Factors That Determine Portfolio Performance..

Many investors ask me how do I choose my investments? Is there a system you follow? How can I improve the performance of my portfolio? What factor or factors do I need to consider to improve my portfolios performance?

All good questions. I will discuss seven broad elements that typically determine the overall performance of your portfolio.

  1. Security selection. Or stock picking. This has proven not to be a good determinant of portfolio success. When you find a manager with great results. There is no reason to believe they will continue. Actually there is zero correlation between past performance and future results.
  2. Costs and expenses. This one is tough. Cheapest is not always best. My grandpa told me don’t buy the cheapest and don’t buy the most expensive. The best value is somewhere in the middle.
  3. Asset allocation. This is probably the most important technical determinant of portfolio success. Modern Portfolio Theory has proven to be a very effective tool in developing a successful portfolio. However, it’s development must be done correctly. And strictly enforced. In that, there needs to be periodic rebalancing.
  4. Valuation and year of birth. This is a determination of risk.
  5. Longevity and starting early. This also a determination of the level of risk you are comfortable with. However, 4 and 5 are just part of the equation. Each individual is different. Therefore, the generalization that these are the only determinates of risk is false.
  6. Humility and learning. If you google investment you will find millions of items to review. The Wall Street bullies have convinced most that someone has the holy grail of investing. They have convinced us that they and they alone can help you pick stocks, get into and out of the market at the right times and can find the best money managers to ‘beat’ the market and make you ‘rich’. Nothing could be further from the truth. The only ones getting rich are these on Wall Street. This is primarily because they make money on every trade you make. It does not matter whether you make money or not.

Remember, you don’t have to know everything about investing to be successful but you do need to know the right things.


  1. Behavior and discipline. This is by far the most important determinant of portfolio success. The Wall Street bullies use your emotions against you. They convince you that if you don’t act now you will miss out on ‘the opportunity of a life time’. Most, if not all of us need an investor coach to guide thru the maze of investment choices and keep us disciplined to meet our goals.

He Who Trades Less…..Wins!

Prior to the new fiduciary rule. The Wall Street bully brokerage firm would use their payout structure to their brokers to generate more trading. They would pay a higher fee for the stock portion of a clients portfolio. For example, pay 1% on the stock portion and 0.50% on the fixed income portion.

This would result in their brokers using higher risk portfolios for their clients. Naturally they get paid more for a riskier portfolio. When there was a downturn in the market their clients realized more volatility than was right for their situation.

This issue may have been corrected with the fiduciary standard. However, right now, there is debate about ‘watering’ down the fiduciary standard

Not sure where the fiduciary standard is going within our industry. But I believe the Wall Street bully brokerage firms will find ways to generate more fees by trading more stocks within their clients’ portfolios.

A broker’s “job” is to get you to buy and sell as much as possible.  That is the primary way he or she gets paid.  This is a huge conflict of interest because what is good for you is bad for the broker.

The Wall Street bully brokerage firms do not make money buying the right stocks at the right time. This is a great misperception by the investing public. They believe the brokerage firms have the right information to ‘beat’ the market.

This is wrong. Because, like you, they cannot predict the future.

These brokerage firms make money when you trade stocks. There is a spread that they earn on every trade plus a commission. For example the bid is the amount someone is willing to pay, say $10 and the ask the amount someone is willing to sell, say $12. When the trade is completed the brokerage firm earns the $2 difference plus commission.

Therefore being an active trader in the long run will cause you to lose money.

By employing a scientifically designed strategy and remaining disciplined to that strategy, over the long term you will win.  Remember you portfolio is like a bar of soap, the more you touch it the smaller it gets.

Own equities….globally diversify…….rebalance.

Refuse To Be A Victim!!

Every day we hear more news, usually bad.  The media has a belief that if “it bleeds it lead”. Somehow people enjoy hearing bad things happening to other people. How many times have you heard, “I’m glad that I do not have to deal with this generation”? “They are lazy, with no work ethic, no ambition, entitled…….”

I believe everything generation does not approve of the next generation. Think about it, what did your parents generation say about you and your generation?

