Why Beating The Market Is An Uphill Skate

It is absolutely possible to beat the market, just as I’m sure it’s possible that someone could climb Mt. Everest in a pair of roller skates.

It is so improbable, however, that it’s rendered a fruitless, if not counterproductive, pursuit.

After 16 years in the financial industry and seeing countless great investors eventually humbled by market forces they could not control, I’ve finally relinquished my skates.

Know Your Greek

First, we must define what it means to actually “beat the market.” We’re not talking about simply outperforming one of the major stock or bond market indices, like the S&P 500 or the Barclays U.S. Aggregate Bond.

Investors who take more risk than these benchmarks in years when taking risk is rewarded could—even should—have a higher expected rate of return. But doing so does not equate to a feat of investing brilliance. No, in order to claim dominance over the market, an investor must achieve a higher risk-adjusted rate of return—the prized, yet elusive, alpha.

Beta, in investing parlance, is the market. The market equals the number one. An investment with a beta of 1.5 is taking on more risk than the market and should enjoy a proportionately higher reward when the market has an upward trajectory, but you should also expect to lose more on the downside. An investment with a beta of less than one should respond to market stimuli with less gusto, or volatility, than the market.

Beta is all around us, but alpha is more like a shrouded ghost investors occasionally glimpse, but rarely capture. When the alpha ghost is captured, it does what those of us who regularly interact with ghosts already know—it slips through our grasp.

Depending on the year, you’ll find statistics confirming that the majority of actively managed funds—mutual funds and hedge funds, whose very existence is justified only by clinging to the hope of attaining alpha—underperform appropriate benchmarks. In any given year, 50% to 90% fail to beat the market.

An even more colossal failing is shown in active managers’ ability to beat the market over an extended period of time, or even a few years consecutively. A Vanguard study, which confirmed previous research, found that only 18% of active managers were able to outperform their benchmark over the 15-year period from 1998 through 2012.

Fully 97% of them underperformed in at least five of those years and “two-thirds of them experienced at least three consecutive years of underperformance during that span.”

Ivy League Investing

It’s always been hard to beat the market, but now it’s become “nearly impossible” according to Julie Segal at Institutional Investor magazine.

And Segal is speaking for the realm considered to be the last bastion of alpha—institutional investors, like Ivy League endowments.

Why has alpha been slipping away from even the brightest investment minds in the business? Charles Ellis, who served on Yale University’s investment committee from 1992 until 2008, tells Segal that volume on the New York Stock Exchange has increased more than 2,000 times in the past 50 years. Ellis also states that during the same time, the balance of trading in the U.S. has swung from 90 percent individuals to roughly 90 percent institutions.

In 1987, there were 15,000 people holding the coveted Chartered Financial Analyst (CFA) designation, the gold standard for money managers. Today, there are more than 110,000 CFAs worldwide.

It’s called the “paradox of skill.” As everyone’s skill increases, relative outperformance diminishes. Investors are smarter and more competitive than ever, and as a result, they’re unable to profitably exploit a dwindling number of market inefficiencies. The market has gone from being pretty darn efficient to ridiculously so.

Sadly, investors lose an awful lot of beta in their quest for alpha.

You have a choice: You can keep trying to climb Mt. Everest with a storm moving in and roller skates for footwear, or you can position probability in your favor and join the movement toward low-frequency trading and evidence-based investing.

If you enjoyed this post, please let me know on Twitter, @TimMaurer.

Embrace Low-Frequency Trading

I love Michael Lewis’ writing, but I have some surprisingly good news to share about the high-frequency trading scandal revealed in his new book:

High-frequency trading is not likely to hurt disciplined, long-term, low-frequency-trading investors. In fact, it might even help.  bondpit

Yes, it is almost impressive that Wall Street has managed to produce yet another scandal, even under the ever more watchful eye of regulators and the media since the financial industry imploded in 2008.

And no, I don’t favor high-frequency trading or especially its less-sophisticated cousin, day trading. I thought former hedge fund manager James Altucher put it best when answering the question, “Should I day trade?”

“Only if you are also willing to take all of your money, rip it into tiny pieces, make cupcakes with one piece of money inside each cupcake and then eat all of the cupcakes.”

However, high-frequency trading, this scandal du jour, seems to actually push trading costs and bid/ask spreads (effectively, the net cost of purchasing a security) down for investors. High-frequency traders aren’t doing it out of the kindness of their heart, mind you, but it’s the large number of medium-frequency active managers who are losing out, not disciplined low-frequency investors. Wall Street’s movement toward high-frequency trading is only making a stronger case for passive asset class management—a major component of which is low-frequency trading.

The primary benefits of low-frequency trading are the reduction of trading costs, the minimization of taxable events and, especially, the avoidance of falling prey to what financial writer and artist Carl Richards calls “the behavior gap”—the difference between what the average investment returned and what the average investor earned. Sadly, investors have earned meaningfully less than the investments they buy simply because they don’t hold them.

I’m not talking about pure indexing, although you could do much worse than establishing a diversified portfolio with Vanguard index funds and/or exchange-traded funds.

