10 Surefire Ways to Ruin Your Financial Future

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

It’s been a brutal day, a long week, and just an overall rough start to the year for the markets. To head into the weekend on, hopefully, a lighter note, I’m taking a tongue-in-check approach to the irrational investor mindset:

  1. Ignore the impact of your behavior – Over the last 20 years, the market has returned an average of 8.25% per annum, but the average investor has gotten just over 4% of that due to poor investment behavior. But making prudent decisions is much less interesting than say, trying to time a bottom in oil prices, so by all means allocate your efforts there.
  2. Trust your gut – A meta-analysis of rules-based approaches to making decisions found that following the rules beats or equals trusting your gut 94% of the time. You know what you should be doing (stay the course, dollar-cost average, etc…), but rules are boring, so just do what feels right with your money!
  3. Live for right now – The worst ever 25-year return for stocks (that included the Great Depression) was 5.9% annualized. But patiently planning over an investment lifetime is sooo tedious, so be sure to check your stocks every single day, where you will see red about 45% of the time.
  4. Do as much as possible – When things get scary it feels good to act, right? Right. Disregard the research that shows that the most active traders in Sweden underperformed their buy-and-hold counterparts by 4% a year. Instead, freak out and sell everything!
  5. Equate volatility with risk – Stocks outperform other asset classes by about 5% annualized after adjusting for volatility, but the ups and downs can be a lot to handle! Volatility also provides opportunities to buy once-expensive names at a bargain. But go ahead and ignore all of the upside to volatility and do something “safe”, like buying treasuries that don’t keep up with inflation and lose real dollars every year.
  6. Go it alone – Aon Hewitt, Morningstar and Vanguard all place the value of financial advice at anywhere from 2 to 3% per year in excess returns, but don’t let that stop you. With multiple 24/7 news channels and hysteria-inducing magazines available to you, who needs personalized advice?
  7. Try and beat the benchmark – You could argue that beating an impersonal market benchmark like the S&P 500 has nothing to do with your goals or risk tolerance, but that takes all the fun out of it! Just go watch “The Big Short” and pick up a few pointers there.
  8. Read every article that mentions “recession” – The U.S. economy has been in a recession nearly 20% of the time since 1928, meaning that the average investor will experience 10 to 15 recessions over their lifetime. But by all means, read every scary article that you can rather than accepting the historical trend that recessions are a common occurrence and haven’t materially impacted the long-term ability of the market to compound wealth.
  9. Tune in to dramatic forecasts – David Dreman found that roughly 1 in 170 analyst forecasts are within 5% of reality and Philip Tetlock’s examination of 82,000 “expert” predictions shows that they barely outperform flipping a coin. So, ignore the robust body of evidence that says no one can predict the future and pick a market prophet to follow.
  10. Ignore history – JP Morgan reports that the average intrayear drawdown over the past 35 years has been just over 14%, a number we haven’t yet reached in 2016. What’s more, the market has ended higher in 27 of those 35 years. Forget the fact that the horror of 1987’s “Black Monday” (a 22.61% single day drop in the Dow) actually ended in a positive year for stocks. Ignore historical suggestions that double-digit volatility is the norm and instead imagine vivid Doomsday scenarios that leave you in financial tatters.

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: An Update on The Current Market Environment

Magnotta-Audio-150x126Amy Magnotta, CFASenior Investment Manager, Brinker Capital

On this week’s podcast (recorded September 2), Amy takes the mic to provide an update on the current market environment and how the recent volatility can create opportunity. Highlights include:

  • S&P 500 finished month down 6%; international markets in worse shape
  • 12% correction from high reached in May
  • Still viewing the environment as a correction, not start of a bear market
  • Bear markets typically caused by recessions and tend to be preceded by central bank tightening or accelerating inflation—these conditions aren’t being met yet
  • U.S. growth still positive
  • If Fed begins to tighten in September, the pace will be measured as inflation is still below target
  • Looking for opportunities created by market volatility

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.

