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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.

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

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.

How a Healthy Lifestyle Affects Your Financial Future

As financial consultants, we spend a lot of time focused on the health of your financial accounts. We take deep looks at your rates of return, cash flow, investment mix, and more to determine the ideal financial model for building your life. But we don’t often talk about your physical health, something that can have a huge impact on your financial future.

As the US has found itself in the midst of an obesity epidemic, skyrocketing health care costs, and uncertainty surrounding how to solve these issues, it is more important than ever that you take care of your physical health. Not only will this help you live longer, but maintaining a healthy lifestyle can mean a huge difference in your net worth and financial legacy.

Poor Health Can Cost You More Than $150K+ Over a Lifetime

Read that heading again. We aren’t referring solely to the costs of healthcare here. A National Bureau of Economic Research paper published in 2017 found that the average difference in net worth between a healthy 65-year-old man and an unhealthy 65-year-old man to be over $150,000. They also found that workers who led unhealthy lifestyles for more than 16 years lost approximately $4,000 in annual wages.

Think of the lost opportunity to make smarter investments! Imagine how you could grow your nest egg with the savings from fewer visits to the doctor’s office. Being more active contributes to the confidence necessary to compete for and win business opportunities that can increase your cash flow and your lifestyle. Taking time to maintain and improve your physical health can transform your present as well as your financial future. Some steps you can take to begin that transformation include.

  • Eliminate Vices for Better Cash Flow – We all fall prey to vices sometimes. If your weakness is for smoking, alcohol, fast food, or sweets, reducing or eliminating that habit can have a twofold effect on the trajectory of your life. Not only will you have cost savings from going without, but your body’s health will improve as well. That discipline can go a long way in saving you the costs of medical treatment and expensive habits.
  • Investing in Healthy Food OptionsEating healthily can be intimidating – not only is there the initial cash outlay of buying better produce and ingredients, but also the labor of shopping, preparing, and cooking the meals. However, eating healthier foods keeps you fuller longer due to better, more plentiful nutrients. There are numerous free recipe websites and how-to videos online to help you make healthy choices easier to make as well. And while it will take some time to get used to, once you’ve detoxed from processed junk foods you will feel better eating these healthy options.
  • Alternative Transport OptionsCommuting is a necessary evil in life. If you live close to your workplace, have you considered walking, jogging, or cycling to work? These options all save you money by reducing fuel and maintenance costs on your personal vehicle while pulling double-duty to help you get a little hidden exercise in your day. Sometimes this can help reduce insurance costs for your personal vehicle too, if your policy is based on an average annual mileage.

It’s not always easy to make these disciplined, healthy choices, but it’s worth it. Take some time to figure out how you can fit some healthier decisions into your daily life to help put a little juice behind your financial model.

While we aren’t certified personal trainers, we are qualified to take a look at your financial path for the future. Interested in improving your current financial situation and living the live you want today? Complete this questionnaire to get started!

How Do the Wealthiest Invest?

In our series on growing your wealth we’ve discussed healthy behaviors for priming your finances for growth, how to write a personal investing statements, and how to avoid unhealthy ways of thinking about investments. These are all essential for growing your finances in a way that serves your life. It is equally important that we have positive role models to study and look up to.

Unfortunately we can’t all be the Oracle of Omaha, but we can learn from behaviors of some of the wealthiest investors in the US. A recent study completed by U.S. Trust of nearly 700 high net worth investors (investable assets exceeding $3 million) found the following:

Wealthy Investing Behaviors

  1. Wealthy investors maintain a fairly high amount of account liquidity. More than half of the surveyed investors keep their liquidity high so that can take full advantage of an opportunity when it becomes available. This is not out of fear or caution, but a strategic decision to keep reserves ready to move quickly. How many channels of your portfolio could be easily liquidated and put to use?
  2. Large cash positions are a common portfolio feature. To further demonstrate the importance of multiple liquidity access points, 60% of surveyed investors have at least 10% of their portfolio in cash. This isn’t a conservative move, but a decisive and strategic commitment to be ready for the future. What percentage of your personal finance is held in cold hard cash?
  3. Long-term goals are more important than short-term growth. Wealthy investors are willing to forego short-term, rapid gains in favor of risk mitigation and steady growth over time. They know that the long-term is what will sustain them over time, and they focus their discipline accordingly.
  4. Mitigating tax burdens is a priority. More than half of those surveyed emphasized the importance of minimized the impact of taxes on their investments. This rated above pursuing higher returns. Wealthy investors are largely focused on their net pay, rather than the gross before taxes. Managing this burden is key for success. Do you know the tax rate for all of your assets?
  5. Tangible assets are important. Almost half of the surveyed individuals have invested in some sort of tangible asset, such as real estate. These can produce passive income and grow in value over time, offering growth and a revenue stream. Do you have secondary income sources?
  6. Credit can be used for good. Nearly 65% of surveyed investors agree that credit can be used to build wealth strategically. While their knowledge is powerful, it is important to note the risk associated here. Consider using credit cards for spending you already planned on doing (so long as you pay them off weekly) or increase your payments on low interest mortgages or student loans to save on interest. This will free up more long-term cash to invest.
  7. Consider the impact of your investments. Beyond your own finances, your investments can affect society and the world. Many mutual funds and ETFs present opportunities to invest your money in companies based on their social values and impacts on society or the Earth as a whole. Many wealthy investors perceive socially responsible companies as being less risky to invest in. What social values and impacts do you want to support through your investments?

Ready to join the ranks of wealthy investors? Begin your journey with our JBWealthFit.com curriculum to grow your investing knowledge and skill set. Or contact us directly to schedule a consultation. We’re excited to help you on this journey to change your life.

The Four Challenges to Building Wealth

If you’ve set up automated deposits, selected an investment mix, and have a general awareness of your overall financial status, you’re doing well. This is especially true when you consider the huge number of Americans who have under $500 in savings and don’t track their spending.

Unfortunately, there’s a lot more to growing your wealth than setting up these healthy behaviors. In fact, there are four distinct challenges to building your wealth and overall financial wellness. We’ll take deep dives into each of these factors in the coming weeks to help arm you against these threats to your wealth building strategies. Today we’re offering up a preview of the posts to follow as part of our four part educational series. We’re hoping you tune in and learn along with us each week.

The very real threats staring down your personal wealth include:

Lost Opportunity Cost

You might think that if you spend one dollar, you’ve effectively lost one dollar, right? Sadly, it’s not that simple. If a situation arises that requires you spend money you would normally save or invest, you’ve lost more than just that amount of money- you’ve given up what that dollar could do for you in the future.

Whether this spending comes from unexpected bills (like medical expenses or emergency car repairs) or from impulse spending (we all remember Cyber Monday), the outcome is the same: you’ve traded the future growth potential of that dollar for the use of it right now. In our deep dive, we’ll look further into how to measure lost opportunity cost, the role of volatility in assessing it, and how to use these measurements to make decisions about your finances and life.

Rules of Financial Institutions

When is the last time you read your bank or credit union’s service agreement? Do you know the steps to take if you want to close your current checking account and open one elsewhere? There’s a reason why the fine print is small and difficult to discern; hidden within service agreements and fine print are many policies that make your money work harder for the institution than it does for you. It can be difficult to disconnect from your current bank’s ecosystem. They want to ensure that while your savings account earns 0.01% interest annually they can loan your funds to a credit card user and charge them 27% APR.

In our examination of financial institutions’ rules, we’ll reveal how they make it difficult to use your money, how to find a more beneficial partner, and ways you can use banks’ approach to finance to guide your own wealth management strategies.

The Velocity of Money

Velocity is the speed of something in a given direction. While “the velocity of money” is typically used by economists studying the GNPs of different countries, it also applies to your personal finance. In this setting, it means how you get your money to do more than one thing for yourself at the same time. Whether this means opening a higher-yield savings account to hold your quarterly payments for freelancer income taxes or refinancing your mortgage to remove a PMI and expedite your amortization rate, figuring out a way to make your finances work harder and faster is key to your financial health.

In our dedicated blog post we’ll further explore the velocity of money, its potential impact on your financial wellness, and ways you can adopt financial institutions’ strategies to make your money work harder.

