I stand out on the Aptus team for having not played major college basketball, but as an avid fan I can at least contribute to the banter. Complementing the content put out by my playing partners at The Backcourt Report, I periodically share my “Starting Five” posts highlighting the best I can find in the areas of investment management, behavioral finance, and the advisory business. I also throw in a favorite podcast episode, and an “oldie but goodie” post that warrants a new read. Enjoy, subscribe, share!

Investors May Have a False Sense of Security: even for someone who thinks the public needs more investor education, some of the numbers in this report from Natixis are downright shocking. Among the biggest jaw-droppers, global investors believe they need 10.4% returns above inflation to reach their goals, 67% believe passive investments will help them minimize loss, and 74% say it’s important to take advantage of short-term market movements. Tough expectations for an honest advisor to manage!

The Dangers of Maximization: Tom Brakke nails it, discussing the flawed process of seeking the “best” investment products. “While the sensitivity to performance varies considerably, chasing it is essentially designed into the evaluation and selection(emphasis mine)of asset managers by almost all allocators.” Whether it’s the impending valuation reversion that often lies ahead, or the behavioral trap of thinking your selection must be the “best”, it’s a setup for repeated disappointment.

How to Use Behavioral Finance in Asset Management:  huge contribution here, as we read a lot of descriptions of behavioral finance but few prescriptions for actually improving outcomes. We all know the “Why?” and anticipate the “When?”, but where does an advisor turn for the How, What, Where, and How Much? Barry lays out the entire path from theory to implementation, and shares how his firm is specifically tackling the issue. Concrete, transparent ideas that should inspire most advisors and certainly benefit RWM clients.

Normal Accidents in the Stock Market: As Ben notes so well, markets are a complex system in which the “abnormal” is actually quite normal. He references a great quote about engineering and technology that “efforts to make those systems safer made the systems more complex and therefore more prone to accidents.” Market participants are constantly looking for ways to remove risk despite Hyman Minsky’s perpetual truth that “stability is destabilizing”.

The Benefits of Base Rates: forget about the endless 2019 forecasts; you’re better off working from history. Jack takes a skeptic’s approach to predicting what markets will do next year(as most should), and focuses on organizing data in a way that can offer a bit of a compass on what can happen over an investing lifetime. Great topic to revisit, if you want the modern bible on base rates go dig into the opus written by Michael Mauboussin a few years back.

*Off the Bench: Michael Covel interviews Daniel Crosby  who brilliantly and concisely explains how things that were good for us as evolving humans are bad for us as investors, and how intellectual understanding of investing concepts is far different than actually living through the experience. Dr. Crosby cites research in which out of 200+ studies, a rules-based approach outperformed discretion 94% of the time. So not only can investors save themselves the “brain damage” of constant decision-making, they actually put themselves in much better financial position by simply following a logical set of rules. Fun stuff!

**Throwback: I sprint to read anything at EconomPic, he is the ultimate BS-meter for financial commentary and ups the game of anyone taking an honest approach to investment management. He only wrote 3 posts in 2018(c’mon Jake!), but I found myself coming back across Predicting Forward 60/40 Returns in my favorites. I naturally shudder whenever I see the words predict or forecast, but to Jake’s credit he builds a logical framework using only the information at hand NOT his crystal ball. Great stuff, very relevant for setting realistic investor expectations.

Hope you enjoy this edition of my Starting Five, join the updates here!