The single biggest risk retirees face is using up all their resources in retirement. The good news is there are options to mitigate that risk.Continue reading
Jared Kizer: So today I’m going to take on a little bit of a different type of topic. A lot of these (Buckingham Weekly Perspective videos) were kind of either reacting to current market events – which of course makes a ton of sense when that’s appropriate – or focused on evergreen-related topics, like previewing a particular asset class or strategy, things that we think will basically always be true about that particular strategy or asset class that we’re talking about. But today I want to talk about a little bit of a longer-range kind of investment planning question, which is how to think about investing in the 2020s or some of the things that come to my mind when I think about long-term investors. So, this is not what might happen over the next year, even the next two to three years. But sitting where we are today into the 2020s at this point, what are some things to think about in contrast relative to past periods that investors have lived through? So, I’m going to touch on a few of those today and really do it by contrasting what we saw in the 2010s – not that long ago at this point – relative to what I think we’ll see over the long-term starting in the 2020s. Hopefully, this also goes without saying even though we’re talking about the longer term, we’re still kind of looking into the future. So, there’s no way to know for certain what exactly will happen, but I think these are reasonable things to think about going forward as we march forward into the 2020s.
The U.S. Market Did Extremely Well in the 2010s
Jared Kizer: So, let’s start by talking about the 2010s. When I think about the 2010s, one of the really good things about the 2010s, from an investment perspective, is the U.S. market did exceedingly, exceedingly well over the 2010s. No doubt from a risk-adjusted return perspective, one of the best decades that the U.S. market has ever had, and we’ve been tracking U.S. market data for a long time at this point. So that’s actually saying something, like one of the best decades risk-adjusted return wise that we’ve seen from the U.S. market. Bullet point here is out of all the developed and emerging market countries that are tracked by the well-known index providers like MSCI, the U.S. market was the single-best performing country out of all of them. We’re talking about 50-plus countries, so very, very good decade for the 2010s. Also we saw very low interest rates and low rates of inflation. Of course, we’ve seen that change, and I think that could be a somewhat persistent change relative to the 2010s. A second thing that comes to my mind is a period of very low interest rates. And then for the way that we think about investing, the third thing that comes to my mind is in the 2010s we saw growth stocks that are growing at higher earnings rates. The names that are typically more well known did quite a bit better than value stocks, but that’s counter to what we know that the long-term evidence shows.
What Challenges Will Investors Face in This Decade
Jared Kizer: So, when I think about translating those into some of the challenges that were put upon investors as we entered the 2020s, the fact that the best-performing asset class was the U.S. market certainly has tempted a lot of investors. I saw this in particular at the tail end of the 2010s – to abandon other parts of a diversified portfolio or to lessen exposure to things that were not U.S. equities. Because people kind of kept seeing the U.S. market to be so dominant, a lot of investors, of course, not all but many, let that influence, I think far too significantly, how they thought about investing on a go-forward basis. Effectively saying I just think they thought we were going to just keep seeing the U.S. market be very dominant on a go-forward basis. So, while it was good and with respect it definitely challenged investors to stay disciplined in investing in things that were not U.S. equities.
The Investment Landscape Looking Forward
Jared Kizer: So, when we look forward, I think the main thing that comes to mind if you wanted to summarize thoughts, for a long-term investor, is that it’s highly unlikely – nothing’s ever impossible – but highly unlikely that we’ll see the dominance of the U.S. market continue. Meaning in the sense of better than everything else over an extended period of time, just not something that tends to happen over consecutive decades, and I think that’s the first thing that I would say for investors looking forward. I’ve already hit on number two, which is again, we never know, but I think it’s certainly possible, that we will be in some type of higher interest rate environment and potentially higher inflationary environment over the longer term compared to both of those being very low in the 2010s. So that’s another thing to think about from an investment point of view. And then when I think about the broader stock markets, what comes to mind is remaining dedicated and thinking about if you don’t already have an allocation to international equities versus U.S., I think it’s very important going forward to be globally diversified and that we think about the value versus growth dimension. We kind of saw in the 2010s growth do really well. I think as we look forward from here, we’ve seen this occur a little bit already in the early 2020s. You can think about having some type of value-oriented allocation within a stock portfolio. So hopefully, those are some helpful kinds of longer-term thoughts, a little bit different topic than we typically touch on here. If you have other questions you’d like for us to tackle, feel free to reach out to your advisor and submit questions that way or click the link below and you can submit questions there as well. Thanks.