What we have to accept is that every generation is different, thankfully. We must believe that the free markets work and the next generation will figure it out.

Unfortunately, the free markets do not guarantee anything. Some will win and some will lose. However, losing is not the end. It only determines what does not work for you.  Losing is only final when you give up.

No matter how much we believe that the free markets work and how much faith we have in the underlying system there will be stress in our lives about the future.

We must refuse to be a victim.

In his book former General Electric CEO, Jack Welch points out that feeling sorry for ourselves in one of the most destructive and energy sapping behaviors you can engage in. yes, it’s unfair that the markets are insane and some people are unreasonable.

We must accept this for the reality that it is and move on.

Every minute engaged in self-pity is one too many.  In the words of Jack Welch, “Refuse to be a victim”.  Develop a scientific strategy for investing and we believe that the “bad times” will not last forever.  Believe it or not we must also remember that “good times” will not last forever.

Remember the only thing that does not change is that things change.

To succeed in investing for the long term we must own equities…..globally diversify …rebalance!

Happy Memorial Day!!

For regular readers of my messages you will recognize this message from past years. I am repeating it for two reasons. One, it is a great message and two, I am a bit lazy this week. So, enjoy!

As we celebrate Memorial Day 2018 let us not forget those who fought and died for us and those who continue to fight for us. To protect our freedom.

You will never know how much it cost the present generation to preserve your freedom! I hope you will make good use of it!! – John Adams

This week will be a short message. Please remember and honor those who fought and continue the fight for our ability to seek the American dream. Every one of us has the ability to seek the American dream, however it involves sacrifice. There are no short cuts to prosperity.

The free markets are part of the reason our veterans fought. It does not involve speculation but rather prudent investing. The American dream is not a get rich scheme. It requires sacrifice, hard work and planning.

As John Adams said above “I hope you make good use of it!!”

Honor our veterans, past and present, by making good use of it.

Free Markets Work!!

Each day the media focuses on a new prediction. Their audience is continually searching for new predictions. What will happen next? What is the new hot asset class? Where is the best place to put my money?

Everyone wants to have the best investments, only making money and avoiding all losses. This futile exercise will only add anxiety to your life. No one can consistently predict the future.

When someone is right on a prediction it is a matter of luck and not skill or knowledge.

Free markets are unpredictable.

Free markets left to their own devices set prices better than any individual or committee. They incorporate all of the knowable and predictable information in the present, as well as knowable information about the future.

Think of all the changes that have taken place over the last twenty years. Who of you would have acted on the prediction of  the cell phone phenomenon, or  the driverless car, or artificial intelligence(think Alexa….), or any change to our society.

The free markets drive innovations, they drive change. Unfortunately, most of us are resistant to change. How would you finish…. if it looks too good to be true it probably………  ? But sometimes new things are true. Free markets drive that change, even if it looks too good to be true.

Just because there was a cause and effect in the past does not mean it will repeat in the future.

Only unknowable future news and information can change prices going forward.

Rather than attempting to predict the future use your time and resources to improve your skills, either career or life. Your investments are best allocated by owning equities, globally diversify and rebalance. Follow these three simple rules and you will succeed in reaching your long term goals.

The free markets as a whole will continue to move forward. However no one can consistently predict what will happen next in any particular sector.

In fact, there are sectors that we have never heard of……. yet. But the free markets will find them.

Do You Have All The “Facts”?

When you read a daily financial publication like the Wall Street Journal you find an enormous amount of facts.

These facts can lead to vastly different conclusions. I wager that each day, with the exception of 2008-9 (even then I could find some facts supporting an up day), I can find 5 reasons the market will go up and 5 reasons it will go down. All of these facts occur in the same day.

Have you ever had someone tell you something and they told you the reasons why? Only to find out they left out something that changed the entire situation. Well the financial media does this every day.

These Wall Street bullies play on our emotions every day.

You can justify almost any imprudent investment decision with “facts.”  Information is filtered by our emotions to create “fact” that support our decisions or beliefs. Without outside guidance, it is impossible to tell when and how this happens.

Truth in the field of investing is elusive.

