Quarterly Letter to Clients

Well, we made it to 2021 so how are you feeling?  The start of a new year can breed hope for new possibilities.  Even though 2020 was oppressive to most in so many ways, I do think we can still hold hope for the new year.  I have never been one to focus on New Year’s resolutions as they always felt like a recipe for disappointment (I know that is not the case for everyone, though).  What I am striving for this year is not new resolutions, but rather strengthening routines.  Routines feel more in my control, and if 2020 taught anything, it is to control what we can control.  One of these areas for me is to practice gratitude.  I have begun by thinking of 3 things I am grateful for each night before I go to sleep.  It is refreshing and encouraging to think on these things.  When we talk later this year, feel free to check on my progress with this.  This is just one small example, and I am sure that you have others that jump to your mind.  Let me encourage you to pursue practices like this for the sake of your own mental health in 2021.

Speaking of control…

You likely have heard us say in the past that market performance is not an area that any of us have control.  Because of this, it is wasted energy to focus and worry about market movements.  You should spend that energy doing things you can control: spend less than what you make, avoid debt, build cash reserves, plan your generosity and plan your future – practical principals that have an outsized impact on your life.

Small, quiet acts

Whether the temptation is to abandon a free-falling market (like the one we encountered less than a year ago), or chase after winning streaks, an investor’s best move remains the same.  Concentrated bets on hot hands generate erratic outcomes, which makes them far closer to being dicey gambles than sturdy investments.  Trust instead in the durability of your carefully planned investment portfolio. Focus instead on small, quiet acts.  That is what we are here for, for example, to:  
  • – Remind you that your globally diversified portfolio already holds an appropriate allocation to Tesla stock (which may be a lot, a little, or none, depending on your financial goals.
 
  • – Guide you in rebalancing your portfolio if recent gains have overexposed it to market risks.
 
  • – Help you interpret the 5,600 pages of the newly passed Consolidated Appropriations Act, 2021, so you can manage your next financial moves accordingly.
 
  • – Assess potential ramifications of the Biden tax proposals and advise you on any additional defensive tax planning that may be warranted for you in the years ahead.
 
  •  -Remain by your side as you encounter whatever other challenges and opportunities 2021 has in store for you and your family.
  These are not loud acts that you will read about in the paper, but they are the stuff financial dreams are made of.  2021 will be interesting to say the least, but let’s hold onto the hope and possibility that a new year brings.  Stay healthy, stay grateful and know that we are here to help.   Josh, Mike, Matt and Sandra  

Fee Reductions

Happy New Year!  I hope this message finds you well after enjoying the holidays.  I just have a quick note to share to start off our new year.  A longer post will be coming later this week as our quarterly letter to clients.

2020 was a tough year on many fronts, but one thing it taught us is that market performance in the short term is wildly unpredictable.  In addition, short-term performance will likely have a small impact, if any, on your probability of success with your own financial goals.  So it is really not worth your mental energy to ever spend a moment worrying about your short term investment performance.   Plus, none of us really have any control over investment performance.

What do we have control over?  From a planning and investment standpoint, we discuss fees quite often, and look to reduce this financial headwind where possible because this is something we can control.  Most of our clients have Dimensional Funds as core holdings in their portfolio, so we were happy to hear this fall that they announced that fees would be reduced across a broad range of their equity funds effective February 2021, representing an approximate 15% reduction on an asset-weighted basis.  They were already significantly lower than the average mutual fund expense ratio, so this is a great move in the right direction.  It is exciting because it means that, all else equal, our clients will get to keep more of the investment’s returns which will have a compounding effect on wealth over the years.

Reducing fees is only one way to increase your wealth over time.  Let us know if you would like to discuss the other planning tools that can be used to increase wealth as well.

April 2020 – Quarterly Update: Covid-19 Edition

This will be the quarter that we look back on and never forget.  It was the time that a virus spread with a silent vengeance, and the world came to a screeching halt.  You may be feeling quite disoriented, fearful or even anxious as you read this note since ‘normal’ for all of us has been shaken to its core due to Covid-19. You are likely hunkering down at home, which is what you should do, with little of your regular activities to keep you busy.  If you are like me, it literally feels like the earth has stopped spinning on its axis.  Up is down, and right is left.  Trust me when I say that it is completely normal to feel this way in the context of what we are dealing with as a human species.

I do not come to you with answers or any conclusions that will change the world…there are people that are much smarter than me working on that now, and I have confidence that they will figure it out.  But I can bring some encouragement and suggest some small actions that might, just maybe, help us feel like planet earth is starting to rotate once again.

