Investment Odyssey

Dan WilliamsDan Williams, CFA, CFP, Investment Analyst

In Homer’s Odyssey there is a memorable section where Odysseus and his crew must shutterstock_369235274sail past the island of the lovely Sirens. He has been warned to plug his crew’s ears with wax so that they will not be susceptible to the Sirens’ call. However, wishing to hear the Sirens’ calls for himself, he orders his men to tie him to the mast of the ship and ignore his future orders until they are clear of the island.

The need to stay the course and to ignore distractions are relevant to many facets of life, but I find special meaning related to long-term investing. When people think of investment risk they normally focus on the volatility seen in recent investment returns. However, the returns of a random month, quarter or even a year has an overrated impact on an account’s growth over a 10+ year horizon.

Tolerance for this volatility/risk typically has more to do with investor psychological make-up than the mathematical impact of these short-term returns on much longer term account performance. For me, this volatility and other market noise represent the Sirens that threaten to take investors off course. Two investors who are the same in every other way and invest in the same portfolio, will have a different investment experience based on how often they look at their account and how they feel about what they see.

In other words, similar to Odysseus’ crew, the journey can be made less stressful and easier by turning off the noise. While feelings and emotions are important considerations, as lost sleep and stress meaningfully impact a person’s well-being, a better course is set by focusing on more objective investment risks. Among the most relevant objective risks for investors is shortfall risk.

Shortfall risk

Most investors invest to fulfill a future goal/need years in the future. Shortfall risk is simply the risk that the money allocated and invested to this future goal/need proves to be inadequate to pay for it when the time comes. This risk is very real and goes well beyond how an investor feels about it. If an investor needs $100,000 a year in retirement but finds that due to insufficient account growth he or she can only sustainably take out $80,000 a year from his or her portfolio at retirement, the math will simply not work. No solace is offered by the smooth but inadequate investment journey of an overly conservative allocation when the investment goal is not achieved.

Addressing volatility

The challenge is often to achieve the long-term returns that can meet account balance requirements, volatility must be taken on. While Odysseus could have taken a long detour around the island of the lovey Sirens, his goal of getting home in a timely fashion would not have been met (and for those who know the story, he had a deadline). Similarly, an investor could ensure a very smooth investment journey by investing in a portfolio dominated by short-term bonds, but could find investment account growth inadequate to meet the goal of the investment. The good news is that if investors can find a way to plug their ears to the noise, they can get the longer-term returns they need and minimize the stress of the volatility along the way.

Multi-asset class goals-based investing is one way to have the investor take a longer view on his or her investing to see past the present sirens of volatility and recent returns to the goal at the end of the investing horizon. Without the ability to take the long-run prospective, we are like Odysseus hearing the Sirens call. Without an advisor to keep the ship on course, the journey is potentially doomed. Investing is only successful if the investor can stay the course and stay invested. The importance of keeping the investor from letting the heart rule the head is one of the most important roles of the investment advisor.

Brinker Capital understands that investing for the long-term can be daunting. That’s why we are focused on providing multi-asset class investment solutions that help investors manage the emotions of investing to achieve their unique financial goals.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

Personal Benchmark was Made for Days Like This

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes

Chuck Widger and I released our New York Times bestselling book, Personal Benchmark: Integrating Behavioral Finance and Investment Management, on October 20, 2014. Although the book was published in 2014, the writing process began in 2013, and Chuck’s original idea for a goals-based investing system is much older still. Both 2013 and 2014 were great years to be invested, with the S&P 500 returning 32.39% and 13.69% respectively. But although Personal Benchmark was crafted in a time of prosperity it was created with an eye to days just like today.

What is needed during times of fear is an embedded solution that helps clients say “no” to short-termism and say “yes” to something bigger.

As we wrote in the book, “While investor awareness and education can be powerful, the very nature of stressful events is such that rational thinking and self-reliance are at their nadir when fear is at its peak.”

