Leave The Worrying To Us
It can take extra effort to practice patience as an investor. We believe it is more useful to spend our time on the things we can control.
By SJS Managing Director & Senior Advisor Jennifer Smiljanich, CFP®.
You’ve no doubt heard the phrase, “Patience is a virtue.” It can take extra effort to practice patience as an investor. With today’s advances in trading technology and the fast pace of news, we’ve seen daily swings of one percent or more in the market happen more often.[1] And if you’re like the many individuals who follow the daily gyrations of the market, then you know it doesn’t take much before stress creeps in.
That’s why you have SJS on your side. We help take the worrying right out of investing. Leave it up to us to be disciplined and patient. Markets will go up and down, that’s their nature. We believe it is more useful to spend our time on the things we can control. Focusing our efforts on these “controllables” can make a difference in the success of your investment experience.
Investment Costs
Dalbar’s Quantitative Analysis of Investor Behavior study on investor performance found that the average stock mutual fund investor underperformed the S&P 500 benchmark by 4.13% annually from 2010 through 2019.[2] As demonstrated in the graph below, for a $1,000,000 starting investment, this underperformance lowered growth by more than $1,000,000 compared to the S&P 500 benchmark. Higher management fees cause much of this underperformance for typical stock mutual fund investors.[3]
Another study suggests that traditional hedge fund management and performance fees consumed 64% of investor returns on average from 1995 to 2016.[4] Talk about a haircut on your net return!
At SJS, we believe that investors are entitled to receive the returns of the market. So we work hard to design portfolios in a way to keep your average cost of investing as low as possible.[5] Because just like in running a business, revenue is important, but the bottom-line profit determines whether you will stay in business and survive the long run.
Keeping your expenses low is important, that’s why many of our client portfolios are invested in institutional class mutual funds with average expenses ranging from 0.22% to 0.25%.
Taxes
Tax rates are out of our control, but we keep an eye on your portfolio design to manage activities that may generate tax. For example, SJS considers taxable events that might occur as a result of a need to rebalance your portfolio. We look for opportunities to reallocate within tax-deferred accounts to avoid generating taxable capital gains. As for stock mutual funds, we strive to select those that offer low turnover of securities.
We are always looking for ways to be mindful of the tax bite. That’s why we often position certain investments, such as publicly traded real estate or taxable high-coupon bonds in tax-deferred accounts, because they may generate income that is taxed at ordinary rates. These particular tax rates are often less favorable than capital gain rates.
Trading
There is no ‘free lunch’ when it comes to trading. There is a cost to buying and selling a security, whether it is a mutual fund, stock or bond. While we generally support the idea of buying and holding a broad market portfolio, there are times when different asset classes or baskets of securities become heavier than their original weighting. And this can cause your portfolio’s risk level to change. If the change is small enough, we accept the incremental risk rather than place a trade. But when the weighting changes enough, we accept the cost of trading as necessary to keep the risk in your portfolio at a level you are comfortable with.
When managing an investment portfolio, there is a lot to consider. If you have any questions about your investment portfolio, please reach out to us. We are always here to listen and assist!
Important Disclosure Information and Sources:
[1] “The Craziest Month in Stock Market History.“ Nick Maggiulli, 01-Apr-2020, ofdollarsanddata.com.
[2] “2020 QAIB Advisor Edition.” DALBAR, 2020, dalbar.com.
[3] “See the difference low-cost funds can make.“ Vanguard, 2020, vanguard.com.
[4] “The Performance of Hedge Fund Performance Fees.“ Itzhak Ben-David, Justin Birru, & Andrea Rossi, 2020, Ohio State University Fisher College of Business Research Paper Series.
[5] MarketPlus Investing® models consist of institutional quality mutual funds. Mutual fund investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.
Advisory services are provided by SJS Investment Services, a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide tax advice. Please consult your tax professional for specific advice. This material has been prepared for informational purposes only.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. In US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.
The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States.
Suggested Reading
Working To Control What You Can
We can identify the risks we know of, craft an appropriate plan given those risks, act according to the plan, update the plan using new information, and repeat.
By SJS Senior Client Portfolio Manager Tom Kelly, CFA
Every day, events happen that are outside our control.
While we may not be able to control what happens around us, what we can do is identify the risks we know of, craft a plan to act appropriately given those risks, act according to the plan, update the plan upon receiving new information, and repeat this process. This tends to be true in health-related matters as well as with investing.
SJS previously wrote about the coronavirus, and our general message stays the same. Since that post, there has been more significant stock market volatility, a new oil price war between Saudi Arabia and Russia, as well as continued societal consequences worldwide due to the spread of the coronavirus.[1]
Here are a few key insights regarding our thought processes and systems in light of the recent stock market volatility and associated news events.
Educate yourself with reliable sources intended to help the general public.
