What is the Real Rate of Return?

One of the intriguing paradoxes in investing is the difference between a fund’s reported return, and the personal rates of return for the people that own that fund.  For example, fund x may have earned 10% in the last 3 years on average, but, what did the “average” investor in that fund earn over the same time period?  The difference may be surprising to you.

Let’s look at a stalwart fund of the broker sold community: The Growth Fund of America.  If you look up the fund on any internet based reporting service, you notice that its five year return is 3.73% per year.  Not bad considering that time period held some of the 2008 downturn.  But what does that number mean?  That is not the return of the average investor, it is simply the return of the fund.  For an investor to have earned that, they would have had to buy the fund on day one, held it entirely, and still have been holding it at the end of the five year period.  As advisors and investors, what concerns us is INVESTOR return, not fund return.  The average investor return over that same period was only 1.18%!   That means that if we look at all of the investors that held that fund during that five year period their average return was only 1.18% per year. 

How could that be?  Well, here again we see that investor behavior trumps the many other factors that contribute to successful investing.  Over that five year period, investors in that fund continued to engage in many of the bad behaviors that investors fall prey to, among them likely market timing and track record investing.  But this is not something that we only see at American Funds.  Fidelity Growth company has a five year return of 7.04%, while its five year “investor” return is only 3.86%.  Here again, investor’s fail to get their full rate of return because of a lack of discipline; discipline which can only be acquired through a commitment on the part of the advisor and client to lifelong investor coaching. Without it, investors do and will continue to leave money on the table.

And now, for a truly amazing thing.  Do you know that an investor in a fund can actually earn MORE than the fund itself?  Take for example a fund that many of our clients own internally in their own portfolio, DFA US Small Cap.  Its five year fund return is 9.44%, while the INVESTOR return over that period was 10.22%.  Can you figure out how this can possibly be?  We’ll have the answer in our next newsletter.

Fidelity's Ironic Announcement and True Independence

Today's post is a two for one. 

The first is a comment about a recent sales flier I got from Fidelity just a few days ago.  It stated that now may be the time for US Equities (stocks).  Inside the brochure it details the various reasons, such as a rebounding housing market and a resurgence in manufacturing that may take place.  I find it ironic that Fidelity makes this announcement now, as the DOW is sitting at a new all time high.  Where was this announcement in March of 2009?  This is an all too familiar theme in the investment industrial complex.  As a retail investor you are "sold" what feels right at the time and seems to make sense.  If Fidelity was really on your side, they would have been saying this forever, and especially in 2009. But, from a sales perspective what is easier, telling people to buy stocks in 2009, or trying to sell them something safe like bonds or some alternative investment like commodities?  There is a difference between giving investors what they want and what will sell, and telling what they need.  Sometimes doing what is necessary does not feel good at the time.

Also, today I had to laugh on the way home.  On a local channel I heard a wealth management firm advertise how it was "independent" and not beholden to any large national financial firms.  It wasn't influenced "by the manufacturers of financial products".  Sounds nice, doesn't it?  But, then comes the fine print.  Any investment office out there is either a) a brokerage office, or b) a fee based planner.  If they have a broker dealer, they ARE affiliated with a larger firm and DO sell financial products. This firm that claimed to be independent, is, in fact not.  They are an Linsco Private Ledger (LPL) office.  Thus, they have to do things that LPL says it must do.  Secondly, they DO then also sell manufactured financial products.  If they really wanted to act in the best interest of the client, they would not need a broker dealer.  The only reason you need a broker dealer is to collect commissions on the sale of commissionable products (financial products).  So, in short, this ad was a sham in my humble opinion.  The firm is not truly independent, and it also does sell the very products it pretends to eschew. Now, no one outside of the industry is going to be able to tell you about this distinction, but that is our mission at Veritas- Investor Education.  Catch our next class on March 28th.

Target Date Funds

The subject of target date funds is brought up in Pound Foolish, the book I told you I was reading in my prior post.  Their popularity in the 401k market has exploded.  According to the book, in 2004 only 2% of Vanguard's defined contribution investors used target date funds.  By 2011 it was 42%.  That is big increase in a short amount of time.

So why are target date funds a bad idea?

First, they are typically not diversified.  The typical target date fund has a few bonds, a few small cap stocks, but is primarily a large cap (US and foreign stock) fund.  This is rather marginal diversification considering that Large US and Large Foreign stock, as asset classes, are not highly uncorrelated.

Second, they are costly.  In the book, Olen states "Fidelity's Advisor Freedom series charged investors in the fund a hefty 1.08% annually.... Oppenheimer's Life Cycle series got away with a 1.68% expense ratio."  Many fund companies load these funds with their own funds, creating a "fund of funds".  This creates often times a whole new layer of expenses that are not necessary. 

