What's the key to long-term investing success? Good habits. Dennis and Katie agree the key to success isn't just about the balance of stocks and bonds but your ability to stick with your investment strategy. The episode underscores the valuable impact of financial advisors in providing behavioral coaching, with a reference to the Vanguard Advisor Alpha study, as well as the challenges faced during market downturns.

The portfolio that works best is the one that you can stick with. - Meb Faber

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Collaboration with Shaping Wealth

Vanguard Advisor Alpha Study

Welcome to simply why, a podcast about money and purpose, where we pull back the curtain on running a financial advisory business focused on providing intentional advice to couples and families. I'm Dennis Morton. And I'm Katie Brown. Welcome back and thanks for tuning in, Katie. I want to start off with a question.

Today we're going to talk about tinkering a little bit. Tinkering and investing and tracking and how to build habits for long term success in investing. But I want to start with this question. Is there something in your life that you're constantly checking, like a data point? Do you check your investment portfolio a lot?

Do you check on your stats on your phone? Or is there anything you check in on a regular basis? Aside from my kids? I don't really think so. The data on your kids or like how many you have?

I check into my kids often. No, you know what? I really don't look at my own personal portfolio that often. Here we have a couple of ways that we help track client performance, cash amounts, all of that stuff. And so we'll run cash reports and every once in a while something will pop up and be like, oh yeah, maybe I should take a look at my account.

But it is not a habit for me to check. And you know, it's funny too, because we've talked about, this is a little bit of a tangent here, but we've often talked about, it's interesting when sometimes clients call us up and they say, hey, what is the market doing today? And honestly, it's not even a habit for me to check the daily performance of a market. I mean, I'll have a good understanding of where we're at on a month to basis, maybe quarterly, annually, further out than that. But to even look on a daily basis for what's happening today, it's not a natural habit for me.

And I am happy about that. Yeah, really good. I'm much less of a what happened? Person than why. And why takes some context and distance a little bit.

The data itself, like whether things are up or down, just doesn't float my boat. No. So my point in asking this is that when we talk about a balanced investing portfolio, oftentimes we hear about the 60 40 portfolio, 60% stocks, 40% bonds. And there has been a lot of inks build in the last couple of years about the death of the 60 40. Like, does that traditional balanced portfolio of stocks and bonds work?

And I think you and I have kind of come to terms with a philosophy around which investment strategy works. And it has very little to do with the balance of stocks and bonds and more with your ability to stick with it. Isn't that true? 100% true, yes. And there have been a lot of studies to support even that, too.

It's about time in the market and reducing that tinkering. Yeah. Whatever strategy you're comfortable with and can stick with that will help you to be successful. Yeah. Early on in the foundation of Morton Brown, I read a piece by Meb Faber from Cambria, where he wrote a piece called Global Asset allocation, and he backtested all of these historic strategies.

There's the Warren Buffett strategy, there's the Yale endowment strategy. There's a 60 40. And all of them backtested through multiple periods, periods of high inflation, low stock returns, low bond returns, global pandemics, whatever it might be, backtested all of them. And what he found was held for a long enough period of time. They all return almost the same.

The key is not jumping from Buffett to the endowment to the 60 40 based on what's happening in market conditions. If you stick with it, it works over multiple periods. Sometimes you're going to be out of favor. Sometimes you're going to be in favor. But that stick to itiveness is the hard part itself.

Right. But the thing oftentimes that people need to come to terms with and become comfortable with is the amount of volatility they are willing to absorb, take ride along with how long they want to stick with that roller coaster up and down. And I think that's where the 60 40 often comes into play, because you try to minimize some of those ups and downs and take a little bit of a steadier path, perhaps, but you may end up in the same spot. And I think that's been a lot of the popularity of the 60 40. However, I think it's interesting to talk a little bit about what is a 60 40 allocation.

Right. When we see it out there in some of the articles saying the death of the 60 40, what are they actually talking about when they say that? Yeah, there was a Wall Street Journal article at the end of October, and that's a key point we'll come back to in a minute. At the end of October, talking about the challenges that a 60 40 portfolio has had in recent years and could have heading into the future. It's just kind of baked into the assumptions and in their charts in the article, the 60% is the S and P 500, and the 40% is a ten year treasury.

That's it. And we looked at that and we said, well, that's not how we would design a 60 40. There's a whole broader universe of investment options beyond that that really help to color well diversified. Like, we can't look at 60 40 and say that's diversified because it really misses on things like small stocks, international stocks, different types of bonds. It's not just a ten year bond, it's a short intermediate term, different international bonds, those types of things.

