December 2018 | Posted By Henry Bragg

Did you know that December 11, 2018 marked the 10-year anniversary of the day Bernie Madoff was charged with securities fraud? His colossal $64 billion dollar scheme came crashing down.

While there is certainly nothing to celebrate about the anniversary, there are lessons to learn. Ranking toward the top of our priority list, we should do all we can to prevent history from repeating itself, at least to the same magnitude.

Madoff’s Manipulative Mind Games

One of the telltale signs of Madoff’s malfeasance is easy to describe, but treacherously tricky to catch when it’s happening to you. Madoff was famous (now infamous) for supposedly employing stock options to deliver unwavering returns, year after year after year, no matter what the market was doing.

Think Houdini. When a supposed gentleman with impeccable credentials is masterfully managing your money like none other, it becomes difficult to recognize what has to be a sleight of hand. A potent mix of your own behavioral biases sees to that. Plus, Madoff’s set-up lacked any of the checks and balances you should demand from your advisor. Without an independent third party custodian reporting directly to you (such as Schwab, for our clients), it’s too easy for a con artist to fabricate a reality that doesn’t exist.

Unfortunately, while magic is entertaining, losing your wealth to a deception is no fun at all.

Bottom line, if any money manager claims to be delivering constant, consistent stock market returns for years at a time while the markets swing up and down, you can almost certainly assume something’s amiss.

Back to Evidence-Based Reality

Unfortunately, these kinds of tricksters put us real advisors at a disadvantage. Unlike Madoff’s portfolios, ours won’t deliver magically positive percentages every month of every year – or even every year. Instead, we employ evidence-based investing to guide us through markets whose expected long-term returns are typically delivered in unpredictable fits and starts.

That means, as a realistic investor, you must be willing to tolerate the risks involved when you Take the Long View®. This does not mean you must accept excessive risk. There are a number of ways to manage the downturns while maximizing expected returns:

  • Avoid concentrated risks by employing broad, global diversification instead of trying to pick individual stocks or time the market’s movements.
  • Establish enough liquid (spendable) reserves to tide you through market downturns without being tempted or forced to unwind your long-term investments.
  • Judiciously seek higher returns when warranted by tilting your equities toward expected sources of added risk and return – such as small-cap value stocks.

Likely vs. Certain = Reality vs. Fantasy

Are we SURE our approach is going to work? Do we KNOW, for example, that small-cap value stocks WILL provide premium returns over time?

We cannot be certain. After all, the value premium has disappointed during the past decade. Ten years might tempt even a resolute investor to waiver.

However, while we cannot be certain, we can shoot for most likely, based on the strongest, longest-term evidence we can find. In that context, the evidence clearly informs us that a decade of underperformance in any given asset class is not only possible but is periodically expected.

As this chart from Dimensional Fund Advisors demonstrates, since 1926, the value premium has outperformed growth 84% of the time across nearly 1,000 overlapping 10-year timespans. This means, 16% of the time (during around 160 decade-long periods), it has not.

If you’d like to ponder this phenomenon at greater length, here’s the Dimensional paper from which we extracted this chart.

We also encourage you to read “Factor Fimbulwinter” by Corey Hoffstein of Newfound Research. Admitting that the recently “disappearing” value factor (as measured by price-to-book) could well signify either the death of the premium, or simply a decade of expected variance, Hoffstein calculated how long it should take to be able to determine which conclusion was correct. The answer: 67 years.

He concludes (emphasis ours):

“The problem at hand is two-fold: (1) the statistical evidence supporting most factors is considerable and (2) the decade-to-decade variance in factor performance is substantial. Taken together, you run into a situation where a mere decade of underperformance likely cannot undue the previously established significance. … In investing, factor return variance is large enough that the proof is not in the eating of the short-term return pudding.”

Larry Swedroe also recently analyzed the durability of various investment factors and reached similar conclusions. In his article, he observed:

“[O]ne of the greatest problems preventing investors from achieving their financial goals is that, when it comes to judging the performance of an investment strategy, they believe that three years is a long time, five years is a very long time and 10 years is an eternity.”

Planning for Uncertainty

Of course most of us don’t have 67 years to wait before we decide whether a market factor is a sure winner or loser. Favoring reality over fantasy, here’s what we suggest:

  1. Incorporate the most robust academic evidence suggesting which risk/return factors to favor.
  2. Tilt your globally diversified portfolio toward those factors (as needed to reflect your unique goals).
  3. Stick to the plan for a long, long time; avoid acting on hopes or fears, favoring only judicious adjustments when warranted.