Remember the Wall Street bullies make money when we, the public, move money from one investment to another. Your broker has a vested interest in moving your money. They make more commission each time you move. The banking system loves to feed the fear.

If you are really interested in earning a good return on your investment dollars stop empowering the Wall Street bullies. Develop a sound, prudent portfolio, based on YOUR risk tolerance level and remain disciplined to that strategy. Jumping from one investment to another will cost you money and make tons of money for Wall Street.

As I have mentioned a number of times, NO ONE can predict the future. When you ask your broker what is the best stock for now? Or, when should I get in and out of the market? Or, who is the best fund manager(s)?  You are essentially asking them to predict the future.

A globally diversified portfolio eliminates the need to predict and allows you to relax and be assured you are properly invested to reach your long term goals.

One of the main attributes investors need as well as advisers is discipline.

Equities are one of the greatest wealth creation tools available, if properly used. To reach you long term financial goals own equities…..globally diversify….rebalance.

What Will Happen Next In The Stock Market?

There continues to be volatility in the markets around the world. Currently the media is focusing on the potential trade war with China. Or is it corporate earnings?  Or is it potentially raising interest rates? Who knows?

With all this ‘potential’ negative news what should an individual investor do? Go to cash? Buy gold? Buy real estate? Buy bitcoin? Buy annuities? Buy CDs? The list goes on and on.

‘Experts’ can make a case for each of these. You should buy….because of….  Don’t forget these ‘experts’ make these cases because this is what they have to offer. They will profit if you buy…..

What asset class will perform best over the short term? No one can consistently predict what the markets will do.

When analyzing this there are two groups of people, those who don’t where the market is going and those who don’t know they don’t know where the market is going.

No one knows if the next 20% movement will be up or down, but the next 100% movement will be up.

That said, markets fluctuate widely in the short term.  Fortunately, every major crash has a recovery, with stocks regaining all of their losses, given enough time.  Similarly, while the stock market has seen many 100% gains, it has never suffered a 100% loss.

It is curious why investors see ‘crashes’ of the past as buying opportunities, at the same time they see ‘crashes’ of the future as risk. Interesting…

Arguably, only a global catastrophe such as nuclear war, asteroid collision, or other extinction-level event could cause such as disaster.  In that case, your portfolio would be the least of your worries.

Free markets will prevail.  Capitalism will prevail.  To succeed in investing for the long term you should own equities…..globally diversify…..rebalance.

When Investing for Peace of Mind, Always Consider the Sum of All Outcomes.

During conversations with investors and financial professionals I hear of the hot advisor who beat the market. They made money throughout the ‘great recession’. They are a Chartered Financial Analyst CFA or some other designation that ‘proves’ their ability to beat the market. They have the system to make money in futures, options, gold, real estate and/or other alternative investments.

Recently while talking with another adviser. He told me since we are not affiliated with a broker/dealer we are not tied to institutional money managers. He stated he had developed a stock picking model of his own that average 19%+ over the last 10 years. What I did not tell him was there are a number of actively traded mutual funds that have average 19%+ over the last 10 years.

What he does not realize is that there is no correlation of past performance to future results.

Many times I hear that their friends’ broker beat the market. Therefore, everyone should move their money to this ‘hot’ broker. Unfortunately, when the ‘hot’ streak ends and it will, investors are devastated.

My studies of investing strategies over the last twenty years. I have come to  the conclusion that trading strategies work until they don’t. When they stop working it gets real ugly real fast.

Just because someone else got lucky doesn’t mean you will.  If we offered you a million dollars to play Russian roulette with a gun containing one bullet and five empty chambers, you would be a fool to ignore the chance of blowing your brains out.

Every day in the world of investing, someone takes a foolish gamble, gets lucky, and wins big.  When investing, you must always consider the sum of all probable outcomes, including the bullet in the chamber.

IF you are saving for a long term goal, like retirement or college for your kids or anything that is important to you follow a formal strategy.  You should follow a strategy which is backed by academic research. This research should use at least 60 years or more of data to eliminate any chance of bias.

You cannot substitute a high risk strategy for a prudent portfolio with a disciplined savings plan.

