Déjà Vu All Over Again

“Wild Week Leaves Investors Reeling” is the front-page headline of today’s Wall Street Journal. After remarking on the week’s “sharp plunges and euphoric rises,” it goes on to rhetorically ask: “What is behind the remarkably sudden swings in the market?”

February 2019 Investment fads are nothing new. When selecting approaches for their portfolios, individual investors searching for “better returns” are often tempted to seek out the “latest and greatest” investment opportunities they are seeing or reading about in the popular media. Over the years, many approaches—more recently using “low cost” index, “smart beta” or exchange traded funds—have sought to capitalize on economic developments such as the perceived relative strength of geographic regions or countries, technological changes in the economy, or the popularity of different natural resources. But serious investors planning for long-term goals like retirement should be aware that that the influence of short-term trends may be counterproductive. As Nobel laureate Eugene Fama said, “There’s one robust new idea in finance that has investment implications maybe every 10 or 15 years, but there’s a new marketing idea every week.”

WHAT’S HOT BECOMES WHAT’S NOT

Looking back at popular investment fads over recent decades can illustrate how often trendy investment themes come and go, along with investor money and their hopes. In the early 1990s, attention turned to the rising “Asian Tigers” of Hong Kong, Singapore, South Korea, and Taiwan. A decade later, much was written about the emergence of the “BRIC” countries of Brazil, Russia, India, and China and their new place in global markets. Similarly, funds targeting hot industries or novel trends with clever names have come into and fallen out of vogue. In the 1950s, the “Nifty Fifty” were all the rage. In the 1960s, “go-go” stocks and funds piqued investor interest. Later in the 20th century, growing belief in the emergence of a “new economy” led to the creation of funds poised to make the most of the rising importance of emerging information technology and telecommunication services. With the “Tech Bust” we all know how that turned out. During the 2000s, 130/30 funds, which used leverage to sell short certain stocks while going long others, became increasingly popular. In the wake of the 2008 financial crisis, “Black Swan” funds, “tail-risk-hedging” strategies, and “liquid alternatives” abounded. As investors reached for yield in a low interest-rate environment in the following years, other funds sprang up that claimed to offer increased income generation for those taking increased credit risks, and new strategies like unconstrained bond funds proliferated. More recently, strategies focused on peer-to-peer lending, cryptocurrencies, and even cannabis cultivation and private space exploration have become more fashionable. In this environment, so-called “FAANG” stocks and concentrated exchange-traded funds with catchy ticker symbols have also garnered inordinate attention among investors and gathered huge sums of speculative money that once again is not turning out so well.

THE FUND GRAVEYARD

Unsurprisingly, however, numerous funds across the investment landscape were launched over the years only to subsequently close and fade from investor memory. While economic, demographic, technological, and environmental trends shape the world we live in, public markets aggregate a vast amount of dispersed information and drive it into security prices. Any individual trying to outguess or out-smart the market by constantly trading in and out of what’s hot today is competing against the extraordinary collective wisdom of millions of buyers and sellers around the world who set prices. With the benefit of hindsight, it is easy to point out the fortune one could have amassed by making just the right call on a specific industry, region, or individual security over a specific period or time. While these anecdotes can be entertaining, there is a wealth of compelling evidence that highlights the futility of attempting to identify mispricing in advance and profit from it. We often hear about winners, but rarely about losers. It is important to know that most investing fads, and indeed, most mutual funds, do not stand the test of time. A large proportion of funds fail to survive over the longer term. Of the 1,622 fixed income mutual funds in existence at the beginning of 2004, only 55% still even existed at the end of 2018. Similarly, among equity mutual funds, only 51% of the 2,786 funds available to US-based investors at the beginning of 2004 endured. The survival results of the exploding number of cheaply-traded ETFs are not any better.

WHAT AM I REALLY GETTING?

When confronted with choices about whether to add additional types of stocks, funds or other assets to a portfolio, it may be worthwhile to ask the following questions:

  • What is this change claiming to provide that is not already in my portfolio?
  • If it is not in my portfolio, can I reasonably expect that including it or focusing on it will increase expected returns, reduce expected volatility, or help me achieve my investment goal more reliably?
  • Am I comfortable with the range of potential outcomes?
  • Do I know what they may be if something goes wrong?
  • Will this change improve my investing confidence or my peace of mind?

If investors are left with serious doubts after asking any of these questions, it may be wise to use caution before proceeding. Within equities, for example, the basic market portfolio of many index funds offers the benefit of exposure hundreds or thousands of companies possibly doing business around the world (depending on your selections) and possibly broad diversification across industries, sectors, and countries. While there can be good reasons to deviate from a market portfolio—perhaps tilting toward dimensions of size, value or profitability as we recommend—investors planning long-term outcomes should understand the potential benefits and risks of doing so. In addition, there is no shortage of things investors can do to help contribute to a better investment experience. Working closely with a knowledgeable CFP® professional can help individual investors create an integrated plan that better fits the needs, values and risk preferences of their families. Pursuing a globally diversified approach without U.S. familiarity bias; managing expenses, turnover, and taxes; and staying disciplined through market volatility and positioned to see market declines as opportunities not to be feared; all can help improve investors’ chances of achieving their long-term financial goals, and gaining greater peace of mind through a professional wealth management process.

CONCLUSION

Fashionable investment approaches will come and go, but investors should remember that a long-term, disciplined investment approach based on robust research grounded in the science of capital markets and smart flexible implementation may be the most reliable path to truly capturing the potential of what global capital markets have to offer.

CFP® professionals are fiduciaries with a duty of loyalty and care, and individually licensed by the Certified Financial Planner Board of Standards. Source: Dimensional Fund Advisors LP. Past performance may not be indicative of future results. This information is provided for educational purposes only and should not be considered investment advice or a solicitation to buy or sell securities. There is no assurance that any investing strategy will be successful. Diversification does not eliminate the risk of market loss. All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to a knowledgeable financial advisor or CFP® professional prior to making any investment decision. Eugene Fama and Kenneth R. French are members of the Board of Directors of the general partner of, and provides consulting services to, Dimensional Fund Advisors LP.

Special Client Edition – Year-End 2018

“Wild Week Leaves Investors Reeling” is the front-page headline of today’s Wall Street Journal. After remarking on the week’s “sharp plunges and euphoric rises,” it goes on to rhetorically ask: “What is behind the remarkably sudden swings in the market?”