Third, investors are very confused on what they (target date funds) are actually are suppose to do!  According to a survey mentioned in the book, more than half of those surveyed believed that a target date fund's performance was guaranteed.  The SEC had similar results in one of its own surveys.  Obviously this is not the case, and these funds are no more guaranteed than any other mutual fund. 

Return of the Investor

I recently posted on our facebook page in regard to this story, but I also noticed an article in Investment News. 

Before January of 2013, April of 2011 was the last month that investors, as a group, invested money into stock mutual funds, versus taking money out.  At the time of this article, investors had invested a net $23.6 Billion in stock funds as of 1/16.  January did finish as a net positive for fund inflows.  From March of 2009, until the end of 2012, investors took an astounding $400 Billion net from stock funds.  While some of this was probably due to economic reasons (unemployment was very high and something has to pay the bills), another reason was simply fear and uncertainty.  According to Investment News, the return on the S&P 500 over that same time was more than 100%.  Unfortunately investors that bailed on the market missed out on that return.

Value of an Advisor

Margaret Wittkopp brought up this article at our investor education class on Wednesday in Plymouth.  This is from Financial Advisor magazine, and was a study that tracked retirement plan participants going back from 1994 through 2008.  I like this study because it looks at the average investment results of different categories of investors that we commonly see, and how their actions have likely effected their bottom line. 

The yellow line is pool or group of participants/investors that had no plan.  They had no advisor, nor did they personally try to implement any plan.  This is the "head in the sand" group.  It is probably no surprise to anyone that this group performed the worst. At the end of this study in 2008, this group had far less money than any other.

The next line from the bottom is the self directed group.  This group was actively involved with planning their retirement, but they did it on their own.  The DIY crowd.  While I can only speculate, I am guessing the reasons for this is that they did not want to pay for the services of an advisor.  That mindset is pretty common actually.  With the wealth of financial "information" out there, many people feel that paying for the input of an advisor would be an unnecessary expense.

The green line represents people that worked with someone in the financial services industry, but not necessarily a comprehensive planner; like someone that may have sold you an annuity, or a few mutual funds.  You may even own an IRA through them.  Although they can provide financial products, they really aren't giving you tax advice or overall financial guidance.  This group trailed the self directed group until later in the 2000s.  Why?  My theory is this:  I am guessing many of the self directeds after 2007 and 2008 stopped contributing or pulled out of their plans in fear (remember the market in 08?).  By contrast, the group who at least had a casual advisor was able to stay the course.

The last and best performing group worked with comprehensive advisors, people who were not just there to sell them stuff, but who helped them look at the whole picture.  Sure, these people also probably paid the most in fees, but there is evidence to suggest that the fees they paid did earn results in the long run.  These investors also weren't afraid to engage their advisor frequently for advice and education. Don't ever be afraid to call your advisor or planner.  That is what we are here for.  There is a positive correlation between how much client/advisor interaction there is, and the ultimate client experience in the end.  Both the advisor, and the client have a responsibility in that regard.


 

Mutual Fund Final Four

I just thought I would update everyone on a little contest that I received in a piece of marketing material.  A certain mutual fund advertising company has created a final four mutual fund contest.  Just like the NCAA tournament, the field will be seeded with 64 competitors (funds), and after several weeks only one fund, the top performer, will remain.  (Unfortunately, we cannot pick the original 64).  Surely, the "prize" at the end of this for the winning fund is the fame of being the "March Madness" mutual fund winner.

Although certainly not a perfect experiment set up, I am going to fill out the bracket with the following way and see how things turn out in the end.  I will in all circumstances pick the less expensive over the more expensive fund.  The logic behind this is that if a fund manager is very "active" they will incur higher costs, which they will not be able to overcome.  I have no idea what the results will be, but it should be fun in any event.  Check back in a few weeks to see the results.

A Discussion About Gold

This morning we had an interesting discussion about gold in the office.  Gold has been a hot topic for a few years now so this may be a bit after the fact, but good to discuss none the less.

It is often said that gold has intrinsic value versus our "paper" money (and things denominated it in like stocks).  It is somehow implied that these assets will lose their value, but since gold is a hard asset it will retain it's value.  But, what are you buying when you buy stocks?  Is it just a piece of paper, or an electronic entry in some corporate database?  Or is it something more?  We'd argue that it's much more.  When you buy stock you are buying equity, or ownership, in the companies that produce the goods and services that make the world economy run.  And as owners of that, part of the profits come back to us, the owners of those firms.  The value of stock investments are determined by the market's view of how valueable and or profitable it is to own a slice of the world's economic markets.  When the economic outlook is doom and gloom, stock values fall, and when the outlook brightens, markets tend to rise.  Over the course of human history, the long term direction has been up.

