Introduction

Last week, we discussed how it is common for investors to be unaware of the competing philosophies regarding investing. Active investing is a type of investment strategy in which a portfolio manager makes specific decisions about which securities to buy and sell, rather than simply following a predetermined investment strategy or asset class. This type of investing involves the buying and selling of securities based on market conditions.

An investment strategy that involves buying and holding a diversified portfolio of securities, with the goal of tracking the performance of a particular market index or benchmark is called passive investing. This means that the portfolio is not actively managed, but tracks or matches the performance of the chosen index.

Structured investing relies heavily on history and Nobel Prize winning economic theory to structure portfolios around risk vs. return metrics. One goal of this philosophy is to target market sectors and other characteristics that have proven to outperform throughout history. One example of this is that small cap companies tend to perform better than large cap companies over long periods of time.

It’s important for investors to understand the differences between them so that they can make informed decisions about which style of investing works best and the evidence that supports each method.

In Part II of this series, we will cover the risks and hidden costs of active investing and how they can hurt the overall performance of the portfolio. We will also discuss passive investing and how this simple approach can potentially help investors achieve a market index rate of return. Further, we will explore how structured investing can help the investor target specific dimensions of return via asset classes and manage the overall risk through broad market diversification. 

Let’s dive in.

The Risks of Active Investing

A major risk of active investing is the game of stock picking. How does one accurately and consistently pick stocks that will outperform the overall market? The answer – they do not! According to Dimensional Fund Advisors, “There are some stock pickers who experience success, but we do not know how to identify them before the fact. We cannot separate skill from luck. Picking stocks is more like gambling than investing.”

What is the Cost?

Another risk is an investor who makes the mistake of thinking that the cost of the funds in their portfolio is determined solely by their expense ratio. The expense ratio is a measure of the costs associated with managing and operating a mutual fund. It is expressed as a percentage of the fund’s assets, and it reflects the fees that the fund charges investors, as well as the operational expenses that the fund incurs. The expense ratio can include management fees, marketing and distribution expenses, and other administrative costs. 

While it is important for investors to consider the expense ratio of a mutual fund when choosing which funds to invest in (higher expense ratios can eat into the fund’s returns over time), it is the hidden cost that can truly hurt the fund’s performance. Turnover is an internal hidden cost that most investors pay little attention to. 

Hidden Cost – What is Turnover?

Turnover is how frequently the holdings of a mutual fund are bought and sold, or “turned over” in a given year. It is calculated by dividing the total value of securities traded in a year by the average total assets of the fund for the same period. The resulting ratio is typically expressed as a percentage. A high turnover ratio can indicate that a fund is being actively managed, with the portfolio manager buying and selling securities frequently. This can lead to higher transaction costs, which can eat into the fund’s returns. A low turnover ratio, on the other hand, may indicate that the fund is following a more passive investment strategy.

According to Michael Laske, former research manager at Morningstar—a company that provides independent analytics and advice on investments in the United States—”the average turnover ratio for managed domestic stock funds is 63% in 2019.” This means that the average fund will have 63% of its holdings in different stocks at the end of 2019 than it did at the beginning. If you’re counting, that’s a turnover ratio of 1.63—or roughly two times per year on average. For comparison, the S&P 500 index has a turnover rate of just 0.4%.

In some of our previous articles we have shared how active managers typically failed to beat the market indexes (such as the SPIVA study). This is primarily because of the hidden costs associated with turnover and the buying and selling of stocks inside the fund. 

A Winning Investment Strategy: Global Diversification with a Financial Plan

The best way to invest is with a globally diversified portfolio of structured funds. This will give you the ability to potentially earn higher returns over time, lower volatility, and a better chance of achieving your financial and retirement goals. 

Factor-Based Investing Evolved Because of Academic Research. Welcome to the World of Structured Investing

Through the power of innovation and academic research, structured investing has evolved into a sophisticated and effective investment strategy. Instead of trying to time the market or sitting on the sideline as a passive investor, we can target certain factors in the market with higher expected returns. Those factors along with decreased trading costs and increased trading efficiency can help potentially get excess market returns with lower volatility and costs compared to active investing.  

Bringing Structured Investing Together with a Financial Plan

A financial plan’s purpose is to provide a road map for your financial future; it will help you identify your long-term and short-term goals, as well as the specific steps needed to achieve them. Your plan will also include an investment strategy that will allow you to reach those goals with the least amount of risk possible. While there are no guarantees in the market, a well thought out financial plan coupled with investment strategy can yield positive results over time.

Conclusion

The debate between which investment strategy is superior will continue and probably never be settled among professional investment managers. Though evidence suggests otherwise, investors keep hoping that there is a special person or entity who can accurately predict the market. Newsflash, there is no crystal ball or financial guru who can accurately predict the future of the markets.

