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Author Archives: LarsonFinancial

The Happiness Equation

Brad Steiman, Director, Head of Canadian Financial Advisor Services, Vice President

To say that “money isn’t everything” is more than a cliché. Studies in the early 1970s demonstrated that a sense of well-being, or happiness, had not increased commensurately with income over the previous half century.

That trend continues as the modern world has arguably made well being more elusive than ever. Fortunately, positive psychology arose in the 1990s, attempting to find the key to understanding what makes people flourish. It has spawned the so-called happiness literature that seeks modern truth by weaving together science and ancient wisdom. How to be happier is now the most popular course at Harvard and Yale.

Business people and entrepreneurs are also contemplating some of these age-old questions. Mo Gawdat, a serial entrepreneur and Chief Business Officer at Google X, tried to engineer a path to joy in his book, Solve for Happy, by expressing happiness as an equation.

HAPPINESS ≥ Your Perception of the EVENTS of your life − Your EXPECTATIONS of how life should behave

According to Gawdat’s model, if you perceive events as equal to or greater than your expectations, then you’re happy—or at least not unhappy.

Investors wanting to increase their wealth and well-being should consider his model. You can’t control many events that affect your portfolio, but events themselves are not part of the equation. Fortunately, you have some control over the two variables driving happiness—your perception of the events and your expectations.

EXPECTATIONS

First, let’s review some fundamentals about expectations in the financial markets.

1. Stocks have higher expected returns than safer investments like Treasury bills.

If it is widely known that stocks are riskier, prices should reflect that information, and, for the market to clear, investors are incented to bear that risk with higher expected returns. The higher expected return for stocks is known as the equity premium and, historically, it has been about 8% annually in the US.


 

2. All stocks don’t have the same expected return.

 

The price of a good and service is set by market forces and results from many inputs, such as the costs of raw materials, labor, shipping, and advertising, as well as competition and perceived value. As a consumer, you don’t need to understand all the inputs to make an informed purchase. You look at the price relative to alternatives in the market and ask if the product is worth the price—and the lower the price or the more you get, either in quality or quantity, the better the purchase.

Similarly, a stock’s price has many inputs. Expectations about future profits, different types of risk, and investor preferences are just a few examples, but you don’t need a model to understand all those inputs or how they impact market prices. All available information should already be reflected in the price, which tells you something about expected returns. Whether you are a consumer or an investor, you want to pay less and receive more.

Therefore, expected returns are a function of the price you pay and cash flows you expect to receive. Companies that are smaller and more profitable, with lower relative prices, have higher expected returns than those that are larger and less profitable, with high relative prices. These patterns are referred to as size, profitability, and value premiums. They have historically ranged from slightly more than 3.5% to just under 5% in the US.


3. Expected premiums are positive but not guaranteed.

Although expected premiums are always positive, realized premiums may be positive in some years and negative in others. You may even experience a negative premium for several years in a row. Exhibit 1 illustrates that the probability of a positive small cap premium over one year is only slightly more than a coin flip, and it is roughly 65% for the equity premium.

The probability of earning a positive premium also increases with your time horizon, but it isn’t a sure thing since underperformance is possible over any time frame. Nobel laureate Paul Samuelson said, “In competitive markets there is a buyer for every seller. If one could be sure that a price will rise, it would have already risen.”

PERCEPTION

The other half of the equation is your perception of an event.

Consider an event, such as realizing a negative premium over 10 years, a time frame that some investors consider long term. This is not just a hypothetical exercise, because, as shown in Exhibit 2, the cumulative value premium has been negative for the past 10 years in the US, while the market and size premiums were negative in the 10-year periods ending in 2009 and 1999, respectively.

Lengthy periods of underperformance are disappointing, as investors obviously prefer higher rather than lower returns. Nonetheless, disappointment shouldn’t turn into anger or regret if you know in advance that periods like these will occur and recognize you can’t predict them.

Ancient wisdom teaches acceptance, as resistance often fuels anxiety. Instead of resisting periods of underperformance, which might cause you to abandon a well-designed investment plan, try to lean into the outcome. Embrace it by considering that if positive premiums were absolutely certain, even over periods of 10 years or longer, you shouldn’t expect those premiums to materialize going forward. Why is this? Because in a well-functioning capital market, competition would drive down expected returns to the levels of other low-risk investments, such as short-term Treasury bills. Risk and return are related.

The good news is there are sensible and empirically sound ways to increase expected returns. The bad news is there will be periods of underperformance along the way.

