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Category Archives: Investment Management

Determining the Value of Financial Advice

Have you ever speculated about how much better off your portfolio would be under the careful stewardship of a financial advisor? It’s difficult to quantify, but a recent study by the world’s largest mutual fund company attempted to put a numerical value on expert financial advice. What they found is that you can potentially add up to 3% in net returns over time when working with an advisor that adheres closely to best practices.

Financial Planning for Physicians

 

While there are many different philosophies and schools of thought when it comes to portfolio management, certain methods are universally recognized as the foundation of a sound investment strategy. For example, diversification is an effective way of spreading your risk across a wide range of asset classes such as local and global bonds, domestic and developed market equities and emerging markets. However, these standard practices can only take a portfolio so far. Strategic investors differentiate themselves by following these seven wealth management principals:

  • Maintaining a long-term, disciplined approach: Investing is a marathon, not a sprint. Advisors can help their clients see the big picture by essentially coaching them to evaluate their portfolio in a long-term context instead of seeking instant gratification. Investing is an inherently emotional experience, so advisors have to maintain a disciplined approach that avoids the temptation of chasing returns.
  • Applying an Asset Location Strategy: The coordination of assets between taxable and tax-advantaged accounts can add value to your portfolio every year that builds up quickly. A properly structured portfolio will hold broad-market equity investments in taxable accounts while holding taxable bonds within tax-advantaged accounts. Doing this generates higher and more certain returns by spreading the yield between taxable and municipal bonds.
  • Asset Allocation: Most firms request that their clients fill out an investment policy statement that outlines the financial objectives of the portfolio. Having this blueprint in place provides a solid foundation for the advisor/client relationship. Not only does it allow them to adopt an investment philosophy and embrace it with confidence, but it also makes enduring the inevitable ups and downs of the market a little more tolerable.
  • Employing Cost-Effective Investments: Advisors constantly seek ways to control costs so they can efficiently deliver higher-than-expected returns. Every dollar spent on management fees, trading costs and taxes is a dollar less for your potential net return. By paying less you are essentially keeping more, regardless of how the market is performing in general.
  • Maintaining Proper Allocation Through Rebalancing: Risk tolerance is different for every investor. It’s up to the advisor to reconcile the risk/return characteristics of a portfolio with the client’s appetite for taking risks. The objective of a properly implemented rebalancing strategy is to minimize risk, rather than maximizing return.
  • Implementing a Spending Strategy: When the time comes to divest your portfolio, it’s important to consider this income in the context of your estate so that tax liabilities are minimized. The acceleration of income taxes and the resulting loss of tax-deferred growth can negatively affect a portfolio. An informed withdrawal order strategy will minimize the total taxes paid when a client reaches retirement which ultimately increases the wealth and longevity of their portfolio.
  • Investing Income Vs. Total Returns: Ideally, an investor could live off the returns generated from their holdings, but that often sacrifices the tax efficiency of the portfolio in the process. Ultimately, this increases the portfolio’s risk by becoming too concentrated in certain sectors which could potentially reduce the lifespan of the portfolio. For retirees to avoid the risk of falling short of their long-term financial goals, experts advocate an approach that considers both income and capital appreciation.

 

Active fund managers haven’t been able to consistently outperform benchmarks despite having a wealth of experience and resources at their disposal. The value of every advisor varies based on each client’s unique circumstances and the way the assets are actually managed. Ideally, you want a responsive advisor that you can trust with your financial future.

Transparency is critical, but you also want to make sure that you’re receiving truly independent advice. This means avoiding the recommendations of someone who is receiving a financial incentive from the provider of the product they are promoting. You don’t want to contract with advisors that are sales representatives for a particular company. The ideal advisor is independent and committed to a fiduciary relationship with their clients.

A fiduciary relationship is defined as “one founded on trust or confidence reposed by one person in the integrity and fidelity of another.” Although this standard is not required by law, an advisor pledging to make recommendations solely with the client’s best interests in mind will be able to manage your portfolio as objectively as possible. This standard of conduct includes controlling excess costs such as transaction fees, taxes and efficiency in implementation.

