Meet Our Guest

Joseph Norton, CIMA

Senior Regional Director at Virtus Investment Partners

Margaret Dorn

Senior Director at S&P Dow Jones Indices

Welcome to Season 1, Episode 11 of Meet the Expert® with Elliot Kallen! 

In this episode, Elliot is bringing on Joseph Norton and Margaret Dorn to discuss how to make better decisions in the marketplace, and how to engage in environmentally and politically correct investing.

Joseph Norton

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Too many investors focus on “beating the market” or hot investment trends because it’s easier to focus on daily market activity than on long-term goals. Planning requires us to look far into the future, make decisions about the life we want to lead, and then step back to allow for the plan to work.

Joseph Norton

senior regional director, virtus investment partners

What’s the secret to achieving better returns?

You might think the key is to “beat the market.” In actuality, it’s more about setting the right goals and controlling your own behavior. To achieve the best possible long-term financial outcomes, we have to be honest about our natural tendencies to make poor decisions about money.

We all know the golden rules of investing: Buy low, sell high. Be diversified. Be patient. Make informed decisions.

The investor’s chief problem—and even his worst enemy—is likely to be himself.

benjamin graham

Economist, Investor, “Father of Value Investing”

Investing in the capital markets gives us the opportunity to enjoy a comfortable life and a dignified retirement. But we’re faced with a dilemma: We must take calculated risks to meet our financial needs, yet our brains have been hardwired over millennia to survive in totally different conditions. As a result, we’ve developed survival instincts—fight-or-flight instincts, fear- and greed-driven reactions, and biases—that can sometimes drive poor outcomes in the modern world.

“Invest for the long run” is the right advice, but it ignores human nature. It doesn’t mean that we’re irrational; it just means that we’re human.

The Importance of Behavior

It’s helpful to be aware of specific biases that create the behavior gap causing lower returns, including:

• Availability bias. We use the most easily accessible information to make decisions, even when that might not be the most important information.
• Anchoring. We stubbornly rely on a small amount of available information to make a decision rather than considering other facts.
• Hindsight. We believe we could read the future, even though before the fact, we didn’t. We are “Monday morning quarterbacks.”
• Confirmation bias. We seek out information that corroborates what we already believe. We find ways to prove that we’re right.
• Pattern-seeking. We think we see patterns when there is only randomness.
• Overconfidence. We think we know more than we do and are better at tasks than we actually are.

By understanding our thought patterns, we can begin to close the behavior gap, or what MorningStar calls the investor gap.

The Behavior Gap

The first rule of investing is to “buy low, sell high.” However, when markets grow choppy and valuations improve, we tend not to buy more and will often sell. When markets are calm, we grow more confident in our portfolios. It’s at those times we’re likely to invest more.

Setting Realistic Expectations

Most of us have heard that stocks return about 10 percent annually. There some truth to

that, but it doesn’t account for what investors really experience in the market. Stocks can be

very volatile in the short term, producing large performance swings within a 3- or 5-year period. It’s only over multi-year periods that the bell curve takes shape and we approach long-term historical averages. That’s why it’s helpful to maintain realistic expectations for how markets actually behave.

The Shape of Markets

Stock markets trend up over long periods of time, like decades or centuries. However, over shorter periods, investing can feel like a roller coaster.

When markets sink by 20%, 30%, or even 50%, it becomes exceedingly difficult to maintain a long-term approach to your investing strategy. Bull markets tend to climb slowly over time, while bear markets occur abruptly and without warning. Every long-run investor should be prepared to hold tight through significant market declines.

There’s no predicting market upswings or downswings either. Calendar year market returns are random! The market is often up, sometimes down, and we almost never experience an “average” year. Rarely a year goes by when there’s not a significant drawdown. In years when there’s only a shallow drawdown, it becomes easy to quickly forget the emotional challenge associated with market declines.

Bonds Then and Now

It’s wise to manage your expectations for future bond market returns: Interest rates have an inverse relationship with bond prices. As rates decline, prices tend to go up, and vice versa.

The interest rate and bond market environment has been remarkable in recent decades. As rates declined from high teens to low single digits, bonds earned historically unprecedented returns. History is not likely to repeat itself in the foreseeable future because starting yields have been a strong predictor of long-term returns. The current yield is 1.92%, indicating a limited return potential.

Three Key Engines

As a savvy investor, you need to arm yourself with the right mindset and a solid plan. Focus on steady investing, occasional rebalancing, and taking full advantage of the magic of compounding.

• Dollar cost averaging. Make regular investments at regular intervals—regardless of the share price at the time of purchase—to wind up buying more shares when prices are low and fewer shares when prices are high.
• Rebalancing. Every quarter, take stock of your investments and shift them to limit your risk. Adjust your portfolio to stay in line with your financial goals.
• Compounding. The more frequently your money earns interest, the faster and bigger your balance will grow. As interest is added to your account, you earn interest on the original balance, plus the previously earned interest

Diversification is Worth the Discomfort

Sure, you could take large wagers on specific securities, markets, or themes. It could end up paying out. But more likely than not, you’ll be wrong, and your retirement nest egg could suffer permanent damage. It’s wise to spread out your bets.

Every year has a different diversification “experience.” For instance, in 2007, emerging markets stocks outperformed REITs by more than 50%. In other years, like 2012, the spread among asset classes was much tighter, which lessened the stress on diversification.

