For Retirement Investing, Putting Customers First Is Now the Law

Tara Siegel Bernard of the New York Times reports:

The Labor Department, after years of battling Wall Street and the insurance industry, issued new regulations on Wednesday that will require financial advisers and brokers handling individual retirement and 401(k) accounts to act in the best interests of their clients.

“The marketing material that I see from many firms is, ‘We put our customers first,’” Thomas E. Perez, the secretary of labor, said in an interview. “This is no longer a marketing slogan. It’s the law.”

As we wrote in April 2015, we are strongly in favor of the Department of Labor’s effort to expand the fiduciary standard to all financial advisors.
Clients should have no doubt that their advisor is placing their best interests ahead of his or her own.
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In a Market Downturn, Think and Act for the Long Term

Worldwide, stocks have fallen significantly and volatility has increased in the early weeks of 2016.

The hardest part about being a disciplined investor is maintaining a patient, thoughtful approach in the face of market headwinds. It’s tempting to sell your portfolio and wait out the storm, at least until things seem to have settled down.

Some investors hit the panic button, liquidate everything, and wait. When people make investment decisions based on fear, however, they abandon the smart, calm approach that should guide their rational long-term planning.

This is a good chance to consider the opportunities available to long-term investors. Modern portfolio theory suggests that the smart, long-term approach is to stay the course.

Though the S&P 500 has had a correction of approximately 10% in the last month and international markets are off 10% to 20%, diversified portfolios with stocks and bonds have been less impacted than concentrated portfolios. This presents excellent opportunities to invest (and reinvest) in a globally diversified portfolio.

Though it’s natural to want to pull out when the market gets volatile, it is impossible to know where the bottom is. Frequently, market timers withdraw at the bottom, already absorbing all of the losses. Other times, they attempt to buy back in at what they think is the bottom, only to see the market fall further — what is known as “catching a falling knife.” Then, once the fear factor has been initiated, it is hard to anticipate the market’s upswing, building the courage to reinvest while getting the re-entry timing correct. In fact, research shows that market timing generally underperforms a buy-and-hold, disciplined approach. Simply riding the swings, even the volatile ones, outperforms active investing and market timing.

As an example, the chart below shows the S&P 500 over the one-month period from July to August 2011. The S&P 500 fell almost 15% in the month. The market had been on a tear through mid July, up 50% from its 2009 lows.


If you jumped out of the boat in August 2011, nervous that stocks were overvalued, you’d have missed a big chunk of a great market rally. Over the next three years, the market was up 66%.


The research says stay the course. Don’t try to time the market. Invest in a diversified portfolio, reconfirm your risk tolerance, and harvest available tax losses.

  • Don’t try to time the market. Attempts to time the market, by jumping out at initial signs of market tops, or jumping in at signs of market bottoms, underperform a disciplined, buy-and-hold, stay-the-course approach. Most finance research indicates it is nearly impossible to figure out where the market is going (minutes, days, weeks, months, or years from now). It is impossible to know if the markets will move higher in the coming days or continue with volatility. Even the so-called experts do not beat the market reliably. Still, markets historically reward smart, disciplined risk-taking over the long-term: investors take on risk by investing in companies and are rewarded with capital gains and dividends.
  • Invest. We strongly advocate setting up regular, recurring deposits. These serve several purposes. First, they build your account value, getting more of your assets to work for you. Second, deposits enable a simple rebalancing of your portfolio to pick up small relative under-valuations between asset classes. Finally, they enable you to invest when the market has experienced a larger decline. These factors combine to lower your portfolio volatility and your overall risk.
  • Confirm your risk tolerance. If you’re watching the market downturn nervously, it’s a signal to rethink your risk exposure. Visit our Managed Accounts page to retake your questionnaire and see if your portfolio’s risk level matches your current comfort with market volatility. Your portfolio should be aggressive enough to achieve the long-term returns you want, while still enabling you to be comfortable living through short-term market pullbacks.
  • Harvest tax losses. Our investment team carefully reviews market conditions for opportunities to reduce your taxes. We automatically look for conditions to lock in a lower cost-basis and capture tax losses for our clients, who can use that loss to offset other gains (and even income) to reduce their taxes. We purchase a similar asset class ETFs so our clients remain fully invested for a market rebound. If you haven’t turned on Tax Loss Harvesting, you can do it now by clicking here. If you want to learn more about Tax Loss Harvesting, visit our FAQ.