Markets are uncertain and cyclical, but a disciplined approach to investing will yield better results over the long run. An advisor that will work tirelessly on your behalf day-in and day-out to provide the highest level of service possible will allow you to have peace of mind and confidence that the foundation for a secure financial future is in place.

Have Questions?

The projections or other information included in the linked report prepared by Vanguard regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Although we believe the information contained in the linked report to be accurate, we can’t guarantee its accuracy.

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

Connecting the Dots

April 16, 2014 | By Jim Parker

Human beings love stories. But this innate tendency can lead us to imagine connections between events where none really exist. For financial journalists, this is a virtual job requirement. For investors, it can be a disaster.

“The Australian dollar rose today after Westpac Bank dropped its forecast of further central bank interest rate cuts this year,” read a recent lead story on Bloomberg.

Needing to create order from chaos, journalists often stick the word “after” between two events to imply causation. In this case, the implication is the currency rose because a bank had changed its forecast for official interest rates.

Perhaps it did. Or perhaps the currency was boosted by a large order from an exporter converting US dollar receipts to Australia or by an adjustment from speculators covering short positions. Markets can move for many reasons.

Likewise from another news organization, we recently heard that “stocks on Wall Street retreated today after an escalation of tensions in the Ukraine.”

Again, how do we know that really was the cause? What might have happened is a trader answered a call from a journalist asking about the day’s business and tossed out Ukraine as the reason for the fall because he was watching it on the news.

Sometimes, journalists will throw forward to an imagined market reaction linked to an event which has yet to occur: “Stocks are expected to come under pressure this week as the US Federal Reserve meets to review monetary policy settings.”

For individual investors, financial news can be distracting. All this linking of news events to very short-term stock price movements can lead us to think that if we study the news closely enough we can work out which way the market will move.

But the jamming of often-unconnected events into a story can lead us to mix up causes and effects and focus on all the wrong things. The writer and academic Nassim Taleb came up with a name for this story-telling imperative: the narrative fallacy.

The narrative fallacy, which is linked to another behavior called confirmation bias, refers to our tendency to seize on vaguely coherent explanations for complex events and then to interpret every development in that light.

These self-deceptions can make us construct flimsy, if superficially logical, stories around what has happened in the markets and project it into the future.

The financial media does this because it has to. Journalists are professionally inclined to extrapolate the incidental and specific to the systematic and general. They will often derive universal patterns from what are really just random events.

Building neat and tidy stories out of short-term price changes might be a good way to win ratings and readership, but it is not a good way to approach investment.

Of course, this is not to deny that markets can be noisy and imperfect. But trying to second-guess these changes by constructing stories around them is a haphazard affair and can incur significant cost. Essentially, you are counting on finding a mistake before anyone else. And in highly competitive markets with millions of participants, that’s a tall order.

There is a saner approach, one that doesn’t require you spending half your life watching CNBC and checking Bloomberg. This approach is methodical and research-based, a world away from the financial news circus.

The alternative consists of looking at data over long time periods and across different countries and multiple markets. The aim is to find factors that explain differences in returns. These return “dimensions” must be persistent and pervasive. Most of all, they must be cost-effective to capture in real-world portfolios.

This isn’t a traditionally active investment style where you focus on today’s “story” and seek to profit from mistakes in prices, nor is it a passive index approach where you seek to match the returns of a widely followed benchmark.

This is about building highly diversified portfolios around these dimensions of higher expected returns and implementing consistently and at low cost. It’s about focusing on elements within your control and disregarding the daily media noise.

Admittedly, this isn’t a story that’s going to grab headlines. Using the research-based method and imposing a very high burden of proof, this approach resists generalization, simplification, and using one-off events to jump to conclusions.

But for most investors, it’s the right story.

Have Questions?

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

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This content is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

Copyright © 2014 by Dimensional Fund Advisors LP. All Rights Reserved

Seven Ways to Fool Yourself

April 8, 2014 | By Jim Parker, Vice President DFA Australia Limited

The philosopher Ludwig Wittgenstein once said that nothing is as difficult for people as not deceiving themselves. But while most self-delusions are relatively costless, those relating to investment can come with a hefty price tag.

We delude ourselves for a number of reasons, but one of the principal causes is a need to protect our own egos. So we look for external evidence that supports the myths we hold about ourselves, and we dismiss those facts that are incompatible.

