Broker Check

Articles by Cicely and Dan

3. Ten Concepts for Investing in Your Financial Future

By Dan Beck, CFA and Cicely Jones

Equitable Advisors

The principles of good investing do not depend on the change in the calendar year, nor on the current macroeconomic environment. If you have determined your financial goals and are working towards achieving them, here are ten things to keep in mind while investing for 2021….and every year thereafter:

1. Match Your Asset Allocation* to Your Risk Tolerance and Investment Time Horizon

One of the fundamental principles of any sound investment plan is to match the asset allocation to the risk tolerance. The greater the risk tolerance and longer investment timeframe, the riskier you may want to consider making your asset allocation.

Asset allocation is the percentage of a portfolio in different asset classes, such as stocks, bonds, real estate, cash, etc. Risk tolerance is the ability and willingness to withstand volatility, or asset price movement - both up and down - in the portfolio. It also typically includes a longer investment time horizon, where the investor has more time to recoup any potential losses that occur within a portfolio.

If the risk tolerance is high, one should consider investing more in securities that have the potential for greater returns over the long term, such as stocks and other risky asset classes, and if the risk tolerance is low, a portfolio should generally be weighted more towards interest bearing investments, such as bonds, cash, and other less risky asset classes.[1]

Let’s take two contrasting hypothetical examples: a 22-year-old recent college graduate investing his money in a Roth IRA, versus a 74-year-old retired widow who needs income from her portfolio to meet ongoing expenses.

The 22-year-old recent college graduate investing money in his Roth IRA has a very high risk tolerance for several reasons. The first, and primary reason, is the long investment timeframe. A Roth IRA cannot be accessed without taxes and penalties on the gains until age 59.5, so he has a least 37.5 years to invest and to ride out any stock downturns during that period. The second reason is that with a Roth IRA, unlike a traditional 401(k) or traditional IRA, taxes are paid upfront and then the gains are never taxed, so it may make sense to be more aggressive or risky with the investment selections, particularly during the early years of the account and potentially achieve the most gains over time in a Roth rather than in a traditional retirement account where gains are taxed at withdrawal. The third reason is that the 22-year-old has many years of income which can help offset any investment losses during his working years.

On the other hand, the 74-year-old retired widow who needs income from her portfolio to meet ongoing expenses has a very low risk tolerance. Since she has less time to recoup potential losses, and any losses would likely impact her ability to access these funds at a consistent rate, her goal is to primarily protect her principal while seeking modest gains, and therefore should invest in low risk assets.

There are other considerations when it comes to risk tolerance, including source of wealth (was it achieved actively, through investing or an entrepreneurial business, or passively, such as inheritance or many years of working at a larger organization), and measure of wealth (how much the client “feels” they have).

Overall, many considerations go into determining risk tolerance, but matching risk tolerance to asset allocation is one of the fundamental components of financial planning.

This hypothetical example is intended for illustrative purposes only and is not indicative of any investment or financial product.

2. Don’t Be Scared of Stocks

For many, stocks should be one of the core components of planning for any long term financial goal because over the long-term stocks beat all other asset classes.[2]

For example, as the below chart shows, one dollar invested in large capitalization stocks in 1926 would have been worth $9,237 at the end of 2019, and invested in small capitalization stocks would have been worth $25,617. This compares to a mere $175 in long term bonds, and only $22 in Treasury bills.

In US dollars.

US Small Cap Index is the CRSP 6–10 Index; US Large Cap Index is the S&P 500 Index; Long-Term Government Bonds Index is 20-year US government bonds; Treasury Bills are One-Month US Treasury bills; 1-Month Treasury Bills Index is the IA SBBI US 30 Day TBill TR USD. Treasury Index data sourced from Ibbotson Associates, via Morningstar. Direct Inflation is the Consumer Price Index. CRSP data provided by the Center for Research in Security Prices, S&P data copyright 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Bonds, T-bills, and inflation data provided by Morningstar.

Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

Source: Dimensional Fund Advisors, available at, accessed December 2020.

However, the important caveat is over the long term. In the short term, the stock market can be a wild ride (the financial literature refers to this as “volatility”). For example, between 1973-1974, 2000-2002, and in the single year of 2008 the stock market lost nearly 40% of its value.[3] Not to mention that the market lost 18% of its value between September and December of 2018, and a full 34% of its value between February 19 and March 23 of 2020.