At SigFig we work to deliver the optimal investing tools and asset management services for our clients and their portfolios in any market conditions. Volatile markets can frighten even the most seasoned investors, but with the right tools and investment partners, even a market downturn can be an opportunity to invest better.

Aaron Gubin
Aaron Gubin leads research for SigFig’s Wealth Management team. He holds a Ph.D. in Finance and taught investments and portfolio management to graduate and undergraduate students before coming to SigFig. His research focuses on asset allocation, behavioral finance, and investment management.

2015 Q4 Market Analysis: Cognitive Dissonance — More Stability, and More Uncertainty

One of the interesting challenges in studying investor behavior is accounting for the notion of cognitive dissonance, which describes the difficulty of weighing two contradictory ideas at the same time.

Consider how you would describe yourself. Are you a nice person? As you reflect on the affirmative, you might also remember a time when you acted with indifference or even cruelty, bringing about an uncomfortable feeling as you ponder this seeming contradiction; I think I’m nice, but I’ve also done some not-so-nice things.

As a behavioral “problem,” people often manage this uncomfortable feeling by ignoring or disregarding information that conflicts with their preferred view. Put differently, we usually dismiss the memories of our being unkind in favor of our positive self-image. The problem is obvious; by filtering the information to align with our preferred perception, we have an incomplete picture of a complex reality.

This filtering affects our worldviews, too. Consider your view of the U.S. economic recovery. Has there even been one? For many, the recovery has not improved net wealth, job prospects, income, or confidence in the future. Recent presidential debates have focused economic discussions on the economy’s weakness.

Yet by nearly every statistical measure, the U.S. economy is strong and growing; the stock market has enjoyed a bull run for more than five years, unemployment is down to 5% (with college graduate unemployment down to 2.5%!), inflation remains under 2%, the dollar is at decade highs against the euro and the yen, and companies report record earnings. Nevertheless, many believe that the economy continues to struggle, perhaps inspired by weak wage growth.

The truth is somewhere between. One feature of this economic recovery continues to be a general shift towards higher-skilled jobs. Without marketable skills, education, and flexibility, many people have been left behind. Meanwhile, the recovery has delivered significant gains to investors, the highly educated, and flexible-work employees. The U.S. economy is expanding, but consumers are suspicious of the recovery’s underlying strength. Even though the stock market remains near all-time highs, our perceptions of the economy reflect this cognitive dissonance.

In spite of anecdotal evidence suggesting a weak recovery, most statistical analysis indicates the U.S. economy is strong: job creation has increased while inflation remains low. Following the late August stock market hiccup, the benchmark U.S. S&P 500 Index is up nearly 10%.

(S&P 500 Index performance 8/26/15 – 11/17/15. Chart from Google Finance.)

Meanwhile, U.S. bonds remained stable through October, as the Fed continues to defer a rate hike. With a great jobs report and continued evidence that inflation remains low, expectations have grown that the Federal Reserve will nudge the benchmark overnight rate by a quarter point, though we prefer they resist the temptation. Why? The risks facing the economy are asymmetric: there’s less chance that the economy overheats in the next quarter than falters.

A deferred hike provides the Fed with more opportunity to gauge macroeconomic impacts. Though the US’s economy is strong, many of the country’s international trading partners face concerning weakness, potentially slowing domestic growth. Further, where the Fed might typically raise rates to combat increasing Inflation, the evidence indicates inflation remains remarkably low. Finally, a quarter-point signal move does little to provide “ammunition” for the Fed if it faces sudden weakness; better to keep the rates low a little longer and maintain a watchful eye than risk slowing an economy that doesn’t show signs of overheating.

