Follow the Money

In the Beginning…

Ten years ago, Paul J. Gire, a financial planner and CFP® professional, wrote a ground breaking research paper that sent shock waves rippling through Wall Street. The article agitated financial advisers, frustrated the status quo being promoted by the common brokerage firm, and called into question the propaganda promulgated by mutual fund and variable annuity companies around the world.

Here is a link to the original white paper by Paul Gire.

Why? Because it showed advisers and investors alike that the “Buy & Hold” investment and retirement planning philosophy – along with MPT (Modern Portfolio Theory), traditional diversification, and periodic rebalancing weren’t the only way to manage portfolios. Perhaps there was a better, less volatile way to manage money?

The premise of this article and the one written by Paul Gire that preceded it, challenges the blanket advice mutual fund companies advocate, suggesting that investors should invest their money, diversify, buy, hold, stay the course, and ride out the crashes.

I remember my early days in sales training classes when we’d be fed one-liners such as, “You haven’t lost anything unless you sell it.” Conferences I attended during and just after the crash of 2000-02 included training on how to advise your clients never to sell, instead recommending they “Keep what they own unless they need to spend the money.” We were trained to show our clients historical performance on mountain charts dating back 70-80 years and explain that it was impossible to “time the market,” and as a result, it was best to simply buy a bunch of stuff, diversify your portfolio, and put your seatbelt on. But who has 70-80 years, especially if they’re withdrawing money from their portfolio to supplement their income?

The most commonly recognized and endorsed confirmation of the industry’s attestation and addiction to the Buy & Hold drug, is the marketing and sales literature handed out to advisers, pushing investors to “avoid missing the best days” in the market. Their sales strategy is to point out that, if an investor misses even a small number of the best days in the market over a given period of time, the performance of the portfolio is adversely affected in breathtaking fashion.   Naturally, the recommended remedy is to simply hold onto their mutual funds for the long term and never, ever sell them unless you need to spend the money.

A Violation of Ethics

But Gire didn’t stop with his criticism of these all-in, all-the-time theories upheld by Buy & Hold disciples. He went on to disclose – with statistical prowess, I might add – not only the fallacy of Buy & Hold, but the possibility that the entire philosophy, upon which MPT is based, “…could be construed as an ethical violation of the CFP Board’s Code of Ethics and Professional Responsibility (Code of Ethics), and the Security and Exchange Commission’s Rule 206(4)-1 under the Investment Advisers Act of 1940.”

What resulted from the publishing of this revolutionary article was an onslaught of piggyback writers, peppering the media with follow-up columns that concurred with Gire’s findings. It was as if there was an underground society of trend followers, momentum investors, chartists, and technicians who all kept to themselves within their dark lairs, and Paul Gire formulated the battle cry that pulled them out of hiding.

Follow the Money

As a kid growing up west of Cleveland, whenever I had a complicated question having to do with society, government, speeding tickets, or private industry, my dad would always respond with, “Follow the money.” When trying to understand why advisers, analysts, mutual fund managers, and wholesalers sell investors on the concept of Buy & Hold, the answer is right in front of your face. Follow the money.

The literature tells us we need to stay in the market, diversify, and hold onto our investments for the long term. Furthermore, they tell us that, if we miss the best 10 days in the market, our returns drop to less-than-desirable figures. They go on, telling us that if we miss the best 20, 30, or even 40 days in the market, portfolio performance drops to levels that will make you want to join your local doomsday prepper’s club.

The truth is, these mutual fund and variable annuity companies are right – performance does fall dramatically when investors miss the best days in the market over any given period of time. What they don’t tell us is what the numbers look like if we missed the worst days in the market. Now, give me one reason why an ETF (Exchange Traded Fund), mutual fund, or insurance company would benefit from sharing such a statistic with you? What if the numbers were better – what if they were a lot better?! You might want to sell your investments? Follow the money.

