By pursuing a globally diversified approach to investing, one doesn’t have to attempt to pick winners to achieve a rewarding investment experience.

Every day we enjoy the benefits of an interconnected world. We might start our day with a cup of coffee that originated in South America, check our email on a smartphone designed in California and manufactured in Taiwan, then shower and change into clothes woven from Egyptian fabrics before driving a German-made car or riding in a French-built train to work.

As consumers, we rarely think twice about the benefits of access to the cornucopia of goods the global market has to offer. Yet, as investors, we will often concentrate our portfolios in favor of our home market at the expense of global diversification. For example, while US stock markets represent just over 50% of the value of global equity markets, many US investors tend to allocate around 70% of their equity assets to domestic stocks.^[1] This phenomenon, which can be observed across countries around the world, is known in the investment community as home-country bias.

Given that certain frictions may be associated with investing abroad, a home-country bias may make sense for an investor in certain cases. For example, for tax-deferred investors in the US, foreign dividend tax withholdings may present a disadvantageous tax drag on international investments. In general, however, neglecting the benefits that global diversification has to offer may increase risks and decrease the investment opportunity set.

As Exhibit 1 illustrates, 13 different developed countries (out of 21) had the best-performing equity market in a given calendar year for the 20 years ended in December 2016, and no country had the best-performing market for more than two consecutive years.

Exhibit 1: Equity Returns of Developed Markets

Annual Return (%)

In US dollars.

Source: MSCI developed markets country indices (net dividends). MSCI data © MSCI 2017, all rights reserved. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

This trend was also observable in emerging markets. As Exhibit 2 illustrates, 13 different emerging market countries (out of 20) had the best-performing market in a given year, and no country had the best-performing market in consecutive years.

Exhibit 2: Equity Returns of Emerging Markets

Annual Return (%)

In US dollars.

Source: MSCI emerging markets country indices (gross dividends). MSCI data © MSCI 2017, all rights reserved. Indices are not available for direct investment. Index performance does not reflect expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.

This data shows that it is difficult to know which markets will outperform from year to year. By holding a globally diversified portfolio, investors are instead well positioned to capture returns wherever they occur.

Due to the recent positive performance of international stocks, investors today may be less worried about a global approach to investing than they may have been in the past. Over the last several years, however, strong performance in the US equity markets has led some market participants to question the value of holding a globally diversified portfolio. In different market environments, and as sentiments about global diversification and its value ebb and flow, it is helpful to remember that history has not shown any one market around the world to be a consistent outperformer.

Clearly, attempting to pick only winning markets in any given period is a challenging proposition. By pursuing a globally diversified approach to investing, one doesn’t have to attempt to pick winners to achieve a rewarding investment experience. By expanding the investment opportunity set beyond their domestic stock market, investors can help increase the reliability of outcomes. Thus, investors can be confident that a globally diversified portfolio will hold the best (and worst) performing countries each year.

Source: Dimensional Fund Advisors LP.

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 not a guarantee of future results. Diversification does not eliminate the risk of market loss.

There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Our First Ebook – Pursuing a Better Investment Experience – is finally here! We are inviting you, our clients and friends, to be the first to view it! Download it for FREE. It is your guide to a simple, free way of thinking about investing in capital markets!

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PURSUING A BETTER INVESTMENT EXPERIENCE

ten practical steps to investing

Whether you’ve been investing for decades or are just getting started, at some point on your investment journey you’ll likely ask yourself some of the questions below. Trying to answer these questions may be intimidating, but know that you’re not alone. Your financial advisor is here to help.  While this is not intended to be an exhaustive list it will hopefully shed light on a few key principles that may help improve investors’ odds of investment success in the long run.

1.  What sort of competition do I face as an investor?

The market is an effective, information-processing machine. Millions of market participants buy and sell securities every day and the real-time information they bring helps set prices.

This means competition is stiff and trying to outguess market prices is difficult for anyone, even professional money managers (see question 2 for more on this). This is good news for investors though. Rather than basing an investment strategy on trying to find securities that are priced incorrectly, investors can instead rely on the information in market prices to help build their portfolios (see question 5 for more on this).

2.  What are my chances of picking an investment fund that survives and outperforms?

Flip a coin and your odds of getting heads or tails are 50/50. Historically, the odds of selecting an investment fund that was still around 15 years later are about the same. Regarding outperformance, the odds are worse. The market’s pricing power works against fund managers who try to outperform through stock picking or market timing. One needn’t look further than real-world results to see this. Based on research, only 17% of US equity mutual funds and 18% of fixed income funds have survived and outperformed their benchmarks over the past 15 years.

