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Park + Elm Investing Principle #6: Practice Smart Diversification

By | August 28th, 2018|Markets|

PRINCIPLE #6 IS HERE!

PRACTICE SMART DIVERSIFICATION!

Download the rest of our Ebook Here to get all 10 principles!!

It’s not enough to diversify by security. Deeper diversification involves geographic and asset class diversity. Holding a global portfolio helps to lower concentration in individual securities and increase diversification.

Over long periods of time, investors can benefit from consistent exposure in their portfolios to both US and non-US equities. While both asset classes offer the potential to earn positive expected returns in the long term, they may perform quite differently over shorter cycles. The performance of different countries and asset classes will vary over time, and there is no reliable evidence that performance can be predicted in advance. An approach to equity investing that uses the global opportunity set available to investors can provide both diversification benefits as well as potentially higher expected returns.

The global equity market is large and represents a world of investment opportunities. Nearly half of the investment opportunities in global equity markets lie outside the United States. Non US stocks including developed and emerging markets, account for 47% of world market cap and represent more than 10,000 companies in over 40 countries. A portfolio investing solely within the US would not be exposed to the performance of those markets.

However, when Americans talk about the stock market, they’re generally referring to the Standard & Poor’s 500 index or the Dow Jones industrial average. But these indices represent only one part of the available investing universe. The total U.S. stock market makes up only about 53% of global market capitalization. Yet, on average, U.S. mutual fund investors possess a home bias, with a disproportionate amount of their portfolio invested in the United States. If their portfolios were balanced according to world market capitalization, about half of their assets would reside in non-U.S. stocks. This “home bias” leads to less diversification, and as a result, greater volatility with lower returns.

It’s well know that concentrating in one stock exposes you to unnecessary risks, and diversifying can reduce the impact of any one company’s performance on your wealth. From year to year, you never know which markets will outperform, and attempting to identify future winners is a guessing game. Diversification improves the odds of holding the best performers, and by holding a globally diversified portfolio, investors are positioned to capture returns wherever they occur.

Put very simply, DIVERSIFICATION:

· Helps you capture what global markets offer

· Reduces risks that have no expected return

· May prevent you from missing opportunity

· Smooths out some of the bumps

· Helps take the guesswork out of investing

There is no single perfect portfolio. There are an infinite number of possibilities for allocation based on the needs and risk profile of each individual. The most important question investors should ask… “IS MY PORTFOLIO GLOBALLY DIVERSIFIED?”

Today’s Video: How Much Should You Save For Retirement?

By | August 17th, 2018|Markets|

So many investors search for the answer to this question! This video discusses important factors that can help you meet your goals – like determining your savings rate, monitoring your progress, and making adjustments over time.

CHECK IT OUT!!

Park + Elm Investing Principle #5: Consider the Drivers of Returns

By | August 8th, 2018|Markets|

dimensions

Principle #5 is HERE!

Consider the Drivers of Returns!

Download the rest of our Ebook Here to get all 10 principles!!

Throughout history, many of the greatest advancements in finance have come from Academia. Our investment philosophy has been shaped by decades of research by leading academics. We structure portfolios on the principles that markets are efficient; that returns are determined by asset allocation decisions, and that portfolios can be structured around dimensions of expected returns identified through academic research. It is through our strategic partnership with Dimensional Fund Advisors, a leading global investment firm that has been translating academic research into practical investment solutions since 1981, that we can pursue dimensions of higher expected returns through advanced portfolio design, management, and trading.
Much of what we have learned about expected returns in the equity and fixed income markets can be summarized in these dimensions.

  • Stocks have higher expected returns than bonds – it has been well documented over time that stocks outperform bonds, and that risk = reward
  • Among stocks, expected return differences are largely driven by company size – small companies have higher expected returns than large companies.