I’m also not talking about pure white-knuckle passivity.

I’m talking about combining the art and science of investing in the form of evidence-based investing—creating a portfolio that is broadly diversified, combining the asset classes that have historically given you the most return for your risk with the asset classes that have tempered portfolio volatility enough to stick with your plan.

Evidence-Based Investing: 101

The fundamental aim of investing is not to actually make money--but to have a better life.

The primary objective of investing in stocks, however, is to make money. The point of investing in bonds, then, is to help you stay invested in stocks when the waters get choppy. The net effect should be adding value to your life, in accordance with your values and working toward your goals.

Evidence-based investing forces us to submit all of our opinions and informed guesses to actual peer-reviewed evidence. The evidence shows, after all, that it is nearly impossible to “beat the market.”

There is adequate evidence, however, that certain asset classes—slices of the market—have outperformed others. For example, you already know that stocks have historically outperformed bonds. Additionally, small-cap stocks have outperformed large-cap stocks and value stocks have historically outperformed growth stocks.

Of course, those asset classes that have historically produced outsized returns have also required an iron stomach at times in order to reap your reward. Their highs are higher, but their lows are also lower.

The objective, then, is to orchestrate a portfolio that accepts the risk you can withstand, and then blend that risk with the proper stabilizing agents to lessen the volatility, helping ensure that you stick with the plan.

Can You Expect More Return With Less Risk?

In short—yes, because a truly diversified portfolio is indeed greater than the sum of its parts . There are two ways to reduce overall portfolio volatility:

1)   Own less volatile asset classes.

2)   Own less correlated asset classes.

The foremost portfolio stabilizing agent is fixed income, and since the primary reason we hold fixed income is to stabilize, it only makes sense to hold the most stable of the stable—FDIC-insured CDs, Treasuries, agencies and, only if you’re in a high tax bracket, AAA-rated municipal bonds.

Yes, I omitted corporate bonds from that list as well as high-yield “junk” bonds, because these varietals tend to exhibit more equity-like risk characteristics. If you’re going to take risk, you may as well do it in an asset class that rewards you better—stocks.

But as Larry Swedroe, author of Think, Act, and Invest Like Warren Buffett, shows, it’s possible to add an equally or more volatile asset class and see the overall volatility go down .

He compares the traditional 60/40 portfolio—60% S&P 500 (stocks) and 40% five-year Treasury notes (fixed income)—to a flip-flopped portfolio with 60% in Treasuries, but a vastly more diversified 40% in equities, skewed in the small, value and international directions (and away from the broader market).  The results?

In short, the 40/60 portfolio with diversified equity holdings outperformed the 60/40 portfolio with substantially less risk. (By the way, I’m not recommending that you should have a 40/60 portfolio—I’m simply demonstrating the benefits of thoughtful diversification.)

The only way this works is if you join the low-frequency trading club. Don’t set it and forget it. Set it, calibrate it when necessary through rebalancing, and only make more meaningful changes when your ability, willingness or need to take risk changes.

If you enjoyed this post, please let me know on Twitter, @TimMaurer.

 

What You Can Learn From Bill Gross And PIMCO’s Troubles

“Trouble. Trouble, trouble, trouble, trouble.” Reading all the news about Bill Gross and PIMCO, I keep hearing that Ray LaMontagne song in my head. (Go ahead—give it a listen while you read this, just for fun.) EGO

The king of bonds isn’t yet abdicating the throne, but it’s been a rough stretch since PIMCO came down from the mountain to translate the etchings on the “New Normal” tablets. It was, of course, hard to argue the logic in 2009, that U.S. markets would struggle under the weight of a sluggish economy hampered by high unemployment and systemic government debt. But as it often does in the face of supposed certainty, the market defied man’s expectations.

Following the new normal playbook, PIMCO bet against Treasurys in 2011, when its flagship fund, Total Return, captured only 53% of the Barclays U.S. Aggregate Bond index return for that year. In 2013, the fund barely beat the Barclays index, but it lost money for the first time since 1999—accelerating a trend of fund outflows.

Then things started to reflect daytime television, when Gross’ heir apparent, Mohamed El-Erian, departed in the midst of rumors of dissent at the top of the organization. Those rumors were confirmed when The Wall Street Journal published an article based on reports by unnamed inside sources, accusing Gross of comparing himself publicly to the unbeatable racehorse, Secretariat. Then Morningstar downgraded PIMCO’s “stewardship grade” to C from B.

Beyond the tabloid fodder, however, there is a vital investing lesson to take away from this still-evolving story:

Pride goeth before a fall.

Ego and ignorance are at the core of nearly every investment blunder. As un-shocked as most of us were to find that an investment management bigwig making $200 million a year had an ego problem, ego is at the core of the PIMCO dilemma.

(Click HERE to see me discussing concerns about Bill Gross' ego on CNBC's "Street Signs.")

Ego, then, often leads to an interesting form of ignorance. While none of us would dispute Gross’ intellectual brilliance, his presumption of preeminence might be his downfall.