Developed international markets have been volatile, up about 3% after tumbling by 9% during the worldwide correction at the end of August.

(3-month performance chart, ending November 17, 2015 of IEFA, an ETF tracking the MSCI Developed Markets Index. Chart from Google Finance.)

(3-month performance chart, ending November 17, 2015 of IEFA, an ETF tracking the MSCI Developed Markets Index. Chart from Google Finance.)

The European Central Bank began a version of quantitative easing to offset austere fiscal programs, which weakened eurozone economies. The British economy has also slowed. The Japanese economy reentered a recession in spite of more aggressive government spending, as a shrinking workforce struggles to sustain output. More broadly, the outlook for Europe remains unclear — the success of the a single economic zone has been repeatedly tested over the last few years, with debt issues across the southern half of the continent, suggestions that Greece drop out of the currency union, and questions about how to handle the influx of Syrian refugees.

The lack of synchronicity between the Fed and other central banks have interesting consequences for global markets. The minutes of Fed meetings and speeches given by various policymakers suggest that the US will be first to raise rates among the major central banks. This action has already led to a strengthening dollar as international investors transition to dollars. Meanwhile, emerging markets are at risk of getting trampled as the dollar strengthens against other currencies.

Emerging markets have stabilized somewhat after being hit hard by three factors: a) an economic slowdown in China has led to lower demand for construction supplies, including commodities; b) global decrease in commodity demand has softened prices; and c) weakness in many developed nations reduced trade. Oil prices have collapsed from 2014, down nearly 60% this year.

The chart below shows the relative performance of IEFA and GSG, ETFs tracking an emerging markets index and a commodities index, respectively.

6-month performance chart, ending November 17, 2015 of IEMG and GSG, ETFs tracking the MSCI Emerging Markets Index and the S&P GSCI Commodities Index. Chart from Google Finance.

(6-month performance chart, ending November 17, 2015 of IEMG and GSG, ETFs tracking the MSCI Emerging Markets Index and the S&P GSCI Commodities Index. Chart from Google Finance.)

Returning to the notion of cognitive dissonance, we have lots of conflicting information about the state of global markets, but we should avoid filtering to fit our preferred worldview. Markets around the world remain in a state of flux; smaller U.S. companies have done well, while large-cap U.S. stocks and developed markets tread water in 2015, and emerging markets declined significantly. This state of uncertainty is exactly the reason it is valuable to be globally diversified in many asset classes.


Diversified portfolios help us manage conflicting information; we remain exposed to multiple opportunities while reducing the risks associated with the ups and downs of market moves. This is especially important when markets yield conflicting information and do not always move in the same direction.
Aaron Gubin
Aaron Gubin leads research for SigFig’s Wealth Management team. He holds a Ph.D. in Finance and taught investments and portfolio management to graduate and undergraduate students before coming to SigFig. His research focuses on asset allocation, behavioral finance, and investment management.

Optimizing Your Human Capital, Part 3: Assets That Matter

Editor’s note: This is the third article in a three-part series by SigFig Advisor Dean A. Junkans, CFA, discussing how investing in your human capital is just as important as your portfolio mix. With 30 years of investing experience, Dean served as Chief Investment Officer of Wells Fargo Private Bank and is a published author.


In the first two installments of our three-part series on Optimizing Your Human Capital, we defined human capital and how to optimize it. We then discussed some of the human capital assets that define you, as well as assets that you can control, and the important role they play in optimizing your own human capital. In the third article in the series, we will discuss some of the assets that matter on your journey to optimizing your human capital. Those are:

1. Reputation

2. Communication

3. Leadership

human capital part 3.001

Assets That Matter


1. Reputation

Reputation matters more than almost any other characteristic you will bring to the workplace, yet it is something that many people never stop to think about, especially early in their careers. There is often a belief that your incredible skill or ability in some area will conquer all, but if your reputation is tainted in some way, your skill will not matter.

You establish your reputation early in your new place of employment. How you “show up” the first few weeks on a new job will largely define your reputation at that company. So start well! In today’s work environment, reputations seems to be developed rather quickly — and lost even more quickly. If you are leaving a job, or leaving a company, how you leave and what you say as you are leaving will be another moment of great impact on your reputation. So end well!

