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Category Archives: Investment Management

Investment Shock Absorbers

February 2017 | By Jim Parker, Vice President DFA Australia Limited

Ever ridden in a car with worn-out shock absorbers? Every bump is jarring, every corner stomach-churning, and every red light an excuse to assume the brace position. Owning an undiversified portfolio can trigger similar reactions.

In a motor vehicle, the suspension system keeps the tires in contact with the road and provides a smooth ride for passengers by offsetting the forces of gravity, propulsion, and inertia.

You can drive a car with a broken suspension system, but it will be an extremely uncomfortable ride and the vehicle will be much harder to control, particularly in difficult conditions. Throw in the risk of a breakdown or running off the road altogether and there’s a real chance you may not reach your destination.

In the world of investment, a similarly bumpy and unpredictable ride can await those with concentrated and undiversified portfolios or those who constantly tinker with their allocation based on a short-term rough patch in the markets.

Of course, everyone feels in control when the surface is straight and smooth, but it’s harder to stay on the road during sudden turns and ups and downs in the market. And keep in mind the fix for your portfolio breaking down is unlikely to be as simple as calling a tow truck.

For that reason, the smart thing to do is to diversify, spreading your portfolio across different securities, sectors, and countries. That also means identifying the right mix of investments (e.g., stocks, bonds, real estate) that aligns with your risk tolerance, which helps keep you on track toward your goals.

Using this approach, your returns from year to year may not match the top performing portfolio, but neither are they likely to match the worst. More importantly, this is a ride you are likelier to stick with.

Just as drivers of suspensionless cars change their route to avoid potholes, people with concentrated portfolios may resort to market timing and constant trading as they try to anticipate the top-performing countries, asset classes, and securities.

Here’s an example to show how tough this is. Among developed markets, Denmark was number one in US dollar terms in 2015 with a return of more than 23%. But a big bet on that country the following year would have backfired, as Denmark slid to bottom of the table with a loss of nearly 16%.1

It’s true that the US stock market (by far the world’s biggest) has been a strong performer in recent years, holding the number three position among developed markets in 2011 and 2013, first in 2014, and sixth in 2016. But a decade before, in 2004 and 2006, it was the second worst-performing developed market in the world.1

Predicting which part of a market will do best over a given period is also tough. For example, while there is ample evidence to support why we should expect positive premiums from small cap, low relative price, and high profitability stocks, these premiums are not laid out evenly or predictably across the map. US small cap stocks were among the top performers in 2016 with a return of more than 21%. A year before, their results looked relatively disappointing with a loss of more than 4%. International small cap stocks had their turn in the sun in 2015, topping the performance tables with a return of just below 6%. But the year before that, they were the second worst with a loss of 5%.2

If you’ve ever taken a long road trip, you’ll know that conditions along the way can change quickly and unpredictably, which is why you need a vehicle that’s ready for the worst roads as well as the best. While diversification can never completely eliminate the impact of bumps along your particular investment road, it does help reduce the potential outsized impact that any individual investment can have on your journey

With sufficient diversification, the jarring effects of performance extremes level out. That, in turn, helps you stay in your chosen lane and on the road to your investment destination.

Happy motoring and happy investing.

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References:

  1. In US dollars. MSCI developed markets country indices (net dividends). MSCI data © MSCI 2017, all rights reserved
  2. . In US dollars. US Small Cap is the Russell 2000 Index. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. International Small Cap is the MSCI World ex USA Small Cap Index (gross dividends). MSCI data copyright MSCI 2017, all rights reserved.

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‘‘Outside the Flags’’ began as a weekly web column on Dimensional Fund Advisors’ website in 2006. The articles are designed to help fee-only advisors communicate with their clients about the principles of good investment—working with markets, understanding risk and return, broadly diversifying, and focusing on elements within the investor’s control—including portfolio structure, fees, taxes, and discipline. Jim’s flags metaphor has been taken up and recognized by Australia’s corporate regulator in its own investor education program.

Past performance is no guarantee of future results. There is no guarantee an investing strategy will be successful. Diversification does not eliminate the risk of market loss.

Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2017, all rights reserved.

All expressions of opinion reflect the author’s judgment at the date of publication and are subject to change without notice in reaction to shifting market conditions. This material is provided for informational purposes, and it is not to be construed as general financial product advice nor an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

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

©2016 Dimensional Fund Advisors LP. All rights reserved. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited.

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Article is for Informational purposes only and is provided courtesy of Dimensional Fund Advisors LP. 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 Larson Financial Group nor Larson Financial Securities does not and cannot 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 Larson Financial Group or its affiliates. Before taking action, please review the mutual fund prospectus and consult an appropriate investment professional regarding your specific needs.

This article is an authorized reprint from Dimensional Fund Advisors LP (“DFA”). The opinions stated are strictly those of the author and are not to be considered recommendation or advise of Larson Financial Group or Larson Financial Securities.