It's really only when you add those pieces in that you can truly consider yourself diversified in different asset classes that aren't correlated. Yes, I think that's a really important differentiator, too, and something that we do often talk about, that diversification makes all the difference. And 2023, as you mentioned, October 25 is an interesting date because we have seen a tremendous rally across many different markets, but not always in the places that people might have expected or that they may be hearing about. Yes, I wish I had. You know, my habit of kind of screenshotting different headlines that I see sometimes because they help to illustrate what a short term headline can capture that doesn't make sense or at least can provide some insight.

There was a day where the markets just popped. And what, I mean, markets, I mean, everything popped. Whether you look at the Dow, the Nasdaq, the bond market, small stocks across the board. It was like green day, everything moving up. And you pull up the Wall Street Journal or CNBC, the headline was, Dow goes up 500 points.

And I had a client call in in the afternoon and mentioned that. He said, I see the Dow was up 500 points. I said, yes, but in percentage terms, that's the lowest number I'm looking at. I'm looking at small caps being up over 4% today or intermediate term bonds being up almost one and a half percent. So there are these massive moves happening in things, but the Dow gets the focus, the 500 points gets the focus, and you miss all of those other pieces.

And that kind of myopic effect. It's a very real thing. But that's why we're diversified. That's why it's an important part of that. It makes it easier to stick with things.

If you're diversified like that. Yes. Coming back to that Ned favor piece on global asset allocation, what are some attributes that can help you to stick with your portfolio? The portfolio that works best is the one you can stick with. Well, one is asking the right questions.

To quote the article, he said, our focus on assets and how much and when to allocate them, are we missing the guerrilla in the room? So asking questions like how much to put in foreign stock? What's the Fed going to do? Should I add to stocks or bonds at this time based on market conditions? The big conclusions that reach in the paper is that any asset by itself can experience catastrophic loss.

We saw that in the bond market last year. If you owned long term bonds in 2022, you got clobbered. And it might not look like that if you look at a long term chart, but it can happen in any one asset class that diversifying is the only free lunch. The only way to spread out risk is by spreading out risk and also coming back to cost. Taxes, fund expenses, all of those things matter in the long term.

The higher cost an investment option is, it's going to act as friction over time on the performance. And then we talked about tax efficiency and everything else. All of that goes into your ability to stick with the portfolio and control the things that you can control. Right. And honestly, a lot of the things that you just talked about, that's part of our job and our role in client relationships, is to help clients to answer some of those questions, understand how those things fit into the context of their plan, their investment strategy, and to help them stay the course.

It's interesting, every once in a while we'll go back and revisit the vanguard advisor Alpha study. And they update this often, and they talk about in the advisor Alpha study how much of a difference advisors make in client returns. And so much of it comes back to all of those pieces that we talked about, but also the behavioral coaching piece and helping clients to stick with whatever strategy it is that's going to make sense for them. That's some of the greatest value that an advisor can bring. One of the things that really jumped out of me in the language this time when I read it through, is how strong the caveat is.

They're really talking to advisors about this. They're saying if you do things this way, your clients will benefit. The implication is not everyone's going to do it this way. Like, if you're going in and you're telling your clients that your value is shifting around asset classes, moving in and out of stocks, trying to cherry pick your way to success, you're not going to be adding value. But if you're a good behavioral coach and helping them stick to that allocation and be patient, which patience has been really hard the last couple of years for all of us, if you do these things, your clients will be more successful, is what they found.

So the key is, do those things, advisors, right? And it was interesting, too, how they actually broke down the value that an advisor can bring when it comes to working with clients and their investment strategies. And they break it down to, if you work with an advisor, there's 3% that you may have in greater net returns by working with an advisor versus going it individually. And there's a whole science behind their study and the breakdown of that. But the part that really jumped out to us was 2% of that, or two thirds of the value that advisors often bring is through those behavioral conversations and helping them stick to the plan.

Reflecting back on October, again, we were having some tough conversations, I'd say especially the beginning of October, just some tough conversations about how challenging the markets had been. We had a nice run up and then gave a lot of it back in the markets between August and September. And by October, I think people were starting to just feel fatigued. And so there were conversations about, all right, we need to stick to the plan. You're not spending all of your money tomorrow for the most part.

In some cases, it's bucketed, but for the most part, most of the money that we're managing for clients is longer term money, longer than this year, next year. And so let's stick to the course. And for people that maybe didn't have that outside advisor or somebody kind of encouraging them to stick to the plan, they would have missed out a lot if somebody abandoned their plan. You can't make back the ten plus percent that they probably made across many asset classes. In all honesty, I think we struggled, too.