The “Don’ts” for Periods of Market Volatility

Crosby_2015Dr. Daniel Crosby, Founder, Nocturne Capital

Having checked in this week with many of our advisors and the clients they serve, we know that this has been a stressful week for everyone involved in the market. On Monday, we wanted to provide a few proactive starting points and created a list of “do’s” for volatile markets. However, at times like this, knowing what not to do can be just as important as knowing what to do. With that, we present a list of things you should absolutely not be doing in periods of market volatility.

  • Don’t lose your sense of history – The average intrayear drawdown over the past 35 years has been just over 14%. The market ended the year higher on 27 of those 35 years. A relatively placid six years has lulled investors into a false reality, but nothing that we have experienced this year is out of the average by historical measures.
  • Don’t equate risk with volatility – Repeat after me, “volatility does not equal risk.” Risk is the likelihood that you will not have the money you need at the time you need it to live the life you want to live. Nothing more, nothing less. Paper losses are not “risk” and neither are the gyrations of a volatile market.
  • Don’t focus on the minute to minute – Despite the enormous wealth creating power of the market, looking at it too closely can be terrifying. A daily look at portfolio values means you see a loss 46.7% of the time, whereas a yearly look shows a loss a mere 27.6% of the time. Limited looking leads to increased feelings of security and improved decision-making.
  • Don’t forget how markets work – Do you know why stocks outperform other asset classes by about 5% on a volatility-adjusted basis? Because they can be scary at times, that’s why! Long term investors have been handsomely rewarded by equity markets, but those rewards come at the price of bravery during periods short-term uncertainty.
  • Don’t give in to action bias – At most times and in most situations, increased effort leads to improved outcomes. Want to lose weight? Start running! Want to learn a new skill set? Go back to school. Investing is that rare world where doing less actually gets you more. James O’Shaughnessy of “What Works on Wall Street” fame relates an illustrative story of a study done at Fidelity. When they surveyed their accounts to see which had done best, they uncovered something counterintuitive. The best-performing accounts were those that had been forgotten entirely. In the immortal words of Jack Bogle, “don’t do something, just stand there!”

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

Investment Insights Podcast – August 26, 2015

miller_podcast_graphicBill Miller, Chief Investment Officer

On this week’s podcast, Bill explains why investors should focus on growth and not Fed policy during this volatile time in the market (recorded August 25, 2015):

Highlights include:

  • Economists have echoed our thought that investors should focus on growth and not so much on Fed policy.
  • We’re seeing a shift from a policy-driven market to a more fundamental-driven market.
  • While the ECB and Bank of Japan stimulate their economies with policy, we must wait to see if that will support markets the way it supported markets in the U.S.
  • Appears consensus view is that markets are close to a bottom, but there is a large range between high expectation and bottom.
  • Potentially a lot of upside or a lot of downside, so patience is key as we head into the fourth quarter.

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.

What About The Correction?

Jeff RauppJeff Raupp, CFA, Senior Investment Manager

Over the holidays, I spent a lot of time with some family members that I don’t often get to see. We got together, had a little too much to eat and drink, and gave each other updates on what’s happening in our lives. Between the updates on kids, new careers, and new houses (no new spouses or kids this year), we never miss the opportunity to get some free advice from one another.

My two sisters are both in healthcare and handle all questions related to our aches and pains. My cousin the mechanic will venture out to the driveway and listen to the ping in your engine for the cost of getting him a beer. You get the idea.

My contribution is on the investment side, fielding questions about 529 plans, IRA distributions, 401(k) plans, etc. But the biggest question is always some version of “where is the market going?” This year’s edition, fueled by the huge returns in stocks in 2013 (and a good dose of CNBC), was “do you think we’re going to get a market correction?”

Hello, My Name is Free AdviceI suggested that when you look at how far the market has run and the high levels of investor sentiment right now—indicating that a lot of good news is priced into the market— I could easily see the market pulling back 5-10% on some unexpected bad news. The natural response from my family was, “What should I do?” “Nothing,” was my presumably blunt response.

