“Fools learn from experience. I prefer to learn from the experience of others.”
Otto von Bismarck
“To be prepared against surprise is to be trained. To be prepared for surprise is to be educated.”
James Carse, Finite and Infinite Games
“Staying rich requires an entirely different approach from getting rich. It might be said that one gets rich by working hard and taking big risks, and that one stays rich by limiting risk and not spending too much.”
Investment Management, edited by Bernstein and A. Damodaran
Overall, the markets got off to a good start in 2017, as indicated by the indices below.
| Periodic Performance | ||||||
| Through 3/31/17; % | ||||||
| 3 Months | 1 Year | 3 Years | 5 Years | 10 Years | Since 01/1999 | |
| S&P 500 | 6.07 | 17.17 | 10.37 | 13.30 | 7.51 | 5.63 |
| Russell 2000 | 2.47 | 26.22 | 7.22 | 12.35 | 7.12 | 8.17 |
| Russell 2000 Value | -0.13 | 29.37 | 7.62 | 12.54 | 6.09 | 9.42 |
| MSCI World ex USA (net | 6.81 | 11.93 | 0.35 | 5.38 | 1.13 | 4.04 |
| div.) | ||||||
| MSCI Emerging Markets | 11.44 | 17.21 | 1.18 | 0.81 | 2.72 | 9.07 |
| (net div.) | ||||||
| MSCI World ex USA Small Cap | 7.61 | 11.58 | 2.70 | 7.78 | 2.72 | 7.97 |
| (net div.) | ||||||
| Bloomberg Barclays U.S. | 0.39 | -0.16 | 1.09 | 0.89 | 2.66 | 3.45 |
| Treasury Bond 1-5 Years | ||||||
| BofA Merrill Lynch 1-Year US | 0.16 | 0.56 | 0.39 | 0.35 | 1.31 | 2.47 |
| Treasury Note |
United States
The broad US equity market recorded positive absolute performance for the quarter. Value underperformed growth indices across all size ranges, and small caps underperformed large caps.
International Developed Markets
In US dollar terms, developed markets outperformed the US equity market but underperformed emerging markets indices during the quarter. Small caps outperformed large caps in non-US developed markets, and the value effect was negative across all size ranges in non-US developed markets.
Emerging Markets
In US dollar terms, emerging markets indices outperformed both the US and developed markets outside the US. The value effect was negative among large cap stocks in emerging markets but positive among small cap stocks, and small caps outperformed large caps.
Multiple Mental Models
Charlie Munger, Warren Buffett’s partner, advocates using different skills to analyze situations. “You must know the big ideas in the big disciplines and use them routinely – all of them, not just a few. Most people are trained in one model – economics, for example – and try to solve all problems in one way. You know the old saying: “To the man with a hammer, the world looks like a nail.””
Wealth management not only encompasses finance and mathematics, but it includes psychology (managing investors’ behavior) and science (using empirical evidence to support investment ideas.)
I was informed last week that a competitor with a similar approach to mine announced a “partnership” with a Silicon Valley technology company that will allow clients “real time access” to their financial life via phone, tablet and computer. What could go wrong with 24/7 access to your financial data?
As Nobel Prize winning Psychologist Danny Kahneman has found by his groundbreaking research, humans are naturally risk averse. Losses are twice as painful as gains. As he so eloquently stated in his book “Thinking Fast and Slow”:
Richard Thaler, another pioneer in Behavioral Finance, which looks at the psychology of finance and investing, states in his highly regarded book Nudge:“attitudes toward risk depend on the frequency with which investors monitor their portfolios. As Kenny Rogers advises in his famous song “The Gambler”: “You never count your money when you’re sittin’ at the table, /There’ll be time enough for countin’ when the dealin’s done.” Many investors do not heed this good advice and invest too little of their money in stocks. We believe this qualifies as a mistake, because if the investors are shown the evidence on the risks of stocks and bonds over a long period of time, such as twenty years (the relevant horizon for many investors), they choose to invest nearly all of their money in stocks.”
24/7 access sounds wonderful, but looking constantly at an investment portfolio is not a good thing – at all! It leads to greater risk aversion, increased trading and decreased returns. Psychological and behavioral scientific research has proven it.
There is a tremendous tension between demands of consumers wanting instant access to information via their smartphones versus what is best for an investor in the long-term. Tristan Harris is a social media expert who worked for Google and other tech companies as an ethicist. According to Harris, technology companies often design their technology by using known “persuasion” techniques to manipulate users and hold their attention as long as possible. As he has stated, “[y]ou could say that it’s my responsibility” to exert self-control when it comes to digital usage, he explains, “but that’s not acknowledging that there’s a thousand people on the other side of the screen whose job is to break down whatever responsibility I can maintain.”
There are many benefits to technology. However, constantly monitoring your portfolio is not one of them. Empirical evidence has proven that the more one looks, the greater the odds of sub-optimal performance. Take a lesson from Vanguard legend John Bogle: “Try and avoid the worst hazards of behavioral investing. Follow the basic rule that I follow: Don’t peek. Don’t look at your account. Throw the 401k statement in the trash when it comes.”
PowerPoint on Diversification
Dimensional Fund Advisors published an excellent PowerPoint on the value of diversification over the long-term. I am attaching a link to the PowerPoint presentation for those who have PowerPoint software. There are valuable slides showing the randomness of the best performing countries each year, as well as the value of a globally balanced equity strategy versus the S&P 500 Index in the long-term. I hope you find the information useful. Please call me with any questions regarding the slides. I am happy to review them with you.
For those who do not have PowerPoint, here is a link to a PDF.
Assorted Links
What You Need to Know About Whole Life Insurance
Active Less Risky Than Passive? Yeah, right!
High Fund Fees, Waste Cost 401(K) Participants $17B Annually
I hope you enjoyed. Please share with friends and family.
Until next time,
Mike