U.S. stock markets and many international developed markets grew strongly during a very long bull run in the aftermath of the global market crisis of 2007-2009. Over the last three years, an unusually low level of market volatility has been noted frequently by many commentators. During this last quarter of 2018, that low volatility has given way to the steepest decline since 2002, steeper even than that of 2008, which like 2002, continued to decline even further. The S&P 500 index had dropped 15% in December until this last week.

With the stabilization of the last three days, will markets continue to decline? We don’t know. And for policy management of multi-dimensional structured strategies, it should not matter.

The increased volatility of the stock markets has caused anxiety for many investors, new and old. The Dow Jones Averages had declined nearly 20% (to constitute a “bear” market) but many factor indexes show declines of more than 20% based on prices since the year 2018 began. Most of our clients with balanced equity/fixed income strategies, however, will experience much-reduced negative performance for 2018, likely ranging between minus 6% to minus 8%. While I am sorry for the unhappy news, that is well within normal parameters.

Media — like the Journal — and industry experts will endlessly speculate and prognosticate regarding which political or social event is driving market turbulence (most likely rising interest rates, aided and abetting the Federal Reserve in our opinion). But the driving force of huge swings is almost certainly the new technological reality that roughly 85% of all major market trading is on autopilot—controlled by machines, models, or passive investing formulas. These collectively have created an unprecedented massive herd of robot investors that trades incredibly fast in unison. Human beings simply don’t react that fast. But this is a new era.

Algorithms, or investment recipes, automatically buy and sell based on pre-set inputs or simplified forms of artificial intelligence. “Momentum” of market movements is a critical factor input. Today, quantitative hedge funds, or those that rely on mathematical computer models rather than on traditional research and human intuition, account for 28.7% of trading in the stock market, according to the Tabb Group — doubled since 2013.

Add to that an increasing number of passive funds such as ETFs, index investors, market makers, and those not buying because of fundamental views such as Dimensional Fund Advisors, and you get about 85% of all trading volume according to JP Morgan. Herein is crisis and along with it, a new opportunity for investing.

WHAT ACTION HAS PROFESSIONAL FINANCIAL TAKEN FOR CLIENTS?

On Friday the 21st and Monday the 24th we rebalanced most clients’ portfolios in a simplified but customized manner back to target policy allocations. We do not depend on an automated rebalancing algorithm. We call this our “Phase One” of our management process in a decline.

Since we largely employ Dimensional funds that trade as of day end, we waited for a special period of bad news and a day that most machines would not operate. Friday tends to be the day, since quants don’t want open positions over a weekend and I guessed that most had booked a fancy holiday get-away and either would be unlikely to change plans or be able to do so. It created optimal conditions for rebalancing. It was a gift that just kept on giving. The two days after Christmas were a record rise for the Dow Jones average and major U.S. indexes.

Blind faith in machines and models leaves investors vulnerable to biased and irrational outcomes. The solution? That which Dimensional Fund Advisors has used in its trading process since its inception — a healthy dose of skepticism and human oversight when trading securities. Remember this about computers and robo-advisors: it’s an algorithm, not an authority.

CONCLUSION

While peace of mind may not have been part of the holiday season due to continuing market declines and substantial swings, volatility is a normal part of all investing. Risk and expected return are related. The idyllic pattern of growth of the past several years that sucked in so many investors to make big bets by over-allocating into U.S. growth stocks could not last.

Additionally, we all know that reacting emotionally to turbulent markets and changing sensible investment strategies and management process is likely to be far more harmful to long-term outcomes and peace of mind than a periodic market drawdown. We remember that we have to be right twice: both when you sell, and then when you buy back.

We will discuss these matters more in our next Planning Perspectives. Should you have questions about our actions before our next planning meeting or have concerns about “Phase 2” should global markets continue their declines into 2019, please call or email us.

This is what we’ve expected for months. The problem is, when we get what we want, we may not want what we get — at least for a while. For those upset by the news, turn off the computer, and ignore the media. Enjoy family and friends as we welcome in what may yet be a very happy New Year.

Carefully Considering Ownership Costs

Costs matter. Whether you’re buying a car or selecting investments for your portfolio, the costs you expect to pay are likely an important factor in making a financial decision.

People rely on different sources of information to make informed decisions. When buying a car, for example, the sticker price indicates about how much you may expect to pay for a car. But the costs of car ownership do not end there. Taxes, insurance, fuel, routine maintenance, and unexpected repairs (and where repairs are made) must be considered for complete ownership costs. While some costs are easily observable, other equally important ownership costs are obscure. Similarly, when selecting investment vehicles for constructing a portfolio both explicit and implicit costs must be considered to properly evaluate how cost‑effective a wealth planning strategy may be.

EXPENSE RATIOS

Mutual funds are the simplest way to illustrate this. Like all investments, mutual funds have differing management costs, all of which impact net investor return. The most easily observable measure of cost to identify is the expense ratio, which must be disclosed. Like a car’s sticker price, expense ratios tells you much about what you can expect to pay for different mutual and exchange traded funds. For investors looking to save on costs, expense ratios influence many decisions.

Exhibit 1 illustrates the “outperformance rate” for the proportion of surviving active equity mutual funds beating their relative category index over a 15-year period. To clarify the link between expense ratio and performance, outperformance rates are shown by quartiles and sorted by their expense ratios. The chart shows that the outperformance rate of active funds has not only lagged but been inversely related to expense ratio. Just 6% of active funds in the highest expense ratio quartile beat their index, compared to 25% for the lowest expense ratio quartile.

Exhibit 1. High Costs Can Reduce Performance, Equity Fund Winners and Losers Based on Expense Ratios (%)

The sample includes funds at the beginning of the 15-year period ending December 31, 2017. Funds are sorted into quartiles within their category based on average expense ratio over the sample period. The chart shows the percentage of winner and loser funds by expense ratio quartile; winners are funds that survived and outperformed their respective Morningstar category benchmark, and losers are funds that either did not survive or did not outperform their respective Morningstar category benchmark. US-domiciled open-end mutual fund data is from Morningstar and Center for Research in Security Prices (CRSP) from the University of Chicago. Equity fund sample includes the Morningstar historical categories: Diversified Emerging Markets, Europe Stock, Foreign Large Blend, Foreign Large Growth, Foreign Large Value, Foreign Small/Mid Blend, Foreign Small/Mid Growth, Foreign Small/Mid Value, Japan Stock, Large Blend, Large Growth, Large Value, Mid-Cap Blend, Mid-Cap Value, Miscellaneous Region, Pacific/Asia ex-Japan Stock, Small Blend, Small Growth, Small Value, and World Stock. For additional information regarding the Morningstar historical categories, please see “The Morningstar Category Classifications.”