The post Considerations For Planning in the 2020s and Beyond appeared first on Buckingham Strategic Partners.
There have been recent concerns about the depreciation of the U.S. dollar relative to foreign currencies. In this episode of Buckingham Weekly Perspectives, Head of Investment Research Jared Kizer shares the drivers for this fear, short-term implications and the potential economic and investment impacts on the marketplace.
Jared Kizer: Today I wanted to tackle an area that we’ve gotten a lot of questions on recently which is the depreciation of the U.S. dollar, or potentially foreign investors moving away from the U.S. dollar and toward other foreign currencies, and what impact that might have, either from an economic point of view or an investment strategy point of view.
What Are the Drivers for this Concern Around the Depreciation of the U.S. Dollar?
Jared Kizer: I’m going to talk about both those areas today. So, first thing I want to note, hard to say exactly what are all the drivers for these questions, a few things come to mind. If I had to guess though, one would be we’ve certainly seen very explosive growth in U.S. federal debt levels, driven by COVID-related reliefs, deficits related to income coming in for the Federal Government. No doubt, longer term concern for the dollar is the growth in the U.S. debt. It could be the fact that as we all know, we’ve seen high inflation rates of the last two or three years that could be driving concerns about the U.S. dollar. And then the other thing that specifically related to this year, we have seen the U.S. dollar depreciate relative to other foreign currencies say like the Euro this year, so probably a confluence of different factors that are driving questions. But I wanted to jump on and give our perspective on the economic side and then on the investment strategy side.
The Impact of a Depreciating U.S. Dollar on the Economic Side
Jared Kizer: On the economic side, the key message would be while we have seen maybe an ever so slight reduction in foreign use of the U.S. dollar, say over the last 20 years, without a doubt the U.S. dollar still remains the dominant currency related to foreign trade. And then central bank reserve holdings – and that last term simply means if you look at other central banks so say the foreign versions of the Fed that we have here in the U.S. – assets that they hold they have to decide “Well, what assets are we going to hold as part of our reserves?”. U.S. Treasury holdings are very common and remain a dominant fraction of central bank reserve holdings. So, whether you look at trade or whether you look at those central banking reserve statistics, you see very dominant use of the U.S. dollar and really hard to say, what would the competitor be at this point. I guess if you had to pick one, it might be the Euro, but the Euro is just nowhere close to the dollar at this point in terms of foreign use both again in trade and central banking purposes. So that’s the overall message. We’ll get to some long-term concerns here in a second.
Jared Kizer: No doubt the U.S. dollar remains very dominant essentially regardless of what statistic that you look at. Let’s talk about some of those near-to-intermediate-term concerns. What are some things that are sitting out there that could drive particularly foreigners to move away from the U.S. dollar in some meaningful way? I think the big one is the growth in the U.S. debt. It’s projected to continue growing at very high rates due to deficits and lots of other factors there. So that would be the number one concern – can the U.S. federal government get its deficit spending under control? Can we tamp down potential growth in the U.S. debt? A lot there that could certainly drive intermediate term concerns, but you’re not really seeing that have an impact here recently. The other thing that comes to mind, which is one of the things that I’ve seen a lot in the recent story lines, which is no doubt there are some bigger emerging market economies like China, India, Russia, although Russia’s economy is not nearly as large as those two particularly at this point, but there are certainly a lot of countries that would like to move away from reliance on the U.S. dollar. I think that will always be a thing. It’ll be interesting to see if any of those countries are actually able to do that. But there is certainly some intermediate-term pressure and near-term pressure I think on that front in terms of certainly you’ve got those countries that would like to be able to move in a different direction and not be as reliant on the U.S. dollar.
The Impact of a Depreciating Dollar on the Investment Strategy Side
Jared Kizer: Let’s move to the investment strategy side of things. What might the impact of these things be? I think that we see a lot of concern sometimes is fear of potential depreciation in the U.S. dollar. There’s not a clear relationship that says if that were to happen that it’s going to have some dramatically negative impact on lots of portions of the investable marketplace. It’s just not a clear relationship there. We don’t have a lot of historical instances to look at, but the one that we do have to look at which is the last time you had massive movement away from the predominant currency, was the investors moving from the pound to the dollar well over essentially a hundred years ago at this point. But you didn’t see that dramatically disrupt financial markets in and of itself. You didn’t see that UK equity returns were particularly poor. It’s not clear, say for the U.S. equity market, how a gradual or even faster movement away from the U.S. dollar would impact financial markets. If you do have concerns though, we do think generally it is good to diversify some of your foreign currency exposure, nevertheless. So, you can own international equities, which we think are an important part of a globally diversified portfolio. A lot of those funds that we would use – pretty much all the ones that we would typically use – do not hedge their currency exposure back to the dollar. So, it’s a way to kind of diversify an investor’s exposure to the U.S. dollar.