When everything goes right for an extended period of time, we often mistakenly allow ourselves to believe that our success is disproportionately attributable to us and not outside forces. It’s called the fundamental attribution error. We attribute our success to our innate traits and our mistakes to external circumstances while assuming that the errors of others are due to internal shortfalls, like a lack of character or intelligence.

It’s a blind spot. Unfortunately, the financial industry seems to be full of them. Everybody thinks they’re smarter than everybody else—and the market, even though the overwhelming evidence stands in opposition.

Déjà vu all over again?

Remember the story of the fabled fund formerly known as the Legg Mason Value Trust? Bill Miller had beaten the market for so many years that he forgot it was possible for him to not beat the market. When he lost to the S&P 500 for the first time in his tenure with the fund in 2006 and 2007 — and then very badly in 2008, betting he could will the financials out of their downward spiral — everything started to become clearer: The fund had returned more than the broader market largely because it was taking on more risk than the market—then, it simply lost more than the market because it was taking on more risk than the market.

Almost two decades of apparent outperformance were undone in a single year.

Or go back even further to explore the life of Jesse Livermore in the fictional account based on his life in Reminiscences of a Stock Operator. Some Wall Street firms still offer this as a securities trading handbook, even though Livermore lost his fortune more times than he was able to make it and ended his life by his own hand, in poverty and disgrace.

The Bottom Line:

The market rewards humility over hubris, discipline over gut feelings and proactivity over reactivity. By acknowledging that you’re not omniscient, you free yourself to compose an investment strategy grounded in evidence that makes up for its lack of sex appeal with its elegant simplicity—and most important, its effectiveness. You can choose to stop chasing the market and build a portfolio designed to get everything the market has to offer.

More on that next week.

If you enjoyed this post, please let me know on Twitter, @TimMaurer.

 

 

Allocating Your Most Valuable Asset—You

What is your most valuable asset? Your home? Not likely, even back in 2006. Your 401(k)? Doubtful, even when it was 2007. No, if you’re not yet glimpsing your retirement years, it’s likely that your biggest asset is you—and not just metaphorically.

Let’s say you’re only 30, with a degree or two and some experience under your belt. You’re making $70,000 per year. If you only get 3% cost-of-living-adjustment raises, you will crest a million in aggregate earnings in just the next 13 years.

Over the course of the next 40 years, over which you’ll almost surely continue working, you’ll earn more than $5.2 million.

Or maybe you’ve just celebrated your 40th birthday—the new 30—and you’re hitting your stride professionally, making $150,000 per annum. With only 3% raises, you’ll make more than $2.1 million in just the next dozen years.

(How’s that 401(k) looking again?)

You are your biggest asset.  It’s called labor capital, and it’s an asset all too often underestimated by financial advisors and their clients.

Labor Capital Curve

While your financial assets start small and hopefully grow over time, compounding through disciplined saving and wise investing, your labor capital brims with potential before descending later in your career.

What would it look like if we treated labor capital with the respect it deserves throughout the financial planning process?

First, we’d invest purposefully in our labor capital. Yes, this means pursuing education, but it also means cultivating our earning potential through mentoring and coaching.

It also means pursuing a job that we enjoy so we don’t feel boxed in if it’s necessary or desired to extend the longevity of our career—and our labor capital.

Second, we’d adjust the rest of our financial plan—especially our investment plan—to accommodate for our labor capital. Moshe Milevsky asks the important but rarely asked question, “Are you a stock or a bond?” in his book of the same name.

If your work offers a high reward but also high risk—let’s say you’re self-employed or you work in a cyclical boom/bust business—you’re a stock. If you enjoy the stability of your position as a tenured professor, but gripe with your colleagues about your unremarkable pay raises, you’re a bond.  "An investor’s ability to take risk is impacted by the stability of their earned income," says Larry Swedroe in The Only Guide You'll Ever Need for the Right Financial Plan, co-authored with Kevin Grogan and Tiya Lim.

If your labor capital acts like a stock, even if you have the intestinal fortitude to endure risk, you should likely be skewing your financial assets more conservatively. Whereas, if your income is more representative of the tortoise than the hare, you may consider infusing your portfolio with a little Usain Bolt.  "[E]ffective diversification of the client’s entire household balance sheet may entail using financial capital to counterbalance against the risks of human capital," says planning guru, Michael Kitces.

Lastly, we’d ensure that our moneymaker is adequately insured. If you work for a well-established company, it likely pays for a base level of disability income (DI). But for most, this isn’t enough, for at least two reasons:

If your company pays the premiums on your group DI policy, the benefits to you will be taxable. Most group policies cover 60% of your salary compensation (although typically not your bonus or incentive comp). If you didn’t have to worry about paying taxes, that wouldn’t be so bad, but after taxes, you’d be lucky to walk away with 40% of your gross pay—while enduring higher medical expenses on the home front.

Additionally, most group DI policies only cover your “own occupation” for two years, at which time you must be medically incapable of performing the material duties of any occupation. (Intending no offense to the gracious folks at the entrance of a Wal-Mart, this means that if you can’t pin a smiley face sticker on the front of someone’s shirt, you ain’t gettin’ your disability checks.)

