Intuitively it makes sense that the lower the cost of investing the more one should make.  As with many things the reality is more complicated as a lower expense does not necessarily mean better returns.  The bigger issue is that asking what something costs may be the wrong question.  The question is not how much something costs but how much one earns over time net of expense and tax.  An even more important question is whether you are meeting your personal needs and goals.  While expense does play a part in determining net return, there are other factors to consider.  Focusing merely on expense can lead to under-performance and not achieving one’s personal goals and objectives.  There are several reasons for this.

1. The largest issue facing most investors is that they miss opportunities by trying to time markets.  Numerous studies have shown that investors generally lag broader indices because they are not invested when markets move up.  A trusted advisor can help you stay invested.  Consider that if an investor stayed fully invested in the S&P 500 from 1995 through 2014, they would’ve had a 9.85% annualized return.   If they missed just the ten best days during that same period or one per year on average,  then those annualized returns collapse to 6.1%.  If the investor missed the forty best days, or just four days per year on average, they had a negative return of 0.45% per year and a 10,000 investment after twenty years was worth only $9,140.  (see chart below, please remember that direct investment in an index is not possible.)                                         

2. It’s not what you make but what you keep net of income tax that is important. Your advisor can help you minimize taxes based on your situation and therefore can potentially provide you with a higher return with less risk than a portfolio that does not consider a tax strategy.  Portfolio models that use only low-cost index shares with an active trading strategy, or actively managed mutual funds,  may have a higher income tax and therefore a lower net return.  We take a very proactive approach to minimizing taxes and work with your CPA as a team.  An individual who earns 9% and then pays 40% in income tax nets less than someone who makes 6% tax-free.

3. The trusted advisor can help in developing, monitoring and updating an asset allocation that meets both your needs and objectives. Numerous studies have shown that asset allocation is far more important than investment selection with regard to long-term¹

Since 2001 The Annual Vanguard study has indicated that a trusted advisor can add a net return for investors. The Vanguard Study from June 2016 (vanguard.com/pdf/ISGAA.pdf) states in part:  “Rather than placing its major focus on investment capabilities, the advisor’s alpha (value)  relies on the experience and stewardship that the advisor can provide in the relationship.  Left alone, investors often make choices that impair their returns and jeopardize their ability to fund their long-term objectives.  The conclusion is that ‘Paying a fee for advice and guidance to a professional can add meaningful value compared to the average investor experience, currently advised or not.’ “

Having an experienced, objective and independent advisor can help you achieve higher net returns than a do it yourself approach even if you are an experienced investor.  A trusted advisor can provide perspective, help minimize emotional responses and assist with holistic planning.  For the same reason that lawyers do not represent themselves but see another lawyer and doctors go to another doctor, we believe that most investors should work with an experienced professional or team. Ultimately this can help provide better long-term returns, make life easier and help you meet your personal goals.  Please feel free to contact us without cost or obligation for a second opinion on your current portfolio or if we can otherwise be of service.

1. http://seekingalpha.com/article/3021756-asset-allocation-vs-security-selection; http://www.cfapubs.org/doi/pdf/10.2469/faj.v47.n3.40

This information has been obtained from sources considered to be reliable, but we do not guarantee that this material is accurate or complete. Opinions expressed are those of Randy Carver and are not necessarily those of RJFS or Raymond James. Raymond James Financial Services, Inc. and its advisors do not provide advice on tax issues, these matters should be discussed with a tax professional. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Asset allocation and diversification do not ensure a profit or guarantee against loss. Working with a financial professional does not ensure a favorable outcome.

The recent election had a lot of rhetoric about manufacturing jobs that had been lost overseas and America’s growing trade deficit with various countries.  If we listen to many of the politicians,  and mainstream media,  jobs and companies are abandoning the US and other countries to manufacture overseas.  Moreover, China and other countries are said to be out producing us.   While this may make for a good soundbite, this is not factually correct.   While we have seen companies move overseas both for tax reasons and other factors such as less regulation; the fact is that the United States remains the largest producer of goods and services in the world both in absolute terms and on a per capita basis.    China is often mentioned as a prime culprit in taking manufacturing the facts suggest otherwise.

