Outsmarting the Ivy League?

Outsmarting the Ivy League?

INSIGHTS

Outsmarting the Ivy League?

JUSTIN VOSSEN, INVESTMENT ADVISER & PRINCIPAL

Each year, the National Association of College and University Business Officers and Common Fund Institute produce a study on the returns of college endowments.[1]  This study tracks the results of University investment portfolios by size of their endowments.  Of the schools participating in the study in 2016, more than 93 had endowment assets exceeding $1-billion.² Schools such as Harvard, Yale, Stanford, Princeton and Notre Dame all have endowments over $1-billion and their returns were contributed to the study.

 

Obviously, the Universities with endowments over $1 billion have many resources, alumni, faculty and trustees to help them guide their investment decisions.  It is probably also safe to assume they employ the most-esteemed consultants, money managers and portfolio strategists that money can buy.

 

One would then guess that those institutions should be outperforming the market on a relative basis if they have all of the best and smartest resources at their disposal.  However, it turns out that is not the case.

 

Consider these returns for all Universities with endowments over $1 billion:

Average Annual Returns for US Higher Education Endowments For Periods Ending June 30,2016
Size of Endowment 1-Year 3-Years 5-Years 10-Years
Over $1-Billion -1.9% 6.0% 6.1% 5.7%

 

 

These returns are pretty decent, all things considered.  However, for comparison purposes, here are the indices for those periods as well.

Indices
Index 1-Year 3-Years 5-Years 10-Years
S&P 500 4.0% 11.7% 12.1% 7.4%
Russell 3000 2.1% 11.1% 11.6% 7.4%
MSCI World ex U.S. (in U.S. $) -9.8% 1.9% 1.2% 1.6%
Barclays US Aggregate Bond 6.0% 4.1% 3.8% 5.1%
CPI – U 0.7% 1.0% 1.6% 2.0%

 

While at face value it is hard to compare one asset class to a diversified portfolio, if we extrapolate a weighting to each index we can show what a blended portfolio of indices would have done against a blended portfolio of endowments.

 

To come up with a relative portfolio blend, let’s assume a 75% equity and 25% bond portfolio.  Of that, let’s assume approximately 25% of the equity component is international.  So, a blended index portfolio we could assume would consist of 55% Russell 3000 (US Broad Market), 20% MSCI World ex U.S., and 25% Barclays US Aggregate Bond.  This hypothetical allocation would not be unreasonable for funds with a very long-term time horizon looking to grow.  In contrast, the group of endowment over $1 billion carried a 13% US equity, 10% bond, 19% international equity, and 58% alternative asset allocation.  Alternative assets is a very broad space, but generally consists of hedge funds, private equity funds, private real estate and other assets such as art.  If we compare these returns we get the following:

 

Comparison Returns for Periods Ending June 30,2016
1-Year 3-Years 5-Years 10-Years
Endowments Over $1-Billion -1.9% 6.0% 6.1% 5.7%
Blended Index 0.7% 7.5% 7.6% 5.7%

 

So in three of the four time periods, the blended index won and in the longer 10 year figure, it was a dead heat.  I always say that if you show me portfolio returns for anything, I can mix and match a portfolio that will beat it with the ability of hindsight.  We did not do that, in this instance.  We carried a slightly higher weight to international equities, which had a dismal 10 years and also carried more bonds in the allocation, which carry lower degrees of risk than equities (and thus lower expected returns).

 

This is not a complex portfolio, but one we all could replicate because of the advent of index funds.  You can bet, however, if someone would have walked into Yale’s investment committee with a straight forward 55% US equities, 20% International equities, and 25% blended bond allocation proposal, they would have been laughed out of the room.  Does that mean the advice would have been wrong?  Using simple, diversified, low-cost investments and taking the time to control what you can.  Controlling behavior, allocation, goals, and taxes in the context of a financial plan isn’t bad advice, it is just not complex.

 

The truth of the matter is the market does not care how smart you are, how many initials you have behind your name, or how much money you have to invest. The capital markets deal in absolutes.  Adding complexity doesn’t necessarily increase returns as we see in this comparison.  Keep in mind, the more complex something is the higher degrees of monitoring, understanding, costs, and potential tax implications there may be.  These institutions have some of the brightest minds in finance on their committees overseeing those complexities and an organizational framework to monitor.  While they search out complexity, I think it is our goal to make the complex simpler.  We all still need to plan, monitor, and understand, but it all doesn’t have to be uber-complex to generate return.  We’ll see what the next 10 years brings, but don’t make the mistake of assuming complex is always better.

