by Timothy J. Delaney, Founding Partner
JDH Wealth Management is now in its 18th year of business. When I look back over those years, I am amazed at where we started and where we are today. I also think back to the many changes to our world during this time, of which I will discuss two of them.
The first one is the introduction of the iPhone about 10 years ago. Until then, no one, even Steve Jobs, could have envisioned how one device would so change our world. (Watch him introduce it to the world for the first time.) Besides being a phone, it also became our clock, flashlight, camera, timer, compass, music player, video player, texter, emailer and many other uses. Prior to this invention, who would have guessed land lines would be a thing of the past?
The other big change was the method of investing. Prior to the development of mutual funds, the only way to invest in a company was to buy its stock. As a kid growing up in the 60s, I can remember my dad reading the Wall Street Journal and looking at pages and pages of individual stock prices. Then in the 70s and 80s, mutual funds really captured the investing public’s attention. However, the philosophy for investing, whether stocks or mutual funds, was to buy large US companies, hoping to hit some home runs with the individual stocks or the mutual fund manager would outperform others and beat an appropriate benchmark.
Investment Strategy Innovations
The investment industry has changed over the last few decades. Academic research regarding stocks and investment management has spurred on these changes. One of the implications from extensive research is that professional money managers cannot consistently outguess and beat the stock market. This is supported by years of industry performance data.
Fortunately, I was exposed to this academically based, passive approach to investing in the late 1990s. Prior to this, I was just like most other investors, always believing that hope springs eternal. When I started JDH in 2000, I had changed my investment philosophy to align with this passive investment approach. So much so, it became one of our core investment principles.
The research continues to prove this was the correct move back then, and still to this day. As this academically based research evolved, another core investment principle was developed, which was small companies have higher expected returns than large companies and value companies have higher expected returns than growth companies.
Eugene Fama was one of the pioneers of this research for which he was awarded the Nobel Prize in Economics in 2013. (You can read his curriculum vitae here.) He is also a member of the Dimensional Fund Advisors (DFA) Board of Directors. DFA is the primary mutual fund company we use to implement our investment philosophy.
If you own mostly large US “blue-chip” stocks, which I refer to as some of the large US companies of the past 10-40+ years, this research and our real world interactions over the past 20 years shows that you are missing out on significant long-term growth opportunities in your portfolio. You would be missing higher expected returns by not having allocations to small, value and international asset classes.
These concepts of diversification and exposure to small, value and international stocks were all new to me more than 20 years ago. I adopted them when most people didn’t. They have changed my life and the lives of our clients. When we first began working with DFA in 2000, they were maybe the 40th largest mutual fund company in the world. Today, DFA manages $460 billion and is the 6th largest mutual fund company in the world.
Just as technology and the world changes, the financial world is continuously changing. We keep learning, researching and monitoring, all with the goal of providing you and your family with a better investment experience.
Have you and your investments evolved and changed for the better over time? Are you using the optimal method? Are your friends and family?
© 2017 JDH Wealth Management, LLC
Jim Parker, Outside the Flags
Vice President, DFA Australia Limited
The global fashion industry is fickle by nature, pushing and then pulling trends to keep hapless consumers forever turning over their wardrobes. Much of the financial services industry works the same way.
Fashion designers, manufacturers, and media operate by telling consumers what’s in vogue this year, thus artificially creating demand where none previously existed. What turns up in the boutiques is hyped as hip by the glossy magazines to make you feel like you “have” to buy it.
Likewise, much of the media and financial services industries depend on fleeting trends and built-in obsolescence to keep investors buying new “stuff.” Driving this industry aren’t so much the real needs of individuals but manufactured wants with short shelf lives. Read more
Professor Eugene Fama revisits some of his landmark work and discusses the evolution of finance in this video from Dimensional Fund Advisors. Read more
All of us could benefit by examining our inclination to invest with our hearts rather than our heads—especially when it comes to gold.
There are two ways of learning: You can be taught how to do something correctly, or you can be shown the consequences of doing it wrong. In the world of investment, it’s a lot cheaper to learn from others’ mistakes.
A recent edition of a television current affairs program detailed how elderly Australians, many of them with only modest nest eggs, had lost up to $15 billion in recent years through dubious investment schemes.
Most of these schemes involved the provision of high-risk finance to property ventures, some involving speculative residential projects. Yet, the program found, these investments were often promoted as safe, secure, and bank-like.
In some cases, the promoters of the schemes extracted high fees (as much as 5%) from the vehicles, and engineered related-party transactions that cost the elderly clients millions—without giving them any say in the matter.
Click here to read the full article by Jim Parker, Vice President, DFA Australia Limited
Bad news sells. It sells because fear is a more powerful emotion than greed. Newspaper editors know that, which is why the front pages are often so depressing. But sometimes you need to dig inside the paper for a more balanced view…
How will you be remembered? Your loved ones will certainly remember and cherish your love, kindness, and generosity, but will they also face a disorganized mess when they get to the point of settling your affairs?
No one wants to think about dying, but if you envision the challenges your family will face when you are gone, it may inspire some long overdue organizing of information, financial assets, and possessions.