A Mixed Bag of Returns
The past quarter
We hope you had refilled your blood pressure medication at the beginning of last quarter, that is, if you are prone to watching the hourly or even daily stock market fluctuations. The NYSE Composite of over 1500 US companies and 330 non- US companies with a market capitalization (market value) of over $19 trillion gained nearly 5.4% from the beginning of April to the 21st of May, and then Mr. Bernanke spoke. (We joke that when the Fed chairman talks, the watchword could be, “when Bernanke speaks the market shrinks.”) His words of assurance sent the market into a tail-spin with a 7.3% decline over the next 30 days. And then the world collectively reassessed his words and the NYSE Composite closed with a gain of .0005 for the quarter.
The investment community subsequently decided that the Federal Reserve’s economic analysis revealed our economy is on the road to recovery. This good news, the markets believed, would translate into a calculated reduction in the easy money policy of the Fed, and an eventual rise in interest rates from the current artificially maintained low rates. As the late June market recovery continued, the focus began to shift away from Fed policy to near term and future corporate profits.
The mixed bag of returns
While the NYSE Composite recovered with a miniscule gain for the quarter, many asset classes were not as fortunate. Below are some of the ranges for other asset classes for the period April-June.
Fixed income (bonds) were generally down in all maturities as the fear or realization of higher interest rates came to fore. Two year bonds were off 1- 2% while 3-5 year governments declined about 3% and inflation protected bonds, or TIPS, declined 6-7% for the quarter. Bonds rated investment grade (BBB or higher) with 5-6 year maturities fell over 3% while global fixed income fell about half that much.
Bonds were not the only asset classes under pressure. The iShares MSCI Emerging Markets Index was off a significant 9.98% for the three months, and the Dimensional Emerging Markets Core swooned with a negative 8.7%. Other asset classes in the negative included both domestic and international real estate and Asian small cap funds.
There were winners: the aforementioned NYSE Composite, and US large, medium, small and micro-cap classes averaged nearly 4% gains. For the quarter our clients had either small gains or small losses. The more aggressive accounts had modest gains due to over-weighting in domestic equities. The most conservative accounts had modest losses due to over-weighting in fixed income asset classes. We continue to evaluate your portfolios on a regular basis, but given the potential changes in the policies of the Federal Reserve our monitoring and assessment of your portfolio(s) has been ratcheted up a few notches. We continue to have a positive outlook for the markets in general.
Staff additions and congratulations
Christina Lowry is a new addition to our business. She runs our office. We debated on titles of office administrator, business manager, head honcho? The truth is she keeps us doing what we are supposed to be doing. She has a background in accounting and office management. She is so efficient that when I propose she look into this or that, she already has and then tells me why she is or isn’t going to adopt it in our office. If you need anything; a report, form, check, wire then Christina is the go to person.
She has three children, attended Frederick Community College, is a daily multi-mile walker and always has a smile on her face. She has already received accolades from our clients who have dealt with her.
Jon Powell is also a delightful addition. Thanks to you and your referrals our business continues to grow and we needed to expand our staff. For some time we have been searching for someone with experience in the financial planning and wealth management field whose philosophy mirrored ours and who believed that the client deserved to come first. Our search included conversations with the business counselor at Virginia Tech. They have an outstanding financial planning program that leads its graduates to qualify for the Certified Financial Planning education track.
Jon graduated from the Virginia Tech program in May 2011 and worked for a financial planning firm in Virginia for two years. He had previously interned with a large national financial services firm. Importantly, Jon brings an expertise in insurance and has already earned our respect when he designed some insurance strategies that fulfilled a client’s needs. Jon is involved in the financial planning process and can actively manage individual life, disability, and long-term care insurance cases.
Jon is a bachelor.
Speaking of bachelors the world is about to lose one. Derek Johnson, who joined the firm as a young pup over thirteen years ago, has found his soul mate. Tiffany has several Masters degrees and is a reading specialist for the Montgomery County, Maryland school system. The wedding is next summer.
Dawn Doebler is back in the office after taking her son and daughter on a cruise through much of the Mediterranean. I wasn’t surprised to receive emails and text messages from Dawn as she regularly inquired as to “what could she do or what did we need?” while she was gone.
