Performance and the Weather – Winter 2016

Belling-hamsters know what it is like to wait out a long winter.  A down market can be like that;  gloomy, day after day.  It’s not pleasant, and there is nothing we can do about it. (Well, OK…I like rain and down markets, because both are necessary for growth,  but I’m odd that way).  Our dislike of both wet weather and down markets has as much to do with our attitude as it does with the reality.  If you are generally pessimistic about most things in life,  I am not going to be able to put a smile on your face with platitudes such as “the sun will come out tomorrow”.

However, I can perhaps give you a perspective that seasoned investors have learned over decades of experience.  Wise investors understand that although they cannot control the markets or the resulting absolute returns that they obtain, they can control their relative returns to some degree.  For our purposes here,  let’s define relative return as the difference between what we are obtaining with our fund selections and what an index fund that invests in the same asset category is obtaining.

We can influence our relative returns through being mindful of what we can control: umbrella

1)  we can reduce costs by avoiding high expense ratios and high cash drag

2)  we can increase after tax returns by reducing the taxes paid as a result of high turnover

3)  we can take advantage of various market factors that increase returns:  tilting toward value stocks, tilting toward small stocks, and tilting toward profitable stocks

 

Through careful selection of funds that control the above factors,  the primary funds we utilize have had positive relative performance over the years.  Calendar year 2015 was no exception.  Other than the DFA Global Equity 1 and DFA Core Equity 2,  all of our primary choices which populate most of your accounts had positive relative returns for the year.

2015 ab  returns

In summary,  both the weather and the absolute market returns have been lousy lately.  However,  due to knowledge and implementation of certain factors that we can control,  the relative return for our clients was generally positive once again in 2015.  This stands in stark contrast to the experience of typical investors;  who because of a lack of knowledge and discipline,  are roundly defeated by the market indices year after year.

Oh….and by the way.  The sun will come out tomorrow!  🙂


 

Aggregate Equity Exposure

Traditionally we have rebalanced each of your accounts to a set equity exposure.  This has worked fine,  but recently we are moving toward a subtle change that we think is beneficial:  Rebalancing the aggregate total to the set equity exposure without regard for the individual account equity exposure.

The advantages include:

1) upon rebalancing, the ability to choose whether we realize gains by selling equities in a non qualified account or avoid gains by selling in a tax qualified account.

2) The ability to be more tax efficient by placing tax inefficient holdings such as REITS in qualified accounts regardless of the effect upon equity exposure at the account level.

 

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