What can you do?

The spread of Covid-19 has impacted the global economy with a speed and impact that is unlike anything seen in our lifetime.  This does not mean that happiness and contentment are totally out of your control, however.  Mindset is key…start by realizing that the sun still rises every morning like the picture at the top of the article.  There is new hope with each new day.  I am sure you have found, as have I, that there is now more time to watch movies, read a book, take a distance-appropriate walk to enjoy the spring weather or call someone (yes, actually call them rather than text) to see how they are doing.

If you are sheltering at home with loved ones, you have probably seen them more in the last two weeks than you have for months.  We should all continue to do more of these things, and the more we do, the more connected we will stay.  I am not a loquacious extrovert, but I have thoroughly enjoyed being around and talking with the ones I care most about.  And the more connected we stay, the more human we will feel.  This is where happiness and contentment hide, not in your investment portfolio or the latest round of news.

What are we doing?

Actions taken during times of fear in the markets will have implications for years to come.  The question is whether they will be positive or negative.  For the long-term investors, which are clients that we serve, volatility creates opportunity.  We have taken advantage of this opportunity by tax loss harvesting, which allows us to realize the losses for tax savings, but then invest the proceeds right back in something else so the money is never out of the market.  The tax savings for our clients this year will be significant.  We have also looked to strategically rebalance portfolios.  Because some of the fixed income assets have gains over the last year, we have sold those gains to go buy equity funds that are now at a discount.  It rebalances the ship and holds to the strategy of selling high and buying low.

What is next?

The fact is, I don’t know.  No one does, but that’s OK.  We are still waiting on the details of the massive Stimulus bill that was signed into law on March 27th.  There are too many details for me to summarize here.  If you want a deep dive in to the details, you can find that here.  I plan to write more on this soon, but if you have any questions about this, please do not hesitate to call our office.  We are all working remotely, but the extensions still ring right to us.  Know that we are here to help in this time of uncertainty.  Your well-being is of greatest concern to us, and not just financially.  Be safe, be smart, and be part of the global solution for everyone by staying home.

We will see you soon,

 

Josh, Mike, Matt and Sandra

A Covid-19 update from your PLC Wealth team

To say the last couple of weeks have been unexpected, unparalleled and dizzying would still be understating exactly what we have lived through in the last few weeks.  Based on further news today (specifically, the Stay at Home Orders issued by Wake County, NC for our local clients), most of us will be sheltering in place for the coming weeks, as we should.  I have listened intently, as I am sure you have, to all sides of the discussion that has carried on since the beginning of the outbreak.  At this point, the experts are making the case for the seriousness of the virus as it spreads exponentially, and that it is likely that the healthy and optimistic among us could be putting our most vulnerable at risk.  Slowing down our movement even further, whether by choice or by requirement, seems to be inevitable for a while longer to give us all the best opportunity to get through this.  While we do not know how long this Covid-19 virus will last, I want to take a few moments to speak to you directly about what we are doing as a firm and how you can continue to reach us during these times.

We have implemented many changes in the last couple of weeks as part of our Business Continuity Plan due to Covid-19.  Thankfully, we were prepared for a remote working environment, and hopefully you have seen no interruption in the normal service from our team.  We have all set up our home workspace.  This give us access to our email, phone calls, and client files just as easily as we have them in the office.  Our phone service is fully digital which means we can take it with us wherever we go.  If you call the office and dial my extension, it will ring my mobile phone.  If I call you from my mobile phone, I will be doing so from my office line.  We also have a fully digital and secure document management system for our firm which means we can safely access all your files at any time of day from any location in the world.  Additionally, all our portfolio management, financial planning and client relationship software is cloud-based and accessible from any location.  Believe it or not, it really did not take much time for PLC Wealth to convert to a virtual firm with the same capabilities as when physically in the office.

Now, obviously, there are some challenges.  It is impossible to fully replace the face-to-face relationship, both for our internal operations and for our client relationships.  We are utilizing a secure and compliant messaging tool for internal communications.   While there may be times that we need to access the office, we are attempting to have only a 1-person max in the office at any time.  We will also plan to continue with client meetings moving forward through virtual meeting technologies such as Zoom.  If you do not have access to a computer for such a meeting, we can still have a conversation the old school way…over the phone…in order to make sure that we do not fall behind in our relationship with each of you.  Again, if you need us in the meantime, we are an email or phone call away, just as we have always been.

