As we have taken on new clients over the years, many have come to us in part because their expectations regarding their investments were not met. It would be easy to simply say, “No problem. Our firm can do better.” But that approach is flawed because unless we can diagnose why the client’s expectations were not met, there is a good chance they will be unsatisfied in the future.
There are four primary causes to a disappointing investment experience:
- inappropriate expectations and comparisons,
- uncooperative markets,
- poorly performing holdings, and
- client behavior.
Inappropriate expectations and comparisons
Some new clients were under the impression that because the long term average of the stock market is almost 10% per year, they should earn 10% on their portfolio. Of course, an average means there are many times in which returns are lower. We frequently mention how often the market declines significantly in an effort to keep our clients from thinking that owning a portfolio of financial assets will ever be smooth sailing, even if over long time frames it has always been profitable.
Further, unless one invests all of their money only in the 30 stocks which make up the Dow Jones Industrial Average, they should expect their portfolio will behave differently from what they see the Dow doing. Comparing a broadly diversified portfolio appropriate for one’s goals and risk profile to an index of any financial market is a classic apples-to-oranges comparison error.
As mentioned, that almost 10% annual historical average for U.S. stocks is just an average. In many periods, the market returned a below average result. This is true for all other portions of the world’s financial markets too. We can select and control how a portfolio is positioned but no one can predict or control whether the markets cooperate. In fact, the best assumption for properly diversified investors is that at any given time, some portion of the portfolio will be struggling. Those that do not expect this can talk themselves into thinking there is a flaw in how their portfolio is structured, when they are actually in good shape given their finances.
…the best assumption for properly diversified investors is that at any given time, some portion of the portfolio will be struggling.
Right now with valuations above average, we believe it reasonable to expect U.S. stocks and bonds to produce below average results over the next decade. This does not mean markets should be feared or that a radically different structure is required. Stocks should be better than bonds which should be better than cash. Diversification is still critical. Tax management should still be wise.
Poorly performing holdings
Too many people are seduced by the lure of a market guru who implies they can adeptly navigate in and out of financial markets in such a way that a superior result will occur. It’s rubbish. The data is crystal clear. There are fewer “stock pickers” that succeed in doing better than the market then would be expected by chance. Those that succeed in one period typically don’t repeat the feat in future periods. To beat the market, they had to take extra risk. Many that tried the same thing failed, some miserably. The market timing hall of fame is an empty room. If taxes were accounted for, the record of the gurus would be even worse.
Of the four causes of failing to meet expectations, poor holdings is the one about which our clients should have no concern at all. The types of low cost, tax-efficient, structured holdings we favor simply do not take on the guru risks such as concentrating in too few companies or sectors, stock picking, or market timing. Markets often do shocking things but there is virtually no risk that any of the holdings we favor will produce a nasty surprise caused by how they are constructed or run.
“I had $2 million when I started with them and three years later I still have $2 million,” is how one new client explained why he was looking to move his money. When we talked further he revealed he had been pulling out $9,000/month the entire time and also renovated a bathroom and put in a pool at his home. He made money on his portfolio – he just didn’t factor in that he spent all that he had made.
We still run across people who bailed out of their portfolios in 2008 or 2009 and missed out on the recovery. Even a sub optimal portfolio probably would have produced a better result had they stuck with it. They behaved based on a short term assessment and were unprepared to behave like a long term investor when it mattered most.
Making your experience good and productive
Our process is designed to help minimize negative gaps between client expectations and their actual results. We begin with your financial planning goals and needs to design a plan that has a reasonable chance of succeeding.
We put these plans in writing through a client-specific Investment Policy Statements (IPS). The IPS reiterates many of the key principles of prudent investing and outlines reasonable expectations about how a portfolio should behave.
We implement and monitor using the best tools available. We are diligently looking for what is best but we are disciplined to favor science over stories and avoid getting swept up in the latest hype or hysteria. We are patient enough to give plans time to work.