Generally, and particularly in uncertain times, it is critical to receive information and lessons from the most reliable sources who intend to help the general public. Over the past few weeks, many news sources have published a lot of sensationalized stories with little-to-no new and useful information for helping people handle the consequences of the coronavirus. At SJS, we focus on high-quality information from sources including the Center for Disease Control (CDC) and World Health Organization (WHO).[2],[3]
Focus on important short-term and long-term economic indicators.
Long-term investors focus on fundamental economic conditions that drive returns, as well as market valuations relative to those fundamentals. For well-diversified global portfolios, general economic growth (as measured by indicators including gross domestic product (GDP)) drives much of the stock market returns that clients will realize over the long-term. Most economic firms believe that although GDP growth will slow down in the short-run, the coronavirus and oil effects should not significantly alter long-run economic growth expectations, which is what long-term investors should focus on.[4]
Design portfolios that can grow from risk and uncertainties.
Many studies have shown that asset allocation (deciding how much of your portfolio to allocate to stocks and bonds, respectively) drives over 90% of variability of returns, meaning that individual security selection and market timing have little positive impact on expected returns for most investors.[5] In light of this, SJS works closely with each client to develop a well-diversified global portfolio using institutional quality mutual fund that is true to the client’s goals and risk tolerances. (Diversification neither assures a profit nor guarantees against a loss in a declining market.)
For stocks, SJS invests globally in 10,000+ securities through institutional quality mutual funds, understanding these funds will move similarly with general stock markets. For bonds, SJS invests primarily (90%+) in thousands of high-quality investment grade securities, also using institutional quality mutual funds, which tend to perform relatively stable or even positively during times when stock markets are volatile.[5] For example, over the past few days, non-investment grade credit bonds (especially in the energy sector) have decreased significantly in price (likely in part due to the new oil price war), while most high-quality bonds have increased in value.[1] A portfolio consisting of a well-diversified mix of stocks and high-quality bonds is not expected to experience the same volatility or losses as what general stock markets will experience.[6]
Rebalance to influence risk, improve returns, and tax loss harvest.
During volatile stock market periods, rebalancing according to a robust systematic process can both move the portfolio back to targeted expected risk characteristics, with the goal of improving long-term portfolio performance due to selling more highly valued bonds and buying lower valued stocks.[7] Additionally, volatile stock periods tend to provide more tax-loss harvesting opportunities, which may increase long-term after-tax expected return. SJS has robust systems and processes in place to facilitate such rebalancing and has been working with clients to perform any relevant trades over the past several weeks.
History does not repeat itself, but it does rhyme.
Over the past 50 years, the world has experienced many significant stress events, due to health concerns, economic issues, wars, and so on. Below is a chart of the MSCI World Index since 1970 detailing performance and associated stress events.[8]
Additionally, over the past 100+ years, the world has experienced major pandemics like the Spanish Flu (1918-1920), which impacted roughly 27% of the world’s population.[9] Below is a graph of the S&P 500 and associated performance during and after these pandemics.[10]
Throughout these events, people reacted with resilience, and markets continued to function.
Sudden and complex events will happen. We do not know what these events will be, nor exactly when these events will happen – but we know that they will happen. We believe in the resilience of human beings, and accordingly we believe in the long-term growth prospects of global economies and investment markets. Because of this uncertainty and risk, we at SJS help clients focus on what they can control and allow markets to do the rest. We continue to recommend that our clients rely on MarketPlus Investing to stay invested in well-diversified global portfolios true to each of their goals and risk tolerances.
If you have specific questions or concerns, please call us. We’re always here to explain and assist.
Sources:
[1] “High-Yield Bonds Are Sinking as Bankruptcy Fears Hit the Oil Patch.” Alexandra Scaggs, barrons.com.
[2] “Coronavirus Disease 2019 (COVID-19).” Center for Disease Control and Prevention, cdc.gov.
[3] “Coronavirus disease (COVID-19) outbreak.” World Health Organization, who.int.
[4] “S&P: Coronavirus to trim 2020 global GDP growth by 0.3 percentage point.” S&P Global, spglobal.com.
[5] Unconventional Success. David Swensen, 2005.
[6] “3 Reasons Why You Should Invest in Bonds.” Nick Maggiulli, ofdollarsanddata.com.
[7] “Opportunistic Rebalancing: A New Paradigm for Wealth Managers.” Gobind Daryanani, fpanet.org.
[8] In US dollars. Source: Avantis Investors. MSCI data © MSCI 2019, all rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.
[9] “1918 Pandemic (H1N1 virus).” Center for Disease Control and Prevention, cdc.gov.
[10] In US Dollars. Sources: Avantis Investors, using data from Robert Shiller Data Collection at Yale University and Centers for Disease Control and Prevention. S&P 500® Composite Index does not include reinvested dividends.
Important Disclosure Information
Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. Mutual fund investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost. Diversification neither assures a profit nor guarantees against a loss in a declining market. There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results.