My rationale is this: From a fundamental standpoint, the market looks good. Companies continue to grow earnings at a steady, albeit slow, rate. The market isn’t cheap, but it isn’t expensive either, and rarely does P/E compress without a recession. Speaking of the r-word, GDP growth continues to be sluggish, but it’s positive and expected to increase in 2014. Housing, the root cause of the last recession, continues to improve in spite of rising rates. And the Fed launched the previously-dreaded tapering of its quantitative easing without any market hiccup.

Depending on the attention span of my audience, all of that might boil down to simply saying, “We could get a correction, but if you’ve got at least 6-12 months, I think the market will be positive from here.”

Now, let’s go check out that leak on my car…

Central Bank’s Sway Stock, Market Commentary by Joe Preisser

Aided by a broad based reassessment of comments issued by European Central Bank President, Mario Draghi on Thursday, and the release of better than anticipated employment figures for the month of July in the United States, stocks rallied strongly on Friday to reverse the losses suffered earlier in the week and reclaim their upward trajectory.

Following a meeting of the American Central Bank’s policy making committee this week, the decision to forbear enacting any additionally accommodative monetary policy at present was announced in tandem with indications that measures designed to stimulate the world’s largest economy may be forthcoming.  The Federal Open Market Committee said in its official statement that they, “will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions.”  As the recovery in the world’s largest economy has continued at a frustratingly slow pace, hope has pervaded the marketplace that increased liquidity will be provided by policy makers in order to encourage growth should they deem it necessary.  In its most recent communiqué, the Federal Reserve has reinforced this belief thus offering support for risk based assets.  Brian Jacobsen, the Chief Portfolio Strategist for Wells Fargo Funds Management was quoted in the Wall Street Journal as saying, “They probably are closer to providing, as they say, ‘additional accommodation as needed’, but I still think that they want more data before they actually pull the trigger.”

Investors across the globe registered their disappointment on Thursday with the decision rendered by the European Central Bank, to refrain from immediately employing any additional measures to support the Eurozone’s economy, by selling shares of companies listed around the world.  Hope for the announcement of the commencement of an aggressive sovereign bond buying program, designed to lower borrowing costs for the heavily indebted members of the currency union, which blossomed in the wake of comments made by Central Bank President Mario Draghi last week were temporarily dashed during Thursday’s press conference.  Although Mr. Draghi pledged to defend the euro, and stated that the common currency is, “irreversible” (New York Times), the absence of a substantive plan to aid the ailing nations of the monetary union was disparaged by the marketplace and precipitated a steep decline in international indices.

Friday morning brought with it a large scale reinterpretation of the message conveyed by European Central Bank President, Mario Draghi the day before, as investors parsed the meaning of his words and concluded that the E.C.B. is in fact moving closer to employing the debt purchasing program the market has been clamoring for.  The release of better than expected news from the labor market in the United States combined with the improvement in sentiment on the Continent to send shares markedly higher across the globe.  According to the New York Times, “on Friday, stocks on Wall Street and in Europe advanced as investors digested the announcement alongside data showing the U.S. added 163,000 jobs.”  Although the absence of immediate action served to initially unnerve traders, further reflection upon the President’s comments revealed the resolve of the Central Bank to support the currency union and fostered optimism for its maintenance. A statement released by French bank Credit Agricole on Friday captured the marked change in market sentiment, “Mr. Draghi’s strong words should not be understated, in our view.  The ECB President made it perfectly clear that the governing council was ready to address rising sovereign yields…Overall, notwithstanding the lack of detail at this stage, we believe the ECB will deliver a bold policy response in due time”(Wall Street Journal).

Potential for ECB Action Incites Strong Rally by Joe Preisser

Emphatic declarations of support for the Continent’s common currency, issued by The President of the European Central Bank, Mario Draghi on Thursday, and echoed by German Chancellor Angela Merkel and French President Francoise Hollande on Friday served to bolster investor sentiment and ignited a strong rally across global equities. The display of solidarity in defense of the euro project from the Union’s leadership seen this week came in response to the reemergence of fears of its possible dissolution as funding costs for the Spanish government soared to dangerous heights.

