I have trees on my mind. It’s no wonder. Just as I finished reading Richard Powers 2019 Pulitzer Prize-winning novel, The Overstory (a gorgeously written ode to the interconnection between forests and our entire natural world), I picked up Warren Buffet’s 2019 Letter to Shareholders. This year he talks about Berkshire’s holdings and investments strategy in terms of forests, groves, and individual trees. The novel and the letter are both enlightening on their own, and both draw an analogy to an important lesson for investors. As Buffett says, “Focus on the Forest – Forget the Trees.” I couldn’t agree more.
As I write this, the market is recovering from the most significant dip in 2019. The primary trigger of the recent volatility is the threat of tariff escalation between the US and China—the world’s most important bilateral relationship. Investors, expecting a recession based on some yield curve inversion, reacted by selling securities, thereby adding to an already volatile situation. There are other risks ahead in 2019, including shifting global alliances, cyber threats, European populism, US political conflicts, and more. These conditions lead to headlines, and market prices react.
The current news cycle and its effect on investors have me longing for pre-internet and pre-24-hour-news-cycle days. Back then, changes in stock prices weren’t available to individual investors minute-by-minute, blow-by-blow. When the previous day’s closing prices were reported in the newspapers the next day, the changes were history. The media focused less on dramatizing each hourly rise and fall of the Dow and the S&P 500. As a result, investing was a much calmer experience. When the leaves on the trees rustled in the wind, it was calmly observed as Wall Street and investors took a longer view.
As investors, we tend to view the trees in our investment portfolio as disconnected from our overall economic well-being. When the global market declines, it is fear-inducing to see that you’ve “lost money.” Even when your total portfolio grows, bond-heavy investment accounts can seem sluggish, so you may ask, “Shouldn’t we sell the losers?” It’s a valid question. With the headlines shouting about soaring US stocks, why invest in out-of-favor international stocks? If your well-diversified portfolio is underperforming the US indexes, why not have a single, towering oak tree rather than nurture the brush, saplings, and fallen leaves?
While the current market cycle may not inspire you with confidence, it is these diverse aspects of your portfolio that are essential to promoting a healthy forest. Here’s why these “trees” matter:
How your assets are invested determines your after-tax returns—which can be far different from your account statement percentages. After-tax return is equal to your gains minus the taxes due when you convert any investment into real income. As your advisors, we design your portfolio to help mitigate taxes and increase after-tax returns. Tax-efficient and appropriately allocated assets avoid current taxation. When the price of a security increases $10,000, no taxes are paid until you sell the security. But when a fund pays a $10,000 distribution, you must report that income in the current year and pay taxes at your highest marginal rate. The taxes come from another account, but your total wealth is affected. That is a sizable “tree” that won’t continue to grow in your forest. Many of you know that Warren Buffet’s Berkshire Hathaway stock has NEVER paid a dividend. Why? So investors can maximize their after-tax investment returns.
If this market cycle hasn’t delivered optimal returns, diversification is likely the culprit—but it will also likely be the icing on the cake in the future. Our strategy is designed to invest not only in today’s biggest winners (or tallest oaks) but also to look toward future growth as well. We invest a meaningful percentage of our equities in small- and mid-cap companies that are poised to succeed in the years to come. Today, ‘FAANG’ stocks (Facebook, Amazon, Apple, Netflix, and Google) are rising stars. Those who chase market returns speculate on the continued success of these leaders in the hopes of achieving higher-than-average future returns. That’s why we are underweighted in these growth stocks while overweighted in value-oriented companies for prudent diversification. We include bonds in our portfolios to dampen volatility, but they too have under-performed in our rising interest rate environment. In today’s cycle, well-diversified portfolios may appear to be straggling. Remember that a market cycle is longer than you think—seven to ten years. But as the cycle changes (and yes, it always changes) and those tall oaks fall, your “forest” will be ripe with new growth.
What you pay for financial advice impacts the health of your “forest,” and often in unexpected ways. While low-priced robo-advisors use algorithms to determine asset allocation and offer “advice,” holistic financial advisors are trained to look at each investor’s long-term goals and lifetime spending needs. College funding. Retirement income planning. Estate planning and wealth transfer. Tax-advantaged investing. Tax planning. Each of these areas have a significant impact on your financial strength—today and for decades to come.
A Vanguard study found that by tapping the services of a financial advisor, investors might improve results by as much as 3% annually. That value proposition (which Vanguard calls the Advisor’s Alpha) quantifies the tangible value of integrated investment management, wealth management, behavioral coaching, and more. Importantly, the primary reason for value added was not an advisor’s investment strategy. What added as much as 1.5% to investors’ returns was having an advisor who was there to answer questions and help them stick to a strategy in times of doubt (such as when they were thinking of selling during a market correction). The study also found that keeping fees low could add another 0.45% to performance. Fees matter—including what you pay and the value you get in return. (See our ‘no caveats’ pricing here.)
If your goal is to have a healthy financial life (and I certainly hope it is!), you need to build a healthy forest. Now is the time to heed Warren Buffet’s advice and “focus on the forest – forget the trees.” And if you need help along the way, please reach out. As always, we’re here to help!