Featured entries from our Journal

Details Are Part of Our Difference

Embracing the Evidence at Anheuser-Busch – Mid 1980s

529 Best Practices

David Booth on How to Choose an Advisor

The One Minute Audio Clip You Need to Hear

Tag: Evidence-Based Investing

The Big Rocks

A professor set a large jar in front of her class of savvy business students and filled it with fist-sized rocks until it was full.

“Is the jar full?” she asked the class.

Most of the class nodded in approval. Then, she took out a bag of gravel, and dropped a handful of it into the jar until it slid into all the spaces between the big rocks. “Now is it full?” The class was starting to catch on. Several students said the jar wasn’t full yet.

“Well, let’s find out,” she said. The professor brought out a bucket of sand and poured it into the jar. With a few shakes, the sand filled the tiny crevices around the rocks and gravel.

“Is it full now?” she asked yet again. The class thought: What could possibly be smaller than sand? Sure enough, the professor took out a jug of water from behind her desk and poured it into the jar where it diffused through the rocks, gravel, and sand, filling the jar to the brim.

“Your life is like this jar,” she explained. “If you don’t put in your big rocks first, they’ll never fit around the little stuff.”

We did not write this story; it’s been around for years. We’ve heard it a hundred times or more from financial thought leader Larry Swedroe, and Matt Hall felt it was so powerful, he included it in his book Odds On.

If anything, the message becomes more relevant as each day passes. In 2019, it’s easier than ever to fill our proverbial jars with sand and water: shopping, entertainment, text messages, and so on. Meanwhile, there’s less and less room for our big rocks: family, community, education, financial freedom the not-so-sexy yet foundational qualities of a life well-lived.

Our job at Hill Investment Group isn’t just to maximize the value of your investment portfolio. That’s part of it, but our greater job is to help you put your big rocks in place. All of them.

How’s your jar looking?

Positive News About Negative Returns

We’ve said it before and we’ll likely say it again: Investment risks and expected rewards are related, but disciplined diversification helps us reduce the risks.

Our friends at Dimensional Fund Advisors recently released an important report supporting this point.

Click to read the full report

In their report, they took a look at four sources of expected returns found in many evidence-based investment portfolios (market, size, value, and profitability).

Using U.S. stock market data stretching back more than 50 years, they found that, about half the time, one of the four premiums delivered negative returns for any rolling ten-year period across that time frame.

That sounds risky, doesn’t it? But consider this: Across the same time frame, at least one of the premiums delivered positive returns during every single 10-year rolling period. In fact, far more often than not, two of them delivered positive returns during each 10-year period. The premiums existed, they observed, but they “do not move in lockstep.”

Check out Dimensional’s report to see the data for yourself. It offers a strong, continued vote for depending on steadfast diversification across multiple risk premiums to help you manage your risks in pursuit of your expected rewards.

Investing Alphabetically – Seriously?

Where would we be without alphabetic order in our life? Imagine if airports listed all departures randomly on their flight boards? We might never make it to the gate.

But should you find your investments alphabetically? When you’re presented with a list of available funds, should you prefer the ones that appear toward the top of the list?

This is not a trick question. Of course, the answer is no. It shouldn’t matter one bit where a fund name falls on an alphabetic list. And yet, amazingly, a recent study found that many investors may be unintentionally allowing “alphabeticity bias” to creep into their decisions anyway.

The study, “Alphabeticity Bias in 401(k) Investing,” is slated to be published in a forthcoming issue of The Financial Review. Investment selections in 401(k) retirement plans are often presented in alphabetic order, so the study’s authors took a look at whether plan participants were allowing that order to influence their choices. They found that, indeed, “alphabeticity – the order that fund names appear when listed in alphabetical order – significantly biases participants’ investment allocation decisions.” The longer the list of selections, the more alphabeticity bias appeared.

Why would we do this? The authors proposed the reason is related to another bias they called “satisficing.” When you’re reviewing an alphabetic list of choices, once you’ve found one that suits your purpose, you tend to give less consideration to the rest of the list. “My work here is done,” your brain tells you, and it shuts down … even if there may be an even better selection further on.

You shouldn’t, and we won’t, settle for next-best investments – in your retirement plan or anywhere else. Helping you avoid doing so is one way we encourage you to Take the Long View® when you invest.

Featured entries from our Journal

Details Are Part of Our Difference

Embracing the Evidence at Anheuser-Busch – Mid 1980s

529 Best Practices

David Booth on How to Choose an Advisor

The One Minute Audio Clip You Need to Hear

Hill Investment Group