I found a pony, but . . .

There is currently a battle being raged in the financial services industry and the battle ground is in Washington, DC.  This battle is over the standard of care for Investment Advice.  The question being ask is whether financial professionals should provide advice under a “Fiduciary Responsibility” or disseminate recommendations based on “Suitability.”  “Fiduciary Responsibility” is providing advice that is in the best interest of the client.  “Suitability” is providing products or services that are suitable for clients, but not necessarily what is in the best interest of the client.  For a point of reference, Doctors, Attorneys and Accountants are required by law to act in the best interest of their patients or clients.  Why shouldn’t all financial professionals act in the best interest of their clients, not just some?

As defined by securities law, there are really only two types of financial professionals: Brokers (also known as Registered Representatives) and Investment Advisors (also known as Registered Investment Advisors).  Brokers sell products to clients based upon a requirement of suitability.  Investment Advisors are required by law to provide advice based upon the best interests of the client.  Most investors do not know this.  In fact, a report by The RAND Institute for Civil Justice in 2008 found that 63% of investors believe that Registered Representatives (Brokers) are required to act in the best interest of clients (they are not), and 70% believe that Registered Representatives (Brokers) must disclose any conflicts of interest (they do not) 1.

Why aren’t all financial professionals required to provide advice in the best interest of their clients? Aubry & Eustice does not know, but we believe it should be the standard, as do most investors.

So, how does this battle relate to “Fin Reg” and finding a pony in a pile of horse manure?  As of right now, the “Fin Reg” bill that was passed in the House of Representatives empowers the Securities and Exchange Commission (the financial services regulatory body) to impose the same fiduciary responsibility on Brokers and Registered Representatives as it currently does on Registered Investment Advisors.  This is a very good thing as it will further protect investors. However, if the only way investors can be further protected is by hindering and harming the great American Economy, it is not worth it.  That is why Aubry & Eustice 2, among other Registered Investment Advisors, continues to try to educate investors as to what their options really are.

Ponies are nice creatures and can be very fun.  But no pony is worth keeping if it comes with a barn full of manure.

…

1 From TD Ameritrade’s The Standard of Care for Investment Advice - Drawing a Clear Line of Distinction Between Fiduciary and Suitability.

2 Aubry & Eustice, LLC is a Registered Investment Advisor.  To view the firm’s most-recent Disclosure Brochure, please click here.

You may recall the story about how a psychiatrist was asked to treat twin brothers with extreme personality differences. One twin was a total pessimist and the other a total optimist. After weeks of interviews and observations, the psychiatrist decided on treatment. She set up two separate rooms; one to observe and treat the pessimist child and the other to observe and treat the optimist child. The psychiatrist had her teams set up and ready to observe. She was sure that she had found the solution for each child to begin to deal with each condition.

She first brought the pessimist child into a room full of brand new toys. To her amazement, the child broke down crying. The psychiatrist asked the little boy what was wrong. In between sobs, he shared that he refused to play with the toys because he was afraid that he would break each toy that he played with.

Thinking that she would fare better helping the optimist pare back his sanguinity, the psychiatrist led the optimist child into his room. This room was full of horse manure. To the psychologist’s surprise, the optimist child jumped onto the pile and started digging. Amazed, the psychiatrist asked the optimist child why he was so excited to be playing in horse manure. With a glee that can only come from optimists, the boy shouted, “With all of this poop, there has to be a pony in here somewhere!”

Those of you who know me well know that I am “the eternal optimist.” Yet, unfortunately, there has not been a lot to be optimistic about regarding the most recent financial regulation reforms being discussed and argued in Congress. Dubbed “Fin Reg,” the proposals are supposedly an effort to “fix” the financial system in the United States. The new regulation was supposed to eliminate “too big to fail” and help create jobs. It does neither. In fact, the proposals are actually an attack on capitalism and will hinder growth, not help it.

I have been digging through the manure coming from Congress over the course of the last several months regarding the new “Fin Reg” – I have yet to find a pony

This has set off a wave of growing concern over the debt issues of the entire EU, notably Greece, Portugal, Spain and Italy.  This has been a concern for many months now with many in the investment community referring to these four countries as the PIGS.  (Portugal. Italy. Greece. Spain.)  This is more than just a Greek issue; this is an issue for the entire EU.  Great Britain, which is not part of the EU, is starting to be a cause for concern for some economists and investment managers.  In fact, the United States has issues of its own.  (I’ll write more about this in another article.)