If you are not sure what your reputation is in the company where you work, find out! Most companies have many ways to figure that out. One of them is the 360 degree feedback process, where you receive specific feedback from people at all levels in your work team. Alternatively, you may simply ask trusted colleagues that you know will give you the straight answer.

A good question to ask is, “What do you see as my personal brand?” It is open-ended enough that you will get a wide range of feedback, and in the process you will get a good sense of your reputation in the company. If you find out that your reputation is strong, great; that is an excellent confirmation that you are on the right track. If you find that your reputation is weak, try not to be defensive, but take positive action to change it and to improve the value of your human capital!

2. Communication

One of the most important and impactful ways to differentiate yourself in the workplace, and thereby enhance your human capital, is to be an effective communicator. What is an effective communicator?  Let’s first define what it is not. It is not simply being able to stand in front of a group and deliver the speech of the century. This is one element of being an effective communicator, but it is by no means the only thing that matters in effective communication.

By all means, if you are shy about getting in front of a group and giving a speech, or if you do not believe you are good at it, please take advantage of every opportunity to practice and learn. Whether that means joining Toastmasters or taking a presentations skills class, or simply agreeing to deliver a speech — the more confidence you have that you can do this, the more valuable you will be as a communicator.

Effective communication is often knowing how your audience, your team, your boss, your friends, want to communicate. Some people are great at face-to-face meetings, but rarely return emails. Some people are great at emails, but would prefer not to meet face to face, unless absolutely necessary. For some, voicemail is a communication tool of the past, and leaving a voicemail is like not communicating with them at all. Learn the preferences of key people you will be communicating with and try to adapt to their preference.

Work on developing a good style in the following methods of communication:

1. Face to Face, either one-on-one or small group,

2. Conference call, either one-on-one or small group,

3. Email,

4. Voicemail,

5. PowerPoint or spreadsheet driven presentations, and

6. Large group presentations.

This sounds like a lot – doesn’t even cover all types of interaction – but it is not as daunting as it seems. For example, if you stand up while on a conference call, your voice will have more energy any your message will come across as more compelling, than if you are sitting down. Just making that one change can make you a more effective communicator. In all of these situations, there is no substitute for preparation, knowing the two or three key points you want to get across, and following the ‘less is more’ approach.

3. Leadership

If you are reading this and thinking to yourself “I am not in a manager role, so this does not apply to me,” you are missing the point. Plenty of non-managers are leaders, and some managers are not leaders. In my entire 30-year work career, I never applied for a manager role, yet I was regularly moved into these positions with greater levels of responsibility. The reason is simple; I always tried to lead in whatever job I had at the time. You can, too!

If you are a cube dweller in a cube city work environment, you can be a leader and look for ways to do things better, and you can be the positive force in your work team who looks at problems as opportunities, who helps the new team member learn their job, and who volunteers for the tough assignments. This is leadership, and it can be a critical factor in spring-boarding your career and increasing the value of your human capital.
Dean A. Junkans, CFA
Dean A. Junkans, CFA*, has 30 years of Investing experience. He served as CIO of Wells Fargo Private Bank and is the author of “The Anatomy of Investing,” a book for individual investors.

*Learn what the CFA designation means here.

Optimizing Your Human Capital, Part 2: Assets That You Can Control

Editor’s note: This is the second article in a three-part series by SigFig Advisor Dean A. Junkans, CFA, discussing how investing in your human capital is just as important as your portfolio mix. With 30 years of investing experience, Dean served as Chief Investment Officer of Wells Fargo Private Bank and is a published author.

Assets that you can control

In the first installment of our “Optimizing your human capital” series, we defined human capital and discussed what it means to “optimize” it in the context of things that define you. While those assets can perhaps be improved upon, they are often intrinsic traits. We then gave a few examples of how to optimize your human capital around some critical defining characteristics that have incredible value in the workplace.