Your happiness as an investor depends on how your perception of events stack up against your expectations. Proper expectations alongside the appropriate perception can help you stay the course and may improve your wealth and well-being.

As David Booth, Executive Chairman and founder of Dimensional, says, “The most important thing about an investment philosophy is having one you can stick with.”


Have Questions?

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
Investing involves risk and the possible loss of principal, and there is no guarantee strategies will be successful.
Diversification does not eliminate the risk of market loss.
Small and micro cap securities are subject to greater volatility than those in other asset categories.
International and emerging markets investing involves special risks, such as currency fluctuation and political instability. Investing in emerging
markets may accentuate these risks.
Sector-specific investments focus on a specific segment of the market, which can increase investment risks.
Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund
Advisors LP.
All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer,
solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior
to making any investment decision.

Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.
Financial markets is a complicated issue and cannot be fully covered within the context of this article. This article should not be construed as market advice. Please contact a qualified financial professional with knowledge about your specific needs.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.

This article is for Informational purposes only and is an authorized reprint from Dimensional Fund Advisors LP (“DFA”). Larson Financial Group (“LFG”) and Larson Financial Securities (“LFS”) are separate from and unaffiliated with DFA. LFS has entered into a selling agreement with DFA whereby LFS may sell and receive compensation for the sale of DFA funds. Material is believed current and accurate but is not guaranteed. Investments are subject to various market, political, currency, economic, and business risks, and may not always be profitable; further, neither LFG nor LFS guarantee financial or investment results. This material is not to be construed as an offer to buy or sell securities or other products and services of LFG or its affiliates. Before taking action on a financial plan, please review any offering documents available, including prospectus and consult an appropriate investment professional regarding your specific needs. Past performance is not an indicator of future results. Note: you can change “article” to article depending on the forum being used.

The ABCs of Education Investing

With school back in session in most of the country, many parents are likely thinking about how best to prepare for their children’s future college expenses. Now is a good time to sharpen one’s pencil for a few important lessons before heading back into the investing classroom to tackle the issue.

THE CALCULUS OF PLANNING FOR FUTURE COLLEGE EXPENSES

According to recent data published by the College Board, the annual cost of attending college in the US in 2017–2018 averaged $20,770 at public schools, plus an additional $15,650 if one is attending from out of state. At private schools, tuition and fees averaged $46,950.

It is important to note that these figures are averages, meaning actual costs will be higher at certain schools and lower at others. Additionally, these figures do not include the separate cost of books and supplies or the potential benefit of scholarships and other types of financial aid. As a result, actual education costs can vary considerably from family to family.

To complicate matters further, the amount of goods and services $1 can purchase tends to decline over time. This is called inflation. One measure of inflation looks at changes in the price level of a basket of goods and services purchased by households, known as the Consumer Price Index (CPI). Tuition, fees, books, food, and rent are among the goods and services included in the CPI basket. In the US over the past 50 years, inflation measured by this index has averaged around 4% per year.1 With 4% inflation over 18 years, the purchasing power of $1 would decline by about 50%. If inflation were lower, say 3%, the purchasing power of $1 would decline by about 40%. If it were higher, say 5%, it would decline by around 60%.

While we do not know what inflation will be in the future, we should expect that the amount of goods and services $1 can purchase will decline over time. Going forward, we also do not know what the cost of attending college will be. But again, we should expect that education costs will likely be higher in the future than they are today. So, what can parents do to prepare for the costs of a college education? How can they plan for and make progress toward affording those costs?

DOING YOUR HOMEWORK ON INVESTING

To help reduce the expected costs of funding future college expenses, parents can invest in assets that are expected to grow their savings at a rate of return that outpaces inflation. By doing this, college expenses may ultimately be funded with fewer dollars saved. Because these higher rates of return come with the risk of capital loss, this approach should make use of a robust risk management framework. Additionally, by using a tax-deferred savings vehicle, such as a 529 plan, parents may not pay taxes on the growth of their savings, which can help lower the cost of funding future college expenses.

While inflation has averaged about 4% annually over the past 50 years, stocks (as measured by the S&P 500 Index) have returned around 10% annually during the same period. Therefore, the “real” (inflation-adjusted) growth rate for stocks has been around 6% per annum. Looked at another way, $10,000 of purchasing power invested at this rate over the course of 18 years would result in over $28,000 of purchasing power later on. We can expect the real rate of return on stocks to grow the purchasing power of an investor’s savings over time. We can also expect that the longer the horizon, the greater the expected growth. By investing in stocks, and by starting to save many years before children are college age, parents can expect to afford more college expenses with fewer savings.