Most investors are best served by a broadly diversified global markets approach along with a structured investment strategy. To ensure that you are getting the best return for the level of risk in your investment portfolio, make sure it’s properly diversified and that your asset allocation matches what you can afford to see fluctuate up and down. However, the most important and often forgotten piece of the puzzle lies in having a well thought out financial plan that covers all aspects of your financial life, not just your investment strategy.

Have a great weekend!




Source: Ballentine Capital Advisors

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Golf Tip of the Week

Top Teacher: 4 Problems My Female Students Ask About The Most—And How To Fix Them

There are certain shots Molly Braid, a Golf Digest Best Young Teacher out of Westmoor C.C. in Wisconsin, gets asked about again and again by her female students. From how to hit uphill chip shots, to picking the right target off of a tee box, Braid’s fixes for each question range from technique tips, to guidance about course management. She gets asked about these on-course issues a lot for a reason. Read on and you’ll likely find the answer to a question you’ve had in your game, too.

1. How to escape the trees

If there’s a tree in between you and the green, the common urge is to try to go over it. But Braid says under is often the more effective strategy.

“Grab a seven iron and hit a big chip shot,” Braid said. “Get your feet closer together, lean towards the target, sternum slightly ahead of the ball. Let the handle lean towards the target as well. From there, we’re going to keep the club low, around hip high to hip high. We’re going to punch the ball out and let it roll up to the green.”

2. How to avoid coming up short on uphill chips

When hitting an uphill chip, do you pop the ball up too high and watch the ball land short of the green? If so, Braid says club selection is the culprit. Instead of a sand wedge, opt for a pitching wedge, 9 iron or even 8 iron, something that will give you more margin for error.

“Set up with your hips and shoulders in line with the hill,” Braid says. “The handle’s going to come back and there’s going to be added loft to the club. So it’ll have more height, like a sand wedge.”

3. How to pick a target off the tee box

What is your process when picking a target on a tee box? It’s ok if yours is more in the ‘hit it down the middle’ camp, a lot of people think like that when setting up to their driver. But the center of the fairway isn’t always the best target. Braid says to look at how the landing area slopes so you can predict which direction your ball will bounce after it lands. In some instances, aiming at or near the rough is the best way to have your tee ball end up in the middle of the fairway.

4. How to clear greenside bunkers

Having to chip over greenside bunkers can be daunting. It’s common to think you need to loft the shot high to clear the bunker. But Braid says to look at the bunker in a different way.

“Bunkers are down in the ground. You don’t need it to go way up in the air,” Braid says. “Instead of taking a great big swing with a lob wedge or sand wedge and trying to hit it high over the sand — which we see a lot of times coming up short — grab your pitching wedge or gap wedge and do a pitching stroke and setup.”




Tip adapted from golfdigest.comⁱ

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Recipe of the Week

Eggnog Blossoms

24 servings

Ingredients

• 1 1/4 cups all-purpose flour (see cook’s note)
• 1/4 teaspoon baking powder
• 1/4 teaspoon kosher salt
• 1 stick (8 tablespoons) unsalted butter, at room temperature
• 3/4 cup sugar
• 1 tablespoon heavy cream
• 1 to 1 1/2 teaspoons rum extract
• 1 small pinch ground cloves
• 1 large egg yolk
• 4 teaspoons freshly grated nutmeg
• 24 foil-wrapped striped milk chocolate-white chocolate drops, such as Hershey Hugs, unwrapped

Instructions

Recipe adapted from foodnetwork.comⁱⁱ

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Health Tip of the Week

How To Stay Active Over The Holidays

The holiday season can be the most festive and busiest time of the year. But it also can be the hardest time to stay fit. Between parties or events and family gatherings, you’re probably eating more and moving less. But working out during the holidays is important for your health — both physical and mental.

“One of the most important reasons to be active during the winter holidays is mood,” says Robyn Stuhr, vice president, Exercise is Medicine with the American College of Sports Medicine (ACSM). “Scientists have found that physical activity lowers depression and anxiety.”

“One of the most important reasons to be active during the winter holidays is mood.” –Robyn Stuhr, American College of Sports Medicine

In fact, Colleen Hacker, PhD, a kinesiology professor at Pacific Lutheran University in Seattle, WA, points to these 13 science-backed reasons to keep moving:

• Lifts your mood
• Boosts energy
• Makes you happier
• Helps you sleep better
• Lowers stress and anxiety
• Fights depression
• Builds strong muscles and bones
• Manages or lowers the risk of chronic conditions like diabetes and heart disease
• Manages pain
• Boosts brain health
• Improves skin
• Improves sex health
• Makes you want to eat healthier

Get Motivated

One of the biggest obstacles to physical activity is motivation. Hacker suggests tricking your mind. “Instead of thinking, ‘I have to exercise,’ think, ‘I want to move’ or ‘I get to move.’ Once you think of physical activity as something you want to do or get to do, you’re more likely to do it.”

