investors. “I was honored to be asked to be a part of the conversation around this very important topic,” says Allen. “Despite a growing awareness of differences in the needs of women, our research shows that the financial services industry still needs to do a much better job in truly partnering with women investors.”

Sharon Allen, CFP(R), CTFA is the Co-Founder and President of Sterling Wealth Management, a fee-only wealth management firm. She has an exceptionally collaborative approach in working with her clients, and has a particular interest in the challenges facing women of wealth. Sharon has co-authored a paper on the Sandwich Generation Woman titled Caught In the Middle: How Does the Sandwich Generation Woman Not Get Squeezed?.

Successful Investing (while riding a roller coaster)

It’s natural human behavior in times of stress to reevaluate the current situation to find answers. This story rang true for many investors of globally diversified portfolios as the sharp declines of early 2016 caused some to examine their asset allocation and question if they were still making the right decisions. In fact, many investors follow their emotions and struggle to   separate those emotions from their investment decisions. Often, following a reactive cycle of excessive optimism and fear leads to poor decisions at the worst times.

Here is a picture of what that emotional investing cycle looks like.Investing Cycle

As professional advisors and fiduciaries of the precious resources clients have entrusted us to manage, we have answers that we feel will help our clients and those we care about have a successful investment experience. Here is what we found.

To Have a Successful Investment Experience… Read more