What’s the alternative? While Madoff is history, we can point to any number of unsavory schemes that continue to be perpetrated by a seemingly never-ending supply of similar scoundrels. So whatever you do and whoever’s advice you choose to take, here’s one tip worth taking to heart: Always be wary of a “sure bet.”

December 2018 | Posted By Rick Hill

We frequently mention the importance of employing global diversification to manage investment risks while pursuing expected returns. The broad concept is simple: Don’t put all your eggs in one basket.

That said, beyond the simple adage, questions may remain. A recent Dimensional Fund Advisors paper addressed one of them: Since U.S. stocks have outperformed international and emerging markets stocks over the last several years, is it still worthwhile to invest worldwide?

Click to enlarge

If you’d rather skip to the compelling conclusion, the short answer is, yes, global diversification is still worth it. Not only do the last several years tell us nothing about the next several years, they could lull U.S. investors into a false sense of home-biased complacency. To emphasize this point, we need only point to the 2000–2009 “lost decade,” when the S&P 500 took a depressing 10-year dive, while most of the world’s indexes soared.

Bottom line: You never know where your next source of best returns will be found, so it’s best to go global – and stay that way.

December 2018 | Posted By PJ McDaniel

Real Progress Is Slow and Boring, and That’s Okay

If you go to the gym for a workout and look in the mirror afterward, you won’t see any results. If you go to the gym the next day and look in the mirror, you still won’t see any results.

Despite your hard work and sacrifice, there’s no visible progress. Therefore, the strategy must be defective, right?

Image from our good friend Carl Richards of The Behavior Gap

In hindsight, someone who has lost weight or completed a marathon knows this logic is laughable. Physical fitness is the byproduct of slow, incremental progress, not large sweeping changes. And yet, we still have 7-day crash diets, magic pills that “burn fat,” and infomercials about toning your abs in your sleep.

Compare these with consistently exercising five days per week, skipping dessert, and getting eight hours of sleep every day. The latter always outperforms the former.

So why do people fall for the shortcuts?

The human brain is wired to enjoy instant gratification; we struggle at rewiring ourselves to embrace durable new habits. Talking about overnight transformation is sexy. Talking about the quiet power of incremental change is not. This applies to weight loss, learning a language, and of course, building wealth.

A Google search for “make money fast” yields more than 1.5 billion results. The cognitive dissonance here is stunning: It’s crystal-clear that financial freedom correlates with systematic contributions to one’s investment portfolio or retirement account, just as systematic workouts correlate with fitness. Think of the ongoing contributions like an extra monthly car or mortgage payment. Over the long run, it becomes a habit.

Unless actions become habits, tangible results remain a pipe dream.

Imagine asking a wealthy person to define the day he or she gained financial freedom. That’s like asking an Olympic gold medalist to define the day he or she got in shape. It’s a silly question.

Obviously that person is financially free, but we have to take a step back to observe the slow, boring progress that was made over months, years, decades — change so slow they hardly even noticed it happened.

December 2018 | Posted By Nell Schiffer

Our humble start in June 2005, before committing to the same office space we’re updating in 2019.

FYI! From January through March 2019, our St. Louis office will be under “reconstruction,” with our St. Louis team in temporary office space or working remotely. If you weren’t planning to visit us in person during the first quarter, you’d be unlikely to even notice that change is afoot. All of our contact information will remain the same throughout, and meeting space will be available in the building as needed.

Why the makeover? As our team continues to grow, we want to keep our administrative costs well-managed. We also want our office to remain a warm and inviting place for ourselves and our visitors. To achieve all that, we’re revamping our existing quarters. We look forward to reopening our doors to walk-in guests come April. Until then, pardon our dust!

November 2018 | Posted By Abby Crimmins


Abby Crimmins

As Hill Investment Group’s newest team member, I was honored when Matt Hall asked me to represent us in a holiday post about gratitude.

One of the reasons I knew I’d found a special place when I joined HIG earlier this year was how integral gratitude is to our culture. It’s not just a word to haul out once a year. We live it here every day.

For example, when a newbie comes on board, along with a bounty of educational materials, we’re provided a little book called The Five Minute Journal. It’s a handsome journal that poses 5 daily questions to help zoom in on gratitude. Each of us has a copy to keep current and we think it helps maintain a positive focus.

I’m grateful for so many things, a page a day can hardly contain them. Toward the top of the list, I’m grateful to have the daily opportunity to help our clients and their families enrich their own lives through our work.

On behalf of all of us here at HIG, I’d like to thank each of our clients for giving me plenty to write about in my Five Minute Journal, every single day.