There are a few logistical items to cover: First, mail will be checked regularly, but maybe not every day.  Additionally, we have always made the effort to suggest linking your personal bank account to your brokerage accounts to allow for quick money movements back and forth, should they be necessary.  Since we are no longer at the office, a time like this makes it necessary.  So, if you need to make an IRA contribution or want to add funds to your brokerage account, we can still do that by an electronic transfer.  Getting money from your accounts is just as easy, or we can have a check mailed to you.  The bottom line is that getting money from your accounts or to your accounts is just as easy as always.  Finally, if you have actual stock certificates, those must be mailed directly to TD for deposit in your account, so just let us know if you need the mailing address.

Unfortunately, times of crisis create opportunities for bad actors.  There are already stories of scams coming to the surface, so be prepared and know what to look for:

 

  1. – There are no miracle drugs or remedies for Covid-19 at this time so don’t fall for this one.  And do not click on any links that may be in an email stating such things, as the link may be another way to inject a virus on your computer.
  2. – Be very skeptical of any investment ‘opportunities’ with research claims that are no supportable.  People will make wild claims to prey on other’s hopes and inability to use the rational brain in times of stress.
  3. – Never, never, never disclose your social security number, account numbers, or any other piece of Personally Identifiable Information (PII).  There are rumors that spam calls and emails are already going out claiming that thsi information is needed to get your piece of the Stimulus bill or a tax refund.  Hold on to your PII like you (financial) life depends on it.
  4. – Generally, just be skeptical in these times of anything that seems too good to be true.  If you are not sure, get in touch with us to talk through it.

 

Let me leave you with a little encouragement in the midst of Covid-19 .  Take this time to do something that many of us no longer do naturally on our own…slow down, exercise (by yourself), rest, re-energize, call someone you haven’t spoken with in a while, or binge watch movies with your family that you never have the time for…but mostly, just look around you to see all of the blessings that you inevitably still enjoy.  Sometimes, when we are not able or willing to do that which is in our best interest, it is necessary for it to be forced upon us.  We find ourselves in one of those times in history.  We are a creative and adaptive species so I look forward to hearing about some of the ways that you will get through this…because you will get through this.  I will leave you with three pieces of advice that I am confident will be good for you in the long run…Wash your hands, don’t touch your face, and don’t touch your stocks.  Know that we are committed to continuing to serve you and your family. We will strive to provide you with an even higher level of service than that which you have come to expect from us.  If you need anything at all, even if it is just to have a conversation about the events of the day, please let us know.  We are here to help.

Carpe diem,

Josh and the PLC Wealth Team

January 2019 – Quarterly Review: “Average returns” are rare

What if Charles Dickens had begun his classic “Tale of Two Cities” as follows: It wasn’t the best of times, it wasn’t the worst of times, it was the usual mixed bag.

While the statement may reflect reality, it doesn’t grab your attention half as well as Dickens’ actual opening sentence describing the French Revolution. As he concluded about the period, “some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”

Thus, we’ve long known about our infatuation with extremes – Best! Worst! Delight! Despair! These are the sentiments that fuel our dreams and inspire our works of art. But you do yourself a disservice if you allow superlatives to rule your investing. In capital markets, if you get caught up in extremes and devalue the sweeping tides of time, you risk giving up your greatest edge: a clear-eyed understanding of what’s really going on.

As we reflect on the events of 2018, here are two evidence-based points worth repeating:

1. “Average” annual investment returns aren’t typical; in fact, they’re rare.

To quote a more contemporary source than Dickens, Cliff Asness of fund manager AQR recently observed: “This world is pretty much designed to convince us that we’re always at DEFCON 1, when 5 is the mode and 4.5 the mean.”

Other year-end analyses concluded that market volatility for 2018 remained on the low side. Even the wilder swings toward year-end were not that remarkable in the grand scheme of things.

And yet, many “noisiest authorities” have been quick to play up the superlatives, while downplaying how these sorts of best of times, worst of times conditions have long been more the norm than the exception in capital markets. As expressed in this Forbes column, “when you take the long view – and if you’re a long-term investor, then you should – you’ll see that what feels jarring right now is actually just a return to normal levels of short-term volatility.”

This brings us to our second point.

2. You are human; you are susceptible to recency bias.

While there are many behavioral biases that trick us into sabotaging our best financial interests, we’re especially interested in the damage recency bias could cause in current conditions.

