Recently, a research paper was published by two University of Chicago professors who studied the effects of coaches on team performance. The paper, titled “How Much Do Coaches Matter?” determined that coaches explain about 20 to 30 percent of a team’s success.
The professors, Christopher Berry and Anthony Fowler, looked at statistics for hockey, baseball and professional and college football and basketball. They found that the biggest impact made by managers in baseball comes from the decisions they make about when a pitcher is wearing down, when to use a reliever and which reliever to use in a particular situation. The process of putting together a line-up of the best hitters in a specific order was not a differentiator since most managers would make the same decision based on the players available.
Likewise, the mix of running and passing plays is well understood by most football coaches, so this is not an area where they add value. Instead, the professors found that their biggest contribution was in teaching their teams to avoid fumbles and penalties.
This is not unlike studies conducted over the years that attempt to measure the impact of financial advisors on their clients’ financial success. A 2017 study titled “Quantitative Analysis of Investor Behavior” published by Massachusetts-based investment research firm Dalbar found that over the 20-year period from 1996-2016, the average equity (stock) mutual fund investor earned an annual return of 4.79 percent - versus the 7.68 percent average annual return earned by the S&P 500 Index, a popular benchmark for the U.S. market.
The authors of the study attributed a significant part of this underperformance not to poor investment selection, but to impatient and shortsighted investor behavior that often results in buying high and selling low, paying unnecessary taxes and fees along the way. Perhaps not coincidentally, many individual investors make these decisions in the absence of a long-term plan or advice from a financial coach. In fact, another study from 2016, conducted by Claude Montmarquette and Nathalie Viennot-Briot and titled “The Gamma Factor and the Value of Financial Advice,” looked at investors in 2010 and compared their positions in 2016. It found that those who dropped their advisor during this period wound up losing 34% of their assets over the period, compared to a gain of 26% for households that retained their advisor.
At First Command, we have been coaching military families in their pursuit of financial security for more than 60 years and have found that while a comprehensive financial plan and a diversified investment portfolio are important, it is our ability to positively influence clients’ financial behavior that matters most to their success. Because just as the importance of mixing running and passing plays is well understood by most football coaches, the importance of diversified portfolios is well understood by most financial advisors. Effective football coaches, though, seem to understand that it is by coaching their teams to consistently do the little things well – like avoiding turnovers and penalties – that they can most positively impact outcomes. Similarly, our Advisors understand that the best way to positively influence their clients’ investment outcomes is to consistently coach them to practice fundamental behaviors like:
- Making regular and consistent investments in mutual funds beginning early in life. It’s called dollar cost averaging, and its simple genius lies in the fact that it allows an investor to automatically buy more shares when prices are low and fewer shares when prices are high.
- Never trying to time the market. Doing so requires knowing not only when to get out, but when to get back in. Many investors can make one of these decisions correctly. Rarely do they make both decisions correctly.
- Understanding that declines in the market are not times to panic and sell, but opportunities to buy shares at a lower price point. As legendary investor Warren Buffet has often advised, it is wise to “Be fearful when others are greedy and greedy when others are fearful.”
- Managing the risks inherent in investing through broad global diversification.
What does all of this mean? We believe it means that taking the time to instill positive behaviors – whether you’re an athletic coach or a financial advisor – can go a long way toward positively impacting outcomes over time.
The information in this report was prepared by John Weitzer, Chief Investment Officer of First Command. Opinions represent First Command’s opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. First Command does not undertake to advise you of any change in its opinions or the information contained in this report. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Should you require investment advice, please consult with your financial advisor. Risk is inherent in the market. Past performance does not guarantee future results. Your investment may be worth more or less than its original cost. Your investment returns will be affected by investment expenses, fees, taxes and other costs.
©2019 First Command Financial Services, Inc. parent of First Command Financial Planning, Inc. (Member SIPC, FINRA), First Command Advisory Services, Inc., First Command Insurance Services, Inc. and First Command Bank. Securities and brokerage services are offered by First Command Financial Planning, Inc., a broker-dealer. Financial planning and investment advisory services are offered by First Command Advisory Services, Inc., an investment adviser. Insurance products and services are offered by First Command Insurance Services, Inc. Banking products and services are offered by First Command Bank. Securities products are not FDIC insured, have no bank guarantee and may lose value. A financial plan, by itself, cannot assure that retirement or other financial goals will be met. In Europe, investment and insurance products and services are offered through First Command Europe Limited. First Command Europe Limited is a wholly owned subsidiary of First Command Financial Services, Inc. and is authorized and regulated by the Financial Conduct Authority. Certain products and services offered in the United States may not be available through First Command Europe Limited.
All estimates provided are for informational purposes only and should not be relied on to make investment or other decisions. Should you require investment advice, please consult with your financial advisor. Risk is inherent in the market. Past performance does not guarantee future results. Your investment may be worth more or less than its original cost. Your investment returns will be affected by investment expenses, fees, taxes and other costs.
The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index.
Diversification, asset allocation and portfolio rebalancing do not guarantee a profit or protect against a loss in a declining market. They are methods used to help manage risk. Investment returns and principal value will fluctuate and your investment, when redeemed, may be worth more or less than its original cost. Sales charges and taxes may apply.
Dollar cost averaging is the practice of investing an equal amount of money at regular intervals, regardless of market performance. The objective of this investment strategy is to reduce the average cost per share by purchasing more shares when prices are low and fewer when prices are high. The illustration below is a hypothetical example of dollar cost averaging and does not represent the past or future performance of any particular investment. While not assuring a profit or protecting against a loss, dollar cost averaging can help remove emotion from investing. But as it involves continuous investment in securities regardless of fluctuating price levels, investors should consider their financial ability to continue purchases through periods of low price levels.
Investors should carefully consider the investment objectives, risks, charges and expenses of each fund before investing. This and other important information is contained in the prospectus, which may be obtained by contacting your financial advisor or by calling First Command. Please read the prospectus carefully before investing.