MALLARD

Financial Partners INC

Money Matters July 2016

NOTICES The Behavior Gap Susan Lehnerd

Paul will be on vacation I recently read a book by Carl Richards, The Behavior Gap: Simple Ways to Stop Doing
(Vermont) and at a govern- Dumb Things With Money. In addition to being a financial planner, he
ment conference (Quebec contributes weekly to The New York Times. He likes making simple
City) from August 3– 11. illustrations on napkins to make his point. A napkin! Which is a point
He expects to be out of in of itself – you don’t need to overcomplicate things. Creating a visu-
town August 23-25. Paul al can be a powerful way to provide a concrete image to an idea that
plans to attend the NAPFA otherwise represents a mental concept. Richards is quite good at this.
National Financial Planning
Conference in Arlington, Richards defines the ‘behavior gap’ as the distance between what we
Virginia October 12-15. should do and what we actually do. The goal of his book is to create a
framework for making better decisions about money. I’d like to share
some of his thoughts with you.
Pam will be on vacation
July 28 - 30, at Lewes 1) Have a Real Plan (not just one you’re tossing around in your head) –
Beach, and August 3-13, in Consider these three questions when developing a plan:
Vermont and Quebec City. a. Where are you today?
b. Where do you want to be later?
c. How will you behave in order to get there?
Ed will be on vacation Au-
gust 1 - 5. 2) No Plan Will Cover Every Situation – It is important to have a plan, but don’t
make it so rigid that you can’t seize opportunities as they come up. We all
know stuff happens. It’s the course corrections that become important, not the
Alan will be on vacation plan.
July 11-14 and July 22-25.
3) Ignore The Crowd – Base your decisions, investment or otherwise, on what you
need to do to reach your goals.

4) Choose Your Life Goals, Then Your Financial Goals – You almost always need
to choose your life goals before your financial goals. Once you’ve determined
what will make you happy, you can then make financial goals to support those
life goals.

5) Don’t Follow Talking Heads – Being anxious about the market can lead to bad
decisions. Focus on what you can do (or control). If your goal is to send your
child to college, tracking the Dow isn’t going to help reach that goal. You can’t
control the results of the market.

MALLARD 6) Stop Resisting Simple Solutions – Simple solutions are often resisted because a)
Financial Partners INC they require a behavior change and b) old habits die hard. Yet, it can be the sim-
ple option that has the biggest impact on your financial success. But at the same
time, it requires on-going discipline, patience and hard work.

7) Track Your Spending – Things that get measured are more likely to improve.
750 Barksdale Road
Suite 3 If you happen to be in Mallard’s office, feel free to borrow a copy of The Behavior Gap.
We’re making it available. We believe it’s a worthwhile read.
Newark, DE 19711
302.737.4546
w w w . ma l l a rd f i n a n ci a l . co m
Winning the Loser’s Game Paul Baumbach

Charles Ellis wrote an article by this name in 1975, and has since written a book with this title. You can find the book at
bookstores and on Amazon. The book was required reading when I pursued the CFA® designation in the mid-90s, and
found it very readable and insightful.

While I haven’t reread the book for many years, and I couldn’t find it in my bookcase, I found that its core message was
so eye-opening that it has been fundamental to Mallard’s approach since our inception in 1996. It is a message that all
investors should consider. I have written about this book in past newsletters, but not for over a decade.

Ellis uses tennis as an analogy for investing—he hooked me instantly. He notes that for most tennis players, tennis
points are not won—they are lost, and thus the key to tennis is avoiding hitting losing shots. I have played tennis for
well over forty years, and I know this to be quite true. One of the most effective styles of play is to be a ‘backboard,’
returning every shot but patiently waiting for your opponent to hit one out. In most cases they will, just wait. It isn’t
easy to play so patiently, and controlled, but it gives you high odds of winning the most points.

So, is investing also a loser’s game? Ellis notes, as have others, including Burton Malkiel, author of A Random Walk
Down Wall Street, that investing comes with costs, amongst them fees, commissions, bid/ask spreads, markups, taxes,
and inflation. These costs result in investing not being a zero-sum game, with an equal number of winners and losers,
but with more losers.

I have included an exhibit with two graphs, from two different time periods. The lower graph shows annualized returns
from different investment approaches over the past twenty years.

Mallard Money Matters Page 2 July 2016

Winning the Loser’s Game . . . continued

Note that the S&P 500 index of large US stocks produced an 8.2% return, bonds have produced a 5.3% gain, and infla-
tion has averaged 2.2%. With stocks averaging 8.2% and bonds at 5.3%, you would expect the typical investor to aver-
age somewhere between these two figures. Yet the graph shows that the typical investor has averaged a 2.1% re-
turn—less than inflation. How is this possible?

