Active Management


Active Management is the practice of picking specific stocks on the belief that those stocks will do better than the market. Active management can take two forms. Some investors pick stocks directly. Other investors invest in actively managed mutual funds. Numerous studies have found that over the long term the majority of actively managed funds fail to beat their benchmark. For example, the Mid Year 2019 SPIVA Report produced by McGraw Hill (page 5) shows that in virtually every Domestic Fund Category, 80% or more of the funds failed to beat their benchmark over a 10 year period. The reason most often cited for this surprising fact is that the expenses (research and trading) of active managers drag down their performance as a group so that the average fund under performs the benchmark.  If you own actively managed funds in your portfolio, are you confident they will be in the 20% that win 10 years from now?        

Market Timing


Market Timing is the practice of altering portfolio structure based on short term expectations for the market. The most extreme form is getting out of the market completely at some times and reentering the market at other times.  Market timing is extremely difficult for several reasons:

  • Markets are very volatile in the short term. It is extremely difficult to identify in advance  which  market moves are noise and which are  significant. 

  • Timing is critical.  A $1,000 investment in the S&P 500 in January of 1990 would have grown to $13,137 by December 2018. However, if you missed the best 25 days over that same period, your $1,000 would have grown to only $3,281.  Source: Dimensional Fund Advisors

High Fees

Do you know what you are paying in fees? Fees come in many forms. It’s important to know what you are paying in total fees.
Common forms of fees include:

  • Mutual fund fees (which are deducted out of each fund’s performance).

  • Advisor fees (a fee on all assets  negotiated with your advisor.)

  • Product fees (see Variable Annuity section  below).

  • Commissions  or front end loads  on mutual funds.

High fees detract from long term performance. There are good reasons why some investments may have higher fees than others (e.g. an Emerging Market fund will have higher mutual fund fees than a domestic Large Cap fund). However its critical to know what your fees are in aggregate and whether they are “reasonable”.   

Diversification Mistakes


Diversification is an important tool to lower portfolio risk. It prevents you from having too much of your portfolio in any one category in case that category does poorly over the next 10 years.

Most investors understand the risk of only owning a few stocks.  To reduce this risk they may invest in a broad index such as the S&P 500. This reduces the individual security risk, but this alone is not sufficient. Over a 10 year period there can be wide ranges in returns between domestic, international, and emerging markets. There can also be wide ranges in large cap stocks and small cap stocks. Finally there can be a range between growth and value stocks. Effective diversification requires consideration of all these factors in constructing a portfolio

Variable Annuities


Variable annuities are complicated products that can have annual fees of 3% or more. It is our experience that in Financial Services product complexity seldom is to the client’s advantage.

​Each company’s product is different but there are some general similarities.  The benefit structure generally involves tracking two different accounts on a contract - an actual account and a notional account. The notional account may have quite attractive interest accumulation guarantees (a key selling feature). However, access to the funds in the notional account is quite restrictive.  All of this is described in the prospectus but the average consumer has little chance to understand a document that can exceed 100 pages.

If considering the purchase of a variable annuity there are a number of questions to ask the broker proposing the variable annuity:

• What are the total annual fees charged in the contract?
• What are the Surrender Charges if I surrender early?
• How restrictive is access to your money? If your needs change and you want to withdraw more funds, how are your contract values affected?
• What restrictions are put on how you invest? Are you required to invest in portfolios that reduce the company’s risk?
• How do the “guaranteed benefits” under the Variable Annuity compare to simply annuitizing your projected Account Value?

Purchasing a variable annuity effectively ties you to that specific company. If you decide to surrender the contract for any reason (e.g. your circumstances change or the insurer’s rating declines) you will forfeit all the rider fees you already paid for the contract. There may be other provisions (such as surrender fees) affecting what you get if you try to liquidate your contract.