 

chart1

  • Relative price – low relative price “value” companies have higher expected returns than high relative price “growth companies.

chart2

  • Profitability – companies with high profitability have higher expected returns than companies with low profitability.

chart3

Since 1981, Dimensional has incorporated rigorous academic research on the capital markets into the design, management, and trading of clients’ portfolios. Some of the major milestones in academic research shown in the chart below have had a profound effect on our investment philosophy.

picture7

 

Our enduring philosophy and deep working relationships with Dimensional and the academic community underpin our approach to investing. Over a long period of time, Academics have been able to identify dimensions of higher expected returns, and with Dimensional, we can structure portfolios around these dimensions in a very cost-effective manner.

Today’s Video – Applying science to investing

By | July 30th, 2018|Uncategorized|

Have you ever heard the term “Financial Science”? A strong belief in markets can free people to think and act differently about investing. By evolving with advances in financial science, our partner, Dimensional Fund Advisors, has delivered long-term results for investors.

Check out today’s video on applying Science to your investing strategy!

 

Contact us today if you’d like to learn more about financial science and our partnership with DFA!

855.PARKELM or kward@park-elm.com.

 

Where’s the Value?

By | July 23rd, 2018|DFA, Dimensional Fund Advisors|

Fresh hot coffee on newspaper with Glasses and pen

From 1928–2017 the value premium in the US had a positive annualized return of approximately 3.5%. In seven of the last 10 calendar years, however, the value premium in the US has been negative.

This has prompted some investors to wonder if such an extended period of underperformance may be cause for concern. But are periods of underperformance in the value premium that unusual? We can look to history to help make sense of this question.

short-term results

Exhibit 1 shows yearly observations of the US value premium going back to 1928. We can see the annual arithmetic average for the premium is close to 5%, but in any given year the premium has varied widely, sometimes experiencing extreme positive or negative performance. In fact, there are only a handful of years that were within a 2% range of the annual average—most other years were farther above or below the mean. In the last 10 years alone there have been premium observations that were negative, positive, and in line with the historical average. This data helps illustrate that there is a significant amount of variability around how long it may take a positive value premium to materialize.

Exhibit 1: Yearly Observations of Premiums, Value minus Growth: US Markets, 1928–2017

exhibit 1

In US dollars. The one-year relative price premium is computed as the one-year compound return on the Fama/French US Value Research Index minus the one-year compound return on the Fama/French US Growth Research Index. Fama/French indices provided by Ken French.Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.

long-term results

But what about longer-term underperformance? While the current stretch of extended underperformance for the value premium may be disappointing, it is not unprecedented. Exhibit 2 documents 10-year annualized performance periods for the value premium, sorted from lowest to highest by end date (calendar year).

Exhibit 2: Historical Observations of 10-Year Premiums, Value minus Growth:
US Markets 10-Year Periods ending 1937–2017

exhibit 2

 

This chart shows us that the best 10-year period for the value premium was from 1941–1950 (at top), while the worst was from 1930–1939 (at bottom). In most cases, we can see that the value premium was positive over a given 10-year period. As the arrow indicates, however, the value premium for the most recent 10‑year period (ending in 2017) was negative. To put this in context, the most recent 10 years is one of 13 periods since 1937 that had a negative annualized value premium. Of these, the most recent period of underperformance has been fairly middle-of-the-road in magnitude.

 

In US dollars. The 10-year rolling relative price premium is computed as the 10-year annualized compound return on the Fama/French US Value Research Index minus the 10-year annualized compound return on the Fama/French US Growth Research Index. Fama/French indices provided by Ken French. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.

 

While there is uncertainty around how long periods of underperformance may last, historically the frequency of a positive value premium has increased over longer time horizons. Exhibit 3 shows the percentage of time that the value premium was positive over different time periods going back to 1926. When the length of time measured increased, the chance of a positive value premium increased. For example, when the time period measured goes from five years to 10 years, the frequency of positive average premiums increased from 75% to 84%.

