The gap that Morningstar wants you to mind is the gap between fund returns and investor returns. The gap arises when investors take action in their investment portfolios.

For example, take an investor in one of the more–if not most–popular technology-heavy funds, the Invesco QQQ Trust, which tracks the performance of the NASDAQ 100 index, pictured below. The fund return is the return of the fund, based on an investment at the beginning of a time period. The investor return, on the other hand, reflects the investor’s investment decisions in the fund, like freaking out over the Tariff Tantrum in April, bailing out, and getting back in later.

The good news about the study is that the gap has narrowed over the time that Morningstar has been doing the study. Based on 2024 data, the gap was 1.2%. Over 2019-2021, the gap was 1.5%+.

The report looks at the gap across different types of funds, from municipal bond funds to international funds to sector (i.e. non-diversified funds.) Not surprising to this author, the biggest gap is in the Sector Equity funds, where it averaged 1.5%. These are common used by market-timing stock jockeys. On the other end of the spectrum are the Allocation and Alternative funds; both at 0.1%.

1.2%…as Ted Lasso might say, “big whoop!” Compound that 1.2% over ten years or longer and pretty soon it’s real money–assuming the gap doesn’t revert to its wider levels, as shown below.

Invested over ten years with a 10% return per year, $100,000 grows to $259,000

Earn 1.2% less each year, and $100,000 grows to $232,000, 10.4% less

Invested over 20 years with a 10% return per year, $100,000 grows to $673,000

Earn 1.2% less each year, and $100,000 grows to just $540,000, 19.8% less

This fits well with our investment philosophy of long-term asset allocation along with periodic rebalancing, ignoring noise along the way. In a formula, it’s…

Strategic Allocation + Rebalancing – Noise

We’d love to talk with you about it. You can contact us at info@strategencecapital.com.

The post Morningstar’s 2025 “Mind the Gap” Study appeared first on Strategence Capital.

You’re excused for wondering if you should just give up on this whole investment thing. There’s evidence of others doing that or the equivalent. Recently, participants in the options markets purchased twice as many contracts to protect against losses compared to contracts that would benefit from the market going up. In the history of this indicator (~1997), this has never happened before.

We consider this a contrary indicator, sort of like everyone getting on the same side of the boat; it usually doesn’t work out for those folks. In his 1841 book, Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay said, “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.” This would suggest the market is due for a bounce.

Still, whether that bounce is a permanent one or just the sort a cat makes when it gets dropped, you may be thinking about sitting on the sidelines for a while.

A common sentiment we hear is some version of I’ll get out and wait until things look better. If this is your line, be forewarned that it will guts of steel since the news will–almost by definition–look worse at lower prices and only look better at higher prices.

That’s a good recipe for this outcome…

What’s more, big market moves tend to happen over very short periods of time. Miss a couple of those, and you may need to delay retirement. The chart below shows that if you missed the five best days of the last 25 years, your $1,000 investment would only have grown to $2,295 instead of the $3,631 you would have had by staying invested.

Our advice remains the same, so long as your investment mix is appropriate for your circumstances, we recommend sitting tight. If you have additional funds, now may be the time to nibble on more investments, since they’re on sale.

The post Enough Already! appeared first on Strategence Capital.

Enter the donor-advised fund (DAF).

Donor-Advised Funds

A donor-advised fund is an investment vehicle that is managed by a third party. This fund can allow you to make a large charitable contribution in one year and make smaller charitable disbursements over several years. One feature of the DAF is that the taxpayer realizes the tax benefit when the money goes into the account, whereas the smaller charitable distributions may have left one under the standard deduction.

DAFs are more user-friendly than charitable remainder trusts and private foundations and are relatively cheap to establish and maintain. Because of the tax law change and the ease of use, there was a 19% increase in individual DAFs between 2018 and 2019, bringing the total number of DAFs to 873,228 (The Tax Advisor, 2021). Let’s look at an example of how bunching your deductions a DAF could work:

Case Study*

John and Jane Smith enjoy giving to their church and other organizations in their local community. Last year, John received a $30,000 bonus at the end of the year, and they gave $18,000 or 10% of their income to their church and another $2,500 to local charities throughout the year. When they go to file their taxes, their accountant figures that even with their giving last year, the standard deduction of $25,900 was still higher than their itemized deductions. The Smiths do not get to deduct any of the $20,500 that was given to charities.

To maximize their tax situation, the Smiths could have taken the $30,000 year-end bonus and started a Donor Advised Fund to use for future giving. This will allow them to deduct the entire $50,500 charitable contributions ($30,000 initial contribution to the DAF + $18,000 to their church + $2,500 to various other charities) compared to their standard deduction and would save them $5,412 in federal taxes. In the following year, the Smiths will give out of their DAF instead of out of their checkbook.