Index funds and fund-of-funds are excluded from the sample. The return, expense ratio, and turnover for funds with multiple share classes are taken as the asset-weighted average of the individual share class observations. For additional methodology, please refer to Dimensional Fund Advisors’ brochure, Mutual Fund Landscape 2018. Past performance is no guarantee of future results.

Dead weight from high expense ratios presents a challenging hurdle for many active equity funds to overcome. From the investor’s viewpoint, selecting among funds with similar asset allocations having a low expense ratio of 0.25% vs. those about 1.25% potentially could mean savings of $10,000 per year on every $1 million invested. As Exhibit 2 illustrates, that difference can add up over time. However, at least some investment managers of higher-cost funds may be able to enhance performance sufficiently to offset their high costs.

Exhibit 2. Hypothetical Growth of $1 Million at 6%, Less Expenses

For illustrative purposes only and not representative of an actual investment. This hypothetical illustration is intended to show the potential impact of higher expense ratios and does not represent any investor’s actual experience. Assumes a starting account balance of $1 million and a 6% compound annual growth rate less expense ratios of 0.25%, 0.75%, and 1.25% applied over a 15-year time horizon. Performance of a hypothetical investment does not reflect transaction costs, taxes, other potential costs, or returns that any investor would have actually attained and may not reflect the true costs, including management fees of an actual portfolio. Actual results may vary significantly. Changing the assumptions would result in different outcomes. For example, the savings and difference between the ending account balances would be lower if the starting investment amount were lower.

GOING BEYOND THE EXPENSE RATIO

The poor track record of so many active mutual funds with high expense ratios has led many investors to select mutual funds based solely on expense ratio. That could be a mistake. As with a car’s sticker price, an expense ratio does not measure the complete cost of ownership. For example, index funds often rank near the bottom of their peers’ expense ratios. These funds are designed to track or match the components of arbitrary indexes formulated by commercial index providers, such as Russell or MSCI.

Important investment management decisions, such as which securities to include or exclude, are not within an index fund manager’s discretion and effectively outsourced to the index provider. Additionally, the prescribed reconstitution schedule for an index, when certain stocks are added or deleted to that index, may force index fund managers to buy stocks when demand is high and sell stocks when demand is low, increasing costs. Price-insensitive buying and selling is required for an index fund to “stay true” to the underlying index mandate. Diminished overall returns can result from sub-optimal transactions: for a given amount of trading (or turnover), the cost per unit due to a strictly regimented trading tends to be higher. These indirect costs are unpublished.

Further, because indices of commercial providers are reconstituted only infrequently (typically once per year), index funds that track them buy and sell underlying holdings based on stale eligibility criteria. For example, the characteristics of a particular “value” stock1 may have changed since the last reconstitution date, but those changes would not affect that stock’s inclusion in its commercial value index. Incoming cash flows into a value index fund, say, may continue to purchase securities that could be more like growth stocks2 (and vice versa). To avoid being different than the index they mimic, index managers invest using a rear-view mirror rather than watching the road ahead.

For active stock picking approaches, both the total amount of trading and the cost per trade usually will be higher than with indexing strategies. If an active manager trades excessively or inefficiently, commissions and price impact from increased trading will progressively eat away at returns. Using our car analogy, this is like incessantly jamming on the brakes or accelerating quickly. Subjecting any car to such abusive treatment results in added wear and tear and greater fuel consumption, increasing the total cost of ownership over time. Moreover, for investors holding funds in taxable accounts, excessive trading increases cost of ownership by realizing income subject to tax sooner.

Unnecessary turnover and higher costs per trade can be avoided, such as with portfolio strategies managed by Dimensional Fund Advisors. In contrast to both highly regimented index and high-turnover active strategies, a flexible management approach reduces the costs of immediacy, and thus enables opportunistic execution. Reducing implicit costs adds value. Keeping turnover low, remaining flexible, and transacting only when the potential benefits of a trade outweigh the costs, help keep overall trading costs even lower. This not only reduces complete total costs of ownership but also translates into higher portfolio returns.

CONCLUSION

Estimating the complete cost of owning any investment vehicle, like mutual funds, can be difficult to assess in advance. There are both implicit and explicit costs. Deciding requires a thorough understanding of costs beyond looking at expense ratio disclosures. Investors should think beyond any single cost metric and instead evaluate the total cost of ownership relative to the potential total benefit for total portfolio return based on a clear understanding of how a management methodology may reliably improve results.

Rather than focus too much time on evaluating investment costs, successful families should spend more time evaluating independent Certified Financial PlannerTM professionals with the right education and expertise that may help them take control of their financial future and make the truly informed decisions necessary to gain real peace of mind and enjoy a more abundant retirement.

1A stock trading at a low price relative to a measure of fundamental value, such as book value or earnings.

2 A stock trading at a high price relative to a measure of fundamental value, such as book value or earnings.

Midterm Elections: What Do They Mean for Markets?

It’s almost Election Day in the US once again. For those who need a brief civics refresher, every two years the full US House of Representatives and one-third of the Senate are up for reelection.

While the outcomes of the elections are uncertain, one thing we can count on is that plenty of opinions and prognostications will be floated in the days to come. In financial circles, this will almost assuredly include any potential for perceived impact on markets. But should long-term investors focus on midterm elections?.

MARKET WORK

We would caution investors against making short-term changes to a long-term plan to try to profit or avoid losses from changes in the political winds. For context, it is helpful to think of markets as a powerful information-processing machine. The combined impact of millions of investors placing billions of dollars’ worth of trades each day results in market prices that incorporate the aggregate expectations of those investors. This makes outguessing market prices consistently very difficult.1 While surprises can and do happen in elections, the surprises don’t always lead to clear-cut outcomes for investors.

