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Lloyd Easters

What is Evidence Based Investing?

Evidence based investing is a recent movement in the financial industry focused on what we see as real market behavior. By discerning what is real and narrowing down the evidence surrounding modern investing, we can then determine the best strategies to deploy to reduce volatility and maximize returns. While no one strategy is the best all the time, the strategies that perform consistently over long time periods have been clearly identified. JarredBunch’s Factor VI strategies consolidate and apply this knowledge to offer clients options which best meet their unique investing needs.

Active vs. Passive

The best investment strategy for you is the one you can stick with over a long period of time. Passive buy-and-hold strategies do work, but there are fundamental issues which need to be addressed:

  • Can you maintain a buy-and-hold strategy for at least 20 years? How long are you willing to hold?
  • Do you have the stomach to not make any changes during market drops of 20-50%?
  • Do I ever sell or make changes to my allocation? Why and when?
  • Do you have alternatives if the market is down when you are ready to draw on your account?
  • How do you know which assets to choose from and when to stick with them?
  • What if you need to take money out during a bear market?

Several studies, including Dalbar, show that the majority of investors may say “yes” to all of the above even when their actions say “no.” These investors routinely under-perform against the market and many end up woefully under-prepared for retirement.

You have one shot at this, so let’s get it right!

When it comes to active investing, most people think of hedge funds, stock picking, and other forms of speculation and gambling. This is NOT what we’re talking about. There is plenty of evidence showing one of the most effective forms of active investing is trend following. We use trend following in almost all of our investment strategies. We’ve compiled our evidence from studies completed during the last 100 years which have shown trend following as performing well in all markets.

What do we like best about trend following strategies?

  • Invest in what is trending up, ride the trend upward
  • Downside risk management to limit drawdowns by exiting downward trending positions
  • Take small short term losses for larger long term gains (ride the winners, sell the losers)
  • Get more consistent returns versus the market to take advantage of the power of compounding
  • Creates a smoother investment ride, a strategy you can stick with over the long-term
  • Removes emotion from the investment decisions by using a rules based strategy that is systematic

We can’t predict the future, we don’t know what the market is going to do, and performance in the past has nothing to do with performance in the future. However, we have the evidence explaining what works and what doesn’t – what people can stick with and what makes them panic.

Our goal is to provide simple, rules based strategies to provide downside risk protection, consistent returns, and peace of mind.

Rules Based Solutions

Factor VI strategies are rules-based, meaning they use specific and quantitative trend following rules. One of the most researched areas of investing, trending following (momentum) has shown time and time again to be worthwhile strategy. As long as investor behavior exists (and there is no reason to believe it will ever go away) there will be market trends and inefficiencies for trend-followers to capitalize upon. The goal is downside risk management and a smoother investment ride. Momentum allows investors to stick with a strategy rather than emotional decision making to compound their wealth.

One of the principles of trend following strategies is letting your winners ride, selling losers early and taking small losses while riding winners to larger returns. Getting out of losers early avoids large dips and big drawdowns.

Traditional investment theory says you have to capture the best days of the market to get returns of the market. What they don’t tell you is you have to capture the worst days to get those best days. The best days occur during large downturns, so you have to “just ride it out” to capture both. Trend followers work to capture up trends, avoid worst days and best days, and often end up with better returns.

The choice is yours – trust Wall Street, trust the government, trust buy and hold strategies of yesteryear. Or choose an evidence-based strategy to reach your full financial potential.

Two Major Risk Factors to Retirement Success

For most people its not until they hit 50 do they have the O.S. moment – do I have enough money for retirement? Am I on track to continue my lifestyle when I stop working?

There are many principles we focus on early and often in financial life management, but a couple very few address are a couple risk factors that are largely out of your control but you must prepare for – Sequence of Return Risk and Longevity Risk. Traditional financial planning just can’t address these two issues so they largely are ignored, however, they are critical to what your “retirement’ lifestyle will be if you don’t address them now.

#1 - Sequence of Return Risk  is the order in which you get returns on your portfolio, i.e. 5% year one, 12% year two, 8% year three, -9% year four, etc. It’s not just the real return which matters, but also the order of these returns. Getting negative returns at the start of retirement can have a devastating impact on your retirement and how long you can live without running out of money. A 20% drop could wipe out 30 years of gains!  You never know when the down market will appear and its effects on your portfolio.