3. Consider Alternatives to Conventional Active Management

“Active” management generally means the on-going selection of securities versus the “passive” approach of holding a position that tracks an index, such as the S&P 500, Russell 2000 etc. While it is not impossible to beat the market over time with a lot of hard work – after all, with a lifetime of practice, you, too, can maybe perform at Carnegie Hall -- most evidence suggests that the overwhelming majority of actively managed funds do not outperform their benchmarks nor do so consistently over extended periods.[4]

Therefore indexing, or, better yet, using the market premiums (also known as “factor strategies”) discussed below, are some of the alternatives you should consider.

This approach precludes choosing active mutual fund managers, selecting individual stocks for a personal portfolio, and practicing “tactical asset allocation,” i.e. modifying portfolio allocations based on valuations of asset classes or forecasts of price movements.

It also recommends against the common pitfall of keeping a significant amount of stock in your employer from options or restricted stock awards, as that in itself is an “active” decision. (However, employees must comply with any company restrictions on selling restricted securities.)

A final corollary to this point, and the one most often violated in practice, is do not try to time the market nor let others try to time it for you. It is virtually impossible to time the market with any regular rate of success over a “buy and hold using an asset allocation based on your risk tolerance” strategy.

4. Take Advantage of the Market Premiums

There are three market premiums in the stock market and two in the bond market that investors can take advantage of to improve their returns over passively holding an index fund.[5]

This premise is based on academic research pioneered by Nobel Prize winner Eugene Fama of the University of Chicago and his colleague Ken French at Dartmouth.

According to their research, the first stock market premium is the size effect, which is that smaller company stocks will outperform larger company stocks over time. The second stock market premium is the “value” effect, which is that companies trading at cheaper valuations (known as “value” stocks) will outperform companies trading at more expensive (also known as “growth” stocks) valuations. The third stock market premium is the “profitability” effect, which is that companies with higher profitability will outperform companies with lower profitability.

For bond investing, term premiums (i.e. bonds with longer maturities that have higher yields), and credit premiums (i.e. bonds with lower credit quality that have higher yields) can also be taken advantage of to improve returns over index funds.

5. Diversify*

From a return perspective, it is important to hold a broadly diversified portfolio because in any given year, and even over longer periods, it is difficult, almost impossible (see paragraph #3 above) to know where the highest returns will occur.

Diversification is the idea that through holding sets of asset classes that have differing risk and return characteristics, portfolio outcomes, to include both risk and return, can be improved.

From a risk perspective, holding a diversified portfolio can help reduce the impact of any one company’s, sectors’, or geographies’ poor performance over any given time period. As an example, individual stocks can go to zero due to bankruptcy, whereas the overall world market cannot.

Diversification can help lower volatility as compared to owning individual asset classes or stocks, also known as “smoothing out the ride.” This lowering of volatility due to diversification contributes to a well-designed investment plan to help achieve one’s financial goals.

6. Rebalance*

A properly diversified portfolio will have different weights for different sectors. Holding to a strategic asset allocation, i.e. a portfolio allocated based on the client’s goals and risk tolerance, means periodically rebalancing the portfolio to maintain strategic weightings.

As an example, let’s say your risk tolerance suggests that your portfolio should be 50% stocks and 50% bonds and you set this allocation at the beginning of the year. By the end of the year stocks have risen and bonds have fallen so that your portfolio is now 60% stocks and 40% bonds. Rebalancing would have you sell stocks and buy bonds so that your portfolio moves back to a 50% stock and 50% bond allocation. This essentially automates the process of buying low and selling high.

Regular rebalancing is essential to maintain the desired risk and return objectives of the portfolio.

7. Keep Taxes Low

Capital gains taxes, and taxes on dividends and interest as ordinary income, can have a substantial negative effect on portfolio returns, especially compounded over many years. There are several ways to mitigate these taxes.

The first is taking advantage of employer sponsored retirement plans. These include the well-known 401(k) for corporate employees, as well as 457 plans for government, state and local employees, and the Thrift Savings Plan for military and federal employees.

In addition, those meeting eligibility requirements should consider taking advantage of Roth IRAs, where after-tax money grows tax deferred, and can be withdrawn tax free after age 59.5 and a holding period of at least five years.

8. Keep expense ratios, transaction costs, and turnover low

One important aspect of investing is to analyze the expenses involved, including fees. One may want to compare the active management fees charged versus those of passive index funds.

The average actively managed equity fund now costs at least 0.72% of assets under management, compared to the average passive fund that costs 0.15%.[6] Additionally, look at fund loads -- or fees assessed when buying or selling a mutual fund – as there is no evidence that funds with loads outperform funds without loads.