Trading for the week commenced as speculation that Spain would be the next member of the currency union to require emergency funding, swept through the marketplace, putting downward pressure on share prices around the world.  A decision by Madrid to offer financial support to the country’s struggling regional governments caused concern that the additional obligations would create an unsustainable situation for the heavily indebted nation. The yield on Spanish 10 year bonds rose above the record height of 7.5% on Tuesday, while Spain’s IBEX-35 stock index sank nearly 10% over the course of three trading sessions, reflecting the depth of trepidation with which the credit and equities markets view the difficulties currently facing the government.  According to Bloomberg News, “After taking on as much as 100 billion euros of bailout loans to aid banks, the risk…is that the additional burden of helping regions pushes bond yields to unaffordable levels.”

As the nations of the European Union continue to struggle to address the soaring borrowing costs faced by several of their member states, the trepidation this has created among investors around the globe revealed itself in several of the quarterly earnings releases issued this week.  The current situation on the Continent has deeply affected markets in the eurozone, reverberated across Asia, and is now being reflected in the profitability of corporations in the United States highlighting the global implications of the current crisis.  United Parcel Service, which delivers more packages than any company in the world, and Whirlpool Corp., the globe’s largest manufacturer of appliances both saw their shares fall after reporting earnings which failed to meet expectations (Bloomberg News). In its earnings release statement, Scott Davis, the Chief Executive Officer of UPS said, “Increasing uncertainty in the United States, continuing weakness in Asia exports and the debt crisis in Europe are impacting projections of economic expansion.”  

In an effort to hold down borrowing costs and to thwart contagion, the President of the European Central Bank, Mario Draghi, stated on Thursday that steps would be taken to halt the precipitous rise in the sovereign yields of several of the most heavily indebted members of the currency union.  Mr. Draghi was quoted by Bloomberg News as saying, “within our mandate, the ECB is ready to do whatever it takes to preserve the euro.  And believe me, it will be enough.”  The marketplace found solace in this statement, as the prevalent feeling among investors currently is that a direct sovereign bond buying by the ECB will be forthcoming, thus easing a measure of the acute effects of the crisis. With unlimited capacity on its balance sheet, the Central Bank is widely considered to be the only institution on the Continent capable of successfully intervening in the debt market to drive funding costs lower.  Bloomberg News quoted Bernd Berg, a foreign-exchange strategist at Credit Suisse, “Draghi’s comments that the ECB would do everything to preserve the euro currency gave some relief to markets and lifted asset prices after renewed euro-zone collapse fears.”

A joint statement issued by German Chancellor Angela Merkel and French President Francoise Hollande that their nations are, “bound by the deepest duty”(Bloomberg News), to maintain the currency union in its current iteration served to further ease investor concerns, as it reinforced the commitment of the Continent’s two largest economies to the euro project.  With a multitude of challenges facing the global economy it will be vitally important that the leaders of the European Union follow through in short order on the pledges made this week and work to drive sovereign yields back to sustainable levels, thus restoring a measure of stability to the marketplace.

Understanding Behavioral Style in Developing New Business – Part 1 by Bev Flaxington

Have you ever been taken completely by surprise by a client or prospect? Or have you ever been unable to close a sale because you just couldn’t “get through” to them? Today, investors are being bombarded by so many advisors and business development people – all trying to connect and persuade them to become clients. However, one of the most fundamental ways to connect with prospects is often overlooked by those in a selling role: understanding behavioral styles and adapting one’s communication approach to the people s/he’s trying to persuade.

You may have at one time taken a training course on relationship-building, face-to-face selling skills, or something similar, but the key to understanding the buyer’s perspective necessarily begins with an understanding of behavioral style. This is because behavioral style is the crux of understanding communication style – and true communication is the key to developing great relationships in both your personal and professional life.
So, is it really true that your likelihood of signing new clients could come down to your behavioral style? Research conducted in 1984 and validated again every year since has proven three things: 1) people buy from people with similar behavioral styles to their own, 2) people in a selling type of role tend to gravitate towards people with behavioral styles similar to their own, and 3) if people in a selling or business development type role adapt their behavioral style to that of the prospect, sales increase.

