Clueless

(from Dan Solin's Huffington Post blog, 2/8/2011 - click here for the original post)

I'm sure Pat Dorsey is highly intelligent and very competent. He is the director of equity research for Morningstar, which is a big job that gives him access to vast resources about the stock and bond markets. As he noted in an article published January 17, 2010 in Money Magazine's Investor's Guide 2010 entitled "10 stocks that can keep running," the analysts he works with at Morningstar cover 2000 stocks. Wow.

With such an impressive background and extensive resources, I am sure many investors paid close attention to Mr. Dorsey's 2010 predictions about stock market trends.

His primary observation was that we were in the "first phase of a bull market" where "smaller and junkier stocks tend to lead the way." However, he confidently predicted that "...speculative frenzy eventually gives way to the fundamentals, and that should bring your focus back to high-quality blue-chip stocks this year."

He was very negative on "lower-quality small stocks" noting they could "get killed if reality falls short of high expectations."

Many investors no doubt dumped their small stocks and focused on blue chips. After all, Mr.
Dorsey is the director of equity research at Morningstar. Presumably he can accurately predict whether large or small stocks will outperform in a given year.

Not exactly.

In a thoughtful analysis not available to the investing public, Weston J. Wellington, vice president of Dimensional Fund Advisors noted that US small stocks had their best year since 2003. The S&P Small Cap 600 index was up 26.31%, compared to an increase of 15.06% in the S&P 500.

It gets worse.

Wellington did an analysis of the ten blue chip stocks recommended by Mr. Dorsey and found they had an average return of 6.3% , significantly under-performing the S&P 500 index.

Let' see if I got this right.

Mr. Dorsey was dead wrong in his prediction that blue-chips would outperform small stocks in 2010. His selection of blue-chips did not come close to the returns that were yours for the taking by investing in the comparable index.

Yet investors continue to rely on the financial media which features pundits of all stripes, confidently predicting the direction of the markets and advising you to buy this or that stock.

It's all errant nonsense, akin to voodoo, designed to separate you from your money and to continue the transfer of wealth from you to those who "manage" your money.

Mr. Dorsey, and his colleagues who pretend to be able to predict random, future events, may be clueless.

You don't have to be.

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The Trouble with Talking Performance

One of the first things we’re often asked in meeting with prospective clients is for performance data. We fully expect the question and often know it is coming. The marketing efforts of the traditional brokerage model and the financial media have conditioned us to think it’s the only thing that matters. The only problem is, they’re wrong.

We often reject the initial request for performance data as we don’t want it to cloud the decision making process for the prospective client in selecting a partner to help them plan their financial future. If someone goes into a financial planning relationship using portfolio performance as their only or even primary scorecard, it likely doesn’t make sense to even begin the conversation. We’re insistent that clients consider their comfort level with the investment philosophy, planning expectations, and overall personality fit long before secondary issues such as performance.

We don’t deny that performance is important, we just know that we have no control over it nor does anyone else. Let me rephrase that, the only control we have over a portfolio is to make sure it’s as globally diverse and low cost as possible and that it is properly allocated for a client’s needs and risk tolerance. Beyond that, seeking higher performance or constantly tweaking our investment philosophy based on market gurus, economic prediction or other forecasting is simply a waste of time and money.

This doesn’t mean we’re not proud of how our philosophy performs. As many know, our portfolios utilize funds from Dimensional Fund Advisors, one of the top-performing fund companies in the country, currently managing more than $202 billion. Some thoughts worth passing along were found in Jessica Toonkel’s December 20, 2010 Investment News article,

“Of the 39 DFA funds with 10-year histories, 33 were in the top half of performance in their categories for that period as of Nov. 18, according to Morningstar. More than half (30) of the 51 funds with five-year histories outperformed their categories for that period - not a small feat, given the market downturn of 2008. In fact, 34 of 58 DFA funds were in the top half of their category just in 2008. And the firm has some of the lowest fees in the industry – with fund expenses ranging from 0.16% to 0.9%.”

The truth of the matter is, in any time frame, about half the people “win” and half the people “lose”. Picking who those people will be in advance is impossible. The middle of that road is the average market return, but the term "average" is a bit of a misnomer. Average return does not an average investor make. The average investor, over the long run in most any time period, earns well below average market returns. If you can earn close to what the market earns at the lowest possible cost and have the discipline to stay invested through thick and thin, you will likely enjoy a very successful investment experience over a 30-40 year retirement horizon.

We don’t really earn our money by providing our client’s with excellent performance. We earn our money by keeping the focus on what they can control; staying invested, being accountable to a sensible spending plan and helping address all the other financial questions that come up on life’s path. If we can do that, our clients will continue to meet their goals.

Chip Workman, CFP®
cworkman@taaginc.com
http://taaginc.com

The Tipping Point?

Why does it seem like it takes someone’s death for the world to realize the value of their message? Michael Jackson’s Thriller is on track to be the first album in U.S. history to go triple diamond, selling more than 30 million copies. The estates of Marilyn Monroe and Elvis Presley have made millions more in the year’s since these stars have died. Although The Investment Answer was released last summer, it was only after author Gordon Murray’s passing in January that the media has been buzzing about his book. The Investment Answer, co-authored by DFA (Dimensional Fund Advisors) advisor Daniel Goldie and his client Mr. Murray, a Wall Street veteran, is now #2 on the New York Times Hardcover and Advice List. The hour it will take you to read this book is worth every minute.

When I began my career over 20 years ago, stock picking was the name of the game and the public didn’t want to hear that gurus with crystal balls didn’t exist. Now that index funds are mainstream and many gurus have been exposed for having no more accuracy than the flip of a coin, America is finally ready to hear the message that The Investment Answer conveys; there five key decisions that will help increase the odds of investing success.

- Should I invest on my own or seek help from an investment professional?

- How should I allocate my investments among stocks, bonds, and cash?

- Which specific asset classes within these broad categories should I include in my portfolio?

- Should I take an actively managed approach to investing, or follow a passive alternative?

- When should I sell assets and when should I buy more?

Although we’ve mentioned the book in previous blog posts and monthly letters, I thought it was worth another blog. It’s very exciting for me to see the momentum this book is gaining. On Amazon, you are limited to ordering only three copies of the book and our local Barnes and Noble had only one in stock because they are selling so quickly. In the past few years books like The Big Short or No One Would Listen, which read like fiction, but were written about what went wrong on Wall Street during the financial crisis, have garnered reader’s attention. Finally - a best seller featuring sensible investment advice!

I can only hope that this snowball continues and the general public embraces the message of The Investment Answer, which is that investing success is achievable for everyone and that sophistication does not equal success. It’s just too bad it took Gordon Murray’s illness and passing to get most people to listen.

Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://taaginc.com/