803.941.4440 | Chapin, SC

  • Nobel Prize Goes to....

    RIchard Thaler of The University of Chicago Booth School of Business has been awarded the Nobel Prize in Economics.

    Thaler is known for his contributions to behavioral economics, one of my favorite subjects. Our job as advisors is part financial and part psychological . The balance of those parts, while different for everyone, affects everyone.

    "Left-brainers" tend to think they are less swayed by emotion and more fact-based. However, mountains of research (much done by Thaler on mental accounting), tells us that all humans are emotional beings, especially about money. One of our critical roles (if not the most critical role) as advisors is to help clients make good decisions for themselves on large scales. Understanding where we fall short in decision-making is part of how we do this.  Studying behavioral sciences helps us get there. Richard Thaler should be commended.  Well done, Nobel committee.

  • Scary Charts

    I have always been fascinated with the misuse of statistics to tell stories.  There is a great blog called Spurious Correlations that I read when I want a good laugh and a reminder that statistics are not always what they seem.  Of course, the point of this blog is to remind us one of the most common statistical fallacies – correlation does NOT indicate causation.  For example, the blog shows a nearly perfect correlation (99.79%) between US Spending on Science, Space and Technology and Suicides by Hanging, Strangulation, and Suffocation.  Clearly, there is no causal effect either direction.

    Here we are after a long run-up in stock markets, particularly US Large Stocks, and the “scary charts” are starting to appear again.  Anytime you see a chart that looks like this and you start to panic….



    Stop, and read this:

    “The ‘Scary Chart’ Fallacy”, by Mathematical Investor

    “The Unfortunate Rise Of The Misleading ‘Scary Chart’ Comparisons Again” by David Templeton

    A simple scaling problem can make things look a lot different from reality. Statistics and charts are easily to manipulate to tell the story you want to tell.  As investors, we have to cancel out this noise and remember that our portfolios are structured to achieve positive, long term expected returns. Don’t be fooled by the sensationalism of journalism.

  • Snowpocalypse 2017

    The scramble of South Carolina’s counties, towns, and school districts in the wake of “the big snow” always ignites my brain to draw parallels between weather and money, particularly in the way people feel about both.  When forecasts turn out to be wrong, there is no shortage of anger, annoyance, and jokes that flood social media accounts.  My facebook feed for this weekend includes:

    “The only job where you can be wrong constantly”

    “I can predict better by just looking out my window”

    So there are two sides to the coin: is forecasting really that bad?  Or are we just oversensitive when the weather predictions fail? 

    Wait – we are a financial planning firm – I will come back to that.

    According to ForecastAdvisor.com, at the time of this writing, MeteoGroup had the best data accuracy for the last year for our zip code at about 77% overall.  This combines both weather (highs and lows within 3 degrees to forecast) and precipitation.  Overall, its not as bad as it may seem – our brains may be wired to think these weather forecasters perform worse than they really do.  However, when a weather forecast goes wrong, very wrong, there can be devastating consequences – floods, ice storms, hurricanes can have life-changing impacts.

    Which brings me back to investing.  Traditional stock pickers have a pretty rough record of outperforming or even matching the market as a whole (See here or here - the debate rages on).  They make weather forecasters look like geniuses - only about 20% of active fund managers beat their benchmark in a given year...when you go out further, repeat performance is even more dismal.  And the consequences of picking poorly can also have dire consequences to the end user – the investor.

    So what can we do differently?  Rather than focus on the short term movements in stock markets (weather), we look at the bigger picture (climate).  We look at the long term – 10 years, 15 years or more and determine what scientifically, statistically, and empirically earns money for an investor.  We remove much of the day to day nonsense and focus on getting it right in the long term.  We stop making short term “forecasts” because we know they are, at best, worthless.  Unfortunately for weather forecasters, they don’t have this option, so they keep plugging along as best they can at 77% accuracy.