The 2016 presidential election serves as a recent example of this. There were a variety of opinions about how the election would impact markets, but many articles at the time posited that stocks would fall if Trump were elected.2 The day following President Trump’s win, however, the S&P 500 Index closed 1.1% higher. So even if an investor would have correctly predicted the election outcome (which was not apparent in pre-election polling), there is no guarantee that they would have predicted the correct directional move, especially given the narrative at the time.

But what about congressional elections? For the upcoming midterms, market strategists and news outlets are still likely to offer opinions on who will win and what impact it will have on markets. However, data for the stock market going back to 1926 shows that returns in months when midterm elections took place did not tend to be that different from returns in any other month.

Election_results_chart

Exhibit 1: Congressional elections and annual returns

Exhibit 1 shows the frequency of monthly returns (expressed in 1% increments) for the S&P 500 Index from January 1926–August 2018. Each horizontal dash represents one month, and each vertical bar shows the cumulative number of months for which returns were within a given 1% range (e.g., the tallest bar shows all months where returns were between 1% and 2%). The blue and red horizontal lines represent months during which a midterm election was held, with red meaning Republicans won or maintained majorities in both chambers of Congress, and blue representing the same for Democrats. Striped boxes indicate mixed control, where one party controls the House of Representatives, and the other controls the Senate, while gray boxes represent non-election months. This graphic illustrates that election month returns were well within the typical range of returns, regardless of which party won the election. Results similarly appeared random when looking at all Congressional elections (midterm and presidential) and for annual returns (both the year of the election and the year after).

IN IT FOR THE LONG HAUL

While it can be easy to get distracted by month-to-month or even one-year returns, what really matters for long-term investors is how their wealth grows over longer periods of time. Exhibit 2 shows the hypothetical growth of wealth for an investor who put $1 in the S&P 500 Index in January 1926. Again, the chart lays out party control of Congress over time. And again, both parties have periods of significant growth and significant declines during their time of majority rule. However, there does not appear to be a pattern of stronger returns when any specific party is in control of Congress, or when there is mixed control for that matter. Markets have historically continued to provide returns over the long run irrespective of (and perhaps for those who are tired of hearing political ads, even in spite of) which party is in power at any given time.

Exhibit 2. Growth of $1 Invested in the S&P 500 Index and Party Control of Congress January 1926–August 2018

Past performance is not a guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. S&P data ©2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Equity markets can help investors grow their assets, and we believe investing is a long-term endeavor. Trying to make investment decisions based on the outcome of elections is unlikely to result in reliable excess returns for investors. At best, any positive outcome based on such a strategy will likely be the result of random luck. At worst, it can lead to costly mistakes. Accordingly, there is a strong case for investors to rely on patience and portfolio structure, rather than trying to outguess the market, to pursue investment returns.

1.This is known as the efficient market theory, which postulates that market prices reflect the knowledge and expectations of all investors and that any new development is instantaneously priced into a security.

2. Examples include: “A Trump win would sink stocks. What about Clinton?” CNN Money, 10/4/16, “What do financial markets think of the 2016 election?” Brookings Institution, 10/21/16, “What Happens to the Markets if Donald Trump Wins?” New York Times, 10/31/16.

The ABCs of Education Investing

With school back in session in most of the country, many parents are likely thinking about how best to prepare for their children’s future college expenses. Now is a good time to sharpen one’s pencil for a few important lessons before heading back into the investing classroom to tackle the issue.

THE CALCULUS OF PLANNING FOR FUTURE COLLEGE EXPENSES

According to recent data published by the College Board, the annual cost of attending college in the US in 2017–2018 averaged $20,770 at public schools, plus an additional $15,650 if one is attending from out of state. At private schools, tuition and fees averaged $46,950.

It is important to note that these figures are averages, meaning actual costs will be higher at certain schools and lower at others. Additionally, these figures do not include the separate cost of books and supplies or the potential benefit of scholarships and other types of financial aid. As a result, actual education costs can vary considerably from family to family.

To complicate matters further, the amount of goods and services $1 can purchase tends to decline over time. This is called inflation. One measure of inflation looks at changes in the price level of a basket of goods and services purchased by households, known as the Consumer Price Index (CPI). Tuition, fees, books, food, and rent are among the goods and services included in the CPI basket. In the US over the past 50 years, inflation measured by this index has averaged around 4% per year.1 With 4% inflation over 18 years, the purchasing power of $1 would decline by about 50%. If inflation were lower, say 3%, the purchasing power of $1 would decline by about 40%. If it were higher, say 5%, it would decline by around 60%.

While we do not know what inflation will be in the future, we should expect that the amount of goods and services $1 can purchase will decline over time. Going forward, we also do not know what the cost of attending college will be. But again, we should expect that education costs will likely be higher in the future than they are today. So, what can parents do to prepare for the costs of a college education? How can they plan for and make progress toward affording those costs?

DOING YOUR HOMEWORK ON INVESTING

To help reduce the expected costs of funding future college expenses, parents can invest in assets that are expected to grow their savings at a rate of return that outpaces inflation. By doing this, college expenses may ultimately be funded with fewer dollars saved. Because these higher rates of return come with the risk of capital loss, this approach should make use of a robust risk management framework. Additionally, by using a tax-deferred savings vehicle, such as a 529 plan, parents may not pay taxes on the growth of their savings, which can further lower the cost of funding future college expenses.

While inflation has averaged about 4% annually over the past 50 years, stocks (as measured by the S&P 500 Index) have returned around 10% annually during the same period. Therefore, the “real” (inflation-adjusted) growth rate for stocks has been around 6% per annum. Looked at another way, $10,000 of purchasing power invested at this rate over the course of 18 years would result in over $28,000 of purchasing power later on. We can expect the real rate of return on stocks to grow the purchasing power of an investor’s savings over time. We can also expect that the longer the horizon, the greater the expected growth. By investing in stocks, and by starting to save many years before children are college age, parents can expect to afford more college expenses with less savings.

It is important to recognize, however, that investing in stocks also comes with investment risks. Like teenage students, investing can be volatile, full of surprises, and, if one is not careful, expensive. While sometimes easy to forget during periods of increased uncertainty in capital markets, volatility is a normal part of investing. Tuning out short-term noise is often difficult to do, but historically, investors who have maintained a disciplined approach over time have been rewarded for doing so.

