I thought I would send out a short memo on three slides that have had an enormous impact on my understanding of markets and key investment principles. We know that our clients and individual investors are quickly becoming more cost sensitive, tech savvy, and have gained significantly higher levels of information pertaining to their portfolios. Nevertheless, given all of these advancements, the average investor has still only achieved an annualized return of 2.3% from 1997-2016- slightly outperforming inflation by 20 bps. in the same period (source below 1). One of our main goals as an investment department has always been focused on educating investors why they are struggling. We attempt to address their short term-focus, educate them on risk management (even when things are going well), and upgrade their investment selection by way of rigorous due-diligence that eliminates conflicts of interest and lowers cost. However, that means nothing unless a financial planner is there to prevent their clients from acting irrationally when fueled by emotions or fear.
Keying in on the second slide above, “Invest with a long-term perspective”- How many individual investors have remained broadly diversified and fully invested through the many negative economic and political headlines that have emerged since 1965? Given their 2.3% annualized return over the last 20 years I would estimate very few. I love this slide because it highlights the reoccurring systematic risk that is inevitable. These crises often result in short-term setbacks followed by continued growth. Most people remember each headline and the panic that followed. Maybe some have made mistakes as a result of fear and emotion directly caused by one of the events. I encourage you to print this slide and share it with those clients that seem to be more susceptible to this way of thinking. In addition, Alan had the idea to develop short timeline of his “Investing Life.” Maybe consider making one of your own investment timelines to go over with your clients. I think the family pictures serve as a great personal touch.
1* Source: J.P. Morgan Asset Management; (Top) Barclays, FactSet, Standard & Poor’s; (Bottom) Dalbar Inc. Indexes used are as follows: REITS: NAREIT Equity REIT Index, EAFE: MSCI EAFE, Oil: WTI Index, Bonds: Barclays U.S. Aggregate Index, Homes: median sale price of existing single-family homes, Gold: USD/troy oz, Inflation: CPI. 60/40: A balanced portfolio with 60% invested in S&P 500 Index and 40% invested in high quality U.S. fixed income, represented by the Barclays U.S. Aggregate Index. The portfolio is rebalanced annually. Average asset allocation investor return is based on an analysis by Dalbar Inc., which utilizes the net of aggregate mutual fund sales, redemptions and exchanges each month as a measure of investor behavior. Returns are annualized (and total return where applicable) and represent the 20-year period ending 12/31/16 to match Dalbar’s most recent analysis. Guide to the Markets – U.S. Data are as of June 30, 2017.