Jared Kizer: And then I think the legitimate investment strategy concern would be “Well, what if we had inflation rates back up again?”. You know we certainly tend to see the U.S. dollar appreciate; we’ve talked a lot about that in the past. Inflation protection is an important part of a portfolio, but you can use strategies like Treasury Inflation-Protected Securities to try to mitigate those risks. So, a couple things to think about on the investment strategy side, but the main takeaway is it’s not clear how any of this exactly would impact financial markets particularly in a negative way. So hopefully you have some helpful perspective on the U.S. dollar. If you have additional questions you’d like for us to tackle, feel free to reach out to your advisor and suggest those or click the link below and submit questions that way. Thanks.
Having a clear plan can save your small business thousands in taxes.Continue reading
Recent news stories have many concerned about the stability and safety of Schwab Bank and Schwab’s custodian/broker dealer business. In this episode of Buckingham Weekly Perspectives, Chief Investment Officer Kevin Grogan breaks down the issues at Schwab, how their circumstances are different than the Silicon Valley Bank failure and why we believe client assets are likely safe.
Recent articles in the news media have started to raise concerns about the stability and the safety of assets held at either Schwab Bank or Schwab’s custodian/broker dealer. And we of course here at Buckingham understand that whenever you read articles talking about issues at your custodian or at your bank, that can cause a lot of anxiety and stress because that’s where your life savings are in many cases. This video will attempt to bring some clarity to some of that discussion and hopefully put your mind at ease a bit about what’s going on at Schwab. This will cover high-level issues, but we did put out a longer article on this topic that was written by my colleagues Jake Fechter and Larry Swedroe. If you would like a deeper dive at the conclusion of this video, you can of course check out that article as well.
Our Predictions for Schwab
Kevin Grogan: I figured I’d start with the conclusion up front, which is that we think Schwab is likely to make it through these current challenges. And really the main high-level reasons for why we have confidence in Schwab is that it’s still a very profitable business, number one, and number two it has highly diversified sources of revenue. So, between those two factors, we think that Schwab will make it through current challenges that are facing lots of different financial services companies these days.
Why is there concern?
Kevin Grogan: Starting with the primary reason why there’s concern at all is because Schwab, kind of similar to Silicon Valley Bank, purchased longer term treasury securities, which have fallen in value as interest rates have increased. Schwab at the end of 2022 had unrealized losses of almost $29 billion, which is obviously a huge number in terms of unrealized losses on that treasury bond portfolio that they held.
The Performance of Schwab Stock vs. the Safety of Client Assets
Kevin Grogan: And in understanding what this means and putting it into context, I think it’s important to differentiate between the performance of Schwab’s stock and the safety of client assets at Schwab. These are two separate issues which of course are related to some degree, but many of the articles that you read in the media about Schwab are really talking about the performance of Schwab stock. Some analysts expect the price of Schwab stock may fall in the short term, which of course it could be true or could not be true. It’s very difficult to predict the performance of any individual stock. But if Schwab’s stock prices fall another 5 to 10%, that doesn’t really have a material impact on the safety of client assets at Schwab. So that’s the first important thing to differentiate.
Kevin Grogan: And then to make things even more complex, you also have to differentiate between Schwab’s bank and Schwab’s broker dealer. The broker dealer is where your mutual fund and stock assets are held, whereas the bank would be where you might have a deposit at Schwab Bank in a savings account or something along those lines. So those are two different business lines that are separate from one another. Starting with the broker dealer, it is important to note that Schwab is the largest public broker dealer in the United States, and all broker dealers in the United States are subject to certain regulatory requirements that help protect client assets. Number one, brokerage firms must meet minimum capital requirements to reduce the likelihood of a broker dealer becoming insolvent. Second, brokerage firms must keep customer securities separate from their own securities, so that they can’t be mixed together, that’s another safeguard in place. And then finally, a brokerage firm must be members of the SIPC, which is kind of the brokerage version of the FDIC which ensures customer securities up to about $500,000. These are some of the protections that are kind of baked into the regulatory framework here in the United States to protect customers from a broker dealer potentially failing.