In contrast, what do you get when you buy gold.  Well, you get ownership of a physical commmodity, or input (like sand, steel, cotton, oil, or any other commodity).  [Gold is unique in that it has been used for many many years as a form of money, but sea shells have also served that purpose].  Gold does not make a profit, and it's physical uses are limited.  (True, there is demand for gold to produce things like electronics and jewelry obviously).  In the direst of circumstances you can't eat it, drink it, or burn it for heat.  That being said, gold is often sought after in turbulent economic times as it's viewed as a safe haven.  Gold certainly has had a run in the past few years, but as long term investors it's important to take the long view.  It is not uncommon for commodities to have wild fluctuations in price.  Does anyone remember oil prices in the late 2000s?

The link below is a good comparision between stocks, bonds, and gold.
http://www.investorsfriend.com/asset_performance.htm

There have certainly been stretches of time when gold outperformed, just like there have been periods when bonds have done better than stocks. But if you take the long view there is a compelling case for stocks.  The only other fault I have with this article is that their only comparision to gold for stocks is "large company stocks". This is a very narrow look at stocks.  A truly diversified stock portfolio would have returned much more, and held stocks in the US, abroad, and of all sizes.  A further thing to note is that as a commodity gold can be just as, if not more, volatile than stocks.  We were just checking yahoo finance today, and an investment in GLD is down about 8%  from it's high in 2011, while stock investments in many categories are up double digits.

2012 Year in Review

Hello Everyone.  Well 2013 is finally here.  It may be a good opportunity for you as an investor to evaluate where you are, where you have been, and where you want to go in the future.

Despite all of the negativity in the air at the beginning of the year, 2012 for the most part was a good year for the markets.  You may be realizing this as you open your 4th quarter statements.  But if you are like most investors, as long as you see the positive returns, you are content to file the statement away and move on to other issues competing for your attention.  This brings me to an important concept in investing called benchmarking. 

I received an anonymous email a few weeks ago asking what I thought a 40lk should have returned this year.  Immediately I knew this was a case where the investor had no idea what returns they should expect, given the funds they owned.  This is truely a sad sceneario, as you can imagine this person, if they have an advisor, has no way to hold the advisor accountable.  Imagine buying a car, and having a breakdown only 3000 miles after purchase.  Most drivers know that that is unacceptable, but if you didn't have a standard of comparison, how would you know?  Imagine how many lemons you would buy and be completely blissful about it if you did not know the standard of quality for cars sold by dealers?

In short, every fund in the fund universe has a "benchmark".  This benchmark is used as a standard of comparison.  It is generally believed that a fund should perform similiar to it's benchmark (or sometimes called an index).  For example, many US large cap stock funds have the S&P 500 as their index or benchmark.  The S&P 500 tracks the performance of 500 of the largest US firms in various industries.  It is generally thought to be a good composite representation of the market for US large stocks.  Mutual funds that trade and own these stocks should perform up to the benchmark, but unfortunately that is not the case routinely.  That my friends is a topic for another blog post.  If you are interested in what your funds' benchmarks are, a great website to visit is morningstar.com.

Jeremy Burri
Veritas Financial

 

Déjà Vu: 1979 and the “Death of Equities” by Jeremy Burri

In 1979, Business Week ran a famous cover story titled, THE DEATH OF EQUITIES.  The article spelled out the case for why stock investing was dead.  The evidence seemed compelling.  From 1966 to 1978, the Dow Jones average had been up & down — but actually was higher in 1966 than in 1979.  Inflation, oil prices, and other issues were a constant worry, and the US economy seemed to be in for years of slow growth.  But, contrary to popular wisdom, stock investing was not dead.  From January 1 1979 to January 1 2012, the average annual return for the Dow was 8.59%,  8.15% for the S&P 500 and 9.88% for the Nasdaq.  What lessons can we learn from this?  First, long-term investing requires discipline.  History is filled with times where the market did not perform up to our sometimes lofty expectations. Second, every time the market slumps, experts will say, “This time is different.”  They were wrong in 1979 and will likely be wrong about this market as well.  To paraphrase Peter Lynch, “I can’t tell you what direction the next 1,000 point move in the market will be, but I can tell you what the next 10,000 move will be.”

Discipline and Your Portfolio: Why it Matters.

“Discipline” is not a word that tends to make us feel warm and fuzzy.  In fact, It is sometimes seen as negative. 

It might make you think of being “grounded,” as a kid, of getting on the treadmill for a workout, of saying, “no” to that second helping of chocolate cake. 

Is discipline a dirty word?

Discipline is the key to success in almost every aspect of life.