RISK MANAGEMENT AND DIVERSIFICATION:
THE FRIENDS YOU SHOULD ALWAYS SIT WITH AT LUNCH

Working with a CFP® professional who has a transparent approach based on sound investment principles, consistency, and trust can help investors identify an appropriate risk management strategy. Such an approach can limit unpleasant (and often costly) surprises and ultimately may contribute to better investment outcomes.

A key part of maintaining this discipline throughout the investing process is starting with a well-defined investment goal. This allows for investment instruments to be selected that can reduce uncertainty with respect to that goal. When saving for college, risk management assets (e.g., bonds) can help reduce the uncertainty of the level of college expenses a portfolio can support by enrollment time. These types of investments can help one tune out short‑term noise and bring more clarity to the overall investment process. As kids get closer to college age, the right balance of assets is likely to shift from high expected return growth assets to risk management assets.

Diversification is also a key part of an overall risk management strategy for education planning. Nobel laureate Merton Miller used to say, “Diversification is your buddy.” Combined with a long-term approach, broad diversification is essential for risk management. By diversifying an investment portfolio, investors can help reduce the impact of any one company or market segment significantly negatively impacting their wealth.

Additionally, diversification helps take the guesswork out of investing. Trying to pick the best performing investment every year is a guessing game. We believe that by holding a broadly diversified portfolio, investors are better positioned to capture returns wherever those returns occur.

CONCLUSION

Higher education may come with a high and increasing price tag, so it makes sense to plan well in advance. There are many unknowns involved in education planning, and no “one-size-fits-all” approach can solve the problem. By having a disciplined approach toward saving and investing, however, parents can remove some of the uncertainty from the process. A CFP® wealth professional can help you clarify your goals, present different portfolio approaches, and help you understand the likely outcomes for an informed decision.

A CFP® professional can help you craft a plan most likely to realize your family’s educational goals. An informed strategy for college funding, integrated with your own informed retirement strategy, will help put you in control of your financial future and gain greater peace of mind.

1.Source: US Department of Labor, Bureau of Labor Statistics, Economic Statistics.

Alternative Reality

Diversification has been called the only free lunch in investing.

This idea is based on research showing that diversification, through a combination of assets like stocks and bonds, could reduce volatility without reducing expected return or increase expected return without increasing volatility compared to those individual assets alone. Many investors have taken notice, and today, highly diversified portfolios of global stocks and bonds are readily available to investors at a comparatively low cost. A global stock portfolio can hold thousands of stocks from over 40 countries around the world, and a global bond portfolio can be diversified across bonds issued by many different governments and companies and in many different currencies.

Some investors, in search of additional potential volatility reduction or return enhancement opportunities, may even try to extend the opportunity set beyond stocks and bonds to other assets, many of which are commonly referred to as “alternatives.” The types of offerings labeled as alternative today are wide and varied. Depending on who you talk with, this category can include, but is not limited to, different types of hedge fund strategies, private equity, commodities, and so on. These investments are often marketed as having greater return potential than traditional stocks or bonds or low correlations with other asset classes.

In recent years, “liquid alternatives” have increased in popularity considerably. This sub-category of alternatives consists of mutual funds that may start from the same building blocks as the global stock and bond market but then select, weight, and even short securities1 in an attempt to deliver positive returns that differ from the stock and bond markets. Exhibit 1 shows how the growth in several popular classifications of liquid alternative mutual funds in the US has ballooned over the past several years.

Graph of Number of Liquid Alternative Mutual Funds in the US

The growth in this category of funds is somewhat remarkable given their poor historical performance over the preceding decade. Exhibit 2 illustrates that the annualized return for such strategies over the last decade has tended to be underwhelming when compared to less complicated approaches such as a simple stock or bond index. The return of this category has even failed to keep pace with the most conservative of investments. For example, the average annualized return for these products over the period measured was less than the return of T-bills but with significantly more volatility.

Chart of Performance and Characteristics of Liquid Alternative Funds in the US vs. Traditional Stock and Bond Indices

While expected returns from such strategies are unknown, the costs and turnover associated with them are easily observable. The average expense ratio of such products tends to be significantly higher than a long-only stock or bond approach. These high costs by themselves may pose a significant barrier to such strategies delivering their intended results to investors. Combine this with the high turnover many of these strategies may generate and it is not challenging to understand possible reasons for their poor performance compared to more traditional stock and bond indices.

This data by itself, though, does not warrant a wholesale condemnation of evaluating assets beyond stocks or bonds for inclusion in a portfolio. The conclusion here is simply that, given the ready availability of low cost and transparent stock and bond portfolios, the intended benefits of some alternative strategies may not be worth the added complexity and costs.

CONCLUSION

When confronted with choices about whether to add additional types of assets or strategies to a portfolio for diversification beyond stocks, bonds, and cash it may help to ask three simple questions.

  1. What is this alternative getting me that is not already in my portfolio?
  2. If it is not in my portfolio, can I reasonably expect that including it will increase expected returns or reduce expected volatility?
  3. Is there an efficient and cost-effective way to get exposure to this alternative asset class or strategy?

If you are left with doubts about any of these three questions it may be wise to use extreme caution before proceeding. A wealth management professional with the right knowledge, expertise, education and experience can help you answer these questions and ultimately decide if a given investing strategy is right for you.

Since few investors can ever know enough on their own to make a fully informed decision, we suggest the first decision you can make in wealth planning is: who can you trust to put your interest first and foremost? We suggest a fiduciary advisor specializing in wealth management is most likely to put you in control of your financial future, show you how to better manage uncertainty, and help you gain confidence and peace of mind.

ALTERNATIVE STRATEGY DEFINITIONS

Absolute Return: Funds that aim for positive return in all market conditions. The funds are not benchmarked against a traditional long-only market index but rather have the aim of outperforming a cash or risk-free benchmark.

Equity Market Neutral: Funds that employ portfolio strategies that generate consistent returns in both up and down markets by selecting positions with a total net market exposure of zero.

Long/Short Equity: Funds that employ portfolio strategies that combine long holdings of equities with short sales of equity, equity options, or equity index options. The fund may be either net long or net short depending on the portfolio manager’s view of the market.

Managed Futures: Funds that invest primarily in a basket of futures contracts with the aim of reduced volatility and positive returns in any market environment. Investment strategies are based on proprietary trading strategies that include the ability to go long and/or short.

