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Second Quarter 2015 Newsletter

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Fat Lip

July 10, 2015

Mike Tyson, at 20 years old, became the youngest heavyweight champion in history. His father disappeared when he was born. He roamed the streets of Bedford–Stuyvesant and Brownsville, Brooklyn as an adolescent, and at 16 moved in with his manager after his mother died. “Iron Mike” was a vicious fighter who knocked out 26 of his first 28 professional opponents, most in the first round.

He is surprisingly short for a heavyweight boxer – 5’10”. “Kid Dynamite” has a high pitched voice and a lisp. He abused his first wife, and was imprisoned years later for raping another woman. Despite winning several bouts with $30+ million purses, and earning over $300 million in his career, he filed for bankruptcy and has owed the IRS millions of dollars. “The Baddest Man on the Planet,” who has been diagnosed as bipolar, bit off a piece of Evander Holyfield’s ear during a match, while sporting a facial tattoo that covers a meaningful part of his face. Since retiring, he has tended his kit of over 100 carrier pigeons, written a NY Times award winning book, starred in his own Broadway play, acted in many movies and was even the lead character in a cartoon series.

But the reason we are talking about Tyson has nothing to do with any of the above factoids. Even though he probably didn’t consider himself an investment genius, the following quote should place him among the ranks of Charles Dow, Warren Buffett and Peter Lynch.

“Everybody has a plan until they get punched in the mouth.” - Mike Tyson

Most investors do not plan to act in a foolish manner. In fact, most probably think they do have a plan when they purchase an investment. In the light of day, when the sun is shining and birds are singing and children laughing, it is fairly easy to feel you can withstand whatever the market can throw at you. But when the weather changes and the pleasant noises stop, things change. When the markets plunge and the news is horrible and the monthly brokerage statements are getting worse and worse, many investors seem to forget whatever plan they may have had.

When they get “hit in the mouth”, they suddenly start making decisions they never would have made in a more hospitable environment. That fear and pain is what forces most boxers’ and investors’ knees to buckle and fortitude to disappear. Rather than calmly focusing on the big picture and the past planning, the immediate battering they are receiving usually leads to bad decisions. 

We have plenty of evidence to verify this type of behavior. Dalbar, Inc. is a top market research firm. Each year it publishes its annual Quantitative Analysis of Investor Behavior, and this year (its 21st edition) we see evidence confirming the previous 20 annual reports. This report shows a 20 year average return of the S&P 500 Index and compares that number with the 20 year period return earned by (average) investors in their equity funds. Here are the results for the 20 year period ending 12/31/14:

S&P 500 Index = 11.06% Average Investor’s Equity Returns = 3.79%

That 7%+ difference is primarily due to the timing decisions of the average investor. Let’s look at another example.
Asset Class Returns vs The

The above chart is from Barry Ritholtz at Ritholtz.com. If you look carefully on its right side, you will see a short red bar. This bar represents the 20 year annual return of an average investor ending 12/31/13. All of the other bars to the left of this red bar represent returns of various other asset classes over the same time period. 

Why does this happen? It occurs because many investors often buy and sell at head-scratchingly wrong times, and undoubtedly that is often a result of a hard punch to the mouth. The timing of those punches often relates to a one-two combination of fleeing the market in times of fear, and then only buying back after the markets had changed directions and already had meaningful positive returns. 

DHGWA clients never have to worry about lacking a plan, nor having someone “in their corner” who will help them stick to that plan when times get rough. Our investment management style, backed by elite academic research, will never attempt to time the market. We don’t try to sell and buy our way around a market downturn. Rather, we insure from the beginning that our clients’ portfolios are in an acceptable risk position. 

Our clients realize that there will be market corrections, and rather than run away from them, we use them to add to the equity asset classes in their portfolios by rebalancing back to their original asset class guidelines. It also insures that our clients will be in the market at the very beginning of the next bull move, thereby getting the full positive returns enjoyed by virtually none of the market timing investors. They buy low, and sell high, automatically without ever having to time the market.

There may be a few bruises and loosened teeth in the worst of the bear markets. But by implementing and adhering to our planned approach, our clients are assured of surviving all punches and being a big winner in the end!

Rarefied Company

We are honored to have been chosen as one of CNBC’s TOP 100 Fee-Only Wealth Management Companies in the United States. There are 12,575 Registered Investment Advisory firms who manage at least $50 million, and 3,303 RIA’s who manage more than $1 billion. This award could not be applied nor lobbied for, but was a result of objective data supplied by the SEC, FINRA and various federal and state agencies. Rankings were derived by a proprietary formula comprised of these measures:

  • Assets under management
  • Percentage of advisory staff owning professional designations
  • Working with third-party professionals
  • Absence of compliance or fraud violations
  • Average account size
  • Growth of assets
  • Years in business
  • Number of advisory clients

Accolades are nice, but the real reward comes from helping our clients and their families experience a greater freedom and peace of mind in their financial life. No list can top that feeling, and that is what drives each member of our firm to be the best they can be.

Second Quarter 2015 Asset Class Returns


The second quarter showed a continuation of the trend started in the first. Those asset classes that dramatically outperformed in 2014 have showed a marked underperformance this year. Large Cap, Real Estate and Fixed Income all reversed their 2014 leadership and are among the poorer performing asset classes in the first half of this year. Conversely, Small Cap and International asset classes added to their first quarter leadership. Interestingly, in year to date performance, Short Term Income leads Intermediate and Long Term, even though the Federal Reserve continues to push back its timing on when to allow higher interest rates. 

The backdrop of this performance continues to be a sluggish global economy. The US still continues to be the leader in developed countries’ growth. Due to this fact, its equity markets have had higher valuations for several years when compared to the European or Japanese markets. It is the lower valuations of these international markets, along with a US dollar that has stopped its brisk ascent, which has allowed for the modestly better performance of the International equity markets year to date. 

US equities are experiencing increased volatility, especially compared to the tepid pace of the last few years. The cause of this volatility lies in the drama of the Fed’s interest rate decisions, the turbulence in energy prices, the instability of the Mideast, Eastern Europe and Russia, Greece’s debt issues, and attempts to stimulate growth by virtually all countries, regardless of their size. These factors, and others, promise that this volatility will not end soon. 

At this time in the economic cycle, more turbulent market fluctuations should be expected. We are in the 7th year of the current bull market, and the low valuations found in the early part of the cycle are gone. Real growth in earnings are needed for the US markets to continue to advance. Fortunately, many US economic indicators, including corporate earnings, employment, housing and others, are favorable. Inflation is modest and there is no reason the market cannot continue its long term upwards trend. But the pace may be a bit strained and the reaction to negative news will probably be more exaggerated than in earlier years of the cycle.

As always, we remind our clients that they are long term investors. The ebb and flow of global economic news and the fluctuation of the corresponding markets are all part of the process. We will keep your portfolios balanced according to your desired risk profile, and take advantage of both upwards and downwards fluctuations to increase or decrease various asset classes. We will insure that your portfolio holds consistent amounts of diversified asset classes which help to dampen the overall volatility of the marketplace. 

Please beware of the heat of both the next high pressure system and the flaring tempers of the politicos and citizens of Greece. In both cases, a cool head will keep you on track for what awaits us this coming Autumn.

Enjoy your summer!


Frederick F. Kramer IV, JD
Chief Investment Officer
Dixon Hughes Goodman Wealth Advisors LLC