3.  If I choose a fund because of strong past performance, does that mean it will do well in the future?
Some investors select mutual funds based on past returns. However, research shows that most funds in the top quartile (25%) of previous five-year returns did not maintain a top-quartile ranking in the following year. In other words, past performance offers little insight into a fund’s future returns.

4.  Do I have to outsmart the market to be a successful investor?

Financial markets have rewarded long-term investors. People expect a positive return on the capital they invest, and historically, the equity and bond markets have provided growth of wealth that has more than offset inflation. Instead of fighting markets, let them work for you.

5.  Is there a better way to build a portfolio?
Academic research has identified equity and fixed income dimensions, which point to differences in expected returns among securities. Instead of attempting to outguess market prices, investors can instead pursue higher expected returns by structuring their portfolio around dimensions of expected returns like company size, price, profitability and risk.

6.  Is international investing for me?
Diversification helps reduce risks that have no expected return, but diversifying only within your home market may not be enough. Instead, global diversification can broaden your investment opportunity set. By holding a globally diversified portfolio, investors are well positioned to seek returns wherever they occur.

7.  Will making frequent changes to my portfolio help me achieve investment success?
It’s tough, if not impossible, to know which market segments will outperform from period to period.

Accordingly, it’s better to avoid market timing calls and other unnecessary changes that can be costly. Allowing emotions or opinions about short-term market conditions to impact long-term investment decisions can lead to disappointing results.

8.  Should I make changes to my portfolio based on what I’m hearing in the news?

Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad. If headlines are unsettling, consider the source and try to maintain a long-term perspective.

9.  So, what should I be doing?
Work closely with a financial advisor who can offer expertise and guidance to help you focus on actions that add value. Focusing on what you can control can lead to a better investment experience.

• Create an investment plan to fit your needs and risk tolerance.
• Structure a portfolio along the dimensions of expected returns.
• Diversify globally.
• Manage expenses, turnover, and taxes.
• Stay disciplined through market dips and swings.

Contact us Park + Elm today to get started on your long-term plan at 855.PARKELM or kward@park-elm.com

Past performance is no guarantee of future results.

Fall is open enrollment in the American workplace, and employers will begin to pass out packets, forms, memos, hold meetings and launch apps for the benefits enrollment season. Navigating your benefits package can be overwhelming, and has a direct effect on your long-term savings. Park + Elm wants to help. Below is your quick guide to navigating your benefits booklet from start to finish:

Health Insurance – pay close attention to the following variables to the health insurance options:

• Coverage – compare what’s covered to your anticipated needs, i.e. maternity?
• Co-payments and Prescriptions – if you go to the doctor often, or have a recurring prescription to fill, evaluate these fees closely.
• Deductibles – the amount you have to pay out of your pocket before coverage begins. A high deductible plan typically means lower premiums, but participants pay more out of pocket if an unexpected illness occurs.
• Premiums – the monthly fee for coverage. A higher premium usually means lower deductibles, co-pays and more coverage. But that’s not always the best financial choice.

Tax advantaged accounts – beyond health coverage, these accounts allow you to save pre-tax dollars for ancillary health and other expenses.

• FSA (Flexible Savings Account) – similar in tax savings, a FSA allows you to use the funds for medical and child care services. There are limits to contributions and to carry over funds.
• HSA (Health Savings Account) – contribute to this account to help cover medical expenses you are paying out of pocket. Choosing a high deductible plan warrants opening an HSA due to the anticipated higher out of pocket costs. These funds roll over from year-to-year.

Vision and Dental – Simply put…

• Dental care is expensive. Insurance doesn’t cover a lot, but what it does cover usually outweighs the cost of the dental care without it.
• Vision care is inexpensive, but sometimes unnecessary. If you have healthy eyes you need a checkup only every 2 years, so vision premiums may not be worth it.

Life and Disability – Important Voluntary Benefits!!!

• Short-term Disability – are you covered for a short-term illness or injury?
• Long-term Disability – if you are unable to work for an extended period of time, how will you pay your bills?
• Life Insurance – How much should you leave your family if something happens to you?

401(k) – the likely #1 source of retirement savings, this benefit is the major player in your ability to retire.