To make up for either or both of these shortfalls, it makes sense for many—if not most—of us to explore the acquisition of a supplemental long-term disability income insurance policy to stack on top of your insufficient group policy. And if you’re self-employed or otherwise uncovered by a group policy, you’re entirely exposed to the risk of losing your most valuable asset. Private policies aren’t cheap and have too many moving pieces, so you’ll want to educate yourself further. But ignore this very real risk at your own peril.

BOTTOM LINE: Discussions of labor capital can be a great encouragement to those just starting their occupational journey—or those who’ve fallen behind on the accumulation of financial assets—but integrating our labor capital into our financial plan only helps if we allocate our income well.  This means spending money on the most important things in life, saving money for a time when our labor capital is exhausted, and ultimately giving money to the people and causes dearest to us.

If you enjoyed this post, let me know on Twitter @TimMaurer.

Financial Advisors: Differentiate Yourself By Being Yourself

The most freeing day of my career was when I sold my golf clubs.

Different

Although the transformation had been under way for several years, it was a moment of symbolic importance. It signaled an official decision to permit myself to be something other than what I had come to believe the financial industry wanted me to be. I was officially granting myself permission to be myself.

Conformity

I apologize in advance for stereotyping, but the sales managers I had worked for had personified the industry for me. Not fond of nuance or implication, they simply had expressed that I was to be, among other things, a golfer. So I bought a set of new clubs outfitted with a nice bag, and I hired an instructor to help me master the gentleman’s game.

After several lessons, my laidback instructor told me he’d never seen anyone grip the club quite so hard. We discovered that I had complemented my less-than-elite athleticism with heavy doses of intensity and hustle to remain competitive in sports while growing up. Unfortunately, as it turned out, these traits were counterproductive to success in golf.

Instead of investing thousands of dollars in psychotherapy to try and loosen my grip on a golf club, I sold my clubs and bought a used road bicycle. I grew to love the sport, which rewarded my overcompensation of will and desire.

But I wasn’t just dumping golf at that moment. I was dumping it all—the notion that I should only wear dark suits, plain white (or light blue on Friday) shirts, power ties, hair that is neither too long nor short and a clean shaven face. Eureka—I could even wear a pair of jeans to the grocery store now!

Differentiation

Paradoxically, as long as I lived inside of the industry’s box, I was taught to differentiate myself professionally—to become “the guy” for orthopedists or cosmetic dentists or corporate attorneys. Everything I did in life, work and play was supposed to send a message that would presumably attract a specific niche of people who are known for making especially profitable financial advisory clients.

Of course, there is nothing wrong with golfing, differentiating yourself or serving a niche. In fact, each of these pursuits can be beneficial for you and your clients when practiced in earnest. What is wrong—or at least unhealthy and more than a touch manipulative—is becoming someone you are not for the benefit of purposefully differentiating or conforming.

What if the Holy Grail of finding your niche and setting yourself apart from the crowd was found simply in permitting yourself to be yourself?

Being Yourself

If you always wanted to be a Navy fighter pilot but got turned down because you’re too tall or your eyesight was worse than 20/20, you could develop a niche serving military officers. If you aspired to be a surgeon but threw up all over the cadaver on the second day of medical school, you could serve the medical community. And of course, if you’re passionate about golf and enjoy the simplicity of uncomplicated garb, you should be entirely free to live up to the stereotype of the financial advisor.

There’s only one caveat, but it’s a big one: When you give yourself the freedom to be exactly who you are, you might disappoint other people. It’s easier for companies and managers—even parents, spouses and, in some cases, kids—to put you in a predictable construct that may best serve their needs and wants.

What if you want to help social workers navigate the world of personal finance and thereby would likely have to take a pay cut? What if it means you’d be working with clients less and drawing more? What if becoming fully you means moving to Latin America to manage a micro-finance operation and teach English? What if it means educating advisors more than investors?  What if it means designing a practice that conforms to your family instead of the reverse?

You might have to change ZIP codes, companies or professions altogether.

Unfortunately, being who you are—especially in the financial industry—may not be the easiest thing to do, but choosing to be yourself is simple because it’s natural, and incredibly liberating.

If you enjoyed this post, please let me know via Twitter @TimMaurer.

 

Time Is More Precious Than Money

As the Fed has taught us through the money-printing machine cloaked as quantitative easing, the potential supply of U.S. dollars is limitless. Even for most of us individually, we are capable, to varying degrees, of generating and regenerating money through work, investment and happenstance.

Time, however, is a different story.

Thanks to Emily Rooney for permission to feature her artwork

Thanks to Emily Rooney for permission to feature her artwork

It brings to mind these lyrics: “Where you invest your love, you invest your life,” croons Marcus Mumford in the song “Awake My Soul” on Mumford & Sons’ debut album, “Sigh No More.”

Sure, musicians are notorious for writing lyrics because they sound self-important, or maybe simply because they rhyme, but Mumford has earned a reputation for lyrical brilliance and offers us something deep and meaningful here to apply in our lives and finances.