¹ http://www.nacubo.org/Documents/EndowmentFiles/2016-NCSE-Public-Tables_Average-One-Three-Five-and-Ten-Year-Returns.pdf

² http://www.nacubo.org/Documents/EndowmentFiles/2016-Endowment-Market-Values.pdf

 

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP® + INVESTMENT ADVISER, PRINCIPAL

Justin Vossen is an Investment Adviser and Principal at Lutz Financial with over 20 years of relevant experience. He specializes in wealth management and financial planning.

AREAS OF FOCUS
  • Financial Planning
  • Wealth Management
AFFILIATIONS AND CREDENTIALS
  • Certified Financial Planner™
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • March of Dimes Nebraska, Past Board Member

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GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

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Lincoln, NE 68508

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GRAND ISLAND + SOUTH

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Timing is Not Everything

Timing is Not Everything

INSIGHTS

Timing is Not Everything

JUSTIN VOSSEN, INVESTMENT ADVISOR & PRINCIPAL

The financial industry analyst firm Dalbar has been tracking investor returns for more than 30 years.  Their studies take into consideration general investor cash inflows and outflows into equities over time and its effect on performance.  In their annual Quantitative Analysis of Investor Behavior at the end of 2013, the average return for an ordinary investor was determined to be only 3.69% percent annually over the last 30-years in their equity fund investments. During that same 30-year period, the S&P 500 has returned 11.11% on an annualized basis.  If it is any consolation, investors did beat inflation as measured by the consumer price index of 2.83% for that same time period.

 

Why does this happen?  Dalbar’s studies show the folly in investors’ decisions.  Time after time they make emotional choices on not only when to buy and sell, but also what to buy and sell.  Investors subject themselves to decisions based on their fears, “gut”, media hype, cocktail party talk and overconfidence.

 

Because of these rash decisions, investors are horrible at timing the market.  A look at the chart below from the Investment Company Institute (ICI) shows exactly why.  Investors continued to flood the market with new money throughout 2004-07 when markets were on a bull run and immediately pulled money out of equities at the bottom in 2008-09.  They have continued to sell as the stock market has come back, until only recently in 2013, began to truly buy equities again.

 

Timing-is-not-everything-Graphic

www.icifactbook.org/fb_ch2.html (8/14/2014)

 

Could this be why many are calling this the most “hated” bull market in history?  From the end of March of 2009 to June of 2014, the S&P 500 is up a total return of 198% and fund inflows show that investors have been selling most of the time.  Those who have tried to market time potentially have missed the run, but those with diligence and persistence have persevered to reap the benefits.

 

That being said, one can understand why people’s emotions have caused them to sell along the way.  There have been a litany of reasons why one could have been driven to do so.  During a little more than five years, we’ve seen an economic crisis in Europe, multiple geopolitical issues in the Middle East and Africa, a period of unprecedented action from Central Banks, budgetary crisis in Washington, nuclear meltdown in Japan, and a sharp credit crisis. Humans are hard-wired to respond to crisis, but one’s investments may be the worst place to respond to them.

 

This brings us to our recent pullback in the markets.  Was the market due for a correction?  Maybe it was?  Was it due to correct by 19% in the third quarter of 2011(I bet you forgot about that one already)?  Perhaps?

 

During the 30-year period that Dalbar did their study on investor equity returns, the S&P 500 corrected at one point in a calendar year by more than 9% in 18 of the 30 years.  At all of those points, I am sure there were reasons we could have seen bigger drops.  However, the person that didn’t panic at those points banked their 11.11% average annual return that was had over those 30-years.

 

It’s hard to advocate never selling any equities as many of us will someday need the proceeds in retirement or for other various reasons.  However, the time to sell equities is when things have appreciated relative to other assets, and not at times of panic and pullback.  This is done through a rebalancing process that is pre-determined, disciplined, mathematical and methodical.  Rebalancing should never be done on based on hunches and knee-jerk reactions.

 

Pullbacks are going to happen, it’s part of the price of admission for taking on higher risk inherent in equities to generate earn higher rates of return.  History shows us, those are rewarded more by accepting these pullbacks rather than responding.  So, when our emotions and predispositions tell us to “do something”, sometimes the best action may be no action!

 

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP® + INVESTMENT ADVISER, PRINCIPAL

Justin Vossen is an Investment Adviser and Principal at Lutz Financial with over 20 years of relevant experience. He specializes in wealth management and financial planning.