Recency bias can trick your brain into downplaying decades of robust market performance data, while magnifying the run of unusually calm market conditions we’ve been enjoying relatively recently – essentially since March 2009. This in turn may lead you to lend more weight than is warranted to current volatility.

That’s not to say the ride will be fun if we encounter more turbulence ahead. But by remembering extremes are actually the norm in your quest to generate durable long-term returns, you stand a much better chance of preserving your objective perspective and your portfolio, come what may.

We are grateful for the opportunity to remain at your side, ever eager to advise your course through whatever the markets have in store for us in 2019 and beyond. How can we help? Let us know!

Ring in the new year with…Financial Planning!

December 20th, 2018

By Matt Miner

Dear Clients and Friends,

At PLC Wealth we enjoy a good New Years party as much as anybody.  But we also know that the end of the year can be a chance to pause and reflect on how 2018 went, and what we aim to change in 2019.

We think it’s terrific to take some time to move from undefined “hope” to vision, and from vision to goals, and from goals to specific plans to make things happen in your life and your family.  As our friend Dave Ramsey says, “Goals are visions and dreams with work clothes on.”

If you’re ready to get a jump on 2019, here are a few financial best practices for the year ahead. Pick one or two of them to tackle.  Give us a call if you’d like to work together to translate these goals into specific plans you can achieve or begin to achieve in the coming year.

1. Do nothing

Seriously. If you have a well-built investment portfolio in place, guided by a relevant investment plan, your best move in hyperactive markets is to let that plan be your guide. That often means doing nothing new with your holdings except your planned, periodic rebalancing. We list investment inaction as a top priority, because “nothing” can be one of the hardest things to (not) do when the rest of the market is in perpetual motion!

2. Double down on your planning

In order to advance your SANF (“Sleep at Night Factor”) in volatile markets, you must have a relevant plan in place that you understand.  That plan guides your portfolio and your new investments. A fresh new year can be a great time to tend to your investment plan – or create one, if you’ve not yet done so. Have any of your personal goals changed, or will they soon? How might this impact your investment mix? Have market conditions put your portfolio ahead or behind schedule? Are you unsure where you stand to begin with? It’s time well-spent to periodically ensure your plan remains relevant to you and your personal circumstances.

3. Prepare for the unknown with a rainy-day fund

Time will tell whether 2019 markets are friendly, foul, or (if it’s a typical year) an unsettling mix of both. Having enough liquid, rainy-day reserves to tide you through any rough patches is a best practice no matter what lies ahead. Knowing your near-term spending needs are covered should help with both the practical and emotional challenges involved in leaving the rest of your portfolio fully invested as planned, even if the markets take a turn for the worse.

4. Redirect your energy to contributing financial factors

While you’re busy staying the course with your investments, you can redirect your attention to any number of related financial and advanced planning activities. While you don’t necessarily need to act on everything at once, it’s worth reviewing your financial landscape approximately annually, and identifying areas in need of attention. Maybe you’ve got a debt load you’d like to reduce, or an estate plan that’s no longer relevant. Perhaps it’s been too long since you’ve reviewed your insurance line-up, or you’d like to revisit your philanthropic goals in the context of the latest tax laws. Refreshing any or all of these items is likely to contribute more to your financial success than will fussing over the stock market’s daily gyrations.

5. Perform a cybersecurity audit

Protecting yourself against cybercriminals is another excellent use of your time. With the new year, revisit a a few basic, protective steps:

Enable two-factor authentication on important accounts

Change key passwords on your most sensitive login accounts

Review your credit reports (using AnnualCreditReport.com)

Place a freeze on your credit file, to block unauthorized access (now free, based on recently enacted federal law)

Especially with child identity theft on the rise, these actions apply to your entire household. Unfortunately, even minor children are now at heightened risk.

6. Have “that money talk” with your kids, your parents, or both

When is the last time you’ve held any conversations about your family wealth? It’s never too soon to begin preparing your minor children for a financially literate adulthood. As they mature, their financial independence rarely happens by accident, with additional in-depth conversations in order. Then, as you and your parents age, you and your kids must prepare to step in and assist if dementia, disability or death take their tolls. There also can be ongoing conversations related to any legacy you’d like to leave as a family. For all these considerations and more, an annual “money talk” can be critical to successful outcomes.  If you’d like help completing this task, PLC Wealth is ready to work with you to get it done.

7. Make 2019 a year you absolutely crush it in your work, business, or volunteer efforts

All of us are engaged in some kind of productive activity that puts us into contact with other people.  This may be our career, our own business, a non-profit organization we serve, or simply running our family’s household.