Greek Austerity

Over the last several weeks, you may have heard about the “Greek Austerity Plan” or something that talks about the changes that the Greeks are going to have to make in order to even be considered for a loan from other EU countries.  The Greeks had to put a plan in place to raise 30 Billion Euros ($38.23 Billion), just to be considered for the loan from the other EU countries.  Here are some of the highlights of the austerity measures:

·         Increase the retirement age from 53 to 67

·         Government workers to lose annual bonuses worth an extra two months pay

·         10% increase on alcohol, cigarettes and petrol (gas)

·         Three-year wage freeze for all public (government) employees

·         Early retirement will be limited or abolished altogether

·         VAT (Value-added Tax) will increase from 21% to 23%

This is not the place to discuss why Greece is in this situation.  However, these austerity measures are why there are so many Greeks upset and rioting.  This is one of the various reasons why the global markets are nervous.  Not necessarily the riots themselves, but more that countries – and the peoples of those countries – will not be able to accept the tough decisions that need to be made. 

What happened on Thursday (May 6, 2010)? 

Was it human error in the form of a “fat finger?” (That is, typing a “B” for Billion instead of an “M” for Million.)  What it a technical glitch?  While the real answer may not be known for several weeks, it is likely that the dramatic 700 point drop and then almost as dramatic 600 point rise on the Dow Jones Industrial Average is due to computerized programs that were triggered to sell stocks because of specific global events. 

These computer programs are designed to buy or sell stocks on a variety of different factors or inputs. The factors in Greece and the EU were some of those factors that could have tripped certain triggers in these computer programs. To be sure, most of the global stock markets were already down 2% to 3% (or more) at the time of the “drama”.  However, the issues in Europe did not cause the DJIA to drop 1,000 points.  Until this week, the global stock markets – led by the U.S. – were performing quite well.  Yet, many of those gains are now gone for 2010.

This may be a correction or it may be something different. 

Should we be concerned?

What the last decade should have taught us is that there are certain economic inevitabilities.   Economies expand and economies contract and then they expand again.  Markets go up and down and up again.  Both of these happen regardless of government intervention. 

The reality of the global marketplace is this: regardless of how each country got there, many Western European countries, along with the United States, are very close to drowning in debt.  Very drastic measures need to be taken over the next couple of years – everyone knows this.  The problem is that very few are willing to do what is necessary.  That is why the Greeks are rioting and that is why the global markets are nervous.

We continue to maintain a positive, long-term outlook.  Many have compared what we have experienced in the last several years to the 1930s or even the 1970s.  As those who lived through those time periods (or those who have studied those time periods) know, they were some very dark and trying economic times.  Yet a globally diversified portfolio provided positive returns in each of those decades.  If you are a client of Aubry & Eustice, you are in a globally diversified portfolio that uses Evidence-Based Investing as a guide.  Please click here for more information about Evidence-Based Investing.

The overwhelming research on investment returns shows that achieving optimal returns in a portfolio is almost entirely a function of time in the market, not attempts to time the market.

To your success!

After being offered a chess set for $45, I laughed and said “No, thank you” and I started to walk away.  The salesman quickly stepped to my side, leaned in and, with broken English, whispered into my ear: “This is where you are supposed to offer me a lower price and we can then negotiate.”  He didn’t realize that I was just not interested in buying a chess set, even though it was a really nice chess set.

A little later in the day, a very old woman tapped me on the arm as I walked by: “Monsieur, how about a bracelet?”  I asked “How much?”  Her answer: 2 for $5.  I smiled, told her “no, thank you” and walked away.  About an hour later as I was getting ready to leave for the day, the same woman stopped me and said “Monsieur, you still want a bracelet?”  Again, I told her that I did not and was probably not going to buy any bracelets.  This went on for 3 days.  Toward the end of the third day, she caught my attention and said: “I know you want a bracelet; make me an offer.”  I really did not care if I bought a bracelet or not.  But I did think that it would be nice to buy a few bracelets for my wife and daughters, so I decided to make a very low offer.  I said: “4 bracelets for $2.” Without even hesitating, the very old woman said, “OK, you come and pick which ones you want.”

