All Things Financial Planning Blog


Young Investors Key to Beating the Market

Invest Outside the BoxWant to know how to beat the market? “Sure,” you may say, “it’s possible. If I spent my every waking hour researching undervalued companies.”

But, what if I told you I had a fool proof way for those with time to spare to win against the market, without searching rummage shops for discarded crystal balls, or trusting in your uncle’s stock advice? And on top of that, even the most novice investor can use this strategy and win?

Impossible? Read on.

The way to beat the market isn’t by finding the next hot mutual fund manager or dedicating yourself to becoming the next Warren Buffett, it’s simply how you manage your tilt.

Your “tilt” is how your portfolio is invested in the market. You hopefully are diversified over the universe of stocks, but your tilt tells your holdings of large or mega companies versus small or medium sized firms. It also tells if you tend to invest in companies trading at premiums or discounts to the overall market.

More often than not, most retirement investors I meet are “top heavy,” investing in a mix that doesn’t stray too far from the market represented to a higher degree by largest companies, or a mix that resembles the S&P 500 (most people refer to this as the market). This is often the case if you’re investing in a Target Retirement Date fund, or any other fund or funds, or have a managed account.

However, is this the best mix when you’re young and have time to take risks?

By shifting the weights of your portfolio towards areas of the market that tend to have higher degrees of return (and volatility), you may supercharge your retirement accounts when starting out, specifically by using a greater share than the market of smaller companies with more room to grow, and stocks that are trading at a discount to the market (value stocks).

How much better can you do than the S&P 500 by including more small and value in your mix?
The S&P 500 averaged 9.5% per year since 1928. One can not invest in an index, but if you could and had invested $1 in the S&P 500 way back then, you would have had $3,530 at the end of 2012.

Using a similar strategy of owning the stock market, but by shifting the tilt to include more small, and more value, a portfolio that tracks Dimensional Fund Advisors US Adjusted Market Value Index would have averaged 11.7% during the same period. An investment of $1 would have grown to $11,998.

A strategy of tilting more towards small and value stocks will be more volatile than the market, so don’t think this approach will only lead to gains; you still have to master the skill of not watching your accounts rise and fall in the short run. However, while you’re accumulating and have a long time horizon, volatility can be your friend.

robertSchmanskyRobert Schmansky, CFP®
Financial Advisor
Clear Financial Advisors, LLC
Royal Oak, MI


Are You Holding? How Long Should You Hold Equity Securities?

Are you holding equity securities? How long do you plan to hold them? Will you hold them overnight? Will most of your current securities still be in your portfolio in February 2021?

There have been a couple of articles recently stating the average period of holding stocks was declining to 7 months or less. This is a concern for a number of reasons but most importantly because you are less likely to realize the value of the security with a short holding period.

In the 1990s the media was reporting about “day traders,” people who would purchase securities with the expectation that they would sell within the day for a profit. For these purchasers, owning a mutual fund was too restrictive because mutual funds are only priced once per day. Stocks were the way to go because you get a new price quote with every purchase.

I never thought day trading made sense. I lean more toward fundamental analysis where you look for value in the company’s sales, sales growth, assets, etc. I recently reviewed a company stock report that said the shares last traded at $20.72 and that the 12-month target price was $24.00. A report on a different company said the current price was $22.95 and the 12-month target price was $20.00. The analysts reviewed the shares for a one-year holding period.

But the common recommendation is that you should “invest for goals exceeding five years and save for goals shorter than that.” Day trading and investing with a one-year time horizon conflict with that advice. Of course, while you would like your investments to go up all the time you do not expect it. You knew, in January of 2008, that you were not going to use your retirement funds for ten or twenty years so you stayed invested in the market. You continued to know that, perhaps with a little less certainty, in January of 2009. You have been rewarded for that faith in the long-term return of the market.

Perhaps you were not so faithful (who can blame you with all the jabbering going on around you) and you reduced your equity exposure. Later you got back in or you are getting back in now. You know that the price of your securities does not matter except on the day (or days) you buy them and the day (or days) you sell them. The long-term trend for equity securities in the United States is up. By staying invested, you now know you can take advantage of that long-term trend.

So you should be planning to hold securities until you meet your goal. You may not hold a particular security that long. Perhaps you decide you made a mistake in buying the security. Perhaps you made the right decision to buy, the security has already reached its potential and now has limited additional prospects (for example, Circuit City was one of the great companies highlighted by Jim Collins in Good To Great because, among other things, it returned 18.5 times the market return from 1982 until 1997 but the company is now defunct). Perhaps you did not make a mistake but the environment has changed so the conditions that existed when you bought the security are no longer in place (think buggy whips and VHS tapes).

To uncover circumstances that might make you sell the security before you achieve your goal, you will want to monitor your investments. When you monitor your investments you will compare the investments to the reason you originally purchased them. You may want to compare the investments to other opportunities in the market (although this one might tempt you to buy bank CDs when the equity markets go down 40%).

Barring changes in the investment fundamentals, you should hold investments for the long term. You might even consider the holding period recommended by Warren Buffet. Mr. Buffet has been quoted to say, “Our favorite holding period is forever.”

John Comer, CFP®
Comer Consulting, LLC
Plymouth, MN