Kevin Grogan: Moving over to the bank, I think one important difference between Schwab Bank and Silicon Valley Bank is just the nature of their depositors. Silicon Valley Bank’s depositors, almost all of them, were over FDIC limits with their deposits, meaning that they weren’t protected by the FDIC insurance because they held more than $250,000 per depositor. At Schwab Bank, more than 80% of their depositors are protected by FDIC insurance limits and are under those limits. It is just a totally kind of mirror image of each other with respect to what their depositor base looks like. So, if you think about Schwab Bank, there really isn’t incentive for those depositors to pull their money out if they’re under the FDIC insurance limit. So, you have those protections, and you aren’t as likely to see a bank run like we saw with Silicon Valley Bank. Now where things get a little bit blurry, if you are a customer of say Schwab’s custodian and you have holdings in the sweep money market account, those are actually held at Schwab Bank. You could in theory, and likely if you have your assets at Schwab, are a client of both Schwab Bank and Schwab’s broker dealer. But the Schwab Bank sweep account allocates that cash to two different banks; you have about $500,000 of FDIC insurance limits if you are a client of Schwab’s broker dealer.
Kevin Grogan: As I said to kick off the video, we think it’s highly unlikely that Schwab will become insolvent. But of course, you know , we never want to treat the unlikely as impossible. So, we do think about these things because of course, it affects our clients to a great degree if something bad were to happen to Schwab, which in turn would affect our business significantly. So we have thought through these issues, and I think it’s important to know looking back at history that there have been broker dealers that have failed historically. When a large broker dealer has failed, clients haven’t lost out from those failures. When Drexel Burnham Lambert failed in 1990, customers were made whole in that example. Bear Stearns failed in 2008. It was purchased by J.P. Morgan, again customers were made whole there as well. And then also when Lehman Brothers failed, it was wound down by SIPC, and again, customers were made whole with their holdings that they held at Lehman Brothers in that instance. And so again, none of these are fun.
Kevin Grogan: We think in the unlikely event that something bad were to happen to Schwab, customer assets are typically held separate from the custodian’s assets. And that is really your protection if something bad were to happen to your custodian, whether you’re a custodian of Schwab or any other custodian that you might be working with. And again, we understand that these issues can cause a lot of anxiety and stress, and so if you do have further questions don’t hesitate to reach out to your advisor.
While high-yield corporate bonds may offer higher returns, they also come with a great deal of risk. In this episode of Buckingham Weekly Perspectives, Head of Investment Research Jared Kizer takes a deep dive into these securities and shares why we don’t recommend this fixed income strategy.
So today we’re going to talk about high-yield corporate bonds, a type of fixed income investment that we frequently get asked about but don’t typically recommend or basically ever recommend in client portfolios. So, I wanted to jump in and talk about what high-yield corporate bonds are, then talk about some of the reasons historically that we haven’t recommended them in client portfolios.
What are high yield corporate bonds?
Jared Kizer: So high-yield corporate bonds, as the name might suggest, are relatively high yielding or high expected return forms of fixed income investing. So, they are fixed income, but on the riskier end of the scale and high-yield bonds almost always refers to higher-yielding corporate bond issuers. So, these are companies that are issuing bonds, but companies that are much much riskier typically than the typical company or what would be called an investment grade company. So, think of more distressed companies that are public companies, but more distressed and higher risk than the typical company that most of us are familiar with.
So therefore, when those companies are issuing bonds, they issue bonds at no doubt at much higher interest rates than say a Walmart or Google, Apple or Microsoft would be paying on their bonds because of that higher risk. So, we see investors can be attracted to high-yield corporate bonds because of those higher-yields and no doubt historically the bonds have had higher net returns than safer a fixed income, but we’ll touch on why that’s only part of the story and why we think is not enough to recommend them typically in client portfolios.