Category descriptions are based on Lipper Class Codes provided in the CRSP Survivorship bias-free Mutual Fund Database.

1Short positions benefit if the borrowed security falls in value.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to a wealth management professional prior to making any investment decision.

Investing involves risks including possible loss of principal. Stocks are subject to market fluctuation and other risks. Bonds are subject to increased risk of loss of principal during periods of rising interest rates and other risks. There is no assurance that any investment strategy will be successful. Diversification does not assure a profit or protect against loss.

E+R=O, a Formula for Success*

Combining an enduring investment philosophy with a simple formula that helps maintain investment discipline can increase the odds of having a positive financial experience.

“The important thing about an investment philosophy is that you have one you can stick with.”
– David Booth, Founder and Executive Chairman, Dimensional Fund Advisors

AN ENDURING INVESTMENT PHILOSOPHY

Investing is a long-term endeavor. Indeed, people will spend decades pursuing their financial goals. But being an investor can be complicated, challenging, frustrating, and sometimes frightening. This is exactly why, as David Booth says, it is important to have an investment philosophy you can stick with, one that can help you stay the course.

This simple idea highlights an important question: How can investors, maintain discipline through bull markets, bear markets, political strife, economic instability, or whatever crisis du jour threatens progress towards their investment goals?

Over their lifetimes, investors face many decisions, prompted by events that are both within and outside their control. Without an enduring philosophy to inform their choices, they can potentially suffer unnecessary anxiety, leading to poor decisions and outcomes that are damaging to their long-term financial well-being.

When they don’t get the results they want, many investors blame things outside their control. They might point the finger at the government, central banks, markets, or the economy. Unfortunately, the majority will not do the things that might be more beneficial—evaluating and reflecting on their own responses to events and taking responsibility for their decisions.

e+r=o

Some people suggest that among the characteristics that separate highly successful people from the rest of us is a focus on influencing outcomes by controlling one’s reactions to events, rather than the events themselves. This relationship can be described in the following formula:

e+r=o (Event + Response = Outcome)

Simply put, this means an outcome — either positive or negative — is the result of how you respond to an event, not just the result of the event itself. Of course, events are important and influence outcomes, but not exclusively. If this were the case, everyone would have the same outcome regardless of their response.

Let’s think about this concept in a hypothetical investment context. Say a major political surprise, such as Brexit, causes a market to fall (event). In a panicked response, potentially fueled by gloomy media speculation of the resulting uncertainty, an investor sells some or all of his or her investment (response). Lacking a long-term perspective and reacting to the short-term news, our investor misses out on the subsequent market recovery and suffers anxiety about when, or if, to get back in, leading to suboptimal investment returns (outcome).

To see the same hypothetical example from a different perspective, a surprise event causes markets to fall suddenly (e). Based on his or her understanding of the long-term nature of returns and the short-term nature of volatility spikes around news events, an investor is able to control his or her emotions (r) and maintain investment discipline, leading to a higher chance of a successful long‑term outcome (o).

This example reveals why having an investment philosophy is so important. By understanding how markets work and maintaining a long-term perspective on past events, investors can focus on ensuring that their responses to events are consistent with their long-term plan.

THE FOUNDATION OF AN ENDURING PHILOSOPHY

An enduring investment philosophy is built on solid principles backed by decades of empirical academic evidence. Examples of such principles might be: trusting that prices are set to provide a fair expected return; recognizing the difference between investing and speculating; relying on the power of diversification to manage risk and increase the reliability of outcomes; and benchmarking your progress against your own realistic long-term investment goals.

Combined, these principles might help us react better to market events, even when those events are globally significant or when, as some might suggest, a paradigm shift has occurred, leading to claims that “it’s different this time.” Adhering to these principles can also help investors resist the siren calls of new investment fads or worse, outright scams.

THE GUIDING HAND OF A TRUSTED ADVISOR

Without education and training — sometimes gained from bitter experience — it is hard for non-investment professionals to develop a cogent investment philosophy. And even the most self-aware find it hard to manage their own responses to events. This is why a financial advisor can be so valuable—by providing the foundation of an investment philosophy and acting as an experienced counselor when responding to events.

Investing will always be both alluring and scary at times, but a view of how to approach investing combined with the guidance of a professional advisor can help people stay the course through challenging times. Advisors can provide an objective view and help investors separate emotions from investment decisions. Moreover, great advisors can educate, communicate, set realistic financial goals, and help their clients deal with their responses even to the most extreme market events.

In the spirit of the e+r=o formula, good advice, driven by a sound philosophy, can help increase the probability of having a successful financial outcome.

*Jack Canfield, The Success Principles: How to Get from Where You Are to Where You Want to Be (New York: HarperCollins Publishers, 2004)

Adapted from “E+R=O, a Formula for Success,” The Front Foot Adviser, by David Jones, Vice President and Head of Financial Adviser Services, EMEA.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to a wealth management professional prior to making any investment decision.

Investing involves risks including possible loss of principal. Stocks are subject to market fluctuation and other risks. Bonds are subject to increased risk of loss of principal during periods of rising interest rates and other risks. There is no assurance that any investment strategy will be successful. Diversification does not assure a profit or protect against loss.

Tuning Out Media Noise and Staying Focused

For investors, the relentless streaming of media news about markets, business and economics can be overwhelming.

Investors are continually bombarded with headlines, charts and financial data over the internet and the press. Topics about U.S. stocks today are popular. All too often, media “news” evokes feelings of greed, fear and envy rather than reasoned thought.

Those whose investing relies primarily on headlines tend to ignore financial history to their peril. For example, in contrast to high recent performance of many featured stocks, the S&P 500 index—comprised of shares representing the most important U.S. companies — for ten years since 2009 – showed a cumulative return of only 0.9 percent, less than a single year’s return for a bank account!