The sequence of returns leading up to and into retirement make a huge impact on the amount of income you will have. Suppose you have a $500,000 retirement fund and need to know how much you can withdraw to live on for the next 20 years. The stock market has averaged 10.24% annual return from 1926-2014. So you would think you should be able to pull at least 10% per year, on average, and have your money last 20 years. On $500,000 that gives you $50,000 annual income. Even if the return fluctuates in the future, as long as it averages at least 10 percent per year, the fund should last 20 years, right?

Wrong! Given typical levels of stock market volatility there are only slim odds that the fund will survive the full time. The following charts simulate this retirement strategy with actual S&P 500 returns starting in various years from 1992 – 1995.

As Ed Easterling puts it in Unexpected Returns, “The cycles that occur during an individual’s period of investment will dramatically influence the returns that investor realizes.” For investors to ignore the strategic implications of this investing reality is folly.

Even with the same behavior and doing everything “right,” you can get very different results even with the same average return.  This is sequence of returns risk!

#2 - Longevity Risk – The risk that you will live a long life and outlast your money. In retirement, longevity risk becomes the greatest risk because the longer retirement lasts (the longer you live) the greater the chance you will succumb to other forms of risk. Increased longevity means more time for another financial crisis, increased chances for health problems, housing costs, more time for inflation to compound, and so on.

Running out of money is usually at the top of the list of concerns when building a retirement income plan. And, it should be!

Once you get into retirement you no longer have an income. Your income is determined by your assets. Retirees often require regular withdrawals from their portfolio to pay for living expenses. Traditional methodology is that you spend the interest off your assets (hope that is enough!) or a combination of interest and the assets themselves.

To ensure your money will last your advisor says to invest more conservatively to lessen your chances of losing money. But at the same time you are diminishing your returns, which means a greater likelihood of dipping into your principal. Neither is a prospect for success!

Maintaining some acceptable level of return means a portion of your portfolio is at higher risk. High portfolio volatility increases the likelihood that you will have to withdraw funds while the portfolio is down, maybe even deep down. The amount of remaining principal determines the amount you can safely withdraw each year. High portfolio volatility and suffering a large loss requires a reduction in retirement income (and lower standard of living). This matters a lot because now you’ve begun a downward spiral from which you may never be able to recover. Sharp  drawdowns  and roller-coaster volatility can drive you to sell equity holdings to cover living expenses. As a result, you get to experience the decline but not the recovery, which will quickly erode the portfolio and leave you without any income.

Diversification is traditional portfolio theory’s answer to managing these risks. While diversification may manage non-systematic risk (specific risk), it fails to manage systematic risk (market risk, day-to-day fluctuations in the market), particularly during bear markets. Asset allocation, as we’ve noted above, only gets you so far. Many markets that were once normally non-correlated now move together under economic stress. Diversification can then fall short when it is needed the most.

So what’s the answer? We’ve studied this A LOT and have come up with some unique answers that are easy to understand and simple to implement.

Download our free guide to learn how we avoid these major risks to your retirement and start living the life YOU want:

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Investor Behavior: Are You Your Own Worst Enemy?

Your poor investment returns may be entirely your fault! I say that tongue in cheek but Dalbar’s Quantitaive Analysis of Investor Behavior study shows how poorly investors perform relative to benchmarks and the reasons for that underperformance.

DALBAR publishes a study every year. Here are some key takeaways from the 2017 study:

  • In 2016, the average equity mutual fund investor underperformed the S&P 500 by a margin of -4.70%. While the broader market made gains of 11.96%, the average equity investor earned only 7.26%.
  • In 2016, the average fixed income mutual fund investor underperformed the Bloomberg Barclays Aggregate Bond Index by a margin of -1.42%. The broader bond market realized a return of 2.65% while the average fixed income fund investor earned 1.23%.
  • Equity fund retention rates decreased materially in 2016 from 4.10 years to 3.80 years. (This is directly related to psychology and behavior.)
  • In 2016, the 20-year annualized S&P return was 7.68% while the 20-year annualized return for the Average Equity Fund Investor was only 4.79%, a gap of -2.89% annualized.
  • 2016 was a great study in investor behavior as fear generally won out as evidenced by several months of steep outflows.

Investor Psychology

Analysis of the underperformance DALBAR data shows concludes that investor behavior is the number one cause of this. Fees are the second leading cause. It’s more than just buying and selling at the wrong time, it’s about breaking down the emotional triggers and traps that plague the investor psyche. This is why it’s important to understand the thoughts and actions that drive poor decision making.

There are nine distinct behaviors that can wreak havoc on investor’s portfolios:

1. Loss Aversion. Loss is felt much deeper than the gratification that comes with gaining. Many bad investor behaviors arise from this, including holding on too long to avoid realizing loss, expecting high returns with low risk and stock picking only those stocks they believe will produce large returns.

