CW Newsletter August, 2021




It Is Not Your (or Your Advisor’s) Job to ‘Beat' The Market

There is such a large emphasis, from TV financial pundits to talk at cocktail parties, on whether or not someone is ‘beating’ the market, which places a focus on the wrong metrics. First, there is no single ‘market.’ There are over 40,000 publicly traded securities and hundreds if not thousands of various indices. Further, even if one wants to measure performance against a given benchmark, which is appropriate? Does it make sense to use the same measuring stick for someone in her 20s investing for retirement 30 – 40 years hence as an octogenarian who is focused on income and capital preservation? That would be like comparing the speeds of a 100-meter sprinter to a marathon runner – both have very different goals and thereby how you measure them is dissimilar.

To be sure, an effective Financial Advisor (FA) needs to be factoring in – and focused on – myriad variables above and beyond performance (especially in the near term). Let’s look at two scenarios.

Client A: Hires an FA and hands them a $1M account declaring, “I want you to beat the market!” Wanting to earn the client’s business, the FA suggests they can accomplish this, even though statistics suggest over time you won't. The FA moves quickly to ‘close’ the deal. The FA knows nothing else about the client’s financial situation, either because they didn’t ask or the client declined to reveal additional information. “Just beat the market, that is what I’m hiring you to do,” states the client. A year passes, the ‘market’ (the S&P 500? How about international stocks…what index to use we’ll save for another discussion) is up 7% and the client’s account has increased 7.6% (all figures net of fees). The client is happy, the FA is happy, all is good in the world.

Client B: Hires an FA who asks for – and gets – a complete financial picture of the client. The FA takes their time to gather information on and analyze assets, liabilities, social security payments, monthly expenses, savings, cash flows, and the like. Together they define clearly what the client’s near and long-term needs and goals are. This includes things like saving for kids’ 529 college plan, being able to travel once a year, staying out of debt, having a certain after-tax cash flow upon retiring in 10 years, etc. They talk about things like risk tolerance and the proverbial ‘sleep at night’ factor. Based on all of this information, the FA puts together a comprehensive plan and allocates assets accordingly, account by account (and even insists on reviewing portfolios not under his purview, e.g. a 401(k) held outside and not managed by the FA) to ensure every dollar invested has a purpose, a goal, and the client is sticking within his stated budget. Some accounts are invested more conservatively (i.e. not 100% invested in stocks) due to the fact that the client indicated an intention to withdraw funds within the next couple years. A year passes and the client has achieved their near-term goals (generating enough cash to cover monthly expenses, putting away money for their kids’ 529, taking advantage of lower rates to refi home with a lender the FA introduced, rebalancing their 401(k) investments and many other financial related matters). The client is happy, the FA feels good about the value they have added to the client’s life, all is well. In the client’s main account his return was 6.1%, in part due to the cash intentionally set aside to cover near-term needs, and in part because of an allocation into international markets which happened to underperform during the time it took earth to rotate around the sun.

Back to Client A: Over time the FA learns, through bits and pieces, that the client has considerable credit card debt at 18% interest. Further, they discover that Client A has not contributed to their 401(k) in years, and that they outspend their income on unnecessary luxury items. But client A sure is ‘happy’ that they can tell their buddies that they ‘beat’ the market.

It is not your – nor your FA’s job – to outperform a group of stocks selected by a committee (designated by the company Standard and Poor’s or otherwise) over any given week, month, or even year. It is your – and especially your FA’s mandate – to understand and help define, very clearly, what your current financial circumstances are and various goals over time. Once those future objectives are defined (e.g. retire at age 67 with an after tax income from investments of $4,000 per month), then you work backwards to today to determine what financial habits – saving, spending, etc. – will most likely achieve those future goals. It is no different than setting forth a health plan. Imagine walking into a gym and asking to work with a personal trainer who immediately has you start lifting weights without knowing anything about your current health situation let alone your goals. It turns out your back is injured, and you are trying to build flexibility and lose 20 lbs of weight. Perhaps in that case lifting weights is the smallest component of your overall optimal health routine.

Investing, as with life, is not a contest of you against others. It is not a zero-sum game. You don’t get any special stars on your grave from having ‘beaten’ the market or your neighbor or anyone else. The goal should be as summarized in the Coastwise tag line, namely to navigate a richer life. By richer life we don’t mean simply more money. Instead we are suggesting a ‘rich’ life in the sense of complete, calm, interesting, deep, and peaceful. Living a rich life comes from focusing on the right things and important priorities, such as setting forth a vision and plan to get there, then executing this plan with consistency and discipline. Living a rich life does not involve obsessing over every last stock ticker movement hour to hour or being upset about ‘losing’ to the S&P 500 (or your neighbor) by 1%. It means you moved nicely towards your various financial goals while living a positive and healthy life.




Kids Menus Are Not Created Equally… and Neither Are ETFs.

Up until recently, kid’s menus were an afterthought for me. I knew they were at the bottom of the menu (if at all) and that they generally consisted of pizza, pasta, maybe a grilled cheese sandwich, milk, and OJ. Now that our daughter is three, not only do I end up eating her leftovers, but I also care about the nutritional value and ingredients of what she orders… and eats. It turns out there are grilled cheese sandwiches and then there are Grilled Cheese Sandwiches.

The same goes for index funds and ETFs. Yes, they generally offer a low-cost broad exposure to an index, geography or sector, but they are not created equally. When selecting an ETF or an index fund for a portfolio, it’s important to consider (among other things) exposure (is it a 2x S&P 500 fund versus a large cap dividend fund?), tracking error or Beta to the index, expense ratio, and options liquidity (if relevant for the portfolio). ETFs and index funds can offer a fantastic way to offer broad and diverse exposure to high quality companies at a low price, but it’s important to know what you’re looking for before making an investment.





Why is it Called a 401(k)?

Despite its popularity amongst companies and employees for retirement planning, the 401(k) is a relatively new vehicle.

Gone are the days of pensions and an employer provided secure retirement. Fortunately, just as pensions began to fade away, the 401(k) was developed almost by accident as a result of a tax code change in 1978. That year, Congress passed the Revenue Act of 1978 which, among other items, included Section 401(k) which allowed employees to avoid tax on deferred compensation. Through creative planning and consultation, The Johnson Companies were the first to offer a 401(k) with employer match in 1980. By 1981, new rules allowed employees to fund 401(k) plans through payroll deductions and we were off to the races.

The 401(k) is just one of many retirement planning tools available to employees and individuals alike. Others include SEP-IRA, Simple IRAs, 403(b) plans and others. Each one serves a certain purpose depending on company size, type, etc. A knowledgeable, patient, and well-trained Financial Advisor can help you determine which retirement planning tools are most important to you, and set forth a near and long-term plan to get there. The journey to financial freedom and success is a long and bumpy one; make sure you are working with the right people to heighten the probability that you arrive safe and sound, while living a richer life along the way.

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