FAQ

Buy and hold only works if you hold 100% of the time. History is littered with periods where it would have been very difficult to sleep at night based on a “hang in there, it always comes back” approach. If we look at some of the worst stock market drawdowns in U.S. history, the facts say it can result in a substantial reduction in your net worth.

Unlike buy and hold, a data-based approach provides investors with prudent and logical damage-mitigation strategies that can greatly reduce worry and lead to a better night’s sleep. Additionally, as you near or enter retirement, a buy and hold strategy simply becomes too risky to employ.

Most robo-advisors are simply a spin-off of the old pie chart investing approach. Like “hang in there during a bear market” strategies, the typical robo-advisor builds an allocation for you and the “robo” feature involves automatically getting the portfolio back into balance based on some simple programming.

As numerous studies have shown, portfolios utilizing "auto-rebalancing" did not perform significantly better than standard buy-and-hold static pie chart allocations. Diversified portfolios and rebalancing are not new concepts and have been used by old school Wall Street firms for decades.

Most robo-advisors do not monitor present day market risk, nor do they adjust your allocation based on present day risk. Therefore, if your robo pie chart contains a heavy weighting to stocks, you will maintain a heavy weighting to stocks during even the most devastating bear market. “Automatic rebalancing” is basically a form of “buy-and-hold-and-hope” investing.

Unfortunately, like old school pie chart investing, a robo-advisor investor may still get spooked by common human investing missteps. Even sound advice from a robo-advisor is not useful if the end user does not have the discipline to stay invested during normal pullbacks.

We have the same incentives to reduce hidden ETF fees as an individual investor. When ETFs are selected, both sides of the spectrum are taken into account (fees and investment performance/potential upside). With the industry moving to a no-commission/low-investment-fee model, we have numerous low-cost ETFs to choose from when building portfolios.

For example, the hidden fees associated with Schwab’s Large Cap Stock Index ETF (SCHX) are three times cheaper than the industry standard S&P 500 Index ETF SPY (0.03% for SCHX versus 0.09% for SPY). Schwab’s SCHX is also cheaper than Vanguard’s VV ETF (0.03% for SCHX versus 0.04% for VV).

Hidden ETF fees and taxes are always relevant. However, let's assume you had a $1,000,000 portfolio invested in the S&P 500 Index in October 2007. If your primary objective was to minimize ETF fees and transaction-related taxes, you would have lost 58% before the stock market bottomed on March 9, 2009. A loss of 58% equates to $580,000 in principal. The hidden annual fee on $1,000,000 invested in Schwab’s Large Cap Index ETF would come to approximately $300. Compare the $300 ETF fee hit to your hard-earned principal to the $580,000 loss in the 2007-2009 bear market example.

Moral of the story, principal protection is infinitely more important than hidden ETF fees or tax implications. Many investors worry about pinching pennies rather than protecting dollars. Trading frequency and taxes are important, but they are not nearly as important as protecting your hard-earned principal.

Net worth-destroying bear markets are not rare events. It is not a question of if another devastating bear market is coming but simply when the next devastating bear market is coming. If you focus on minimizing trades, you may regret that decision a few months into the bear market episode. It is best to build your shelter during a bull market; the FIRM Investment Model is a form of probabilistic shelter for your investments.

• ETF information as of September 2019. Fees associated with third-party ETFs are subject to change. Figures above are presented for illustrative purposes only.

An investor who understands the importance of protecting their wealth during the next inevitable bear market, but also wants to be able to capture positive returns during long-term bull markets. The miracle of compounding can work for us or against us.

“Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn’t ... pays it.” ~Albert Einstein

Charts and hard data were meticulously studied to answer the following questions:

• What do the early stages of a new bear market look like?

• What do the early stages of a new bull market look like?

• What does a healthy market look like?

• What does a low-probability (unhealthy) market look like? - What data points and charts are helpful?

• What data points and charts are not helpful? - What characteristics do winning investments share?

• What characteristics do unfavorable investments share?

Given there are an overwhelming number of charts, indicators, and economic data points to consider when making investment decisions, one of the most powerful elements of model development centers around what data to use and what data to exclude. The key is to find data that is consistently helpful over long periods of time, and to exclude data that leads to false signals. Item description

Yes. And it will be!

We can use answers about goals and risk tolerance in our client questionnaire to adjust the model’s base recommendations if needed. For example, allocations to more volatile ETFs or sectors, such as semi-conductors, can be adjusted up or down based on the client’s needs.

Since all investments are selected based on present day facts, most clients own the same ETFs, with a few possible exceptions from time to time. The weighting of each ETF in your profile will be adjusted slightly to accommodate varying tolerances for risk.

During prolonged corrections or bear markets, larger incremental defensive steps can be taken for clients that wish to have their portfolios managed in a more conservative manner.

In most instances, incremental steps or position weightings are adjusted in relatively small increments to make sure all clients stay invested in line with present day market data.

For the most part, it is better to run any investment strategy in a tax-deferred account, including the FIRM investment strategy. Many clients have a taxable account and an IRA, which allows us to conduct many of the less tax-efficient transactions in an IRA; under these circumstances, we can treat the taxable account and IRA as one large household account.