No matter how much we strive, delegate and engineer for efficiency, there are only 24 hours in each day. We are unable to manufacture more time, and once a moment has passed, it is beyond retrieval.

Of these 24 hours each day, if we assume that we will sleep, work and commute for approximately 17 of them, that leaves us with a measly seven hours to apply ourselves to loftier pursuits. After an hour at the gym, an hour to eat and another hour to decompress with a book or TV show, we’re down to four hours to personally affect those for whom we are presumably working and staying healthy—the people we love.

Our human capacity to love also has its limits.

While not measurable, we can all acknowledge that our capacity to love, in the four hours each day that we have to invest it, is affected by how we’ve invested the other 20 hours. By the “end” of many days, we are just beginning our four hours, and we are already spent. Even if we wanted to, we have nothing left to give—no love left to invest.

I am a chief offender of misallocating my love.

I often allow the four hours I have to give to my wife, Andrea, and two boys, Kieran (10) and Connor (8), to shrink to three, two or even one. In whatever time is allocated, I often serve leftover love, having over-invested myself throughout the day. Then I steal from their time, interrupting it with “important” emails and calls.

I must acknowledge that these are choices I make.

We have the choice to order our loves, to acknowledge the limited nature of time and our own capacity, and to prioritize our work and life.

It’s entirely appropriate to love our work and the people we serve through it. It’s entirely appropriate to love ourselves and to do what is necessary to be physically, fiscally, psychologically and spiritually healthy. It’s entirely appropriate to love our areas of service and civic duty, and to serve well. Therefore, almost paradoxically, it’s entirely appropriate to spend 83 percent of our daily allotment of time in pursuits other than the direct edification of those we love the most.

But what would our lives look like if we engineered our days to make the very most of the other four hours?

Would we have a different job? Would we live in a different house or part of the country? Would we drive a different car? Would we say “no” to some people more and to other people less? Would we invest our time and money differently?

Would you invest your love differently?

I’m excited to be part of a contingent of financial advisors asking these questions of our clients (and ourselves).  We don’t believe that the only way to benefit our clients is through their portfolios, and we believe that asset allocation involves more than mere securities.

This isn’t a particularly new concept.  Indeed, the second phase of the six-step financial planning process, as articulated in the Certified Financial Planner™ (CFP®) practice standards, is to “determine a client’s personal and financial goals, needs and priorities.”  But thought leaders like Rick Kahler, Ted Klontz, Carol Anderson, George Kinder, Carl Richards and Larry Swedroe are persistently nudging the notoriously left-brained financial realm to reconcile with its creative and intuitive side for the benefit of our clients.

With statistics suggesting that as many as 80% of financial planning recommendations are not implemented by clients, it’s officially time to recognize that personal finance is more personal than it is finance.

If you enjoyed this post, I'd love to hear from you on Twitter via @TimMaurer.

Study Reveals Investing Is Hazardous To Your Health

Investing Hazard-01I don’t need to inform you that investing is dangerous business.  You already know in your gut what Joseph Engelberg and Christopher Parsons at U.C. San Diego found in their new study, that there is a noticeable correlation between market gyrations and our mental and physical health.

But when do you think the financial industry will get the point?

Shortly after I became a financial advisor, I was given a book to commit to memory.  It told me what my role in life would be: To make a very good living helping approximately 250 families stay in the stock market.

The text insisted that regardless of my client’s age or risk temperament, it would be in their best interest to be—and stay—in stocks, exclusively and forevermore.  I was the doctor; they were the patients.  I was the ark-builder; they were the—you get the point.

The book might even be right.

But…

The Behavior Gap

My friend and New York Times contributor, Carl Richards, has been drawing a particular picture for years.  He’s struck by the research acknowledging the noticeable difference between investment rates of return and what investors actually make in the markets.  (Investors make materially less.)

Investors, it appears, allow emotions to drive their investing decisions.  A desire to make more money causes them to choose aggressive portfolios when times are good, but a gripping fear leads them to abandon the cause in down markets, missing the next upward cycle.

Investors buy high and sell low.

Well-meaning advisors, then, including the author of the book I referenced, have claimed their collective calling to be the buffer between their clients’ money and their emotions.  Unfortunately, it’s not working.

Maybe it’s because the intangible elements of life are so tightly woven into the tangible that we can’t optimally segregate them.

Maybe it’s because we’re not actually supposed to forcibly detach our emotions from our rational thought.

Maybe it’s because financial advisors and investing gurus should focus less on blowing the doors off the benchmark du jour and more on generating solid long-term gains from portfolios designed to be lived with.

Livable portfolios.

Portfolios designed to help clients stay in the game.

Portfolios designed to help clients (and advisors) avoid falling prey to the behavior gap.

Portfolios calibrated with a higher emphasis on capital preservation.

How much less money do you make, anyway, when you dial up a portfolio’s conservatism?

