Johns Island Financial Advisor Archives

Positive News Articles

June 15, 2016 by Justin M. Follmer, MBA, CFP®, AIF®

Where are all the positive news articles? Do you ever listen to the news and find yourself thinking that the world has gone to the dogs? The roll call of depressing headlines seems endless. But look beyond what the media calls news, and there also are a lot of things going right.

It’s true the world faces challenges in maintaining stable and well-functioning social, environmental, and economic systems. The legacy of the financial crisis is still with us, and concerns about climate change and sustainability are widespread.

Europe is grappling with a refugee crisis; China faces a difficult transition from an export and industrial-led economy to one driven by domestic demand; and the US is preoccupied with a sometimes rancorous election campaign.

But it’s also easy to overlook significant advances in raising the living standards of millions, increasing global cooperation on sustainability, and efforts to build greater transparency and trust in financial institutions.

Many of the 10 developments cited below don’t tend to make the front pages of daily newspapers in the form of positive news articles or the lead items in the TV news, but they’re worth keeping in mind on those occasions when you feel overwhelmed by all the grim headlines.

So here’s an alternative positive news articles bulletin:

Over the last 25 years, 2 billion people globally have moved out of extreme poverty, according to the latest United Nations Human Development Report.¹
Over the same period, mortality rates among children under the age of 5 have fallen by 53%, from 91 deaths per 1000 to 43 deaths per 1000.
In September 2015, all members of the UN set 17 sustainable development goals for 2030, including targets for eliminating poverty and hunger and lifting standards in health, education, water, energy, and infrastructure.
Global trade has expanded as a proportion of GDP from 20% in 1995 to 30% by 2014, signaling greater global integration.²
Global bank regulators recently announced that since the financial crisis they have implemented reforms to reduce leverage, address systemic risk, and build capital buffers into the banking system.³
The world’s biggest economy, the US, has been recovering. Unemployment has halved in six years from 10% to 5%.⁴
Global oil prices, while about 80% up from January’s 13-year lows, are still 50% below where they were two years ago. While bad news for the oil sector, lower prices also raise real incomes for consumers, increase profits outside energy, and decrease costs of production.
While fossil fuels still play a major role in the economy, renewable energy sources—such as solar and wind— accounted for nearly 22% of global electricity generation in 2013 and are seen rising to at least 26% by 2020.⁵
We live in an era of rapid innovation. One report estimates the digital economy now accounts for 22.5% of global economic output and projects digital technologies could generate $2 trillion of additional output by 2020.⁶
The growing speed and scale of data are increasing global connectedness and transforming industries as new discoveries are made in such areas as engineering, medicine, food, energy, and sustainability.

No doubt many of these advances will lead to new business and investment opportunities. Of course, not all will succeed. But the important point is that science and innovation are evolving in ways that can help mankind. The world is far from perfect. The human race faces major challenges. But just as it is important to be realistic and aware of the downside of our condition, we must also recognize the major advances that we are making.

Just as there is reason for caution, there is always room for hope. And keeping these positive news articles and trends in mind can help when you feel overwhelmed by all the bad news. Working with an investment advisor and financial planner can help you keep a perspective on the positive news articles that have an impact on your portfolio and long-term financial plan. Looking at the daily barrage of negativity through traditional media outlets as well as Facebook and other social media platforms can seriously dampen your mood. A constant state of depressed emotions and feelings can have lasting negative effects on the decisions you make with your money. One of the core investment philosophies of Coastal Wealth Advisors is keeping emotions in check – thereby helping to prevent our clients from making poor decisions at the worst times. Let us be your fiduciary; let us help you towards a more meaningful investing and planning experience. Get in touch today to learn about our unique financial planning process.

Image credit: Nitin Dhumal

1.”Human Development Report 2015: Work for Human Development,” United Nations.
2.”International Trade Statistics 2015,” World Trade Organization.
3.”Finalising Post-Crisis Reforms: An Update,” Bank for International Settlements, November 2015.
4. Bureau of Labor Statistics, May 26, 2016.
5. “Renewable Energy Statistics,” International Energy Agency, March 2016.
6. “Digital Disruption: The Growth Multiplier,” Accenture and Oxford Economics, February 2016
7. Authored by Jim Parker of Dimensional Fund Advisors. Original article here.