The Biggest Problem on Wall Street

I started in this business just over 14 years ago, just a handful of days prior to the World Trade Center attack. I was hired right out of college by a national brokerage firm as a financial adviser. I worked there for just under three years before starting my own firm, and never once in that 3-year period did anyone teach me a lick about portfolio management.

There were no conferences, no suggested research (other than that of the firm’s own, proprietary research), and we were only granted access to a “preferred list” of roughly ten investment companies to choose from. Never mind the fact that these “preferred companies” pay millions of dollars to be on the list – or that there are thousands of other investment choices that we were discouraged from researching on our own. They didn’t want us learning to manage risk in our clients’ portfolios. They wanted us to go out and get clients. Again, “Follow the money.”

Brokerage firms make money by teaching their financial advisers how to obtain new clients, not by teaching them how to actively manage risk in client portfolios. Instead, they defer to mutual fund companies, SMAs (Separately Managed Accounts), ETFs and other pooled investment products, telling their advisers to trust the seasoned analysts and managers employed by those firms to manage the money for them. Brokerage firms make money by teaching their advisers how to sell products, not by teaching them how to use proven risk management tools to keep their clients from losing a third of their life savings the very year after they retire!

It is much easier to train an adviser how to Buy & Hold a portfolio of investments, using sales literature pitched by a sales rep from an investment company, than it is to explain the intricacies of investment analysis, whether it be fundamental or technical in nature. Brokerage firms teach advisers that all you need to do is put a little bit of money into different pieces within a pie chart; an allocation formulated using the result of a risk tolerance questionnaire the client fills out and signs, thus releasing the brokerage firm from liability for any future losses if said allocation doesn’t work out in the investor’s favor.

Never mind the fact that interest rates have been falling for 30 years and that we’re likely coming to the end of a bull market in bonds that has lasted that same three decades. Firms teach their advisers, and the advisers regurgitate to their clients, that “bonds are safe.” Never mind the possibility that rates might rise for the next 30 years, pushing bond prices down, sending the elderly public into a confused frenzy. In defense of the entire financial industry, rules and laws imposed by regulatory authorities at the government level have created this ridiculously poor excuse for an “investment pyramid,” not much different from the FDA’s food pyramid, but I digress…

The bottom line is that it’s easy to train advisers to buy, diversify, hold, and go find more clients than it is to educate them on sound risk management techniques such as trend following, momentum, relative strength, charting, and fundamental analysis. In defense of these brokerage and financial advisory firms, if they tried to teach advisers how to manage money, these same advisers would likely spend most of their time at a computer screen, glued to stock charts and momentum metrics, trying to master the science of managing a portfolio instead of obtaining more clients. This, as we’ve already learned, doesn’t earn the brokerage firm (or the adviser, for that matter) any income, does it? Follow the money.

The Problem With Most Mutual Funds

Convinced financial planners and advisers aren’t worth the money? No problem. There is no shortage of discount brokerage firms that are more than happy to take your annual account fee in return for nominal trading costs. These days, you can get a bunch of trades for free, just for signing up and opening up an account.

So instead of paying a financial adviser 1% per year to sell you investments that you plan on buying and holding anyway, why not forego the 1% annualized fee and buy a bunch of mutual funds, ETFs, or SMAs on your own. Problem solved? Maybe not…

The problem with most pooled investment funds is that they’re not allowed to take your money out of the markets. Investment Policy Statements (IPS) make a promise to stay in the market in bonds, stocks, or whatever the underlying investments in the portfolio, regardless of whether the markets are booming or crashing. It doesn’t matter if it’s a U.S. stock mutual fund or a tactically managed bond ETF.   They might have some hedging capabilities through the use of options, but if you take a look at any prospectus (that big, thick book no one reads) and thumb through to the IPS, you’ll find something that reads a little like this:

“The ABCDX mutual fund invests in domestic, large-capitalization stocks and must remain 90% invested in U.S. large-cap stocks at all times.”

This is just an example, obviously, but to take things a step further, these prospectuses also promise something called Style Specificity, where they’re basically promising investors that, even if they saw a great opportunity on a Small Cap stock, if they’re a Large Cap mutual fund, they promise to avoid that great opportunity and stay true to their “style” (with the “style” being Large Cap in this example).