AREAS OF FOCUS
  • Financial Planning
  • Wealth Management
AFFILIATIONS AND CREDENTIALS
  • Certified Financial Planner™
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • March of Dimes Nebraska, Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND + SOUTH

2722 S Locust Street

Grand Island, NE 68801

P: 308.382.7850

“Yellen” At The Fed

“Yellen” At The Fed

INSIGHTS

“Yellen” At The Fed

JUSTIN VOSSEN, INVESTMENT ADVISOR & PRINCIPAL

ceftin vs levaquin order ceftin

“Ultimately, cynicism is a poor substitute for critical thought and constructive action.”        – Ben Bernanke – June 2, 2013

The Federal Reserve was created in 1913, when President Woodrow Wilson signed the Federal Reserve Act into law.  While the Fed has many general responsibilities, its main one is to maintain the stability of the financial system and contain systemic risk that may arise in our financial markets.  Janet Yellen continues this tricky task today as the Chair of the US Federal Reserve.

 

The Federal Reserve has used significant latitude in recent years to deal with the risks of the financial system that were most pervasive in 2008 and 2009.  Many of the steps taken have no historical precedent.  The conspiracy theorists and cynics alike have painted the Federal Reserve as being at the best, too accommodative, or  at worst the impetus of our eventual economic demise.

 

It’s easy to be cynical of an entity that truly yields great power over the world’s economy, but sometimes difficult to understand the rationale for the actions taken and ramifications thereof.  Naysayers are quick to say the Fed has inflated the stock market because of quantitative easing, and a market crash is coming when it ends (as the Fed just announced this could be as soon as October).   These critics are much less apt to dive into the numbers and understand the organics of quantitative easing.

 

To understand quantitative easing, you have to begin with the nation’s banking system in 2008.  When Lehman Brothers collapsed, questions arose about the health of other banks.  At that time the inter-bank lending market came to a standstill.  Banks with excess liquidity, that previously lent funds overnight to other banks, hoarded cash and refused to lend to any bank that had the slightest hint of insolvency.  Instead of return on their cash, they were worried about return of their cash. Couple this with the fact that consumers were now running to pull deposits from banks based on fear, the banks were in more need of liquidity than ever.

 

Typically banks access short-term cash in two ways, via the fed funds market as previously described, or directly from the Fed’s discount window. The Fed maintains both rates, the fed funds rate through the use of open market operations, and the discount rate by directly charging the banks.  Historically if a bank borrowed from the Fed, it was viewed as a sign of trouble/weakness for the borrowing bank as the Fed was deemed lender of last resort.  Beginning in 2008, the Fed recognized this and offered banks loans of up to 90-days and reduced the discount rate to 0.50%.   They lowered the target fed funds rate to 0.25%, or virtually to zero.  They tried to take the stigma away to encourage the banks to maintain liquidity.

 

With more banks using the discount window, the Fed had to attract money from the other banks that had excess cash.  They embarked on an unprecedented action in 2008 by offering to pay interest on excess bank reserves of 0.25%.   Essentially they paid banks interest to deposit money at the Fed.  Banks had historically held their required reserves at the Fed earning no interest, but banks could now be paid interest for holding both required and excess reserves.   This seemed innocuous at the time, but for capital reasons and for the fact that it paid the same rate as Fed funds, it was an attractive alternative for the banks.   While this seems to be an ancillary event, it has had large ramifications on the Fed’s ability to quantitatively ease.

 

Cynics quickly snipe that the Fed has recklessly printed money to pay for bond purchases which have swelled their assets to over $4.3 trillion as of July of 2014.  Prior to the crisis, the Fed’s assets were just above $800 billion.  However, one must take the time to look at the other side of the balance sheet to understand the true impact.

 

Since the Fed began paying interest on excess reserves, reserve deposits by banks at the Fed have jumped to more than $2.6 trillion.  You can see this in the graph below from the Fed’s website.  The other two lines are currency in circulation and the US Treasury’s balances at Fed.

 

Yellen-at-the-Fed1

Source: http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm  7/14/2014

 

Why is this important?  It’s important because a more thorough look at what the Fed has done shows that it isn’t printing all of the money to pay for quantitative easing.  What they are doing is using bank reserves that the banks are not lending to purchase mortgage backed and Treasury notes.  The Fed is essentially saying, if the banks aren’t going to lend it, we’ll put this excess cash to work for them.

