Month: August 2018

Rebalancing or Reframing?

© Can Stock Photo / Juliedeshaies

“Rebalancing” is said by some to be a wonderful portfolio practice, as it restores a predetermined ratio of stocks to bonds. But this consensus wisdom has a cost that is seldom mentioned.

Over very long periods, some kinds of assets have outperformed others. So on the whole, rebalancing over extended periods has tended to remove funds from potential higher-return sectors and placed them in lower-return sectors.

The aim of rebalancing is to reduce volatility. It is generally successful at that. But bottom line, rebalancing may deliver lower volatility to long-term investors at the cost of lower returns.

The only problem with volatility is that people may react to it and behave less than optimally—selling out at a low point, for example. But rebalancing is not the only way to deal with this issue.

Behavior can be changed by reframing. Long-term investors can be persuaded to consider the original starting point (the contributed capital) as the anchor for comparison to current values. Gains in the faster growing side of the portfolio can then be viewed as “house money,” so to speak. After some gains are amassed, then volatility does not need to be viewed as a loss of capital. Selling out at low points may be less likely.

Problems arise when investors define a “loss” as the peak value ever attained less whatever lower value may occur later. By that logic, people could claim that they have lost money most of the time, even while they’ve grown a fortune. It makes no sense to us. Most of the time, markets and stocks are trading lower than some prior peak—they never set a new high every day.

By reframing gains and losses to the cumulative result since inception—instead of over some shorter period—one might substitute reframing for rebalancing and could end up with more wealth. No guarantees, of course.

Clients, this is one of the reasons we talk about long time horizons, patience, and living with volatility. If you would like to talk about these things or any others, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

Portfolio Hiccups

© Can Stock Photo / NicoletaIonescu

We have all had the experience of getting interrupted by a hiccup. Do they serve any useful purpose? A momentary dislocation, each spasm passes quickly.

Over the course of our lives as investors, we similarly experience a spasm through our portfolios from time to time. We feel this way about the year so far. Unlike hiccups, which sometimes feel like they come out of nowhere, in this case we can clearly spot some of the causes:

• Your portfolios are generally overweight in select natural resource holdings, a sector that may do better or worse than the major market averages in the short run. So far this year? They haven’t been great.

• We began adding overseas equity exposure a while back, as we saw better bargains emerging after a decade of underperformance. These bargains have become even better bargains, which is another way of saying they haven’t been great either.

• In recent years, cyclical holdings have found a home in our shop. Many of these have been affected by trade war talk and tariffs.

At the start of the year, we were focused on the years and decades ahead, as always. We prefer up years to down years, of course. But the best time frame for effective investing is one measured over many years. That is why we see this year so far as a hiccup—in the grand scheme of things, a momentary dislocation that will pass.

Paradoxically, those things that hold us back in the short run are often the things that provide above-average results in following periods. It has happened before; it will happen again. We counsel patience with our current holdings.

Clients, if you would like to talk about this or anything else, please email us, or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

 

There’s One Born Every Minute

© Can Stock Photo / stokkete

Here at 228 Main Street, we pride ourselves on having an elite clientele. Other advisors may brag about having richer or more famous clients. We prefer to enjoy having the wisest group of clients we could ask for.

Some financial types might see this as a drawback. If you are trying to trick someone into a sale, you want them as gullible as they come. But we are in this business for the long haul. If we resorted to tricking people, how long would they stick around? Even if we managed to string them along, they would only hang around until the next slick pitch.

We would rather find people who understand what we are about. It is simpler. The added benefit? It is easier to face ourselves in the mirror.

We are not in the business of selling to suckers. Radical transparency about who we are and what we do is the best way to make sure we are all on the same page. We do not believe in using manipulative sales tactics.

We do not sugarcoat our risks. Our investment philosophy carries risks. If you want safety and stability, you can open up a savings account at the bank. That is not what we are here for, and we will not pretend otherwise.

We do not promise returns. We have winning streaks and losing streaks. We hope to make the winning streaks outweigh the losing streaks. We are proud of the work we have done, but we make no guarantees.

We do not pretend to be a charity. We are not in business as a favor to you. When we buy groceries from our friend the grocer, he is providing us a service; when we do our work for you, we strive to do the same. But he does not do it out of the goodness of his heart, and neither do we.

Some of the pitches we have heard are so transparently phony it would be insulting to your intelligence if we were to use them on you.

We believe you are a member of a very select group. Clients, if you would like to discuss any aspect of your business, please call or email us.


 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Haunted Houses, Haunted Markets

© Can Stock Photo / AlienCat

As Halloween approaches every year, haunted houses sprout across the land. Their purpose is to surprise and scare you, to provoke fear and screams and chills. Sights and sounds and sensations are all used to create the illusion of horror and danger. People pay money for the experience.