Exhibit 3: Historical Performance of Premiums over Rolling Periods, July 1926–December 2017

exhibit 3In US dollars. Based on rolling annualized returns using monthly data. Rolling multiyear periods overlap and are not independent. Fama/French indices provided by Ken French. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.

conclusion

What does all of this mean for investors? While a positive value premium is never guaranteed, the premium has historically had a greater chance of being positive the longer the time horizon observed. Even with long-term positive results though, periods of extended underperformance can happen from time to time. Because the value premium has not historically materialized in a steady or predictable fashion, a consistent investment approach that maintains emphasis on value stocks in all market environments may allow investors to more reliably capture the premium over the long run. Additionally, keeping implementation costs low and integrating multiple dimensions of expected stock returns (such as size and profitability) can improve the consistency of expected outperformance.

Park + Elm Investing Principle #4: Let Markets Work for You!

By | July 16th, 2018|Uncategorized|

 

business person and worldwide business, mixed media abstract

Principle #4 is HERE! Let Markets Work for You!

 Download the rest of our Ebook Here to get all 10 principles!!

The financial markets have rewarded long-term investors. People expect a positive return on the capital they supply, and historically, the equity and bond markets throughout the world have provided growth of wealth that has more than offset inflation. Companies compete with each other for investment capital, and millions of investors compete with each other to find the most attractive returns. This competition quickly drives prices to fair value, ensuring that no investor can expect greater returns without bearing greater risk. The chart below shows how the growth of $1 is affected by the level of risk an investor is willing to take. It also shows that any level of risk taken has historically outpaced inflation.

picture2

Many investors and investment managers strive to beat the market by taking advantage of pricing “mistakes” and attempting to predict the future. Too often, this proves costly and futile, due to holding the wrong securities at the wrong time, meanwhile, markets are succeeding. Instead of allowing the media to sway you into making impulsive and reactive decisions about your investments, or gambling on hunches, why not let the markets work for you?

When you try to outwit the market, you compete with the collective knowledge of all investors. By harnessing the market’s power, you put their knowledge to work in your portfolio. Markets integrate the combined knowledge of all participants, and enables competition among those who voluntarily agree to transact. We believe that all of this powerful information drives security prices to fair value, and that differences in performance are largely attributed to asset allocation decisions, and differences in average risk.

We know that investing in the market means taking risks. We also know that not investing means taking risks, because your money today will buy less in the future. We want investors to incorporate the vast, complex network of information, expectations, and human behavior that we believe markets reflect, into their portfolio design. This powerful view of market equilibrium has profound investment implications.

Quarterly Market Review: Q2-2018

By | July 6th, 2018|Uncategorized|

q2

Click on the link below for a detailed analysis of quarterly performance of the global equity and fixed income markets.

CLICK HERE TO READ THE 2ND QUARTER 2018- QUARTERLY MARKET REVIEW

Park + Elm Investing Principle #3: Resist Chasing Past Performance!

By | June 25th, 2018|Uncategorized|

Outgess

 

 

Principle #3 is HERE! If you missed #1 and #2…YOU’RE IN LUCK!

Download the rest of our Ebook Here to get all 10 principles!!

 

(Research above shows only 20% of all active mutual funds beat their corresponding index over a 10 year time frame.  And of those, only 37% continued over the next 5 years. This is only 205 of 2758 mutual funds that beat their index over a 15 year time frame.  It’s nearly impossible to pick the right ones)

Some investors select mutual funds based on past returns. However, funds that have outperformed in the past do not always persist as winners. The most important guideline to remember is: If a fund does not fit into your overall investment strategy, it’s a dangerous choice no matter how it’s performed in the recent past.

Investors have a tendency to weight recent events more heavily than history. It’s nearly impossible for the typical investor to choose a fund that had negative returns in the previous year. Yet that fund, historically, may have proven to be an outperformer in its category. And the largest hurdle is that most investors don’t even think they are chasing performance. Research shows, however, that nearly every mutual fund outperforms individual investors in the fund.

