Stockbridge Private Wealth Management

Personalized Financial Strategies for a Secure Retirement

Eric Ludwig

Are you exactly on track with your financial plan?

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When NASA launches a spacecraft to land on the moon (yes, I know that’s been awhile) what percent of the time does it spend on its intended path?

It’s only 3% of the time.  The Apollo missions took about 3 days to reach the moon. This means that out of the 3 days to reach the moon, they were on their intended path for only about 2 hours!  That’s it!  What the heck does that have to do with investing?  I think it’s a worthwhile analogy.

As humans, we set goals, whether it’s going to the moon, buying a house, saving for college or being independently wealthy.  Goals are so important because it guides our actions and it gets us moving in the right direction.  Apollo was only on its exact intended path 3% of the time, but its trajectory, it’s path, was always moving closer to the moon.  (if you’re a bad golfer like me, you know the feeling)

And so is the case with financial goals.  When we run a projection for a financial plan that earns 6% per year, that does not mean we will earn 0.0238% per day.  Investing doesn’t work that way.  Sure, there will be some days that we earn exactly 0.0238% in one day, but I have a feeling that occurs even less often than Apollo was on track towards the moon.  It’s more likely that we have days like today: the Fed raises rates, your portfolio jumps 1.28% today.  Tomorrow it goes down a little, and on and on.

But daily returns don’t matter.  Frankly, monthly, quarterly, and semi-annual returns aren’t the most important thing either.  Those are just results.  That’s the scoreboard.  What matters is that we’re taking the right actions towards our goals, and making course corrections along the way. That’s even how our investment models work: making adjustments as we adapt to changes in the global markets.  We will experience down days, months and quarters along the way.  As investors, we shouldn’t be surprised by that, we should expect that.  That’s how investing works.  Volatility is just part of the process.  If your account didn’t fluctuate, you’re either one of Bernie Madoff’s clients or sitting in cash.

That’s why focusing on process is so important (vs results).  Goals change as we have new experiences.  The goals we had when we were 5 changed by the time we were 15, and changed when we were 25 as we had new experiences along the way.  But at least goals put us on the right trajectory towards the things that are most important to us in life.  A cool exercise: think about a goal and then ask yourself “if I accomplish that goal, what will that mean to me.”  For example, goal: have a million dollars. What will that mean? I’m rich.  What will that mean?  I don’t have to work anymore.  Why is that important?  I can spend more time with my family, exercise, and hiking.  Ahhhhhh….now we’re on to something.

General advice: Think big.  As someone once said “aim for the moon.  Even if you miss, you’ll still land among the stars” …even if we’re off track 97% of the time.

 

Eric Ludwig is a certified financial planner in Madison, WI primarily for a select group of successful professionals and business owners, who among other things aspire to a work-optional lifestyle.  Stockbridge has developed and refined a process to put all the pieces of that puzzle together and we call it the Stockbridge GPS process.  GPS stands for Goals, Planning, Strategy.

Do you have an investment strategy or are you gambling?

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Do you have an investment strategy, or are you gambling?

Recently, somebody asked for my opinion of a certain stock they were considering buying.  I never know quite how to answer that question because buying individual stocks isn’t part of the investment strategies we run.  For 1, I’m not a big fan of owning individual stocks because I’d much rather own a commission-free, low-cost ETF that consists of 1,000 companies instead of buying only 1 company.  And 2, it probably doesn’t matter so much as “what stock to buy” as much as it does to be able to answer “when should I buy it” and “when should I sell it.”

The reason this question irks me so much though, is because it gets at the root of most investors problem: they’re gambling, not investing.  How do you know if you’re a gambler or an investor?  The ex-airline pilot in me has created a checklist to find out.  If you answer “no” to any of the questions, you’re probably just gambling with your money.  Or even worse, if you use the services of an investment advisor and they answer “no” to any of the questions, you’re paying someone else to gamble with your money…not cool dude!

First, the nuts and bolts of what makes it an actual strategy:

  1. My investing decisions can be boiled down to rules that could be programmed into a computer and answer the following:
    1. what to buy
    2. when to buy it
    3. how much to buy
    4. what to sell
    5. when to sell it
    6. how much to sell

Now you see why asking me “what do you think of this stock” just seems odd to me.  If it fits your investment strategy’s rules, buy the stock; if not, don’t buy it.  It’s pretty linear thinking at this level.  The idea of some stock jockey sitting in front of 15 computer screens watching their indicators with beads of sweat dripping down their forehead is Hollywood my friend, not Wall Street.  Investing, pragmatic investing, is pretty damn boring.  You run your system, you follow the rules, you go on about your day.  Once the rules are developed, it’s all about the proper execution of the strategy and just following the rules.  Think about weight loss for example.  You eat healthy, eat less, you exercise.  You just follow the steps and the results will happen.  That’s why it’s so important to focus on “process”, not “outcome.”  You can’t change the outcome.  That just happens.  But we can change our process.  And a better process will eventually lead to better results.