To succeed in reaching your long term financial goals you should, buy equities……globally diversify….rebalance.

Spring Has Sprung…Oh Wait..

This last weekend Northeast Wisconsin was hit with a record snow storm. The measurement last I saw in Green Bay was nearly 24 inches. Second most in recorded history.  It beat a record set in 1889. I also saw that Shawano received 33 inches this weekend. WOW!

I for one, have had enough snow and cold and wind…

This can teach us something about investing. Over the years we can expect the S&P 500 to earn an average of a little less than ten per cent. These facts also say that most of the time the return will vary from -6% and +22%. There are of course exceptions, 2008 saw a -40% loss.

This is comparable to the snow event we experienced this last weekend. They give us average snow falls for Wisconsin. Some years are below and some are above the stated averages. Then there are the exceptional years, like April 2018.

During years of exceptional snow we experience inconvenience, we probably need to stay off the roads, we probably need to wait longer for the roads to be cleared. There is also power outages to deal with. The list goes on for many.

The question becomes should we prepare of these rare events by investing in more snow removal equipment? Or keep more people on staff? Or should everyone invest in personal power generators?

The answer, in my opinion, is no. These rare events are part of life. Soon the roads will be cleared, our lives will go back to normal. Since it is April this snow will soon melt. OK it may not seem like winter will ever end but it will.

Like the economic downturn, we will recover. During 2008 many said this was the end. Our finances would never be the same. Many felt the downturn would never end. They panicked and sold.  But eventually the economy did recover. The pain went away for those that remained disciplined.

Unfortunately those that panicked locked in their losses and lost out on the eventual recovery.

It is April 2018 and we are digging out. There is a light at the end of the tunnel.

Will there be another event such as 2008? I have no idea. However I know if you work with an adviser that builds a prudent portfolio designed for you. You can go ahead with confidence that eventually the bad times will disappear.

Remember you don’t have to know everything about investing but you do need to know the right things.

In most cases this means the adviser you hired needs to keep you disciplined and focused on the long term.

Well Now We Know That Equity Markets Don’t Always Go Up.

As investors we know or should know that the reason stocks have historically returned more than fixed income over the long-term is because stock holders endure the volatility of the market. Without the volatility that goes hand-in-hand with stock ownership, the risk premiums associated with stocks would diminish, and so would the attendant wealth. Mark Matson

We enjoyed a great return year in 2017, in fact January 2018 looked pretty great.  Many of us now believed that the markets will continue going up. Of course there are always those predicting impending doom.

As an investor coach now is the time that I really earn my fees. Each week I discuss building a prudent portfolio at a risk level that YOU are comfortable with. We discuss that we need to know the expected return and the expected volatility. This information will give us the tools to build the right balance of return and risk.

However I also mention the most difficult task of an investor coach is keeping clients from making emotional decisions. The task sounds easy, remain disciplined. However when we are bombarded with dire predictions of doom many cannot resist panicking and selling when markets correct.

This in fact is a great opportunity to buy at a discount price. I believe Warren Buffet said it best when he told of his investment philosophy ‘when they’re crying I’m buying when they’re yelling I’m selling.’

Some historical statistics might help with this. Since 1928 the S&P 500 has returned 9.8% on average. During this time there has been 89 drops of 10% or more compared to 23 drops of 20% or more.

Since 1946 it has taken the market 111 days on average to rise to its pre-crash levels. Of course we must add that past performance is no indication of future results. However, I believe that since we have over six decades and more, of data we can assume that after all market downturns, regardless of how severe, the markets recover and go on to greater heights.

Now is not the time to panic and sell and seek safety, now is the time to implement one of our three simple rules which is rebalance.

At the end of 2017 when the equity markets flourished and fixed income lagged, we sold equities back to our original allocation and bought fixed income to our goal allocation. Buy low and sell high. We will again rebalance at the scheduled time. If the down turn continues we will sell fixed income and buy equities. Again buy low and sell high. When we have a prudent process and the discipline to follow it we will succeed long term.

This is where the services of an investor coach become invaluable. Because with the right process and discipline you will reach your long term financial goals.