Instead of chasing performance, investors should follow on these 4 rules:

1. Develop an investment strategy and COMMIT to it

Every investor should have a disciplined investing strategy and stick to it, through bull and bear markets. A relationship with a professional financial advisor is the first step to developing this strategy, and it insures that you’ll take the right actions at the right time.

2. Rebalance your portfolio

Rebalancing your portfolio will keep you from buying high and selling low.  Investors who chase returns, are adding to a piece of the investment pie that’s already too big. If you rebalance your portfolio once a year, you’ll be insured that you’re adding to the smaller piece of the pie, and inherently buying low and selling high.

3.  Remain Invested

Don’t be tempted to pull your investments from the market when it falls. These are the most opportune times to increase long-term returns through rebalancing.

4. Focus on your personal goals

Your personal goals should drive your investing strategy. Keep that in the front of your mind and it will be much easier to remain disciplined.

Remember, past performance alone provides little insight into a fund’s ability to outperform in the future. A more disciplined approach has proven to be the best way to increase-long term performance.

INTERESTED IN THE REST OF THE INVESTING PRINCIPLES? DOWNLOAD OUR EBOOK HERE!

What You Pay, What You Get: Connecting Price and Expected Returns

By | June 19th, 2018|DFA, Dimensional Fund Advisors, Markets|

STOCK PRICES ARE CHANGING EVERY DAY – AND AS PRICES CHANGE, SO DO EXPECTED RETURNS.

It has been more than 50 years since the idea of stock prices containing all relevant information was put forth. Information might come in the form of data from a company’s financial statements, news about a new product, a change in the regulatory environment, or simply a shift of investors’ tastes and preferences toward owning different investments.

 

Information is incorporated into security prices through the buying and selling process. While fair prices may
not depend on a certain level of trading, over $400 billion of stocks traded on average each day in the world equity
markets suggests that a great deal of information is incorporated into stock prices.

As investors, we should consider whether we want to use the price we observe or look for a better price. A recent
study from Dimensional Fund Advisors shows that over the 15-year period ending December 2017, only 14%
of investment managers that attempted to outguess the market survived and beat benchmarks.

This study is just one of many conducted over the past 50 years that have documented similar results. With investing, many things are out of our control, but we can make decisions that improve our odds of having a positive investment experience. Looking at these results, attempting to identify a better price than the one we observe in the market may not be accomplishing this objective.

What-You-Pay_-What-You-Get_-CoPrice-and-Expected-Returns-625-1

WHAT CAN WE LEARN FROM THE PRICE

Beyond the challenge of trying to outguess the market, why is price so important? We should first understand
the connection between the price you pay and the return you expect to receive.

Let’s consider an example: Imagine that you want to buy a house and you know for certain the house will be worth $2 million 10 years from now. If you pay $1 million for the house today or you pay $500,000, in which case would you earn a higher return? Obviously paying less, $500,000, would earn you a higher return.

Of course, investing offers few, if any, guarantees, and we can’t know for certain what something will be worth in the future. Given this, investors should think in terms of expected returns and what decisions will lead to an investment with higher expected returns. Holding other factors constant, the lower the price you pay, the higher the expected return, which is why it’s so important to consider a stock’s observed market price. The price paid has a direct connection to the return we expect to receive.

AS PRICES CHANGE, SO DO EXPECTED RETURNS

We also know that, in a changing world, new information becomes available on a regular basis and that new information can affect the price of stocks. Let’s imagine a pharmaceutical company announces a new drug that investors believe will generate substantial revenues for the company. If this news was previously unknown, once it becomes available, it will likely influence the price of the stock. The price will adjust based on new information, and as the price changes, so will the expected return. Changes in stock prices are taking place every day, and as prices change, so do expected returns.