To get good grades in school takes the discipline of good study habits.  To maintain a successful career means having good work habits.  Athletes know that to be on the top of their game takes the discipline of hours of practice.  The same is true for musicians or artists.  The list could go on and on.

And so it also is with financial success, and your investing life.

Choosing a disciplined, prudent investment philosophy is the single most important decision the investor makes.  This is one of the main messages I learned at an Advanced Coaching Conference set in Chicago this year.

What does a disciplined investing philosophy look like?

¨ Focused on asset allocation using engineered portfolios which are periodically rebalanced.

¨ Based on the science of investing. 

¨ Choosing partners who focus on delivering efficient market returns.

This is the opposite of what you will find at most investing firms, the opposite of gambling and speculating, of attempting to find so-called “experts” who think they can pick winning stocks and can time the market.  A disciplined client – advisor relationship is based on communication and education. That is one of the main reasons we offer classes every month.  Join us this summer and discover what the dreaded “D” word can mean to YOUR financial future!

By Margaret Wittkopp

Investment Advisor Representative

Investment Risk: There's No Escaping It!

Looking for an investment without any risk? You won't find one. 

All investments have risks - just different kinds and degrees. So it's important to know what the specific risks are and how they can affect your portfolio.

Market Risk. Stock market ups and downs are unpredictable. So market risk - the possibility that investments will lose value because of a decline in the securities markets - may be the risk you think about first. Choosing an appropriate investment strategy and sticking with it may help your portfolio survive a volatile market.

Interest Rate Risk. You may think you can avoid the uncertainty of the stock market by investing in bonds. But bond investments have their own risks. Changes in interest rates affect bond prices. When rates rise, prices of existing bonds fall because older bonds are paying less interest than newly issued bonds. Holding a variety of bonds having different maturity dates may reduce interest rate risk.

Default Risk. Bonds are subject to another type of risk - the risk that the bond issuer won't have money to make principal and interest payments to bondholders. Generally, investors who buy lower rated "junk" bonds are more at risk from default than investors who hold investment grade bonds. Check an issuer's credit rating with a bond-rating agency, such as Moody's or Standard & Poor's, to minimize default risk.

Inflation Risk. Over the years, the rising costs of goods and services can reduce the purchasing power of your savings. If you invest the bulk of your money in fixed income investments, you may be at risk of not earning enough to reach your long-term goals. Consider investing a portion of your money in investments, such as stocks, with the potential for earning higher returns to help reduce inflation risk.

Currency Risk. Adding international investments to your portfolio may provide diversification.* But be aware that currency exchange rates, foreign taxation issues, and differences in auditing and financial standards, among other things, can affect the value of foreign investments.

Play a Role. You can't prevent investment risk, but you can take steps to moderate it. By diversifying your portfolio, you improve your chances that gains in one asset class may offset losses in another. And, when you invest for the long term, you'll have more time to recoup any losses.

What Did We Learn in 2011?

A Year of Stormy Seas

Every year has its ups and downs, but 2011 had more than most, creating unusual volatility in the financial markets. We could describe it as a bit like being tossed on the ocean in a stormy sea, swooping up one moment, and plunging down the next. This volatility left many investors gasping for breath, at least figuratively, and maybe even feeling a little seasick!

The S&P 500 is only one of several indexes, but we’ll use it to illustrate these market ups and downs. For example, in a two-week period from July 25 through August 8, the S&P 500 lost almost 17% of its value. On November 30, it gained 4.3% in a single day.1 Yet by the end of the year, the S&P 500 was just 0.04 points lower than where it started—the smallest annual change in history!2
 
Global Events

The pro-democracy movement in the Middle East began in late 2010 with events in Tunisia and spread to Egypt and Libya in early 2011. Economically, the Libyan conflict was particularly significant because of the country’s key role as an oil producer. On February 22, after fighting broke out in Tripoli, the S&P 500 dropped 2.1%. This was its largest single-day decline since the previous summer. Crude oil prices rose 8.6% to reach $93.57 per barrel, the highest level in more than two years.3  Oil prices continued to rise through the end of April, when they began a six-month decline. The earthquake and tsunami that hit Japan in March devastated the Japanese economy and caused humanitarian and economic concern around the globe. The S&P 500 dropped for three consecutive days the following week, but it quickly recovered and went on to reach its high for the year on April 29.4 The real impact of the Japanese disaster for the United States played out over a longer period of time because of the decline in the flow of Japanese products.

