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Asset Allocation

No single input is more important to a portfolio’s success than asset allocation, or determining how much to allocate to various asset classes.

In 1986, authors Gary Brinson, Gilbert Beebower, and Randolph Hood conducted an in-depth study of the various sources of investment returns. Specifically, they analyzed quarterly returns from 1974-1983 for the 91 largest pension funds, and determined that 93.6% of the returns generated were a result of asset allocation.

In a follow-on study in 1991, the authors concluded that 91% of portfolio returns are determined by asset allocation.

footballThe last 18 months have been a volatile time in the market with fears of a Chinese recession causing a temporary market pullback in August 2015, Eurozone concerns causing a dip in February 2016, and Brexit triggering a quick decline at the end of June this year. Through all of that, the S&P 500 is actually up 3.67% over the last 12 months and 6.17% year-to-date. Because the S&P 500 is up 6%, your portfolio should have returned around 6% this year, right? Not necessarily, and if you’re in a diversified portfolio, likely not.

The problem with comparing a diversified portfolio to “the market” is that the S&P 500 only measures companies that make up a portion of a well-diversified portfolio. Football is top of mind as it is nearly football season again (HALLELUJAH!) so allow me to draw an analogy. Lineman, the largest players in football, make up only a portion of NFL football players. Comparing the S&P 500 to a diversified portfolio is like comparing the average size of an NFL lineman to the average size of an NFL football player. While players of the same sport are being compared, the comparison is apples to oranges because there are a large variety of statures in the NFL. The same goes for investing where there are countless asset classes available.

Financial advisors can provide peace of mind. But do they deliver a demonstrable, dollars-and-cents advantage to their clients?

a-leaders-disciplineTwo studies show that the answer is yes—if the advisor is diligent in providing several key services. Let’s start with research from Morningstar, the big Chicago-based investment research firm. A 2012 Morningstar study found that advisors who use an “efficient financial planning strategy” can help clients increase their retirement assets significantly.

By making better decisions in five areas, the study found, advisors can help their clients earn an extra 1.82% a year—or about 30% more for their retirement.

On Tuesday, Donald Trump won the Republican nomination for President. This news likely caused much elation, disgust, and nothing in between.

But among those who call themselves Republicans, this marks quite a shift in their thinking from last year. In an April 2015 poll of registered Republican voters, Jeb Bush led Marco Rubio while Donald Trump … wasn’t even on the list!

No-Clear-Leader-in-the-GOP-Field Blog 07.20

“What goes best with a cup of coffee? Another cup.”

-Henry Rollins

Coffee beans 07.14Thus far, 2016 has been an interesting year for money managers. We have seen the recent market rally mask some of the greatest market volatility experienced in five years. If you think back to the beginning of the year, you’ll remember the worst start to the calendar year ever for the S&P 500. As recession fears subsided, stocks rebounded and we closed at a new record high on the S&P 500 yesterday. We have also seen a reversal in commodity prices.

From a total return standpoint, the S&P GSCI, the commodity index, sits atop of its equity counterparts. The increase in commodity prices have helped subdue the concerns of a global recession, but also comes with drawbacks. The clear drawback is the price to fill your car. We have seen prices at the pump increase over the year as oil prices have risen and now hover around $50 per barrel. Another downside, one not as publicized as other commodity prices, is the price of coffee.

When it comes to financial planning, I have found that a systematic approach is needed to make important decisions, focus on what matters most, and evaluate options. In previous posts I introduced the guiding principles of wealth management:

  1.  Make your balance sheet, cash flow, and portfolio your friend
  2. Compare your finances to standards of excellence
  3. Stress-test your financial plan
  4. Know what is holding you back and spurring you forward
  5. Be specific and proactive to make permanent changes

To achieve the desired consistency, I find that people need a well-designed structure. I strive to provide this structure in my role as a financial advisor.

In my previous four posts I introduced my guiding principles of wealth management, along with the first four principles (links to one, twothree and four). Today I will discuss the fifth and last guiding principle:

Be specific and proactive by identifying and implementing the actions that will result in the best permanent changes

PrintOver the years, I have had the privilege of observing how clients meet challenges and tackle opportunities. Some have a knack for succeeding in any task they take on, while others seem to struggle more than they need to. Eventually, I saw a key distinction between these two groups: Successful people are usually very specific and proactive, while those who struggle tend to be vague and reactive. They set goals, but they do not follow through with a plan of specific actions aimed at meeting those goals. Consequently, instead of controlling events, they wind up responding to events. Getting stuck in reactive mode is another example of the 85% Trap.

By contrast, when successful people see a need or set a goal for themselves, they develop a specific plan of action. In keeping with the concept of the Essential 15%, they strive to find a permanent solution to every challenge, as opposed to a solution that requires ongoing effort.

In my previous four posts I introduced my guiding principles of wealth management, along with the first three principles (links to one, two, and three). Today I will discuss the fourth guiding principle, which is one of the most enjoyable for me to use as a financial advisor while helping clients:

Know what is holding you back, spurring you forward, and serving you best

Road cartoonThis kind of self awareness is essential to have the energy, confidence, and focus to support your financial plan. Wealth mastery cannot be pursued with out a degree of self-mastery and self-knowledge. You need to know what is working against you and deal with it. You need to know what you have in your favor and use it to the best possible advantage.

In my experience as a financial advisor, I have found that people often lack such self-awareness. So, I have made it one of my guiding principles to take proper time for reflection. With weaknesses especially—habits of mind that can hold you back—people often need a third party or a sympathetic ear to surface issues.

In my last few posts I have discussed my first few guiding principles for wealth management: make your balance sheet your friend and compare your financial plan to standards of excellence. Today I will discuss the third principle:

Back-test and stress-test your financial plan under various scenarios to further reveal strengths, weaknesses, and possibilities.

Checklist

The “Elastic Limit” is a term I’ve borrowed from engineering because it has tremendous relevance in wealth management and financial planning. It refers to the amount of stress a material can withstand before undergoing permanent deformation. For example, if you stand on a wooden bench, the wood may sag a bit and bounce back when you jump off. However, if several NFL linemen stand on the same bench, the wood will probably warp, crack, or break.


*Ranked/Named among Top, Best and Most Exclusive Advisors sources: Barron's March 2016, 2015, 2014; Advisory HQ March 2016; Financial Times June 2015; Five Star Professional November 2015, 2013, 2012,2011, 2010, 2009; Mutual Funds Magazine January 2001; NABCAP September 2010, 2011, 2013; Worth Magazine July 2002, January 2004, October 2004, October 2008; Wealth & Finance International, October 2014. Rankings and/or recognition by unaffiliated rating services and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Janiczek & Company, Ltd. is engaged, or continues to be engaged, to provide investment advisory services, nor should it be construed as a current or past endorsement of Janiczek & Company, Ltd. by any of its clients. Rankings published by magazines, and others, generally base their selections exclusively on information prepared and/or submitted by the recognized adviser.

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