• Make a goal to increase your contributions every year
• Take full advantage of your employer’s match
• Make catch-up contributions if you are eligible
• Evaluate the need to defer some of your funds to a Roth 401(k) to provide future tax diversification.
• Evaluate your risk tolerance and allocate appropriately
• Choose low-cost funds

The best way to make the most of open enrollment is to simply set aside adequate time to review all your options carefully and ask any questions you may have. Consult with your financial advisor, as these benefits choices will affect your long-term savings. To make the most of open enrollment, read the fine print, consider your family’s needs and make an educated, rather than a rash, decision. We are here to help you navigate these important choices. Please let us know if you would like a more detailed COMPLIMENTARY REVIEW of your benefits booklet!

When you retire or change jobs, you have new options for your old 401(k) that can provide continued potential tax-deferred growth opportunities. With a transition of this magnitude, it’s helpful to understand the steps in the process and have a checklist for guidance.

YOUR TRANSITION CHECKLIST

• Contact your former HR department and understand your options
• Consider the pros and cons of those options (See Below)
• Consult a Financial Advisor and develop a retirement income strategy

Now let’s discuss your options. There are 3 main options you will be given the opportunity to evaluate:

• can maintain the tax-deferred status, earn tax-free growth and avoid paying current taxes or penalties
• will be limited to the investment choices in the plan
• will be restricted to the withdrawal rules of the plan

• maintain the tax-deferred status, earn tax-free growth AND avoid paying current taxes or penalties
• be able to consolidate your retirement savings
• add additional investment options
• enjoy more flexible withdrawal options
• potentially lower fees than traditional 401(k) plans

• there are immediate & significant tax consequences
• there are most likely withdrawal penalties
• you will have immediate access to the funds
• you will have 60 days to complete a rollover

1. Open a Rollover IRA with a trusted Firm
2. Complete your Distribution Paperwork to do a DIRECT rollover to your new IRA
3. Consult a Financial Advisor to develop a strategic retirement plan based on your personal financial situation
4. Implement your new strategy and focus on disciplined investing

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 3RD QUARTER 2017 – QUARTERLY MARKET REVIEW

“I have found that the importance of having an investment philosophy—one that is robust and that you can stick with— cannot be overstated.”

—David Booth

The US stock market has delivered an average annual return of around 10% since 1926.^[1] But short-term results may vary, and in any given period stock returns can be positive, negative, or flat. When setting expectations, it’s helpful to see the range of outcomes experienced by investors historically. For example, how often have the stock market’s annual returns actually aligned with its long-term average?

Exhibit 1 shows calendar year returns for the S&P 500 Index since 1926. The shaded band marks the historical average of 10%, plus or minus 2 percentage points. The S&P 500 had a return within this range in only six of the past 91 calendar years. In most years the index’s return was outside of the range, often above or below by a wide margin, with no obvious pattern. For investors, this data highlights the importance of looking beyond average returns and being aware of the range of potential outcomes.

S&P 500 Index Annual Returns

1926–2016

[1]. As measured by the S&P 500 Index from 1926–2016.

In US dollars. The S&P data are provided by Standard & Poor’s Index Services Group. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Index returns do not reflect the cost associated with an actual investment.

TUNING IN TO DIFFERENT FREQUENCIES

Despite the year-to-year uncertainty, investors can potentially increase their chances of having a positive outcome by maintaining a long-term focus. Exhibit 2 documents the historical frequency of positive returns over rolling periods of one, five, 10, and 15 years in the US market. The data shows that, while positive performance is never assured, investors’ odds improve over longer time horizons.

Frequency of Positive Returns in the S&P 500 Index

Overlapping Periods: 1926–2016

From January 1926–December 2016 there are 913 overlapping 15-year periods, 973 overlapping 10-year periods, 1,033 overlapping 5-year periods, and 1,081 overlapping 1-year periods. The first period starts in January 1926, the second period starts in February 1926, the third in March 1926, and so on. In US dollars. The S&P data are provided by Standard & Poor’s Index Services Group. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not an indication of future results.

Conclusion

While some investors might find it easy to stay the course in years with above average returns, periods of disappointing results may test an investor’s faith in equity markets. Being aware of the range of potential outcomes can help investors remain disciplined, which in the long term can increase the odds of a successful investment experience. What can help investors endure the ups and downs? While there is no silver bullet, having an understanding of how markets work and trusting market prices are good starting points. An asset allocation that aligns with personal risk tolerances and investment goals is also valuable. Financial advisors can play a critical role in helping investors sort through these and other issues as well as keeping them focused on their long‑term goals.

When you’re laying the foundation for your retirement, the first big step is choosing your deferral rate. When you say it that way, it seems easy. What if I said, “how much of your paycheck will you sacrifice now for your future self?”