We were reminded of this recently, listening to promotors of a canned sales pitch that began, “With all the uncertainty in the market…” The peddler’s aim was to create a sense of fear and danger about long term investing. The pitch seems cynical, since it is alleged to be appropriate in all market conditions.

People who succumb to scare tactics pay for the experience, too. The costs may be in foregone gains resulting from stagnant investments, or higher expenses from products that purport to provide stability.

A member of the best group of clients in the world (our opinion) told us recently about her response when another financial type promoted the fear of market uncertainty to her. “What market uncertainty? There is certainty in the market. It is certain to go up and down.”

Accepting volatility as an integral part of long term investing has been quite liberating for this person. She has been through market cycles, up years and down years, and she knows how it works. She lives a vibrant life in retirement, filled with sports, activities, friends, and travel. Worrying about things that cannot be changed does not fit in to her life.

One of the keys to her comfort is understanding that account balances are not what buys the groceries–cash flow does. Knowing where the cash is coming from allows her to live with the ups and downs of her account value. She keeps track of where she started, so she understands the magnitude of her cumulative gains over the years.

We are not saying that our approach, our philosophy, is right for everyone. If you prefer to believe the markets are scary, you may—it’s a free country. We are talking to our clients here, not debating those who disagree.

Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Change is Changing

© Can Stock Photo / PerseoMedusa

When we think about our lives, our work, and our leisure, it seems evident that the pace of change is accelerating. This is not a new idea. A 1970 best-selling book by Alvin and Heidi Toffler, Future Shock, first brought this idea into public consciousness—they argued that the rate of change was overwhelming for many people. The future was coming too quickly. And since then, things have only gotten faster.

Thinker Burt White spent time talking about change at the recent LPL Financial national conference. One of the lessons of change is that knowing about it is not good enough, he says: “You have to do something about it.”

We think about the evolution of the economy and the markets, the changing face of law and regulation, industry trends that affect us, and the unfolding needs of you, our clients. There are many sources of change!

Knowing that adaptability is the new superpower, as White says, we also think about how we survive change, or better yet, thrive in it. How do we “do something about it”? The answer, for us, has a number of parts.

• Focusing on your wellbeing helps us sort out what we need to do in seeking to improve your position in the years ahead. You know our theory has long been the better off you are, the better off we will ultimately be. Looking at change through this lens brings clarity about what we need to do.

• Planning to work to age 92 has perhaps given us the perspective of a younger, more vibrant enterprise. When others might be coasting toward retirement, seeking an exit, we are gearing up and planning for the decades ahead.

• Having a sophisticated institutional partner like LPL Financial is a boon. It feels as if they are creating the future of digital communications together with us. They are at the leading edge of new media in terms of support and training, in our opinion. Few colleagues employ these tools to the extent we do, to keep our connection to you.

The unfolding future, change and all, feels as if it were built for us. We like having the same story for everyone. Communicating at the speed of light is good for you and for us. And it is as gratifying as ever to work with you as you strive toward your goals.

Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Magic Phrases

canstockphoto6643802.jpg

A fresh-faced youngster in a cheap suit, I began in business working for a life insurance company. Its agent training program included the sales tactics common to that era, full of scripts and one-liners.

The conventional wisdom was that you had to take seven “no’s” from a prospect to get to the “yes.” Have you ever dealt with a sales person like that?

I learned how to irritate people to no end. Business was difficult.

It took me a while to realize that simply talking to people was a better way. The product was decent and had its uses: connecting in a genuine way made it possible to see if there was a fit or not. Trust went up, pressure went down. And there was no need to memorize sales tracks and magic phrases.

These early memories came back to me recently at a conference. One session featured a consultant who had some good ideas and interesting perspectives, though a lot of their program was never going to apply to us, since it was aimed at finding new clients. We strive to grow your buckets; new clients find us.

But their formula for greeting a referral for the first time took me back to those early sales days: “I’m calling as a courtesy…” In truth, the caller’s goal is to get in business with this prospective client. You know, close the deal, make the sale. Courtesy doesn’t enter into it.

This is how it sounded to me: “I’d like to start our relationship by pretending to do you a favor so you owe me one back.” This logic may work like magic on some people, but we are not here to manipulate anyone. The real magic is created together, through trust.

Clients, if you believe you would be helping a friend by introducing us, we will fit them in if they call. Or you can bring them along if we are having breakfast or lunch together. But we are not going to call them, nor pretend to do them a courtesy by doing so.

