Though I’m not qualified to give life advice, one thing I’ve learned through the years is that life is all about tradeoffs. For many decisions, the tradeoffs are obvious. Do I join friends for a beer or go for a run along the river? Admittedly, I don’t always make the most prudent decision on this one, but I do understand one path will lead to short-term gain, while the other will probably be better for me in the long-run (no pun intended!). Fortunately for me, (when I’m creative enough) the events don’t have to be mutually exclusive.
"Money is like soap, the more you handle it, the less you will have." Gene Fama
The typical owner of an individual bond couldn’t care less about the current price of that bond. When asked “why not?” they’ll say it’s because they plan on holding it to maturity.
This is a technically wrong but a behaviorally useful way of looking at things.
Because what this bond investor cares about is getting their principal back at the end and earning a little interest along the way—no thought is given to the bonds changing price between the purchase date and maturity—they’ve essentially taken the bond and placed it in a drawer until it matures. They’re in it for the long run—something that is easy to do with individual bonds as they are more expensive to trade with less transparent prices that are quoted less frequently. These are all negatives but with one behavioral benefit: a lower temptation for action.
Long-term investors would do well to pull a page from the typical bond investor’s playbook and put their entire portfolio in a drawer.*
In “Five Simple Behavioural Tips For Better Long-Term Investment Decision Making” Joe Wiggins, CFA offers a simple suggestion to “check your portfolio less frequently.”
If you need to cross a river, it's unlikely the bridge below you will collapse.
That's because the engineer has been trained in hundreds of years of best practices. From tension and compression to the latest on when and where to use a beam, arch, truss or suspension for support, she knows what's come before.
Not only that, but the bridge she designs is the result of countless iterations over the centuries. Every design has been improved based on trial and error from the millions of crossings before yours.
Bridge construction is an engineering project, and it's based on physics and best practices. Learn from the past, don't ignore it. It’s black and white: physical laws cannot be violated.
Investing, on the other hand, is something we value because the markets are dynamic. It is more than engineering—investing is, by definition, without guarantees. There are no physical laws. It’s gray: remove uncertainty from the outcome there is no opportunity for return.
But even so, investing is based on best practices and the evidence.
The value investor better have read Graham and Dodd, and more recently Damodaran. The asset allocator should be familiar with Markowitz, Swenson, and Bernstein. The factor investor needs to know William Sharpe, Fama and French, Mark Carhart, and James O'Shaughnessy. And those looking for insight on how humans behave in their interactions with the markets: read Kahneman and Tversky, Thaler, and Ariely.
Depending on the investment strategy you chose to pursue, ignore the work that has come before it if you want to, but learn it first.
For us, this means that our starting point is the global market portfolio (i.e., “the work that has come before) then deliberately shaping how we will differ. This might mean taking more (or less) risk, tilting towards factors of higher expected returns, or incorporating alternative strategies which we anticipate will improve our risk/return trade-off.
Different investment strategies work for different people, but before going down one of these paths, it pays to know the best practices of those who’ve come before.
*This post is inspired by and draws heavily from the article “Best Practices” by Seth Godin on November 22, 2017.
‘Because I said so‘ is the easy answer as a parent but rarely the best response. It's one I swore as a kid I'd never use when I grew up, but I do.
The investing version of this time-saving shortcut, “Because I said so investing,” is allocating based on headlines—something we all know we shouldn’t do, but that proves tempting nonetheless. It saves time and may feel justified in the short run but is ultimately harmful.
Last year provided ample opportunities for some ‘Because I said so’ investing. A string of bearish headlines from legendary investors Stanley Druckenmiller, Carl Icahn, and George Soros that Michael Batnick highlighted on his blog:
And, from June 09, 2016
But, since the last of these, on June 9th, the S&P 500 index is up 22%. Investing based on headlines, become someone said so, would have cost you real money.
Batnick, in his article, gave three reasons why these headline-grabbing “opinions have absolutely no place in an investment process.”
1) Losing money means literally nothing to them. They can drop $10,000,000 on a trade and not even notice it’s missing.
2) These guys are traders, they’re not married to their opinion. They can change their mind tomorrow and you’d never know it.
3) The best batting average of all time is .440. The greatest investors have a similar winning percentage.
The latest opportunity from ‘Because I said so’ investing comes from another billionaire investor. Jeff Gundlach made headlines this last week with his warning on Wednesday about the stock market:
JNK ETF down six days in a row, closing near its seven month low. SPX up five of last six days, closing at an all time high. Which is right?— Jeffrey Gundlach (@TruthGundlach) November 8, 2017
- Intel is simplifying its retirement plan lineup by removing six investment options
- This change goes into effect September 1st, 2017
- If you own any of these funds and don't make a change before the deadline, your investment will be automatically sold and the proceeds transferred into an age-appropriate retirement date fund
- For a complete list of eliminated funds and potential replacement, see our table below.