Your 401(k) contribution rate will set the financial tone for your retirement plan. First let’s start with the factors that go into this determination:

• Age of the Contributor – younger participants traditionally have a lower salary to work with
• Income – 3% of 100,000 is significantly higher than 3% of 40,000
• Expenses – while it seems natural to calculate your contribution rate after everything else is paid, we advise our clients to adjust your expenses to allow for the optimal deferral rate. Pay Yourself First!!
• Company Match – does your company offer a matching contribution?
• Outside investments – are you investing for retirement elsewhere?

It’s clear that savers are at different points in their careers and lives. There is not a magic number. But everyone can take steps to get to the optimal amount of savings. There are many factors that can help you determine your deferral rate. This checklist is a good place to start:

1. You have to start somewhere. Make that first step. SIGN UP! Even if it’s a small deferral, get in the habit of doing something
2. Start with a calculation of how much you will need. Refer to #3 in this series “On my retirement day, how much money will I need”
3. If possible, maximize the company match. If your company offers a match, ideally you would be able to save enough to get the full match…the FREE MONEY!
4. Next, focus on paying off your high interest debt like credit cards.
5. Make a goal to increase your contribution every year until you reach 15% – traditionally known as the 401(k) deferral Sweet Spot.

Conclusion: Make a commitment to pay yourself first and take advantage of free money from your employer. Stay disciplined and work toward a goal of increasing your deferral every year. When selecting a deferral rate, aim higher rather than lower! You’ll thank yourself later! If this process seems overwhelming, a financial advisor can help you determine the best rate for your situation.

Many investors, including retirees, rely on their investment portfolio to fund their cash needs. This need can be approached in one of two ways. In this blog, we explore the yield vs. total return approaches to generating income in a portfolio, and address misconceptions about the benefits of emphasizing dividend and interest income at the expense of other portfolio issues.

Using Interest and/or Dividends from securities to fund cash flow needs

The traditional appeal to this method stems from the belief that stocks paying high dividends are less risky because they offer a regular stream of payments to investors. Before you determine this is the favorable route, keep in mind that the amount of dividend and interest income generated by a portfolio is largely determined by dividend policies of the firms and prevailing market interest rates. Both of these are variables outside an investor’s control. Dividend   payments are not created out of thin air. They flow from a company’s earnings or assets, which are reflected in the current stock price.

DID YOU KNOW when a company pays a dividend, its stock price is reduced by an amount approximately equal to the dividend itself? So even when accounting for the cash received, the portfolio value may remain unchanged. While you may not have to liquidate assets for cash flow, the economic impact may be essentially the same.

The key is not to allow your preference for yield to influence your asset allocation by focusing on securities with higher yields. Let’s look at the numbers:

• A dividend-focused portfolio would exclude 35%–40% of stocks globally, resulting in lower diversification and hence, higher risk
• Global portfolios holding only dividend-paying stocks exclude about 47% of the available small cap stock universe, which historically has offered higher average returns than large cap stocks
• Dividends are not certain or guaranteed. As demonstrated in the 2008−2009 financial crisis, companies have reduced dividends after large market declines.

Focusing on TOTAL RETURN to create cash flow

This type of portfolio involves selling assets in the portfolio to create cash flow. This method reflects the idea that, from an investment standpoint, it makes little difference whether returns are delivered as dividends or capital gains. Selling assets also allows greater control over the amount of cash flow generated, and eliminates reliance on dividend yields and interest rates, which are uncontrollable. It may create an opportunity to strategically rebalance by selling assets that are over-weighted relative to the target allocation.

If you follow iconic investor Warren Buffet, you may know that he also believes in the Total Return Strategy. His company, Berkshire Hathaway, has never paid a dividend. His belief is that investors can sell shares if cash is needed, with a timed sale that can capture optimal tax rates. His strategy is to keep the cash in the company, prevent dividends from being double taxed, and use that cash to fund future investments into the company.

CONCLUSION

Investors can have much greater control in generating cash flows by selling securities rather than relying on dividend and interest income. Firms’ payout policies evolve over time, as do market interest rates. Rather than letting portfolio yields determine spending rates, investors can develop a sustainable withdrawal strategy with a financial advisor. If you plan to rely on interest income for cash flow, consider your overall fixed income needs in your portfolio first. Contact us to set up a free portfolio evaluation, and take the first step to a long-term plan. Don’t let an income bias affect your diversification or expected returns.

 
2. Is there a chance I’ll need to withdraw before age 59 ½?

• Yes: Roth 401(k)
• No: Traditional 401(k)