“Analyze This” – BDF Annual Client Event Recap

January 25, 2018

On January 18, BDF held its Annual Client Event in Itasca with over 300 clients and guests in attendance. Chad Carlson, Director of Investment Research, and Mark Balasa, Chief Investment Officer, were the keynote speakers.

2017 Market Review

Chad reviewed 2017, which was a phenomenal year for both stock and bond returns – far exceeding anyone’s expectations.

Stocks

  • Emerging markets led the pack, returning over 37%
  • Non-U.S. stocks outpaced U.S. stocks for the first time in several years, perhaps marking a shift in favor of markets outside the U.S.
  • The S&P 500 returned almost 22% for the year
  • BDF’s equity strategy showed strong performance relative to market averages due to our factor exposure – specifically momentum and profitability.

Bonds

  • Bonds had better than expected returns despite concerns that rising interest rates would create a headwind for bonds.
  • While the Fed raised short-term rates, rates further out on the yield curve remained static, so being further out on the yield curve boosted returns.
  • BDF’s bond strategy also showed strong performance relative to market averages as recent shifts away from the Fed’s “bullseye” helped.

As good as 2017 was, there are still risks. The market had very little volatility in 2017 compared to a typical year in which one would expect at least a 10% pullback at some point. Thus, we may be overdue for a correction in 2018 even though that doesn’t mean a down year for stocks. Also, the Fed has embarked on an unprecedented “unwinding” of its bond holdings which had ballooned from about $900 billion to $4.5 trillion following the financial crisis. U.S. stocks are expensive by some measures and reasonably valued by others. Stocks outside the U.S. remain cheap. And, it’s important to remember that news and perceptions don’t always equal reality. 2017 was a perfect example as most prognostications for the year turned out to be completely wrong.

Analyze This

Mark Balasa devoted his portion of the presentation to a discussion of behavioral finance. Referencing Nobel Prize winning research of Richard Thaler, Mark illustrated how human beings often “misbehave” when it comes to investing. That misbehavior negatively impacts returns. Mark focused on three specific behaviors – past performance heuristic, loss aversion, and framing.

  • Past performance heuristic. Investors often look to past performance (good or bad) as a predictor of future performance. Doing so leads to bad investing decisions. For instance, studies of mutual fund performance show that there can be a material difference between a fund’s performance and the actual return experienced by investors. The main reason is that investors don’t stay disciplined. They often buy high and sell low – the direct opposite of what they should do.
  • Loss aversion. One of Thaler’s studies showed that we don’t experience pleasure and pain equally when it comes to investing. Losses are up to 2.5 times more painful than gains are pleasurable. Furthermore, the more frequently one looks at their investment portfolio, the more “pain” they feel as it is more likely to see a down day than it is a down month, quarter, or year.
  • Framing. How one views information makes a difference in decision-making. When thinking about retirement, it is better to focus on the success of your financial plan rather than the performance of your portfolio. Your financial plan shows the true impact of movements in the market and is tailored to your goals and objectives. The MyBDF portal was built with this in mind.

If you are interested in learning more about what was discussed at the event, look for an upcoming webinar by our Chief Investment Officer, Mark Balasa.

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