At Massie Financial Planning, we start with getting a thorough understanding of where you are and where you want to be. Beginning with the end in mind and mapping out a financial plan helps to inform us on how we should construct your portfolio to best achieve your goals. Once we understand where your investment portfolio fits into your overall plan, we use an evidence-based approach to building and monitoring your portfolio.
Conventional Investing – Stock Picking and Market Timing
Contrary to most of the news and headlines you’ll see on the stock market, we believe it is not wise to try and outguess the market. Money managers often try to outperform their peers through stock picking or market timing, but few are successful. As evidence, only 18% of US equity mutual funds and 15% of fixed income funds outperformed their benchmarks over the 15-year period between 2004 and 2018. Roughly half of those mutual funds weren’t in business by the end of that 15-year period.
An indexing strategy will follow one of the commercial indexes (e.g., S&P 500 Index) but replicating the holdings. The fund will prioritize a low tracking error as they attempt to mirror the performance of whatever section of the market the given index measures. The major advantages to index investing are lower investment costs and avoiding big mistakes from money managers. Indexing doesn’t avoid market losses.
On the downside, index investing by its nature doesn’t allow for any upside potential and can face challenges closely tracking the selected index in a crowded market. For example, Tesla was recently added to the S&P 500 Index, when the index was evaluated and updated for a recent quarter. Since the S&P 500 tracks the 500 largest companies by market capitalization, it’s important to review and update on regularly scheduled intervals. When it was announced that Tesla would be joining the index, all the money managers following this approach were forced to purchase shares in the company at the same time, driving the price of the stock higher. This is an example of one of the practical challenges of implementing the theory of indexing in real life.
A Better Approach: Weight of the Evidence
In our approach, we gain insights about markets and expected returns from academic research. We’ll structure portfolios along the dimensions of expected returns and add value by integrating research, portfolio management and trading. These dimensions are identified by meticulous academic research from Nobel prize winning economists such as Gene Fama. Put more simply, we compile the leading academic research and apply it to the real world in our client’s portfolios.
There is wisdom in crowds when it comes to the stock market. Fama was the developer of the concept that markets are “efficient”. In other words, markets sort through new information quickly and bake that into stock prices. He argues that stock prices always will reflect what can possibly be known about a company. In plain English, there is no one who can consistently outperform the market by picking stocks or timing the market. Rather, we make sure you have an appropriate exposure to portfolio factors that academic research has shown to add value over time. We also value low costs, and have partnerships that help us achieve this.
We’ve chosen to partner with Charles Schwab and Capital Directions to implement our investing strategies. Schwab is the custodian of the assets and is an industry leader for supporting the independent advisor community. Their job is to safeguard your assets and maintain accurate records.
Capital Directions is a Registered Investment Advisory firm based out of Atlanta, GA. They partner with us to create tailored portfolios for our clients that align with our investment philosophy. Once our client’s strategy has been implemented, they help to keep a watchful eye for necessary changes and trades to your investments when there is an opportunity to add value.
Through our partnership with Capital Directions and Schwab, we can offer institutional pricing on our investment offerings to individual clients and families. This is akin to buying in bulk or at wholesale prices which helps keep your investment costs low. These share classes aren’t available to retail investors as some will require over a million dollars for a minimum purchase.
Wrapping it Up
In summary, we want to help you build a portfolio that helps you reach your goals of building and maintaining your wealth. We believe an evidence-based approach that keeps your investment costs low is the best path towards your financial success. Please reach out to start a conversation about how we can help.