Financial advisors do their clients a great service by educating them about investing best practices, but at times of volatility, logic is often thrown out the window. What is needed during times of fear is an embedded solution that helps clients say “no” to short-termism and say “yes” to something bigger.

When presented with an extremely complicated decision, it is human nature to seek simplicity, something psychologists refer to as “answering an easier question.” Rather than deeply consider and weight the relative importance of social, economic and foreign policy positions, voters tasked with choosing a Presidential candidate tend to instead answer, “Do I like this person?” Confronted with a complex dynamic system like the stock market, the easier question that we ask ourselves is, “Am I going to be OK?” Part of the power of the Personal Benchmark solution is that it helps clients answer this important question in the affirmative.

bookOur book discusses the human tendency to engage in “mental accounting”, the psychological partitioning of money into buckets and the corresponding change in attitudes toward that money depending on how it is accounted for. Page 154 features the story of Marty, a Philadelphia-area gang member who separated his money into “good” and “bad” piles depending on whether it was honestly or ill-gotten. Marty would tithe to his local church using the good money, but reserved his bad money for reinvestment in his criminal pursuits. Although we are hopefully all more civic-minded than Marty, we are no less likely to label our money and spend, invest and think about it relative to that label. One huge advantage of Personal Benchmark the solution is that it sets aside a dedicated “Safety” bucket for days just like today. When a client asks herself, “Will I be OK?” she can take comfort from the fact that her advisor has accounted for her short-term needs. Being comforted in the here-and-now, she will be less likely to put long-term capital appreciation needs at risk.

“While investor awareness and education can be powerful, the very nature of stressful events is such that rational thinking and self-reliance are at their nadir when fear is at its peak.”

Besides helping clients say “no” to short-termism, Personal Benchmark also helps advisors paint a more vivid, personalized picture of return needs. Page 203 of Personal Benchmark tells the story of Sir Isaac Newton, who lost a fortune by investing in what we now refer to as the “South Sea Bubble.” Newton invested some money, profited handsomely and eventually sold his shares in the South Sea Company. However, some of his friends continued to profit from their investment in South Sea shares and Newton was unable to sit idly by and watch people less gifted than he accrue such fantastic wealth. Goaded on by jealousy, he piled back in at the top and lost almost everything, saying after the fact, “I can calculate the movement of the stars, but not the madness of men.” Newton’s failure is a direct result of anchoring his benchmark to keeping up with his friends instead of attending to his own needs and appetite for risk. If Personal Benchmark’s Safety bucket is for providing comfort today, then the Accumulation bucket is a vehicle for rich conversations about the dreams of tomorrow. As clients simultaneously manage their short-term fears and identify their long-term goals, they are able to experience the best of a goals-based solution.

Personal Benchmark was created in a time of comfort and even complacency on the part of some investors, but was done so with a perfect knowledge that there would be days like this. At Brinker Capital we believe that an advisor’s greatest value is providing “behavioral alpha”, increasing returns and mitigating risk through the provision of sound counsel. Our goal is to be your partner in that sometimes-difficult journey and Personal Benchmark is evidence of that commitment.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast – Why So Shaky, Markets?

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast (recorded January 7, 2016), Bill lends some insight into why markets have started the year so volatile, and what that means for the long-term outlook.

Two themes are at the heart of the current market weakness: (1) Chinese government has meddled too much with its market and currency and (2) Central banks have kept interest rates too low for too long.

China

  • Stock prices are two to three times more expensive relative to Germany, U.S., Japan and others
  • China halted trading (twice) so investor’s couldn’t get to their investments, causing panicked behavior among investors
  • Officials manipulated down the value of the yuan in an effort to stimulate exports, creating more fear in investors
  • Things must be weak enough where officials think that they have to stimulate exports

Central Banks

  • Central banks around the world have kept interest rates near zero, but now that is shifting
  • U.S. has raised rates and there is talk of raising them again in 2016; but Europe and Japan remain at near-zero levels, creating a credibility issue
  • Investors now questioning why U.S. is going in one direction and Europe and Japan in another, and what that means to their investments

The combination of Chinese market manipulation and central bank credibility is surely causing fear, and perhaps some irrational investing, but it’s important to temper those voices. While the current volatility may take some time to pass, it feels more like a market correction and less of a large-scale economic issue.

