Client Priority Financial Advisors LLC

Why do so many 401(k) plans choose terrible investments when they have the ability to choose good ones? Research suggests that lower-cost funds mostly outperform higher-cost funds over the long run. I helped a client reallocate their portfolio and was disappointed to see that their 401(k) plan only offered one high-cost fund in the mid-cap stock category while they separately offer a low-cost index fund in the small-cap category. The mid-cap stock fund that they offer has underperformed a low-cost, mid-cap index fund by over 4-1/2 percentage points per year over the last three years and by over 3 percentage points per year over the last five years. If they offer a small-cap index fund then they must be able to offer a mid-cap index fund but they chose not to. It would be understandable if they chose to offer a fund that has been outperforming its benchmark but not one doing poorly. Perhaps they selected it right after it had a few good years. If this is the case, they may not know that many funds which do well one year do not do well the next. This is not an isolated case as I so frequently see retirement plans that only offer underperforming, high-cost funds. When you buy an index fund, you know you will match the market. When you buy an actively-managed fund with higher internal fees, you never really know what you will get because it is up to the decisions of the manager. In the case of the mid-cap fund in this 401(k) plan, the manager made bad decisions and the fund investors have lost quite a bit of money over the last several years because of it. 401(k) plans have many legal protections for retirement savers. But the legal protections don’t prevent the selection of poor funds that too often cost the investor money.
(Past performance may not be an indicator of what to expect in the future and your individual circumstances should be considered in any investment decision.)
Larry Pike, CFA
Client Priority Financial Advisors LLC
www.clientpriority.com
Blog: clientpriority.blogspot.com
Hourly, Fee-Only Financial Planning and Advice.
No Commissions. No automatic, annual fees.

Is it any wonder that the majority of actively-managed investment portfolios do worse than their benchmarks? For the first half of this year, all I heard on the business channels was how the market is overpriced and it is definitely going to fall, and the portfolios of these analysts were heavily in cash instead of being fully invested. These analysts claimed they would get back into the market when it was lower. If they could get back in when it is down 15%, they could save their clients from losing $150,000 on $1 million held in cash. The problem is, they got it wrong. Instead of being down and giving them a chance to buy in a lower price, the U.S. stock market is up 19% year to date. Instead of saving their clients $150,000, they cost their clients $190,000. Did they do their clients a favor by using that crystal ball they claim they have? Apparently not. The markets are unpredictable and very few successfully time the market. Sitting tight with an appropriate long-term portfolio would have made you a lot more money than following these overconfident portfolio managers. But their job is to convince you that they do have a crystal ball so that you might pay them $10,000 a year to manage your $1 million portfolio. Don’t be fooled into believing that high fees give you more. Investment managers that know how the markets work know that you can’t time the market and creating a portfolio and sitting tight with it is your best course of action. With 93% of actively-managed, large-cap mutual funds doing worse than their S&P 500 benchmark over the last 15 years, it should be clear that portfolio managers do not have the crystal balls they claim they have. (Past performance may not be an indicator of what to expect in the future and your individual circumstances should be considered in any investment choice. Investments in stocks can rise or fall in value, especially in the short run, and should only be the part of your portfolio intended for your long-term needs and not for money you may need in the short term.)
Larry Pike, CFA
Client Priority Financial Advisors LLC
www.clientpriority.com
Blog: clientpriority.blogspot.com
Research: SPIVA Scorecard

Did “Recency Bias” kill your portfolio in 2022? In investing, many people load up on sectors that have recently done well believing they will continue to do well. These investors fail to follow the common advice to regularly rebalance your portfolio. Growth stocks have soared to high levels in recent years making big growth companies the daily topic of conversation on the financial channels. Many investors weighed their portfolios heavily towards growth stocks hoping that infinitely higher stock prices are possible even as corporate earnings can only grow by so much. This past year taught a harsh lesson to those who ignore valuations and keep chasing the highest flyers. In 2022, an index of growth stocks fell by 33% while an index of value stocks only fell by 2%. Those who fell into the “recency bias” trap may have lost a lot more than if they regularly rebalanced their portfolio. Many people have avoided international stocks for the same reason but equities from other parts of the world lost 2% less than U.S. stocks this year (and 17% less than U.S. growth stocks.) It is easy to fall into this trap when analysts on TV tell you to keep buying the most expensive stocks. When the big growth name goes from $100 to $120, they now tell you they have moved their target to $140. When it hits $140, now they tell you it will go to $160. There is rarely sound logic based on fundamental factors for why the price target is raised just because the stock price is higher when the company didn’t change much. Maybe you loved Tesla stock and didn’t diversify as it rose. Tesla fell 65% in 2022. Maybe you loved Amazon after everyone stopped going to stores in the Covid era. Amazon fell 50% in 2022. No one knows which stock sector will outperform in the coming year. Rebalancing your portfolio at least annually will allow you to lock in some gains from the sector that did best in the past year and ensure that you have some exposure to the sector that will do best in the coming year.
(Past performance may not be an indicator of what to expect in the future and your individual circumstances should be considered in any investment decision.)
Larry Pike, CFA
Client Priority Financial Advisors LLC
www.clientpriority.com
Blog: clientpriority.blogspot.com
Hourly, Fee-Only Financial Planning and Advice.
No Commissions. No automatic, annual fees.