On the tennis court, I have beaten ‘better players,’ and have been beaten by ‘worse players.’ Most often, this is due to
the losing player trying to do too much, and the winning player being more steady. The big pros can win by being
flashy—but most tennis players lose when they try being flashy. Before you play a match, if you know that your oppo-
nent will be tough to beat, it is best to develop a game plan, a plan that you stick to, but a plan that you are able to adjust
a bit as conditions warrant.

Typical investors try too hard. They loaded up on stocks during the dot-com run-up, only to lose a whole lot in 2000-
2002. They sold almost all of their stocks in 2008, and missed the very strong rebound which began in early 2009. Why
did they sell in 2008? The upper graph, on the previous page, shows the 50% loss suffered by stocks from the October
2007 peak to the March 2009 low. It is very hard to be a patient investor, to ‘keep the faith,’ when half of your stock
investment dollars evaporate, when the ‘loser’s game’ hits you in the face so painfully.

This is the exact reason that investors should prepare the way that tennis players do, by making a plan. A written Invest-
ment Policy Statement (IPS) provides that plan, with guidelines to follow during normal times. Its greatest value, how-
ever, is during the difficult times, times like 1999 and like 2008. Your IPS may include some adjustments to make in
trying times, adjustments such as Mallard’s Firewall Investing™ program, designed to limit further losses while ena-
bling gains during subsequent recoveries, but your IPS should condone neither buying into a frenzy, nor selling into a
panic. It is these overriding guidelines, when followed at stressful times, which can help you avoid being a typical in-
vestor, who loses at the ‘loser’s game’.

Last month, I was reading some recent issues of Tennis. The magazine spends most of its pages with reviews of the
pros, which ones are expected to win the next major tournament, etc. I skip those articles, as being a distraction from
my focus—improving my tennis game. I jump to the articles with tips for the recreational player: superior court posi-
tioning, improved communication with your doubles partner, helpful drills, etc. Professional tennis players can hit some
astounding shots. When I try such shots, they go out or hit the net, and I lose the point.

Like Tennis magazine, the financial press is filled with astounding stories, about hedge fund managers and personalities
such as George Soros, and the big bets they make, in the market, out of the market, etc. (Notice that the tennis press,
and the financial press, spends no time detailing the story of the countless unsuccessful professionals.) Playing consist-
ently works in tennis. The lower graph shows how the consistent 60/40 or 40/60 (stock/bond) investment approach has
produced very attractive results over the past twenty years. Nothing flashy. The upper graph shows how much steadier
the path was for such a balanced approach.

While the 2.1% average annual return for the typical investor over the past twenty years is depressing, I view it as en-
couraging. It shows how low the bar is for you, for you to win the loser’s game. You don’t need flash. If you adopt
and maintain a very steady asset allocation (60/40, 40/60, or whatever), in good times and bad, you should be a winner.

Mallard Money Matters Page 3 July 2016

Compliance Corner Pam Baumbach
Proxy Voting soning for many of the issues with a focus on US com-
Most of Mallard’s clients have delegated the responsi- panies. The second is Proxy Paper™ Guidelines –
bility for voting proxies to Mallard. With the magni- Shareholder Initiatives. This covers research and meth-
tude of securities with proxy votes and the diversity of odology of shareholder initiated votes.
issues being voted on, Mallard decided that we will no Copies of this and other documents are also available
longer set an all inclusive proxy voting policy and vote by contacting our office.
all the proxies produced by client portfolios. What
does this mean? News and Events
Mallard has outsourced our proxy voting responsibili- Mallard’s Quarterly Conference Call
ties. We utilize a service that applies the Proxy Friday, July 15 at 4 p.m. (East coast time).
Paper™ Guidelines, An Overview of the Glass Lewis
Approach to Proxy Voting. The advantages to using Delaware Money School presentations will be pre-
this service are many: sented by Ed Mink in October at the Newark Free Li-
 An objective review of each issue brary:
 Large resources in researching each issue Tuesday, October 4, 2016 @ 6:30pm
 Consistent application of guidelines Social Security Benefits
 Cost effective Monday, October 17, 2016 @ 6:30pm
At mallardfinancial.com under the Resource tab, you Pt 1 - How Much to Withdraw from Retirement Savings
can find two documents. The first is the Proxy
Monday, October 24, 2016 @ 6:30pm
Paper™ Guidelines – United States. It outlines major
changes since the previous year, methodology, and rea- Pt 2 - How to withdraw Retirement Savings

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