At Hill Investment Group, we believe in helping our clients take the long view when it comes to their financial well-being. But what does that mean in practice? It’s about more than just numbers; it’s about finding strategies that improve your financial outcomes and give you peace of mind. 

Quantifying the Impact of Financial Advice

Several research studies have attempted to quantify the value of good financial advice. Vanguard estimates the impact at up to 3% per year, calling it “Advisor’s Alpha.” Morningstar refers to it as “Gamma,” measuring it at 1.59% per year for retirees. While the terminology may differ, the consensus is clear: thoughtful, evidence-based financial advice can significantly enhance your financial outcomes over time.

At Hill Investment Group, we believe this value goes beyond just dollars and percentages. It’s about guiding you through market fluctuations, life changes, and financial decisions with a steady hand, always focusing on the big picture.

The Behavioral Factor: Turning Plans into Action

One of the most overlooked benefits of working with a financial advisor is ensuring that the plan actually gets implemented. Most people know they should save more, spend wisely, and avoid emotional investing decisions, but turning intention into action is another matter entirely. This is where Hill Investment Group comes in—providing the support, coaching, and accountability needed to take the long view and stay the course.

The “Compared to What” Problem

Measuring the value of financial advice isn’t straightforward. It’s one thing to compare two specific strategies and determine which is better. It’s another to assess how much value a financial planner adds in the abstract, especially when we can’t know how someone would have behaved without the advice.

For example, a strategy that maximizes wealth might not be best if it leaves you feeling anxious about potential losses. What truly matters is how well a strategy aligns with your goals and risk tolerance. A financial plan that looks perfect on paper might not be ideal if it keeps you up at night. At Hill Investment Group, we focus on strategies that not only work on spreadsheets but also fit seamlessly into your life.

More Than Just Portfolio Management

Financial advice goes beyond portfolio management. It touches on various areas like tax planning, insurance, estate planning, and retirement strategies. And while some benefits, like tax savings from effective asset location, are easier to quantify, others, like peace of mind from knowing your financial house is in order, are invaluable.

The Bottom Line

At Hill Investment Group, we believe that the true value of financial planning is not just in the strategies recommended but in their execution and alignment with your personal goals. It’s not just about achieving higher returns or paying less in taxes—it’s about living a life where your finances support your well-being and aspirations. That’s the essence of taking the long view.

Historically, the US Equity market has returned about 10% annually to investors from 1926 – 2022. Due to this historical rate of return, many investors expect this level of return year over year. However, stock markets are highly volatile. Although the average is 10% per year, it is extremely rare for the market to be up 10% over any given year.

Since 1927, there have only been 6 years where the stock market returned between 8-12%. Thus, even though you should expect the market to give you a 10% return, you should expect the market over any given year to hardly ever give you a 10% return. It is this bumpy road that creates the risk in investing in equities, which is why you are compensated with the 10% annual average return. The key is to take the long view and not look at quarter-to-quarter or year-to-year returns.

People often panic when their expectations don’t match reality. Investors expect a 10% return every year, which will often not materialize. When the market goes down and does not match this 10% expectation, investors tend to panic. Changing your expectations on the range of outcomes of equities while keeping in mind the long-term average can help investors stick to their plan.

Hill Investment Group is a registered investment adviser. Registration of an Investment Advisor does not imply any level of skill or training.  This information is educational and does not intend to make an offer for the sale of any specific securities, investments, or strategies.  Investments involve risk, and past performance is not indicative of future performance. Return will be reduced by advisory fees and any other expenses incurred in managing a client’s account. Consult with a qualified financial adviser before implementing any investment strategy.

Hill Investment Group may discuss and display charts, graphs, and formulas which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used alone to make investment decisions.

At Hill Investment Group, we recognize that when a few clients raise the same question, it’s likely that more have similar thoughts. To better serve you, we’re introducing a new segment in our newsletter where we’ll address common questions and how we approach them. To submit questions for future newsletters, email us at info@hillinvestmentgroup.com

Hey Hill, how can I think differently about the total return of my portfolio vs. focusing on income investing alone?

Throughout our working lives, we relied on our earned income to support our day-to-day expenses. Each year, we worked, earned a salary, and used that money to cover necessities such as food, housing, entertainment, and childcare. A consistent income stream provided us with a sense of security to fulfill our needs and save for retirement. 

However, after retiring, the question arises: where will the income come from to sustain our lifestyle? While some may come from pensions or social security, these sources may not always be sufficient. As a result, investors often dip into their savings portfolio to supplement their income.

When considering how to invest their savings, investors tend to zero in on needing “income” to replace their salaries. They may have a funding gap and want to ensure their portfolio will yield a certain yearly income level through fixed-income or dividend-paying stocks. Although this approach is intuitive and may give retirees peace of mind, it does not maximize the odds of financial success. Why not?

Investment returns come from two places. Income (dividends and interest) and capital appreciation (prices going up). By focusing solely on income, you forgo the primary driver of returns: capital appreciation. 

When you go to the store and buy new clothes, you don’t care if you pay with cash from your left pocket or your right pocket. Money is money, and the source is irrelevant. The same is true of investment returns. It does not matter whether those returns come from dividends or prices going up. What matters is the total amount of money you have. By focusing on income returns or just the money in your left pocket, you are not investing in the stocks or bonds with the highest expected total return. You are not maximizing the money you have across both your pockets. At the end of the year, this will leave you with less total savings.

Capital appreciation generally drives total returns much more than income. Additionally, capital appreciation receives favorable tax treatment. Gains from price increases are taxed at a lower rate than income. Thus, an investor would prefer their return come from capital appreciation vs. income because, after taxes, they will have more money to spend. 

Therefore, rather than thinking about how much income my portfolio generates year by year, we encourage our clients to consider the total value of their investments and what that total level can sustain in terms of spending over a lifetime, understanding the ebbs and flows of the market. This approach maximizes our clients’ odds of achieving their financial goals.

Hill Investment Group is a registered investment adviser. Registration of an Investment Advisor does not imply any level of skill or training. This information is educational and does not intend to make an offer for the sale of any specific securities, investments, or strategies.  Investments involve risk and, past performance is not indicative of future performance. 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.