What You Need to Know Before You Invest Your Money

MarketPlus Investing® Helps Investors Choose What’s Right for Them

By SJS Investment Services President Kevin Kelly, CFA.

With countless investment options available to you, with so much written about the state of the markets, the state of the economy, and the state of the world, deciding how to invest your money - whether it be your own or an organization’s - keeps getting more complicated. Smart investors do their homework, seek out people they can trust, and find investment strategies that work for them. In words, that sounds easy. In practice it isn’t very easy at all.

SJS Investment Services has spent decades helping people choose what’s right for them when it comes to investments through our proprietary investment process called MarketPlus Investing. And through it all, we have discovered the three most important things investors need to know about themselves before they invest.

WHO ARE THE PEOPLE YOU CARE ABOUT AND HOW DO YOU WANT TO TAKE CARE OF THEM?

In the course of conversation, SJS Investment Services gets to the core of what’s important. It might be a person or a cause, but until we know who you care about and how you want to take care of them, we don’t know enough about you to fully guide you.

WHAT IS YOUR TIME WINDOW? (OR, HOW LONG IS YOUR RUNWAY?)

How long before you or the people you care about need your money? This makes a big difference when determining an appropriate investment vehicle for you or your organization. Some individuals have a time window of twenty years or more. Others, including organizations, want investments that cover their expenses next month or next year. Between the extremes are an infinite number of scenarios, and each imply a different investment strategy.

HOW RISK AVERSE ARE YOU?

When asked this question, investors are often quick to say that they are comfortable with risk. But the reality is that many investors are more risk averse than they think. That’s why SJS Investment Services digs deeper than just this question to find out the real answer. And more importantly, we ask about necessary or desired return on an investment*, so we can help design an investment portfolio appropriate for you.

At SJS Investment Services, these three questions are just a part of getting to know you. The more we know about you, the better we can design a MarketPlus Investing portfolio for you. Because MarketPlus Investing is our proprietary science-based process of structuring investment portfolios to help people achieve their specific financial goals, there are countless options. And the more we know, the better we can apply the academic models, the market trend analysis and consider ever changing key indicators on your behalf. SJS Investment Services through MarketPlus Investing seeks to develop the right portfolio design to meet your needs.

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Important Disclosure Information:

*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.

Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. This material has been prepared for informational purposes only.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

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Suggested Reading

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Are Stocks Riskier Than Bonds?

By SJS Investment Services Investment Associate Bobby Adusumilli, CFA.

You have probably heard the saying, “Stocks are riskier than bonds.” The idea is that if investors take greater risk, they should get rewarded with a higher return over time; therefore, since stocks are riskier than bonds, then stocks should have higher returns over time. While the logic seems to make sense, we wanted to look at the historical data to answer the question: are stocks actually riskier than bonds?

The answer is: it depends on how you define risk. If you define risk as portfolio fluctuations over the short-term, then stocks have generally been riskier than bonds. However, if you define risk as loss of wealth over the long-term, or as lost opportunity to grow wealth over the long-term, then you may be surprised to learn that stocks may not actually be much riskier than bonds.

We want to illustrate these points via graphs. We use the S&P 500 Index as representative of the U.S. stock market, and the Bloomberg Barclays U.S. Aggregate Bond Index as representative of the U.S. bond market.[1][2] We want to focus on increases in purchasing power, so we use the U.S. Consumer Price Index (CPI) to calculate real (inflation-adjusted) returns.[3] Additionally, in order to use as much reliable historical data as we can, we chose the S&P 500 Index that has available data since 1926, while the Bloomberg Barclays U.S. Aggregate Bond Index has data since 1976.

It’s important to emphasize that indices are not directly investable. Before the last few decades, it was difficult for an individual to invest similar to a broadly-diversified index in a low-cost, tax-efficient, trading-efficient way. Therefore, it is unreasonable to expect that any investor could have matched the index returns below. However, with the increasing popularity of index funds over the past 25 years, an individual investor has a much greater ability to achieve returns similar to a well-known index in a low-cost, tax-efficient, trading-efficient way going forward.[4]

Risk: Portfolio Fluctuations Over The Short-Term

The U.S. stock market tends to fluctuate a lot from year-to-year. Since 1926 using end-of-year data, yearly real returns have ranged from -38% to +58%, rarely staying flat.

Source: Dimensional Returns Web. See “Important Disclosure Information” below.[1]

Comparatively, the U.S. fixed income market has been much more steady. Since 1976, yearly real returns have ranged from -10% to 27%, with most returns within the range of -7% to 7%.

Source: Dimensional Returns Web. See “Important Disclosure Information” below.[2]

These graphs above support the argument that stocks are riskier than bonds, if you define risk as fluctuations in value over the short-term.

Risk: Loss Of Wealth Over The Long-Term

Since 1945 based on end-of-year data, the U.S. stock market has not had a negative 20-year real return. The annualized 20-year real returns have ranged from 1% to 15%.

Source: Dimensional Returns Web. See “Important Disclosure Information” below.[1]

Similarly since 1995, the U.S. bond market 20-year real return has never been negative. The annualized 20-year real returns have ranged from 3% to 7%, and have generally been steadier than the U.S. stock market.

Source: Dimensional Returns Web. See “Important Disclosure Information” below.[2]

It’s surprising, but if you define risk as loss of wealth over the long-term, then U.S. stocks have not actually been much riskier than U.S. bonds over longer-term periods.

