By SJS Managing Director & Senior Advisor Jennifer Smiljanich, CFP®.
You’ve no doubt heard the phrase, “Patience is a virtue.” It can take extra effort to practice patience as an investor. With today’s advances in trading technology and the fast pace of news, we’ve seen daily swings of one percent or more in the market happen more often.[1] And if you’re like the many individuals who follow the daily gyrations of the market, then you know it doesn’t take much before stress creeps in.
That’s why you have SJS on your side. We help take the worrying right out of investing. Leave it up to us to be disciplined and patient. Markets will go up and down, that’s their nature. We believe it is more useful to spend our time on the things we can control. Focusing our efforts on these “controllables” can make a difference in the success of your investment experience.
Investment Costs
Dalbar’s Quantitative Analysis of Investor Behavior study on investor performance found that the average stock mutual fund investor underperformed the S&P 500 benchmark by 4.13% annually from 2010 through 2019.[2] As demonstrated in the graph below, for a $1,000,000 starting investment, this underperformance lowered growth by more than $1,000,000 compared to the S&P 500 benchmark. Higher management fees cause much of this underperformance for typical stock mutual fund investors.[3]
Another study suggests that traditional hedge fund management and performance fees consumed 64% of investor returns on average from 1995 to 2016.[4] Talk about a haircut on your net return!
At SJS, we believe that investors are entitled to receive the returns of the market. So we work hard to design portfolios in a way to keep your average cost of investing as low as possible.[5] Because just like in running a business, revenue is important, but the bottom-line profit determines whether you will stay in business and survive the long run.
Keeping your expenses low is important, that’s why many of our client portfolios are invested in institutional class mutual funds with average expenses ranging from 0.22% to 0.25%.
Taxes
Tax rates are out of our control, but we keep an eye on your portfolio design to manage activities that may generate tax. For example, SJS considers taxable events that might occur as a result of a need to rebalance your portfolio. We look for opportunities to reallocate within tax-deferred accounts to avoid generating taxable capital gains. As for stock mutual funds, we strive to select those that offer low turnover of securities.
We are always looking for ways to be mindful of the tax bite. That’s why we often position certain investments, such as publicly traded real estate or taxable high-coupon bonds in tax-deferred accounts, because they may generate income that is taxed at ordinary rates. These particular tax rates are often less favorable than capital gain rates.
Trading
There is no ‘free lunch’ when it comes to trading. There is a cost to buying and selling a security, whether it is a mutual fund, stock or bond. While we generally support the idea of buying and holding a broad market portfolio, there are times when different asset classes or baskets of securities become heavier than their original weighting. And this can cause your portfolio’s risk level to change. If the change is small enough, we accept the incremental risk rather than place a trade. But when the weighting changes enough, we accept the cost of trading as necessary to keep the risk in your portfolio at a level you are comfortable with.
When managing an investment portfolio, there is a lot to consider. If you have any questions about your investment portfolio, please reach out to us. We are always here to listen and assist!
Important Disclosure Information and Sources:
[1] “The Craziest Month in Stock Market History.“ Nick Maggiulli, 01-Apr-2020, ofdollarsanddata.com.
[2] “2020 QAIB Advisor Edition.” DALBAR, 2020, dalbar.com.
[3] “See the difference low-cost funds can make.“ Vanguard, 2020, vanguard.com.
[4] “The Performance of Hedge Fund Performance Fees.“ Itzhak Ben-David, Justin Birru, & Andrea Rossi, 2020, Ohio State University Fisher College of Business Research Paper Series.
[5] MarketPlus Investing® models consist of institutional quality mutual funds. Mutual fund investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.
Advisory services are provided by SJS Investment Services, a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide tax advice. Please consult your tax professional for specific advice. This material has been prepared for informational purposes only.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. In US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.
The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States.