INSIGHTS

The Eggheads Did It AgainOctober 17, 2013Richard Nixon called Adlai Stephenson an “egghead” during the 1952 presidential campaign. It was not meant as a compliment. Intellectuals, college professors and even the broader category of teachers just don’t get much respect in our society. I’m sure you have heard, and maybe even voiced, some disparaging remarks about these really smart people. “They live in their ivory towers, and could never make it in the dog-eat-dog world that the rest of us must survive in.” “They are pretentious, lack common sense, and are out of touch with the real world.” Finally, there is the ever popular witticism: “Those that can, do. Those that can’t, teach.”Regardless of your opinion of academics, we here at Dixon Hughes Goodman Wealth Advisors love them. Well, maybe not all of them, but the ones who have found ways to add value to our investment process hold a particularly special place in our hea...

All That glitters...July 16, 2013Everyone likes gold. It is so pretty and shiny. Rappers, (old) dentists, prospectors, historic James Bond villains, Scrooge McDuck (Huey, Dewey and Louie’s great uncle), King Tut’s mortician and the Rothschild family were/are all gold lovers. There are many more, too numerous to list. But most people don’t know an awful lot about this precious metal. For instance, a large majority of gold on the planet is located near the Earth’s core, having gravitated there during the earth’s formation. All “discovered” gold is the result of meteorites, which carried it and crashed into the Earth’s crust. Really.Gold is a frequent topic in the investment world, too. Just like other assets, its popularity is often inversely related to its potential future value. It is often more desired when it is trading at a high price than when it is priced at lower levels. Less than two years ago, gold hit its all-time high price (in ...

Rich and Richer, Dumb and DumberApril 16, 2013No, we're not talking about the inequities of our economic class structures, nor the 1994 comedy starring Jim Carrey and Jeff Daniels with bad hair cuts. Rather, the topic is about investors, and how on average, they repeatedly shoot themselves in the foot, market cycle after market cycle. In their attempt to ease their fear and embrace their greed, they historically do the wrong thing at the right time, or vise versa.Dalbar, the stock market research company, recently announced their Investor vs. Market research data (Dalbar.com). They found that over the last 20 years, the average return of all stock mutual fund investors was 4.25%, or only about half of the 8.21% annualized return enjoyed by the S&P 500 Index over that same time period. That means for every dollar an average investor invested, it grew to $2.30. Had they just invested in an S&P 500 Index fund and held tight, their $1.00 would have grown to $4.85. That's no...

A Sheep In Wolf's ClothingJanuary 10, 2013The inverse of the above idiom comes from the Bible. "Beware of false prophets, which come to you in sheep's clothing, but inwardly they are ravening wolves." In every day usage, this verse has become a warning about bad guys disguising themselves as good, or at least harmless, and tricking an unsuspecting victim.But that's not what we're talking about here. In fact, we are talking about just the opposite. More like a meek and harmless animal dressing like a big, aggressive creature to attempt to get your attention, or in this case, your money. In the investment world, there is a great example of this phenomenon, and it is being perpetrated by some of the biggest, most well known mutual funds in America.Large actively managed mutual funds attempt to portray a potential for beating their passive index/benchmark performance. The only reason an investor would choose an active manager, and pay the much higher expense ratio...

ObdurateSay what? For those who think we haven’t been erudite or scholarly enough in these quarterly reports, we hope your mind will now be changed. For non-English majors, the word “obdurate” means pig headed, inflexible, rigid, unyielding. Not the stuff that makes for a good marriage. You might be hard pressed to find an instance where being obdurate is good. However, in the investment world, you should really hope that your investment vehicles are all very obdurate. If they don’t have this quality, there is no way to maximize the diversification of asset classes in your portfolio.Most of our clients realize that we use very distinct asset class vehicles to build our portfolios. That is because each vehicle must represent a particular size and style and geographical location within the equity universe. Why? Because during most segments of a market cycle, each asset class performs somewhat differently in terms of risk, re...