 

So what does this mean for the markets and for the economy?  This is an unprecedented step the Fed has taken.  Simple economics would assume that banks will remove some of the excess reserves and lend them to customers when they are willing to justify greater risk to generate greater return.  For a couple of reasons, capital and risk, those funds may be used by banks to purchase the same bonds the Fed may or may not be selling.

 

The balancing act the Fed has to do comes into play when there is a quick demand for reserves; at which point the Fed will have to sell off assets to compensate for lost deposits, or increase interest rates to tempt the banks to keep the funds on hand.  So far, they haven’t had the need to do either.  The Fed could also sell assets as the banks take back their reserves.  Currently, the Fed doesn’t have to do any of this and could keep this balance sheet at these levels.  Thus, they will continue to walk the fine line of maintaining stability of the economy and keeping the systemic risk at bay.

 

Taking a critical and thoughtful look uncovers that the Fed is not simply printing money, but mostly using money that is already in the system that banks are not putting to work.  Someone who looks at this exercise at face value may misunderstand and deem it reckless, but it is just another tool that the Fed has used over the past 100 years to reduce systemic risk and promote economic stability.  Based on the Fed’s track record for most of its history, we probably should give them the benefit of the doubt.

 

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP® + INVESTMENT ADVISER, PRINCIPAL

Justin Vossen is an Investment Adviser and Principal at Lutz Financial with over 20 years of relevant experience. He specializes in wealth management and financial planning.

AREAS OF FOCUS
  • Financial Planning
  • Wealth Management
AFFILIATIONS AND CREDENTIALS
  • Certified Financial Planner™
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • March of Dimes Nebraska, Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND + SOUTH

2722 S Locust Street

Grand Island, NE 68801

P: 308.382.7850

Mind What Matters… Focus Efforts On What You Can Control

Mind What Matters… Focus Efforts On What You Can Control

INSIGHTS

Mind What Matters… Focus Efforts On What You Can Control

JUSTIN VOSSEN, INVESTMENT ADVISER & PRINCIPAL

You may have heard our brand promise at Lutz Financial: “Mind What Matters”.  While catchy and cute in the marketing sense, it is also very consistent with our approach in working with clients on a daily basis.  We spend time working on the unique issues clients have that “matter” to them.  Certain things that matter to a client cannot be controlled, thus you should focus your limited time and energy on those issues that can be impacted.

 

Things That Matter

Most of us share a handful of common issues that matter to us all.  Family, friends, faith, and country are things we all care about in varying degrees and prioritization.  Another common topic that can weigh heavily on our minds is our financial well being.  Our financial resources provide us with a sense of independence, as well as give us the ability to influence a variety of aspirations.

Global issues matter to us as well.  The digital age accompanied with the rapid movement of information keeps us more informed on world events now more than ever.  Whether it be politics or poverty, human rights or animal rights, economics or ecology, many of us have special issues that matter to us.  While we can hold many of these things close to our hearts, our influence over these things is limited, at best.

Obviously there are things specific to your own situation that matter as well.  Maybe it is a charity, future accomplishment, political goals, our local sports team, classic automobiles, traveling, education, legacies, businesses, or hobbies?  These are some of the many examples of things that may be important to you based on your individual upbringing or interests.

 

Avoiding Things That You Can’t Control

It’s clear that we cannot control such things as the weather, random strangers’ actions, and the outcome to sporting events (legally!).  It is an inherent characteristic to want control of a situation; however it is much more difficult for us to admit that we cannot completely govern things like our kids, our business associates and clients, our politicians and even our future.  If we think we control all of these, it’s probably a combination of hubris and/or overconfidence.

 

What You Should Focus On

Time is a precious resource, and focusing time on things that can be controlled is the greatest use of that resource.  Formulating a plan on tangible items and establishing a timeline on when to complete each task are critical.  This process will cut down on needless time, worry and even expense trying to fix the things beyond our control.

How does this translate to our financial lives?  Wall Street, Hollywood and the media have portrayed investing as a modern day treasure hunt.  Because of this, the investment industry spends most of its time forecasting future results, predicting economic and political events, and trying to move client assets to the “next best thing”.  It’s their hubris and overconfidence in believing they can predict the market’s performance.   They use this forecasting ability as the primary reason that one should put their trust and ultimately their money with them.

Instead, it is important that you spend energy focusing on the things that matter which we can be controlled or influenced.