It is important to recognize, however, that investing in stocks also comes with investment risks. Like teenage students, investing can be volatile, full of surprises, and, if one is not careful, expensive. While sometimes easy to forget during periods of increased uncertainty in capital markets, volatility is a normal part of investing. Tuning out short-term noise is often difficult to do, but historically, investors who have maintained a disciplined approach over time have been rewarded for doing so.

RISK MANAGEMENT AND DIVERSIFICATION: THE FRIENDS YOU SHOULD ALWAYS SIT WITH AT LUNCH

Working with a trusted advisor who has a transparent approach based on sound investment principles, consistency, and trust can help investors identify an appropriate risk management strategy. Such an approach can limit unpleasant (and often costly) surprises and ultimately may contribute to better investment outcomes.

A key part of maintaining this discipline throughout the investing process is starting with a well-defined investment goal. This allows for investment instruments to be selected that can reduce uncertainty with respect to that goal. When saving for college, risk management assets (e.g., bonds) can help reduce the uncertainty of the level of college expenses a portfolio can support by enrollment time. These types of investments can help one tune out short‑term noise and bring more clarity to the overall investment process. As kids get closer to college age, the right balance of assets is likely to shift from high expected return growth assets to risk management assets.

Diversification is also a key part of an overall risk management strategy for education planning. Nobel laureate Merton Miller used to say, “Diversification is your buddy.” Combined with a long-term approach, broad diversification is essential for risk management. By diversifying an investment portfolio, investors can help reduce the impact of any one company or market segment negatively impacting their wealth. Additionally, diversification helps take the guesswork out of investing. Trying to pick the best performing investment every year is a guessing game. We believe that by holding a broadly diversified portfolio, investors are better positioned to capture returns wherever those returns occur.

CONCLUSION

Higher education may come with a high and increasing price tag, so it makes sense to plan well in advance. There are many unknowns involved in education planning, and no “one-size-fits-all” approach can solve the problem. By having a disciplined approach toward saving and investing, however, parents can remove some of the uncertainty from the process. A trusted advisor can help parents craft a plan to address their family’s higher education goals.

Have Questions?

Source: US Department of Labor, Bureau of Labor Statistics, Economic Statistics.

There is no guarantee investing strategies will be successful. Investing risks include loss of principal and fluctuating value.

Diversification neither assures a profit nor guarantees against loss in a declining market.

Risks include loss of principal and fluctuating value. Investment value will fluctuate, and shares, when redeemed, may be worth more or less than original cost.

The S&P data is provided by Standard & Poor’s Index Services Group.

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.
Tax loss harvesting is a complicated issue and cannot be fully covered within the context of this article. This article should not be construed as tax advice. Please contact a qualified tax professional with knowledge about your specific needs.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.

This mode of content is for Informational purposes only and is an authorized reprint from Dimensional Fund Advisors LP (“DFA”). Larson Financial Group (“LFG”) and Larson Financial Securities (“LFS”) are separate from and unaffiliated with DFA. LFS has entered into a selling agreement with DFA whereby LFS may sell and receive compensation for the sale of DFA funds. Material is believed current and accurate but is not guaranteed. Investments are subject to various market, political, currency, economic, and business risks, and may not always be profitable; further, neither LFG nor LFS guarantee financial or investment results. This material is not to be construed as an offer to buy or sell securities or other products and services of LFG or its affiliates. Before taking action on a financial plan, please review any offering documents available, including prospectus and consult an appropriate investment professional regarding your specific needs. Past performance is not an indicator of future results. Note: you can change “article” to article depending on the forum being used.

Saving for Retirement

 

How much should you save for retirement? Marlena Lee, PhD, discusses important factors that can help you meet your goals, like determining your savings rate, monitoring your progress, and making adjustments over time.

 

 


Have Questions?

Advisory services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, member FINRA/SIPC.

This video is for Informational purposes only and is an authorized reprint from Dimensional Fund Advisors LP (“DFA”). Larson Financial Group (“LFG”) and Larson Financial Securities (“LFS”) are separate from and unaffiliated with DFA. LFS has entered into a selling agreement with DFA whereby LFS may sell and receive compensation for the sale of DFA funds. Material is believed current and accurate but is not guaranteed. Retirement plans are subject to various market, political, currency, economic, and business risks, and may not always be profitable; further, neither LFG nor LFS guarantee financial or investment results. This material is not to be construed as an offer to buy or sell securities or other products and services of LFG or its affiliates. Before taking action on a financial plan, please review any offering documents available, including prospectus and consult an appropriate investment professional regarding your specific needs. Past performance is not an indicator of future results.