Same Old, Same OldThere always seems to be some type of unpleasant revelation lurking on Wall Street. It hides in the darkness until its discovery causes surprise. The huge trading loss by J.P. Morgan Chase is in that category. It seemed to take everyone, including most JPMC officials, by surprise. The blatant overvaluation of Facebook's IPO was another type of surprise, especially if you were a retail investor who was "lucky" enough to get in on that "deal." But perhaps the most baffling Wall Street discoveries aren't really surprises, because they are based on circumstances that are fully known, and have been for a long time. Yet these unfortunate lessons seem to continuously repeat themselves, year after year, market cycle after market cycle.Already in 2012, three studies point to some basic investor mistakes that we have been discussing with prospective clients since our company was formed. The first has to do with choosing an advisor. In a recent paper ...

Breaking A Bad HabitSmoking. Talking with your mouth full. Forgetting to put the seat down. All bad habits. Some will kill you; others will simply make you unpopular. But bad habits in investing are the worst, because they are guaranteed to make you poorer!One of the most insidious of these habits is known as Recency Bias. It occurs whenever we use our more recent experiences as a basis for expecting a future event. It happens all the time with the stock market. People often forget about market cycles when they invest. Here is an example. The NASDAQ index had these annual returns from 1992 until 1999:In the first quarter of 2000, investors purchased more shares of NASDAQ Index mutual funds than any previous quarter in history. Can you guess what happened next? Here are the following three years' returns for the NASDAQ Index:Why in the world would investors gobble up shares of a volatile index that had gone up (almost) nine years in a row and finally spiked to a record setting 85.6%...

The Little Engine That Couldn'tThere’s a 100 year-old heartwarming story about a little engine that persevered by repeating “I think I can, I think I can,” until it was finally able to pull a line of railroad cars up a mountain. Small, but mighty. In the investment world, we have our own diminutive hero, known as the Small Cap asset class. You probably remember hearing that this asset class has superior long term performance compared to the behemoth blue chip engine that is the Large Cap benchmark – the S&P 500 Index.You might also think that the best overall performing stocks within the Small Cap asset class are the tiny, hard working growth companies – the ones that chug along and grow and grow until they finally reach a new, larger size asset class at the top of the Wall Street mountain. But that’s where these two comparisons appear to derail.We have been a long time proponent of Dimensional Fund Advisors (DFA) asset class m...

"Lieutenant Dan got me invested in some kind of fruit company. So then Igot a call from him, saying we don't have to worry about money no more.And I said, 'that's good. One less thing.' "-- Forrest GumpOne Less Thing. Or Was It?That’s the $64,000 question, because we don’t actually know what Forrest has done with his Apple stock since the bus picked up his son at the end of the movie. Investors who have watched Apple’s advance over the past couple of years probably think that it was a “no brainer” hold for Mr. Gump. After all, the stock has advanced 400% in the last 18 months. If Forrest still held it, it would be worth over 100 times what it was worth during the decade he bought it.The problem, of course, is that he would have to be crazy to have held it this long. Why? Because during his holding period, the stock price was lower in 2003 than it was in 1987. That’s 16 years of dead money - zero or negative return on investm...

Morningstar Ratings: A Study in Self FlagellationWe have nothing against Morningstar, the ubiquitous mutual fund research service. In fact, it’s an American success story. In 1982, its owner started the company with an $80,000 initial investment. The company is now worth $3.1 billion. It’s not that Morningstar doesn’t provide some helpful information; in fact its databases contain hundreds of data points for virtually every mutual fund. But upon further review of its mutual fund Star Ratings, Morningstar’s value may be suspect.The real problem occurs when mutual fund investors use Morningstar’s “Star Ratings” as a reason for purchasing or selling a fund. And unfortunately, these Star Ratings are perhaps the most used aspect of Morningstar’s information for the average investor. One would think that their Star Ratings would have some predictive value. In other words, buying a 5 Star Fund (highest rating) should get you better results than ...