Items to Consider

• Donation amount: The minimum amount to open a DAF is typically $25,000 and the donor is usually limited to sending checks to their preferred charities larger than $100.
• Fees: It is important to understand all the costs that go into a Donor Advised Fund. The DAF will charge a fee to hold the assets, if you hire an advisor to manage the investments, they will charge a fee, and if the money is invested in a mutual fund or ETF, there is an annual expense ratio that the investment fund company charges. All told, the money inside the DAF could cost between 1.0% – 3.0% of the total assets in the DAF.
• Ownership: Once the money goes into a DAF, technically the assets no longer are owned by the donor. The funds that go into the Donor Advised Fund are irrevocable. The donor can advise which charities receive the grants but cannot reverse the gift back to themselves.
• Type of Asset: Be sure the donor-advised fund can accept the asset you wish to donate. Not only can you set up a DAF with cash, but it may be possible to open a DAF with highly appreciated assets such as a stock, real estate, or a business.
• Income Gains: DAFs work great for someone who wants to frontload a charitable contribution to offset a windfall such as the sale of a business or property

If you are looking for ways to give back to some of the non-profit organizations that you are passionate about and want to make sure you are taking full advantage of the potential tax savings, don’t hesitate to give us a call.

*This is a hypothetical example and is for illustrative purposes only. It is not representative of any specific situation. Your specific situation may vary. We encourage you to seek personalized advice from qualified professionals regarding all personal finance, tax, and legal issues.

Content in this material is for general information only and not intended to provide specific tax, legal, or investment advice or recommendations for any individual. Strategence Capital and LPL Financial do not provide tax or legal advice or services. Please consult your tax and legal advisors regarding your specific situation.

The post Maximizing Your Giving Strategy appeared first on Strategence Capital.

One example of a time horizon would be saving for a child’s college education. If the child is four years old and might attend college at age 18, the time horizon is 14 years. Time horizon is so important that we’re required to review it annually with all our clients; it’s one of the most important factors behind an investment decision. It’s the reason that age-based investment products have different asset allocations, depending on the age-group targeted for the product.

Briefly, the shorter one’s investment time horizon, the less volatile those investment should be. Vice versa, the longer one’s horizon, the more volatile the investments can be.

The chart below, using data back to 1928, was produced by Bespoke. It shows the percentage of time that total returns for the Standard & Poor’s 500, a widely-followed measure of stock market returns, have been positive over various time frames. Total return includes not only price appreciation/depreciation but also dividends.

Now we can use that data to think about whether one should invest in stocks, as represented by the S&P 500.

• If you have money to invest for one month, there’s a 37.2% you’ll suffer a loss;
• If you have one decade to invest, there’s only a 5.8% chance you’ll suffer a loss;
• And there’s never been a 20-year period where the total return has been negative.

You can look at these percentages from the other side, too. Over a six-month period, your chance of having a positive return is 70%. That’s not bad. That means that out of ten six-month periods, seven will be positive, but what will your six-month period look like? That’s the big question. I like the odds at five years a lot better. That seems to me to be a good horizon to be thinking about owning stock, but your situation may be different.

Do you wonder if your asset allocation is in keeping with your time horizon? Give us a call or shoot us an email. We’d be happy to discuss this with you.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is an unmanaged index which cannot be invested into directly.  Past performance is no guarantee of future results.

The post The Importance of Time appeared first on Strategence Capital.

But check out this next chart. It shows the same asset classes, but with 30-year rolling returns. It’s far less random, with a couple of clear takeaways: bond categories have never shown up in the top half, and stock categories rarely show up in the lowest ranks.

The first chart points out the importance of diversification—and stop your guessing, already, as to which category is going to do well in any one year; it’s unknowable. The second chart suggests that, if you’re investing for the long run, your portfolio should be heavily tilted toward stock funds. Couple both of those with a disciplined rebalancing strategy and you’ve got the makings of a good investment strategy. It’s no guarantee of success, but it is stacking the odds in your favor.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Past performance is no guarantee of future results.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Please note that rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability.

The post Discerning Order in Randomness appeared first on Strategence Capital.

Obviously, we’re based in the largely-conservative Midwest, where one is more likely to hear the pejorative “tree hugger” than the kinder “environmental steward” or—for the Christian—”creation care,” but we’d like to encourage you to talk to us about this subject, especially if it speaks to your values.  What’s more, ESG, as you’ll read below, goes beyond, as the initials suggest, just environmental concerns.

Let us know if this subject is of interest to you; we may be able to tilt your investment portfolio, accordingly.  In addition to having access to tools that can help us access the investment products, we also have tools that can help analyze your individual stock holdings to determine if companies whose stock you hold are involved in adult entertainment or animal testing or contraceptives, just to name a few factors.