The Tao of Wealth Management

July 13, 2018

Jim Parker, Vice President
DFA Australia Limited, a subsidiary of Dimensional Fund Advisors LP

The path to success in many areas of life is paved with continual hard work, intense activity, and a day-to-day focus on results. However, for many investors who adopt this approach to managing their wealth, that can be turned upside down.

The Chinese philosophy of Taoism has a phrase for this: “wei wu-wei.” In English, this translates as “do without doing.” It means that in some areas of life, such as investing, greater activity does not necessarily translate into better results.

In Taoism, students are taught to let go of things they cannot control. To use an analogy, when you plant a tree, you choose a sunny spot with good soil and water. Apart from regular pruning, you let the tree grow.

This doesn’t mean that we should always do nothing. In fact, insights from financial science suggest you should direct your investment efforts to the things you can control. These include taking account of your own preferences and sensitivities when choosing investment strategies, diversifying your allocation to moderate the ups and downs, being mindful of the impact of fees, and exercising discipline when emotions threaten to blow you off course.

Successful investing requires taking actions that can have a positive impact on the outcome. For instance, to maintain their desired asset allocation, investors should regularly rebalance their portfolio by reallocating money away from strongly performing assets.

But rebalancing is a disciplined, premeditated activity based on each person’s circumstances. It contrasts with the “busyness” of reflexively following investment trends and chasing past returns promoted through financial media. Look at the person who fitfully watches business TV or who sits up at night researching stock tips. That sort of activity is likely counter-productive and can add cost without any associated benefit. With investing, constantly tinkering with an allocation does not perfectly correlate with success.

Now, while that makes sense, many people struggle to apply those principles because the media tends to look at investing through a different lens, focusing on today’s news, which is already priced in, or on speculating about tomorrow. Guesswork can surely be interesting. But is it relevant to your long-term plan? Probably not.

People caught up in the day-to-day may constantly switch money managers based on past performance,or attempt tactical changes in their allocation, or respond in a knee-jerk way to news events that turn out to be noise.

Again, the assumption underlying these approaches is that if you put more effort into the external factors and adjust your position constantly, you will get better results. Unfortunately, people may end up earning poorer long-term returns from trading too much, chasing past performers, or attempting to time the market. Ultimately, that’s just another reminder of the potential benefits available to disciplined investors who stay focused on what they can control.

As the ancient Chinese proverb says: “By letting it go, it all gets done. The world is won by those who let it go. But when you try and try, the world is beyond the winning.”

Are you ready to talk over your wealth management strategy?

Past performance is not a guarantee of future results. There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision. Diversification does not eliminate the risk of market loss.
All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
Advisory services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, member FINRA/SIPC.
This handout is for Informational purposes only and is an authorized reprint from Dimensional Fund Advisors LP (“DFA”).
Larson Financial Group (“LFG”) and Larson Financial Securities (“LFS”) are separate from and unaffiliated with DFA. LFS has entered into a selling agreement with DFA whereby LFS may sell and receive compensation for the sale of DFA funds. Material is believed current and accurate but is not guaranteed.
Investments are subject to various market, political, currency, economic, and business risks, and may not always be profitable; further, neither LFG nor LFS guarantee financial or investment results.
This material is not to be construed as an offer to buy or sell securities or other products and services of LFG or its affiliates. Before taking action on a financial plan, please review any offering documents available, including prospectus and consult an appropriate investment professional regarding your specific needs. Past performance is not an indicator of future results.

E+R=O, a Formula for Success

Combining an enduring investment philosophy with a simple formula that helps maintain investment discipline can increase the odds of having a positive financial experience.

“The important thing about an investment philosophy is that you have one you can stick with.”

-David Booth Founder and Executive Chairman

 

AN ENDURING INVESTMENT PHILOSOPHY

 

Investing is a long-term endeavor. Indeed, people will
spend decades pursuing their financial goals. But being
an investor can be complicated, challenging, frustrating,
and sometimes frightening. This is exactly why, as
David Booth says, it is important to have an investment
philosophy you can stick with, one that can help you
stay the course.

This simple idea highlights an important question:
How can we, as investors, maintain discipline through
bull markets, bear markets, political strife, economic
instability, or whatever crisis du jour threatens progress
towards our investment goals?

Over their lifetimes, investors face many decisions,
prompted by events that are both within and outside
their control. Without an enduring philosophy to inform their choices, they can potentially suffer unnecessary
anxiety, leading to poor decisions and outcomes that
are damaging to their long-term financial well-being.