Higher returns = Higher risks
Jared Kizer: And we start there with yes returns a bit higher, but so is risk. So, you do see that on average about 1% to 2% of the yield that you’re earning on high-yield corporate bonds has been lost to defaults each year, so riskier companies. Yes, it’s fixed income but some of these companies will no doubt default over the course of a typical year. And of course, more of those companies will default during periods of prolonged stress and broader markets and the broader economy and that I think is the most important reason which we’ll touch on now while we haven’t recommended them historically. So, I think of high-yield corporate bonds almost as junior equities, so they’re very equity-like even though they are a fixed income investment. So, they’re not a great way to diversify a portfolio, said another way, most all clients that we work with and most investors in general will have some portion of their allocation dedicated to stocks. So, if you’ve got that part of your allocation, you’re kind of already getting what high-yield corporate bonds provide. So, if you separately then allocate what the high-yield corporate bonds provide, you’re kind of doubling up on risk that you’ve already got in your portfolio and doubling up on it in a way that’s not that tax efficient either. So, when we think about stocks, one of the nice characteristics they have is that they do tend to be relatively tax efficient. So in sensible stock strategies, you don’t lose a lot of return each year to tax related costs if you’re investing in a taxable account. Not true with fixed income – you’re taking equity like risks, but you’re going to be taking it in ways that would be taxed at traditional ordinary income rates. So just not a great diversification agent relative to other strategies that are out there in the marketplace. For example, some of the alternative strategies that we typically recommend and again in many ways you’re taking equity-like risk with less preferential tax treatment. So hopefully that’s a helpful kind of brief introduction to high-yield corporate bonds and the way that we think about them and why we don’t recommend them. If you have additional questions you’d like for us to tackle, feel free to reach out to your advisor. Or click the link below and submit questions in that way. Thanks.
What is the correct U.S. versus international equity allocation for a portfolio? In this edition of Buckingham Weekly Perspectives, Chief Investment Officer Kevin Grogan shares the principles for determining the correct equity allocation split, the cyclical nature of these investments, current valuations and the long-term forecast.
Kevin Grogan: In today’s video I’m going to answer a question we received from one of our viewers, which is what is the right U.S. versus international equity allocation for my portfolio? I’d say this is a question that has come up over and over again. I’d say over the past couple of years and honestly for my entire career really at Buckingham, it is a very very common question that comes in from investors, advisors and clients.
#1: The allocation process is cyclical.
Kevin Grogan: And so, the first thing I’ll mention is that it is kind of funny how these things go in cycles. I can remember back in the early 2010s when investors were looking backwards at the period from 2000 to 2009 and looking at the amazing run the international stocks had over that stretch of time relative to the U.S., and the tenor of the questions I and others were getting at that point in time or why do we have such a large U.S. allocation. And it’s just kind of human nature to look back at whatever did best over the recent period and want to have a greater allocation into that area of the market or into that asset class. Well now of course we’ve seen from say 2010 through 2020, we’ve seen a long stretch of time where the U.S. outperformed international stocks by a pretty wide margin over that stretch of time and so a kind of the cycle then completed itself where people started asking why do I have an international allocation looking back over the last 10 or 12 years when I can see the U.S. has dramatically outperformed international over this most recent five-to-ten-year period of time.
#2: Principles of successful investing.
Kevin Grogan: And so, the first bedrock principle I’ll come back to over the course of the video today, is that you want to have a diversified portfolio and that is kind of principle one in successful investing is diversification is your friend and this is no exception to that principle. And so, where you might start is thinking about the way the world allocates capital and if you look at global stock markets, the U.S. presents about 55ish% of the way the world allocates capital in the stock market so that could be thought of as a starting point for what the right allocation is. Although you could certainly make arguments for why a U.S. based investor might want more allocated to the U.S. than the way the world allocates capital because number one, it’s less expensive to invest in the U.S. Second, the U.S. is just more familiar to a U.S. based investor and third keeping in mind that international equities get you exposure to foreign currencies. And of course, most U.S. based investors expenses are in U.S. dollars. So those would be arguments why you might want a bit of a tilt or an overweight to U.S. stocks relative to the way the world allocates capital, but the important principle again is you want to own both because you want to have a diversified portfolio.
#3: Where are higher returns expected?
Kevin Grogan: A related question that comes up on this topic is where do you expect the higher returns to be from here? And so, the way we would answer that question is by looking at what’s called valuations or looking at the price-to-earnings ratios of U.S. companies versus non- U.S. companies. So, if you looked at a U.S. index right now, the price earnings ratio for that would be about 19, meaning you’re paying $19 for every $1 of earnings from a U.S. based company. If you were to look at international companies that price-to-earnings ratio would be closer to $13 mean you’re paying a lot less for a dollar of earnings from an international company than you are from a U.S. company. The academic evidence would say that means you have higher expected returns internationally, than you do here in the U.S. and keeping in mind, these are long-term expected returns say over the next 10 years. It’s not a prediction about what will happen over the next quarter or a year or anything like that, but we would say over kind of a planning horizon. You should expect international stocks to do better than U.S. stocks, just due to the differences in valuation. So, circling back to the question at the top is what’s the right U.S. versus international allocation? Unfortunately, I don’t think there is kind of one right answer, but I do think there are some guiding principles to keep in mind, which is I think it’s important to have at least 20% of your stock portfolio invested in international stock. So, I think that is at least a meaningful amount of international diversification. I think getting closer to say a 60/40 split would be closer to optimal. But again, there’s no one right answer here except to say that it’s important to have a meaningful amount invested internationally because again going back to those first principles of wanting to have a diversified portfolio and not having all of your eggs in one basket because you don’t know which market will wind up doing the best from here. If you do have any questions on anything I’ve covered today, please don’t hesitate to reach out to your advisor or click the link in the description below.