The better off you all are, the better off we will be, sooner or later. What goes around, comes around. When that is your agenda and your belief, pretense is unnecessary. Life is good—thank you for being part of ours. Email us or call if you would like to talk.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Connecting, Communicating, Caring

© Can Stock Photo / focalpoint

The third birthday of our 21st century communications program at 228Main.com is upon us. It is a natural time to look back, and think ahead.

When we started, there were things we wished each of you knew. Questions we answered over and over. Stories we told all the time. We wanted our values and principles to be available for inspection, anytime, at your convenience. And we wanted to tell you our thinking about strategy and tactics on a more timely basis.

But we also wanted to hear more from you. Interaction is a key feature of electronic communications and the new media. You reply to our email newsletters with questions or comments or service inquiries. You like or share or comment on the things we post on Facebook, LinkedIn, and Twitter.

The whole object was to talk to you in new ways. Others focus on how to attract new business, new customers—not us. We simply thought it was great to have our thoughts go to all clients at once, to your phones or computers, at the speed of light, for you to read at your leisure.

We are always looking for ways to improve, but it has been a success so far. We feel better-connected than ever. We were fortunate about one aspect: LPL Financial, with whom we are affiliated, is a sophisticated and strong supporter of the new media. (Not all investment firms are.) LPL provided a lot of information that helped us get started.

Now it seems as if we are creating the future together, out on the leading edge, building a reputation in the industry. But it is still all about talking to you.

We are committed to expanding our communications in ways that will make us more accessible to you. If you have anything you would like to share that might improve what we are doing, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Laying the Foundation

© Can Stock Photo / ermess

Burt White, one of the great thinkers of our age, presented at the recent LPL Financial annual conference. His observation? “Adaptability is the new superpower. The faster change happens, the quicker our experience expires.”

It is daunting to think about everything changing all the time. But as we pondered Burt White’s thoughts, we realized that while many things do change, some things do not. We see this in our framework of values, principles, strategy, and tactics.

Start with unchanging values, which give rise to the principles by which we live and work. Then you have a strong foundation from which you can adapt strategy and tactics to changing times, new opportunities, and developing threats. The unchanging things provide congruence and stability even (especially!) in the midst of change.

If what we do needs to change, where do we begin? Our principles, rising from our values, guide us at all times, in every condition. Strategy needs to adapt; tactics change even more frequently. But they are shaped and guided by the bedrock on which they are built.

And Burt White might have it: it may be that stable values and principles are more important than ever before. In the 19th century, a saddle-maker or blacksmith might have practiced the same trade the same way for an entire career. If there is no change, the process of adapting is unnecessary.

But if strategy expires more frequently today, then the values and principles that drive strategy are more important. Therefore, authenticity—being genuine regarding those values and principles, as consistently and openly as possible—might also be more important than ever before.

People may need a clear understanding of who we are, what makes us tick, in order to have faith that we will be able to adapt and thrive in a changing world.

Could straightforwardness—“what you see is what you get”—be the most valuable business skill of the 21st century?

We believe life is too short to spend any time trying to kid you. Our energy is finite, and we focus it on striving to be of value to you, not trying to maintain some pretense or other. We aren’t perfect, we make mistakes, we can offer no guarantees. But we are excited about the way the future is unfolding.

Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The URL – IRL Connection

© Can Stock Photo / Bialasiewicz

… or, where the virtual world and the real world meet. We often talk about these two places as if we must choose one or the other. The reality is that the two work together in many ways.

Fans in stadiums root for their favorite team IRL (“in real life”), but they may also have a source for instant replays or play-by-play through a browser on their smartphones.

IRL, a grandparent plays with a grandbaby. But that grandparent may also enjoy seeing that baby between visits on social media or a photo-sharing site or some other URL—the address that connects them to a website.

And we see you at 228 Main in beautiful downtown Louisville, B’s Diner, or Round The Bend live and in person. But we’re also reaching you here at 228Main.com, plus social media sites like Facebook, Twitter, and LinkedIn.

In other words, we lead integrated lives that combine the real world and a variety of virtual venues. It is not an either/or deal: we benefit when our lives have a home in both places!

It is worthwhile thinking about the advantages we derive from life in the 21st century. When we started communicating in new media, one client told us they would talk to us every day if they could, being interested in planning and investing. They knew that couldn’t happen. But they were delighted to find what we most wanted to say each day was online, plus in these three-minute essays twice each week.

A key advantage of these virtual venues: they do not require each of us to be available at exactly the same time. Nobody plays “phone tag” on Twitter. We frequently post updates early in the morning, but you can read them at your leisure or even on another day. And each of you may choose how much or how little you want.

That client and I still meet; we still have lunch together. And our real-world conversations start warmer and go deeper and farther than before—because of all we share in the virtual world.

Clients, if you would like to talk about this in any world, email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.