You might be a candidate for some portfolio tweaking if numbers two or three, below, describe you.

1. I don’t care if my portfolio has a few companies with poor environmental or human rights track records, just get me the best return.
2. If I could adjust my portfolio to reduce investments in companies with poor environmental or human rights records, I might want to do that, so long as it didn’t hurt my prospective returns.
3. I would be willing to sacrifice returns if I knew my investments would not be in companies with poor environmental or human rights records.

Remarkable Rise of ESG Investing

Environmental, Social and Governance Investing Basics

Responsible investing is widely understood as the integration of environmental, social and governance factors—hence the ESG acronym—into investment processes and decision-making.  ESG factors cover a wide spectrum of issues that traditionally are not part of financial analysis yet may have financial relevance for investors.

ESG factors might include how corporations respond to climate change, how good they are with water management, how effective their health and safety policies are in the protection against accidents, how they manage their supply chains, how they treat their workers and whether they have a corporate culture that builds trust and fosters innovation.

History of ESG

The term ESG was first coined in 2005 in a landmark study entitled “Who Cares Wins.”  Today, ESG investing is estimated at over $20 trillion in assets and its rapid growth builds on the Socially Responsible Investment (SRI) movement that has been around much longer.

But unlike SRI, which is based on ethical and moral criteria and uses mostly negative screens, such as not investing in alcohol, tobacco or firearms, ESG investing is based on the assumption that ESG factors have financial relevance.

In fact, today there are thousands of professionals from around the world holding the job title “ESG Analyst” and ESG investing is the subject of news articles in the financial pages of the world’s leading newspapers.  Many investors recognize that ESG information about corporations is vital to understand corporate purpose, strategy and management quality of companies.  It is now, quite literally, big business.

But what explains the remarkable rise of ESG investing and what does this mean for the future?

Why ESG Matters

Cynics may argue that responsible investing is just a fad.  But a closer look at the forces that have driven the movement over the past 15 years suggests otherwise.

First, technology and the rise of transparency are here to stay.  Gathering and processing data will become ever easier and cheaper.  Smart algorithms will increasingly allow for better interpretation of non-traditional financial information which seems to be doubling in volume every couple of years.

Second, environmental changes, in particular climate change, will with scientific certainty put a growing premium on good stewardship and low carbon practices as natural assets will appreciate in value over time.

Finally, people everywhere are increasingly empowered by technology.  ESG investing allows them to express their own values and to ensure that their savings and investments reflect their preferences, without compromising on returns.

The Rise of ESG

The rise of ESG investing can also be understood as a proxy for how markets and societies are changing and how concepts of valuation are adapting to these changes.

The big challenge for most corporations is to adapt to a new environment that favors smarter, cleaner and healthier products and services, and to leave behind the dogmas of the industrial era when pollution was free, labor was just a cost factor and scale and scope were the dominant strategies.

• For analysts, ESG data is increasingly important to identify those companies that are well positioned for the future and to avoid those which are likely to underperform or fail.
• For individual investors, ESG investing offers the opportunity to vote with their money.
• For policy makers, it should be a welcome market-led development that ensures that the common good does not get lost in short-term profit making at any cost.

Today’s use of ESG

In terms of overall assets, the report says money managers as a whole incorporate ESG factors “fairly evenly” across environmental, social, and governance categories.  Money managers incorporate social factors slightly more than environmental and governance criteria.  As the report shows, social criteria incorporation by money managers increased 39% from 2016 to $10.8 trillion in 2018.

Even so, “climate change” is identified as the most important specific ESG issue considered by money managers in asset-weighted terms; the assets to which this criterion applies more than doubled from 2016 to 2018, reaching more than $3.0 trillion.

Further the report found that “conflict risk” was the leading social criterion at $2.3 trillion assets under management, while assets managed with “human rights” criteria were next, at $2.2 trillion.

Continuing a trend that began years ago, criteria related to climate change and carbon emissions remained the most important environmental issue for these institutions, affecting $2.2 trillion.

According to the report, “public funds” represent both the largest value of ESG assets under management and the largest number of institutional investors incorporating some form of ESG in their investments.  Insurance companies rank second in value of ESG assets under management, although only a few institutions are involved.

ESG is here to stay

ESG investing has matured to the point where it can greatly accelerate market transformation for the better.  As corporations and investors experience growing influence and power, their actions and decisions increasingly shape the future.  Provided that political framework conditions based on openness and global rules do not deteriorate further, market-led changes will act as a force for good on a truly massive scale.

The information provided here is for general information only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Socially Responsible Investing (SRI)/Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.

The post Overview of ESG Investing appeared first on Strategence Capital.

That can’t be, of course; some must be worse than average.