The post U.S. vs. International Equity Portfolio Allocation appeared first on Buckingham Strategic Partners.
It’s a fair question to ask ourselves: Should my portfolio be exposed to foreign companies? The answer is nuanced and investor-specific, but ultimately, yes. Buckingham’s Investment Policy Committee (IPC) believes an allocation in your portfolio to companies outside of the U.S. is beneficial. Let’s look at some of the most common reasons people tend to question their portfolio’s international allocation.
This risk is front of mind for many investors given that the war in Ukraine has been ongoing for longer than a year and shows little sign of resolution. Geopolitical risks, such as a war or health crisis, can affect global companies – and their stock returns – in many ways, including by creating trade disruptions, slowing the economy and weakening local currencies relative to the U.S. dollar. Last year showed the impact: International stocks faced headwinds as the U.S. dollar had its best run in 20 years, which increases costs and lowers profits for businesses operating overseas.
Although geopolitical risks can be worrying for investors, we believe there is no reason to react to the latest news because highly efficient markets incorporate all the relevant, known information into today’s stock prices. That’s also the reason why your portfolio isn’t tactically managed around the timing of different market events; by the time you come across new information, it has likely been baked into current prices. In fact, the IPC believes the best strategy to guard your portfolio against geopolitical risk is to own stocks from as many different countries and regions as possible. By doing so, you will be lowering your country-specific risk, both at home and abroad.
International Business by U.S. Companies
Proponents of a U.S.-only stock portfolio argue that it supplies ample exposure to foreign markets through each company’s international revenue streams: According to Morningstar, U.S. companies source approximately 38% of their revenue outside our borders. While this would provide some international exposure, we believe it falls short from a total portfolio diversification viewpoint. One of the big benefits of investing in foreign markets is the opportunity to own shares of companies that focus solely on their local markets, such as grocery chains and local restaurants. Studies show that these companies provide greater diversification benefits than multinational companies, which source revenue from their home markets and internationally.
Also, investing internationally means you own portions of foreign companies that source part of their revenue from the U.S. For example, U.S. consumers provide more than 20% of revenue for companies based in the U.K., Germany, France, Belgium and Taiwan, among others. By not investing internationally, one would forgo the opportunity to take part in the growth and innovation of well-known, multinational companies like LG, Honda, Nestlé, Anheuser-Busch and many others.
Recent U.S. Stock Market Performance
It can be very easy to anchor your expectations to recent performance when evaluating the holdings in your portfolio. Since the 2010s, U.S. stocks have enjoyed a stretch of superior performance compared with their international counterparts. However, this hasn’t always been the case. International stocks outpaced domestic stocks in the 1970s and 1980s. And although that trend reversed in the 1990s, the following decade — known as the “Lost Decade” because U.S. stocks lost value during the period — international stocks posted modest gains. This reinforces the fact that over any period, U.S. stocks can outperform their international counterparts and vice versa. And because market timing is often ill-fated, it’s best to own stocks from all over the world.
Focus on What You Can Control
As investors, we like to think that we can forecast stock market performance with some degree of certainty, but ultimately, global stock market performance is not within our control. Instead, we should focus on the things we can control, such as the types of risk that we take in our portfolios. Taking on international stock market risk in your portfolio provides the potential for diversification benefits, but if this risk makes you feel too uneasy, consult with your advisor to discuss the appropriate level of international stock exposure in your portfolio.
For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based on third-party data and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. R-23-5210
On Friday, March 10, regulators took control of Silicon Valley Bank as a run on the bank unfolded. Two days later, regulators took control of a second lender, Signature Bank. With increasing anxiety, many investors are eyeing their portfolios for exposure to these and other regional banks.
Rather than rummaging through your portfolio looking for trouble when headlines make you anxious, turn instead to your investment plan. Hopefully, your plan is designed with your long-term goals in mind and is based on principles that you can stick with, given your personal risk tolerances. While every investor’s plan is a bit different, ignoring headlines and focusing on the following time-tested principles may help you avoid making shortsighted missteps.
