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Drivers of Investment Returns

There is no lack of opinions on the best way to achieve optimal investment returns in our portfolios. CNBC, Facebook feeds, and seemingly everyone's brother-in-law are constantly offering up the sure fire way to find the best investments. 

So who do you trust? For me, I trust evidence rooted in academics. And although past performance is never indicative of future returns, knowing how asset classes have performed over long periods of time can at least give us an idea of what to expect moving forward. Some call this evidence-based-investing. It's contrasted to actively trying to figure out what's going to happen next. 

Using data stretching back until 1928, US small companies have done better than their large counterparts by 2.16% a year. Value companies similarly did better, to the tune of 3.30% a year compared to growth companies. 

But this is no guarantee it'll happen every year. In fact, over 10 year rolling periods, small beats large around 73% of the time in the US, and value beats growth around 83% of the time. 

And most recently, being a value investor has been challenging: growth has beaten value 14 times over those rolling 10 year periods - and 8 of those time periods have happened most recently (see chart below). It is super tempting to bail on the evidence and chase other returns around this time.

This is where patience comes into play for long-term investors. It requires some education, trust, and then patience to maintain a successful investment plan.


(Data: Information provided by Dimensional Fund Advisors LP.)
Additional Resources

1. Daniel Crosby - The Formula for Happiness (Article, 4 minute read)
Happiness = Reality - Expectations

An interesting read that argues changing our expectations can at least be as powerful as changing our reality. Dr. Crosby encourages three practices to do this: gratitude, negative visualization, and mindfulness. 

2. Morgan Housel - Twitter
"Something I believe more and more is that keeping money is harder than making money because you can make money by luck but keeping it is almost always due to a series of good, hard decisions."
No commentary needed on this - so good. 

3. Calibrating Capital - Financial Independence* (Article, 3 minute read)
This was one of those posts that was being pent up within me for years waiting to come out. I challenge the term we use of "financial independence," not because I don't respect the goal - but I question whether it really exists. I'm not sure we are ever 100% financially independent - we may get to the point of making work optional at some point in life, but there are too many factors in this world that threaten us from ever having true independence. Everything we have can be taken or severely depleted in the blink of an eye (or at least several long blinks). Proverbs 23:5 describes wealth as fleeting, something that can fly away into the sky. It doesn't make wealth wrong - but it does make it ... well, not entirely independent. Hence the asterisk. 
I want to express my own gratitude to you and offer a give-away. Something I order every year, without fail, is the Behavior Gap calendar. (And an unexpected shout out from Carl in the video was pretty cool.) In fact, over the years I've accumulated them, I've made a wall of the images you see below and mentioned in the video.
I want to give 5 of them away. I'm limiting this to current Fident Family members, so if you're a part of the Fident Family, reply back to this email with a simple "YES" and I'll create a randomized list of replies and select a winner for next week. 

Gratefully,
Jeremy
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Phone: 717-208-2235
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Fident Financial, LLC (FFL) is a registered investment advisor offering services in the state of PA and in other jurisdictions where exempted.  Opinions expressed in this email are solely those of FFL, unless otherwise specifically cited.  Material presented is believed to be from reliable sources but no representations are made by FFL as to another parties' information accuracy or completeness.






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