2. Narrow Framing. This is when decisions are made without considering all of the implications. Market bubbles are great examples of this. Most of those investments are made based on the hype and initial skyrocketing growth. What often isn’t factored in to those decisions are the economic implications down the road.

3. Mental Accounting. Investments may be mentally segregated, with different criteria and due diligence applied to them. You end up taking undue risk in one area while avoiding rational risk in another. Examples include how people spend tax returns, bonuses, etc.

4. Diversification. While important, investors often tell themselves they are seeking to reduce risk, when they are actually using different sources that may be just as risky. Diversification should again be evaluated as a whole, examining the risks of the different investments. These make up the overall risk of the portfolio. You may not be as “diversified” as you think.

5. Herding. We like to copy the behavior of others even in the face of unfavorable outcomes. This is a representation of confirmation bias to a certain extent. There’s comfort in following the crowd, but it often leads to dire consequences.

6. Regret Aversion. We tend to treat errors of commission more seriously than errors of omission. For example, this causes investors to sell winners prematurely in order to lock in profits before they turn into a loss. It can also cause them to hold losing positions too long, in the hope they may turn profitable.

7. Media Response. It’s easy to react to news from television personalities and financial “gurus” without reasonable examination. Confirmation bias plays a big role here too. If the information investors are listening to and gathering confirms their own beliefs, actions and/or opinions, they fail to gauge how that decision may negatively impact them. They fail to look to other sources of information that challenge their own way of thinking or offer other perspectives.

8. Overconfidence. A natural human thought is that good things happen to me, bad things happen to others. For investors, this causes them to think that they have the skills and knowledge to consistently beat the market. And they’ll succeed, because blow ups don’t happen to them. However, they quickly learn otherwise.

9. Anchoring. We determine how to behave based on previous experiences, and relevant facts. Investors tend to anchor their thoughts to a reference point – like that time they took a risky leap and lucked out with a big reward – even if that reference point has no relevance to the decision at hand.

The long term consequences of poor decision making

Dalbar notes that, since 1994, they have seen that investors are impatient and move into and out of investments too frequently, typically 36 to 56 months depending on the type of fund. These flows tend to happen at the worst possible time. This behavior has been observed every year since 1994. The results are an equity performance gap of 4.7%. In terms of dollars, on a $100,000 account invested for 20 years the difference is shortfall of $185,471*.

*($100,000 invested at market return of 7.69% vs 4.79% over 20 years = $440,874 vs $255,403 respectively.)

These behaviors can be harnessed. They can even be eliminated. Using a rules-based system is one way to do it. Our Factor VI portfolios were created on this very premise and are designed to keep you invested, create a smoother investment experience and remove emotion/bias from the decision-making process.

Ready to learn how to reach your full financial potential by adjusting your behaviors? We’ll teach you how. Get in touch with us today and let’s work together!

An Investment Strategy with Downside Risk Protection 

If the market returns around 9% on average why would I need downside risk protection? And, what is that exactly?

While the market may average 9% annual return you aren’t getting that. First, no one can achieve the average, only the returns that make up the average. Those returns fluctuate from up 54% to down 43%. Most people just can’t stomach those wild swings. So what happens? They bail too early and get in too late. Investing is the only industry where most people sell when things go on sale and buy when they are not.

The market spends a lot of time in drawdown. The chart below shows drawdowns of 5% or more nearly 50% of the time. Historically, the market has always rebounded and grown. Your performance depends on your ability to psychologically weather the storm. Or, if you need money from your portfolio during a drawdown, well…yikes.

Given enough time you might be okay. How much time? 20, 30, 40 years maybe. You just can’t say with any certainty.

We also know this volatility robs your returns over time. It’s a mathematical fact that two funds with equal rates of return but with differing levels of volatility, the lower volatility fund would have a higher compound return. Not only does lower volatility make for a smoother investment ride, but it also helps create wealth.

What can you do about it?

The largest portion of our portfolios use momentum as a factor for lower volatility and downside risk protection.


Momentum is simply using price to determine the appropriate allocation. Price works as the ultimate indicator because of supply and demand. The irrefutable law of supply and demand has been the ultimate guide to navigating markets for centuries. Supply and demand govern how prices move. Therefore, price tells the true story. For example, if there are more buyers than sellers, prices will rise. If there are more sellers than buyers, prices will fall (Dorsey, 2007).   