When you look at pretty much giving back, a lot of the returns that we'd had through July, getting back to flat, and it was really frustrating, and then kaboom. It just bounces back. It really is a challenging thing, even for us as professionals, to hold on to that. Yeah. And I think the way that we help each other with that, though, too, is that it is a very open conversation in our firm for the advisors talking together, even all members of our team talking through.

What are the conversations you're having? Where are you struggling? Where do you need support? How should I be thinking about this over here versus this over there? So just like we hope our clients lean on us and we feel privileged to have that advisory role, I consider our firm.

I consider us to be advisors for each other as well. Yes. Reflecting back on that advisor study, you know, one thing that really, really jumped out to me in the advisor study, they talk about the alpha that advisors bring, but it's only in the realm of the portfolio. They don't talk about the alpha that advisors bring when looking at the full plan, they do recognize. I thought this was a really strong recognition in that we tend to only measure the decisions made and often discount or overlook the decisions not made.

And I think that's where an advisor that's focused on the full wealth management, the full wealth plan for a client, has such an opportunity to play an instrumental role in those decisions that are made and some of the pitfalls that are avoided. Yeah, and even what was the second largest impact of any activity that advisor can have is on the withdrawal strategy, choosing where do we pull from first? Because just like contributions to a withdrawal rate compounds to the negative. So all that friction and everything else, it does come back to the holistic plan and not just capturing the investments. I think that's kind of the global asset allocation point, is that are we talking about the right things here?

Right. I liked they put into this study a diagram, Carl Richards diagram, section of things that matter and things that you can control. And we talk about that often, too. And that space there between what matters and what you can control is what you need to focus on. But also it's where we, as advisors, can help guide in that process, too, to help people to recognize what they can control and how to control that through various times and events in their financial lives.

The more we can talk about influencing versus controlling, because, frankly, if we're talking about market performance, we have no control over that. We still hear from people as they look back over the last couple of years, isn't there something we could have done in 2022 to succeed or have a better investment performance? And the answer, honestly, is no. Unless you wanted to trade off for concentrated risk or something else, it was a very difficult time, and whatever you had done then would have blown you up this year. It changes all the time, the cycles.

I think one important thing to remember along this. So if you can compose something that's consistent enough with your financial plan and your goals, that you can stick with it in the long term. I think one of the challenges that we as advisors have is we're not trained to help people stick with stuff. Always. We talk about how you come up in the business, and there's no part of that that's in the series seven and getting your license.

There wasn't part of that in the CFP curriculum when we started that behavioral side. So we've really had to build a different set of muscle as we realize that this is really the most important thing for investing success. So one of the things we're excited about is really increasing our skill set as behavioral advisors. And so we're engaged with the team from shaping wealth, Brian Portnoy and his team to build the better advisor and become better behavioral advisors to help support that stick to itiveness that our clients need to have, and recognizing the very human side of things that might tempt them to veer off course. Sometimes I think the real exciting part is going through shaping Wealth's foundations program that's going to involve our entire team and really having that language permeate what we do to help better behavioral outcomes, contribute to better financial outcomes and higher confidence.

Yes, involving the whole team, that is probably honestly what I am most excited about. I think we already have really great communication in the office, and I think that we do speak openly about things that we're struggling with different ways to help support different clients. And so to have a tool, and I don't even just want to call it a tool, but to be able to expand our mindset, our skill set around helping to recognize the human side of the finance decisions that we make from the very first phone call that comes into the office, all the way through an engagement process and beyond even influencing how we help communicate. So we have some members of the team that maybe aren't speaking with the clients directly, but they're helping us in our communication and our processes. That alignment through that process, I think is going to be so amazing.

I'm super excited about it. Yeah, this comes back to one of our best lessons learned from the last year, which is the teams that learn together, grow together. We're excited to kind of ramp up the common education that we have as an advisory firm. I think the outcome is going to be good. All right, so the lesson here today, if we're talking about that balance of stocks and bonds and your asset allocation is the way you compose, that is important.

But most important is your ability to stick with that through different cycles and navigate it and keep it consistent with your plan. And that should be where our focus is and where the conversations with our clients should be as well. Thanks for tuning in to this episode of simply why, a podcast about money and purpose. We hope you enjoyed getting to know us, how we approach leading a financial advisory practice, and the work we do every day to help families and couples make important financial decisions. Morton Brown, family Wealth is an SEC registered investment advisor.

This podcast is designed for educational and informational purposes and not intended as investment advice. More information can be found at www.mortonbrownfw.com.