  • There is no question the markets matter, but we need to focus on our reactions to the markets, instead of the markets themselves.
  • Our kids matter to us, but we can’t control how they spend their money as adults.  However, we can ensure how much inheritance they get and when they get it.
  • We can’t control who is going to be president in the next election, but we can control the tax efficiency of our assets and allocation to minimize current and future taxes.
  • Our businesses are important, but are we doing everything we can to mitigate controllable risk?
  • The economy is very relevant to our lives.  But isn’t being prepared for the inevitable temporary pullback more important than the timing of said pullback?

These are just a few examples in our lives where overlap occurs between the things that matter and the things we can control.  Focusing our time and energy to prepare for these things will help insulate us from uncontrollable noise that distracts us.  Most importantly, it will reduce our stress and help us prioritize the things that matter most and formulate a plan to protect them!

 

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP® + INVESTMENT ADVISER, PRINCIPAL

Justin Vossen is an Investment Adviser and Principal at Lutz Financial with over 20 years of relevant experience. He specializes in wealth management and financial planning.

AREAS OF FOCUS
  • Financial Planning
  • Wealth Management
AFFILIATIONS AND CREDENTIALS
  • Certified Financial Planner™
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • March of Dimes Nebraska, Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND + SOUTH

2722 S Locust Street

Grand Island, NE 68801

P: 308.382.7850

Love Indexes – Hate the Index

Love Indexes – Hate the Index

INSIGHTS

Love Indexes – Hate the Index

JUSTIN VOSSEN, INVESTMENT ADVISER & PRINCIPAL

Studies have shown that over longer time periods actively managed funds are outperformed by their respective index benchmarks.  In one such recent study, Standard and Poor’s¹ released that more than 79% of US Large-Cap funds are outperformed by their respective index over a five-year time period.  It’s numbers like these that continue to show the benefits of passively managed fund selection over their actively managed peers.

 

While the benefits of index funds can be many, it’s important to note that all indexes aren’t created equal.  For example, the most notable and talked about index in the world, the Dow Jones Industrials, may be do the worst job of representing what it is supposed to reflect.

 

Most media types quote the Dow Jones Industrial Average as the proxy for the United States stock market.  Quoted on newscasts and by professionals who should know better, the Dow index is what many quote when they talk about stock market performance.  Rarely do you hear anyone say, “Did you hear the Russell 3000 fell 12 points today?”

 

However, the Russell 3,000 measures the performance of 3,000 publically held US companies based on total market capitalization.  The Russell 3,000 represents approximately 98% of the capitalization of the US equity market.  Market capitalization is better defined as the “net worth” or “value” of the equity market.  The Russell 3,000 is a very good proxy of the broad US “stock market”.

 

However, the Dow-our most common proxy, only contains 30 large US based stocks.  They are chosen by the S&P Dow Jones indices and are intended to represent the breadth of the American market.  How could 30 companies represent the breadth of the US stock market when there are roughly 15,000 different publically traded companies in the US alone?

 

It’s also a price weighted index.  What does this mean?  It skews the weighting of the index to the companies with the higher price.  For example General Electric, which trades around $25, carries about 1/8 of the weighting than IBM does trading around $175.  Further complicating, is that GE has a market capitalization (worth) of $250 billion, which is about 37% higher than IBM.  So essentially, the bigger company carries far less weight in the index than smaller company.  Now, one can understand why Berkshire Hathaway is not in the Dow Jones!

 

So, why is the Dow Jones Industrial Average still the unofficial proxy of the market?  It is the second oldest index and was first calculated in May of 1896 (the Dow Jones Transportation Average is the oldest).  The price weighting of the index made it easy to calculate by hand, and probably most importantly was calculated by the same company that published the Wall Street Journal!  The Wall Street Journal had profit motives to promote the index.  Even back then, the media was influencing perception in the stock market!

 

We now have computers that can calculate indexes by the millisecond, and thus the proliferation of different index offerings abound.  You now have indexes from: Russell, Dow, S&P, Wilshire, CRSP, Barclays, MSCI and many others.  Which one is the right one?  Ultimately, for your portfolio, it really doesn’t matter.  What matters is that your portfolio contains the proper amount of diversification in the asset classes in which you desire exposure.  What index you benchmark it to matters less.  We’d probably just recommend avoiding the Dow Jones Industrial Average!

 

¹ Standard & Poors SPIVA® Scorecard Mid-Year 2013

 

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP® + INVESTMENT ADVISER, PRINCIPAL

Justin Vossen is an Investment Adviser and Principal at Lutz Financial with over 20 years of relevant experience. He specializes in wealth management and financial planning.

