Month: December 2019

Year-end investor review

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We made it, another year is in the books and everyone has an opinion on where the market is going. My line of work involves me adamantly advising people not to try to predict markets, but even I have an opinion about what might happen in the future. Thankfully, there’s a difference between having an opinion and making a poor investing decision.

So where are we now? We’re coming off of a historically great period of market returns, especially in the category of U.S. large growth companies (the S&P 500, which happens to be the category we almost exclusively hear about in the news). Since U.S. large growth companies have faired well, so have investors, because the vast majority of investors have the majority of their investments in large U.S. growth companies. That’s great news right now. But it’s also a problem.

Large growth companies are historically one of the poorest performing asset categories in the free market. This holds in performance data going back one hundred years, but it also makes sense a priori. Large growth companies are inherently less risky than small and value companies, they stay in business longer, they seldom go bankrupt (it happens, just not as often), and their prices don’t fluctuate as significantly. Small companies are often younger, less established, and more susceptible to tough markets. Value companies are often distressed and sometimes never recover. These small and value companies default more often and their prices are more volatile, they’re riskier.

You’ve heard the principle, risk equals return. That applies here. It makes sense that as entire asset classes, small companies and value companies outperform large growth companies by a significant margin over time because their additional risk brings additional return. The fact that large growth companies have performed so well over these last ten years is great, but it also means that at some point we’ll see these returns balance out. Now, I would never pretend to know which asset classes will perform better or worse next year, that’s a fool’s errand which we refer to as ‘market timing.’ But I do know that most years will favor a diversified portfolio that leans toward small and value asset classes instead of a heavy weighting towards large growth companies. Next year the most likely circumstance is that you’ll be happy to have left your large growth company portfolio to get into a more diversified situation, which, incidentally, is true at the end of every year.

So the obvious question is how to diversify with a lean towards small and value companies. I’ve covered this before, but total market index funds won’t help you here, because of cap weighting total market funds are invested almost entirely in large growth companies. Index funds have become very popular over the last 20 years and, while they’re certainly an improvement over active funds, they’re inherently flawed. To get into an ideal portfolio takes an advisor committed to the academics of investing utilizing structured funds (a solution to the index fund problem).

Take the opportunity to review your portfolio as we head into the new year. The returns may look great, but that doesn’t mean you’re in a great portfolio.

Affirmation is not the path to growth

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We live in an age of affirmation. It’s on church signs, it’s enforced in the court of public opinion (Twitter), it’s even taught to children in school. Everyone is great just the way they are (unless they’re not affirming). That’s obviously not all bad, but if affirmation is the highest good we’re missing something.

We tend to think of affirmation as a virtue on a spectrum. Affirmation occupies one side of the hypothetical spectrum and pure evil hatred exists on the other. If that’s true then anything less than affirmation is bad, or at least tainted. But that’s not a real spectrum. Affirmation and hate are not opposites, love and hate are opposites. And love and affirmation are two very different things. We tend to think that the loving thing to do for people is to affirm them, but that’s not true either. Love seeks what’s best for people.

Affirmation can be crippling if we begin to believe that we’re just right the way we are. If we’re affirmed as we are, why make an effort to change? Why take responsibility if it’s not your fault? Why take some initiative if you have no control over what happens to you? Instead of affirmation, you may benefit from a loving nudge towards something better.

Growth happens when we’re challenged, pushed, when we realize that we might not be great just the way we are, when we see a new world of potential. It doesn’t happen by affirmation but by relationships, by tough conversations and experiences, by a new way of seeing or understanding, by coaching.

We all want affirmation, but most of us would benefit from some growth.

You should give board games another chance

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We’re all humans, right? We have these incredible senses of touch and sight and hearing and tasting (is there one more?). We also thrive in community, when we talk to other people and interact with each other. What better way to combine all of these human things than to sit down with some friends or family in front of a board and some little pieces of plastic?
One of our greatest temptations today is to turn to our technology instead of engaging with other people. Our phones are some of the most helpful and useful pieces of technology ever invented, but unfortunately, they can also inhibit the things that make us human.
A helpful category for thinking about this is to distinguish between rest and leisure (which I have shamelessly hacked from The Tech-Wise Family by Andy Crouch, a really helpful read). Leisure is mindlessly scrolling through social media or news on your phone, playing some kind of video game by yourself, or maybe worst of all, watching reality TV. Leisure is fine, but ultimately not all that helpful. It puts you into a sort of trance, you lose track of time, you’re probably more stressed when you quit, and you haven’t achieved anything except to waste some time and feel more harried. Rest, on the other hand, is restorative. Restful activities typically engage your mind instead of putting you into a coma. They include things like reading a book, conversing with close friends and family, playing an instrument, fishing (obviously), working out (it might take a few weeks, but once it becomes a habit it’s the best), building Legos, or playing a board game. An interesting note here, leisure activities often involve screens, restful activities often don’t.
As I write this we’re in the thick of the holiday season, Christmas hits this week, we’ll celebrate the New Year next week. Most of us will be spending at least some amount of time away from work and with family. Take the opportunity to enjoy a board game together. Engage your mind, indulge in some conversation, enjoy the people in your life. If my reasoning holds up, you’ll feel much better having done that than to have entered your trace space. We’re humans after all.