In this second article, we will discuss the things that you can control. A lot happens in life and at work that we cannot control, but there are many things you can control which can make a substantial difference in the value of your human capital.

human capital part 2.009

One of the most important things you can control in your job and in your career is your attitude. Your co-workers want to work with people who have a positive, can-do attitude because it is infectious and motivating! Bosses want can-do people on their teams because they are fun to work with and they know they can count on them to see the opportunities, not just the challenges. You will differentiate yourself from the masses of often really smart people who have glass half-empty attitudes that no one wants to work with, promote, or hire.
Another important thing you can control is your work ethic. I have seen a lot of people do the bare minimum and then wonder why they do not get promoted! So many workers today are fast, efficient, and focused to the point where they can get their “required” duties done in less time than is allocated. Rather than bolt for the door, ask around for other projects you can get involved with and help out. Most people will not do this, so be the one who does and differentiate yourself in the process!
Work ethics can be described generally as doing the right thing and it is arguably the most important thing that you can control. Your work ethics relate to your co-workers, clients, vendors, and any of the relationships you have at the job or at home as ethics transcends place. If you are challenged in controlling ethics at work, it will likely be a problem at home, as well.
Work ethics are often explained with words like trust and integrity. Are you someone who others trust? Are you seen as having integrity? You can control doing the right thing, being trustworthy and having unimpeachable integrity. And if you do, people will seek your counsel, trust you with important information, bring you in on sensitive matters, look to you as a leader, and likely look to give you even greater responsibility, thereby improving you human capital stock.
One last thing you can control is preparation. How many times have you heard someone say they are going to “wing it”? Probably too many. Sometimes you will have no choice but to wing it if something comes up that needs your attention and decision right away. However, in many cases we have at least some control over being prepared. Lack of preparation stands out, and consistent lack of preparation can be a career derailer, or a detractor to your human capital.  If you do you whatever it takes to be well-prepared on a consistent basis, people in the workplace will know that they can count on you, and that will usually be recognized in the value of your human capital.
There are, fortunately, many things you can control that will enhance and optimize your human capital. As you go through your day and week, think about what you can do to control your attitude, your work ethic, your work ethic and your preparation, and see what this does for you human capital, as well as your enjoyment of work.
Dean A. Junkans, CFA
Dean A. Junkans, CFA*, has 30 years of Investing experience. He served as CIO of Wells Fargo Private Bank and is the author of “The Anatomy of Investing,” a book for individual investors.

*Learn what the CFA designation means here.

Investing Requires Discipline and Long-Term Focus

A diversified strategy is not without its ups, downs, and sideways, and the current market environment exhibits all of these. Such markets require maintaining discipline and focusing on the long run, even if it feels like you are running in place.

The reasons for holding a diversified portfolio are clear; we know with some certainty that each year, some asset classes will shine, while others decline. Of course, we would love to invest only in the winning asset classes, but no one knows which will win, lose, or run sideways. In an effort to maximize our returns while managing risk, we spread our investments across the available assets.

Even when we understand the logic and the mathematics of long-run performance, it is still difficult to stay disciplined when a familiar asset class outpaces the disciplined, diversified approach. Why shouldn’t we change course and invest in the single asset class that is currently outperforming our diversified, long-run strategy? In spite of our experience and rational investment philosophy, the lure of recently better performance is strong.

One thing modern portfolio theory doesn’t take into account is the risk that our human, emotional self overrides the logical, rational self — to the detriment of our portfolio. It is up to investors to remain focused and committed to maximizing long-term performance, while keeping risk manageable.

For U.S. stocks, mixed signals continue

Over the last six months, U.S. equities outperformed international developed and emerging markets, but that’s not to say that U.S. stocks were great investments. After several years of relentless upward momentum, the S&P 500 flatlined for the last few months; nearly all the positive year-to-date returns came during the month of February alone. Even as its trajectory stalled, the S&P 500’s increased volatility is noteworthy, but not immediately alarming, as it is now closer to historical norms (the previous few years had relatively low volatility).

