The SD-PFS*Ticker
Vol 8, Issue 2
June 2017

Which way to go?

It's finally summer, and many of us are thinking about vacation destinations or which project to tackle next on that honey-do list. But, even with thoughts of vacation on the brain, as your advisors, we are always thinking about the best way to help you plan for your financial future. There has been a lot of talk in the news lately about active vs. passive investing, so David Brinkman, CPA, CFA, CFP ® , our Columbus, Ohio, based Investment Advisor, has addressed many of the concerns around this discussion in the article below.

We hope you are all having a wonderful summer. As always, please feel free to call us with any questions or comments at 412-697-5331

Active vs. Passive Investing:
Is the Argument Missing the Point
... David Brinkman

Institutional and individual investors have become increasingly focused on the active versus passive investment strategy debate, but in our opinion, they are focusing their attention on the wrong aspect of investing. What investors should really be focusing on is formalizing their long-term investment goals, developing a long-term portfolio that meets their objectives, and, finally, consistently assessing their relative progress towards achievement.    

In recent months, we've heard more about a migration among institutional investors to what is called a passive strategy. This approach, also known as indexing, is an investment management approach based on investing in exactly the same securities, and in the same proportions, as an index, such as the Dow Jones Industrial Average or the S&P 500 indices. The idea is to be less involved, or passive, in monitoring investment holdings, and follow a pre-determined strategy based on indexes. Most recently, some states - including the state of Pennsylvania - have elected to transfer previously active public stock holdings to a passive investment strategy.

A recent biannual report based on the S&P index confirms that passive investing has outperformed actively-managed funds over the recent short- and long-term. However, we still believe that active management should play a role in a client's investment portfolio in certain asset classes, provided one has a clear understanding of that portfolio manager's overall investment process and any underlying fees, and has the patience to stay with that manager through a full market cycle. In our view, the active versus passive industry debate misses a much more important decision for investors, which is their overall investment allocation.

Industry studies have illustrated that over the long run, an investor's mix of assets (i.e., fixed income, equity and alternative investments) ultimately dictates the majority of one's return and variability of those returns. An investor's mix of assets should be determined by personal investing objectives such as age, long-term goals, and appetite for risk. Prior to investing any money, successful long-term investors understand the risk/reward of their investment portfolio and adhere to these allocations throughout a full capital market cycle (i.e. stock market peaks and valleys). Long-term investors seek to mitigate the inherent emotional component of investing by periodically rebalancing back to their long-term allocation targets. Examples include taking on more risk during a market downturn by selling down conservative investments such as fixed income to buy back into potentially beat up equity/alternative markets or vice versa by taking some chips off the table during prolonged bull market rally (i.e. selling equity/alternatives and buying fixed income) to rebalance their overall portfolio. This investor discipline of understanding one's portfolio and staying the course is the real key for an investor's long-term success.

In another investment management industry study, Dalbar, Inc. illustrates how poorly the average investor performs relative to market benchmarks over time by analyzing net purchases, redemptions, and exchanges on a monthly basis as a proxy for investor behavior. Dalbar's study consistently illustrates that the investor can be their own worst enemy when it comes to making investment decisions and in particular, trying to time those decisions. Instead of "buying low and selling high," most investors as mentioned before get wrapped up in the emotion of investing and end up doing the inverse "buying high and selling low."

As the above chart illustrates, if an investor had simply held the S&P 500 index from 1997 to 2016 their annual rate of return would have been 7.7% compared to Dalbar's estimation of 2.3% annual return for the average investor during the same time period. We feel the Dalbar study illustrates that those investors who have a clear vision of what they want to accomplish and how they plan to get there are much more likely to achieve their goals. As a reminder the 7.7% S&P 500 annual return from 1997 to 2016 assumes one invested the assets on January 1, 1997, kept a level head and stayed fully invested in the index throughout that time period, particularly in 2008 when the index sold off 37% for the year and over 21% in just the fourth quarter of 2008 alone! 

While there is an increasing movement within the investment management industry toward more passively managed strategies, even with an all-passive strategy, we believe that the role of a competent advisor whom facilitates discussion and dialogue around goal-based planning remains paramount. In the long-run, passive investment strategies can provide low-cost access across asset classes, but without proper financial planning, asset allocation, and investor discipline, success will be no closer at hand for the individual investor.

Please note that investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal and with any investment vehicle, and past performance is not a guarantee of future results. The information discussed is meant for general illustration and/or informational purposes only and it is not to be construed as investment, tax or legal advice.  Individual situations can vary, and the information should be relied upon when coordinated with individual professional advice.

July 4th Holiday Office Hours

In observance of the Independence Day holiday, our office will close at 3 p.m. on Friday, June 30th, and be closed on Monday and Tuesday, July 3rd and 4th. Please let us know in advance if you anticipate having any cash needs before that date. Have a safe and happy holiday!

Cyber Security Tip

Likejacking: While we've all become more careful about clicking links in email messages, did you know that clicking Like or Share on Facebook and other social media sites can have a similar effect? That click can install malware or ransom-ware, as well as hijack your profile and post unwelcome updates to spread the contagion. Those news stories and cute videos that show up in your news feed may not be so innocent. Think before you share or like!  

What We're Reading
Yes, Chef: A Memoir by Marcus Samuelsson
Review by: Nancy Skeans

Marcus Samuelsson is a well-known chef and owner of restaurants all over the world. I have often watched him on various Food Network shows, but never knew anything about his life. As it turns out, it's an interesting and inspiring story. An orphan at the age of 3, then adopted, Marcus grew up primarily in Sweden, where he developed his interest in cooking from his grandmother. This was an interesting and inspiring story about how Marcus reinvented himself and became an accomplished chef and restaurateur. Now my goal is to eat at his Harlem, New York restaurant, the Red Rooster!

The Schneider Downs Wealth Management Team

Nancy, Don, Theresa, Julie Ann, Vicky, Karen, Beth, Nick, David, Derek, Jason and Amber