Please enjoy some of the articles that I read this month, starting with my top five:
A Conversation with DFA’s David Booth
This is an interesting conversation with David Booth, co-founder of Dimensional Fund Advisors. They touched on the DFA edge over index funds: “Some DFA funds have historically earned small increments over their indices by forgoing the minimization of tracking error in favor of trading at the best price.” David displayed a refreshing humility, noting that he can’t be certain why small and value stocks have generated a return premium, “it could be risk; it could be a behavioral bias.” On profitability, which was recently added as another factor in DFA’s portfolio management, Booth comments that to an already well diversified portfolio, it might be expected to add 25-50 basis points per year.
Two main takeaways from this article: 1. Booth’s humility is consistent with the academic culture underlying the firm’s approach. DFA is a firm that uses the academic process to explore ways to increase efficiency, reduce costs or add value, and 2. to that end of adding value, significant efforts are often taken in order to find what many might consider small incremental advantages. Many might not consider 25-50 basis points a huge deal, but Booth sees it as a big win.
A Conversation with DFA’s David Booth, by Robert Huebscher, Advisor Perspectives
Why I’m Done With Financial Goals
Interestingly, a similar article appeared in Entrepreneur Magazine. These articles challenge one of the cornerstones of financial planning, that you should begin by defining your goals. Instead, they argue, you should focus on your process. Here’s the idea: instead being focused on losing ten pounds, you should focus on eating healthy and exercising more. It’s an interesting read, but ultimately, I don’t agree. Not for financial goals. I think goals provide focus and motivation to help develop and adhere to appropriate processes. Goals also provide a way to measure whether our processes are working or not. The key to is to set long term goals and break them down into both short and medium term goals. Long term goals without the benefit of shorter term goals is too abstract and too distant.
Why I’m Done With Financial Goals, by Morgan Housel, The Motley Fool
Outcome or process — what investment focus succeeds over time?
On its surface, this article might seem similar to the prior article. With investing, the author makes the case that process is more important than outcome. He tells the story of Tom Coughlin, Super Bowl winning coach of the New York Giants. Even when Tom was out of a job, he rigorously stuck to his process of player evaluation to make sure that he was ready when the next job came calling. Tom’s outcome was highly successful, but it was his focus on the process that delivered that success. He describes process oriented investing “a long-term approach to putting capital at risk by owning a broad variety of asset classes, making periodic contributions and regularly rebalancing.” And tells us our payoff for being process focused: “Over the long term, a good process delivers highly desirable results, and generates better and more reliable outcomes.”
Here’s the difference between the conclusion of this article and the one above. I believe process is more important in fields where there are large numbers of variables that are outside of your control. This is true in investing, to a large extent as a sports coach and probably for medical practitioners. In areas where you have the ability to control most of the variables, such as saving money, eating healthy or exercising more, you should focus on the process.
Outcome or process — what investment focus succeeds over time?, by Barry Ritholtz, Washington Post
Why You Should Discuss Health With Your Financial Planner
Carol McClanahan is a Certified Financial Planner Professional and Medical Doctor. She is an industry leader, particularly in the areas in which healthcare and financial planning intersect. In this article she addresses the importance of discussing your health with your financial planner with the aim at determining a realistic life expectancy. Most financial planners plan retirement scenarios with life expectancies of 100 for all clients. It’s a conservative way to plan, which sits well with most clients. However, it has the risk of shortchanging clients. If you have known health issues or a family history of limited longevity, you should consider a higher spending rate during the early years of your retirement. For this client, planning for age 100 means an unnecessarily diminished lifestyle. Even still, planning for age 100 might make you more comfortable, but arriving at that number should come from a conversation with your planner.
Why You Should Discuss Health With Your Financial Planner, by Carol McClanahan, Forbes Magazine
The Re-education of a Brash Young Stock Picker
Randy Kurtz was an active investment manager. Stock picking, market timing, the works. So confident in his ability to beat the market that his fees were based strictly on his ability to beat the S&P 500. Despite some success, he had an epiphany, a moment he calls his “capitulation.” He saw three main problems with his model. First, he didn’t manage comprehensive portfolios, so clients had to be willing to work with multiple advisors. That’s a process that is generally inefficient from both a portfolio management perspective, but even more from a planning and tax perspective. The second issue, as it usually is with active management, was taxes. Which is to say that active management tends to be tax expensive, and when successful, even more so. The third issue was lack of international diversification.
In an uncommon admission for a stock picker who succeeded in outperforming the market (according to the article, not audited performance reports), Kurtz observed that “we simply cannot know ahead of time whether a high-performing mutual fund manager or investment adviser is lucky or smart.”
This article resonated with me, as it was reminiscent of my career defining moment, which I wrote about in a recent blog post, The Great Recession, Five Years Later.
The Re-education of a Brash Young Stock Picker, by Ron Lieber, New York Times
Other good reads:
The Smart Way to Tap Investment Accounts in Retirement, Wall Street Journal
The Richer You Are the Older You’ll Get, Wall Street Journal
Most investors have no idea what they’re doing, MarketWatch
Quantifying The High Value Of Advisor Advice, Financial Advisor Magazine
Some fun and interesting reads that are not about money and investing:
As someone who enjoys running, I was inspired to read about one woman’s journey from being injured at the Boston Marathon bombing to running it a year later. A Year After the Boston Marathon Bombing, a Runner Rises, by Jason Gay, Wall Street Jornal
Optimism linked to reduced risk of heart failure, Medical News Today
Treadmill Desks Boost Productivity, by Susan Adams, Forbes Magazine
Fitness For Duty: Exercise Can Make You A Better Leader, by Roger Dean Duncan, Forbes Magazine
A couple of good Ted Talks:
Most people think that success will bring them happiness. In this entertaining and motivating talk, Shawn Achor explains that we have it backwards. Happiness itself leads to greater productivity. The Happy Secret to Better Work, by Shawn Achor.
Regardless of your political leanings, this interview with Congresswoman, Gabby Giffords and her husband, Astronaut Mark Kelly will inspire and move you. Be Passionate, Be Courageous, Be Your Best, Gabby Giffords and Mark Kelly.