What-You-Pay_-What-You-Get_-CoPrice-and-Expected-Returns-625-2

 

 

 

 

 

INDEX MANAGEMENT AND MARKET PRICES

Each year on the last Friday in June, the Russell indices go through a process called reconstitution. In this process, certain stocks are added and deleted from the index. The goal of reconstitution is to periodically rebalance the index to account for historical changes in stocks during the prior period. Index providers, such as S&P, Russell, or CRSP, have different processes for adding and deleting stocks, and while each will have some variation, all will establish pre-set points in time to make their adjustments.

To decide which stocks will be added or deleted, the index provider may look at the market price of a stock to determine what is a small cap vs. large cap stock or what is a value vs. growth stock. It is only during these pre-set dates of reconstitution that index providers might consider market prices. On all other days between the reconstitution dates, changes in the prices of stocks are not being incorporated by the index. And since there is a direct relation between the price of a stock and expected return of a stock, indices are considering differences in expected returns only at infrequent intervals during the year. It not only seems logical that we may want to consider changes in market prices more frequently, the failure to do so can have a direct impact on the expected return of the index.

Again, this is why we believe using market prices is so important. The price we see gives us information about what we expect to receive. If you want to have an investment approach that targets higher expected returns every day, you need to ensure the approach incorporates changes in price every day. Otherwise, investors may not be getting what they think they are paying for.

Investing for Retirement Principle #2: Don’t Try to Outguess the Market!

By | June 12th, 2018|Uncategorized|

business person and worldwide business, mixed media abstract

Principle #2 is HERE!

Download our Ebook Here to get all 10 principles!!


The market’s pricing power works against mutual fund managers who try to outsmart other participants through stock picking or market timing. As evidence, only 17% of US equity mutual funds have survived and outperformed their benchmarks over the past 15 years. Even so, traditional investment approaches strive to beat the market by taking advantage of pricing “mistakes” and attempting to predict the future. Too often, these approaches prove costly and futile. Predictions go awry and managers may hold the wrong securities at the wrong time, missing the strong returns that markets can provide. Meanwhile, capital-based economies thrive—not because markets fail but because they succeed.

Outgess

What if the typical investor decided not to bet their life savings on tips and hunches? We know from our first piece in this series, that trying to guess the most underpriced stocks is betting against 98.6 Million other investors each day; and that equity prices are fair and efficient. We also know that markets throughout the world have a history of rewarding investors for supplied capital. Instead of guessing, we should lean on academics and science to guide the way to designing a portfolio that delivers what the markets offer. A financial plan based on the science of investing frees you to focus on what matters – diversification, lowering costs, and discipline.

Many of the greatest advancements in Finance have come from academia and research. Academic research has identified the sources of investment returns historically, and applying academic insights to practical strategies can help investors benefit from what the capital markets have to offer.

There is a different way to invest. We should think about why we invest, what we know from research, and apply proven scientific methods of expected returns to our portfolio design. We focus on gaining insights about markets and returns from academic research, reducing expenses, rebalancing, and taking on an acceptable amount of risk based on scientific dimensions of expected returns. Let markets work for you by taking advantage of sensible, well-diversified, low-cost portfolios backed by decades of research and practical experience.

INTERESTED IN THE REST OF THE INVESTING PRINCIPLES? DOWNLOAD OUR EBOOK HERE!

Park + Elm Investment Advisers, LLC is a Registered Investment Advisor offering Investment Advisory Services. The custodian for our client’s funds is The Charles Schwab Corporation. Park + Elm Investment Advisers, LLC is not affiliated with The Charles Schwab Corporation. We are registered with the Indiana Secretary of State Securities Division and additional information about us can be found on our ADV at http://www.adviserinfo.sec.gov/. The information in the brochure has not been approved, verified, or otherwise endorsed by the SEC or by any state securities authority. The brochure is for informational purposes only. It is not to be construed as tax, legal, or investment advice.

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