Consumer confidence for business prospects here in the U. S. has risen to its highest level since 2000, when the infamous “Lost Decade” for U.S. stocks began. That is partly due to tax reform, leading many businesses to expand, and S&P 500 corporations to repatriate billions of dollars accumulated overseas. From January 2010 to May 2018, beginning at a low market point, the S&P 500 Index has grown 189.4 percent, leading other asset class alternatives.1

Recalling media headlines from the “Lost Decade”2 reminds us when even experienced market participants questioned the wisdom of disciplined equity investment strategies with U. S. stocks:

TAKING ACTION

  • May 1999: Dow Jones Industrial Average Closes Above 11,000 for the First Time
  • March 2000: Nasdaq Stock Exchange Index Reaches an All-Time High of 5,048
  • April 2000: In Less Than a Month, Nearly a Trillion Dollars of Stock Value Evaporates
  • October 2002: Nasdaq Hits a Bear-Market Low of 1,114
  • September 2005: Home Prices Post Record Gains
  • September 2008: Lehman Files for Bankruptcy, Merrill Lynch Is Sold to Avoid Bankruptcy

Equity markets are inherently volatile as well as cyclical. While those times are well behind us, those crises continue to be important reminders of when headlines directly impacted investor feelings and decisions impacting wealth.

So how well did media headlines after the fact positively influence investor behavior by implying investors should go to cash? Sometimes, doing nothing is the right response, and the best way to avoid disaster.

For example, if one hypothetically held a diversified portfolio of large US stocks worth $10,000 back in May 1999 and stayed invested, that portfolio would be worth approximately $28,000 today, much better than a bond index fund or a bank savings account.3

Hypothetical growth of S&P 500 chart

When media noise focuses on high-performing stocks and funds, losing sight of psychological benefits for staying disciplined and abandoning sound strategy is all too common. Over the recent past, investors have been heavily influenced by media to concentrate in the well-performing top ten to 15 percent of larger U.S. stocks, like those found in an S&P 500 index—after they have already gone up in price and actually may be priced too high. Without a disciplined strategy, an equally strong temptation may be to start selling those same stocks low after media speculative noise has turned from optimism to pessimism.

Recently we see an increasing number of prospective clients wisely avoid expensive actively managed funds, and instead own low-cost index funds. But after professional analysis, X-raying their aggregate portfolios of index and index-style funds, we keep finding the same recurring issue: these personally repositioned portfolios are actually concentrated on a single asset class and a single market factor—closely approximating the U.S. larger company stock asset class, much like the S&P 500 index. International positions are underweighted, and size and value factors are absent. As for fixed income allocation to reduce volatility—those positions are often very underweighted.

Unknowingly, these investors have a diversity of funds but lack stock diversification and informed asset allocations for effective risk reduction, that would protect them in a market downturn and position them better for a recovery.

While no one has a crystal ball, looking beyond the headlines and adopting a long-term perspective can change how market volatility is viewed, and set more realistic expectations for sound investment strategy for successful long-term retirement planning.

THE VALUE OF A TRUSTED ADVISOR

Having a sound investment policy aligned with your ability to bear risk minimizes emotional responses when volatility hits and media once again, after the fact, blares a different trumpet.

A professional wealth management process combined with smart economic philosophy can lead to more confidence, more disciplined behavior, and fewer investing mistakes.

A Dimensional Fund Advisors survey found that those planning for retirement place a high value on the sense of security and peace of mind they receive from working with a professional advisor.

Busy people know they cannot do it all themselves, or lack the time and interest, and need time for other matters of importance. A knowledgeable and experienced specialist with expertise, perspective, and encouragement can more than pay his or her way.

How do you Primarily Measure the Value Received from your Advisor bar graph

Look for a professional wealth specialist who works with people like you, who can help you ignore the noise and stay focused, and so gain confidence and peace of mind with better outcomes.

The right professional relationship can make all the difference in your future retirement lifestyle, and position you to make a bigger impact with your family and community—and so finish strong.

For a short video, please see https://us.dimensional.com/tuning-out-the-noise.

Source: Dimensional Fund Advisors LP. All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to a certified wealth management professional prior to making any investment decision.

Investing involves risks including possible loss of principal. Stocks are subject to market fluctuation and other risks. Bonds are subject to increased risk of loss of principal during periods of rising interest rates and other risks. There is no assurance that any investment strategy will be successful. Diversification does not assure a profit or protect against loss.

There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

  • 1For the US stock market, this is generally understood as the period inclusive of 1999 – 2009.
  • 2OECD (2018), Consumer confidence index (CCI) (indicator). doi: 10.1787/46434d78-en (Accessed on 22 June 2018)
  • 3As measured by the S&P 500 Index, May 1999–March 2018. A hypothetical dollar invested on May 1, 1999, and tracking the S&P 500 Index, would have grown to $2.84 on March 31, 2018. However, performance of a hypothetical investment does not reflect transaction costs, taxes, or returns that any investor actually attained and may not reflect the true costs, including management fees, of an actual portfolio. Changes in any assumption may have a material impact on the hypothetical returns presented. It is not possible to invest directly in an index. To put the S&P 500 index return in perspective, the Bloomberg Barclays US Aggregate Bond Index would have grown to $2.40 for the same period with only 23 percent of the market volatility (measured by annualized standard deviation). With interest rates at historic lows today, however, looking forward the next twenty years, bond indexes cannot deliver a comparable performance.

What You Need to Know About the New Tax Law

With the tax season behind us, we look ahead to new opportunities and challenges presented by the most comprehensive change in Federal tax laws since 1986.

Changes are far-reaching, subject to interpretation and revisions, and will impact nearly every person, family and business. Figuring out a personalized strategy is critical to gaining better wealth outcomes.

People are wondering:

  • How do the new tax laws affect me, my family, my business?
  • Will these tax rules cost me money, or are there smart ways to benefit?
  • How can I position myself, my family and my company to best stay ahead?
  • What actions do I need to take NOW and in the coming years?
  • What should I need to worry most about TODAY?

KEY #1: Many tax deductions you counted on in the past were substantially changed or eliminated. For those with higher incomes, new rules are needed to play this tax game and win.

  • Nearly every bracket sees a 2% to 4% tax rate reduction, for an average savings of $1,600. However, because tax brackets were compressed, many higher earners will be worse off—some, much worse off.
  • Everyone will gradually be pushed into higher tax brackets because based on new inflation measures (Chained-CPI), making tax credits and standard deductions less valuable over time.
  • The standard deduction has nearly doubled to $12,000 for singles and $24,000 for married couples. Four out of five taxpayers will benefit. One out of five taxpayers likely will not.
  • Miscellaneous itemized deductions are no longer allowed, but that is offset with alternative minimum tax relief.
  • “Bunching” allowable deductions, especially involving charity, should be utilized one year and standard deduction only taken the next to cumulatively maximize year-over-year deductions.
  • IMPORTANT: Dividends and capital gains tax rates remain the same under the new tax law.

