How Skydiving Can Help Explain Investment Risk

What can skydiving teach us about investing? It teaches about risk and reward, and can give you a perspective on risk that may change the way you think about investing.

It’s Always a Good Time to Talk About Risk and Volatility

 
In the 68 trading days in the U.S. stock market from 11/11/16 to 2/17/17, the Dow Jones Industrial Average (DJIA) set new all-time high records on 26 of those days. In the last seven consecutive days over the same period, the Dow closed at a new record every day.

Why Uncertainty Might Just Be an Investor’s Best Friend

This blog is from the March issue of Portfolio Perspectives.
 
With many stock market indices at all-time highs, Washington awash in political turmoil and unsettling news around the globe, many investors may be unsure what to do next.
 
And we believe that is a good thing.
 

Financial Risk through a Wide-Angle Lens

This blog is from the January issue of Portfolio Perspectives.
 
The world is risky. The future is uncertain. And many of the decisions we make can have a profound impact on our future welfare. This is where financial advisors can add value by helping their clients navigate an inherently risky world. Risk cannot be eliminated, but it can be managed.

Great “Client” Expectations

Guest author Michael Noland is a financial advisor and managing partner with Integrated Financial in Tulsa, Oklahoma.
 
One of the things I tell my clients is that if I’m doing my job as their advisor, they will be mad at me fairly often. This definitely gets their attention and then gives me an opportunity to have an important conversation about expectations.
 
To some extent, we probably all grapple with best practices for keeping clients happy as well as on track. Clients might call you about a hot stock tip their neighbor told them about, or they may feel strongly about being in a concentrated position but are lukewarm on the idea of a truly diversified portfolio. I like to tell my new clients, “If I told you I had a system that figured out how to time the market, you should run the other way immediately. (And I wouldn’t be working for a living if I actually could.)”

There is Always a Reason to Sell…Unless You Want to Achieve Your Goals

This article is featured in the fall edition of our 360 Insights Quarterly Client Newsletter.
 
The problem with good advice is that it tends to be boring, especially when it comes to your portfolio.
 
This is a good thing.
 
For investors, excitement can be your worst enemy. Excitement generates headlines; it causes people to be greedy or fearful; it drives volatility and speculation — all resulting in too many people compromising their financial futures.

Invest for the Long Term

This article is featured in the fall edition of our 360 Insights Quarterly Client Newsletter.
 
This is the last article of a four-part series to help you understand our investment approach — and why it matters to you.
 
Long-term perspective, discipline and patience are the most important ingredients of portfolio success. But emotional, short-term behaviors like panic selling at lows and elated buying at highs can have detrimental long-term consequences, including dramatic portfolio underperformance.
 
Consider the daily returns of the Dow Jones Industrial Average (DJIA) from 1991 to 2015. A $1,000 investment over that period would grow, assuming dividend reinvestment, to $12,016. But if you were out of the market on the 10 best days, your $1,000 investment would have grown to just $6,141. This illustrates the value of staying in the markets for the long run rather than jumping in and out of the market.
 

Flip a Coin and Learn About Your Portfolio

This blog is from the August issue of Portfolio Perspectives.
 
Even if you don’t consider yourself much of a gambler, you probably can answer this question correctly: Are you likely to lose more money placing one $100 bet or 50 $2 bets?
 
If you answered the $100 bet you are right, but what does this have to do with investing?
 
Imagine that we flip a coin. If it comes up heads, I’ll pay you $2; if it comes up tails, you’ll pay me $1. We can play this game in any relative amount and we can flip the coin as many times in a row as you want. You have a 50% chance of receiving $2 and a 50% chance of having to pay $1. Therefore, your “expected value” on such a game would be 50 cents on each flip for every $1 you are willing to put at risk.

Keep Your Eye on Your Goals

If someone asked you, “Why is wealth important to you?” what would be your answer? In a survey of high-net-worth families, financial security was the most popular answer, followed by help children become successful, educate children and help the less fortunate.¹
 
Financial security is more than money in our portfolios; it is the confidence that we can continue to live in dignity and support ourselves financially rather than rely on our children.
 
A diversified portfolio that follows our Investment Policy Statement is most likely to get us to our long-term goals — like financial security and helping our children — yet we worry daily as we watch markets go up and down.