Click here to listen to the audio recording

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Five Answers for the Voices in Your Head

Crosby_2015Dr. Daniel Crosby, Executive Director, The Center for Outcomes

Many investors are waking up this morning to the unsettling realization that trading was halted in China last night after another precipitous market drop. When paired with rumors of hydrogen bomb testing in North Korea, the recent acts of domestic terrorism and a long-in-the-tooth bull market, it can all be a little frightening and overwhelming.

It’s at a time like this that it’s best to temper the catastrophic voices in our head with some research-based truths about how financial markets work.

For each of the rash, fear-induced common thoughts below (in bold), we have countered with a dose of realism:

“It’s been a good run, but it’s time to get out.”
From 1926 to 1997, the worst market outcome at any one year was pretty scary, -43.3%; but consider how time changes the equation—the worst return of any 25-year period was 5.9% annualized. Take it from the Rolling Stones: “Time is on my side, yes it is.”

“I can’t just stand here!”
In his book, What Investors Really Want, behavioral economist Meir Statman cites research from Sweden showing that the heaviest traders lose 4% of their account value each year. Across 19 major stock exchanges, investors who made frequent changes trailed buy-and-hold investors by 1.5% a year. Your New Year’s resolution may be to be more active in 2016, but that shouldn’t apply to the market.

“If I time this just right…”
As Ben Carlson relates in A Wealth of Common Sense, “A study performed by the Federal Reserve…looked at mutual fund inflows and outflows over nearly 30 years from 1984 to 2012. Predictably, they found that most investors poured money into the markets after large gains and pulled money out after sustaining losses—a buy high, sell low debacle of a strategy.” Everyone knows to buy low and sell high, but very few put it into practice. Will you?

“I don’t want to bother my advisor.”
Vanguard’s Advisor’s Alpha study did an excellent job of quantifying the value added (in basis points) of many of the common activities performed by an advisor, and the results may surprise you. They found that the greatest value provided by an advisor was behavioral coaching, which added 150 bps per year, far greater than any other activity. At times like this is why investors have advisors so don’t be afraid to call them for advice and support.

“THIS IS THE END OF THE WORLD!”
Since 1928, the U.S. economy has been in recession about 20% of the time and has still managed to compound wealth at a dramatic clip. What’s more, we have never gone more than ten years at any time without at least one recession. Now, we are not currently in a recession, but you could expect between 10 and 15 in your lifetime. The sooner you can reconcile yourself to the inevitability of volatility, the faster you will be able to take advantage of all the good that markets do.

Brinker Capital understands that investing for the long-term can be daunting, especially during a time like this, but we are focused on providing investment solutions, like the Personal Benchmark program, that help investors manage the emotions of investing to achieve their unique financial goals.

For more of what not to do during times of market volatility, click here.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Early Concern in 2016 Yields Opportunity

Miller_HeadshotBill Miller, Chief Investment Officer

Overall global economic concerns and yesterday’s market events present a great opportunity to remind investors to stay focused on their goals. To that end, we highlight two performance metrics:

First, as illustrated below, some asset classes, including gold, U.S. Treasury bonds, TIPs and pipeline Master Limited Partnerships, finished up yesterday in the face of poor global equity performance. In some cases, this is the opposite of last year’s performance. Such a flip-flop in performance across asset classes only serves to highlight the value of Brinker Capital’s multi-asset class investment philosophy. A commitment to diversification can help calm investors on bad days and moderate enthusiasm on good days.