Negotiations always work best for the one that is willing to walk away.  However, those eager to reach a deal often make the biggest concessions.  So it is with investing.

The financial markets are essentially giant electronic bazaars, filled with millions of participants haggling over the prices of individual securities.  Like shoppers and sellers at a Caribbean bazaar, participants in the financial market bazaars are all driven by varying needs. 

There are really three different types of shoppers at the financial market bazaars:

1.       The index manager.  Index managers have to track a particular index and go to great lengths to have “zero tracking error.”  This might be an S&P 500 index fund manager who looks to constantly have the exact exposure, and in the same proportion, as the S&P 500 index.  This shopper has to deal with high transaction costs, high turnover and often pays more for purchases than was originally intended. 

2.      The active manager.  Active managers make buying decisions based upon convictions associated with particular securities.  These convictions are so strong that the active managers forego concern about the prices they pay, the turnover generated, the transaction costs they incur or the taxes they cause.  These convictions are emotionally driven, not scientifically driven.  If you want a Caribbean bazaar example, ask me about a wooden cat I once bought in Jamaica . . . a very emotional purchase.

3.      The patient manager.  The third manager is neither obsessed with tracking an index nor in buying a particular security.  With no artificial push to buy, this manager has the advantage of being able to walk away if the price is not right.  This manager knows that there are plenty of stocks to choose from and is agnostic to one stock over another if both fit the manager’s criterion.  This gives the manager tremendous flexibility and allows for the market to come to the manager.  Just like the patient Caribbean shopper, the patient manager knows that there are many people selling.

The patient manager philosophy is embraced by Aubry & Eustice.  The patient manager adds value – in the form of increased returns. 

There are three killers to long-term portfolio performance:

1.       Inflation

2.      Taxes

3.      Fees

There is really very little value that a wealth manager can add when it comes to inflation and taxes.  Sure we can look for investments that will outpace inflation or minimize the amount of taxes an investor will pay.  But a wealth manager cannot control inflation or taxes; these are decisions made by outside forces.  While fees cannot be eliminated completely, the manager can seek to minimize fees as much as possible.  A wealth manager can have a direct affect on increasing or decreasing fees.

Managing a portfolio with no regard to costs, turnover or fees hurts the real return an investor receives.  Conversely, if a manager can minimize costs, decrease turnover and cause less fees, the investor receives an increase in real return.

Patient trading is smart, flexible and it increases returns.   Or, it at least gets you a bracelet for each of your family members.

To your success!

Is 2010 the year the stock markets in the United States begin to lead the world again?

Because of  the statistical phenomenon known as Reversion to the Mean - simply a “return to the average” - many believe that it is just a statistical inevitability that the US stock markets will be positive in 2010 and through the next decade.  After a return of -1.15% per year from 2000-2009 (through November) some predict that, like a gambler who has endured a long losing streak, the US stock markets are “due”.

S&P 500

1930 -1939     -0.05%

1940-1949     9.17%

1950-1959     19.35%

1960-1969     7.81%

1970-1979     5.86%

1980-1989     17.55%

1990-1999     18.21%

2000-2009     -1.15%  (through November)

1926-2009        9.79% (through November)

Should we be concerned whether the United States stock market will lead the world again or not?  Absolutely not!  As investors chase returns and consider chasing returns in the US and the emerging markets, we must be aware of Japan’s stock market over the last 20 years.  On December 29, 1989, the Nikkei 225, Japan’s stock market benchmark, was at 38,957.  Twenty years later, on December 30, 2009, the Nikkei 225 closed at 10,546.44.  A whopping 73% decline!  There are myriad theories as to why this has happened, but as an investor, why something happened is no where near as important as how a portfolio is positioned.  (By the way, Japan had the best stock market return of the developed markets in 2008: -29.21%)

In the last 25 years, the S&P 500 has never led the developed markets in returns. (See chart here.)  Is this the year?  We don’t know and will never claim to know.  Here is what we do know:

1. Our clients are long-term investors and our portfolios are built as long-term investment vehicles.
2. Over time, stocks are going to out-perform bonds.
3. Over time, small companies are going to out-perform large companies.
4. Over time, value companies are going to out-perform growth companies.
5. Over the last 25 years, the United States stock market has never been the best performer relative to other developed countries
6. Over time, emerging market companies are going to out-perform companies in the United States.
7. Capital flows to where the expected return is the greatest.