Scott Meholick is our summer intern and another Virginia Tech finance major. This makes three VT students who have graced our offices and we have been most pleased with their presence.
Check your bank statements and credit card bills
Scams are proliferating. We have witnessed within our cadre of clients and friends some frightening attempted acts of fraud and deception. Some scammers pad your credit card bill with unauthorized services that you inadvertently and unknowingly “authorized”, bank charges that should and will be reversed, identity theft effecting your credit rating, restaurant charges that you didn’t total after adding the tip. The list is on-going. Please, take nothing for granted and shred those unsolicited credit card applications.
The Art of Letting Go
In many areas of life, intense activity and constant monitoring of results represent the path to success. In investment, that approach gets turned on its head.
The Chinese philosophy of Taoism has a word for it: “Wuwei”. It literally means “non-doing”. In other words, the busier we are with our long-term investments and the more we tinker, the less likely we are to get good results.
That doesn’t mean, by the way, that we should do nothing whatsoever. But it does mean that the culture of “busyness” and chasing returns promoted by much of the financial services industry and media can work against our interests.
Investment is one area where constant activity and a sense of control are not well correlated. Look at the person who is forever monitoring his portfolio, who fitfully watches business TV or who sits up at night looking for stock tips on social media.
In Taoism, by contrast, the student is taught to let go of factors over which he has no control and instead go with the flow. When you plant a tree, you choose a sunny spot with good soil and water. Apart from regular pruning, you leave the tree to grow.
But it’s not just Chinese philosophy that cautions us against “busyness”. Financial science and experience show that our investment efforts are best directed to areas where we can make a difference and away from things we can’t control.
We can’t control movements in the market. We can’t control news. We have no say over the headlines that threaten to distract us.
However, each of us can control how much risk we take. We can diversify those risks across different assets, companies, sectors and countries. We do have a say in the fees we pay. We can influence transaction costs. And we can exercise discipline when our emotional impulses threaten to blow us off course.
The reason these principles are so hard for people to absorb is that the perception of investment promoted through the financial media is geared around the short-term, the recent past, the ephemeral, the narrowly focused and the quick fix.
We are told that if we put in more effort on the external factors, that if we pay closer attention to the day-to-day noise, we will get better results.
What’s more, we are programmed to focus on idiosyncratic risks–like glamour stocks-instead of systematic risks such as the degree to which our portfolios are tilted toward the broad dimensions of risk and return.
Ultimately, we are pushed toward fads that the financial marketing industry decides are sellable and which require us to constantly tinker with our portfolios.
You see, much of the media and financial services industry wants us to be busy, but about the wrong things. The emphasis is often on the excitement induced by constant activity and chasing past returns rather than on the desired end result.
The consequence of all this busyness, lack of diversification, poor timing decisions and narrow focus is that most individual investors earn poor long-term returns. In fact, they tend not to even earn the returns available to them from a simple index.
This is borne out each year in the analysis of investor behaviour by research group Dalbar. In the 20 years to 2012, for instance, Dalbar found the average US mutual fund investor underperformed the S&P-500 by nearly 4 percentage points a year.
This documented difference between simple index returns and what investors receive is often due to the individual behaviour– in being insufficiently diversified, in chasing returns, in making bad timing decisions and in trying to “beat” the market.
Recently, one of Australia’s most frequently quoted analysts broke ranks from the industry and gave the game away on this “busy” investing. In his final note to clients before retiring to consultancy work, Morgan Stanley strategist Gerard Minack said he had found over the years that investors were often their worst enemies. “
The biggest problem appears to be that–despite all the disclaimers–retail flows assume that past performance is a good guide to future outcomes,” Minack said.
“Consequently, money tends to flow to investments that have done well, rather than investments that will do well. The net result is that the actual returns to investors fall well short not just of benchmark returns, but the returns generated by professional investors. That keeps people like me employed.”
It’s a frank admission and one that reinforces the ancient Chinese wisdom: “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.”
We wish you health and happiness and an enjoyable summer.
John, Derek, Dawn, Christina, Jon, and Scott
Ferguson Asset Management, 13305 Travilah Rd., Potomac, MD 20854, (301) 284-8786, www.mymoneymanager.com