Performance Across Asset Classes

Source: Brinker Capital, FactSet

Second, big drops in the S&P are infrequent but certainly not an unfamiliar occurrence on an absolute basis. There have been single-day dips of 2% or greater in the S&P 500 a total of 222 times in the trailing 20 years, or just slightly under 5% of the total number of trading days.

More importantly, following these dips the median S&P return in the following month (2.44% over the subsequent 20 trading days) has been more than double that of the median 20-day S&P return over the period on a non-conditional basis (1.01%).

Over the last 20 years, a strategy that fled to cash for 20-day periods following those 2% S&P 500 declines would have fared 2% worse on an annualized basis than staying 100% invested in equity. That’s a cumulative return difference of 151%.

S&P 500 Performance

Source: Brinker Capital, FactSet

Again, yesterday’s volatility presents a great opportunity early in 2016 to remind investors that it’s not time to panic–it’s important to stay focused on their goals. While we can’t predict what specifically may happen in the future, Brinker Capital has been identifying trends and leveraging our six-asset class philosophy when positioning our portfolios to anticipate a period of increased market volatility in many of our strategic and tactical portfolios.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change. Brinker Capital, Inc., a Registered Investment Advisor.

Investment Insights Podcast – July 10, 2015

Bill MillerBill Miller, Chief Investment Officer

On this week’s podcast (recorded July 7, 2015):

What we like: Harvard study shows when there’s debt relief as part of the solution, countries tend to recover and thrive more quickly

What we don’t like: The emotional impact the Greek crisis has on investors, chiefly contagion and anger

What we’re doing about it: Touting behavioral finance; investors shouldn’t allow this anger or fear to dictate their investment decisions; encouraging the themes found in Personal Benchmark: Integrating Behavioral Finance and Investment Management 

Click here to listen to the audio recording

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Holdings are subject to change.

 

Managing Emotions During Life’s Disruptions

Sue BerginSue Bergin, President, S Bergin Communications

It seems like a new survey comes out daily revealing how ill-prepared Americans are for retirement. Well, to reference one, now there is a study that shows two-thirds of those who have saved for retirement may still fall behind.

TD Ameritrade’s 2015 Financial Disruptions Survey shows that unexpected events have cost Americans $2.5 trillion in lost savings. [1] Typical scenarios involve unemployment or having to take a lower-paying job, starting a family and/or buying a home, assuming a care-taking role, experiencing poor investment or business performance, suffering an accident/illness or disability, divorce, separation, or becoming a widow or widower.

No surprise that any one of these events would cause stress. As explained in the best-selling book, Personal Benchmark, Integrating Behavioral Finance and Investment Management, stress triggers a move away from a rational and cognitive decision-making style in favor of an effective style driven by emotions. Research also has suggested that we experience a 13% reduction in our intelligence during times of stress, as valuable psychophysiological resources are shunted away from the brain in service of our ability to fight or flee. [2]

When under stress, emotional decisions tend to be myopic. We privilege the now and forget about the future. Decisions made under stress are also reactive. Since our body is being signaled that something dangerous is imminent, we tend to react rather than reason. Reacting is great for swerving to miss a car, but not such a great impulse to follow when it comes to setting a course that will traverse the next five years.

What we learn from the study is that the average length of the disruption was five years. These weren’t one-time events or blips on a radar screen. They were prolonged periods over that necessitated several financial decisions.

84% of those who suffered from disruptions indicated that prior thereto, they had been saving $530 per month for long-term financial goals/retirement. During the “disruption” savings were reduced by almost $300, which had a cumulative adverse impact on their long-term goal, on average of over $16,200.

Interestingly, the TD study asked how they could be better prepared for the unexpected. The vast majority focused on what authors of Personal Benchmark suggest in helping to manage emotions during stressful times, which is to focus on matters within their control. The top five responses included:

  • save more (44%)
  • start saving earlier (36%)
  • better educate self on investments (26%)
  • consult with a financial advisor (19%)
  • pay closer attention to investments (15%)

There are two key takeaways from this study. Expect the unexpected by doing as much advanced planning and saving as possible. And, when life does throw you a curve ball, manage your emotions by focusing on matters with personal significance and those that are within your personal control.