The Same Return With Less Risk

In his book, How to Think, Act, and Invest Like Warren Buffett, index-investing aficionado, Larry Swedroe, writes, “Instead of trying to increase returns without proportionally increasing risk, we can try to achieve the same return while lowering the risk of the portfolio.”

Using indexing data from 1975 to 2011, Swedroe begins with a standard 60/40 model—60% S&P 500 Index and 40% Five-Year Treasury Notes.  It has an annualized rate of return of 10.6% over that stretch and a standard deviation (a measurement of volatility—portfolio ups and downs.) of 10.8%.

Next, Swedroe begins stealing from the S&P 500 slice of the pie to diversify the portfolio with a bias toward small cap, value and international exposure (with a pinch of commodities).  The annualized return is boosted to 12.1% while the standard deviation rises proportionately less, to 11.2%.  (Remember, this is still a 60/40 portfolio with 40% in five-year treasuries.)

But here’s where Swedroe pulls the rabbit out of the hat:  He re-engineers the portfolio, flipping to a 40/60 portfolio, proportionately reducing all of his equity allocations and boosting his T-notes to 60% of the portfolio.  The net result is a portfolio with a 10.9% annualized rate of return—slightly higher than the original 60/40 portfolio—with a drastically lower standard deviation of 7.9%

Same return.  Less Risk.

This, of course, is all hypothetical.  This happened in the past, and for many reasons, it may not happen again.  These illustrations are not a recommended course of action for you or your advisor, but instead a demonstration that it is possible—and worth the effort—to work to this end.

Because we can’t keep hiding from the following logical thread:

1)   Volatile markets increase investor stress (even to the point of physical illness).

2)   Heightened investor stress leads to bad decisions—by both investors and advisors—that reduce investor returns.

3)   Market analysis suggests that portfolios can be engineered to maintain healthy long-term gains, while at the same time dramatically reducing the intensity of market gyrations.

How could we not, then, conclude that more investors would suffer less stress, thereby reducing (hopefully eliminating) their behavior gap, thereby allowing investors to hold on to more of their returns?

Isn’t that the point?

If you enjoyed this post, please let me know on Twitter @TimMaurer, and if you’d like to receive my weekly Forbes installment via email, click HERE.

In 2014, Accomplish More By Doing Less

DO LESS-01Instead of bullying yourself into adopting new practices that are designed to overhaul your life for the better in 2014, consider finding the path to success by simply doing less.

The arctic blast of our fledgling 2014 offers a chilling reminder that the kindred warmth of the holiday season is over.

That’s enough being. It’s time to get back to doing.

“So, how’s it going?”

“Good. Busy. Super busy.”

“Me too. Never been so busy.”

It’s as if there is a self-worth contest sure to be won by the contender most frazzled.

But busyness is no virtue. If anything, it makes us—me included—distracted, forgetful and often late. It diminishes our capacity and saps our creativity.

That’s why we can actually accomplish more by doing less.

But how do we decide which activities absolutely must stay and which might have to go?

Five Minutes to a Leaner You

This quick and simple exercise should give you several top candidates for the chopping block. You need only one piece of paper with a line down the middle (or click HERE for a printable form). On the left side, write LIFE-TAKING, and on the right side, write LIFE-GIVING.

life-taking-life-giving---blank-2Fill the Life-Taking column with the roles (or tasks within roles) that drain you. They’re onerous chores, not labors of love.

On the Life-Giving side, list the opposite—those practices you can pursue for extended periods of time, wondering where the time has gone. You might be tired after a long day of life-giving activities, but you’re not weary.

I should be clear that this exercise is not a license to shed roles to which you’ve pledged yourself—like being a good parent or spouse—or common duties that appear on no one’s life-giving list—like changing diapers or cleaning dishes. Heck, the president of my company, Drew Tignanelli, washes whatever dishes he finds in the company kitchen sink.

But if the majority of your roles and the duties you’ve accepted are life-taking, I encourage you to consider making some difficult decisions in an effort to improve that ratio. That may mean saying yes to something, but it almost certainly means saying no.

Two caveats:

1)   Following through on this exercise may be simple, but it’s not easy. Stakeholders are likely to be disappointed, whether you’re giving up a board seat, book club, church committee or poker night. Your income may also be reduced if you sacrifice an activity that creates income, change jobs or invest in furthering your education.

2)   Many activities are not wholly life-taking or life-giving. For example, last year I decided that maintaining a presence on Facebook took more life than it gave. I certainly derived some benefits from being on Facebook, connecting with friends and family, but the net effect was life-taking. (By the way, I dumped FB six months ago and don’t miss it at all.)

Addition by Subtraction

You can cause a monumental shift for the good in your life and work by simply removing life-taking activities. Your performance in life-giving roles has room to flourish, increasing your productivity and satisfaction. Even more surprising, some activities will move from life-taking to neutral—or even life-giving—after your overall burden is lightened.

Hitting the delete button on even one or two life-taking commitments can make you a better partner or parent, boss or employee, friend or family member. And especially for those whose vocations fall under the creative heading, creating more blank space on the canvas is essential to maintaining and improving your art.

Special thanks to Josh Itzoe, a colleague and good friend, for encouraging me to undertake this exercise several years ago.

