💰 The “Suitability” Problem 💰

Today's Newsletter:

• Quote From Warren Buffett

• The “Suitability” Problem

• My Investment Portfolio

• A Money Question

Quote

“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes .” - Warren Buffett

Warren Buffett is largely considered one of the greatest investors of all time. His recipe for success is relativity simple, play the game longer than everyone else. Warren Buffett's net worth today is an estimated $112.3 billion yet $112 billion of that came AFTER his 50th birthday.

The “Suitability” Problem

I posed a thought this week on Twitter that more clients of financial advisors should ask to see their advisor's portfolios. Yes, everyone has their own unique goals, timelines, and risk tolerances but my thought speaks to the types of investments, not the percentages. I remember as a 22-year-old having one of the most complex-looking portfolios you could dream up. I owned 30+ mutual funds that were seemingly getting changed out each year. For a frame of reference, I was a client at the time of a nationally known broker-dealer. You know, the types that have commercials on the golf channel.

In one meeting, I asked my advisor “Do you invest in all of these same mutual funds?”. I will never forget the look on his face. It was one of surprise, confusion, and a sprinkling of “Uh Oh”.

He said something to the effect of I own a few broad-based index funds. Let me break down what this actually meant. Me (the client) owned high-cost funds that the advisor was being told to sell while my advisor owned low-cost funds that he actually believed in. Unfortunately in my industry, this is the standard, not the exception.

You see the large majority of financial advisors (a loose term) are bound by “suitability”. This means that they can recommend anything that is “suitable” for your goals, objectives, and risk tolerance. In real-life terms, this means if they have two solutions, both could be acceptable, and one makes them more money, guess which one you are getting sold?

Look, I say this not to put down other advisors but this is a real problem in my industry. It is hard to make money and the last thing a client should ever have to worry about is the financial advice they are getting is not in their best interest.

My motto with our clients is simple: If I don’t own or wouldn’t buy the exact same investment then I will never recommend it to our clients.

My Investment Portfolio

One thing that I learned early on in my investing journey is that emotions are the enemy of good investing. Money is emotional and seeing an investment drop in value stinks. It also stinks seeing another investment go up more than the one you own. Yet, often the best thing to do in those situations is to stay emotionless and stick to the plan. It is the hardest thing to do in investing.

The best way for one to keep emotions in check is to follow the data, not your heart. When looking at the stock market some of the most overwhelming data has come from Nobel Prize winning economist Eugene Fama. Fama won the award for his three-factor model on the markets outlining the “efficient market hypothesis”. In short, Fama pointed out that when new information comes into the market, it is almost always immediately reflected in stock prices, and thus technical and fundamental analysis to generate outsized returns is quite difficult. It is hard to beat the market.

My investment philosophy is built on the back of much of this work. It is hard to beat the market. Be wary of anyone who says otherwise. Yet, Eugene Fama took his work to the next level showing that there are asset classes or groups of the market that have shown to outperform other sectors. This can be described as factor investing. The four factors Fama considered persistent were risk, price, size, and profitability. Put more simply stocks (riskier) outperform bonds (safer), value companies outperform growth companies, small companies outperform large companies, and profitable companies outperform unprofitable ones. So, what does the data look like on this?

The goal of investing is to stack the odds in your favor. I believe that Fama’s factor model does just that. It is the backbone of how I invest my own money. As the above chart shows the four factors provide the best chance of outperformance over a long time period. There are no guarantees and sticking with it long enough is hard. Yet, investing based on data helps to reduce the emotional swings and innate desire to tweak a portfolio. My personal portfolio subscribes heavily to these factors. Here is the breakdown of my asset allocation:

29% in Small Cap Value

18% in Large Cap Value

13% in Large Cap Growth

23% in International Stocks

8% in Emerging Markets

5% in Real Estate

4% in Municipal Bonds

The main four fund companies I own are Dimensional Fund Advisors, Avantis, Blackrock, and Vanguard. Out of thousands of fund companies, these are the ones I personally own the most of and the ones many of our clients own.

A Money Question?

“How often do you check your investment portfolio?”

The longer I have invested the less I have checked my personal portfolio. Fidelity Investments did a study that showed that forgotten accounts actually performed the best. The enemy of good investing is emotions and money is emotional. Remember my friends, know the game you are playing and stick to it longer than everyone else. It is a recipe for success.

Work with Jacob

I help athletes and entrepreneurs pay less in taxes, coordinate their financial life, and invest for the long run.

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Until Next Time, My Friends

JL Strategic Wealth, LLC is a Registered Investment Advisor, located in the State of Missouri. JL Strategic Wealth provides investment advisory and related services for clients nationally. JL Strategic Wealth will maintain all applicable registration and licenses as required by the various states in which JL Strategic Wealth conducts business, as applicable. JL Strategic Wealth renders individualized responses to persons in a particular state only after complying with all regulatory requirements, or pursuant to an applicable state exemption or exclusion. Nothing in this content is intended to be, and you should not consider anything in this content to be, investment, accounting, tax, or legal advice.