If it was possible to know which area of the world or which asset class was going to produce the greatest return in the coming year, we would definitely adjust our portfolios.  However, because it is impossible to know, our portfolios will continue to be positioned in a broadly diversified manner to both maximize long-term returns and minimize risk.

To your success!

After wrestling the heavy, jagged toothed behemouth into my yard from the previous user, I was struck by its rather dainty, light blue color. I could only surmise that the designers did this on purpose to lull it’s users into thinking the machine was docile, and friendly to use. Well, if you can imagine what it would be like to push a lawn mower with square wheels across your lawn, you have an idea of how docile it actually was. When I finished my lawn, I wrestled it over to the yard of the neighbor who was next on the list.  As I returned to my own driveway, I was met by my daughter who asked me, “Daddy, why did you make those holes and mud balls in our yard with that big machine?”

“Well Honey,” I said, “it will help make the grass grow better next summer.”  But unfortunately, before I could go on and explain to her what I thought was the deeper science behind proper yard maintenance and aeration techniques, she seemed to be satisfied with my first answer and zoomed away on her bike.

So there I was, left on my own to contemplate the real reasons as to why I aerated the yard…“I’m supposed to,” I thought. “I’m supposed to aerate the yard. People who want a healthy yard aerate it, don’t they?”  Well, that’s what my neighbors told me!  Or were they just telling me that to get me to pitch in for the aerator?  Suddenly, I realized that I don’t exactly know why I am “supposed to aerate the yard.”  I just do it. To be honest, I’m not even sure if you follow the aeration with seeding the yard or “weed and feeding” the yard…what do I do next?  So, without a clear answer for myself, I decided to spend the next two Saturdays raking the leaves.  At least I’m pretty sure that helps the yard.  But again, I’m not sure exactly how.

This little mental dilemma I was in is actually a great demonstration of how a lot people think about investing. Many investors invest because “they are supposed to.” And while investing in something is generally better than investing in nothing, knowing exactly how and why to invest will ultimately give you a stronger and healthier portfolio. Having a specific, long-term investment strategy that is both cost effective and efficient is not something the average investor thinks about when buying investments. Developing and implementing a strategy that increases returns and decreases risk is what extraordinary investors look for when striving for financial success.

The Determinants of Success:

1. A customized plan.
2. Proper asset allocation.
3. Behavior management.

Holes and mud balls are good for lawn care; they are extremely bad for investment portfolios.

On Wednesday, November 25^th, Dubai World, a conglomerate that is owned by, and based in, the city-state of Dubai, announced that they were having difficulties making the payments on their debts.  Dubai World has asked the creditors of its roughly $59 billion in liabilities for a six-month moratorium on its debt payments.  The announcement immediately caused stock markets around the world to drop in value.  The decline continued on Friday.

How does this affect you?

As all clients with Aubry & Eustice know, we have a rather large exposure to international markets and we always have.  Using Evidence-Based Investing as our guide, the Standard portfolios have 50% exposed to markets outside of the United States and the International portfolios have 75% exposed to markets outside of the United States.  At this point, none of the Aubry & Eustice portfolios are exposed to companies that are based in Dubai.  In fact, the only Middle Eastern exposure our portfolios have are to companies that are based in Turkey.

The following is a list of the Developed Markets that we invest in outside of the United States:  Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.

We also have a relatively large exposure to Emerging Market countries as well:  Brazil, Chile, China, the Czech Republic, Hungary, India, Indonesia, Israel, Malaysia, Mexico, the Philippines, Poland, Russia, South Africa, South Korea, Taiwan, Thailand, and Turkey.

While we do not invest any money directly in Dubai, there are potential ancillary effects on our portfolios.  It is likely that we own stock in some of the banks that have loaned money to Dubai World.  These loans were taken in order to finance the massive real estate growth that has taken place there over the last five years.  But the number of companies is very small and the total exposure, relative the global markets, is rather small as well.  Yet, unlike the problems that were encountered in 2008, the liabilities of Dubai World seem to be relatively contained to Dubai. 