Low Cost Index Funds

June 3, 2016 by Justin M. Follmer, MBA, CFP®, AIF®

Low cost index funds are an innovative solution for investors that provide diversified investments at low fees. On any given day, an investor can observe the performance of indices from providers such as MSCI,¹ S&P,² or Russell³—and that means it’s easy to monitor whether or not an index fund manager replicated the index’s performance (gross of fees and expenses). However, an index fund manager’s strict adherence to an index comes at a cost in the form of reduced discretion around trading.

Most indices revise their list of index constituents periodically (e.g., annually or quarterly), at which time securities may be added or deleted from the index. This process is commonly referred to as index reconstitution. For example, the annual reconstitution of the widely tracked Russell indices will occur on June 24, 2016. Russell index fund managers will need to buy additions and sell deletions for the indices they track in order to minimize tracking error⁴ relative to the index. Any deviation of the fund from the index, over days or even hours, could result in different returns from the index.

The effect on volume from index rebalance trades is apparent in a huge volume spike on trade reconstitution day. Exhibit 1 illustrates average trade volume for additions and deletions in four major indices during the 80-day period surrounding reconstitution. Each of the charts shows a marked increase in trade volume on the effective date of reconstitution relative to the surrounding days. The effect is pervasive across the market capitalization spectrum as well as geographic region.

Exhibit 1: Equal-Weighted Average Trade Volume for Index Additions and Deletions

S&P data provided by StanS&P data provided by Standard & Poor’s Index Services Group. Russell data © Russell Investment Group 1995-2016. MSCI data © MSCI 2016, all rights reserved.

For each index, this large liquidity demand tends to drive up the prices of securities with greater purchase demand (generally additions to the index) relative to the other securities in the index. It also tends to push down prices of securities with greater sell demand (generally deletions from the index) relative to the other securities in the index. Thus, for an index being tracked by a large amount of assets, the index has generally added securities at higher prices and deleted securities at lower prices than it would have if no assets had been tracking it. This phenomenon is the result of low cost index fund managers’ demanding liquidity on or around the index reconstitution date.

After the reconstitution of an index, as the liquidity demands of low cost index fund managers decline, research shows this price effect tends to reverse. That is, additions tend to underperform the index while deletions tend to outperform. As a result, low cost index fund managers’ implicit trading costs can result in a performance drag on the index and, consequently, low cost index funds tracking the index.

A simple experiment in delaying reconstitution allows us to estimate how much this price pressure has impacted index performance. Exhibit 2 compares average monthly returns for two sets of Russell indices; one set is rebalanced on the June-end reconstitution date and the other three months later. As shown in the final three columns, delaying rebalancing improved average returns between 0.15% and 0.73% per month from July through September—the three months between the rebalance date of the standard indices and their delayed counterparts. For all calendar months, including October through June when holdings are identical for both rebalancing methods, this amounts to a performance benefit ranging from 0.04% to 0.18% per month, or approximately 0.45% to 2.21% per year.

Exhibit 2: Effect of Delaying Reconstitution Month

Russell data © Russell Investment Group 1995–2016, all rights reserved. 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.

Low Cost Index Funds: Summary

Low cost index funds may be a good option for investors seeking investments with low fees. However, in an attempt to match the returns of an index, a low cost index funds manager sacrifices trading flexibility. Because of high liquidity demands around index reconstitution dates, low cost index funds may incur high trading costs that do not appear in expense ratios but do affect net returns. The funds’ goal of minimizing tracking error may come at the expense of returns. Investors should consider the total costs, both in terms of expense ratio and trading costs, when evaluating investment options. Working with our Johns Island Investment Advisor can help you build a low cost portfolio using non-index funds in favor of evidence-based portfolios. Give us a call for a free consultation today!

Morgan Stanley Capital International.
Standard & Poor’s Index Services Group.
FTSE Russell is wholly owned by London Stock Exchange Group.
Tracking error is the standard deviation of the return differences between a fund and its benchmark
Source: Dimensional Fund Advisors LP.