There can be things happening in the world and life in general to worry about, but we are here to provide you “A sanctuary from the noise®”
New client portal updates
In our continual effort to improve your client experience, dual factor authentication was added to our client portals last year to enhance security. We posted a significant amount of information about cybersecurity last month, including a briefing on why you might want to utilize this added security feature. To set it up, contact Tommy Lucas on our staff at extension 116 or [email protected]/.
This year, we are expanding the amount of portfolio information available to you in your portal. We will be going live with a new arrangement in our online client portals by the end of the year.
The first thing you will see are a few “tiles” with some summary data points clients often want to know at a quick glance, such as the total account balance as of the date shown, portfolio performance, and a summary of what you have put in to and taken out of your accounts. Below the tiles will be a number of dynamic reports. Hover your cursor over parts of the reports and additional information will appear in a bubble on your screen. Some reports provide additional information about the tiles and others have information on other items such as a breakdown of individual holdings. To make uploaded documents easier to find, they will now be listed on a separate page within the portal.
We have a vast amount of data and analytical power within our best in class portfolio management systems. In keeping with our motto “A sanctuary from the noise”®, we have no intention of overwhelming you with data but will likely add some additional features in the future.
Once the new portals are live, we will be happy to walk you through how to navigate the site and explain any of the reports to you.
…when you want up-to-date information, we want you to be able to get it
Finally, we are providing this information because when you want up-to-date information, we want you to be able to get it. Nonetheless, we would be remiss if we did not remind you that just because the portal allows you to track your portfolios every day doesn’t mean you should. Studies show a strong correlation between frequent assessment of an investment portfolio and POOR results. People who check their accounts frequently may lose sight of the big picture, have more anxiety about money, want to shorten their time frames, and feel compelled to act on emotion more often. So as mom used to say, “look but don’t touch.”
News & Notes
Fall conference season has begun: Charlie Fitzgerald and Dan Moisand recently attended the national conference of the Financial Planning Association. Charlie was invited as a current member of the Board of Directors of the CFP Board and Dan was there as a past national President of the FPA. Dan served as a panelist for a session on how academics and practitioners can work together to create better and more practical research for the financial planning profession. A highlight was a talk by Eric Maddox, the chief interrogator in Iraq who found Saddam Hussein. Charlie and Dan also both enjoyed meeting baseball Hall of Famer Cal Ripken Jr. at a reception.
IRS provides relief for some rollover errors: When a taxpayer missed the 60-day deadline to complete a rollover of an IRA, they could apply for a Private Letter Ruling to ask for relief from taxation and applicable penalties. The IRS recently increased the fee for such rulings to $10,000. Recognizing that it routinely waived penalties for 11 specific situations, in August the agency created a self-correction process. So now, as long as the deadline was missed for one of the 11 specified reasons and the error was corrected in a timely manner, no taxes or penalties will apply. Among the reasons listed were significant damage to the taxpayer’s residence, serious illness of the taxpayer, and death of family member. While this new relief mechanism is welcome, an easy way to avoid problems with the 60-day rollover rules is to do a “direct rollover” or “transfer” in which the check is payable to a financial institution for the benefit of the account owner and NOT directly to the account owner.
Please remember to call us: When anything significant happens in your life, including changes in your finances, family, or health that could affect your financial plan, please let us know so that we can adapt our planning and portfolio work for you accordingly. Also, if you ever fail to receive a monthly statement for one of the Schwab Institutional or TD Ameritrade Institutional accounts under our management, please let us know so we may assure the respective custodian delivers your statements promptly.
The Team at Moisand Fitzgerald Tamayo, LLC
Moisand Fitzgerald Tamayo, LLC is an Orlando, Tampa and Melbourne, Florida based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between. If you have any questions or would like to discuss anything further, please give us a call or send us a note. If you are not a client and wish to receive emails notifying you of new posts – no more than once per month – fill out the subscription information in the sidebar to the right. For more frequent updates, follow us on Facebook, LinkedIn, or Twitter.
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