Our belief is that markets are not always priced efficiently and that investors do not always act rationally. Since markets rarely act the way textbooks say they should, markets can and do rise and fall. Investors can and do act irrationally for long periods of time. Using price momentum to capture these waves in a portfolio makes a lot of sense. In fact, its been studied for centuries.

Our equity strategies invest in equities when they are strong, according to absolute momentum, in order to capture the highest return amount. When equities are weak, we can switch to bonds, which offer a more modest return. Since the equity market is a leading economic indicator, a weak market can indicate a future economic slowdown, declining interest rates, and a healthy bond market. Stocks and bonds may complement each other in this manner. So instead of holding them as a permanent allocation in your portfolio, we can move in and out based on the trend of the market. This also is used with different asset classes within equities and within bonds.

The Benefits of a Momentum-Based Strategy

While momentum strategies does not avoid declines, they can greatly minimize volatility and drawdowns. The beauty of momentum lies in avoiding the BIG declines. Investors have to minimize the big declines to create greater success when investing. We’ve designed our momentum strategies to minimize these large drawdowns while still being able to capture upside. Over the long term you should be able to experience compound returns and greater investment performance. Contact one of our advisors or visit explore more of our website for detailed information.

What does this really mean for you? Momentum strategies may offer a smoother investment ride, allow you to stay invested (instead of bailing at the wrong time), and enhance long term performance.

Top 10 Things Learned at the EBI Conference

We get invited to a plethora of investment conferences and are always reluctant to attend. Getting “sold to” and/or hearing biased investment information is a big turn-off for us. We aren’t product pushers and feel that real evidence is the only way to make the best decisions for our clients. This conference discusses “evidence” from a wide array of experts and allows us to decide how to use the information.

The line-up of speakers included AQR’s Cliff Asness, Vanguard’s incoming CEO Tim Buckley, Jason Zweig from the WSJ, Wes Grey from Alpha Architect, and many more. In addition to gaining insight from these learned people, we get to network and discuss our ideas with them as well. This is invaluable and helps us as we constantly monitor how we invest for our clients.

Here are the top 10 things we learned at EBI:

1. Josh Brown and the Ritholtz Wealth Management team are great hosts and Josh is pretty darn funny. His exit strategy for Bitcoin is to have his stolen from him.

2. Scott Galloway, NYU professor and author of The Four, New York Times bestseller book, showed how each of the big four (Facebook, Apple, Google, Amazon) each appeal to a separate and specific instinct, or unique “organ.” I highly recommend this book.

3. 58% of the population has Amazon Prime, yet only 55% of the population voted in the 2016 election.

4. Three keys to living to 100: #3 is genetics, #2 is healthy lifestyle, #1 is how many people you love and care for.

5. Eddy Elfenbein, Portfolio Manager and Crossing Wall Street blogger, said that “being an investor means being at war with your own instincts.” People hate facts, so to be a successful investor you must fight your own instincts and emotions.

6. American billionaire hedge fund manager and co-founder of AQR Capital Management, Cliff Asness was asked what factor in the Fama-French 5-Factor model he most believed in. His response was, “Gotta love the market factor, but nobody is interested in talking about that.” (Most of a portfolio’s risk and return are driven by this factor). He also likes the value factor, it has the best story. He least likes the small cap factor saying the data says it’s not good and the story is not good. Of course, momentum is one of his favorites not included in the 5-factor model. (We call it the 6th factor.)

7. Vanguard’s Tim Buckley was asked “What’s your favorite stock?” He quickly retorted, “All of them.” Indexing is a big focus for Vanguard as is lowering fees. However, still over $1 trillion is invested in their actively managed funds. He says with all the brilliance in the finance industry, it’s tough to outperform.

8. Jason Zweig, WSJ columnist and author, shared a wealth of wisdom with us. Most notable was “the most dangerous bias is the bias we don’t know we have.” People are quick to point out the biases of others when they should be looking in the mirror to see their own flaws. Jason learned to question everything from Daniel Khaneman (who I believe should be required reading for everyone). At one point in his life he didn’t know why he did anything. Jason’s book Your Money and Your Brain is excellent. You should pick it up.

9. Best meme was of Jeff Bezos, founder and CEO of, from Galloway’s presentation.

10. Josh Brown opened with a remark about the importance of evidence based investing. With Millennials, he said, they don’t care about legacy brands. When you tell them stuff about investing they look it up, right then, on their phones. They want to see if what we’re doing and recommending is working. I think it’s that way with most investors now.

That’s why we work so hard to be transparent, use real strategies that work, keep it simple, and act in the best interests of our clients. That’s what evidence based investing is for us.

Ritholtz and Co., thanks again for another great conference. We’re looking forward to next year!