Debt Concerns

The steep decline of the S&P 500 in late July and early August, mentioned at the beginning of this article, coincided with acrimonious debate over the federal deficit and raising the debt ceiling. The decline continued for a week after a last-minute agreement was reached, fueled by dissatisfaction over both the outcome and the unprecedented downgrading of the U.S. credit rating by Standard & Poor’s Ratings Services.5

The United States was not alone in struggling with debt in 2011. The European debt crisis cast a shadow over the global economy and contributed to many more ups and downs for the markets. After Greece announced it would be unable to meet its financial obligations, the S&P 500 hit its low for the year on October 3rd.6 Less than a month later, on October 27, news that European leaders had forged an agreement to address the Greek issue helped spark a 3.4% increase that contributed to the largest one-month rally of the S&P 500 since 1991.7

Obviously, world events can have a dramatic effect on financial markets. However, these effects typically dissipate fairly quickly. Long-term trends are rarely, if ever, driven by a single event.

Rather than focusing on market volatility, it may be more helpful to look at the long-term growth of the U.S. economy. In the third quarter of 2011, real gross domestic product grew at an annual rate of 1.8%. Although less than the 2010 growth rate, this was a substantial improvement, suggesting that the economy has continued to recover, albeit slowly, from the Great Recession of 2008–09.8

Persistent unemployment affects millions of Americans and has been one of the most significant drags on the economy and financial markets, so perhaps the best economic news of 2011 was that the unemployment rate dropped to 8.5% in December, the lowest rate since February 2009. If this trend continues, it may bode well for 2012.8

It will take some time to fully understand the economic impact of the stormy financial seas caused by domestic and global events of 2011.

So what can we take away from all this? Is it time to get out of the water and tie your boat to the dock?

Absolutely not!

I hope you saw from the examples here that domestic and global events are random and unpredictable. Many investors did see some losses in their portfolios last year, but consider this: If you got out of the market because the S&P 500 took a 17% dive, you missed the subsequent upturn. Would you, or anyone, be able to accurately predict the optimum time for getting back in?

Volatile times call for a disciplined, steady plan of action, a time to make sure you are truly diversified, and not (as is the case for far too many American investors) simply holding a lot of “stuff.” The only way to know this is to take a good look inside the funds in your portfolio.

Times of feeling a bit “seasick” are NOT times for an emotional response. The wisest course is to follow a sound, disciplined investment strategy based on your long-term goals, personal situation, and risk tolerance.  To schedule a look "under the hood" of your investments, or to talk further about this, call Jeremy Burri or me at 920-893-5262.

Margaret Wittkopp
Financial Advisor/Coach
Investment Advisor Representative

1)Yahoo! Finance, 2012, for the period 12/31/2010 to 12/31/2011. The S&P 500 Composite Index is generally considered to be representative of U.S. stocks.
2) CNNMoney, January 3, 2012
4) The Washington Post, July 13, 2011
5) Standard & Poor’s, August 5, 2011
6) CNNMoney, October 3, 2011
7) CNNMoney, October 27, 2011; October 31, 2011
8) U.S. Bureau of Economic Analysis, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material partly prepared by Emerald Connect, Inc.


The painting, A Ship in Stormy Seas, is by Mantague Dawson.  To purchase it, click here.

Subtle Differences

I was doing some researching and ran across the website of a very "intelligent" sounding financial advisory firm. Their website is very well done. They advertise that they are fee-only planners, and (like us) are independent. They present a good image. They even have a name in their title that is very much like the name of a firm with which Veritas has a business relationship. The more I looked at their site, the more I felt like they are our clone from another dimension: similar sized staff, articles about market panic, references to Money Smart Week, and a golf event.  If I were an outsider, I would see almost no difference between this firm and Veritas Financial Services.

But then I dug a little deeper. One of their FAQs (frequently asked questions) is about active management. I am quoting their reply directly:

"Active investment management is the use of analytic research, forecasting, experience and expertise to decide what securities to buy or sell and when. This process aims to achieve a greater rate of return than the market by identifying mispriced assets. In contrast, passive investing subscribes to the Efficient Market Hypothesis and promotes index investing based on the premise that it is not possible to beat the market. These are the two main schools of thought in investment management and attract significant debate and contention within the industry and academia.

Actually, there is NO contention amongst academics about which method is best, only on Wall Street. But anyway, here is their next section on "which is best."

We employ an active investment strategy as we feel greater returns can be achieved with this method. While the majority of investors don’t beat the market, our results have shown that it is not impossible.

And something makes them different from "the majority of investors?” This is a common psychological misperception, similar to how over half of drivers think they are “above average.” I continue, from their website:

Our process can be referred to as “tactical asset allocation” [TRANSLATED: “MARKET TIMING”] in which we make changes…based on our current Market Outlook [TRANLATED: “GUESS”]. With these adjustments we aim to add value for our clients by anticipating broad market and economic themes. We also utilize active mutual fund managers…to make the decisions of which specific companies are best poised to profit from these themes. While many tout index funds because of lower expense ratios, our experience [BUT WHAT RESEARCH?] has shown that there are fund managers who are worth the higher cost [ARE THEY INDENTIFIABLE IN ADVANCE?] and we spend a lot of our research time trying to identify those managers and make sure the costs are appropriate for the value provided."