At this point in time, no one seems to know exactly what and who has been affected and for how much.  What is clear, though, is that many investors acted on emotion over the course of the last several days.  There is bound to be some after effects from the shock of 2008.  That is what this appears to be happening at this time.  More uncertainty has entered the market, and it is interpreted through the fears and reactions to the events of the last year.  To make matters worse, financial media are obsessed with the presentation of multiple talking heads in order to generate as many varied viewpoints as possible.  These attempts at “surrounding the issue with opinions” is designed to increase viewership, but it actually contrubutes to more uncertainty rather than providing the clarity they hoped for.

There is a possibility that this issue could turn into something bigger.  Meaning: there could be more countries and companies around the world that are going to have trouble paying their debts.  If that is the case, investors around the world may be concerned that putting more money into emerging markets is more risk than they are willing to take on.

There is a basic economic principle that says this: capital flows to where the expected return is the greatest.  While many people around the world collectively hold their breath, hoping for economic recovery, the evidence shows that the emerging economies are most likely going to provide the greatest returns over the long-term.

We talk and write about how risk and return are related.  That is, if there is a greater expected return with a particular investment, there is going to be a greater expected risk.  While counter-intuitive, one of the most unexpected and consistent findings of Evidence-Based Investing is that when riskier asset classes are strategically added to a portfolio, the risk (volatility) is minimized.  This is only seen in long-term investment philosophies, and it is precisely why Aubry & Eustice employs Evidence-Based Investing.

The three determinants of success continue to be the baseline for the guidance we provide for our clients:

1. Have a plan, specific to your goals

2. Maintain proper asset allocation, as determined by your tolerance for risk, relative to your goals

3. Manage your behavior by not making emotional decisions when it comes to your money and investments.

To your success!

While I typically talk about the markets in general terms and refer to indices only (such as the S&P 500), I am going to speak specifically about the Aubry & Eustice portfolios, both the negatives and the positives, and how they compare to the most well-known indices, over the last 24 months.

The following is a list of the Aubry & Eustice portfolios, the S&P 500 and the EAFE.  The list shows three columns: the total return percentage loss from October 1, 2007 through February 27, 2009, the total return percentage needed to break even after that loss and the third column shows the percentage return from March 1, 2009 through September 30, 2009:

____________________Total Return %                             Total Return %                            Total Return %

____________________10.1.2007-2.27.2009              Needed to break even             3.1.2009-9.30.2010

International 97                          -56.81%                               131.53%                                            78.09%

International 88                           -51.90%                               107.9%                                              71.07%

International 75                         -45.42%                                  83.22%                                              59.06%

International 50                          -31.09%                                  45.12%                                               37.82%

Standard 97                                   -54.89%                                  121.68%                                             72.23%

Standard 88                                   -50.93%                                   103.79%                                            64.60%

Standard 75                                   -44.50%                                   80.18%                                              53.69%

Standard 50                                   -30.40%                                   43.68%                                              34.60%

Standard 25                                   -13.68                                        15.85%                                              17.42%

___________________________________________________________________________________

S&P 500                                         -50.17                                           100.68%                                           45.76%

EAFE Index                                 -54.68%                                          120.65%                                            60.02%

While it looks like the odds are insurmountable and that it will take years to get accounts back to even, the reality, when applying principles of Evidence-Based Investing, is much different.  The last time we had a major drop in the stock markets (April 2000 - March 2003), the following 18 months saw spectacular returns.

_____________________Total Return %

_____________________4.1.2003-9.30.2005

International 97                         129.18%

International 88                         120.64%

International 75                          98.61%

International 50                           61.43%

Standard 97                                  121.28%

Standard 88                                  107.19%

Standard 75                                   88.47%

Standard 50                                   56.02%

Standard 25                                     27.71%

________________________________

S&P 500                                            51.41%

EAFE Index                                  100.20%

As the “experts” argue about whether the latest “recovery” is sustainable or not, we would like you to know that many of these same “experts” were talking about how long it would take to recover after the last stock market crash.