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

The preceding message is an advertisement of Larson Financial Group LLC.

Investing for Physicians

Distribution of US Market Returns

While no one can reliably predict the future, the past may offer perspective on recent market events and the long-term benefits of equity investing. The below chart shows the historical distribution of US market returns since 1926. The performance years are stacked in order of return range.

The graphic highlights that performance over the past two years has been extreme by historical standards, and that, over time, the market’s positive return years have outnumbered the negative return years, with positive performance more concentrated in the higher ranges of returns.

History shows that the stock market has rewarded investors who can bear the risk of stocks and stay committed through various periods of performance.

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CRSP data provided by the Center for Research in Security Prices, University of Chicago. The CRSP 1-10 Index measures the performance of the total US stock market, which it defines as the aggregate capitalization of all securities listed on the NYSE, AMEX, and NASDAQ exchanges. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

Investment Advice for Doctors

Do Morningstar Ratings Matter?

A common misconception amongst doctor investors is that their portfolio should only be composed of 4 and 5 star funds. In reality, these ratings are based only upon past performance and have no bearing on future returns. Consider the following investment advice for doctors:

investing for doctors

This graphic shows that actively managed funds that achieve top performance in one period typically do not repeat their success in a subsequent period.

The stacked graph at left sorts the Five-Star funds by cumulative 10-year performance relative to each fund’s benchmark (includes only those funds with a complete return history for the period). As shown, the five-star category comprises 403 funds. The right box shows how these five-star funds performed relative to their benchmarks in the subsequent 10-year period. The arrows indicate the movement of these top funds across categories.

Only 11% of the five-star funds repeated their top performance in the subsequent 10-year period. 68% of the funds dropped to the four, three, two and one-star categories. More significantly, 21% of the original five-star funds did not survive the entire subsequent period. These top managers, who were perceived as the most skilled in the US equity market, showed no ability as a group to repeat their top-quartile performance. Indeed, 21% did not survive, and the funds that did survive were spread across the sorted universe.

The lesson of this illustration: choosing actively managed equity funds according to past success does not guarantee an equally successful investment outcome in the future.

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

The information provided is for informational purposes only and should not be construed as a recommendation or advice. Further, this is not an offer to buy or sell securities or other products and services of Larson Financial Group or its affiliates. Please consult an appropriate investment professional regarding your specific needs.

4 Financially Responsible Habits to Adopt in the New Year

As we close the book on another year, there are certain goals and ideals we’d all like to shoot for in the next twelve months. This could mean taking on something new or phasing out something bad as a way of growing, changing or resolving to make this year better than the last.

For many, this process starts and ends with financial resolutions. Every physician could benefit from adopting just one of these as a New Year’s resolution, and in doing so will set themselves up for a more responsible and balanced financial year.

Emergency Reserve Funds

It’s been said: “Life changes in the blink of an eye.” Emergencies and catastrophes often have a way of developing when we’re least expecting them, and having adequate resources to deal with these unforeseen circumstances is key to a successful financial life. Some people might call this their “Rainy Day Fund.” Regardless of what you call it, it’s crucial to set aside some money for the unexpected expenses that life throws at you.

Forrest Friedow

Financial planners recommend you have a reserve fund equal to six months of your income. However, most physicians keep enough cash to cover about two or three months worth of monthly living expenses in a checking account or money market fund. They unwisely choose to supplement their emergency reserve by relying on a home equity line of credit, four-day access to their investment funds or some other unsecured line of credit. There’s no telling how much you’ll need or how urgently it will be needed, therefore it’s preferable that your emergency fund consists mostly of cash so you’ll be ready when the unexpected comes your way.

Stick to a Budget

Creating a budget is an often overlooked, yet critical way to get your finances in order. Start by dividing your expenses into five different categories:

  • Giving
  • Saving
  • Living
  • Medical School Debt Reduction
  • Taxes

Next, assign each category a percentage that is representative of your total income. In most cases, living expenses will account for at least 50% of your total budget. Besides living expenses, one is encouraged to allocate a percentage of each pay check towards saving money, paying down outstanding debts and charitable giving. As long as the percentages are properly balanced, this simple method can make your life a whole lot easier.

Create a Savings Target

It may sound simple, but spending less than you earn is a key component of the formula for financial success. Setting realistic fiscal goals allows you to determine the degree of sacrifice that is necessary to achieve them. It’s perfectly realistic to save for the future and still enjoy a comfortable lifestyle here and now. Every situation is different, and there is no exact dollar amount that works for everyone so it’s important to consider all the factors and variables at play.

A great deal depends on what type of lifestyle you desire when you reach retirement age. Most financial planners advocate setting aside 10% of your income to provide for retirement. Of course, the earlier you begin saving, the lower the percentage of income that is required to meet your goals. However, physicians by and large have ten less years to reach financial independence, which requires them to save their income at a higher rate.