If you enjoyed this post, please let me know on Twitter @TimMaurer, and if you’d like to receive my weekly Forbes installment via email, click HERE.

Top 5 Posts of 2013 and A Thank You Gift

Top Blog Posts of 2013-01One of the great blessings of my career—heck, my life—is the opportunity I’ve had to communicate through the written word.  Thank YOU for reading my work.  I write for YOU, and to thank you, I’m including a gift at the end of this post.

In 2011, my bucket list daydream of having a book published came true; then in 2012, I began actively contributing to Forbes.com, for which I write a weekly blog post.

I enjoy the creative process enough that if only one person read a post, article or book that I wrote—and benefited from it—that would be reward enough for me.  The pleasant surprise of 2013, though, was that far more people read and responded to my work than I ever could have imagined.

Even more of a shock, however, was the subject matter of the posts that became popular and garnered the most attention.  I’m a financial planner who writes about the intersection of money and life, but my most viewed posts definitely skewed toward the life part of that equation.

In case you missed any of them, here are the top 5 most viewed posts of 2013:

5. Haiti Doesn’t Need Our Help (Forbes.com) — Though it only ranks fifth in views, I think this would be my personal favorite—and most important—post of 2013.

4. 10 Days Is the Magic Vacation Number. Here’s Why (Lifehacker.com) — This post was initially published on my Forbes blog, but Lifehacker republished it (with permission), where it racked up an even higher number of views.

3. Two Reasons Why Copying People Won’t Make You Successful (Forbes.com) — On this most recent post within the top five, I got to work with two of my favorite “success authors,” Michael Hyatt and Laura Vanderkam. We discussed why the path to success isn’t necessarily found following someone else’s footsteps.

2. What you don’t know about Social Security can hurt your retirement (CNBC.com) — I’ve had the privilege of working with CNBC for several years on video projects, but this article was my first contribution on the written front.  I’m looking forward to more of these in 2014.

1. 7 Reasons I Dumped Facebook (Yahoo! Finance) — I’m still dumbfounded by the popularity of this post.  Yes, I decided to quit Facebook and hesitantly chose to write about why.  Apparently, this sentiment happened to hit the online airwaves at just the right time, because after getting more views than anything else I’ve ever written for Forbes.com, it was picked up by Yahoo! Finance and went viral on their site. Crazy.

I’m really looking forward to 2014, excited about the opportunity to bring money to life—and life to money—in writing.  I’m soaking up wisdom from the Forbes editorial staff, have two new book projects in the works and was humbled by CNBC’s invitation to join their inaugural group of 20 financial advisors making up the CNBC Digital Financial Advisor Council.

But I’d love to hear what YOU want to read more of in 2014.  Please shoot me an email at tim[at]timmaurer[dot com] with your thoughts.  (Yes, I know email address is not “spelled” correctly; it’s so robo-spammers don’t snag my email address.)

Lastly, to help kick off YOUR new year, I’ve packaged a bunch of my work from 2013 in the form of a free financial plan for your consumption.  Just click HERE and you’ll be able to save the PDF file.

THANKS AGAIN, AND HAPPY NEW YEAR!

If you enjoyed this post, please let me know on Twitter @TimMaurer, and if you’d like to receive my weekly Forbes installment via email, click HERE.

20 Lessons We Can Learn From 20-Year-Olds

20 YO Graphic-01It’s become enormously popular to publicly lecture 20-somethings.  I’m not a 20-something, but my regular interaction with the Millennial generation as a college instructor leads me to conclude that we may have more to learn from 20-somethings than we have to teach them.

Here are 20 lessons in LIFE, WORK and MONEY inspired by the Millennial generation:

In LIFE…

Nobody responds well to being lectured.   Despite the ineffectiveness of self-righteous bombast, it seems never to be in short supply.  Insisting that someone else sees how wrong they are may guarantee that we will feel more right—but it doesn’t necessarily make it so.  Even if you have good intentions, the best time to teach someone something is after they’ve asked for input.

Life needn’t be so strictly compartmentalized.  Work, family, leisure, service, worship and artistic expression are elements of life that remain segregated for most.  But this schizophrenia of roles leads to inauthentic living in one or more of these venues (and drives us crazy).

We should give ourselves permission to be more of who we are and less of who people want us to be.  There’s an externally successful business owner who shows up at my gym for his morning workout dressed to the nines in a suit and tie.  He didn’t come from a meeting—he just thinks it’s important to send a message everywhere he goes that he is successful (and he’s happy to announce it).  The Millennials’ refusal to engage in such posturing is often mistaken for aloofness or apathy, but it’s really more about a healthy yearning for authenticity.

Being miserably busy is not a good measure of self-worth.  Busyness is no virtue.  It leads to forgetfulness, distraction and tardiness.  And it’s exhausting.

We are human beings, not human doings.  We tend to explain who we are by listing what we do for work and what we have accomplished professionally.  Millennials are more comfortable in their own skin and more capable of enjoying time that can’t be measured in terms of productive output.