As was stated in our August 26^th, 2009 article (http://aubrygroup.com/beyond/2009/08/evidence-based-investing-vs-market-timing/):  “With Evidence-Based Investing, we are not worried about timing the ups and downs of the markets.  The evidence shows that in order to be a successful, long-term investor, it is imperative to stay focused on one’s time in the market, and not one’s ability to time the market.”

Evidence-Based Investing shows us that investors should:

1. Have a Plan

2.  Maintain Proper Asset Allocation

3.  Manage our Behavior

If you have become familiar with my writings over the last couple of years, you can guess my thoughts as I left the bookstore….”Time for a new blog post.”

Just about every author, in every article, discussed the importance of staying in, or getting back into, equities.   Equities are really the only area that the average investor can count on to help plan for retirement.  This, I thought, was good.  But, within all this information there lingered another issue that really bothered me.

Year-to-date (1.1.2009 - 7.30.2009), the S&P 500 is up 10.97%, and since March (3.1.2009 - 7.30.2009) the S&P 500 is up 35.62%.  At the same time, the EAFE Index - the S&P 500’s international cousin - is up 18.33% year-to-date and 46.13% since the beginning of March.

What does this mean?  Unfortunately, for investors who rely on “advice-for-the-masses” magazines, newsletters and television personalities, they have missed out on tremendous gains - gains that they may never recover. 

Trying to time the market is a fool’s errand.  The idea that individuals or computer models can accurately and consistently use market timing methods as a way to enhance investment returns is one of the greatest myths that is promulgated by the investment industry and financial media.  The truth is, market timing does not work.  If it did - or if some ONE could make it work - it would be so expensive that very few would be able to afford the service fees involved with all of the trading that would be necessary.  While the vast majority of investors try to look for cycles and patterns over time to help them predict the future movements of the markets, the evidence shows us that on a consistant basis, the market returns are random.  This may sound a little aloof, but for me to say that the one consistancy of the markets is their randomness, I better have some evidence to back that up.   So, if you want to see the evidence of this randomness in both the US and International markets, click here for Randomness in Asset Classes and click here for Randomness in Global Markets.

Investors, both average and professional, who are not yet “back in the market” say that they will get into the market when the “pull back” occurs.  That is, when the market slows down and loses anywhere from 10%-20%  of the gains it has seen since March.  While this predicted drop in stock prices may happen, the fact remains that no one knows exactly when it will happen. 

With Evidence-Based Investing, we are not worried about timing the ups and downs of the markets.  The evidence shows that in order to be a successful, long-term investor, it is imperative to stay focused on one’s time in the market, and not one’s ability to time the market.

Here is more evidence . . .

From January 1, 1970 - December 31, 2008, the S&P 500 had an annualized compound return of 9.49%.  In terms of actual dollars, if Investor A had invested $1,000 into the S&P 500 on January 1, 1970, by the end of 2008, that investment would have grown into $34,310.  However, let’s assume that Investor B, by pure  bad luck, missed the best one-day performance of the S&P 500 over a 39-year period.  Investor B would have an annualized compound return of 9.18%.  Assuming the same investment of $1,000, Investor B would have $30, 749 at the end of 2008.  So, by just missing the best one-day performance over the last 39 years, it would have cost Investor B $3,561.  Over the course of 39 years, $3,561 does not seem like that much money, so lets take a look at the same results with a different initial investment.  (To view this illustration, click here for Missed Best Day.)  Let’s say the original investment had been $100,000.  With the same returns expected for Investor A and Investor B, the difference in their investments would now be a whopping $356,100.  That is a BIG difference!

“Oh, but how likely is that?” you may ask.  “It’s just an example that has no real world, practical application.” 

Really?

Let’s look at actual data.  What if Investor B from our example above began to get very nervous (possibly even scared) in October of 2008.  Maybe Investor B’s financial professional was talking about the coming collapse of the markets, and that the timing wasn’t right to stay in.  So, he pulls his money out of the market on October 12, 2008.  The very next day, October 13, 2008, was actually the best single-day return for the S&P 500 in the last 39 years.  On that day, the S&P 500 went up 11.58%.  Investor B, frustrated that he missed 11.58% return in one day, decided that his instincts (and his financial professional) were wrong, so he gets back in the market on October 14, 2008. 

