Monday, March 31, 2014

The Devil Wears Nada

Jim Parker
Outside the Flags
Vice President














The global fashion industry is fickle by nature, pushing and then pulling trends to keep hapless consumers forever turning over their wardrobes. Much of the financial services industry works the same way.

Fashion designers, manufacturers, and media operate by telling consumers what’s in vogue this year, thus artificially creating demand where none previously existed. What turns up in the boutiques is hyped as hip by the glossy magazines to make you feel like you “have” to buy it.

Likewise, much of the media and financial services industries depend on fleeting trends and built-in obsolescence to keep investors buying new “stuff.” Driving this industry aren't so much the real needs of individuals but manufactured wants with short shelf lives.

Just as in fashion, many consumers jump onto an investment trend after it’s already peaked and the market has moved onto something else. So their portfolios can end up full of mismatched, costly, impractical creations such as hybrids, capital protected products, and hedge funds.

These products tend to be created because they can sell. So in early 2005, Reuters wrote about how banks were manufacturing exotic credit derivatives (instruments designed to separate and transfer credit risk) for investors looking for ways to boost yield at a time of narrowing premiums over risk-free assets! (A credit default swap is a credit derivative. It’s an over-the-counter financial instrument whose value is determined by the default risk of an underlying asset.)

Four years later, in the midst of the crisis caused partly by those same derivatives, the shiny new things were “guaranteed” or “capital protected” products as financial institutions rolled out a new line of merchandise they thought they could sell to a ready market.

Some investors made the mistake of swinging from one trend to the other, ending up with overly concentrated portfolios—like a fashion buyer with a wardrobe full of puffy blue shirts.

While some of these investments may well have found a viable market, it’s worth asking whether the specific and long-term needs of individuals are best served by the design and mass marketing of products built around short-term trends.

Luckily, there is an alternative. Rather than investing according to what’s trendy at the moment, some people might prefer an approach based on long-term research and built upon principles that have been tried and tested in many market environments.

Instead of second guessing where the market might go next, this alternative approach involves working with the market, taking only those risks worth taking, holding a number of asset classes, keeping costs low, and managing one’s own emotions.

Instead of chasing returns like an anxious fashion victim, this approach involves investors trusting the market to offer the compensation owed to them for taking “systematic” risk—those risks in the market that can’t be diversified away.

Instead of juggling investment styles according to the fashion of the moment, this approach is based on dimensions of return in the market that have been shown by rigorous research as sensible, persistent, and pervasive. Instead of blowing the wardrobe budget on the portfolio equivalent of leg warmers, this approach spreads risk across and within many different asset classes, sectors, and countries through a technique called diversification.

And instead of paying top dollar for the popular brands at the expensive department stores, this approach focuses on securing good long-term investments at low prices relative to fundamental measures. Buying high just means your expected return is low.

Most of all, instead of focusing on off-the-rack investments created by the industry based on what it thinks it can sell this week, this approach can help deliver long-term results based on each individual’s own needs, goals, and life circumstances.

To paraphrase the legendary designer Coco Chanel, investment fashion changes, but style never goes out
of fashion.

S&P data are provided by Standard & Poor’s Index Services Group.

MSCI data copyright MSCI 2013, all rights reserved.

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.
This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.








Dimensional Fund Advisors LP ("Dimensional") is an investment adviser registered with the Securities and Exchange Commission.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This article is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services. 


©2013 Dimensional Fund Advisors LP. All rights reserved. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited.

Wednesday, March 19, 2014

2014 IRS Refund Chart


For those of you expecting a tax refund, you should be aware the IRS is not publishing a refund chart as they have in years past. The IRS does have a new tool you can use to determine the status of your refund on their website. Click here to check where your refund is.

Find Pathways on

Thursday, March 13, 2014

The Golden Ticket Trap

Jim Parker
Outside the Flags
Vice President














In a popular children’s story, the young hero pins all his hopes on finding one of a handful of “golden tickets” hidden among millions of candy bars. It seems many people approach investing the same way.

The notion that the path to long-term wealth lies in locating secret and previously undiscovered treasures in the global marketplace of securities is one regularly featured in media and market commentary.

One magazine, for instance, runs a feature called “Fund Managers’ Secret Stocks,” referring to supposedly “bargain” stocks the pros keep hidden. (How the stocks can be secret when splashed on magazine stands nationally is not explained.)

Likewise, a popular business broadcaster regularly tells its viewers about the “under-the-radar” stocks that Wall Street analysts don’t want them to know about.

This stuff sells because it plays to a misconception about how markets work: that they are like beaches after a hot day, full of buried treasures. All you need, in this view of investing, is a virtual metal detector to find the money that people left behind.

You could get lucky this way, of course. But basing a
long-term investment strategy on stumbling across the equivalent of a mislaid trinket in the sand or a golden ticket in a chocolate wrapper is not likely to be sustainable.

It’s a haphazard approach, reliant on chance and requiring a lot of work that is unlikely to be rewarded. Worse, it means taking unnecessary risks by tying one’s fortunes to a handful of securities or to one or two sectors.

Taking big bets on a single sector or commodity is a bit like buying a chocolate bar in the hope of finding a golden ticket. There’s an element of pot luck, and you’re exposing yourself to idiosyncratic risk related to that sector or industry.

On the subject of hidden treasures, gold itself can have a special allure for investors, particularly in uncertain times. Indeed, the yellow metal has had a couple of spectacular runs, in the 1970s and in the 2000s. But there have been long lean times and significant volatility in between, which makes gold a highly speculative bet.

In early 2013, the Daily Mail in the UK carried the headline, “Gold Set to Shine Even More Brightly in 2013.” The rationale was that with investors scouring the world for “safe havens,” gold could reach as high as $2,500 an ounce by year end.

As it turned out, gold suffered its biggest annual loss in three decades last year, with its spot price falling 28% in US dollar terms. From an all-time high of $1,920 in September 2011, gold fell to just over $1,200 by the end of 2013.

Now, adopting some exposure to gold may well suit some investors as part of a broadly diversified portfolio, but taking speculative bets on a single commodity, sector, or stock is more akin to blind hope than to anything else.

The popularity of media stories about hidden bargains and undiscovered stocks is understandable. Like townsfolk in a bar overhearing the boasting of gold diggers down from the hills, we desperately want to believe in El Dorado. But this sort of speculation is really no different than gambling.

In contrast, sound investment starts with identifying the risks worth taking and minimizing the risks that don’t come with an expected reward, like taking a big bet on gold. You can help reduce risk and increase flexibility by diversifying.

It’s true that you can get lucky the other way, like the boy in the chocolate factory story. But the chances are against you.

And keep this in mind: The best investment may not be the golden ticket anyway.


S&P data are provided by Standard & Poor’s Index Services Group.

MSCI data copyright MSCI 2013, all rights reserved.

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.
This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale. All expressions of opinion are subject to change without notice in reaction to shifting market conditions.









Dimensional Fund Advisors LP ("Dimensional") is an investment adviser registered with the Securities and Exchange Commission.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This article is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services. 

©2013 Dimensional Fund Advisors LP. All rights reserved. Unauthorized copying, reproducing, duplicating, or transmitting of this material is prohibited.