 “American” is not actually a language.  Millennials are the first generation in decades who don’t take American pre-eminence for granted.  They’re expanding their personal and professional horizons with international travel and picking up a second or third language.

Traditional education is overvalued.  While Millennials are known for having overpaid for higher education, their dissatisfaction with what they got in return—fueled by their angst over the loans that now burden them—are serving to ensure that they and their children will spearhead the biggest education overhaul in a couple centuries.

In WORK…

Being a slave to work is no badge of honor.  Being the first in and last to leave may send a message to the types of people who value an ascetic work regimen, but it will also send a message to your family and close friends that your work is more important than they are.  Which message do you want to send?

We’re not all productive in the same ways and at the same times.  Sure, there are advantages to being an early bird, but the best employees will figure out where, when and how they work most effectively, and the best bosses will encourage them to do so (to a mutually beneficial end).

Work and life aren’t something to be balanced, but instead something to be integrated.  That we must balance work and life implies that they are seemingly opposed forces incapable of being effectively blended, but the most effective leaders and satisfied employees find ways to bring work to life by inviting more life to work.

Success is overrated.  Boomers have made an art form of becoming successful, or at least appearing so.  Success certainly isn’t a bad thing, but when the visible representation of success (more impressive titles, bigger houses, nicer cars, granite everything) takes precedence over those for whom we supposedly became successful to serve, we have a problem.  This isn’t even a generational thing.  It’s never really been true that reaching the pinnacle of success is what ultimately makes our lives fulfilling—it’s really significance and meaning for which we hunger.  Millennials seem to have a better handle on that.

In MONEY…

You don’t have to “get settled down” right away.  Financial planner, Roger Whitney, told me “[Millennials] are getting married later in life [than Baby Boomers] which gives them time to mature and be more financially secure when entering marriage.”

Money shouldn’t be a taboo topic of discussion.  30-something personal finance writer, Arielle O’Shea, finds Millennials to be more open about money.  Even if it’s because they’re more cynical about financial security, having seen a couple bubbles burst and many of their parents split over financial issues, Millennials seem to be more open to discussing their personal finances (to good effect) with each other and in public.

We don’t have to own everything—sharing is ok too.  Having to own everything we touch in this lifetime may be good for auto and home improvement companies, but it’s certainly not the most efficient or inexpensive way to do things.  Airbnb allows users to swap living spaces, Lyft offers a network of drivers when you need a ride, and that’s just the tip of the iceberg in the growing sharing economy.  Millennials are making and saving money with services like these, according to Forbes writer, Maggie McGrath.

The acquisition of real estate is overrated.  Creating stability, building equity and getting tax deductions are all good things—but losing money and depriving yourself of the freedom and flexibility to be mobile are not.  Millennials haven’t abandoned home ownership, but we all need reminding that it does have its drawbacks and shouldn’t be a foregone conclusion for everyone all the time.

We can and should embrace the role of technology in our financial lives.  The financial services industry is known more for hindering progress and clinging to antiquated, high-margin practices and procedures.  Millennials, however, are creating and “using websites such as Mint, You Need a Budget or Manilla, which not only help to track spending, but serve as accountability partners with e-mail alerts when spending limits are exceeded,” according to Mary Beth Storjohann, founder of Workable Wealth.

Youth isn’t a license to embrace reckless investing.  Carmen Wong Ulrich, host of Marketplace Money on APM says “[Millennials are] less likely to want to risk investing their money in the markets, but that also means they’re more likely to stay away from the financial products (and marketing) that burned their parents.”  Indeed, losing money isn’t a good strategy, regardless of your age.

Experiences are more valuable than things.  David Burstein, Millennial author of Fast Future: How the Millennial Generation Is Shaping Our World, acknowledges that 20-somethings are spending more than any past generation on travel and eating out, but it’s because they place a higher value in deepening interpersonal relationships and creating lasting memories.

The “traditional” notion of retirement isn’t necessarily an ideal.  Millennials tell me that they expect to be working a long, long time.  They don’t expect pensions and don’t trust Social Security, leaving them with little choice, but they also don’t idolize the notion of full-time feet-in-the-sand retirement.  They plan to work longer and enjoy themselves more along the way, many of them hunting more for a calling than a job.

You can do well and do good at the same time.  Profit or charity—take your pick?  The Millennials have invited us to consider that we don’t have to choose between Robber Barron or do-gooder.  In addition to Google’s unofficial motto—“Don’t do evil”—companies like Toms and Warby Parker give one pair of shoes and eyeglasses (respectively) for every pair sold.

Every generation finds comfort in the norms it helped establish and relishes in the norms it helped deconstruct—but the outgoing generation tends to not-so-quietly mourn when the incoming generation does the same.  Pew Research calls the Millennials confident, connected and open to change.  Yes, it’s a little scary that 20-somethings are changing the way we live, work, play, invest and worship—all without even asking our permission!  But it’s not necessarily a bad thing.

If you enjoyed this post, please let me know on Twitter @TimMaurer, and if you’d like to receive my weekly Forbes installment via email, click HERE.