When they don’t get the results they want, many
investors blame things outside their control. They might
point the finger at the government, central banks,
markets, or the economy. Unfortunately, the majority
will not do the things that might be more beneficial—
evaluating and reflecting on their own responses to
events and taking responsibility for their decisions.

 

e + r = o

 

Some people suggest that among the characteristics
that separate highly successful people from the rest
of us is a focus on influencing outcomes by controlling
one’s reactions to events, rather than the events
themselves. This relationship can be described in
the following formula:

 

e + r = o (Event + Response = Outcome)

 

Simply put, this means an outcome—either positive
or negative—is the result of how you respond to an
event, not just the result of the event itself. Of course,
events are important and influence outcomes, but not exclusively. If this were the case, everyone would
have the same outcome regardless of their response.

Let’s think about this concept in a hypothetical
investment context. Say a major political surprise,
such as Brexit, causes a market to fall (event). In a
panicked response, potentially fueled by gloomy media
speculation of the resulting uncertainty, an investor sells
some or all of his or her investment (response). Lacking
a long-term perspective and reacting to the shortterm
news, our investor misses out on the subsequent
market recovery and suffers anxiety about when, or
if, to get back in, leading to suboptimal investment
returns (outcome).

To see the same hypothetical example from a different
perspective, a surprise event causes markets to fall
suddenly (e). Based on his or her understanding of the
long-term nature of returns and the short-term nature
of volatility spikes around news events, an investor is
able to control his or her emotions (r) and maintain
investment discipline, leading to a higher chance of
a successful long-term outcome (o).

This example reveals why having an investment
philosophy is so important. By understanding how
markets work and maintaining a long-term perspective
on past events, investors can focus on ensuring that
their responses to events are consistent with their
long-term plan.

THE FOUNDATION OF AN
ENDURING PHILOSOPHY

An enduring investment philosophy is built on solid
principles backed by decades of empirical academic
evidence. Examples of such principles might be:
trusting that prices are set to provide a fair expected
return; recognizing the difference between investing
and speculating; relying on the power of diversification
to manage risk and increase the reliability of outcomes;
and benchmarking your progress against your own
realistic long-term investment goals.

Combined, these principles might help us react better
to market events, even when those events are globally
significant or when, as some might suggest, a paradigm
shift has occurred, leading to claims that “it’s different
this time.” Adhering to these principles can also help
investors resist the siren calls of new investment fads
or worse, outright scams.

THE GUIDING HAND OF A TRUSTED ADVISOR

 

Without education and training—sometimes gained
from bitter experience—it is hard for non-investment
professionals to develop a cogent investment
philosophy. And, as we have observed, even the most
self-aware find it hard to manage their own responses
to events. This is why a financial advisor can be so
valuable—by providing the foundation of an investment
philosophy and acting as an experienced counselor
when responding to events.

Dimensional has an enduring investment philosophy
that is shared by the advisors we work with and is the
foundation for how we view the world of investing.
We trust in the power of markets to deliver reliable
returns over time and focus our efforts on helping
investors benefit from as much of the return of the
market as possible.

We know that investing will always be both alluring and
scary at times, but a view of how to approach investing
combined with the guidance of a professional advisor
can help people stay the course through challenging
times. Advisors can provide an objective view and help
investors separate emotions from investment decisions.
Moreover, great advisors can educate, communicate,
set realistic financial goals, and help their clients
deal with their responses even to the most extreme
market events.

In the spirit of the e + r = o formula, good advice, driven
by a sound philosophy, can help increase the probability
of having a successful financial outcome.

Have Questions?


Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Past performance is no guarantee of future results. There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services.


Advisory services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, member FINRA/SIPC.

This handout is for Informational purposes only and is an authorized reprint from Dimensional Fund Advisors LP (“DFA”). Larson Financial Group (“LFG”) and Larson Financial Securities (“LFS”) are separate from and unaffiliated with DFA. LFS has
entered into a selling agreement with DFA whereby LFS may sell and receive compensation for the sale of DFA funds. Material
is believed current and accurate but is not guaranteed. Investments are subject to various market, political, currency,
economic, and business risks, and may not always be profitable; further, neither LFG nor LFS guarantee financial or
investment results. This material is not to be construed as an offer to buy or sell securities or other products and services of
LFG or its affiliates. Before taking action on a financial plan, please review any offering documents available, including
prospectus and consult an appropriate investment professional regarding your specific needs. Past performance is not an
indicator of future results.