At Hill Investment Group, we’re dedicated to putting the odds for the best possible returns in your favor, leaving no basis point behind. Since every client is unique, the method to accomplishing this goal is multifaceted.  I have talked to dozens of other prominent investment advisors about how they systematically handle these issues for their clients.

The answer I get 90+% of the time is some combination of, “We are not doing X because… it is too much work, clients don’t know the difference, the benefit is small, etc.”. As your fiduciary, that doesn’t sit well with us. Our obligation is to seek the best solutions we can find for our clients…no matter what.

Therefore, at HIG, we’ll continue to pick up the pennies. Over the coming months, we plan to highlight how we do that and what the impact can be on your wealth over time. We will discuss the following topics, starting with the level of cash we hold in our clients’ portfolios.

•   Volume 1 – Keep Cash Balances Low (Better Chance for Higher Returns)
•   Volume 2 – Asset Location (Reduces Taxes)
•   Volume 3 – Using ETFs (Reduces Taxes)
•   Volume 4 – Trading ETFs in Competition (Reduces Trading Costs)
•   Volume 5 – Number of Funds and Not Auto-Reinvesting Dividends (Reduces Trading Costs)
•   Volume 6 – Tax Lots and Tax Loss Harvesting (Reduces Taxes)
•   Volume 7 – Summary (Total Impact)

Most investment advisors and hold between 5-10% of their client’s portfolios in cash for convenience. The “better ones” out there will hold 2-4% cash. Holding a large buffer of cash means the advisor can be a bit lazier in monitoring and trading client portfolios. This buffer comes at a cost. It’s called “cash drag” because, in general, cash doesn’t earn as high a return over time as investing in stocks or bonds. Therefore, for every $1 of cash you hold, there is an opportunity cost… which depending on how much cash you hold, could be massive. 

We don’t want our clients to incur that cost, and thus, HIG keeps cash levels well below 1%, ideally around 0.5% (unless the client has recurring withdrawals). Maintaining cash levels below 1% requires diligence and a commitment to active monitoring. It’s easy to keep a significant amount of cash on hand, but it’s far more challenging—and ultimately rewarding—to deploy those funds into investments that generate meaningful returns.

We want the mutual funds and ETFs we invest in to embody the same approach. The average mutual fund holds between 3-5% cash, causing meaningful cash drag to their investors. The funds we recommend generally keep cash in the 0.1-0.3% range.  By minimizing cash drag in your accounts and in the funds you hold, your portfolio more closely reflects the asset allocation and the corresponding risk profile you set up with us, that we agree to maintain on their behalf.

The impact of reducing cash drag can be significant. On average, stocks outperform cash by 6% annually. This means that an additional 5% in cash could lead to a 0.3% reduction in returns annually. While it might seem like a small fraction, due to compounding, the deficit can accumulate significantly over time. For every $1,000,000 invested, a 6.0% vs 5.7% return over 30 years represents a difference in wealth of ~$450,000.

At Hill Investment Group, our dedication to maximizing returns sets us apart. Our commitment to picking up every basis point is part of a broader philosophy. We understand that the little things, the pennies, add up to create meaningful gains for our clients. Through careful management and a relentless pursuit of opportunities, we believe these small gains will culminate in a substantial increase in overall returns.

Stay tuned for more insights in the coming months as we continue to share how these small gains add up to significantly impact our clients’ portfolios.

In the heart of a bustling county fair, an extraordinary experiment unfolded, showcasing the incredible power of collective intelligence. A seemingly whimsical challenge emerged: Guess the weight of a cow on display. What initially appeared as a playful game soon transformed into a stunning demonstration of the “wisdom of crowds.”

A diverse group of fairgoers, each with varying degrees of knowledge and intuition, were asked two simple questions: How much does this cow weigh? Do you have any experience with the weight of cows? The goal was to see if anyone in the crowd could guess the correct weight and if experts would be superior to the average individual.

A fascinating phenomenon began to unfold. Although individual estimates ranged wildly, the average of all these guesses astonishingly approached the actual weight of the cow. In the end, the average guess for the non-experts was 1,287 pounds compared to the actual weight of 1,355 pounds. A difference of only 68 pounds. A bigger surprise: the expert’s average guess was less accurate at 1,272 pounds, a difference of 83 pounds.