Stock Market News

December 7, 2015 by Justin M. Follmer, MBA, CFP®, AIF®

Why don’t the media run more good stock market news? One view is bad news sells. If people preferred good news, the media would supply it. But stock markets don’t see news as necessarily good or bad, rather in terms of what is already built into prices.

One academic study appears to confirm the view that the apparent preponderance of bad stock market news is as much due to demand as to supply, with participants more likely to select negative content regardless of their stated preferences for upbeat stock market news.¹

“This preference for negative and/or strategic information may be subconscious,” the authors conclude. “That is, we may find ourselves selecting negative and/or strategic stories even as we state that we would like other types of information.”

So an innate and unrecognized demand among consumers for bad stock market news tends to encourage attention-seeking commercial media to supply more of what the public appears to want, thus fueling a self-generating cycle.

Insofar as consumers of stock market news are investors, though, the danger can come when the emotions generated by bad stock market news prompt them to make changes to their portfolios, unaware that the stock market news is likely already built into market prices.

This is especially the case when the notions of “good or bad” are turned upside down on financial markets. For example, stocks and Treasuries rallied and the US dollar weakened in early October after a weaker-than-expected US jobs report. Some observers said the “bad news” on jobs was “good news” for interest rates.²

Conversely, a month later, stocks ended mixed, bonds weakened, and the US dollar rallied after a stronger-than-expected payrolls number. While an improving job market is good news, it was also seen by some as cementing the case for the Federal Reserve to begin raising interest rates. In both cases, the important thing for markets was not whether the report was good or bad but how it compared to the expectations already reflected in prices. As news is always breaking somewhere, expectations are always changing.

For the individual investor seeking to make portfolio decisions based on stock market news, this presents a real challenge. First, to profit from news you need to be ahead of the market. Second, you have to anticipate how the market will react. This does not sound like a particularly reliable investment strategy.

Luckily, there is another less scattergun approach. It involves working with the market and accepting that stock market news is quickly built into prices. Those prices, which are forever changing, reflect the collective views of all market participants and reveal information about expected returns. So instead of trying to second-guess the market by predicting news, investors can use the information already reflected in prices to build diverse portfolios based on the dimensions that drive higher expected returns.

As citizens and media consumers we are all entitled to our individual opinions on whether stock market news is good or bad. As investors, though, we can trust market prices to assimilate news instantaneously and work from there.

In a sense, the work and the worrying are already done for us. This leaves us to work alongside a Johns Island Investment Advisor to build globally diverse portfolios designed around our own circumstances, risk appetites, and long-term goals.

There’s no need to respond to stock market news, good or bad.

1. Marc Trussler and Stuart Soroka, “Consumer Demand for Cynical and Negative News Frames,” International Journal of Press/Politics (2014).
2. Mark Hulbert, “How Bad News on Wall Street Can Be Good News,” WSJ MarketWatch (October 5, 2015).
3. Author: Jim Parker, Vice President, Dimensional Fund Advisors with some edits by Coastal Wealth Advisors, LLC. Original article here.

7 Simple Rules for Investing

October 9, 2015 by Justin M. Follmer, MBA, CFP®, AIF®

Today’s blog topic is focused on 7 Simple Rules for Investing, but first, I wanted to take a moment and talk about what we’ve been doing during this recent market correction.

We’ve been rather absent from blogging lately because we’ve been spending all of our time speaking with our clients to ensure their investment portfolio matches their risk tolerance and reinforcing these 7 Simple Rules for Investing. And I know what you’re thinking…shouldn’t that be determined at the onset of the investment process? Absolutely. And it was. But the quirky thing about risk and behavioral finance is that our opinions of our own money change as the markets change. It’s really easy to become more optimistic about the stock market when markets are on the rise; thus causing us to want to become more aggressive when times are good. The same is true when times are bad; convincing us to become more conservative when the markets take a hit. This mental behavior has been studied for decades and a Nobel Prize in Economics was won as a result of a 1979 study in which two psychologists, Kahneman and Tversky, concluded that we feel the “pain” of the losses much more than the “joy” of the gains.¹ Two authors, Thomas Gilovich and Gary Belsky, took this study a step further in their 1999 book (referenced below) to conclude “the sting of losing money, for example, often leads investors to pull money out of the stock market unwisely when prices dip.”²

In our role as an investment advisor, we have to constantly be available to manage the reins on the emotions of behavioral finance. And we do all that we can to address these topics head on. We believe that having a constant finger on the pulse of clients’ risk tolerance is far superior to setting a risk tolerance target in the beginning and never revisiting it. We use a mathematical and statistical approach, combined with group discussion to determine our clients’ risk scores.