Why This Matters

You may be wondering why the definition of risk matters. To demonstrate, this graph below shows the real growth of $100 for both the U.S. stock market and U.S bond market since 1976. Although U.S. stocks had significantly greater short-term fluctuations than U.S. bonds, $100 grew to $3,184 for the U.S. stock market, compared to $510 for the U.S bond market. A big difference.

Source: Dimensional Returns Web. See “Important Disclosure Information” below.[1][2]

If you define risk as short-term fluctuations in value, then you may be tempted to invest more in bonds than in stocks. Conversely, if you define risk as long-term loss of wealth or lost opportunity to grow wealth, then you may be able to better withstand the yearly fluctuations in favor of more stocks. As Jeremy Siegel wrote in his best-selling book, you may be able to commit yourself to “stocks for the long run”.[5]

Considerations

Because of evolving needs, many investors use different definitions of risk at different periods of time as well as for different accounts. There are many legitimate reasons to focus on short-term portfolio fluctuations - and thus potentially invest more in bonds - including:

• Cash flow needs in the short-term and / or intermediate-term

• Potential expected return benefits through diversification and rebalancing

• Belief that the stock market will not continue to provide positive returns in the future

• Ability to psychologically withstand large market fluctuations

• Focusing more on current self compared to future self

If you have varying goals and time horizons for your wealth, then you can consider the following:

• For shorter-term (<5 years) cash flow needs, you can define risk as short-term portfolio fluctuations, and focus more on bonds.

• For longer-term (10+ years) investing (e.g., 401(k), IRA, savings for future children / grandchildren), you can define risk as long-term loss of wealth, and focus more on stocks.

• For intermediate-term (5-10 years) cash flow needs, you can combine the definitions of risk, and use a balanced portfolio of stocks and bonds.

Conclusion

Many investors have greatly benefitted from investment markets historically (particularly stocks), and we expect investors to continue to benefit going forward.[6] Defining how you think about risk can significantly impact your future returns. If you have any questions or want to talk about your situation, please feel free to reach out to us.

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Important Disclosure Information & Sources:

[1] 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.

[2] The Bloomberg Barclays US Aggregate Bond TR USD Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS.

[3] The US Bureau of Labor Statistics Consumer Price Index (CPI) All Urban Seasonally Adjusted is a measure of the average monthly change in the price for goods and services paid by urban consumers between any two time periods. It can also represent the buying habits of urban consumers. This particular index includes roughly 88 percent of the total population, accounting for wage earners, clerical workers, technical workers, self-employed, short-term workers, unemployed, retirees, and those not in the labor force.

[4] “Index Funds Are the New Kings of Wall Street“. Dawn Lim, 28-Sep-2019, wsj.com.

[5] “Stocks for the Long Run 5/E: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies“. Jeremy Siegel, 2014, McGraw-Hill Education.

[6] “SJS 2021 Capital Markets Expectations: Making Sense Of The Future“. SJS Investment Services, 04-Feb-2021, sjsinvest.com/blog.

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. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured 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.

Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

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The Sum Of Its Parts

By SJS Senior Advisor & Director of Institutional Investment Management Kirk Ludwig.

What do bicycles and portfolios have in common? More than you might think. My son likes to tinker—to take things apart and put them back together, to see how they work. When he was younger, we bought him a new bike, and the first thing he did was take it apart. But, after he was done taking it apart and putting it back together, there were three pieces lying on the garage floor. The bike looked the same as it did before, but when he tried to ride it, something wasn’t right. It still looked like the original bike, but it didn’t work like it was supposed to. You need all of the pieces, in all of the right places, for the bike to function properly.

So, what about all of the components of your investment portfolio? Have they been mindfully assembled? Or do you have some extra pieces like yield, term or liquidity lying on the proverbial floor? All of these pieces are necessary to have a complete, well-designed portfolio.

For example, we find that many fixed-income investors will look only for the highest yielding bond without considering what it may do to the bigger picture. Buying a bond isn’t just about the yield; there are more components to evaluate. We also need to consider maturity, the creditworthiness of the issuer, the structure of the bond (e.g., callable versus non-callable), how the yield compares to similar bonds, and most importantly, how the bond may impact the degree of risk of the entire portfolio.

When we build an investment portfolio, whether it’s a bond portfolio or a diversified portfolio that includes stock and bond exposure, the focus is on how all of the pieces come together, not on just any one component. The value of the design lies in the way all the components integrate and work together.

You could also compare a balanced portfolio to the inner-workings of your car. Sure, all cars need an engine to go. That’s what powers the car. But, a good braking system is just as important—you need to have quality tires and stable brakes to be able to balance the power and strength of your engine. If your engine needed work, you wouldn’t take your car in to have the brakes fixed, or get new tires to correct the problem.

It’s the same with your investments. Instead of an engine, brakes and tires, you have safety, liquidity and return to consider. All have their places in both longer-term and shorter-term investments and serve different purposes. But, all are also useful in designing a balanced portfolio.

At SJS, the MarketPlus® Investing approach is to help you understand risk, first and foremost. Then, we utilize all the parts to construct a portfolio designed to meet your objectives and goals using our MarketPlus models as the cornerstone. We know that investing is different for everyone, just as there are different car options for everyone. We base investment recommendations on what you’re trying to accomplish and knowing what you need to get there. And, finally, by putting all of the pieces in all of the right places to build and maintain a portfolio that can help you get to your destination.

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Important Disclosure Information:

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.

MarketPlus Investing® models consist of institutional quality registered investment companies. 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. This material has been prepared for informational purposes only.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

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Suggested Reading

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