AREAS OF FOCUS
  • Financial Planning
  • Wealth Management
AFFILIATIONS AND CREDENTIALS
  • Certified Financial Planner™
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • March of Dimes Nebraska, Past Board Member

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Do I Own a Market?

Do I Own a Market?

INSIGHTS

Do I Own a Market?

JUSTIN VOSSEN, INVESTMENT ADVISER & PRINCIPAL

It’s an important distinction that we as investors need to get correct in our minds.   Do I own a “market” or a collection of businesses?  All too often, investors fall into the trap of thinking that the market is a beast that is prone to violent swings that is too scary to tangle with.  While the “market” is absolutely volatile, when you break it down to what it actually is, it seems easier to comprehend.

 

The market is not in itself an entity.  The market does not exist as a thing, it is a place.  The marketplace does exist, which are thousands of businesses that are listed on a public exchange and available for purchase.   It’s an amazing place where ordinary individuals can purchase ownership in these businesses and own shares of the returns that these companies generate.  We invest our capital in companies that are available in a central location.  We do not invest in the “market”.

 

The problem is that some on Wall Street, cable news shows, and others spend an indordinate amount of time creating a persona about the market.  Many spend time describing the market as a “bear” or a “bull”, or note that the market is “tired”, or perhaps is a “bubble”.

 

Nobody describes any other market place like that.  Have you ever heard somebody give those personas to a supermarket ?  People treat a supermarket like what it is, it’s a place where you go to purchase goods.  In an investor’s case, those goods happen to be ownership of businesses.

 

What is different is that in the investing marketplace, the prices change by the second.  In other market places that is never the case.  Can you imagine going to the supermarket and getting a basket full of items and your banana’s jumped by $1 by the time you checked out?  What really changed with the bananas between taking them out of the produce section, and getting them to the checkout?  Would you look at a historical chart of banana prices to find the best time to buy them and buy a cart full?  Of course you wouldn’t, it would be ridiculous.

 

What really changes with a company such as Union Pacific on a minute-by-minute or even a daily basis?   Sure, they may have major news that day, but what about the other 364 days a year?  Because of the disclosure rules and publically disseminated information, aren’t we all looking at the same set of numbers, facts and environment?  We are, but many are interpreting the same data very differently.  This leads to daily fluctuations.

 

Different opinions on the same information is good for the market as it aids in getting the correct value for the company.  The sum of everyone’s collective interpretation of the data is probably a reasonable estimation of the worth of that company at any particular time.

 

The point is, that we shouldn’t look at the market as an entity that is moody on a daily basis.  At the end of the day, we as investors own companies that produce things, and most importantly produce profits.  So, the next time you see the next 300 or 400 point day on the Dow (up or down!), ask yourself what really changed with the businesses I owned that day?  Chances are, much less than the market moved.

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.827.2300

jvossen@lutzfinancial.com

LINKEDIN

JUSTIN VOSSEN, CFP® + INVESTMENT ADVISER, PRINCIPAL

Justin Vossen is an Investment Adviser and Principal at Lutz Financial with over 20 years of relevant experience. He specializes in wealth management and financial planning.

AREAS OF FOCUS
  • Financial Planning
  • Wealth Management
AFFILIATIONS AND CREDENTIALS
  • Certified Financial Planner™
  • Financial Planning Association, Member
EDUCATIONAL BACKGROUND
  • BSBA in Economics and Finance, Creighton University, Omaha, NE
COMMUNITY SERVICE
  • St. Augustine Indian Mission, Board Member
  • Nebraska Elementary and Secondary School Finance Authority, Board Member
  • St. Patrick's Church, Trustee
  • March of Dimes Nebraska, Past Board Member

SIGN UP FOR OUR NEWSLETTERS!

We tap into the vast knowledge and experience within our organization to provide you with monthly content on topics and ideas that drive and challenge your company every day.

Toll-Free: 866.577.0780  |  Privacy Policy

All content © 2018 Lutz & Company, PC

OMAHA

13616 California Street, Suite 300

Omaha, NE 68154

P: 402.496.8800

HASTINGS

747 N Burlington Avenue, Suite 401

Hastings, NE 68901

P: 402.462.4154

GRAND ISLAND + NORTH 

403 Lexington Circle

Grand Island, NE 68803

P: 308.384.9910

LINCOLN 

601 P Street, Suite 103

Lincoln, NE 68508

P: 531.500.2000

GRAND ISLAND + SOUTH

2722 S Locust Street

Grand Island, NE 68801

P: 308.382.7850