Investing is not an art, it is a science.   Evidence-Based Investing is the science of investing.

Evidence-Based Investing shows us that investors should:

1. Have a Plan

2.  Maintain Proper Asset Allocation

3.  Manage our Behavior

Writing in Financial Advisor Magazine, Mitch Politzer, the president of a consulting group, wrote an article called “Managing In a Post-Economic Crises Era.”  In the article, Mr. Politzer discusses how financial advisors should be shaping their practices to not only meet the changing perceptions of clients, but also the changes in the reality of investing and the financial services arena.

While I disagree with how Mr. Politzer suggests advisors and clients should be investing, I do agree with how he ends the article.  He tells the reader that we must “invest in those who understand how profoundly different the world is and will be.  Invest in those who will innovate, seek growth and truly understand this new world.”

He could not be more correct.  The vast majority of financial professionals and investors are investing with strategies that are equivalent to financial “blood letting.” Just as medicine has been driven by thousands of years of science, it has really only been the last 50 years that we have seen major medical breakthroughs.

Such is the world of investing and finance.

Over the course of the last 100 years or so, we have seen tremendous advances in the understanding of capitalism, capital markets and how individuals and groups make investing decisions.  Armed with this understanding of the history of the capital markets, we set out to truly understand the science behind the capital markets.  Specifically, and more importantly, how this understanding would help our clients.

As a result of that research, we began using the phrase Evidence-Based Investing to describe how Aubry & Eustice would continue to manage client portfolios.  Evidence-Based Investing delivers the performance of the capital markets and increases returns through state-of-the art portfolio design and trading.  While the overwhelming majority of investment platforms are based on the more risky practices of stock picking, market timing and track-record investing, we base our strategies on what the evidence, driven by the scientific method, has led us to.  Because Evidence-Based Investing is not based on speculation or guesswork, but on tested and proven results, there is a measured certainty that can be expected.  For more information about Evidence-Based Investing, click here.

The key to Evidence-Based Investing is a patient, long-term view that utilizes strategies based on the evidence provided by the capital markets.  Within that, it must be understood and accepted, that over time, there will be short-term losses.  But, when driven by the evidence, those losses will be regained and the best decisions for our investor-clients will be made without being driven by emotional factors, reactions, or “predictors.”

What Does the Evidence Show?

It shows that the profoundly different strategies used by Aubry & Eustice are providing returns that are superior to the traditional benchmarks and traditional investing strategies.  We will let the results speak for themselves.  Below are the returns of the 9 portfolios that Aubry & Eustice manages and how they have compared to the traditional benchmarks.  We have portfolios for all risk levels.  All periods end June 30, 2009.

Aubry & Eustice                YTD                1 Yr                 3 Yr                 5 Yr                 10 Yr

International 97             20.89%            -23.88%          -2.64%           7.48%              8.23%

International 88             19.09%            -21.06%          -1.77%            7.28%              7.97%

International 75             16.59%            -16.70%          -0.45%            7.07%              7.71%

International 50              11.60%            -8.72%            1.71%              6.38%              6.88%

Standard 97                      14.57%            -24.65%          -5.29%            4.35%              6.75%

Standard 88                      13.73%            -21.82%          -4.10%            4.55%              6.70%

Standard 75                      11.96%            -17.51%          -2.56%            4.70%              6.61%

Standard 50                       8.56%              -9.45%            0.20%              4.74%              6.19%

Standard 25                      4.89%              -1.92%            2.54%              4.40%              5.29%

Benchmarks                        YTD                1 Yr                    3 Yr                 5 Yr                 10 Yr

S&P 500                              3.16%              -26.22%          -8.22%             -2.24%             -2.22%

EAFE Index                       7.95%              -31.35%          -7.98%               2.31%              1.18%

Throughout the rest of this year, we will spend a great deal of time discussing the “evidence”.  We will also be sharing with you how we are shaping our practice to meet the needs and manage the expectations of our clients. But for the time being, we wanted to show you the fruits of our Evidence-Based Investing labor…the Evidence-Based Results.

For more specifics and disclosure information, see Evidence-Based Returns - June 30, 2009.