    Here are my takeaways from this:

    1. Don’t be too hard on the weatherman – he has a nearly impossible job.
    2. Don’t treat investing like weather forecasts – treat it like long term climate forecasts.  Those are a lot closer to reality.
    3. Don’t get caught in the day-to-day drama of being right or wrong.  A good financial plan can weather nearly any storm.

    Happy Snowpocalypse 2017!

  • 2016 Predictions

    January is the time for financial predictions - the economy, the stock markets, oil, China, etc.

    Here are some of our predictions for 2016:

    1. Some days, markets will go up, others they will go down.

    2. Most of the "experts" or "prognosticators" will be wrong.

    3. Even if some correctly predict what will happen in the economy, most will still be wrong about how markets react to that data.

    4. Predictions don't really matter for most folks.

    As a student of behavorial finance and economics, I have learned that how we react to market events is much more important than the events themselves.  So what do we do now that some markets have gone down?  It depends.  If you are investing for the long term, have enough cash to meet your needs and enough fixed income to replenish that cash when you need it...you do nothing.  Ride out the downturn, knowing the long term trend will be in the upward direction.  Rebalance your portfolio buy selling those sectors that have done well and buying those that have gone down.  If you have extra cash hanging around, a downturn is an opportunity to buy stocks at lower prices, again understanding that investing is long term.

    My final prediction is this: Those who do not panic and take the current volatility in stride, will outperform (in the long run) those who panic.  Stock markets provide long term returns to investors.  It is up to us to not screw it up. 

  • Are You Biased?

    Yes, I am.  We all are.  The fact that we don't like to admit it IS one of our biases.  Here is a great chart about common biases we all have.  Recognizing them will hopefully make us better decision-makers, better planners, and better investors.


  • China...Greece...Time to Panic?

    One of the necessary functions of financial planning is investing.  When it comes to investing, we are constantly evaluating market and economic events to determine if anything should be done in light of those events.  We use both science and history to make those decisions.

    I had a client ask me “In ten words of less, what do you think about China devaluing its currency?”  My initial response was “Its already priced in”.  While of course there is a lot more to the story -  like that it is very difficult to invest in China directly (rather it is mostly done through Hong Kong and ADR’s) and the fact that China is less than 3% of the world’s stock market (even if the economy is not).  But the most important thing to remember is that by the time we hear about an event, the stock and bonds markets have already considered the information and it is reflected in prices.

    The “Debt Crisis” in Greece is much the same.  This is not the first time this crisis has occurred and in its current form has been going on for years.  Investors know this and have already adjusted prices to address it.

    But what if we could predict these events?  To paraphrase a great market historian, Weston Wellington of Dimensional Fund Advisors, “We would not only have to correctly predict the event, but also predict how other investors will react to that event”.  The good news is, we don’t have to see the future to be successful at investing.  (see Weston’s video on Greece here).

    Both history and science show us that these individual “events” or “crises” rarely impact long term investment results.  Our advice is to keep focused on why you are investing the first place and don’t panic.

  • Occam's Razor

    “When you have two competing theories that make exactly the same predictions, the simpler one is better.”

    Financial “Advisors” have an inherent flaw in character - we want everyone to know how smart we are.  Have you ever been to your investment “guy” and he says something like “the alpha created by the manager in this mutual fund outweighs the higher standard deviation of the fund relative to its beta.”  huh?

    While it is important for the advisor to understand industry buzzwords, I would surmise that most clients don’t particularly care about them.  They want to know answers to the most important questions: “How can I get the most after-tax income?” or “What will happen if the stock market goes down?” or “Is my business running the best it can?”  We recognize this and work hard to simplify the complex, so lets try this again:

    “If you have two equally likely solutions to a problem, choose the simplest.”

    Complicated products, “guarantees” or investments usually do not work to solve the long term financial questions that most people care about.  Don’t fall into the trap of thinking that because a product is complicated, it must be good.  It is quite the opposite.  If you don’t understand the advisory philosophy of your advisor (or worse, he doesn’t have one), that might be a good indication that he’s trying to sell you something.   We don’t sell anything but our unbiased advice - and in the spirit of taking our own advice:

    “Keep things Simple!”  

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