November 2018 | Posted By Rick Hill

Younger Next Year author Chris Crowley

While I just turned 76 last week, my 80th birthday doesn’t feel that far off. I couldn’t have asked for a better role model on how to prepare for that milestone than Chris Crowley, octogenarian and best-selling author of the Younger Next Year book series.*

Earlier this month, we were delighted to host a special evening with Crowley (84) and a gathering of friends and family at St. Louis’ PALM Integrated Health venue. In his featured book at the event, Crowley shared seven tips on how to “Live Strong, Fit and Sexy — Until You’re 80 and Beyond.” He and his co-author Dr. Henry Lodge suggest this is “all” you have to do:

  1. Exercise six days a week for the rest of your life.
  2. Do serious aerobic exercise four days a week for the rest of your life.
  3. Do serious strength training, with weights, two days a week for the rest of your life.
  4. Spend less than you make.
  5. Quit eating crap!
  6. Care.
  7. Connect and commit.

Okay, I’m on it!

*To our clients – Shoot us an email if you’d like your own copy of Younger Next Year.

November 2018 | Posted By Buddy Reisinger

We’re not the only ones encouraging investors around the globe to Take the Long View® with their investment strategy. AQR Capital Management’s like-minded perspective is one of the reasons we’ve been known to turn to some of their fund solutions, when appropriate for a client’s goals.

We also appreciate how their podcast series, hosted by Gabe Feghali and Dan Villalon, takes otherwise complex academic insights and translates them into what you need to know to build those insights into your own investing.

We’re particularly fond of their September podcast, “Taking Stock of Stock Myths.”

In this podcast, AQR’s team takes on three types of equity risks – home bias, market-timing and inflation – and busts some of the stock market myths that cause investors to succumb to them.

First, what is “risk” to begin with? We like their working definition, which describes risk as “how likely it is that you end up with a bad outcome over whatever investment horizon you care about.”

See what I mean about keeping it simple but substantive? Here are links to listen to the rest:

  • “Taking Stock of Stock Myths” (web browser)
  • “Taking Stock of Stock Myths” (iTunes)
November 2018 | Posted By Nell Schiffer

Combine our aging population, longer life expectancies, and all the new-fangled ways to engage in old-fashioned thievery, and America faces a perfect storm of increased financial elder abuse.

It’s worth emphasizing, even those who are affluent, well-educated and/or generally street-savvy are not immune from the threat. In a 2015 survey, True Link Financial (a firm dedicated to protecting families against financial abuse) found that, “Seniors who are young, urban, and college educated lose more money than those who are not,” and “[f]inancially sophisticated seniors lose more to fraud, likely because they are comfortable moving larger amounts of money around.”

They also found that especially friendly (and/or lonely) seniors were at increased risk. For example, you probably know someone who fits this description: “You tell mom to hang up on telemarketers, but she is just too polite to hang up on anyone.”

First, we fiduciary advisors have an important role to play as our clients’ first lines of defense against financial elder abuse. Once we know you well – and thanks in part to recently enacted legislation – we and our allies at Schwab Institutional are better equipped to detect and follow up when something seems “off.”

Family members can and should help as well (although, tragically, they can also be among the worst perpetrators, given their ready access to the victim’s heartstrings).

Together, we can watch out for telltale signs of financial elder abuse.

Be on the lookout for erratic financial activities that don’t jive with your loved one’s past habits and levels of competency. For example, watch out for missing or inconsistent account statements, unpaid bills, and unexplained deposits or withdrawals.

There are softer signs as well. Be on alert if a loved one is displaying increased levels of anxiety or confusion about their money; or if a family member, “friend” or guardian may be isolating their victim from you or others.

Financial abuse can arrive in the form of an external threat – such as a phone scam, in which the victim is tricked into wiring money overseas to “rescue” a stranded relative, or a phishing email that tempts them into clicking on infected links. As touched on above, the abuse also can come from a trusted friend or family member, and it can continue for years.

If you suspect you or someone you know has become a victim of financial abuse, don’t feel embarrassed or ashamed to report it. It truly can happen to anyone, at any age! Hill Investment Group clients and their family members should feel free to reach out to us with any questions or concerns. You also may wish to be in touch with other financial alliances, such as your bank or insurance provider, and consider submitting a complaint to the Consumer Financial Protection Bureau.

Would you like to know more about what we are doing Hill Investment Group to prevent abuse and fraud, and protect client information? We are here as a resource for you. Feel free to be in touch with any questions.