The genius of this collective average lay in its ability to filter out errors and biases inherent in individual guesses. High estimates countered low ones, and the middle-ground approximations formed a consensus that defied the odds. This experiment showcased the concept of the “wisdom of crowds” that a diverse group’s collective knowledge can outperform the insights of any individual expert.

Translating this concept to the realm of financial markets, where stocks are traded and their prices determined, demonstrates a similar effect. The market comprises countless participants, each with their own insights, analyses, and biases. When these factors converge, the resulting stock prices tend to reflect the most accurate estimate of a company’s value at a given point in time.

This phenomenon finds its backbone in the Efficient Market Hypothesis (EMH), which proposes that stock prices encapsulate all available information. Much like the cow guessing average, EMH posits that the combined insights of countless individuals lead to fair and accurate valuations, making it incredibly challenging to outguess the market consistently. Financial markets react to new information quickly, updating prices to reflect the most up-to-date information and risks fairly. Rather than trying to outguess market prices, causing turnover, high fees, and trading costs, one is better off accepting and using market prices to your advantage. Invest in global capitalism rather than trying to outguess it.

From guessing the weight of a cow to the intricate world of financial markets, the wisdom of crowds continues to shape our understanding of collective intelligence. Just as a diverse group of fairgoers could accurately estimate the cow’s weight, the multitude of participants in financial markets work together to create prices that reflect a collective estimate of a company’s value. The efficient market hypothesis stands as a testament to the power of this concept, reminding us that while individual expertise is valuable, the aggregated insights of many can often lead to more accurate and reliable outcomes. As we navigate the complexities of the modern world, embracing the wisdom of crowds can lead to better decision-making and a higher likelihood of financial success.

As an investor, it’s natural to be drawn to invest in your “home” market. The United States is where you live and work. You know the companies, politics, and economic climate. It also doesn’t hurt that the returns of the U.S. market have been fantastic over the last decade. From 2010-2022 the S&P 500 has returned an average of 12% annually.

In comparison, over the same period, the MSCI All Country ex US index, representing global stocks excluding the US, returned an average of 3.5% annually. These figures might lead one to question the need for global diversification. I’m here to convince you that diversification is, in fact, “the only free lunch” in investing.

History has demonstrated the importance of looking beyond recent performance and that any country, even successfully developed ones, can have long periods of sustained underperformance.

For example, let’s start by looking at the United States for the decade directly before the one mentioned above. From 2000-2009, known as “the lost decade,” the S&P500 had an annualized return of -1%, while the MSCI World ex US index had an annualized return of 1.6%. Over this decade, investors lost money by investing in the US stock market and had 27% less money than an investor who invested in global ex-US equities.

Another example is Japan. In 1989, Japan held the title of the world’s largest stock market. With a total market cap of approximately $4 trillion USD, iconic companies like Toyota, Sony, and Honda were global industry leaders. Japan had a diversified economy and was widely regarded as the world’s technology hub. During the 1980s, the Japanese market grew from $0.5 trillion to $4 trillion, with the Nikkei (Japan’s equivalent of the S&P 500) delivering impressive annual returns of 19.5% from 1980 to 1989. At that time, the US stock market’s size was smaller than that of Japan at around $3 trillion.

However, fast forward 35 years, and the picture looks starkly different. Today, the US market is valued at a staggering $40 trillion, while the Japanese market lags behind at approximately $5 trillion USD. Notably, Japan experienced no runaway inflation, wars, political turmoil, social unrest, or famine during this period. Despite its once fast-growing market and technological prominence, the Nikkei grew by less than 1% annually over the next 35 years. This is a powerful reminder that even the most promising markets can encounter prolonged stagnation.

The tale of Japan’s rise and subsequent stagnation highlights the importance of global diversification. While recent US market returns have been remarkable, investors must consider the broader global landscape and the potential risks of concentrating investments solely in one country. By embracing global diversification, investors manage risk, gain exposure to diverse opportunities, and position themselves to capture long-term growth potential. A well-diversified portfolio provides resilience, protects against overexposure to a single market, and helps navigate the uncertainties of the global economy.

This information is educational and does not intend to make an offer for the sale of any specific securities, investments, or strategies. Returns and market information quoted here was pulled from publicly-available, third-party sources believed to be accurate. Investments involve risk and, past performance is not indicative of future performance. Any actual return will be reduced by advisory fees and any other expenses incurred in the management of a client’s account. Consult with a qualified financial adviser before implementing any investment strategy.