A LITTLE FULL, A LOTTA SAP

Every year after Thanksgiving, my family heads to a remote Christmas tree farm in Edmond to get a real tree for the house.  The fresh air is invigorating, it’s our two-year-old lab Berkeley’s happiest day of the year, and my kids still love the experience—while they’ve sadly gotten too old for some of the Christmas traditions, this one’s still a favorite.

Without fail, for about an hour, we trek through a dozen different fields, looking at the various trees to find that perfect one. But we haven’t cut one down in years.

At the entrance, the tree farm sells pre-cut trees in different sizes. A few years ago, I saw one about to be wrapped, and I thought it looked better than anything else in the fields. That year I bought a pre-cut tree and have never deviated since.

Now, as I said, I still look in the fields.  After a while, I’m the only one left out there, still searching out that last remote row or revisiting a tree I saw earlier looking at it from a different angle.  I remain open-minded to the idea that a better tree is out there.  Maybe not a perfect tree, but a better option that I can also tell our family and friends that I cut down, with my own hands, after a long afternoon search.  Maybe I’m trying to recreate the Grizwald family outing scene in National Lampoon’s Christmas Vacation?

Yet year after year, I return to the front and pick a pre-cut tree, and I’m glad I did. It is never perfect—no tree is—but it’s by far the best tree I can find. This year the tree leaned a little forward, and it took a bit of turning and jostling before I was confident I wouldn’t wake up with a tree on the ground the following morning. But it looks great, symmetrical, and full; it holds a ton of ornaments that took us over an hour to decorate fully. It is, in other words, precisely what we need it to be, despite lacking the novelty and compelling story that comes from cutting one down from the fields.

I go through a similar exercise, year in and year out, looking at and researching different investment approaches that might complement or even replace our tried-and-true asset-class approach. Every year, a new batch of investment strategies and options are available. They come with solid marketing stories and emerging popularity that makes for exciting conversation, not to mention outstanding backtested return simulations.

But like my tree search, I reject these options—sacrificing the stories I’d have to share with current and future clients. I stay committed to our asset class approach because I believe it’s the one that will work better for you.

At the tree farm, a simple principle guides my search—the best trees are upfront and pre-wrapped. In investing, we have a few more enduring beliefs that we follow:

1. Trying to outguess stock and bond prices through selection and timing doesn’t work—prices change every second of every day to reflect the most current information about prospects for the underlying companies they represent.
2. The main drivers of your investment portfolio returns are first your stock and bond mix and then your exposure to small cap and value stocks versus large cap and growth stocks. Higher expected returns come from holding more stocks in general and more small cap and value stocks in particular.
3. Short-term stock and bond returns are highly unpredictable, so portfolio changes based on the recent past can be costly. The best way to exploit the random ebbs and flows of asset class performance is to rebalance your portfolio—sell higher and buy lower—back to its target when it has drifted too far off course.
4. We’re hard-wired to make bad decisions with our investments that can cost us a lot of our wealth. We tend to buy high, sell low, chase performance, and panic during temporary bad times. A full-time advisor can help keep you from being your worst enemy if you trust their advice.

I take pride in that, after all these years, my kids still count our annual Christmas Tree trek as one of the highlights of their holiday. And after almost 20 years of managing asset class portfolios for clients (in some form), I’m proud that our approach is every bit as effective and justified today as it was in the early 2000s—it, too, has stood the test of time. Rest assured, I keep my eyes open, always willing to consider other options or approaches as an addition or replacement to our asset class approach. But I don’t expect radical changes any time soon.  

My messages for 2023 are similar to 2022, 2021, and before: I still think you should have most, if not all, of your portfolio in stocks, depending on your withdrawal needs (a few years of future spending in bonds is OK). I still expect smaller and more value-oriented stocks to earn higher long-term returns and provide added diversification to traditional US large cap stocks and indexes—as they did in 2021 and again this year. I still think Dimensional’s mutual funds and ETFs are the most effective investment vehicles targeting the core asset classes we want to own—especially value stocks, small cap stocks, and high-quality short-term bonds. I still expect future returns to be rocky and short-term returns to be noisy. Finally, because our investing approach is simple but never easy, I still believe my ongoing advice and coaching is worth more than the 1% a year or so you pay for it. Especially if you can check out and stop looking so often at your portfolio values and the financial news and headlines that impact them.

Our approach isn’t perfect—it doesn’t always “work,” nor does it always go up or outperform the market, any more than the tree I bring home each year is without flaws.  But our approach—like my tree—is still the best one I can find to help you succeed in achieving your long-term financial goals.

It is a privilege to work with you and your family. I appreciate you continuing to trust me and trust your hard-earned wealth to Servo. I hope I can make your holiday season less stressful and more enjoyable, knowing you’re in good hands financially, thanks to someone who cares a great deal about you and wants the best for you.

Merry Christmas and Happy Holidays,

Eric