Our view is that the general pattern speaks more to multiple divergent views among market players on where the U.S. economy is going. As the United States enters a new phase of a global economy with many dimensions in flux, there is value in the absence of a single dominant view about the future. For example, historically, the United States has been a net importer of oil and generally benefited when gas prices were low, but as U.S. production increased over the last decade, declines in oil prices now bring some negative consequences to oil producers and energy employment in the Midwest.

S&P 500 6mo 8-20-15
(S&P 500 Index performance for the six months ending August 20, 2015)

Continued anticipation of a rate hike

For the better part of five years, markets have been waiting for the Federal Reserve to start lifting interest rates off the ground floor. As anticipation mounts, U.S. bonds pulled back from their early 2015 highs, suggesting bond markets are already pricing in a rate increase.

AGG 6mo 8-20-15
Six-month performance chart, ending August 20, 2015, of AGG, an ETF tracking the Barclays Aggregate Bond Index)

The recent minutes of the Federal Reserve Open Market Committee note that labor markets are improving (unemployment is down to 5.3%) and inflation remains below their 2% target. Polled economists are leaning towards a September interest rate liftoff date over December, though we remain skeptical of a September hike. The economy continues to improve on the back of 2.3% GDP growth in the second quarter of 2015, but there is little evidence of overheating or inflation pressure. China’s recent currency devaluation will continue pressure on our trade deficit. Moreover, Fed Chairwoman Janet Yellen’s dovish stance on rates – she prefers to keep interest rates low to spur economic growth while risking a higher chance of inflation – makes her likely to push to extend the current low-rate environment until the end of the year. If the Fed acts in September, we can interpret that action as signaling the Fed’s belief that the economy is sufficiently strong to weather any negative consequences of tightening monetary policy.

What is going on overseas?

The last several months have not been kind to developed international markets. It is easy to point at the Greek crisis for a reason why European markets struggled, but that is only part of a bigger story. Questions remain about the viability of a single currency union, with Germany and other major economies’ outsized role in driving economic policy, and this continues to hamper European growth. Across the continent, European government austerity policies have had terrible consequences for growth: eurozone expansion fell to 0.3% last quarter, following two quarters of just 0.4% growth. The one bright spot in developed markets, Japan, has enjoyed substantial gains–up almost 16% in the last six months–even as its economy contracted 1.6% in the second quarter.

EFA 6mo 8-20-15
(Six-month performance chart, ending August 20, 2015, of EFA, an index fund tracking the MSCI Developed Markets Index.)

China’s performance depends on the timeframe

Most frustrating for globally diversified investors has been the abysmal performance in emerging markets. Led by China and declines in commodity prices, these markets slid nearly 15% over the last six months. China’s main Shanghai Index is off 25% since its June heights, but consider the entire run-up in values over the last year. Even though it just lost a quarter of its value, the Shanghai Index is still up 72% over twelve months.

DJ Shanghai 1yr 8-20-15
(One-year performance chart, ending August 20, 2015, of the Dow Jones Shanghai Index.)

Where should globally diversified investors go?

Even as it seems like all markets are flat or falling, a globally diversified investor should be asking this question: What, if anything, about the current environment and future prospects for growth changes our view about the long run? Our view is that there is little in the recent past and little on the immediate horizon to shift our opinions about the long run. International markets are risky, emerging markets especially, but they comprise the vast majority of the world’s resources, consumers, and long-run growth opportunities.
Locally, the U.S. economy is building on its recent growth and a Fed rate increase should reinforce positive inference about the state of the economy–solid growth in prospects, earnings, and labor market tightening. Inflation continues to appear low in the short and long term. Divergence in market views reflects a better, more balanced outlook about the long-run future. On the whole, our stance continues to be that a broad, globally diversified, risk-appropriate portfolio will serve the needs of the long-run investor.

Aaron Gubin
Aaron Gubin leads research for SigFig’s Wealth Management team. He holds a Ph.D. in Finance and taught investments and portfolio management to graduate and undergraduate students before coming to SigFig. His research focuses on asset allocation, behavioral finance, and investment management.