Transaction costs should be kept low as well as there is evidence that funds with higher transaction costs lead to lower returns.[7] The primary way to keep transaction costs low is to use funds with low turnover ratios. Turnover means how often the fund manager is buying and selling securities. Low turnover may also lead to lower taxes, depending on whether the funds pay dividends.

9. Read good sources on investing

There are many quality sources of knowledge on personal investing such as financial publications and books. Some that come to mind are:

  • Irrational Exuberance by Robert Shiller
  • Stocks for the Long Run by Jeremy Siegel
  • A Random Walk Down Wall Street by Burton Malkiel
  • Common Sense on Mutual Funds by John Bogle
  • Unconventional Success by David Swensen
  • Fooled by Randomness by Nassim Nicholas Taleb
  • CFA Curriculum
  • Articles by Jason Zweig of the Wall Street Journal

10. Use a coach (aka a financial professional)

There is significant evidence that suggests that using a financial professional can add value over going it alone. These include studies from Vanguard, Envestnet, Russell, Morningstar, and Fidelity, which suggest that advisors can add anywhere from 1.5% to 4% in annualized returns each year for their clients.[8]

Vanguard breaks an advisor’s value down into three areas:

  • Portfolio construction: proper asset allocation (see #1); cost effective implementation (see #8); asset location--dividing assets between taxable and non-taxable accounts (see #7); and total return vs. income investing, or choosing the best strategy for taking distributions from a portfolio.
  • Wealth management: rebalancing (see #6) and spending strategy for drawdowns.
  • Behavioral coaching: financial professional guidance to adhering to the financial plan.[9]

To quote Vanguard:

“Advisors, as behavioral coaches, can act as emotional circuit breakers by circumventing clients’ tendencies to chase returns or run for cover in emotionally charged markets. In the process, advisors may save their clients from significant wealth destruction and also add percentage points— rather than basis points—of value. A single client intervention, such as we’ve just described, could more than offset years of advisory fees.”[10]


If you are interested in discussing these ideas as they pertain to your portfolio, please send us an email to and

IMPORTANT – Investments are subject to market risk, will fluctuate, and may lose value. The subject matter discussed in this article is for informational purposes and should not be relied upon, as investment or financial advice and does not constitute an offer, recommendation or solicitation. The information was written to support the promotion or the marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent advisor.

Mutual funds are offered by prospectus. The prospectus contains the investment objectives, risks and charges and expenses of the mutual fund, which the investor should read and consider carefully before investing.

Securities offered through Equitable Advisors, LLC, member FINRA, SIPC (Equitable Financial Advisors in MI & TN). Investment advisory products and services offered through Equitable Advisors, LLC, an SEC-registered investment advisor. Annuity and insurance products through Equitable Network, LLC (Equitable Network Insurance Agency of California, LLC in CA). Equitable Advisors, its affiliates, and its associates do not provide tax or legal advice or investment or market research. GE-157916(1/21)(exp 1/23)

[1] For examples of portfolio allocations based on years until retirement see Burton Malkiel, A Random Walk Down Wall Street: The Time Tested Strategy for Successful Investing (New York: W.W. Norton and Company), p. 346-347, John Bogle, Common Sense on Mutual Funds (Hoboken, New Jersey: John Wiley & Sons, 2010.), p. 84, and David Swensen, Unconventional Success: A Fundamental Approach to Personal Investment (New York: The Free Press, 2005), p. 87-90.

[2] Jeremy Siegel, Stocks for the Long Run, Third Edition, (New York: McGraw Hill, 2002). p. 27. Siegel concludes, “The safest long-term investment for the preservation of purchasing power clearly has been a diversified portfolio of equities.”

[3] For S&P 500 returns going back to 1928 see, accessed December 2018.

[4] The shortcomings of active management have been well documented in both the academic and popular literature. Malkiel shows data that over 20 year period periods the S&P 500 outperformed over 82% of large cap equity funds. And even these results are skewed by survivorship bias – i.e. funds that were closed due to poor performance do not show up in the data. Malkiel, 268. Bogle points out that over short periods actively managed funds can beat their index, but in the long term the majority do not. See also Swensen, Chapter 7, “The Performance Deficit of Mutual Funds,” p. 208-219. The underperformance of actively managed funds is not a new phenomenon. See Ben Graham, The Intelligent Investor, (New York: Harper Collins Publishing, 1973), Chapter 9. Graham points out that from 1961 – 1970 the “actual performance of the funds seems to have been no better than that of common stocks as a whole.” While Graham does believe that mutual fund companies have a purpose in allowing investors to diversify their common stock holdings with a small amount of money, he was writing before it was so easy and low cost to buy index funds.