We all have things we’d like to be different in our daily situation.  As you conclude 2018, think back on items you would like to change in 2019.  Focus on what you can change or influence, not what you can’t, concentrating your efforts your “locus of control.”  For example, if you have a difficult boss or co-workers but you don’t want to change your actual employment, change how you respond emotionally to a difficult situation.  Use tactics like focusing on what you are grateful for in this context, getting more exercise, or having that difficult conversation with someone about why a situation has become problematic for you.

Many of us have room to be more organized and focused on the vital few that really matter.  Make a plan for how to tune out the noise and get the right things done.

Two great resources here are Stephen Covey’s Seven Habits of Highly Effective People, and David Allen’s Getting Things Done.  If you don’t love reading, try an Audible audio book while you exercise or commute.

So, there you have it: seven creative ways to bolster your financial well-being while the stock market does whatever it will in the year ahead. While this list is by no means exhaustive, we hope you’ll find it an approachable number to take on … with two critical caveats.

First, we’ve got a bonus “financial best practice” to add to the list:

Above all else, remember what your money is for.  Money is meant to fund your moments of meaning.  At PLC Wealth, we want our clients to live rich, not die rich.

Second, we recognize that each of these “easy” best practices aren’t always so easy to implement. We could readily write pages and pages on how to tackle each one.

But instead of writing about them, we’d love to help you take action on these steps.  At PLC Wealth, we work with families every day and over the years to convert their dreams into plans, and their plans into achievements. We work in the context of single-issue planning engagements, comprehensive financial planning, and investment management.  We hope you’ll be in touch in the new year, so we can partner with you.

Merry Christmas & Happy New Year to you and your family from the team at PLC Wealth – Josh, Mike, Sandra, & Matt

Good advice is simple – but not easy!

Here in North Carolina, we cope with hurricanes from time to time, and like the storms, financial markets can bring bumpy weather to our investment portfolios.

However, unlike with hurricanes, which are typically in the forecast for several days at least,  no one can truly see over the horizon to know when bad times – a big drop in asset values – may affect our investments.  When that happens, it is more important than ever to have, and to follow, a solid financial plan.

Sometimes the best, most rigorously developed financial advice is so obvious, it’s become cliché. And yet, investors often end up abandoning this same advice when market turbulence is on the rise. Why the disconnect? Let’s take a look at five of the most familiar financial adages, and why they’re often much easier said than done.

  1. If you fail to plan, you plan to fail.
  2. No risk, no reward.
  3. Don’t put all your eggs in one basket.
  4. Buy low, sell high.
  5. Stay the course.

We’ll explore each in turn, how we implement them, and why helping people stick with these evidence-based basics remains among our most important and challenging roles.

  1. If You Fail to Plan, You Plan to Fail.

Almost everyone would agree: It makes sense to plan how and why you want to invest before you actually do it. And yet, few investors come to us with robust plans already in place. That’s why deep, extensive and multilayered planning is one of the first things we do when welcoming a new client, including:

  • A Discovery Meeting – To understand everything about you, including your goals and interests, your personal and professional relationships, your values and beliefs, how you’d prefer to work with us … and anything else that may be on your mind.
  • “Traditional” Financial Planning – To organize your existing assets and liabilities, define your near-, mid-, and long-range goals, and ensure your financial means align as effectively as possible with your most meaningful aspirations.
  • An Investment Policy Statement (IPS) – To bring order to your investment universe. Your IPS is both your plan and your pledge to yourself on how your investments will be structured to best align with your greater goals. It describes your preferred asset allocations (such as your percentage of stocks vs. bonds), and is further shaped by your willingness, ability, and need to tolerate market risks in pursuit of desired returns.
  • Integrated Wealth Management – To chart a course for aligning your range of wealth interests with your financial logistics: insurance, estate planning, tax planning, business succession, philanthropic intent and more.

As we’ll explore further, even solid planning doesn’t guarantee success. But we believe the only way we can accurately assess how you’re doing is if we’ve first identified what you’re trying to achieve, and how we expect to accomplish it.

  1. No Risk, No Reward.

In many respects, the relationship between risk and reward serves as the wellspring from which a steady stream of financial economic theory has flowed ever since. Simply put, exposing your portfolio to market risk is expected to generate higher returns over time. Reduce your exposure to market risk, and you also lower expected returns.