Proper portfolio design, in our opinion, is built upon the notion that markets are going to rise and fall, have really bad times and really good times, and over the long-term, provide adequate returns to offset the risks taken. By this, we mean, markets work. We believe the markets are efficient to price in all of the known information out there about a particular security, sector, etc. And this is why we consistently avoid trying to time the markets and buy or sell on “news.” But the markets change and what looked like a promising investment, may turn out to be not-so-promising. In our business, we call these investments, losers. And even portfolios managed by professionals will have losers.

It’s important to understand and constantly refer to the basics of investment philosophy. We’re going to let Jim Parker, Vice President of Dimensional Fund Advisors, outline below 7 Simple Rules for Investing:³

Accept that not every investment will be a winner. Stocks rise and fall based on news and on the markets’ collective view of their prospects. That there is risk around outcomes is why there is the prospect of a return.
While risk and return are related, not every risk is worth taking. Taking big bets on individual stocks or industries leaves you open to idiosyncratic influences like changing technology.
Diversification can help wash away these individual influences. Over time, we know there is a capital market rate of return. But it is not divided equally among stocks or uniformly across time. So spread your risk.
Understand how markets work. If you hear on the news about the great prospects for a particular company or sector, the chances are the market already knows that and has priced the security accordingly.
Look to the future, not to the past. The financial news is interesting, but it is about what has already happened and there is nothing much you can do about that. Investment is about what happens next.
Don’t fall in love with your investments. People often go wrong by sinking emotional capital into a losing stock that they just can’t let go. It’s easier to maintain discipline if you maintain a little distance from your portfolio.
Rebalance regularly. This is another way of staying disciplined. If the equity part of your portfolio has risen in value, you might sell down the winners and put the money into bonds to maintain your desired allocation.

We couldn’t have said it better ourselves. You may have a similar risk tolerance to thousands of other people, yet your portfolio could be drastically different. There are numerous, if not, infinite, ways to construct a portfolio that matches your tolerance for the risks of the stock market. When constructing a portfolio, it should be done in a way that allows you to remain invested even during really bad times. There’s a reason “don’t panic” is the mantra of most investment advisors out there…you should have built a portfolio that takes into consideration your internal panic button, or better said, “the amount of money you’re willing to lose before you make the decision to sell everything.” If you find yourself increasingly worried that your portfolio is not structured according to your risk tolerance and financial goals, give us a call. We’re a Johns Island Investment Advisor who helps clients define their risk tolerance and build a portfolio to match it.

Dimensional Fund Advisors LP (“Dimensional”) is an investment advisor registered with the Securities and Exchange Commission. Dimensional and Coastal Wealth Advisors, LLC are not affiliated companies. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This content is provided for informational purposes, and it is not to be construed as specific investment advice or recommendation.

¹ http://prospect-theory.behaviouralfinance.net/
² http://books.simonandschuster.com/Why-Smart-People-Make-Big-Money-Mistakes-and-How/Gary-Belsky/9781439163368
³ 7 Simple Rules for Investing, Jim Parker, Unhealthy Attachments

Image: Angel Oak in Johns Island, SC

Financial Knowledge

August 19, 2015 by Justin M. Follmer, MBA, CFP®, AIF®

Not everyone is knowledgeable about money and finances, however, it’s a learning process. Keep in mind you don’t know what you don’t know until you know it and we’re here to help. Gaining financial knowledge comes with time and some help. Let us help educate you on a wide range of topics from financial planning, 401k rollovers, and even investing. Let’s get started today to work towards expanding your financial knowledge. We’ll work with you through every step of the way. Give us a call to set up an appointment.