Financial Organization and Coordination

You can’t build what you don’t know. It’s not enough to be aware of your finances – you have to aggressively coordinate and organize your money so that it moves and grows in a productive manner. This topic is one of the largest stumbling blocks for the general public – our financial systems mean ignorance is bliss for many. But taking time to organize your money and enact a strong plan will empower you and remove a lot of the stress associated with personal finance.

We’ll look into ways to organize your funds, why you should treat your household’s finances like a business, and how to get over the initial fear and pain that comes from discovering where your money may have gone wrong.

Wrap Up

The short story? These are in no way simple challenges to tackle. But taking the steps to empower yourself through this learning will put you on the path to building your wealth and improving your overall financial wellness.

Ready to tackle these challenges together? Complete this questionnaire to help us better understand what value we can bring to your life. It’s time to start making your money work for you.

Five Ways to Build Your Healthy Financial Mindset

Your bank account, investing strategy, and credit score aren’t the most important parts of your financial life. Your net worth or rate of return aren’t even the most pivotal. The most important part of your financial life is your mindset.

Without the right way of thinking and feeling about your financial well-being, those other metrics of success amount to nothing. A healthy mindset leads to healthy behaviors and a productive relationship with your money. Without this foundational approach to managing your financial life, all the positive planning and execution on the world won’t improve your overall life. Having the right money mindset means:

1. Developing an Abundance Mindset

Much of the world operates in a mindset of scarcity. The debt crises, global conflict, and fear-based media all operate from a scarcity mindset. They believe that opportunity is limited and that your good fortune is under threat. A mindset of abundance accepts these risks, but knows that there are more opportunities waiting if you plan and act effectively. Adopting an abundance mindset means being thankful for the good things in life and knowing there is more good waiting for those who plan and act correctly to reach their goals.

A good way to grow your abundance mindset is to challenge encroaching, negative thoughts that may arise when you are stressed by re-framing them as positive opportunities rather than threats.

2. Anticipating Your Nature

Part of a healthy financial mindset involves knowing yourself and being honest about who you are. We are all impulsive, emotional, messy human beings. Developing overly tight budgets that don’t allow for your occasional impulse can torpedo all of your efforts towards financial self-improvement. Feeling deprived can make you lash out and resent your own efforts in impulsive ways that lead to overcharges and other negative outcomes.

Know what your impulsive vices are and plan to reduce those in healthy ways while still giving yourself the occasional reward. Whether that means an impulsive purchase of an ebook on sale or treating yourself to a movie theater trip once a month, you have to allow yourself to enjoy life while working towards financial wellness.

3. Rolling with the Punches

The trajectory of success is never a straight line and neither is your financial trend line. Changing  behaviors, investing, and trying to better your financial status all come with associated risks. Can you handle negative returns on higher risk investments? Can you run your finances like a business and accept that your funds will be working for you in several different places? Accepting the constant presence of change and uncertainty and remaining self-assured that your strategy WILL work for you is essential for your mindset.

Automated investment and savings strategies can help make this easier for you by keeping it out of sight and out of mind. Market downturns and hiccups happen, but the trick is trusting in your strong strategy to weather the market volatility that can harm your investments.

4. Staying Motivated

Staying the course and maintaining your focus on the positive outcomes you’re working toward is easy early on in your financial journey. Can you maintain that focus in year? Five years? Figuring out what steps you have to take to keep yourself motivated and working toward financial prosperity is key for your journey. It’s a moving target and requires radical honesty with yourself, but maintaining that motivation is essential. Some people use vision boards or other simple reminders of what they’re working towards.

Some people track behavior streaks on a calendar or in a mobile app. What works best for you won’t hold true for everyone else; you just have to figure out how to keep yourself motivated in a natural and effective way.

5. Expressing Gratitude

Being thankful for what you currently have and for the future you are building will help immensely. Too many people spend their lives pessimistic and jaded, resenting their current status without taking real action to improve their standing. It goes beyond appreciating what you have. True gratitude means celebrating others’ good fortunes and contributing to a better world through your self improvement. Your most valuable asset is you, and you should be thankful for the commitment you are making to yourself and your life as you begin this journey towards a better financial life.

Taking these steps will help put you on the right path towards cultivating a healthy financial mindset. Want to learn more about effective money management principles and see how we improve our client’s lives? Contact us to discuss how we can help you on your financial journey.