As you work on a new mindset, follow these tips:

Know your why. 

“Reflect on what you want to achieve,” says Caroline Silby, PhD, a nationally renowned expert on sports psychology and author of Games Girls Play. Do you want to maintain or change your current fitness level? Do you seek social connection and stress relief? “The more you understand your specific goals for this timeframe, the more likely you’ll stay motivated to exercise over the holidays.”

If you’re not walking at all, then walking 10 minutes a day is a win.

Colleen Hacker, kinesiology professor at Pacific Lutheran University

Prepare for distraction.

“Challenge yourself to adapt and adjust rather than doing nothing over the holidays,” Silby says. She suggests you create several exercise plans. If plan A won’t fit into your day, shoot for plan B or C.

Be consistent.

Choose an exercise type and length that you can do daily like walking while talking on the phone or 10 pushups after brushing your teeth. “Shoot for consistency rather than intensity,” Silby says.

Reward yourself. 

Pair a behavior you don’t enjoy with one you do enjoy. For example, if you don’t feel like walking, try walking to a new playlist or your favorite podcast.

Plan for setbacks. 

“If you miss your workout on Monday, Tuesday, or Wednesday, it’s OK,” Hacker says. “Start again on Thursday.”

Celebrate small wins. 

The ACSM recommends healthy adults ages 18 to 65 get 150 minutes of moderate physical activity a week (30 minutes 5 days a week). But Hacker says it’s OK to have smaller goals. “If you’re not walking at all, then walking 10 minutes a day is a win.”

Change it up.

Add variety to your workouts. “If you do the same thing 6 days a week, 26 days of the month, it’s going to get boring,” Hacker says.

Discover your style.

Are you more likely to work out alone, in a group, or with a partner? Would you rather work out indoors or outdoors? With equipment or without? Free or paid? You have plenty of options.

Start Moving

“The best physical activity is the one that you will do,” says Hacker, who has trained Olympic athletes for six Olympic games. “It should be enjoyable and meaningful to you. If you hate the thought of running, then don’t run. Find something else you will enjoy.”

Also, Hacker and Silby suggest you change some of your daily habits to include moving more.

• Rake leaves or sweep your driveway instead of using a leaf blower.
• Wash your car instead of going through a car wash.
• Take advantage of free virtual workouts.
• Take the stairs instead of the elevator.
• Walk back and forth to the mailbox several times each day even if you’ve already gotten the mail.
• Give yourself “activity snacks” throughout the day. Climb stairs, walk briskly up and down the hallway, stretch, or dance in your kitchen.
• Do your formal exercise classes or gym workouts early in the day before other activities get in the way or you talk yourself out of it.
• Do a chore or walk briskly in your house during holiday movie commercials.
• Play active video games with your kids or play with them outdoors.
• Make your house or apartment your own fitness center.

Ring in the New Year

Physical activity during the holiday season can ease stress, lift your spirits, and help you get ready for the New Year. Remember to pick activities you enjoy and celebrate small wins. Plan for physical activity throughout the day or pair quick workouts with habits you already do daily. If you get behind, simply start over.

“Take care of yourself during this stressful time of year,” Stuhr says. “Step away from obligations and move in a way that feels good to you.” You’ll be glad you did both today and in the new year.

Tip adapted from webmd.comⁱⁱⁱ 

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Disclosure:

Ballentine Capital Advisors is a registered investment advisor. The advisory services of Ballentine Capital Advisors are not made available in any jurisdiction in which Ballentine Capital Advisors is not registered or is otherwise exempt from registration.

Please review Ballentine Capital Advisors Disclosure Brochure for a complete explanation of fees. Investing involves risks. Investments are not guaranteed and may lose value.

This material is prepared by Ballentine Capital Advisors for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation or any particular security, strategy, or investment product.

No representation is being made that any account will or is likely to achieve future profits or losses similar to those shown. You should not assume that investment decisions we make in the future will be profitable or equal the investment performance of the past. Past performance does not indicate future results.

Advisory services through Ballentine Capital Advisors, Inc.

ⁱ https://www.golfdigest.com/story/womens-golf-instruction-four-common-questions
ⁱⁱ https://www.foodnetwork.com/recipes/food-network-kitchen/eggnog-blossoms-4480816
ⁱⁱⁱ https://www.webmd.com/fitness-exercise/features/your-holiday-fitness-program

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