We typically build a measure of stock market exposure into our clients’ portfolios accordingly, with specific allocations guided by individual goals and risk tolerances. But here’s the thing: Once you have accepted the evidence describing how market risks and expected returns are related, it’s critical that you remain invested as planned.

There’s ample evidence that periodic market downturns ranging from “ripples” to “rapids” are part of the ride. As a February 2018 Vanguard report described, from 1980–2017, the MSCI World Index recorded 11 market corrections of 10% or more, and 8 bear markets with at least 20% declines lasting at least 2 months. Such risks ultimately shape the stream that is expected to carry you to your desired destination. Consider them part of your journey.

  1. Don’t Put All Your Eggs in One Basket.

At the same time, “risk” is not a mythical unicorn. It’s real. If it rears up, it can trample your dreams. So, just because you might need to include riskier sources of expected returns in your portfolio, it does not mean you must give them free rein.

This is where diversification comes in. Diversification is nothing new. In 1990, Harry Markowitz was co-recipient of a Nobel prize for his work on what became known as Modern Portfolio Theory. Markowitz analyzed (emphasis ours) “how wealth can be optimally invested in assets which differ in regard to their expected return and risk, and thereby also how risks can be reduced.” In other words, according to Markowitz’s work, first published in 1952, investors should employ diversification to manage portfolio risks.

This leads to an intriguing, evidence-based understanding. By combining widely diverse sources of risk, it’s possible to build more efficient portfolios. You can:

  • EITHER lower a portfolio’s overall risk exposure while maintaining similar expected returns
  • OR maintain similar levels of portfolio risk exposure while improving overall expected returns

Rarely, evolving evidence helps us identify additional or shifting sources of expected return worth blending into your existing plans. When this occurs, and only after extensive due diligence, we may advise you to do so, if practical (and cost-effective) solutions exist.

The details of how these risk/return “levers” work is beyond the scope of this article. But come what may, the desire and necessity to DIVERSIFY your portfolio remains as important as ever – not only between stocks and bonds, but across multiple, global sources of expected returns.

  1. Buy Low, Sell High.

Of course, every investor hopes to sell their investments for more than they paid for them. Here are two best practices to help you succeed where so many fall short: time and rebalancing.

Time

By building a low-cost, broadly diversified portfolio, and letting it ride the waves of time, all evidence suggests you can expect to earn long-term returns that roughly reflect your built-in risk exposure. But “success” often takes a great deal more time than most investors allow for.

In a recent article, financial author Larry Swedroe looked at performance persistence among six different sources of expected return as well as three model portfolios built from them. He found, “In each case, the longer the horizon, the lower the odds of underperformance.” However, he also observed, “one of the greatest problems preventing investors from achieving their financial goals is that, when it comes to judging the performance of an investment strategy, they believe that three years is a long time, five years is a very long time and 10 years is an eternity.”

In the market, 10 years is not long. You must be prepared to remain true to your carefully structured portfolio for years if not decades, so we typically ensure that an appropriate portion is sheltered from market risks and is relatively accessible (liquid). The riskier portion can then be left to ebb, flow and expectedly grow over expanses of time, without the need to tap into it in the near-term. In short, time is only expected to be your friend if you give it room to run.

Portfolio Rebalancing

Another way to buy low and sell high is through disciplined portfolio rebalancing. As we create a new portfolio, we prescribe how much weight to allocate to each holding. Over time, these holdings tend to stray from their original allocations, until the portfolio is no longer invested according to plan. By periodically selling some of the holdings that have overshot their ideal allocation, and buying more of the ones that have become underrepresented, we can accomplish two goals: Returning the portfolio closer to its intended allocations, AND naturally buying low (recent underperformers) and selling high (recent outperformers).

  1. Stay the Course.

So, yes, planning and maintaining an evidence-based investment portfolio is important. But even the best-laid plans will fail you, if you fail to follow them. Here, we get to the heart of why even “obvious” advice is often easier said than done. Our rational self may know better – but our instincts, emotions and behavioral biases get in the way.

Three particularly important biases to be aware of in volatile markets include tracking-error regret, recency bias, and outcome bias.

Tracking-Error Regret

When we build your portfolio, we typically structure it to reflect your goals and risk tolerances, by diversifying across different sources of expected risks and returns. Each part is expected to contribute to the portfolio’s unique whole by performing differently from its counterparts during different market conditions. Each portfolio may perform very differently from popular “norms” or benchmarks like the S&P 500 … for better or worse.

When “worse” occurs, and especially if it lingers, you are likely to feel tracking-error regret – a gnawing doubt that comes from comparing your own portfolio’s returns to popular benchmarks, and wishing yours were more like theirs.