The next part of the checklist will determine if the strategy will actually make money or not. For example, I could come up with a “strategy” that buys all stocks that start with the letter A, every January, with 100% of my account value, and then sell them in December and repeat with the letter B next January.  That fits all the criteria to make it a “strategy”, but now we need to address whether or not it will make money.  And last time I checked that is the point of investing, right.  We need to be able to answer ‘yes’ to these questions:

  1. My investment strategy is based on a market truth of how the market really works (ex. momentum, short-term mean-reversion, trend-following, etc.  Not “buy in May and go away”.)
  2. My investment strategy has a repeatable edge that is not sensitive to input metrics, as determined by robust back-testing results (okay, that was the nerdiest thing I wrote today, but it’s very important. Many back-tested systems work because someone tried 487 combination of inputs until they finally got 1 that showed it would generate $200 million in 5 years.  If you roll the dice long enough, you’ll eventually roll a pair of snake-eyes 10 times in a row.  But we want positive results that work under all market conditions.  That’s what I mean by being robust, and not chance.)
  3. I can calculate the expected return, maximum equity drawdown, and probability of a positive and negative year (again, the only way to know this is because you can back-test a set of rules that you created in step 1 above)
  4. Finally, once you know the risk and return metrics, does the strategy fit your goals? Does it fit your comfort level?  The reason Kahnemann won the Noble Prize in economics for doing research on behavior, is because he knew that at the end of the day, it is investor behavior that has the biggest outcome on our final wealth result, not investment performance. Do you buy at market peaks and sell at market bottoms?  Do you exit because you’re currently down 6% even though historically the strategy has been down 10%?  Those decisions will have a much larger impact on our final wealth result than anything else in the checklist.  Since 1980, even Warren Buffett has had 4 times of losses worse than 30%, and 2 of those losses were worse than 50%!  On the upside, he’s outpaced the stock market (that’s investment performance).  But how many people can sit through 30% drops, or 50% drops, especially in retirement?  That gets to the core of investor behavior. See what I mean?

If you have a portfolio of actively managed mutual funds with internal costs of 1% per year, plus a 1% management fee that’s re-balanced quarterly (like they do at companies that rhyme with “you, “es”, pank”) you have a strategy, it’s just not a very good one, unless you actually like paying high fees and can sit through 50% losses every 8 years.  Or, if you buy Disney stock because Star Wars is coming out next week, I’m sorry fellow nerdy friend, but that’s more gambling than investing.  Spend your money going to the movie instead!  You could even ask a girl to go with you!

Final point: having a pragmatic set of rules to follow for making investment decisions, that will get you closer to your unique financial goals, is where we should focus our time.  And in the final analysis, that’s all that really matters.  If you want to know “whaddya think of XYZ stock?” call Jim Cramer instead of me.  At least he’s entertaining.

 

Eric Ludwig is a certified financial planner in Madison, WI primarily for a select group of successful professionals and business owners, who among other things aspire to a work-optional lifestyle.  Stockbridge has developed and refined a process to put all the pieces of that puzzle together and we call it the Stockbridge GPS process.  GPS stands for Goals, Planning, Strategy.

Actively Managed Robo Advisor Live

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This is a guest post from momentumstrength.com

Actively Managed Robo Advisor live!

Awesome new Actively Manged Robo Advisor using momentum strategies went live recently.  Check out their site!  Use Access Code: MomentumStrength to get a free portfolio and fee comparison.  I think you’ll be blown away by what your portfolio is missing.

They make a great point: all the other Robo Advisors use passive strategies (Wealthfront/Betterment, etc.)  That does nothing to protect from big losses and drawdowns (which are often -50% and can take only months to occur).  Frankly, Wealthfront and Betterment are a waste of money.  You can go to Vanguard/Schwab direct and skip the management fee all together.

AnytimeWealth is low cost and low min’s, like the other robo advisors.  BUT AntyimeWealth uses momentum investing strategies that can

  1. outperform the market during uptrends, and
  2. (more importantly) protect from big losses that occur every 5-10 years.

This is what I love most about them: their reason for existence. They want to help as many people as possible use momentum investing.