Now, imagine that same group is asked whether each person is  a better driver on average than the people in Conference Room A and B. Little do they know that Conference Room B is a gathering of Formula 1 drivers.

I think the average investor imagines him or herself as only competing against the others in Conference Room A. In fact, the chances are good that he or she is forgetting about Conference Room B, which is a gathering of the most sophisticated investors in the world. There is a pretty good chance that the investor you’re selling to and buying from has more information than you.

That’s one of the main reasons underlying our approach of determining a long-term asset allocation and rebalancing to it. We advise only making changes to it as your long-term situation changes. In the meantime, the other stuff is noise and should be ignored. Almost by definition, you can’t know more than your competition.

In the 2014 article here, Richard Bernstein, one of the people in Conference Room B, compares the performance of the average mutual fund investor to just about every investment type available, and he displays it in the bar chart featured nearby.

If that’s not enough, also in 2014, Fidelity did a study of returns on its accounts, to see which had done the best. Care to guess which did the best…?

“They were the accounts of people who forgot they had an account at Fidelity.”  Read the whole story behind that here.

The post Average Investors appeared first on Strategence Capital.

Behavioral economics is mash-up of psychology and economics that tries to look at economics through the lens of how people actually act. That’s in contrast to traditional economics which assumes that, as a whole, people respond rationally; they don’t.

It’s widely believed that investment decisions made rashly and/or emotionally can be very damaging to one’s financial health and retirement readiness. Dr. Bernarzi suggests a three-question quiz that lets you know yourself better so that you’re better armed to not panic.

Question 1: In normal times, how often to do you evaluate the performance of your investments?

1. Daily
2. Monthly
3. Quarterly
4. Yearly
5. Less frequently

Give yourself points equal to the item number.

Question 2: When you set a goal, how likely are you to stick to it?

1. My track record isn’t very good on this
2. Occasionally I drop a goal
3. I don’t change goals very often
4. Once set, it stays

Again, give yourself points equal to the item number

Question 3: Do you have any apps that let you check how your investments are doing?

1. Yes
2. Yes, but I only downloaded it and never use it
3. No

By now, you know the routine.

Tally up your score. If it’s six or less, you’re a panic waiting to happen. Seven or more, you should be good. If it’s 11 or more, you can stop reading if you haven’t already.

So now what?

Depending on the severity of your condition, consider the following.

In the article, Dr. Bernartzi suggests three things you can do. First, “zoom out,” or look at a different performance metric. Specifically, he suggests looking at the change in the projected retirement income on your 401(k) statement. Look at the drop in that, instead of the drop in prices. Second, consider reframing the price decline as a sale. You probably love to get to the store and see your favorite items are on sale. Consider investments the same way. Third, he suggests using his 1-2-3 approach. Work 1 year longer; save 2% more per year; and reduce retirement spending by 3% per year.

A few years ago, I wrote a blog post titled, “Tie Yourself to the Mast,” which suggested other ways you can protect yourself from yourself. You can read it here.

The post Don’t Just Do Something; Sit There appeared first on Strategence Capital.

What’s not to like?

Well, let’s play a version of Password, where I say a word and you try to guess the other word I’m thinking of.

Ready? Here goes. Return…

[This is where you say “risk.”] Exactly! Here’s a look at a something called drawdown, a measure of risk, which measures the drop from peak to trough (and back.

The red line is the Standard & Poor’s 500, the index of large-company stocks, the one that returned 31.5% in 2019. From its late 2007 peak, it lost more than 50%, and one had to wait until 2011 to recoup the loss. Not devastating if you’re relatively young; historically, losses in stocks have been recouped over time. If this happens early in your retirement, though, it could be, “do you want fries with that?” Bonds are shown in the same chart in blue, and they’re represented by the Bloomberg Barclays Aggregate Index, which had a sharp drop on the heels of the Lehman Brothers bankruptcy in 2008.

None of this is intended to suggest any sort of decline in stocks is in the offing or is something we’re forecasting. We don’t do forecasts. Rather, take this piece as a reminder of why you invest in bonds or should consider investing in bonds as part of a well thought out strategic asset allocation.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual [shocker]. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise, all else equal, and bonds are subject to availability and change in price.

No strategy, including asset allocation, can ensure success or protect against loss.

The post Me, invest in bonds? appeared first on Strategence Capital.

Soon, we hope to publish a page on our website that allows you to find your risk number for yourself.  Until then, check out the Riskalyze post and see if you can figure out your investor personality type using their helpful graphic.  If you want to explore the personality testing phenomenon, we recommend the Enneagram.  Learn more about this method that explores your motivations for behavior and take the brief test here.

While you’re at it, here’s another post about risk that considers more than just risk tolerance.

The post Four Types of Investors appeared first on Strategence Capital.