Here is a case of an intelligent-looking firm in all respects that falls victim to the same cancer of active management, and not only that-- MARKET TIMING (ie "tactical asset allocation"). The sad truth is, they interpret mutual fund manager luck in making correct bets as a consistent, repeatable, and predictable skill they can employ for their investors.

Nothing could be farther from the truth.

Granted, index funds are often held in high esteem for being less expensive, but inexpensive isn't everything. It is also the asset mix that matters. At Veritas, we use structured Free-Market funds and emphasize appropriate asset allocation and true diversification. We do NOT advocate actively-managed funds.

It is highly unlikely that the average investor can decipher and discern these subtle differences. That is why our goal is, week in and week out, to educate you, the investor.

Jeremy Burri
Financial Advisor Coach

Registered Investment Advisor

Separating Myths and Truths of Investing

Teaching investors the truth about investing is a part of our mission.

Are you an investor? Considering the ups and downs of the stock market, the struggles (or outright disappearance) of some of the best-known banks and brokerage houses, and the constant (and often contradictory) media hype—you might wonder if the best thing to do is put your money under a mattress. How do you know what to do?

Don’t despair! It IS possible to find the truth about investing, to discard long-held (and dangerous) Wall Street myths--and to become a successful investor.

Here are just four common myths that can sabotage the returns of uninformed or unwary investors:

• Stock Selection: Picking stocks that are expected to do well in the future. Have you seen the articles that promise to reveal, “Ten Best Stocks for the New Year” or something similar? One financial company’s prospectus even boasts that they use “superior fund managers” to pick stocks! Stock selection is a Wall Street myth.

• Track-Record Investing: The use of performance history to determine the best investment for the future. Have you or a professional looked for superior-performing mutual funds? Track-record investing is a Wall Street myth.

• Market Timing: An attempt to alter or change the mix of assets based on a prediction of what the market will do in the future. Did you, or someone you know, “get out of the market just in time?” Did they know exactly what day to get back in? Market timing and predicting up and down markets is a Wall Street myth.

• Costs of Investing: The belief that investing costs are limited to commissions and other disclosed fees. Many fees are NOT disclosed but can create financial leaks in your portfolio? Thinking that costs are always disclosed is another Wall Street myth.

What is the truth? The truth is that no one can consistently and predictably add value through stock selection. The truth is that an investment manager’s track record of past success has nothing to do with ability to do so in the future. The truth is that free markets work; only new and unpredictable news and events affect market prices. And the truth about costs is that what you can’t see CAN hurt you. The solution is called Modern Portfolio Theory and is based on years of academic research.

You don’t have to use traditional investment methods to be a successful investor! Would you like to know more? Make 2012 the year you discover the truth about investing. Each month we will present the class, “Myths and Truths: the History of Investing.” Call us at 893-5262 if you would like to receive a schedule of educational opportunities or if you would like to talk about it with us.

Margaret Wittkopp

Investment Advisor Representative

 

The Truth about Traditional Investing

What's happening to my money?

Margaret Wittkopp Investment Advisor Representative

You may know that I founded Veritas (Latin for truth) after many years of working in the financial industry. It was not an easy decision, but I had to make a change because I had discovered that much of what financial advisors are taught is not the whole truth.

Are you investing with a traditional firm? Or if you are a Veritas client, have you shared with others that you have found a more efficient way to invest?  Here are some things for you to consider (or for clients, things to ask your investor friends and family):

• Many retail financial products, mutual funds and/or other actively-managed funds involve high turnover rates. Each turnover involves a fee. Do you know how often the holdings inside your mutual funds are changed? Do you know the amount charged each time this happens?

• Did you get out of the Market when things looked bad and wait till things looked good before getting back in (the opposite of “buy low—sell high”)?

• Are you, your advisor, or your mutual fund manager attempting to find the next “hot” stock?

•Is your advisor attempting to pick stocks or mutual funds by past performance (checking the 10 year, 5 year or 3 year history of a fund’s returns)? Past performance has ZERO correlation with future performance.

• Do you know what is in your mutual fund? Many people, upon taking a look “under the hood” of their portfolio, discover that they have lots of overlap which means even though your portfolio may have lots of “stuff” it is not really diversified.