Why?

So they can get better returns with lower risk

Why?

So the average American can reach their goals faster

Why?

We all are working against finite amount of time

Why?

Time is our most precious resource.  Don’t waste it getting average returns

Momentum Strategy Updates: November 2015

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A Quick Update for November.  Hope you had a Happy Thanksgiving!  Time for us at Stockbridge to shake off the turkey coma and get back to business!

In our Global Momentum strategy we were in US Large Caps (VTI) and enjoyed a +0.6% return.  Turns out that was slightly better than the S&P, and only 2nd to US Small Caps for the month.  More importantly, it kept us out of Europe (-0.8%), out of Emerging Markets (-2.3%), and out of High Yield Bonds (-2.6%).

That’s why we do what we do… whereas passive strategies invest in all markets, all the time.  Does that even make sense?  Clearly there’s a better time to be in different markets, and that’s how we earn our keep.  For those of you that were my previous clients at the bank, it’s times like this that really solidify WHY we manage funds this way…it’s just a better way and you all get to enjoy those benefits.

In the bond world we utilized long-term treasuries and unfortunately lost a slight -0.34%. In Bonds, this was a month of focusing on minimizing losses (vs maximizing gains) as every bond sector was negative for the month.  Even short-term treasury bonds, which is often a proxy for money markets, even lost -0.26%.  Surely, our intention is to be cautious for December as the mid-month Fed meeting will be here before we know it.  I’ll mention what I did in the last newsletter: if you have bond funds held outside of Stockbridge, we’re happy to analyze your risk potential if interest rates rise in a few weeks.  Just let us know ahead of time and we can give guidance.  But don’t wait until it’s too late!!!!

Our Sector Rotation portion performed twice as well as the stock market, raking in 1.2% as Information Tech stocks keep rising.  Interestingly enough, of the 11 Sectors that make up the US Stock Market, 6 were negative and 5 were positive.  So it’s month’s like this where it pays to be nimble (something the big bank investors can’t do), and only invest in the rising sectors like we do. (you’re welcome). The range of sector performance were Financials performing the best at 2.1% and Utilities came in last at -2.1%.  We’ll take our earnings and move on!  Clearly there is some momentum building in the financial sector in anticipation of a Fed interest rate hike (which would likely be good for banks). Again…we’ll be watching!

My final though for the month: Time is our most precious resource. Starting with that undeniable truth, my mission is to help you get better returns with less risk so you can reach your goals faster, and less time spent thinking about the markets.  Thanks for your continued support.

 

Eric Ludwig is a certified financial planner in Madison, WI primarily for a select group of successful professionals and business owners, who among other things aspire to a work-optional lifestyle.  Stockbridge has developed and refined a process to put all the pieces of that puzzle together and we call it the Stockbridge GPS process.  GPS stands for Goals, Planning, Strategy.

E+R=O The most important equation for investing

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E+R=O

The most important equation for investing, and maybe even life is E + R = O.  Which stands for Event + Response = Outcome.  Meaning that the final Outcome of things that happen each day consists of some Event AND our Response to it.  We cannot control Events.  Events just happen.  We cannot cause the stock market to go up and down.  We can’t even predict whether it will go up or down.  What we can control is our Response to Events, and ultimately, it is our Response that will have the biggest impact on the end result.

For example, many years ago I had a client that was thinking about retiring soon.  When markets started to slide in 2007, I recommended that she sell some of her high-gain stocks and get into more of a balanced portfolio, but she decided to keep her portfolio the same.  In 2008, markets fell further, dropping some 40%, and she still hung-in there.  In early 2009, markets continued to drop!  Finally in early March of 2009, she said, “Eric, I can’t take it anymore.  Let’s sell everything and go to something safe.”  I’ve seen many people make this decision (response) after various market drops (events), but I will never forget this client, and this day.  It was March 9th, 2009, which was literally the absolute bottom of the market.  It hasn’t dropped a penny lower since that day.

Stocks are up about 200% from that date, but she is not.  Stocks dropping is the Event.  Her Response was to sell, literally at the worst possible time.  The final Outcome is that 8 years later she is still working, still not retired, and her account has never gotten anywhere near to its pre-crash value.  The Event (market dropping) was not the biggest factor in the final outcome (value still low), but rather it was her Response (selling low) to that Event that has had the larger, lasting impact.  She still blames the Event, when in reality it’s her Response to the event that has caused her so much grief.