1. Uncertainty Is Unavoidable
Remember that uncertainty is nothing new and investing comes with risks. Consider the events of the last three years alone: a global pandemic, the Russian invasion of Ukraine, spiking inflation, and ongoing recession fears. In other words, it may have seemed as if there were plenty of reasons to panic. Despite these concerns, for the three years ending February 28, 2023, the Russell 3000 Index (a broad market-capitalization-weighted index of public US companies) returned an annualized 11.79%, slightly outpacing its average annualized returns of 11.65% since inception in January 1979. The past three years certainly make a case for weathering short-term ups and downs and sticking with your plan.
2. Market Timing Is Futile
Inevitably, when events turn bleak and headlines warn of worse to come, some investors’ thoughts turn to market timing. The idea of using short-term strategies to avoid near-term pain without missing out on long-term gains is seductive, but research repeatedly demonstrates that timing strategies are not effective. The impact of miscalculating your timing strategy can far outweigh the perceived benefits.
3. “Diversification Is Your Buddy”
Nobel laureate Merton Miller famously used to say, “Diversification is your buddy.” Thanks to financial innovations over the last century in the form of mutual funds, and later ETFs, most investors can access broadly diversified investment strategies at very low costs. While not all risks—including a systemic risk such as an economic recession—can be diversified away (see Principle 1 above), diversification is still an incredibly effective tool for reducing many risks investors face. In particular, diversification can reduce the potential pain caused by the poor performance of a single company, industry, or country.1 As of February 28, Silicon Valley Bank (SIVB) represented just 0.04% of the Russell 3000, while regional banks represented approximately 1.70%.2 For investors with globally diversified portfolios, exposure to SIVB and other US-based regional banks likely was significantly smaller. If buddying up with diversification is part of your investment plan, headline moments can help drive home the long-term benefits of your approach.
When the unexpected happens, many investors feel like they should be doing something with their portfolios. Often, headlines and pundits stoke these sentiments with predictions of more doom and gloom. For the long-term investor, however, planning for what can happen is far more powerful than trying to predict what will happen.
- 1Consider that a study of single stock performance in the US from 1927 to 2020 illustrated that the survival of any given stock is far from guaranteed. The study found that on average for 20-year rolling periods, about 18% of US stocks went through a “bad” delisting. The authors note that delisting events can be “good” or “bad” depending on the experience for investors. For example, a stock delisting due to a merger would be a good delist, as the shareholders of that stock would be compensated during the acquisition. On the other hand, a firm that delists due to its deteriorating financial condition would be a bad delist since it is an adverse outcome for investors. Given these results, there is a good case to avoid concentrated exposure to a single company. Source: “Singled Out: Historical Performance of Individual Stocks” (Dimensional Fund Advisors, 2022).
- 2Regional banks weight reflects the weight of the “Regional Banks” GICS Sub-Industry. GICS was developed by and is the exclusive property of MSCI and S&P Dow Jones Indices LLC, a division of S&P Global.
The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or, representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional Ireland and Dimensional UK, as applicable (each an “Issuing Entity, as the context requires), to be reliable and the Issuing Entity has reasonable grounds to believe that all factual information herein is true as at the date of this document. It does not constitute investment advice, recommendation or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorised reproduction or transmitting of this material is strictly prohibited. The Issuing Entity does not accept responsibility for loss arising from the use of the information contained herein.
This material is not directed at any person in any jurisdiction where the availability of this material is prohibited or would subject Dimensional or its products or services to any registration, licensing, or other such legal requirements within the jurisdiction.
“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd. and Dimensional Hong Kong Limited. Dimensional Hong Kong Limited is licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities) regulated activities only and does not provide asset management services.
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.
Diversification neither assures a profit nor guarantees against loss in a declining market.
Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.
All returns are in USD. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
Investment products: • Not FDIC Insured • Not Bank Guaranteed • May Lose Value
Dimensional Fund Advisors does not have any bank affiliates.
Are you familiar with the butterfly effect, or how small actions can have big, often unexpected ripple effects? The classic example (and its name source) is a butterfly flapping its wings in one locale altering the air pressure just enough to generate a tornado halfway around the world.
Next question: Have you ever heard of Dan Wheeler? Unless you are an independent, fee-only financial advisor, probably not. But despite his relative anonymity, Daniel Webster Wheeler, Jr. is acclaimed in our community as someone who changed the advisory profession for the better.