[5] Wei Dai, “A Review of the Empirical Evidence on the Dimensions of Expected Stock Returns,” Dimensional Fund Advisors, August 2015, available at, accessed December 2015.

[6] Morningstar, “U.S. Fund Fee Study: Average Fund Fees Paid by Investors Decreased 8% in 2017, the

Largest One-Year Decline Ever,” Morningstar Manager Research, 26 April 2018, p.2-3,, accessed December 2018.

[7] Edelen, Roger M. and Evans, Richard B. and Kadlec, Gregory B., Scale Effects in Mutual Fund Performance: The Role of Trading Costs (March 17, 2007). Available at SSRN: or

[8] Envestnet, Capital Sigma: The Return on Advice (estimates advisor value add at an average of 3% per year); Russell Investments, 2016 Value of a Financial Advisor Update: More than 3.75% (estimates value add at an average of 3.75% per year)

Vanguard, Putting a Value on Your Value: Quantifying Vanguard Advisor's Alpha® (estimates value add at an average of 3% per year); Merrill Lynch, Value of Personal Financial Advice (estimates value add at an average of 2%–3% per year); Morningstar Investment Management, Alpha, Beta, and Now... Gamma (estimates value add for a subset of the service identified in this paper at an average of 1.5% per year). Fidelity, The methodologies for these studies vary greatly. In the Envestnet and Russell studies, the paper sought to identify the absolute value of a set of services, while the Vanguard and Morningstar studies compared expected impact of advisor practices to a hypothetical base case scenario. Please follow the links above to see important differences in the methodologies of these various studies.

[9] Vanguard, Putting a Value on Your Value.

[10] Vanguard, Putting a Value on Your Value, p.16

Thoughts on Privately Held Stock

By: Cicely Jones

We refer to most of our clients as HENRY’s or “High Earners, Not Rich Yet”. Many people who fit into that category work at companies that offer stock-based compensation or stock options. In this article, we would like to explore privately held stock, why employees own it, and some things to be aware of.

What is a privately held stock? A privately held stock is an ownership stake in a corporation whose shares are not available to the public.


  • Companies that are not publicly traded (in theory) do not have as much focus on short-term stock price and can take a longer view on the future of the company
  • These companies have power to select their investors and advisors
  • These companies could IPO in the future leading to potentially significant gains by the investor
  • Privately held stock may experience less price movement due to market volatility because of the lack of liquidity


  • Because shares are not available to the public, the investor would have to seek someone to buy their shares if they have need for liquidity
  • Owning a single illiquid stock position puts disproportionate risk on the investor holding it
  • Unicorns are rare; As of 2021, there were only 900 unicorns in the world[i] (The number of companies in the United States was 10,750,000 in 2020[ii])
  • If companies choose their advisors or investors poorly, the company may be at significant risk

Common Reasons an Investor May End Up with Privately Held Stock:

  1. It is part of their compensation/bonuses: We’ve found this to be the most common and unavoidable way that investors at privately held companies end up with the stock.
  2. They were given stock options: This is when an investor can opt to buy the stock at a fixed price for hopes they can sell it later at a higher price.

For many reasons, we do not encourage investors to hold concentrated stock for their investment goals. Individual stocks run the risk of going to zero and broadly diversified portfolios help mitigate risk and can potentially improve returns. If an investor is on track with all their financial goals (retirement, major purchase, education, charitable giving, etc.) and has some excess funds to “play with”, that is generally the only time we would say it may be acceptable to take those kinds of speculative risks and sacrifice liquidity of funds held on the side.

If owning privately held stock is unavoidable and tied to compensation, we would encourage staying in the loop about upcoming liquidity events and sale opportunities and learning if there is a system in place to facilitate the sale of these securities. Relying on privately held concentrated positions for financial goals is ill advised and we would generally recommend getting out of the position, when possible, to avoid excessive exposure.

If an investor were to seek out private equities outside of their own organization, they would need to meet high minimums in liquid investible assets to invest in this asset category with fund managers. Privately held stock and private equities may offer an attractive investment for those who can afford to diversify and have sufficient other assets to sacrifice some liquidity, but they are not suited for every investor

Before deciding to invest in this kind of asset class, speak with a financial advisor regarding your current risk tolerance, goals, and investment needs.

AGE-4849230.1 (8/22) (Exp. 8/24)