Psychologists call this “confirmation bias”—a tendency to select facts that suit our own internal beliefs. A related ingrained tendency, known as “hindsight bias,” involves seeing everything as obvious and predictable after the fact.

These biases, or ways of protecting our egos from reality, are evident among many investors every day and are often encouraged by the media.

Here are seven common manifestations of how investors fool themselves:

#1 “Everyone could see that market crash coming.”: Have you noticed how people become experts after the fact? But if “everyone” could see a correction coming, why wasn’t “everyone” profiting from it? You don’t need forecasts.

#2 “I only invest in ‘blue chip’ companies.”: People often gravitate to the familiar and to shares they see as solid. But a company’s profile and whether or not it is a good investment are not necessarily correlated. Better to diversify.

#3 “I’m waiting for more certainty.”: The emotions triggered by volatility are understandable, but acting on those emotions can be counterproductive. Uncertainty goes with investing. Historically, long-term discipline has been rewarded.

#4 “I know about this industry, so I’m going to buy the stock.”: People often assume that success in investment requires a specialist’s knowledge of a sector. But that information is usually already in the price. Trust the market instead.

#5 “It was still a good call, but no one saw this coming.”: Isn’t that the point? You can rationalize a stock-specific bet as much as you like, but events or external influences can conspire against you. Spread your risk instead.

#6 “I’m going to restrict my portfolio to the strongest economies.”: If an economy performs strongly, that will no doubt be reflected in stock prices. What moves prices is news. And news relates to the unexpected. So work with the market.

#7 “Ok, it was a bad idea, but I don’t want to sell at a loss.”: We can put too much faith in individual stocks, and holding onto a losing bet can mean missing opportunities elsewhere. Portfolio structure affects performance.

This is by no means an exhaustive list. In fact, the capacity for human beings to delude themselves in the world of investment is never-ending.

But overcoming self-deception is not impossible. It just starts with recognizing that, as humans, we are not wired for disciplined investing. We will always find one way or another of rationalizing an emotional reaction to market events.

But that’s why even experienced investors engage advisors who know them, and who understand their circumstances, risk appetites, and long-term goals. The role of that advisor is to listen to and acknowledge our very human fears, while keeping us in the plans we committed to at our most lucid and logical.

We will always try to fool ourselves. But to quote a piece of folk wisdom, the essence of self-discipline is to do the important thing rather than the urgent thing.

Have Questions?

‘‘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.

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

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

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This content is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

Copyright © 2014 by Dimensional Fund Advisors LP. All Rights Reserved

Choosing the Best 529 Plan for Your Child’s College Fund

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

College tuition continues to rise. Over the past 30 years, the average annual increase for college tuition has been 1.9% to 5% above the rate of inflation as measured by CPI according to College Board statistics. This long-term trend shows no signs of being reversed anytime soon. As a result, a pressing concern for many parents is whether they’re saving enough money for their child’s college education. The ever-shifting landscape of tax laws and college education funding rules only compounds this uncertainty.

529 college savings plans can offer attractive tax-advantaged benefits, however, a recent survey by Edward Jones found that 70% of Americans aren’t aware of these investment vehicles. Currently, there are over 50 different 529 college savings plans, with the onus for implementing these on the individual states.

Searching for the Ideal 529 Plan

Not only does money contributed to a 529 plan accumulate tax-deferred, but the earnings withdrawn are not taxed at the federal level as long as it’s being used to pay for qualified expenses. Many states incentivize the transaction by offering tax deductions on 529 contributions on your state income tax return. Five states (Oklahoma, Oregon, Georgia, Mississippi, and South Carolina) even allow you to take the deduction on the previous year’s tax return as long as the contribution was made by April 15th of the following year.

Financial Planning for Doctors

Many states are making this incentive even more attractive by increasing the value of the deduction. For example, in 2013, Arizona increased its deduction of $750 to $2,000 a year for individual tax filers and $1,500 to $4,000 a year for joint filers. Other states are in the process of taking similar action. However, there may be other considerations aside from tax breaks to weigh, which is why families are encouraged to consult with a qualified financial advisor.

