As many of you know, both Steve & I have been coaches at all levels from college to T-ball. One of the great things about sports is how they can be used to teach meaningful life lessons; and, if you get the lesson wrong, the downside might be only a loss to another little league team, not the end of the world. We thought we would use this newsletter to apply some of the lessons we use in coaching to help explain some of our investment philosophies.
# 1 - Focus on what you can control
As a baseball player, you have zero ability to control the pitch the other team throws, or the strike zone the umpire is calling, or the condition of the field. If you can’t control it, it is senseless to worry about it. You can, however, control how you adapt to these factors. For example, if the pitcher has a nasty curve ball, maybe you will move forward in the batter’s box, so you can hit the ball before the ball starts to curve. Or, if the pitcher throws really hard, you may move back in the box to give yourself a fraction of a second longer to get your bat on the ball. If the infield grass is thick and long, maybe as an infielder you move closer to home plate, so you can get to the ball more quickly.
The investment markets are similar in that there are many variables beyond our control. We can’t control the economy or where we are in the economic cycle, but we can control the positioning of investments to try to reduce the portfolio’s vulnerability to the most obvious risks and take advantage of current conditions. In doing this, it is still critical to stay diversified. This year’s investment climate could be characterized as being extremely narrow. By that we mean only a few sectors of the global markets are making significant advances. For example, as of this writing (10/19/18), consider the following year to date performance figures (all performance figures from Thomson One) :
• S&P 500 Growth (TR) Index: +9.9%
• S&P 500 Value (TR) Index: -1.5%
• MSCI Europe, Australasia, Far East (EAFE) Emerging Market (TR) Index: -15.1%
• EAFE International Index: -9.0%
• Bloomberg Barclays US Aggregate Bond Index (Gross Return): -4.5%
• Morningstar US REIT TR USD Index: -4.1%
• HUI Gold Index: -6.1%
….pretty narrow indeed! 1
To further the baseball analogy, the last 6 hitters have all hit to left field. Should you now move all your fielders to left field? Of course not! Maybe shift a bit in that direction, but you still need a right fielder. Otherwise, what could have been an out or a single becomes a homerun if you overreact and move everyone to left field. The same principle applies to why it’s important to stay diversified.
At the end of the day, we believe there are four key areas we can help bring to our clients a measure of over their portfolios:
• Fees & Expenses - by finding and maintaining cost-effective investment products that continue to meet the complex and varying investment needs of our clients at all stages of their personal and professional lives;
• Taxation – by being cognizant of the after-tax returns in portfolios;
• Volatility management – by rigorously applying our discipline which has the potential to help mitigate some of the effects of large market drawdowns;2
• Investor behavior – by encouraging clients to clearly understand their risk tolerance and financial goals prior to the stress of a down market. Then, when things do get tough, helping clients to remain disciplined and stick to their plan.
We believe John Skjervem, CIO of the Oregon State Treasury, has it right when he describes PERS’ investment approach: “We remind people that on the investment side we are returns takers, not return makers. We go into the markets every day to compete…. the markets give a certain level of return, but we can’t create beta out of thin air.”
#2 – Be disciplined, even (especially) when it is hard
I love the sport of wrestling because of the intense discipline the sport requires to excel. It is so easy to find a reason not to get up for your 5:30 a.m. run, or not to get that extra practice session in with your coach. Instead, we urge our kids to find that one reason to go to practice or that one reason not to hit snooze on the alarm. Sometimes athletes lose discipline because things are going really well so they feel they don’ t need to stick with the plan that got them there – they take the easy road instead. Sometimes athletes lose discipline because they are not seeing the results as quickly as they had hoped. I tell our kids every year, “Plan your work, then work your plan”.
Our moving average process requires the same type of discipline. We have stuck to our discipline and it is working. Previous buy & sell decisions on international stocks, emerging market stocks, bonds and commodities have all added value. If you’re interested, we are happy to provide examples of the process at work in your portfolio. Again, just because most of the major asset classes listed above are down for the year does not mean there is an issue with the process.
#3 – Success is a marathon, not a sprint
True success can only be measured over relevant time periods. Having a good game or match doesn’t mean an athlete has arrived. The disciplined work must continue. If an athlete has a goal of being a US Olympic gymnast, each day in practice and each event along the path must be viewed as another step toward the ultimate goal.
For most clients, wealth is a means to an end, not the end itself. Whatever the objective for your wealth – whether a comfortable retirement, a philanthropic legacy, or to give your heirs a leg up on their dreams – viewing your situation from the context of a financial plan is useful. This is why, in periods of market stress, we regularly go back to the client’s plan to ensure we are still on track toward achieving their goals.