Many advisors, business development and client service personnel have excellent communication skills, but have difficulty in relationships with prospects and clients – and don’t understand why. Something just doesn’t feel right, but they’re not sure how to diagnose the problem or modify their behavior for greater success. Often times, it’s not technique (i.e. the questions asked, presentation or negotiating skills, etc.) but rather a lack of understanding of one’s own behavioral style and motivators, and of knowing that behavioral differences can cause significant communication difficulties that hamstring closing a prospect or an ongoing relationship with clients.
One scientific way to understand behavioral style is through an assessment called DISC (Dominance, Influencing, Steadiness, Compliance). Based upon the work of Carl Jung, the DISC approach was invented by William Moulton Marston, inventor of the lie detector and holder of a Harvard MBA, over 80 years ago. The statistically based profiles show a person’s preferred styles on four scales of behavior – Problems, People, Pace and Procedures:

• Dominance (“D” factor) How one handles problems and challenges
• Influence (“I” factor) How one handles people and influences others
• Steadiness (“S” factor) How one handles work environment, change and pace
• Compliance (“C” factor) How one handles rules and procedures set by others

Depending on our differences in style and approach, we can either get along very easily together (because we’re so much alike!) or we can have significant clashes in our relationship.

A person’s behavioral preferences have everything to do with their communication approach and style. People who operate with very different styles have a difficult time “hearing” one another and communicating effectively. For instance, if I communicate only within my own behavioral comfort zone, I will only be effective with people who are just like me. However, in the corporate environment we are dealing every day with colleagues, prospects, clients and management – all of whom can be very different behaviorally. Not only is communication difficult where there are differences, but often individuals become hostile and conflict-oriented toward one another. Significant time, effort and corporate money is wasted because people are unable to “get along” and work together effectively toward common corporate goals. (Refer to the Brinker blog “Dealing with Difficult Clients” for a complementary discussion of this topic.)

In the next blog, we’ll take a “deeper dive” into behavior style – how you can identify it in your prospects and use this knowledge to improve your selling effectiveness.

Brinker Capital Market Commentary –July 5, 2012 by Amy Magnotta

After the “risk on” environment to start the year pushed risk assets sharply higher, we experienced a pull-back in the second quarter. The deepening crisis in the Eurozone and evidence of slower global growth weighed on the global financial markets and drove investors to the relative safety of the U.S. government bond markets.

Some positive factors remain, but the macro risks continue to dominate. We expect
continued sluggish growth in the U.S. because of ongoing deleveraging, regulatory
uncertainty and the looming fiscal cliff in 2013. While U.S. corporations are in good
shape with strong earnings and high levels of cash on their balance sheets, they are hesitant to put it to work because of the uncertain environment. We still lack sustained growth in real personal incomes, which is key to greater levels of consumption and stronger economic growth going forward. While the Federal Reserve remains accommodative and stands ready to act further, the effectiveness of their monetary policy tools is diminishing.

The Eurozone has begun to take steps toward addressing their sovereign debt crisis, but more needs to be done. Policymakers must also contend with a deepening recession in the region, which will send debt/GDP ratios even higher. The need for a bailout of Spanish banks prompted leaders to announce somewhat more aggressive measures at their recent summit. It remains unclear whether these policy options will actually be put into place; however, it appears that Europe is beginning to lay out a path forward, which is a positive.

While growth in developed markets is weak, growth in emerging markets has also slowed. Investors continue to watch China’s actions to see whether a hard landing can be averted. One positive corollary of a slowdown in global growth is receding inflationary pressures and lower commodity prices. Lower retail gas prices are a boost to the disposable incomes of consumers.

The unresolved macro risks will keep the markets susceptible to bouts of volatility as we enter the second half of the year. The U.S. Presidential election will likely add to that volatility. Because of massive government intervention in the global financial markets, we will continue to be susceptible to event risk.
Amy Magnotta, Portfolio Manager
Brinker Capital Inc., a Registered Investment Advisor