Security Selection and Passive Investing (EBI #2)

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Passive investing as the foundation for an optimal portfolio

To investors who have spent years accumulating wealth through active entrepreneurship or business management, the notion of being “passive” may have a negative connotation. But when designing a portfolio strategy, evidence suggests that passive investing produces superior results with lower expenses than one built around active trading.

In a passive investment strategy, an investor is not looking to beat the market. Rather, the goal is to gain exposure to the broader market – all the good and all the bad – at the lowest possible cost. (Source: Managing Investment Portfolios: A Dynamic Process)

The broader market is represented by indices, for example the Standard & Poor’s 500 Index for stocks and the Barclays Aggregate Bond Index for bonds. Investors do not buy into an index per se, but in funds that closely mimic the index.

financial-planner 08.19Hiring a financial advisor can be a smart and profitable decision: As we detailed in a recent blog article, advisors using industry best practices can help their clients earn a significant investment premium.

There’s a catch, though. Not all financial advisors do the right thing, consistently, for their clients. Surprisingly, the great majority of financial advisors are under no legal obligation to put their clients’ financial interests ahead of their own.

Gold Medal 08.15As we have watched the 2016 Olympics in Rio, it’s truly impressive to see the athletes from all over the world compete at such a high level and demonstrate their true dedication to their chosen sport.  The athletes and their families have spent years devoted to hard work, incredible amounts of focused energy to training, exhibit world class discipline and dedication in order to be the very best in the world.  Their ascension to the Olympics of course has not been linear, as each of the athlete’s had to overcome many obstacles and adversity in their paths to reach the pinnacle of their respective sport.  The Olympian athletes’ training efforts, focus, and discipline are primarily behind the scenes with many hours working with their coach and trainers, with never a promise to compete or let alone win an Olympic medal.  Their hard work and tireless effort’s provides them the best chance to execute their lifetime goals.

boardroomJaniczek recently hosted an expert team of five respected advisors to discuss business exit planning for high net worth individuals. Around the table sat five like-minded professionals who interacted in a case study regarding an upcoming business sale and the necessary steps to complete the transaction. The group included an estate attorney, a consultative tax professional, a life insurance advisor, and two comprehensive wealth management professionals.

The case study focused on four key areas:

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.


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Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken Janiczek Welath Management -Janiczek”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Janiczek. Please remember that if you are a Janiczek client, it remains your responsibility to advise Janiczek, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Janiczek is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Janiczek’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Janiczek does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Janiczek’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Janiczek & Company, Ltd.), or any non-investment related content, made reference to directly or indirectly on this website will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this website serves as the receipt of, or as a substitute for, personalized investment advice from Janiczek & Company, Ltd. To the extent that a viewer has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Janiczek & Company, Ltd. is neither a law firm nor a certified public accounting firm and no portion of the website content should be construed as legal or accounting advice. If you are a Janiczek & Company, Ltd. client, please remember to contact Janiczek & Company, Ltd., in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. A copy of the Janiczek & Company, Ltd. current written disclosure statement discussing our advisory services and fees is available upon request.

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