Some readers may already be a step ahead, investing instead in index funds and ETFs. Just as in the case of mutual funds, most ETFs cannot get out of the market, either. While more are becoming tactically managed through algorithms and a rules-based approach to rebalancing, ETFs are typically tied to an index, such as the SPDR S&P500 Index (SPY), which aims to mimic the return of the cap-weighted S&P500. The only way the SPY sidesteps the market is if a portion of the S&P500 itself moves into a partial cash/money market equivalent, and that ain’t gonna’ happen.

The silver lining is, ETFs are a whole lot less expensive than most mutual funds. However, even with ETFs, you’ll still need to execute some stone-cold mental toughness as you ride the waves of the market up and down through the peaks and crashes that follow, which leaves you right back where you started again – wondering if life would be a whole lot easier if you simply implemented a Buy & Hold investment strategy, avoided missing the best days in the market, and followed the advice contained within fund sales literature.

A Closer Look, Revisited

We had been using Paul Gire’s white paper for years in discussions with clients when explaining our trend following process when earlier this year, one of the other advisers at our firm asked me, “Why don’t you update these statistics, see how the numbers look today, and see if anything has changed in the last ten years?”

We decided that, in order to put together a study that was comprehensive, convincing, and for lack of a better term, “bulletproof,” we needed to use a time period that included at least one bubble and one crash.   So we examined the ten year period from 2005 through the end of 2014. Reviewing this 10-year period, which includes two up-markets and The Great Recession, we find the following.

Best and Worst Trading Days

(12/31/2004 – 12/31/2014)

Untitled Follow the Money

The first phenomenon we observe is that all of the ten worst days occurred during the worst market crash in the past 80 years. Starting with the earliest of the ten worst days (9/30/08) to the last occurring worst day (3/23/09), the S&P500 declined 34%. Ouch! “Honey, I blew-up the nest egg!” In addition we find that the best and worst days were often found in close proximity to one another, much like they were when Paul Gire did his research ten years ago:

  • The #1 worst day’s performance occurred only 2 trading days after the top ranked, best day’s performance.
  • 80% of the best and worst performing days fell within a mere 65 trading days of one another.
  • In 75% of the cases, the best gaining and best losing days occurred within 12 trading days or less.
  • There were two outliers – January 20th, 2009 and August 8th, 2011 – which were both big losing days that did not have a closely associated gainer.

Secondly, the lag on performance created by missing the best days in the market was no surprise. We’ve seen it before, so here’s what the numbers look like as of December 31st, 2014:

Missing the Best Days in the S&P500

(12/31/2004 – 12/31/2014)

missing-the-best Follow the Money


Again, there was a problem with the data, above. It is not in the best interest of investment companies to recommend you sell their investments – at any time… ever. If you sell your investments, they don’t get paid! So it only made sense to examine the outcome of the derivative of the above results. Said another way, what would happen if we missed the worst days in the market as opposed to the best? The numbers were compelling, to say the very least:

Missing the Worst Trading Days

(12/31/2004 – 12/31/2014)

missing-the-worst Follow the Money

Upon observation of this data, any investor would struggle to come to the conclusion that one must buy, hold, and remain fully invested in the market all the time (thus ensuring participation in “the best days”) in order to achieve financial success in their investment portfolio. All we needed to do was flip the data upside-down and it became crystal clear that missing the worst days in the market was drastically more beneficial to the investor than missing the best days.

Of course, it is impossible to miss the worst days in the market since it would require some inherited form of clairvoyance or for Elon Musk to invent the Tesla Time Machine. However, if we glance back up to our first set of data, recall the closeness in proximity associated with each successive best and worst performing day. Since most of the best and worst performing days bordered one another with such reliable consistency, could it be possible to miss both the best and worst days in the market? What would those numbers look like?