In investing, what is comfortable is rarely profitable.

robert arnott

Chairman and CEO, Research Affiliates

Diversification, though smart, can also be uncomfortable. Why? Because true diversification means holding underperforming assets. It’s natural to feel antsy when you own a weak corner of the market, and it’s normal to prefer exposure to recent winners. If everything is “working,” it means you’re not actually diversified. Because of the behavioral bias of loss aversion, we find losses more painful than gains gratifying. The math behind diversification makes sense, but the psychology can prove challenging.

Luck and Market Timing

Sometimes, it’s just the luck of the draw; some generations are enriched by strong market tailwinds. Others endure long periods of lackluster returns. Consider this series of 20-year periods—the Boomer generation enjoyed outstanding returns in the 1980s and 1990s. Over the past twenty years, however, investors experienced two 50+ percent market declines.

The idea of market timing—that investors can participate in good markets and sidestep the bad—has a long history of weak results. The stock market is too unpredictable to duck in and out with any significant accuracy. As these data show, investors need consistent exposure to the market. Missing only a small number of the market’s best days produces extreme underperformance.

Investing for a Sound Retirement

Inflation is a quiet but dangerous enemy of long-term wealth creation. It erodes your purchasing power slowly but surely, even when the figures sound small. For example, after 25 years at 3 percent inflation, your capital has less than 50 percent of the purchasing power than it does today.

So what really matters?

Too many investors focus on “beating the market” or hot investment trends because it’s easier to focus on daily market activity than on long-term goals. Planning requires us to look far into the future, make decisions about the life we want to lead, and then step back to allow for the plan to work.

As an investor, your job is to focus on 3 main objectives:

• Growth. Grow your wealth, but do so without taking excessive risk.
• Income. Fund your spending needs, but beware of chasing higher yields.
• Protection. Keep yourself prepared for sharp market drawdowns and the harmful impact of inflation.

Margaret Dorn

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People want to feel good about their investments. They want to know where their money is going, and they want to feel good about it.

Margaret dorn

senior director, s&p dow jones indices

The S&P 500 is calculated and owned by S&P Dow Jones Indices, but what a lot of people don’t realize is that S&P Dow Jones Indices and S&P have a substantial background in sustainable investing, or ESG investing.

Over 20 years ago, S&P Dow Jones Indices launched the first ever global sustainability benchmark—the Dow Jones Sustainability Index—so this index really pioneered sustainable indexing, and has shaped corporate sustainability practices all over the world

People want to feel good about their investments. They want to know where their money is going, and they want to feel good about it.

SRI vs. ESG Investing

SRI investors assess the environmental and social effects of investments.

ESG investors focus on how environmental, social and corporate governance factors impact an investment’s performance.

Though similar, the two have some major differences.

SRI vs. ESG

Socially Responsible Investing (SRI)

• Values-driven approach.
• SRI investing can include the practice of actively not investing in certain companies or funds because they don’t meet certain standards.

Environmental, Social, and Governance (ESG)

• Data-driven approach; incorporate financially-material information—sometimes in alignment with values.
• Considers how a company’s adherence—or lack thereof—to certain standards might affect its performance on the market.
• ESG does not mean sacrificing returns; resource-efficient companies tend to be more efficient in general.
• Broad market exposure is now possible with market (if not better) returns.
• ESG investing allows investors to do well while still doing good.

If you’re more concerned with how the environmental and social impacts of an investment will affect returns, then ESG investing might be the best choice. ESG investors seek to balance values with performance by seeking financially-material data that can give us an additional lens into a company’s policies, metrics, and business operations that aren’t traditionally in standard financial analysis.

SRI investing is more exclusionary in nature. If you’re content with forgoing potential returns if an investment doesn’t meet your standards for a socially or environmentally conscious investment, SRI investing may be a better option.

Who are the biggest ESG investors?

Millennials and women are the biggest demographics driving the demand behind ESG investing.

The global net worth of Millennials is predicted to more than double by 2020, to $18 to 24 trillion. The Millennial segment alone is putting upward of $15 to 20 trillion in the U.S. domiciled ESG investments—which could double the entire size of the U.S. equity market. 90 percent of Millennials surveyed want to allocate to responsible investments over the next 5 years.

Women control $14 trillion, or roughly 51 percent of the personal wealth in the U.S.—making women a faster-growing economic power than China and India combined.

But it’s not just Millennials and women who are interested in ESG. Investors, across ages and genders, have clear preferences for ESG investments:

• 70 percent of customers are interested in learning about what social causes the companies they invest in support
• 77 percent of customers are interested in learning about what type of corporate citizens the companies they invest in are
• 85 percent of customers are interested in learning about how the company’s products and services impact people’s health and well-being

What does this mean for the future of ESG investing?

As more Millennials come into money, we’ll start to see more focus on themes like global stewardship and corporate stewardship; ESG is poised to become an ever-increasing conversation in a client’s portfolio.

With this demand, there’s a growth for ESG funds. Morningstar reports that sustainable funds and estimated annual flows have almost tripled over the past year alone!

When you’re exploring ESG indexes, funds, and mutual funds to invest in, make sure you work with a Financial Advisor who can walk you through sustainable metrics. That will help them better identify what the right ESG investment is for your portfolio.

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DISCLAIMER: Prosperity Financial Group and Meet the Expert® with Elliot Kallen do not make specific investment recommendations on Meet the Expert® with Elliot Kallen or in any public media. Any specific mentions of funds or investments are strictly for illustrative purposes only and should not be taken as investment advice or acted upon by individual investors. The opinions expressed in this episode are those of the Meet the Expert® with Elliot Kallen guests, and not necessarily of Elliot Kallen or Prosperity Financial Group.