Orion Communities Offers Easy-to-Use Peer-to-Peer Model Sharing

Access simple peer-to-peer model sharing for your advisory firm with Orion Communities, part of the Orion Eclipse trading platform.

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Having Regret Doesn’t Pay!

Content provided by Paula Wieck, CFA, Portfolio Manager

In early October, it was announced that Richard Thaler, renowned economist and theorist in behavioral finance, was awarded 2017’s Nobel Prize in Economic Sciences. Thaler, amongst other behavioral economists, such as Daniel Kahneman and Amos Tversky, have made tremendous contributions to this field of science, which has gained more and more traction in recent decades.

Behavioral finance challenges the traditional economic and financial theory, which assumes everyone has whole and perfect information and always acts rationally. As rational as investors may be, chances are they suffer from some sort of behavioral bias. Usually, humans don’t make perfectly rational decisions, and sometimes our less-than-perfect behavior can affect our investment outcomes. This concept is also known as the Behavior Gap.

There are 15 biases cited by the CFA Institute. In addition to loss aversion, mentioned previously, regret aversion is an interesting one I see a lot of in investors. Investors who exhibit regret aversion tend to avoid making decisions altogether by either inaction (staying out of the market for too long) or following the herd. They do this so they can relieve themselves of the responsibility of making a decision and because they fear making a poor one.

For example, regret-averse investors may be more likely to stay out of the market if it has suffered recent losses (they don’t think it’s prudent to invest at this time). What our research shows, however, is after an intra-year market decline, the market typically ends up positive for the year.

On the other hand, these investors hesitate to enter the market after it has appreciated significantly for fear they are entering at the top, so they hold off for a better buying opportunity. However, our studies have shown that investing at the peak of each market cycle going back to 2000 would still have generated an average rate of return of 6.3% as compared to staying out of the market, which only generated a return of 1%.

See how the behavior gap rears its ugly head? Herding poses its own set of problems. Usually this action results in below-average returns because investors may have invested in an asset that has appreciated well beyond fair value.

The best course of action for regret-averse investors is to hire a professional money manager to balance out their biases with a plan in which they feel comfortable and brings them closer to achieving their long term goals — thus narrowing that behavior gap!




What’s Risk Got to do With It?

Learn more about our Risk Dashboard, preview the launch of Communities, and check out our Ascent featured course, AdvisoryWorld Checkpoint.

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How the Risk Dashboard Helps You and Your Clients Understand Risk

risk dashboard

By understanding how statistics can be used within Orion, you can help your clients better understand their portfolio risk and performance.

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Announcing Communities, Orion’s Peer-to-Peer Model Marketplace

In today's Orion Weekly, we're focusing on Fuse Best in Show winner RIA in a Box, talking about Orion's security certifications, and announcing Communities.

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Think Big by Going Small

Content provided by Joe Smith, CFA, Senior Market Strategist

Small-cap stocks have long offered investors opportunities to capture sizable gains either through index exposure or active management. The long-term excess return premium to small-caps has been well documented and exploited by investors for decades.

This year, small-caps have generally lagged relative to the rest of the stock market as FANG (Facebook, Apple/Amazon, Netflix, and Google) stocks in the U.S. and international stocks have taken off. Recently, however, small-caps have started to show a turnaround as the Russell 2000 has outpaced the S&P 500 during the third quarter 2017 by +1.2%.

There are three primary benefits that make the case to go big by thinking small-caps. Based on research from MSCI, these benefits are:

  • Small-caps tend to be less correlated to the broader market.



  • Small-caps offer more differentiated sector exposure than their large-cap counterparts.



  • Small-caps’ business performance is more tied to the domestic economy than large-caps.


In short, small-caps are an important part of a globally diversified portfolio. Investors should keep in mind that all segments of the markets go through tough times and shining moments. This is no different for small-caps, but currently there are notable reasons to consider adding to them.



Fuse 2017 Best in Show Winner: RIA in a Box

Fuse 2017 recap

2017 Best in Show Award winner RIA in a Box talks about their new MyRIACompliance tool, which helps automate third party service provider due diligence.

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Orion Takes Home Second Award

Orion was honored to receive the Technology Provider’s award for Compliance for our Advisory Fee Benchmark tool at the Industry Awards.