Americans produce about 20% of all the stuff in the world with 4.5% of the world’s population,

China makes 17% of the stuff with 19% population (source: Unleashing the Second American Century: Four Forces for Economic Dominance by Joel Kurtzman)   America’s productivity, measured on a per capita basis, remains the world standard.   Even more significant is that while the 20% of the world’s goods are produced in the United States, American companies collectively produce between 30% and 40% of everything in the world.  A lot of that money comes from overseas operations and up until now most of that cash stays overseas.   With an expected reduction in corporate tax rates and/or on repatriated funds much of this cash may come back into the United States.

Despite the high relative tax rates the number of jobs coming back to the United States – so called  Re-Shoring – continues to increase.  We believe that with lower tax rates and less regulation this number will continue to grow.

For the first time in at least 20 years U.S. manufacturing showed a net gain in jobs created domestically in 2015 – the most recent year to report. That’s according to a study published by Reshoring Initiative, a Chicago-based firm, that found the net gain on reshoring (also called onshoring) and foreign investment in the U.S. was 67,000 jobs nationwide in 2015.  Foreign companies are also investing hundreds of millions in the United States.  A case in point is Nox, a leading Asian manufacturer that opened a state-of-the-art manufacturing facility in Fostoria, Ohio, in 2015.  Nox is investing tens of millions of dollars into modifying the space, which spans a little over 300,000 square feet. The plant will supplement the company’s primary manufacturing facility in South Korea.

Harry Moser, founder and president of Reshoring Initiative, said the trend in manufacturing in the U.S. is to source domestically. “With 3 million to 4 million manufacturing jobs still offshore, we see huge potential for growth.”  While there are several factors at play here, Moser—as well as others—said one big influencer is escalating wages in traditionally lower-cost countries, including China, have pushed companies to reconsider sourcing strategies.

As mentioned in our last blog we believe that  the Republican sweep in the U.S. Congress means we will see a focus on areas where President Trump has common ground with the Republican establishment in the first 100 days of the new  administration.  This should include lower tax rates for companies and an attempt to reduce regulation- both of which would bode well for increasing jobs and investment in the U.S.

It remains to be seen what actual policy the new administration puts forward and how successful they are in getting it passed. Furthermore, we believe that a push for more protectionism is not necessarily  a good thing for the United States in the long run and not consistent with the standard Republican policy.  While we are very optimistic about the longer term growth of the broad equity markets we believe that we will see rising interest rates, federal debt and inflation.  This may have a large negative impact on bonds and other so called ‘safe investments’.  A proactive diversified approach will be crucial to help achieve investment  success in this environment.   Those who are properly allocated and maintain reasonable expectations for return and withdrawals while ignoring short term swings, and don’t get caught up in the negative hype, can potentially benefit from the opportunity.

Our team is here for you and your family and looks forward to discussing any questions or concerns you may have.  As we look to 2017 and beyond we continue to take a customized holistic approach to planning and wealth management that is based on your personal vision.  A proactive holistic approach will, in our opinion, become even more important as we see increased volatility and regulatory complexity.  Please contact us with questions or whenever we may be of service.  randy.carver@raymondjames.com  or (440) 974-0808.

This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Opinions expressed are those of Randy Carver and are not necessarily those of RJFS or Raymond James and as of 1/2/17.   Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Asset allocation and diversification do not ensure a profit or guarantee against loss. Re-balancing a non-retirement account could be a taxable event that may increase your tax liability. Past performance does not guarantee future results  The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material.  Expressions of opinion are as of this date and are subject to change without notice.  There is no guarantee that these statements, opinions or forecast provided herein will prove to be correct.