Remember this: By design, your factor-based, globally diversified portfolio is highly likely to march out of tune with typical headline returns. It can be deeply damaging to your plans if you compare your own performance to benchmarks such as the general market, the latest popular trends, or your neighbor’s seemingly greener financial grass.

Recency

Recency causes us to pay more attention to our latest experiences, and to downplay the significance of long-term conditions. When an expected source of return fails to deliver, especially if the disappointment lasts for a while, you may start to second-guess the long-term evidence. This can trigger what Nobel laureate and behavioral economist Daniel Kahneman describes as “what you see is all there is” mistakes.

Again, buying high and selling low is exactly the opposite of your goals. And yet, recency causes droves of investors to chase hot, high-priced holdings and sell low during declines. Irrational choices based on recency may still turn out okay if you happen to get lucky. But they detour you from the most rational, evidence-based course toward your goals.

Outcome Bias

Sometimes, even the most rational plans don’t turn out as hoped for. If you let outcome bias creep in, you end up blaming the plan itself, even if it was simply bad luck. This, in turn, causes you to abandon your plan. Unfortunately, it’s rarely replaced with a better plan, which brings us back to our first adage about those who fail to plan.

To illustrate, let’s say, several years ago, we created a solid investment plan and IPS for you. At the time, you felt confident about them. Since then, we’ve periodically refreshed your plan, based on your evolving personal goals, perhaps a few new academic insights, and any new resources now available for further optimizing your portfolio.

Now, let’s say the markets disappoint us over the next few years. Ugly red numbers take over your reports, seemingly forever. Before you conclude your underlying strategy is wrong, remember: It’s far more likely you’re experiencing outcome bias (with a recency-bias chaser).

Investing will always contain an element of random luck. From that perspective, in largely efficient markets, your best course remains – you guessed it – to stay the course with your existing, carefully crafted plans. While even evidence-based investing doesn’t guarantee success, it continues to offer your best odds moving forward. Don’t lose faith in it.

 Simple, But Not Easy

Let’s wrap with a telling anecdote. Merton Miller was another co-recipient of the aforementioned 1990 Nobel prize. Miller’s portion was in recognition of his “fundamental contributions to the theory of corporate finance.” While his findings were deep and far-reaching, he once summarized them as follows:

[I]f you take money out of your left pocket and put it in your right pocket, you’re no richer. Reporters would say, ‘you mean they gave you guys a Nobel Prize for something as obvious as that?’ … And I’d add, ‘Yes, but remember, we proved it rigorously.’”

Like Miller’s light take on his heavy-duty findings, some of what we feel is our best advice seems so simple. And yet, in our experience, it’s very hard to adhere to this same, “obvious” advice in the face of market turbulence.

Blame your behavioral biases. They make simple advice deceptively difficult to follow. We all have them, including blind spot bias. That is, we can easily tell when someone else is succumbing to a behavioral bias, but we routinely fail to recognize when it’s happening to us.

This is one reason it’s essential to have an objective, professional advisor (along with your network of informal advisors) who is willing and able to let you know when you’re falling victim to a bias you cannot see in the mirror. At PLC Wealth, that is exactly what we are here for! Let us know if we can help you reflect on these or any other challenges that stand between you and your greatest financial goals.

Global Diversification is Your Investment Antacid

Let’s be clear: We did not wish for, nor in any way cause a tumble in the markets, especially among tech stocks. That said, we could not have come up with a more telling illustration to underscore the perennial value of building – and maintaining – a globally diversified investment portfolio for achieving your greatest financial goals.

Global diversification is such a powerful antacid for when (not if!) we experience market turbulence, it’s why we’ve long recommended spreading your market risks:

  • According to your personal goals and risk tolerances
  • Between stock and bond markets
  • Among evidence-based sources of expected long-term returns
  • Around the world

In short, broad, global diversification never goes out of style.

Breaking news shows us why.

Just a few short days ago, third quarter market performance numbers were rolling in, and we were fielding questions about the wisdom of continuing to participate in worldwide stock and bond markets. Some globally diversified investors were beginning to question their resolve after comparing their year-to-date returns to the U.S. stock market’s seemingly interminable ability to whistle past the graveyards of disappointing, portfolio-dampening performance found elsewhere.

Some were asking: “Should we dump diversification, and head for the ‘obviously’ greener pastures watered by U.S. stocks?”