iPad Pro and commitment issues

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I’ll be completely honest with you, my audience. I love my iPad Pro, it’s what I’m using to write this very post. But, in the two months I’ve been using it my commitment hasn’t been 100% unwavering. I’ve checked Apple’s refurbished website (maybe the best place to buy a laptop, full stop) for MacBook Pro options more than once. I’ve read several reviews of the new 16 inch MacBook Pro, and I questioned my friend about his with a noticeable uptick in enthusiasm. I’ve even used my iMac more than I expected, although with lackluster results (have I mentioned how distracting those things are?). The point is, working from an iPad Pro is a large adjustment, and sometimes I just want to go back to my comfortable place wasting time on a MacBook Pro. Here’s what I’ve realized, the feelings aren’t bad and it doesn’t mean I’m going to buy a MacBook Pro.

It’s normal to feel a little nostalgic for the old way of doing things. And it takes time, more than a week or two, or maybe even a month or two, to get comfortable with a new setup. But I’ll say this, after a while, it does get more comfortable. The question of whether my feelings of nostalgia are rooted in some flaw in the iPad Pro or in my own addiction to familiarity is slowly being revealed as the latter. All that stuff I wrote about the focusing power of the iPad Pro? It still rings true. All the capability and portability are still there. I still get more of my most important things done on my iPad Pro, it has forced me to work more intentionally.

So I guess this is my thought: when you commit to something, you probably have to commit to it for more than a few weeks. Change isn’t easy but it’s often better. My iPad Pro experience falls right in line with other good change initiatives, not always comfortable, but ultimately moving me in a better direction.

Your 401k account is probably loaded up in the wrong asset class

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401k accounts good and bad. They’re mostly good because they provide an avenue for people to save and invest money for their future, but there are some things to watch out for.

Good stuff:

  • The main benefit of a 401k is that it allows you to invest qualified money. You could just invest money on your own, but investing in your 401k accounts means that you get some significant tax advantages (no capital gains on the growth of your investments and an income tax break). The same advantages apply to IRA accounts, but 401ks include two other significant advantages.
  • Many employers offer a matching contribution. For example, if you contribute a certain small percentage of your income (say 5%), the employer may kick in an additional small percentage into your 401k account (say 4%). That’s free money, and you should definitely take it.
  • 401k contributions are capped at $19,000 per year by the employee, employer contributions can exceed that. IRA contributions are capped at $6,000 per year. Not all of us are maxing out our qualified retirement accounts, but the larger cap offered by 401k accounts is certainly an advantage.

Bad stuff:

  • 401k accounts offer a limited number of investing options, and they’re almost never great. 401k Plan sponsors (employers) are typically concerned with one thing when choosing a plan: cost. If the plan seems expensive it will be harder to explain to the board, regardless of the value or benefits of the portfolio and the advisor.
  • Your money is locked up for as long as you work at the company. You’re stuck with the options available and you can’t move the money elsewhere unless you leave or retire.
  • Investors have little to no help deciding which funds or options to use within the 401k so they end up in default options, which are usually target dated funds. You may have seen these funds that end with a future year, like 2045, which you’d be in if you were expected to retire sometime around 2045. A target dated fund is not the worst investment you could be in (which isn’t saying much) but it’s far from ideal. A target dated fund will load you up in U.S. large growth companies (essentially the S&P 500), sprinkle in some international large growth companies, and decide what percentage of your money should be in bonds based on the target year. Unfortunately, in the history of the market, large growth company asset classes are among the lowest-performing of any asset classes over time. A target dated fund is usually made up of index funds (along with their inherent problems) so at least it’s not active, but it will sacrifice large amounts of return over time because of its poor diversification.

Don’t be afraid to use your 401k account, especially if your employer offers a matching contribution (again, free money). But if you’ve obtained the maximum matching contribution, think about investing additional money into a better portfolio through an IRA. Unfortunately, your 401k is probably loaded up in the wrong asset class.