The most successful investing strategy involves:

• Appropriate asset allocation and true diversification

• Disciplined decision made on academic research, not just the latest hot stock or complicated retail product

• Consistently capturing market return

• Reducing fees and hidden costs

Would you like to learn more? Or are you looking for a way to help other investors? Email me at margaret.wittkopp@veritasinvesting.com or Jeremy Burri at jburri@veritasinvesting.com or call us at 920-893-5262. 

If you are in the area, don't forget that we offer at least two classes each month on topics related to successful investing. Click on the "Learning Opportunties" link above to see a schedule of classes.

The Dirty Little Secret of Investing

Some words of wisdom from Symmetry, one of our partners in a non-traditional approach to investing...

Contrary to conventional wisdom or what pundits might have you believe, it's really hard to beat the market. Many try; most fail. (The term "beating the market" refers to an investment manager generating higher returns than the market of stocks within which they are investing.) Investors often lose sight of this widely documented phenomenon for one very simple reason: we place too much weight on recent events. This inherent bias is called Representativeness and is quite common among investors. Ability shouldn't be judged based on short-term success because most of us are long-term investors.

To be fair, yes, there have been active money managers who have found success in playing the market by delivering superior returns above the market rate of return. Here's a little realistic perspective: Beating the market for 5 years garners respect, beating it for 10 demands recognition, beating it for 15 years warrants the title of investment icon. One of the biggest mistakes that end investors make is assigning this extraordinarily rare skill to the general population of professional money managers. If indeed you do decide to put your faith in someone's ability to actively pick stocks, consider the following three part test:

First, you as an investor would have to believe that financial markets don't work very well, meaning stocks are often mispriced, and that the current price of a stock isn't a good judge of what it's worth. You would have to arrive at this conclusion because active stock pickers believe that they can identify these mispriced stocks.

Second, you would also have to believe that successful, active stock pickers exist - that have consistently (consistently being the keyword) shown an ability to outperform the broad-based market over very long periods of time.

Finally, and most importantly, as an investor, you must be confident in your ability to identify these individuals BEFORE they beat the market. Not after! Essentially you would be looking for the next great money managers BEFORE they became the next great money managers.

There are investments that are actively managed that may make sense in your portfolio, and as your advisory firm, we have the resources available to conduct due diligence looking for the right fit for your portfolio. However, our belief is that a passive investment strategy at the core of your holdings makes good sense.

This has been an exercise in rationality, and to a degree, advocacy for the benefits of passive index style investing. However, recognizing the difficulties of beating the market isn't to say that achieving market rates of return using a passive buy and hold investment strategy is easy. It requires patience, emotional discipline and strict attention to detail when building, maintaining, and adjusting your portfolio over time. Therein lies the critical role of the financial advisor.

Content written by Symmetry Partners, LLC. Our firm utilizes Symmetry Partners, LLC for investment management services. Symmetry Partners, LLC, is an investment adviser registered with the Securities and Exchange Commission. The firm only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. All data is from sources believed to be reliable, but cannot be guaranteed or warranted. No current or prospective client should assume that future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable. As with any investment strategy, there is a possibility of profitability as well as loss. Symmetry follows a passive investment strategy that involves limited ongoing buying and selling actions. Passive investors will purchase investments with the intention of long-term appreciation and limited maintenance. Passively managed portfolios are designed to closely track their respective benchmark index rather than seek out performance. As a result, the portfolio may hold securities regardless of the current or projected performance of a specific security or particular industry or market sector. Maintaining investments in securities regardless of market conditions or the performance of a specific security could cause the portfolio to lose value if the market as a whole falls. Please note that you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Symmetry Partners or your advisor.

Copyright (C) 2011, Symmetry Partners. All rights reserved.

What Is Financial Coaching?

Why do our Financial Advisor Coaches, Margaret Wittkopp and Jeremy Burri, use that term to describe themselves.  Just what is a financial coach?

Coaching is different from traditional financial advice. How is it different? An investment coach is a financial professional who goes beyond typical financial planning and advice to help you identify your investment philosophy, understand your investment strategy, and provide discipline throughout your investment experience.

Margaret often asks investors, "Do you want me to tell you something that will make you feel better, or do you want me to tell you what you need to know?"

A coach will not only help you identify the right strategy for you, but help you keep your decisions and behavior regarding your investments on track for achieving the results you want.

So, how do you distinguish whether you are working with a coach or not? A coach helps you answer 'Yes' to the 20 Must-Answer Questions for Investing Peace of Mind™.


We will post those 20 questions tomorrow.

Should You Get Out of the Market in Volatile Times?

Jim Cramer, who is featured on MSNBC's "Mad Money" was recently interviewed on The Today Show. He advised investors to "avoid" the stock market because of its recent ups and downs. Is this wise advice?