We aren’t the only ones advising investors against reacting to hot runs by turning a cold shoulder to their well-structured portfolio. In his timely September 28 column, Wall Street Journal personal finance columnist Jason Zweig commented: “Looking back in time from today, U.S. stocks seem to have dominated over the long run only because they have done so extraordinarily well over the past few years.”

As current conditions starkly show, there’s a reason for the expression, “Things can turn on a dime.” Whether it’s U.S. stocks, international bonds, emerging markets or any other sources of expected return, the evidence is clear: Trends rise and fall among them all. This we know. But precisely when, where, how much, and why is anybody’s guess. As Zweig suggests in his piece, “Markets tend to lose their dominance right around the time it seems most irresistible.”

What’s next?

We’re drafting this message to you Wednesday evening, October 10, in advance of what may be a wild ride for the next little while. By the time you’re reading this, prices may still be tumbling, or they may already have recovered their footing. We can’t say.

Come what may, we hope we can be particularly helpful to you at this time.

Have current conditions left you troubled, unsure of where you stand?

Let’s talk. We’ll explore whether you’re able to sit tight with your existing strategy, or whether we can help you think through any next steps you may be considering. Most of all, know you are not alone! We are here as your sounding board and fiduciary advisor. Your best interests remain our top priority.

Are you reflecting calmly on current events, recognizing that market volatility happens?

Allow us to applaud you for your stamina, and remind you: Current conditions likely represent a time for continued quietude, along with ongoing attention to managing your tailored portfolio.

Regardless of your temperament, we’d like to share a sentiment from Behavior Gap author Carl Richards’ 2015 New York Times column.  His point remains as relevant as ever:

“On a scale of 1-10, with 10 being abject misery, I’m willing to bet your unhappiness with a diversified portfolio comes in at about a 5, maybe a 6. But your unhappiness if you guess wrong on your one and only investment for the year? That goes to 11.”

Let’s be in touch if we can answer any questions or scale down any angst you may be experiencing.

Regards,

Your PLC Wealth Team

Q3 2018 Client Letter – Is this bull getting long in the tooth?

October 2018

As of August 21, the longest-running S&P 500 rally (by some counts) was born out of “the ashes of the financial crisis.”  As of quarter-end, as reported by Morningstar, “Following a flattish first half, global equities enjoyed a fairly strong third quarter, with the Morningstar Global Markets Index now up 4.5% year to date.”

And yet … you may fret. Tariffs and trade war threats remain wild cards in the financial deck. A Brexit looms nearer and scarier. Emerging markets struggle while global leaders squabble. And, historically, many of the worst days in the markets have arrived in the fall.

When it comes to market forecasts, will the sky be falling soon, or are we set to soar some more? Have you been tempted to get out of “high-priced” markets while the getting seems good? Here are three compelling reasons to avoid trying to time the market in this manner.

  1. Markets (Still) Aren’t Predictable

Before you decide you’d like to stay one step ahead of a market that seems certain to rise, fall or head sideways, consider this quote from The Wall Street Journal personal finance columnist Jason Zweig: “Yes, 2018 is full of uncertainty and teeming with hazards that might make the stock market crash. So was 2017. So were 2016, 2015, 2014 – and every year since stockbrokers first gathered in New York in the early 1790s.”

  1. Economists Aren’t Wizards

A day rarely goes by when you can’t find one respected economist suggest we’re headed for a financial fall, while another opines that we’re going to keep going like gangbusters. Which is it this time? As one Bloomberg columnist reports, “a 2014 study by Prakash Loungani of the International Monetary Fund found that not one of the 49 recessions suffered around the world in 2009 had been predicted by a consensus of economists a year earlier. Further back, he discovered only two of the 60 recessions of the 1990s were anticipated a year in advance” (with “recession” defined in the referenced paper as “a year when output growth was negative”). 

  1. You Can’t Depend on Your Instincts

Still thinking of trying to sell ahead of a fall? For this, and any other investment “hunch” you may have, your best bet is to assume it’s a bad bet, driven by your behavioral biases instead of rational reasoning. For example, loss aversion can trick you into letting the potential for future market losses frighten you away from the likelihood of long-term returns. Couple that with our oversized bias for seeing predictive patterns, even where none exist, and it’s all too easy to talk yourself right out of any carefully laid plans you’ve established for your wealth.

For these reasons and more, we’re here to advise you: Your plans aren’t there to eliminate uncertainty. They’re there to counter the temptation to succumb to it, so please be in touch with us personally if we can help you review your plans.