Sadly, Wheeler passed away recently, on February 15, 2023, at age 72. To honor his memory, we want to share with you the larger-than-life butterfly effect he had on our life and yours.
An Unlikely Champion for Individual Investors
Born in East St. Louis, serving as a Vietnam War Marine, bouncing among various accounting, philanthropic, and financial roles (including being comptroller for a Saudi Arabian arms dealer), landing as a broker at Merrill Lynch in the 1980s … Wheeler might seem like an unlikely hero for individual investors.
But perhaps it was his restless nature that made Wheeler perfect for the role.
Pre-Wheeler, the financial industry fed almost exclusively on commissions. From an investor’s perspective, any advice you received would seem free of charge. But behind the scenes, your “advisor” was earning their keep from commissions paid by third-party providers who stood to benefit from your transactions, including broker/dealers, bankers, insurance companies, and fund managers. Your advisor was also usually employed by one of these same providers, beholden to their sales quotas and other profit-generating priorities.
It’s easy to imagine how rife this model could be with conflicts of interest to trade, trade, trade, and to recommend investments that would enhance a firm’s bottom line, whether or not they made best sense for you. After all, earning commissions and chasing incentives was the only way a financial provider could earn their keep, or sometimes, even keep their jobs.
Reimagining Investment Advice
In the late 1980s, Wheeler characteristically called BS on the financial industry’s inherently flawed compensation model. He’d seen the sausage-making, grown disgusted by what it took to “succeed,” and envisioned a new, more meaningful way to deliver solid investment advice to investors who were otherwise too often being thrown to the wolves.
Even then, Wheeler was not alone in his beliefs. But he became among the first to act on them. At age 40, in a brash, virtually unheard-of move, Wheeler quit Merrill Lynch and opened a solo firm. In lieu of commissions, he charged a transparent fee, which clients paid directly to him for his independent advice. He refused to accept any forms of third-party compensation that might influence his recommendations.
The independent, fee-only advisory model was born. Wheeler blazed a new path, in which advisors were free to structure and manage clients’ portfolios, without being beholden to opaque sales incentives, and third-party conflicts of interest.
An Alliance with Evidence-Based Investing
Wheeler also turned to fellow thought leaders to help him implement his vision. As described in this homage by Financial Times Editor Robin Wigglesworth, Wheeler’s next epiphany arrived when “he discovered the works of … Gene Fama, the University of Chicago professor and father of the efficient markets hypothesis. It all suddenly makes sense, Wheeler thought.”
In another butterfly moment, Wheeler crossed paths with a nascent Dimensional Fund Advisors (with Fama sitting on Dimensional’s board). In its early days, Dimensional was providing no-load/no-commission funds that investors could use to efficiently and effectively capture available dimensions of market returns at lower costs compared to most retail fund equivalents. They grounded their strategies in evidence-based insights provided by Fama and other Nobel laureate financial economists. This approach was also virtually unheard of at the time.
Together, they agreed it was high time for advisors, fund managers, and investors to all sit on the same side of the table—the investor’s side, that is. But there was a wrinkle. Dimensional was serving institutional investors only.
Once again, Wheeler led the charge. He convinced Dimensional they could—and should—create a legion of like-minded, independent advisors to bring evidence-based investing to the world. Dimensional’s co-CEO Dave Butler describes in his post, “Remembering Dan Wheeler”:
“Dan was convinced that there were other financial advisors who would share his enthusiasm for marrying independent and conflict-free financial advice with cost-effective investment strategies grounded in a scientific approach. He just didn’t know who they were, and they didn’t know about Dimensional. With a larger-than-life personality and enough zeal to overcome the odds, he made this vision a reality.”
In 1989, Wheeler joined Dimensional to build up its advisor channel. He retired in 2011 as its director of global financial advisor services. His business strategy had happened, just as he’d described it.
Advocating for a Fee-Only Future
Today, thanks to Wheeler and other early advocates like him, it’s much easier for investors like you to find an independent, fee-only advisor like us. From our perspective, it’s also much easier for us to provide the kind of fairly priced, fiduciary advice we are proud to provide.
Unfortunately, it also remains all too easy for consumers to end up being swayed by commission-based advice, which is still widely available as well.
We’ll continue to work on that. We’ll continue to beat Wheeler’s drum, insisting, as he did, that investors deserve far better than that. One thing is clear: Were it not for Wheeler’s early effect on investment advice as we know it, our voice would not reverberate nearly as loudly as it now does. Wherever he is now, the irascible Dan Wheeler has earned his wings.