- For clients of Cordant, we will coordinate any changes necessary on your behalf
If you’re like most Intel employees, you want to make smart financial decisions. You like being certain you’re doing the right things with your investments and making confident choices.
But, between a demanding career, family commitments, and other social obligations it’s not like you have a lot of extra time (or interest in the subject perhaps) to research your Intel retirement plan investment lineup and weed through the upcoming changes. So, how do you keep from making a mistake? Do you simply elected the default option or do you do something else?
Since we look at this stuff all the time for clients (and enjoy doing it too!), let's lay out the changes, the time frame, and the choices you'll be forced to make.
But first, why is Intel making the changes in the first place?
Over the last three calendar years, Global stocks (MSCI All Country World Index - ACWI) have returned a meager 3.7% annualized leading some to question their investment approach. Large market moves up are obviously fun, and even big moves down are often easier to ride out (at least you can see something happening) than a sideways markets. It’s extended periods of low returns which test patience and one’s ability to stick with a strategy and let it work over time.
These periods can be frustrating, causing investors to wrestle with questions like: am I doing the right things to succeed? Is there somewhere else I should be focusing? Are there changes I should make? The pain of patience triggers the question: is my strategy broken?
In his fantastic biography, legendary mathematician, successful gambler, and hedge fund manager, Ed Thorp reveals how he answers this question.
Last week I enjoyed dinner with a group of people, one of which happened to be a hedge fund manager and fellow CFA charterholder. As us finance-types are wont to do, we quickly made our way to a discussion of every investment nerd’s favorite question: what is risk?
Warren Buffett, in his 2014 Berkshire Hathaway annual letter (page 18), shared his views on the topic:
That lesson [that stocks are less risky than cash-equivalent holdings over the long-term] has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk.
Buffett is pointing out that over the long-term stocks are an attractive way to grow capital while cash and their equivalents (i.e., treasury bills) do little more than keep pace with inflation, as can be seen in the chart below. He’s obviously correct on this point, investing in stocks has historically been one of the best things you can do to compound your wealth.
Now then, does this mean people should ignore volatility and only own stocks? I’d say no. Buffett aside, most of us don’t live in the long-term; we live in the present and volatility is a risk that must be managed in the present.
So, despite my better judgment, I'm going to a disagree with one of, if not the greatest investor of all time and my new friend, the hedge fund manager with the NYU law degree and Stanford MBA to his credit—in other words, two very bright people.
All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident. ~Arthur Schopenhauer
19th-century German philosopher, Arthur Schopenhauer thought truth (and in this case, we'll extrapolate to include “new ideas”) passed through three stages: ridicule, opposition, then acceptance. While the index fund, which turned 40 last year, is a new idea no longer, based on the massive shift in assets that are moving from active to passive, one could argue their “truth” is now self-evident.
According to Michael Mauboussin and others at Credit Suisse, “Since the end of 2006, investors have withdrawn nearly $1.2 trillion from actively managed U.S. equity mutual funds and have allocated roughly $1.4 trillion to U.S. equity index funds and exchange-traded funds (ETFs).”
This shift from active to passive funds has driven total assets invested in index mutual funds to around $2 trillion with another $2 trillion invested in ETFs.
Clearly, index investing is an idea that is catching on and gaining momentum.
But sometimes it feels like people are disappointed to have to “settle” for indexing. No one wants to be passive or merely average. It can feel to many like settling for meatloaf because you can’t afford the prime rib.
Next month, Cordant is releasing a short eBook titled “Three Mistakes Intel Employees Make as They Approach Retirement.” (Shameless plug: sign up here to join our mailing list and make sure to get notified when it’s released.) One of the mistakes we identify in the eBook is a willingness for late-career employees to take on too much risk with their investments as they approach retirement.
It's a mistake we frequently see among Intel employees, many of which are striving to hit their “number” (a desired net worth) or simply maximize their last few years or decade of accumulating assets. What’s more, this penchant to increasing risk late in one’s career is heightened during bull markets—like we’ve had since 2009—according to a recent article in the Wall Street Journal.
This year on the Cordant blog, we’ll be answering questions that we frequently see, or that relate to a relevant topic for many readers. We'll kick if off with the following question about structuring a competition between two investment managers.
Question: I will retire in one year. My 401(k) will be sizeable enough that I'm thinking of splitting it in half and giving a portion to two different investment companies. I will give them the same expectations I have in terms of risk and goals. I then plan on waiting a year or two and give my total business to the company that provides the largest gain in their respective portfolios. Is this a good strategy? Why or why not?
Congratulations on your upcoming retirement, but please, please, please don’t risk it with this strategy. Here are three reasons why this is not only a bad idea but quite risky as well.