KEY #2: Living in states like New York, Massachusetts and New Jersey will negatively impact many with new rules how state and property taxes are deducted.

  • For many higher earners, touted tax savings from rate reductions of tax brackets will not be realized.
  • Previously unlimited deductions for state, local and property taxes now are capped at $10,000.
  • Interest deduction on new mortgages is now capped at $750,000, down from $1 million.
  • Home equity loan interest is no longer deductible unless it is used in connection with home acquisition or improvements. Home borrowings for college tuition would not be deductible.

KEY #3: Family-related tax rule changes regarding high-earning couples, children, education, divorce, retirement and estate planning need immediate attention.

  • A $2,000 per child tax credit (up from $1,000) and $500 for non-child dependents may be claimed with up to $1,400 refundable credit! No phase outs until $200,000 for singles and $400,000 for marrieds.
  • 529 college savings plans are now “educational” plans, allowing up to $10,000 annually to be applied for K through grade 12 private education.
  • Alimony will no longer be deductible after 2018 (until sunset), nor will it be income to the payee.
  • Roth IRA conversions can no longer to reversed (recharacterized), so get your timing right.
  • Federal tax law benefits estates valued up to $11 million for individuals but sunsets to $5.5 million in 2025. New York State estate tax is still $5.5 million, with a “cliff” surcharge back to $1.
  • IMPORTANT: Wills and trusts should be checked for language that could accidentally disinherit certain heirs or increase NYS taxes because of temporarily increased federal estate tax exemptions.

KEY #4: All businesses have new opportunities and choices regarding what taxes are paid and how deductions and depreciation are claimed.

  • The corporate tax rate is now 21% and the corporate AMT has been eliminated.
  • Many self-employed business owners are allowed to take a 20% deduction for qualified “pass-through” business income (which may be enhanced for S Corp owners), phasing out between $157,500/$315,000 and $201,500/$415,000 (single/married).
  • Business owners should consider reorganizing their firms for preferential tax treatment, and carefully review new depreciation rules on deductibility of capital equipment and other assets.

OPPORTUNITY: While most will see lower taxes from the new tax law, some with higher incomes could easily pay much more. A professional specialist is needed more than ever for optimal tax outcomes.

Professional Financial will host a Tax Briefing at Monroe Golf Club on Thursday, August 9th at 5:00 PM. Simply call (585) 218-9080 x4 for reservations. Seating will be limited.

Topics to be covered include:

  • How the new tax law seriously impacts your retirement planning strategy.
  • The inflation calculation change in the tax code leading to higher future taxes.
  • Why paying off your mortgage sooner may be smarter than ever before.
  • Why 529 savings plans aren’t only for college anymore, and what that means for planning.
  • Why small business owners could only be taxed on 80% of their business income.
  • Why reorganizing your business into a different entity might be a valuable strategy.
  • How special types of qualified retirement plans may allow some to multiply tax savings.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to a wealth management professional prior to making any investment decision.

Investing involves risks including possible loss of principal. Stocks are subject to market fluctuation and other risks. Bonds are subject to increased risk of loss of principal during periods of rising interest rates and other risks. There is no assurance that any investment strategy will be successful. Diversification does not assure a profit or protect against loss.

Sailing with the Tides

Embarking on a financial plan is like sailing around the world. The voyage won’t always go to plan, and there’ll be rough seas. But the odds of reaching your destination increase greatly if you are prepared, flexible, patient, and well-advised.

A mistake many inexperienced sailors make is not having a plan at all. They embark without a clear sense of their destination. And once they do decide, they often find themselves lost at sea in the wrong boat with inadequate provisions.

Likewise, in planning an investment journey, you need to decide on your goal. A first step might be to consider whether the goal is realistic and achievable. For instance, while you may long to retire in the south of France, you may not be prepared to sacrifice your needs today to satisfy that distant desire.

Once you are set on a realistic destination, you need to ensure you have the right portfolio to get you there. Have you planned for multiple contingencies? What degree of “bad weather” can your plan withstand along the way?

Key to a successful voyage is a good navigator. A trusted advisor is like that, regularly taking coordinates and making adjustments, if necessary. If your circumstances change, the advisor may suggest you replot your course.

As with the weather at sea, markets can be unpredictable. A sudden squall can whip up waves of volatility, tides can shift, and strong currents can threaten to blow you off course. Like a seasoned sailor, an experienced advisor will work with the conditions.

Once the storm passes, you can pick up speed again. Just as a sturdy vessel will help you withstand most conditions at sea, a well-diversified portfolio can act as a bulwark against the sometimes tempestuous conditions in markets.

Circumnavigating the globe is not exciting every day. Patience is required with local customs and paperwork as you pull into different ports. Likewise, a lack of attention to costs and taxes is the enemy of many a long-term financial plan.

Distractions can also send investors, like sailors, off course. In the face of “hot” investment trends, it takes discipline not to veer from your chosen plan. Like the sirens of Greek mythology, media pundits can also be diverting, tempting you to change tack and act on news that is already priced in to markets.

A lack of flexibility is another impediment to a successful investment journey. If it doesn’t look as though you’ll make your destination in time, you may have to extend your voyage, take a different route to get there, or even moderate your goal.

The important point is that you become comfortable with the idea that uncertainty is inherent to the investment journey, just as it is with any sea voyage. That is why preparation and planning are so critical. While you can’t control every outcome, you can be prepared for the range of possibilities and understand that you have clear choices if things don’t go according to plan.

If you can’t live with the volatility, you can change your plan. If the goal looks unachievable, you can lower your sights. If it doesn’t look as if you’ll arrive on time, you can extend your journey.

Of course, not everyone’s journey is the same. Neither is everyone’s destination. We take different routes to different places, and we meet a range of challenges and opportunities along the way.

But for all of us, it’s critical that we are prepared for our journeys in the right vessel, keep our destinations in mind, stick with the plans, and have a trusted navigator to chart our courses and keep us on target.

Adapted from “Sailing with the Tides,” Outside the Flags by Jim Parker, March 2018. Past performance is no guarantee of future results. There is no guarantee an investing strategy will be successful. Diversification does not eliminate the risk of market loss. All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.