Consider the following headlines:

1. “Wave after wave of selling again moved down prices on the Stock Exchange today and billions of dollars were clipped from values.”
2.“The…volume of retail sales went down an estimated 10% last year."

3. “In one hectic week, the paper value of the 1,545 stocks listed on the Big Board plunged by $30 billion—which is more than the GNP of Australia, Sweden, and Ireland.”
4. “The U.S. banking system has been stretched very nearly to the limit.”
5. “The recent crash bears an uncanny resemblance to the crash of 1929.”
6. “Most Americans have lost faith in the stock market.”

What may surprise you about this gloomy list of quotes is that the first one is from 1929, the next is from 1947, then 1962, 1974, 1989, and the last one is from 2002.

I could share many more such headlines, but the point is that market ups and downs happen.  The reason stocks have historically returned more than fixed income over the long-term is precisely because stock holders endure the volatility of the market. Without the volatility (risk) that goes hand-in-hand with stock ownership, the returns associated with stocks would diminish, and so would the attendant wealth. 

Emotions (and sometimes the advice of so-called experts) cause many investors to do the opposite of what will grow their portfolio over the long-term. 

If you live near Plymouth, Wisconsin, I invite you to join us for a complimentary meal and our last investor education class of 2011. We'll be presenting "Myths and Truths: the Story of Investing" on December 15th at both 11:30 AM and 5:30 PM here at Veritas Financial Services, 506 E. Mill St.

If you are out of the area, we still may be able to set up a meeting, or perhaps we can connect on Skype.  Jeremy or I would be glad to talk with you about your investments.  Just give us a call at 920-893-5262.

Margaret Wittkopp
Investment Advisor Representative

Market Behavior

In light of recent market volatility, I thought I'd bring up a little bit of market history from way back in..... 2010.  When I refer to "the market,"  I am talking only about the  S&P 500 Index, a commonly accepted measure of the US Stock Market.

Back in April of 2010, the market suffered nearly a 16% decline from April 23rd, to the market bottom on July 2nd. Our most recent episode was a 17% decline from July 7th to August 8th.

And yet, 2010 went on to be a positive year for the market.

Market declines and sell-offs come in all shapes and sizes. Long term investors should remained focused on managing risk, controlling costs, and staying diversified.

Jeremy Burri
Investment Advisor Representative

What Do You Believe (Who's Side are You On)?

There is a battle raging in the world of finance. Two ideologies are at war, and every investor, even you, has taken a side.  Does this sound surprising?  Did your financial advisor ever ask you whose side you were on?

The stock market, with its images of bulls and bears, Wall Street, ticker tape, and bell ringing, is a part of American culture. The allure of “getting rich” in the stock market has attracted investors for decades.

Benjamin Graham was one of the first people to seriously study investing. His book, Security Analysis, was considered the ultimate stock picker’s guide. He was very much admired by a young Warren Buffet, so much so that Warren used Graham as a middle name for one of his sons.  Many of Graham's ideas live on today.

Jim Cramer is picking stocks on CNBC.  You can watch shows like Fast Money (also on CNBC).  Many brokers are touting their “stock picking” ability, and a legion of mutual fund managers are dutifully trying to pick the "best stocks" to include in their mutual funds.

In the 1960s, academia first started to take an interest in the markets. A burgeoning mutual fund industry was emerging. Scholars wanted to determine if all of these stock pickers could add any value to investing. Could they "beat the market" by finding the best stocks, thus delivering a superior return to their clients?  This was first tested in 1965 with a study by Beckencamp, and it was determined that mutual fund managers were NOT beating the market. But the industry was not concerned as people at that point had no alternative.

But in 1976, shortly before his death, the very father of stock picking said the following:

I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when [the bible of fundamental stock analysis, Graham and Dodd's Security Analysis] was first published; but the situation has changed. I doubt whether such extensive efforts will generate sufficiently superior selections to justify their cost.

But the industry forged on unaffected. Fast forward to today, and the lines are clearly drawn. Academia has come a long way since the 1960s, and volumes of academic work have been produced which show repeatedly that stock picking and “active management” do not work. But we still have a flourishing financial services industry, using investor’s money to pick stocks, speculate, and gamble with your hard earned money.

Not in your portfolio you say?  Really? Can you tell me the turnover rate of your mutual funds?

So I ask you, what do you believe? Do you believe that someone can "beat the market" through stock picking and speculation (the methods of many in the financial services industry)? Or do you believe academia and in their findings that the market is random and not easily beaten by any money manager, financial guru, or stock picker?

If you believe in the later, don’t give up hope. There are ways to invest in the market which avoid Wall Street’s games. If you are interested in learning about this disciplined, common sense approach, please contact us at 920-893-5262.

Jeremy Burri

Investment Advisor Representative

Veritas Financial Services