[1] http://www.amtd.com/files/doc_downloads/research/Disruptor_Survey_2015.pdf

[2] Dr. Greg Davies, Managing Director, Head of Behavioral and Quantitative Investment Philosophy at Barclays Wealth

The views expressed are those of Brinker Capital and are for informational purposes only. Brinker Capital, Inc., a Registered Investment Advisor.

Two Ways Advisors Can Help Clients Reduce Financial Stress

Sue BerginSue Bergin, President, S Bergin Communications

While all of your clients are unique when it comes to financial outcomes, they are likely to share one unifying factor—money being the top cause of their stress.

The American Psychological Association, which releases figures on stress, documented in their final report for 2011 (published in 2012) that, “More adults report that their stress is increasing than decreasing. 39% said their stress had increased over the past year and even more said that their stress had increased over the past five years (44%). Only 27% of adults report that their stress has decreased in the past five years and fewer than a quarter of adults report that their stress has decreased in the past year (17%).”

The same report shows that the top source of stress is money (75%), with work coming in a close second (70%) and the economy getting the bronze (67%). These results were validated by another study in which 63% of survey respondents indicated that they had some financial stress and another 18% rated their stress level at high or overwhelming[1].

It has been well established that stress triggers a move away from a rational and cognitive decision-making style in favor of a style driven by emotions. As the book Personal Benchmark: Integrating Behavioral Finance and Investment Management states, “Research also has suggested that we experience a 13% reduction in our intelligence during times of stress, as valuable psychophysiological resources are shunted away from the brain in service of our ability to fight or flee.” Experts suggest that emotionally-charged decisions are myopic (nearsighted), reactive, and associative.[2] All three of these predictable responses to stress are powerful ingredients for disastrous investment results.

Advisors can help clients manage emotion and associate stress in two ways:

  1. Manage the volatility in their portfolio. As the highs and lows of investments are brought under tighter control, so too will the emotions of the investors that hold them.
  2. Refocus clients’ attention on the appropriate things, such as matters with personal significance and those that are within their own control. Far too often, clients worry about externalities that have no direct impact on them or their wealth but which create a sort of vague anxiety that can never be truly calmed.

“By managing volatility as a means for controlling emotional extremes and by focusing on germane financial matters within personal control, investors can reap the benefits of appropriate stress without the paralyzing effects of excessive worry” (Personal Benchmark).

[1] http://www.financialfinesse.com/wp-content/uploads/2014/05/Financial-Stress-Report_2014_FINAL.pdf

[2] Dr. Greg Davies, Managing Director, Head of Behavioral and Quantitative Investment Philosophy at Barclays Wealth

The views expressed are those of Brinker Capital and are for informational purposes only.

Announcing our New Book, Personal Benchmark: Integrating Behavioral Finance and Investment Management

Chuck WidgerCharles Widger, Executive Chairman

Today is a very exciting day. I am pleased to announce the completion of my book, Personal Benchmark: Integrating Behavioral Finance and Investment Management co-authored by Dr. Daniel Crosby (@incblot) and published by John A. Wiley & Sons, Inc. This book is dedicated to America’s advisors, as it is these professionals who help investors achieve their goals.

We chose to write this book for three reasons:

  • The current investment advice delivery system is broken
  • In order to fix the system, it’s time to change the conversation toward goals-based investing
  • Behavioral finance needs to be automatic in order to be effective in improving investor behavior

The current investment advice delivery system is broken. The Great Recession of 2008-2009 was the wake-up call for investors and, in turn, advisors and the architects of the wealth management advice delivery system. No investor ever wants to experience a more than 20 to 30% decline in their investment portfolio. And yet, over the decades, this has not been an infrequent occurrence. Too often, encouraged by advisors, asset managers and the media, investors have sought to mimic returns generated by indexes. They tend to discover, albeit too late, that they really didn’t understand the risk involved with index-oriented or relative return investing. Then when the risk hits the fan, investors proceed to sell at market bottoms, having piled in at market tops. The existing system is not sufficiently helping investors.

