A few advisors attending a webinar by Dr. Craig Israelsen about encouraging good behavior by investors were sharply critical of the title of the presentation but they’re objections are misguided, and attendees overall awarded Israelsen a 4.6 star rating.
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“I enjoyed the webinar and learned a lot, but feel the title was misleading, said one advisor after the session.
“This was good,” said another attendees. “However, I expected it to be more about motivating behavior. Forewarning that it would be another presentation of the 7Twelve model would have better set my expectations.”
After reviewing comments from attendees, Dr. Israelsen, responded with a point that is so important. “Very simply, creating better client behavior starts with a shared investing philosophy,” said Israelsen. “7Twelve is an example of an investing philosophy: broad diversification with systematic rebalancing.”
Israelsen is exactly right. To remember how to behave properly, people need structure — what Israelsen in this case calls “investment philosophy.” Without a set of guiding principles that are clearly articulated and reinforced constantly, people won’t behave well.
And regarding A4A members who felt this session plugged Israelsen’s 7Twelve Portfolio program, I can understand why you may look at it that way agree but you're off base Here’s why.
Israelsen has spent the last 23 years academia teaching thousands of college students about family financial management, specializing in researching low-cost, tax-sensitive investment strategy that promoting good behavior in investors. He's expert in applying modern portfolio theory and using broad diversification to optimize a household’s financial resources, and he has codified his research in a program called 7Twelve Portfolio. Branding and packaging his ideas does not diminish the validity of his research and investment philosophy. It makes it more valuable to advisors!
Expect A4A to continue to give you uncommonly authoritative ideas from thought leaders in the wealth management profession in a 24/7 video lesson, and please don't hold it against these very generous professionals for capitalizing on their ideas and making them accessible. I believe in these wealth management thought leaders and have culled them carefully. These webinars are just another new kind of journalism in financial planning and investment management for CFPs, CPAs. CIMAs, CFAs, CIMAs, EAs, CLUs, ChFCs, insurance agents and other professionals -- with unlimited professional continuing education 24/7.
“Investors with no investment philosophy are more susceptible to emotionally-based buying and selling (i.e., greed/panic) because they are not grounded in a game plan,” says Dr. Israelsen, who presents quarterly at A4A webinars. “If an advisor does not have a fundamental investing philosophy, he or she certainly cannot share it with a client. And if an advisor and client are not synchronized around a common philosophy, they will likely part ways sooner rather than later.
“Broad diversification is a philosophy that guides the investor through good markets as well as rough markets,” he added, in responding to comments from attendees. “Clients that understand the nature of diversification are less likely to get greedy when the S&P 500 soars. They understand that a diversified model isn't designed to crank out that type of return and that a diversified portfolio will have fewer down years and less drama.”
Here are answers to some question from attendees:
You began the presentation using the last 44 years of data and then switched to the last 15 years (1999-2013). Why? Does this have a more favorable effect in comparing the 7Twelve results?
The reason for a 15-year analysis period for the 7Twelve model is that it can't be back-tested prior to 1998, when TIPS were introduced in the U.S. I'd love to test it back to 1970, but can't. The 44-year history for seven asset classes is the longest period I can test.
On slide 25, does the client contribute but only buy in years when the sum of investments in below the target?
Yes, that's correct.
Okay, what does the client buy each year?
The client would invest the needed amount of money into the portfolio as a whole. Pragmatically, the investor would add the needed money into the funds that were lagging at that time.
Why do I feel this is an infomercial for 7Twelve? There is a lot of math here that most of us already know but what about the psychology of changing behavior, for example getting people to put more money into a bad market? Long-term results are great, but clients live in a short-term world and we all know they feel the pain of loss more than the joy of gains.
7Twelve is what I know best, so I use the model in my presentations. We change behavior by implementing protocols: such as saving a higher percentage of our income as we get older, which we covered in the presentation. We change behavior by introducing a protocol for supplementing our portfolio with additional investments when the portfolio is "on sale," which we covered as well. We change behavior when we benchmark the performance of our portfolio more correctly by using a blended index, rather than an all equity index, which was covered. Changing investor behavior starts with rules and guidelines for building and managing portfolios. If not, emotions will rule the day.
What about the opportunity cost of having all of that cash sitting on the sidelines awaiting a ""buy sign” moment?
Most older investors were glad to have "all that cash" on the sidelines during 2008. If a person has saved correctly, they don't need a portfolio that cranks out a 10% return--they need to keep their savings safe. Cash does that. For investors that have not saved enough, they likely will not be able to enjoy the luxury of having 40-60% of their portfolio in cash.
Can you share any details on the Partners program? Cost, annual renewals, time commitment, etc.?
7Twelve Partners is an annual commitment that costs the advisor 1 bp of AUM. There are several deliverables to the advisor:
1) in-depth monthly performance reporting of the 7Twelve model and the various sub-components (the 12 asset classes),
2) access to monthly deep-dive webinars that cover a particular asset class in depth
3) access to all the 7Twelve research reports and white papers produced by Dr. Israelsen
4) ability to use the 7Twelve trademark
5) free registration at the annual 7Twelve Conference in Salt Lake City, Utah each October
6) consulting from me and Lunt Capital Management
Can you comment on the non-US bond fund? Is this a non-US dollar fund that reflects currency risk or a US-dollar denominated fund with non-US names?
Excellent question. Funds handle this differently. For example, Vanguard hedges currency risk its international bond funds, whereas T. Rowe Price does not. One option is to use two funds in the non-US bond allocation. One fund is hedged, the other is in local currency.
Learn more about 7Twelve's $350 a year research report and service for advisors, and its Partners Program, which costs one basis point per year.