posted on October 22nd 2014 in Austin CFP Team Posts & Market Commentary with 0 Comments /

Kim-Il-Sung-statuePeople often look for the secrets in life: the  secret to happiness, the secret to success, and of course, the secret to wealth. Throughout history, there has never been a shortage of experts claiming to have these secrets and there has never been a shortage of people willing to latch on to these gurus as a cult of personality.

The investment world is certainly no exception and can be held up as a benchmark for this behavior. As an investor, it’s important to reflect on your mindset regarding your thought process relative to this phenomenon. Are you convinced there is a person out there who has the secret to predict investment performance? Do you believe an individual exists who has so much insight, experience, connections and education that he or she can provide superior returns relative to the general market consistently over decades?

The history lesson is that many of these investment gurus do in fact outperform the market for some period, whether it be a day, a month, one year, five years, etc. Then, of course, their marketing machine and the media point to this successful period as a testament to their unique abilities, with the implication that their special powers will continue forever. Then they don’t. What happened? It turns out that “unforeseen circumstances” got in the way and these performance-predicting managers trended toward the mean, or worse, relative to market indexes.

Unfortunately, investors often rely on the cult of personality rather than rigorous academic processes and are left in the lurch when a guru fails or jumps ship.

Case in point: Bill Gross and Pacific Investment Management Company commonly known as PIMCO. Gross has long been billed the most powerful man in the bond market for this mutual fund company focused on actively managed fixed-income mutual funds. Many of you reading this who are not my clients probably have PIMCO funds in your portfolios.

Here are some article headlines from Morningstar throughout the years:

PIMCO Total Return has more than earned its reputation.


PIMCO Municipal Bond Fund continues to impress.


PIMCO is boldly putting investors’ dollars where its mouth is.


PIMCO has done well lately, and so has PIMCO Stocks Plus.


Morningstar Reaffirms Gold Rating on PIMCO Total Return


And now, this headline from the Wall Street Journal on September 28, 2014:

Billions Fly Out the Door at PIMCO

About $10 Billion Is Withdrawn After Departure Of Gross

This is just another example of problems that can arise with investment firms headed by gurus. There is the expectation that about $100 billion could leave PIMCO following Gross’ departure after all is said and done. Investors in PIMCO now have the unenviable task of figuring out if they should stay with PIMCO without Gross, follow him to another firm, or reshape their mindset to avoid the same problem in the future.

My advice is to choose the latter option. Break this inherently bad cycle and find a firm that relies on proven academics and processes rather than a guru’s status. You could make the case that Dimensional Fund Advisors, the firm WorthPointe utilizes to build our client portfolios, is chock full of reluctant gurus. These folks are definitely stars in their fields of academia but perhaps not well-known to the public: Eugene Fama, Nobel Laureate; Roger Ibbotson, Yale University; Myron Scholes, Nobel Laureate, Stanford University; the list goes on. The key difference is that their research is codified into strict processes that do not require the guru to maintain a cult of personality.

In summary, beware the temptation to follow the guru and if you do have PIMCO investments in your portfolio, it’s time to re-think your investment strategy.

2014 Q3 Quarter Review



morgan screenshot



(Table Disclosures)

Performance for periods greater than one year are annualized. Selection of funds, indices and time periods presented are chosen by the client’s advisor. Indices are not available for direct investment and performance does not reflect expenses of an actual portfolio. Past performance is not a guarantee of future results. Russell data copyright © Russell Investment Group 1995-2013, all rights reserved. The S&P data are provided by Standard & Poor’s Index Services Group. MSCI data copyright © MSCI 2013, all rights reserved. Barclays Capital data provided by Barclays Bank PLC.* 100% globally diversified stock portfolio net of expenses and fees ** 60% stock 40% bond portfolio net of expenses and fees See complete disclosures at

Thirty days. That’s all it took to negate most of the positive stock returns for the third quarter. The other headline is that the S&P 500 posted its seventh straight quarter of positive gains. The large-company stock index hasn’t posted a losing quarter since the fourth quarter of 2012, when it slid 1%.

Nobody seems to have a convincing explanation for the recent stock market slump. The economy still seems to be pushing along in a long, slow, steady growth process, and corporate earnings are well-above historical averages. Oil prices are at their lowest level since November 2012; consumer spending has rebounded; and although the Fed will cease its bond purchases, there is no indication that it’s going to sell its inventory back on the market, and its policymakers are projecting low interest rates well into 2015. Corporate cash at larger corporations is near an all-time high.

The expected rise in bond rates never materialized, confounding the experts yet again. Fed officials, though, have become more concerned about weak growth overseas and the impact of a strengthening dollar, additional rationale for it to hold short-term rates near zero, even as the economy improves. The Bloomberg U.S. Corporate Bond Index now has an effective yield of 3.07%, while Treasury rates held steady. Thirty-year Treasuries are yielding 3.20%, and 10-year Treasuries currently yield 2.50%. At the low end, 3-month T-bills are still yielding a miniscule 0.02% and 6-month T-bills are only slightly more generous, at 0.04%.

If you’re feeling uncomfortable about the future, then let me remind you about an elegant concept. The split between equities and fixed-income (bonds) is one of the most effective tools an investor can use to balance expected risk and return. As long as the portfolio is constructed correctly, shifting it to a higher percentage of bonds, while limiting growth, should lower your risk and volatility. The devil is most definitely in the details and success in accomplishing this comes down to the science of portfolio construction.

Don’t feel constrained should your situation necessitate a modification of this equities to fixed-income ratio, as ensuring it’s done correctly should not be your job. But, don’t rush to change your investment strategy based on an impulsive need to react to news events of the day.

Most importantly, though, if you are feeling uncomfortable about the future, do not trust your feelings (or act on them). When your emotions are strong, you become easily swayed and it’s very easy to latch on to the latest predictions of this year’s investment gurus. Listening to their advice has been shown time and time again to be detrimental to investor wealth in the long run.


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