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The Biggest Risk in the Markets

Content provided by Rusty Vanneman, CFA, CMT, Chief Investment Officer

At a recent panel, an advisor asked our portfolio managers what they believed to be the biggest risk in the markets today. As usual, I was proud of every response from our portfolio managers on the panel. We sounded smart, disciplined, and experienced. We should sound that way, because we are.

As I’ve written in the past, I believe risk is best defined as the element that will destabilize investors and shake them out of their investment plans and portfolios. That catalyst is usually volatility, which is defined as the magnitude with which prices move around.

I identified the biggest risk to investors these days — what will likely cause the most significant damage to well-laid plans — as not the market moving lower, which most investors and advisors seem to be relatively prepared for, but the market moving higher.

Ten years ago, investors were not like they are today. There was a very clear and powerful optimism — even in the face of well-known structural and economic issues. I talked to many individual investors, including my clients, and my biggest problem every day was managing their expectations and keeping their portfolios at appropriate risk levels. I was often called too conservative, even by my own sales team, although we hadn’t fundamentally changed the way we managed portfolios. Some clients even left for what they felt were “greener pastures.” Greed dominated, and investors didn’t want to miss out on the returns they were seeing and hearing about in the media and at cocktail parties. That definitely doesn’t describe the environment we are in now.

The late 1990s were even worse for gung-ho greed and complacency. Appropriate and reasonable portfolios bit the dust even harder than they did 10 years ago. Sure, we have FANG stocks and bitcoin now, but the current environment is nothing like it was nearly 20 years ago.

Personally, I would not be surprised if the market gained another 30% to 50% from current levels in the months ahead — and did so in almost parabolic (i.e., pace of accelerated sharply increasing) fashion. Now, that’s not my “most-likely” call, nor the CLS house call (see page 50 of the CLS Reference Guide for that), but it’s definitely possible. And if it happens, it will hit like a hurricane on appropriately built, balanced portfolios.

The CLS Reference Guide (page 12 in the latest version) includes a “Cycle of Investor Emotions.” If I had to assess where I think we are based on my conversations with advisors and investors, I would say we are at the Optimism level — and more likely closer to Relief than Excitement.

Ever wonder why Dalbar’s study is so powerful, or the behavior gap exists, or so many studies show investors trail market benchmarks? Most think it’s because investors get scared out of investments when prices are down, and that is indeed a large part of the problem. But an equally significant problem is their tendency to chase higher prices and assume far more risk than they should. This is especially problematic when they do so during the late stages of a bull market — when euphoria has taken over.

We are most likely not at the late stages of the bull market. Many of the classic signs, at least in terms of investor sentiment, are not in place yet. I talk to a lot of advisors and investors, and not one has told me I am being too conservative. Not one. Instead, they ask about corrections and bear markets.

But what if we do experience a bear market soon? While, admittedly, they’re not great for paychecks — thankfully, they are typically short-lived — there are positives about bear markets. These are the times quality investment managers and counselors shine. In our roles, we preach, teach, and educate investors about the markets and why they should stay the course and invest for the long-term. If we do our job, they do well. When the markets are down, it’s our calling to help investors stick to their financial plans and stay on track to reaching their investment goals. And as investment managers, stocks are on sale! It’s a great time.

However, during a parabolic, melt-up market, many investment professionals sort of lose their cool. Everybody is making money — it’s a win-win-win for all. But the problem is market cycles haven’t broken. Trees still won’t grow to the sky. As counselors, we need to tamp down enthusiasm and teach market history just as we’ve done in bear markets. We might be called killjoys, and may even lose some clients to investment firms that have more “juice,” but we will be acting as we should.

As money managers, it will be time to take some chips off the table (at least as much as we can with Risk Budgeted portfolios). We might lag the go-go firms at this point. As the market runs higher, and before it peaks, we won’t be making as much money for ourselves and our clients, but when the market cracks after an epic melt-up (which it always has and always will), our disciplined money management and counseling will serve our clients well.



Orion Receives WealthManagement Industry Award

In today's Orion Weekly, we’re discussing this week’s blog on our November software updates and announcing a few award nominations.

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