If you would like to review your financial plan, we are always happy to do so. We have multiple planning tools that can help with everything from “do I have enough money to retire” to ultra-high net worth situations needing complex charitable, insurance and trust strategies.
In conclusion, we have attached a chart that helps to keep market corrections in perspective.
As always, a sincere thank you for your support, and let us know if you have any questions.
Brett, Steve & Becky
[1] This newsletter is provided by True Private Wealth Advisors, LLC (“TPWA” or the “Firm") for informational purposes only and contains content that is not suitable for all investors. No portion of this newsletter is to be construed as an offer or solicitation to buy or sell any security, or as the rendering of personalized investment, tax or legal advice. Past performance is no guarantee of future results and may be the result of market events and economic conditions that will not occur in the future. There can be no assurance the views and opinions expressed in this newsletter will come to pass. Investing involves the potential for gains and the risk of losses. No investment management service, portfolio diversification, or investment strategy, including without limitation, Modern Portfolio Theory, can guarantee profitability of an investor’s account or protection from losses, particularly in declining markets.
Certain information in this newsletter is derived from third-party sources that TPWA believes to be reputable; however, TPWA makes no representation with regard to the accuracy or timeliness of such information and assumes no responsibility to update any of the information in this newsletter; TPWA disclaims all liability for any damages resulting from any reader’s or investor’s reliance on such information.
Historical performance results for market indices and well-known investment benchmarks do not reflect the deduction of transaction costs, custodial charges, or the deduction of investment-management fees, which would decrease performance results. Indices and benchmarks do not correlate directly or may correlate only partially to an investor’s portfolio due to differences in underlying investments, differences in strategies, or differences in objectives compared to the investor’s portfolio. Investors cannot invest directly in an index. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that a portfolio will match or outperform any particular index or benchmark. This newsletter refers to the following market indices and well-known investment benchmarks. For the indices and benchmarks which are shown as “TR” or “Total Return,” this indicates that this series of the index or benchmark calculates performance based on reinvestment of dividends, interest, and any other income:
S&P 500 Index: The S&P 500 Index is calculated and published by S&P Dow Jones Indices LLC, to reflect generally the U.S. large-cap equity market. It is a market-cap-weighted unmanaged index comprised of the stocks of approximately 500 companies with the largest market capitalizations trading in the United States. This index is referred to on the chart that accompanies this newsletter. The S&P 500 Index is used by the designer of the chart as a proxy for the broader equity market in the United States, in order to provide the market performance demonstration desired by the designer. Since the S&P 500 Index reflects the performance of stock prices, it will not necessarily perform the same as the mutual funds which comprise the portfolios of many of the Firm’s investors.
S&P 500 Growth Total Return Index: The S&P 500 Growth TR Index is calculated and published by S&P Dow Jones Indices LLC, and comprises those growth stocks included in the S&P 500 Index measured according to three factors: sales growth, the ratio of earnings change to price, and momentum. S&P Style Indices divide the complete market capitalization of each parent index into growth and value segments.
S&P 500 Value Total Return Index: The S&P 500 Value TR Index is calculated and published by S&P Dow Jones Indices LLC, measures the performance of the large-capitalization value sector in the US equity market. It is a subset of the S&P 500 Index and consists of those stocks in the S&P 500 Index exhibiting the strongest value characteristics.
MSCI EAFE Total Return Index: The MSCI EAFE TR Index is published by MSCI, Inc., and represents the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 21 countries.
MSCI EAFE Emerging Market TR Index: The MSCI Emerging Markets TR Index is designed to represent the performance of large- and mid-cap securities in 24 Emerging Markets. As of March 2018 it had more than 830 constituents and covered approximately 85% of the free float-adjusted market capitalization in each country.
Bloomberg Barclays US Aggregate Bond Index (Gross Return): The Bloomberg Barclays US Aggregate Bond Index is a broad-based index that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). Prior to August 24, 2016, this Index was called the “Barclays Capital Aggregate Bond Index,” and until November 3, 2008, was called the "Lehman Aggregate Bond Index."
Morningstar US REIT TR USD Index: The Morningstar US REIT TR USD Index is a free-float-weighted index that tracks the performance of publicly listed real estate investment trusts, or REITs. The qualifying REITs are identified by Morningstar's proprietary Global Equity Classification Structure.
The performance of indices linked to the prices of stocks, exchange-traded funds, or other equity investments will differ from the performance of mutual fund investments that comprise a significant component of the portfolios of the clients of TRUE Private Wealth Advisors. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Graph Source:
2 Past performance is no guarantee of future results. There is no guarantee that our strategy will minimize or reduce losses experienced in any investor’s account, or improve the performance results of any account.
