19 May

Academic Principles. Is Your Portfolio Built On Them?

18 Questions Blog Series

At von Borstel & Associates, we ask our clients 18 critical questions. The answers to these questions determine how we partner with each client and manage their wealth. So Today we will be talking about building your portfolio on academic Principles

Follow along with us through the 18 Questions Blog Series. Because you may be surprised by what you discover about yourself and your financial plan!

#7. Is Your Portfolio Built On Academic Principles?

 

People I talk with often ask me why I make such a big deal about fact-based portfolios built on academic principles. Why are they important? Because of Predictability!

 

If our portfolio is not predictable, we are gambling with our financial future, choices, and well-being. 

Is someone telling you they can outwit the market? They might use phrases like “I can out-time the market”, “out-pick the market”, or “predict the market”. The factors that affect tomorrow’s market are the things that are unknown today. Do you know what the future has in store? No one but God does, yet people act like they do while spinning a fantastic story. They tell you why their system is better and how they manage their portfolio while actively looking for mistakes and pricing of shares. Year after year, studies show how the vast majority of people do this and fail. Not only do they underperform in the market, but it costs more to get there; it is a double negative.

 

What is a fact-based portfolio going to offer you?

1)  Less turnover equating to less cost1.

2) Fewer taxes because of the lower turnover1.

3)  A more predictable result because on average 90% of the return in a portfolio comes from allocation2.

  • We should focus on allocation
  • We should look at long-term studies that show us what allocation is best for our client.
    • depending on their risk tolerance
    • depending on their long-term investing goals 

4) Less worry because of the expected performance long-term.

5) Less time spent managing investments and more time spent enjoying life.

 

So why are fact-based portfolios more predictable?

We build them based on asset classes such as:

  • T-bills characteristics
    1. has never lost money in a given year3
    2. and has an average a little less than 1% over inflation in return3
    3. if we invest in T-bills long-term, it is likely we will never have a losing year and average almost 1% over inflation for return.3
  • Small-cap international stocks characteristics
    1. has losing years at least 25% of the time4
    2. it is not abnormal to lose 50% in one year4
    3. it has averaged over 8% more than inflation historically5
    4. if we invest in small-cap, international stocks, we will get good returns long-term with a ton of standard deviation and maybe an ulcer5

And by utilizing a fact-based portfolio, we can mix these and other academically proven asset classes quite predictably. There will still be unpredictable short-term results. But considering your entire lifetime – the results are more foreseeable.

I think this discussion becomes a battle because most of what Wall Street tells you is how they can outsmart, out-time, and out-predict the market one way or another. In contrast, I believe it’s better to harness the markets give. 

 

So what do you want…

 

1) Predictability or Promises?
2) Likelihood or Stories?
3) Boring or Exciting?
4) Low Cost or High Cost?

 

It is your choice to build a fact-based portfolio. I have decided to put both my career and my client’s future in line with academic studies, awards, and accolades.

 

So, let’s be predictable together and build a fact-based portfolio and future!

 

And Our Sources are…

  1. http://anchorcapital.com/low-turnover-tax-efficiency/

    Gary P. Brinson, CFA, Randolph Hood, and Gilbert L. Beebower (known collectively as BHB). And sought to explain the effects of asset allocation policy on pension plan returns. In their seminal paper, “Determinants of Portfolio Performance,” published in the Financial Analysts Journal

  2. http://www.investopedia.com/ask/answers/041515/treasury-bond-good-investment-retirement.asp#:~:text=Also%2C%20T%2Dbonds%20are%20backed,that%20offer%20long%2Dterm%20growth.

  3. http://fred.stlouisfed.org/series/WILLSMLCAP

  4. http://my.dimensional.com/key-questions-for-long-term-investors

  5.  And in USD. US Small Cap is the CRSP 6–10 Index. US Large Cap is the S&P 500 Index. Long-Term Government Bonds is the IA SBBI US LT Govt TR USD. Treasury Bills is the IA SBBI US 30 Day TBill TR USD. US Inflation is measured as changes in the US Consumer Price Index. CRSP data is provided by the Center for Research in Security Prices, University of Chicago. S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Long-term government bonds and Treasury bills data provided by Ibbotson Associates via Morningstar Direct. US Consumer Price Index data is provided by the US Department of Labor Bureau of Labor Statistics. And past performance is no guarantee of future results.

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Investment advisory services offered through von Borstel & Associates, Inc., an SEC Registered Investment Advisor.

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Marlene Large