posted on April 8th 2015 in Austin CFP Team Posts & Market Commentary with 0 Comments /

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For some, the mind is a battlefield. For others, it’s a tranquil pond. The difference between those two states is a personal journey that involves both the mind and the heart. And, you are never completely in one state or the other; it takes continued effort and discipline over time to get the results you are looking for.

I would call Buddhism a science of the mind. The Buddha taught the Noble Eightfold Path as a life discipline for truth seekers. This path can be broken into three divisions: wisdom, ethical conduct, and concentration. To me, these are also three very important components of a successful financial outcome.

Unfortunately, for many people truths are often distorted by their long-held beliefs. The world is round. The Earth is not the center of the universe. Lightning is electricity. Way back when, these notions were just not believed to be true.

The same holds true with investing as many investors hold notions that are just not true.

Our journey is a discovery. For investors who take the leap into the science of investing, it’s a discovery that often goes against their commonly held notions such as:

  • I or a smart and experienced advisor can predict the future.
  • I or a smart and experienced advisor can consistently outsmart the markets.

Trying to outsmart the collective intelligence of the millions of market participants with an almost infinite amount of variables usually results in the well-known definition of insanity: doing the same things and expecting different results. Here is a link to a great video on the concept that I highly recommend you view: The Power of Markets

Of course, there are many instances of people outsmarting the market, but you would expect that on just chance alone–not to be confused with skill. And of course you will hear about these people, especially when you are being sold a hot investment idea. There are at least just as many instances of people trying to outsmart the market who lose; you just don’t hear about them as much. I wonder why?

If you can’t consistently outsmart the market, then how should you evaluate your investment strategy? Should you compare short-term performance results? Find a 5-star manager? Just focus on your investments or fees? My answer: none of the above.

You should focus on your portfolio structure. What does this mean? In short, it means making a global allocation to those components that the science of investing has shown us has historically benefited investors. Doing this correctly, tax-efficiently, and cost-efficiently is where most get it wrong. And, don’t focus on short term-results. If you focus on your actions, the results will come. Just don’t expect them to come next year or the year after; in fact, it may take awhile. Actually, I think my father told me that.

Having said all this, I’ll opine and suggest you are most likely overly focused on your investments and not looking at the big picture. There are many things that will impact your overall financial future. Being organized. Having all your information at your fingertips. Estate planning. Planning for life passages. Retirement plan management. Trust services. Insurance. These are some of the things you should be looking for in a comprehensive wealth manager. He or she should provide counsel rather than persuading you to act in one way or another, and be more to you and your family than just an investment manager. You’re busy, and you most likely need the help.

2015 Q1 Review: Selected Indexes & Model Portfolios

Through 12/31/2014

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(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 http://www.wpwm.com/disclaimer/

This quarter could be labeled “The Comeback of International vs S&P 500.” As I explained in my previous newsletter “The Asset Allocation Paradox“, history tells us you would not want to have been holding just the S&P 500, even though it has had a stellar recent year versus other asset classes. Some investors, I’m sure, were recently swayed to allocate heavily to the S&P 500, and as it turns out, that would have been a bad move. The MSCI EAFE (International) was the best-performing asset class for the quarter and trounced the S&P 500, 5% versus 0.95%. This is a great data point relative to the topics I have discussed in this newsletter and what is demonstrated in the video. Just when you think it’s time to change lanes, your lane starts moving faster.

In general, this turned out to be a solid quarter across the board for stocks and bonds in a volatile time period. All indicated indexes indicate positive gains for the quarter with the exception of the unhedged Barclay’s Global Aggregate Bond Index with a -1.92%.

One of the reasons I cover quarterly performance is for transparency, not necessarily for relevancy in decision-making. There is nothing much we can do to affect short-term results.

What is important for most investors is not days, months, or even years, but decades. Looking at the WorthPointe 100% stock model portfolio (WP 100) since 12/01/1990, you’ll see it has the highest return of 11.31% (net after expenses and fees) and the lowest standard deviation (volatility/risk) of 16% among any of the indicated equity indexes. Those are exactly the kind of long-term results that can make your financial life successful.

[Standard Deviation: A primer for the curious: What Is Standard Deviation?]

Equally as illuminating, the WorthPointe 60% stock/40% bond model portfolio performed almost as well as the 100% stock S&P 500 index, with about half the risk.

My friends, this is what you should be focusing on with your investments: long-term performance, risk, and the actions needed today to help ensure financial stability in a decade or more. Tune out the day-to-day noise that will whiplash your emotions, and even better, let an exceptional financial advisor focus on this, and all the other areas that affect your financial future, so you can focus on enjoying your success.

In summary, the science of investing is essentially the science of the mind. A good financial advisor should not persuade you to act, he or she should just present the facts and guide you. You can always fight the facts, if you so desire, but that will most likely result in less than ideal outcomes. Take it from me, the Earth is round. I’ve seen it at 50,000 feet and Mach I.

about the author: Morgan H. Smith Jr. IMBA CFP®

Morgan Smith Jr. IMBA, CFPMorgan H. Smith Jr. IMBA CFP, who has been a fee-only financial planner for over 12 years, specializes in wealth management for successful families, business owners, retirement plans and institutions requiring a disciplined fiduciary process.

An Assistant Professor at the University of San Diego, Morgan has been a frequent speaker to many professional organizations and has appeared on CNBC, Fox Business New Live and is a founding member of the Strategic Trusted Advisors Roundtable.

Learn More and/or Contact Morgan

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