bookIt’s time to change the conversation toward goals-based investing. We believe the solution to improving the investment advice delivery system begins with a focus toward goals-based investing. We believe it’s time to help advisors improve the investment experience for their clients. It’s time to turn emotion away from being an investor’s worst enemy to its best friend, time to get personal and help investors become more focused on their goals, time to change the conversation.

Behavioral finance needs to be automatic in order to effective. We also believe that in order to improve investor behavior, the elements of behavioral finance must be embedded within the investment management framework. This will help advisors and investors discuss, recognize, and manage behavioral biases. As a result, investors may avoid the typical pitfalls of wanting risk in bull markets, safety in bear markets, and failing to achieve expected returns because they do not properly manage risk.

I encourage you to visit http://www.personalbenchmarkbook.com for more information about Personal Benchmark: Integrating Behavioral Finance and Investment Management and hope that you find the book both educational and valuable.

The views, information, or opinions expressed in this blog are solely those of the authors and do not necessarily represent those of Brinker Capital, Inc. and its employees. The primary purpose of this blog is to educate and inform. This blog does not constitute financial advice. Brinker Capital, Inc. is a registered investment advisor.

Be The Benchmark

Dr. Daniel CrosbyDr. Daniel Crosby, President, IncBlot Behavioral Finance

If you’re like so many Americans, you probably made a list of your goals for 2014 back in January on New Year’s Eve. Whatever form those resolutions took; whether the goals were physical, financial, or relational, they likely had two foundational elements: they were specific to you and they were aspirational.

More than half way into the year, you may or may not still be on track to meet your goals. But regardless of your current progress, they will stand as personal reminders of the person you could be if you are willing to do the necessary work. As silly as it may sound, let’s imagine goals that violate the two assumptions we mentioned above.

Can you conceive of measuring your success relative to a goal that had nothing to do with your particular needs? What about setting a goal based on being average rather than exceptional? It defies logic, yet millions of us have taken just such a strategy when planning our financial futures!

shutterstock_171191216There is a long-standing tradition of comparing individual investment performance against a benchmark, typically a broad market index like the S&P 500. Under this model, investment performance is evaluated relative to the benchmark, basically, the performance of the market as a whole.

Let’s reapply this widely accepted logic to our other resolutions and see how it stands up. The CDC reports that the average man over 20 years of age is 5’9 and weighs 195 pounds. If we were to use this benchmark as a goal-setting index, the same way that we do financial benchmarks, the average American male would do well to lose a few pounds this year to achieve a healthier body mass index (BMI). Should we then dictate that all American males should lose ten pounds in 2013? Of course not!

The physical benchmark that we used is disconnected from the personal health needs of those setting the goals. Some of us need to lose well more than ten pounds, others needn’t lose any weight and some lucky souls actually have trouble keeping weight on (I’ve never been thusly afflicted).

A second problem is that affixing your goals to a benchmark tends not to be aspirational. The goals we set should represent a tension between the people we are today and the people we hope to become. When we use an average like the benchmark for setting our financial goals, we are settling in a very real sense. No one sets out to live an average life. We don’t dream of average happiness, average fulfillment or an average marriage, so why should we settle for an average investment?

The bulk of my current work is around addressing the irrationality of using everyone else as your financial North Star. Through a deep understanding of your personal needs, your advisor should be able to create a benchmark that is meaningful to you and your specific financial needs. After all, you have not gotten to where you are today by being average. Isn’t it time your portfolio reflected that?

Views expressed are for illustrative purposes only. The information was created and supplied by Dr. Daniel Crosby of IncBlot Behavioral Finance, an unaffiliated third party. Brinker Capital Inc., a Registered Investment Advisor