Legacy of Giving

Financial success is not something to be taken for granted, and giving consistently to those less fortunate is a responsible way to manage your finances. Studies have shown that those who are generous with their time and wealth are happier, less stressed, live longer and feel more spiritually fulfilled.

For those who haven’t yet established their own philosophy for charitable giving, we offer a simple approach. Begin by giving away a set percentage of your after-tax paycheck, and make it a goal to increase that percentage every year if only slightly. Find a cause you are passionate about, but also keep in mind that by donating to certain organizations you could be eligible for a tax deduction in the near future.

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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 was provided by Forrest Friedow, Regional Director and Senior Financial Advisor of Larson Financial Group. The opinions stated are strictly those of the author and are not to be considered recommendations or advice of Larson Financial Group or Larson Financial Securities.

Developing a Plan to Save for your Child’s College Education

Provided By Matt Harlow, CFA, Chief Investment Officer at Larson Financial Group

As seen in St. Louis Medical News

For many parents, providing a better future for your children is of the utmost importance. A college education is still an effective way for young adults to pursue their passion and get ahead in life. By funding their college education, you’re helping lay some groundwork for your children to make a successful transition into adulthood by minimizing the need to carry student loan debt.

Currently, the cost of higher education is consistently rising. In fact, College Board statistics show that over the past 30 years the average annual increase for college tuition is 3% to 5% above the rate of inflation. This can make projecting the amount to save for college difficult. This problem may be alleviated by performing some due diligence.

How Much Should Be Funded?

As a physician, there is a chance your family won’t be eligible for any need-based financial aid from the government or a university due to a high net income. It falls on you to decide what savings methods to utilize while weighing factors that can impact education costs. For example, the difference between public and private tuition can be substantial, so you need to plan accordingly.

Medical School Debt

The appropriate amount to save is different for every family depending on your circumstances, values and the needs of your child. Some families target a set dollar amount that they’d like to put aside for their child’s educational needs which allows for flexibility when it comes to controlling cost. If the cost of college ends up being less than the amount saved, the child may be able to apply the excess funds towards graduate school.

Other families take a set-savings approach where they designate a certain amount of their monthly or annual discretionary income towards funding education expenses. Some or all of this money may go into a tax-advantaged account, and whatever accumulates is the financial assistance provided by the parents. You can typically increase or decrease the amount diverted to these accounts as cash flow permits.

In addition to tuition and room and board, students will need about $3,000 to $5,000 throughout the school year. This extra money is needed for books, additional meals, laundry, cell phone, travel home, a computer, a printer and various other expenses. You can proactively develop a college spending plan by listing each category of expense and targeting a total dollar amount they’ll expect to need annually. If you won’t be providing a monthly allowance, make sure your child has a sense of how much money they will need to earn over the summer or in part-time jobs during school.

Investment Philosophy

Once you’ve determined how much of their education you want to cover, the next step is to decide which investment methods are the best fit for your situation. Conventional wisdom may suggest that you take an “age-based” approach to saving for college. However, our experience has shown that age-based portfolios many times offer less opportunity to meet the goals you’ve set for your children’s education fund. For many situations, simply using a conservative portfolio during the entire funding and accumulation period prior to your child attending college often outperforms the conventional wisdom.

It may be an option to spend any savings you have accumulated in non-retirement accounts. For example, if you are planning to sell stock to fund you child’s education expenses, you may consider gifting that stock to the student because they’ll typically pay a lower capital gains tax when they sell it. As a result, appreciated assets transferred to students often yield more than the same amount of appreciated assets sold by a parent. Also, consider cashing in any savings bonds you and your child may own. They usually have low interest rates, and savings bonds purchased after 1989 are tax-advantaged if used to pay for education expenses.

Unlike retirement accounts, which usually have more time to recover in the event of a bumpy stretch in the market, education funds are typically exhausted within a few years once distributions begin. Meaning, you’re taking a comparable amount of risk without as much opportunity for reward. This is why we prefer analyzing your retirement portfolio separately from your education portfolio, and often have separate investment strategies for each.

You’re encouraged to speak with a financial advisor familiar with the factors that are unique to your family’s situation before taking action. The important thing to remember is that education planning should be reconciled with your own financial independence needs. Generally, you should avoid taking a loan from your 401(k) plan for your child’s education. These loans typically need to be paid off when changing jobs, and unpaid 401(k) loan balances are treated as taxable withdrawals.

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The information presented is for informational purposes only, and is not to be construed as legal, tax advice, or otherwise. The material is based on information believed to be reliable but is not guaranteed. Before making any important financial, legal or tax decision, it is always recommended to seek advice of a qualified representative who can address how this relates to your own personal and specific situation.

Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC. Tax services offered through MedTax, an affiliated company.