4 Ways to Help Manage Risks

Source: Dimensional. In U.S. dollars. Market cap data is free-float adjusted from Bloomberg securities data. Many small nations not displayed. Totals may not equal 100% due to rounding. Past Performance is not indicative of future results. All investments involve risk. Foreign securities involve additional risks including foreign currency changes, taxes and different accounting and financial reporting methods. Countries represented by their respective MSCI IMI(net div.). Indexes are unmanaged baskets of securities in which investors cannot directly invest; they do not reflect the payment of advisory fees or other expenses associated with specific investments or the management of an actual portfolio.

This article is featured in the summer edition of our 360 Insights Quarterly Client Newsletter.
 
This is the third article of a four-part series to help you understand our investment approach — and why it matters to you.
 
Look up the word RISK in a thesaurus and you see words like danger and hazard, but also opportunity and fortune.

Is the Potential for Tax-Exempt Yield Really Worth the Risk?

This article will be featured in the summer edition of our 360 Insights Quarterly Client Newsletter.
 
In a recent period of low stock market returns, low interest rates and low economic growth, investors have faced the temptation of trying to find the elusive outperforming investment. Who wouldn’t want to speed into the investment performance fast lane while others are stuck in traffic? Recently, promised outperformance has come from hedge funds, limited partnerships and high-yield bonds. Yet, as history proves again and again, great expected returns also mean taking on great risk. This year, the latest exemplar of this was the municipal bond market.
 
Would you buy a bond backed simply by the good faith of an entity that was drowning in debt and had poor growth prospects? What if the debt to GDP ratio rose above 70% as revenue dried up and borrowing cost rose?¹ And what if this entity did not have the option of defaulting on its debt? Yes, the investment we’re discussing is Puerto Rico Municipal Bonds.

Don’t Get Spooked by Headlines

This blog is from the October issue of Portfolio Perspectives.
 
October is full of ghosts, goblins and trick-or-treaters, so what better topic to write about than fear? Fear, if not conquered, can be a deceiving and misguiding emotion. To show you what I mean, let me ask you a question: What do you fear more, nuclear reactors or taking a selfie?

What Do the World’s Deadliest Animals Have to Do with Investing?

As much as we all like to think of ourselves as rational, occasionally we worry about things we probably shouldn’t. Here’s an example: what worries you more, getting bitten by a shark or a mosquito? If you said the shark you might want to think again.
 
Check out the infographic on the World’s Deadliest Animals which shows that although 10 people a year die from shark attacks, 725,000 die from mosquito bites. Sometimes when we focus on the wrong thing, it causes us to make poor decisions, including with our investments.
 

Give Up, Throw Up or Stay the Course: What To Do When the Market Drops 20%

 
Like death and taxes, bear markets are unavoidable. The only question is when? Next week, next month or several years from now?

A Surefire Way to Ruin a Great Portfolio

When people ask me what keeps me up at night, here’s what I tell them: I hope clients don’t change their long-term plans when the next downturn correction happens in the markets.
 

Window Dressing

Source: “Corporate Bond Market Transaction Costs and Transparency,” Edwards, Harris, Piwowar. The Journal of Finance, Volume 62, Issue 3, June 2007.
 
Are you using individual bonds to differentiate your portfolio offering for affluent investors? Many advisors do, often citing liability matching and taxes as the main justifications for such a strategy. Although, I don’t argue there may be cases where individual bonds make sense for a client, I believe it is important to consider the tradeoffs of using individual bonds vs. a bond mutual fund before making that decision. Below I’ve summarized the key points to consider when deciding between an individual bond and bond mutual fund strategy.

Vanishing Volatility

Gains of nearly 30% on a broad index like the S&P 500 — after four years of above average growth — has given investors many reasons to rejoice. And it’s not just the absolute return that investors have relished; it’s the smooth fashion in which we’ve reached that number.
 
In 2013 we saw only 17 days where the index fell by over 1%, and no days when it fell by over 2.5%. Looking at the last 20 years we would expect to see 35 days where the index fell by over 1% in a given year, meaning 2013 had only half the number of significantly down days that we would expect.
 
And the volatility has disappeared not only on a daily basis, but on a cumulative basis as well. The chart below shows the annual drawdowns of the S&P 500 since 1972. The last two years have had very small drawdowns of around 6%; this is really nothing worse than a bad week or two on the index. With volatility so low for a few years, it’s easy to extrapolate this tranquility into the future, assuming the market will continue to be a smooth ride.