Six states (Missouri, Kansas, Maine, Montana, Arizona and Pennsylvania) even allow one to claim a deduction for contributions to a 529 plan from other states. Residents of these states have the opportunity to shop around for plans with minimal administrative and investment fees. Nevada, for example, has an institutionally-managed portfolio of exchange-traded funds which allows them to keep their costs low.

Due Diligence

529 Plans also vary in the investment options they offer. Plans can be customized with a wide variety of investment options that range from conservative to more growth-oriented to match various risk tolerances. Some 529 Plans offer aged-based portfolios that automatically adjust to more conservative holdings as a child approaches college age.

Some 529 college savings plans can be obtained directly while others are advisor-sold, meaning they are purchased through a registered investment advisor. Carefully read the 529 plan issuer’s official offering circular or prospectus before investing.

Gifting from family and friends is made easier by the e-gifting program for 529 plans, available in 11 states. Once an account is opened, relatives can be emailed a link where they would enter their banking information and make a direct contribution to the account. There is usually no fee for this service (unless you’re using a 3rd party gift conduit), and the relative making the contribution is also eligible for a potential tax break.

Have Questions?

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

Information gathered from sources believed to be reliable but is not guaranteed. Any information or opinion contained herein should not be construed as an offer, recommendation or solicitation to invest. Information provided is not to be deemed tax or legal advice. Consult your legal, tax and investment professionals for personalized advice.

Living With Volatility Again

October 28, 2014 | By Jim Parker, Vice President DFA Australia Limited

Volatility is back. Just as many people were starting to think markets only ever move in one direction, the pendulum has swung the other way. Anxiety is a completely natural response to these events. Acting on those emotions, though, can end up doing us more harm than good.

There are a number of tidy-sounding theories about why markets have become more volatile. Among the issues frequently splashed across newspaper front pages: global growth fears, policy uncertainty, geopolitical risk, and even the Ebola virus.

In many cases, these issues are not new. The US Federal Reserve gave notice last year it was contemplating its exit from quantitative easing (an unconventional monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective). Much of Europe has been struggling with sluggish growth or recession for years, and there are always geopolitical tensions somewhere.

In some ways, the increase in volatility in recent weeks could be just as much a reflection of the fact that volatility has been very low for some time. Investors in aggregate were satisfied earlier this year with a low price on risk, but now they are applying a higher discount rate to risky assets.

So the increase in market volatility is an expression of uncertainty. Markets do not move in one direction. If they did, there would be no return from investing in stocks and bonds. And if volatility remained low forever, there would probably be more reason to worry.

As to what happens next, no one knows for sure. That is the nature of risk. In the meantime, investors can help manage their risk by diversifying broadly across and within asset classes. We have seen the benefit of that in recent weeks as bonds have rallied strongly.

For those still anxious, here are seven simple truths to help you live with volatility:

#1 Don’t make presumptions:Have you noticed how people become experts after the fact? But if “everyone” could see a correction coming, why wasn’t “everyone” profiting from it? You don’t need forecasts.

#2 Someone is buying: People often gravitate to the familiar and to shares they see as solid. But a company’s profile and whether or not it is a good investment are not necessarily correlated. Better to diversify.

#3 Market timing is hard: The emotions triggered by volatility are understandable, but acting on those emotions can be counterproductive. Uncertainty goes with investing. Historically, long-term discipline has been rewarded.

#4 Never forget the power of diversification: People often assume that success in investment requires a specialist’s knowledge of a sector. But that information is usually already in the price. Trust the market instead.

#5 Markets and economies are different things: Isn’t that the point? You can rationalize a stock-specific bet as much as you like, but events or external influences can conspire against you. Spread your risk instead.

#6 Nothing lasts forever: If an economy performs strongly, that will no doubt be reflected in stock prices. What moves prices is news. And news relates to the unexpected. So work with the market.

#7 Discipline is rewarded: We can put too much faith in individual stocks, and holding onto a losing bet can mean missing opportunities elsewhere. Portfolio structure affects performance.

Have Questions?

‘‘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.

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

The S&P 500 Index is not available for direct investment and does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.

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

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This content is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

Copyright © 2014 by Dimensional Fund Advisors LP. All Rights Reserved