 While we cannot control market Events, we can certainly control how we Respond to market movements.  What our research has found is that by analyzing market trends over the last 2 to 3 months, and owning more the markets that are going up and not owning the markets going down in that time-frame, and then repeating that process monthly, may be one of the best ways to Respond to Events.  That process generated gains during the 2008 crash.  It’s why our most conservative momentum model has made money last week while stocks dropped.  The problem with continuing to own markets that are in a down trend, is that nobody knows how far it will drop, how long it will take to bottom-out, or how long it will take to recover.  The Japanese stock market, for example, is still not above a high it set in 1989!  Sometimes, “just hang in there” is not the best advice.

We feel that most of the sell-off from last week is over concerns in China’s economy.  That is somewhat valid, as it is the 2nd largest economy in the world.  BUT, last time I checked, it is China’s economy that is bad, not ours, and we don’t have anyone invested in China.  I’m not going to sit here and tell you though, that the market will quickly reverse.  I have no way of predicting what will happen next, and neither does anybody else (not even the good looking people with expensive suits on CNBC).

Events are random.  They just happen.  Events are out of our control.  Responses are not the same as Events.  Responses can be void of emotion like fear, void of the desire to predict what will happen next, and void of having only a short-term perspective.

 Responses can consist of a rules-based strategy that has worked over decades of good and bad market cycles.  Responses can be backed by probabilities of likely outcomes.  And Responses can consider the long-term perspective.  And that’s what we do.  That’s why we’re here to help.  What I can tell you is that in one more week we will re-run our monthly analysis and continue the process of owning markets that have the highest probability for continuing up for the next month, and repeat, and repeat, and repeat.

Last week a client in my office asked, “What will happen next in the market?”  I moved my crystal ball on my desk in front of him and said, “Take a look, and you tell me.”  He said, “I don’t see anything” and I asked, “Are you sure?  Look again.”  He said, “All I see is my reflection.”

“Perfect” I said.  “That guy in the reflection, you, is ultimately what’s going to determine what really happens next.  We won’t know which way the market will move, but at least you have the wonderful ability to decide how you will respond.  And that’s the only thing that matters.”

 

Eric Ludwig is a certified financial planner in Madison, WI primarily for a select group of successful professionals and business owners, who among other things aspire to a work-optional lifestyle.  Stockbridge has developed and refined a process to put all the pieces of that puzzle together and we call it the Stockbridge GPS process.  GPS stands for Goals, Planning, Strategy.

Momentum Investing Worst Months

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Momentum Investing: Worst Months and what Happened Next

Successful Investing: Stay Disciplined

I was re-reading an awesome investing classic “What Works on Wall Street” where he discusses the simplicity and effectiveness of the “Dogs of the Dow” strategy. The author goes on to explain that there were times of the strategy’s under-performance, yet for the disciplined investor who followed the strategy through the bad times, the investor was ultimately rewarded.

In the same light, I asked:

Q: What were the 6 worst months of the Global Asset Momentum Strategy back-test? (starting in 1990)

and more importantly

Q: What happened in the following 12 months?

Below is the table with the answers:

Month-Year Month % Next 12 Months Event
May-10 -7.80% 29.90% Flash Crash
Nov-07 -7.81% 7.40% Financial Crisis
Jan-09 -8.47% 61.80% Financial Crisis
Apr-04 -8.68% 14.20% Unidentifiable
Jun-08 -8.90% -25.20% Financial Crisis
Aug-90 -12.96% 2.50% Invaded Iraq
Average:  -9.10% 15.10%

The worst 6 months range from -7.8% to the worst of -13% (averaging -9%).  The return of the strategy over the next 12 months averaged 15.1%.  They were all positive “next-12-months” except for the June 2008 to July 2009 when the strategy was still climbing itself out of the Financial Crisis.

One interesting observation: 3 of the worst 6 months occurred within 14 months of each other: November 2007…June 2008…January 2009.  That’s not to say that we wouldn’t expect poor performance to clump together again in the future, but it appears that on average, the back-test shows it’s fruitful to “stay-the-course”, even when we see a loss of -8% in one month.  This is just a repeat of what successful investors already know: invest with discipline and be rewarded.

 

Eric Ludwig is a certified financial planner in Madison, WI primarily for a select group of successful professionals and business owners, who among other things aspire to a work-optional lifestyle.  Stockbridge has developed and refined a process to put all the pieces of that puzzle together and we call it the Stockbridge GPS process.  GPS stands for Goals, Planning, Strategy.

The information provided on this website is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. Before making any investments, the readers are advised to seek independent professional advice, verify the contents in order to arrive at an informed investment decision.  Past performance is not indicative of the future performance.