Missing the Best and Worst Trading Days

(12/31/2004 – 12/31/2014)

best-and-worst Follow the Money

If that isn’t mind-blowing enough, take a look at the growth of $100,000 below (using only the “40 days” data above). Buying and holding looks okay on the surface, especially when you consider the consequences of missing the best 40 days, where your $100,000 turns into a mere $28,440.63! We all know it’s impossible to time the market, so we know it’s impossible to miss the worst 40 days, which turns that same $100,000 into an astounding $1,241,032.35. However, if we miss both the best and the worst 40 days in the market, we end up with $206,072.68, which is more than 20% above the total return for an all-in, all the time, Buy & Hold strategy.

Dollars-and-Cents-Column-Bar-Chart Follow the Money

So there we have it. Staying in the market, all-in, all the time, yields us a descent return on investment, but it comes along with the crucial commitment to abstinence from any emotional reaction to the market’s booms, bubbles, and crashes. Missing the worst days in the market is impossible, as we’ve already discussed, but what if there was a way to miss both? Doing so would obviously reduce portfolio volatility and dramatically decrease portfolio drawdown, especially in the case of investors who take systematic withdrawals from their portfolio to supplement their Social Security, pension, and other income. What if there already is a way, but investors (and many advisers) aren’t aware of it?

Is There a Better Way?

Naturally, we think there is a better way, or I wouldn’t have asked Heather Atkins (one of the financial advisers at our firm who crunched the numbers for this follow-up article) to take on this painstaking, analytical project and provide you and I with the data observed above. I’ll take the high road and suggest, just as Gire did in his original white paper, that attempting to outline a strategy that is capable of missing the best days, worst days, or both is well beyond the scope of this already lengthy follow-up article.

What I can tell you is that, in my opinion, there are better ways of managing money and risk than a do-nothing, diversification approach. Put together a group of two fundamentalists and two market technicians and you’ll still get four different opinions on what strategies to utilize when deciding what to buy or how and when to implement an exit strategy from any asset class, sector, or the entire market altogether.

With that said, the mainstream financial world would rather stereotype and label firms like ours as “market timers” that attempt to buy at the bottom and sell at the top, which no portfolio manager (fundamental or technical) can do with any consistency without the help of a time machine or insanely good luck.

Firms (like ours) that shun and avoid pooled investment funds, implementing a dynamic, active risk management strategy within their portfolio management process are given derogatory labels for obvious reasons. We’re a threat to publicly traded funds and the revenue they depend on in order to continue their existence. It’s no wonder the Wall Street Journal reported in 2014 that ETFs have already caught up to index funds (in market share) as of 2003.

In Conclusion…

I would recommend viewing this confirmation of Gire’s original work to be further evidence pointing to the obligation advisers have as professionals to constantly seek knowledge and solutions that provide a better way to manage risk and money in client portfolios. If it wasn’t evident in 2005, it certainly is now.

As one of my long-time mentors once said to me, “If it’s not broken, break it.” Old habits die hard, especially when those same habits are being fed to financial professionals by the very institutions that support and regulate the financial industry. So maybe it’s time to “break” what you’re familiar with, jumping the rails that stand as today’s status quo. Maybe it’s time to do something different. After all, will what worked in the past continue working in the future? …or did it ever work to begin with?


Adam D. Koos, CFP®, is founder, president, and portfolio manager at Libertas Wealth Management Group, Inc., a fee-only RIA (Registered Investment Advisory) firm located in Columbus, Ohio. His firm specializes in retirement planning and portfolio management for individuals, couples, corporations and non-profits. He is a member of the National Association of Personal Financial Advisers (NAPFA) and the Central Ohio chapter of the Financial Planning Association (FPA).

Heather Atkins is a finance graduate of the Fisher College of Business at The Ohio State University. She works as a Para-Planner at Libertas Wealth Management Group, Inc., a Fee-Only Registered Investment Advisory (RIA) firm, located in Columbus, Ohio.

Categories: Adam Koos, CFP®, CMT®, Educational Articles, Market Commentary

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