What We're thinking: Advisor Portfolios Underperform

A recent article in “Think Advisor” (an advisor trade journal) was titled “Advisor Portfolio Models Underperformed When Markets Tanked.”

What?! I clicked.

 

In the article, the box score shown at the right has a column labelled "Representative advisor portfolio return" for five portfolios during the February 20th to March 23rd period-- the meat of the Corona Crash.

 

Being incurably curious, a question arose: Have our clients been competitive with the “representative advisor?” Because we use low-cost, indexed-based, globally diversified portfolios, we imagined we were pretty close to the representative advisor. 

We compared Vanguard’s Life Strategy funds with the "representative advisor" portfolios because those are the actual investments we suggest, and the ones we use ourselves. We eat our own cooking. Here’s what we found:

     


                                  
Portfolio                    Advisor Return           Your Return*           Your Advantage
         

Conservative                   -13.6%                VASIX     - 8.9%                   +4.7%

Mod Conservative           -21.1%                VSCGX  -15.8%                  +5.3%

Moderate                          -24.6%                50/50      -19.1%                  +5.5%

Mod Aggressive              -27.8%                VSMGX  -22.3%                  +5.5%

Aggressive                      -32.9%                 VASGX   -28.3%                  +4.6%

*The highlighted blue areas are where most client portfolios reside. Vanguard fund data was derived from Morningstar. Individual portfolio results will vary.

You're reading that right. Our approach delivered significant positive differences.

It might be argued that this was just a short-term, one-off example. If that were true, we wouldn't have bothered. But unfortunately, it's a recognizable pattern. After costs and after all the "special," "unique," and "sophisticated" approaches that many companies and planners claim to offer, there's little if anything to show for it.

Here are the take-aways:

·       A disciplined commitment to proven strategies works. Especially during high-stress times.

·       Diversification works. Even when you think you don’t like something in the portfolio.

·       Saving aggressively and rebalancing to target asset allocations works.

·       Partnering with an unconflicted, advice-only fiduciary works.

·       Tuning out the news/noise works.

None of this is newly discovered. None of it has anything to do with a virus, politics, oil, or the price of tea in China. It's just unexciting, unsexy, boring, and amazingly competitive.

Jim Cosgrove, CFP, Plano, TX                             jim.cosgrove@verizon.net    972-489-0262
Jim Cosgrove, Dir of Research, San Jose, CA    jimcos42@gmail.com           408-674-6315

What We're Thinking: Michigan Consumer Sentiment

We've begun this "What We're Thinking" series because, well, we're all in uncharted territory, and you have a right to know what's guiding and shaping our thinking. It's called transparency. And it underscores our commitment to a strong, conflict-free, fiduciary mission.

It's unknown if March 23rd was "the bottom" of the Corona Bear Market. Impassioned arguments are circulating on the topic. We're actually doing our best to just notice them for what they are-- entertainment and click-bait-- and stick with our strategic asset allocation. We're also finding that most clients need few, if any, portfolio adjustments. The damage to globally diversified, low-cost portfolios has not been fatal, nor has it even been irrevocable. As Bill Bernstein would say, "It's just fluctuation-- shallow risk."

The most important thing we saw this week was the monthly release of the University of Michigan Consumer Sentiment Index. This is one of our favorite indicators. It has a long record for showing how the nation feels. And it's been a remarkably accurate correlate to financial market inflection points. Also, notice how the extreme readings-- both high and low-- can persist for a few years.

As you can plainly see, a sharp drop took place this month. We expected a drop, but this is exceptional. In fact, it was record-breaking. So, what are the takeaways? What action might you take?



We think this is just the front end of a period of contraction and eventual recovery that may take several years. Understand that we might have strong opinions. But we hold them lightly. 

The good news for investors is that this is likely to be one of those gift horse-prize pony moments we wrote about in February. The other part of the good news is that you don't need to be in a hurry. Patience and a long vision will carry the day.

Jim Cosgrove, CFP, Plano, TX                             jim.cosgrove@verizon.net    972-489-0262
Jim Cosgrove, Dir of Research, San Jose, CA    jimcos42@gmail.com           408-674-6315

The Next Step

 

Yes, it's time for the next step.

It's time to get a step ahead of what keeps coming at you from friends, your social media feeds, and cable news.

For sure, some things deserve immediate attention. If someone you know is not well, in need of food, medicine, life-sustaining support, or perhaps they've just been furloughed, those issues must be addressed. Right now. Go take care of them.

Without those immediate needs to tend to, our sheltered-in-place bodies can easily get overrun by our unsheltered minds running amok. It happens to all of us and serves none of us. It's easy to end up feeling like we're at the wrong end of a bull whip. It's natural to be scared, frustrated, impatient, angry, bored, anxious, and emotionally disoriented.

Let's go a different way.

First, expect the news to get worse.

• Parts of the country that are not locked down will get locked down. Or maybe they won't.
• The political blame game and snipping will ratchet upwards.
• Someone you know may die. Or you'll know someone who knows someone who is dying.
• People will become increasingly impatient with being unable to connect with each other in person. Zoom enthusiasm will wear thin.
• Medical professionals will struggle to cope. Some of them will get sick.
• There may be serious shortages of medical supplies.
• Unfounded rumors, gossip, and misinformation has a way of spreading faster than any virus.
• You either don't need a check from the government, or the one you get will be too small or too late.
• The recession will be deeper, wider, and take longer to recover from than we think.
• Financial markets and your portfolio values will gyrate in unexpected ways.
• The pandemic will accelerate and begin to recede at different rates in different places.
• Those working on the front lines- medical professionals, first responders, business leaders, and most government officials- are doing their best in a situation for which there's been no precedent or rehearsal. 

It took me almost 15 minutes to write this. Now it's your turn. Think about your life.

• What will change in the next few weeks, few months?
• What is knowable? 
• What is unknowable? When will it become knowable? 
• What will you need? 
• How will those needs change over the next few months?
• What will not change?

The point is to start peering around the corner. Chasing the catastrophe du jour and bad news only makes you feel helpless and hopeless. Right now we need helpful and hopeful. This will do two things:

• You'll be better prepared to take care of yourself.
• You'll be in a better position to help those who need help.

There's no need to wallow in past errors, misjudgements, or regret. And there's no point in trying to imagine how things will be by 2030. Just take care of right now in a proactive, helpful, and hopeful way-- whatever and however that is.


If we can help soothe your financial concerns, please contact us at:
Jim Cosgrove, CFP, Plano, TX                             jim.cosgrove@verizon.net    972-489-0262
Jim Cosgrove, Dir of Research, San Jose, CA    jimcos42@gmail.com           408-674-6315




Hat tip, Josh Bernoff.