Are You Ready for Your Portfolio’s Dustin Johnson Moment?

Tyler Linsten Investing

Life is 10% what happens to you and 90% how you react to it.

-Charles R. Swindoll


#17 at Chambers Bay

I’m a huge fan of golf. It’s about the only stereotypical “financial professional” trait I have. I don’t sport a suit, I’ve never earned a commission and, hell, I don’t even have an office – but I do love me some golf.

Last weekend, the USGA brought our nation’s championship, the US Open, to the Pacific Northwest at Chambers Bay in Pierce County. This is like having your town host the Super Bowl so naturally I had to be there for at least one day. I was in full-on, giddy golf nerd mode. (Pictures at the bottom of this post!)

The big story out of the weekend was not so much about how the winner (Jordan Spieth!) played, but how the runner-up, Dustin Johnson, lost.

Johnson has a well-publicized problem with closing out tournaments. He’s got one of the most powerful swings in the game and always seems to be at the top of the leaderboard in every tournament he plays, but the guy just can’t close. This weekend was no different, except for the absolute brutal sequence of events.

Dustin choked in epic fashion.

He needed to make a twelve foot putt to win, or he could sink it in two putts to force a playoff. Even so, he three-putted, missing a three footer on his second putt. The color drained from his face and you couldn’t help but feel bad for the guy. Jordan Spieth was practically speechless, no doubt because he felt so bad for Dustin. Three-putting from twelve feet is something you’d expect to see a pro do once a year at very most –  but Dustin did it to lose the US Open.

The US Open is the tournament you dream about winning as a kid. Dustin played 71 holes of excellent golf, not to mention a lifetime of preparation, only to let it slip away on the 72nd hole at Chambers. Demoralizing is an understatement.

So where’s the financial parallel?

You’re going to have a Dustin Johnson Moment in your portfolio. I can’t say when, but it’s coming. Tomorrow is one day closer to the next bear market and there’s a very good chance you’ll have a moment where you, too, feel demoralized.

There’s going to be a day, or a week, month or year, where it all just goes wrong. A good many folks had a “DJ Moment” in 2008 – financial markets were crashing and investors were similarly dejected after seeing their portfolios take haircuts of 50% or more. DJ Moment symptoms include loss of appetite, sleep disruption, nausea and/or extreme anger.

Many investors took to liquidating their portfolios in response to their financial DJ Moment – an action nearly all surely regret.

Missed 3-footer at the US Open and halved portfolio alike, it’s all about what you do after your DJ Moment. For Dustin, he’ll either use this golf tournament as a learning experience or it’ll mark the beginning of a steep decline into irrelevance with a significant haircut in earnings.

If Dustin uses this loss to improve his resilience and strengthen his resolve, then he’ll be much better off for it. Dustin could use this loss to springboard himself to major tournament victories.

The financial case is exactly the same: when the next bear market hits, investors will either panic and damage their financial outlook, or they will use the volatility and depressed prices to their advantage. Reiterating a commitment to a long-term focus, where short-term disruptions are barely meaningful, is a must when the next downturn arrives.

How will you know a DJ Moment is present, besides the symptoms listed above? The number one indicator is likely the desire to act. I can tell you, with a high degree of confidence, that the biggest obstacle between you and your goals is you “doing stuff” – especially in response to market selloffs. Financial returns and frequency of “tinkering” have almost a perfectly negative correlation. This effect is known as the Behavior Gap.

Translation: do less to earn more, especially in the face of feeling stress about losses. We need to accept that downturns are always a day closer but are a normal part of markets (just as losing is a part of golf). If we notice a DJ Moment developing, the best course of action is always to take a step back, remove our finger from the “panic” button and head to the practice green to work on our three foot putts.

Now, a few more pictures from the tournament:


2015 US Open Champion, Jordan Spieth (in Red)


18th Hole Panorama


The Masses


The View up the 18th Hole

Q1 Client Letter

Tyler Linsten Client Letters

Like reading long pieces about interest rates? This one’s for you!

Don’t worry, there’s also discussion of fugitives with bazookas, the danger of steamrollers and the nuances of fire starting.

Read it for yourself:

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The Details Matter

Tyler Linsten Uncategorized

Financial planning and portfolio management is ripe for disruption, and the “robo” advisors are definitely making inroads. I follow the developments pretty closely and have formed some pretty strong opinions about them. For the most part, they get it – it’s just that there are a few sticking points I believe they’ll need to address to be successful. Obviously it doesn’t benefit me to spell it out for them step by step, but I also know they’re probably not reading this.

One of my gripes is the Schwab cash issue. It’s probably above gripe status – I think they’re acting like full on Wolves of Wall Street on that one. Anyway, on to the point.

The Wall Street Journal has a great piece online, which breaks down the asset allocation suggestions from each robo for a user with a “moderate risk profile.”

BF-AJ663_ROBOTE_G_20150424153910Schwab has what I can only describe as a total “Schwabbed” suite of NINETEEN ETFs as an asset allocation recommendation. This is a ridiculous amount of holdings but it’s not even the point of this note. The details do matter and I think the “robos” will have to do a better job at tailoring portfolios according to a user’s full financial picture instead of assuming every user just sends them their entire investable asset base.

For instance, a majority of the “robo” recommendations in the WSJ piece have an allocation for real estate ETFs. One “robo,” Wealthfront, has no real estate holding slated, but instead recommends a slice of commodities, which is a whole other blog post. Betterment shines again in the WSJ survey, omitting both real estate and commodities – I think they’re the mostly likely “robo” to survive, for what that’s worth.

Back to real estate holdings. I find real estate ETFs, which are usually REIT index funds, are typically an unnecessary asset class for most portfolios. If the home ownership rate in the United States is nearly 66%, then why is it prudent to add real estate exposure to client portfolios? I would be curious to hear the “robos'” answer.

It’s pretty safe to assume that the one third of Americans who don’t own a home are also much less likely to have a portfolio of financial assets ready to invest with a “robo.” And just the opposite, the two-thirds of Americans who own a home are very likely to have assets for investment. It’s also very likely that an investor with a home valued at $200K has their net worth WAY “overexposed” to real estate swings if they have a financial portfolio of $200K as well.

So it stands to reason if you have an investment portfolio then you probably don’t need extra exposure to real estate. Why? If we see another crash in housing of, say 20%, then it’s pretty likely your house will also drop somewhere in the neighborhood of 20%. The same goes for rises in price. I don’t think the slightly different risk exposure of a REIT is sufficient to justify the allocation – REITs are going to live and die by the general value of real estate and housing in their markets. The swings in value of an investor’s home will provide sufficient exposure to real estate.

Plenty of Americans have a big fat mortgage with slim-to-no retirement savings – do they really need more exposure to real estate via REIT ETFs when they finally start investing?

The “robos” will have to incorporate these questions into their client onboarding processes if they want to truly claim their investments are suitable for their clients. I’ve checked a few of them out and haven’t seen these questions being asked. I could be wrong, so, please, “robos,” have your human counterparts contact me if you do indeed take home ownership into account for tailored portfolios.

Shut up, Chuck: My Take on Cash

Tyler Linsten Uncategorized

Here’s another example why I’m an independent investment advisor.

Read on only if you’re fully caffeinated…

There’s a big controversy in the investment world regarding Schwab’s high allocation to cash in their brand new “robo” platform (up to 30%). The discussion started with accusations of this being an unethical move on Schwab’s part because they’re branding their new product as “free” but will utilize high cash allocations to bank revenue via low interest rates paid to clients.

Elsewhere, the discussion has turned into a debate of the merits of cash itself in an investment portfolio. Here’s where I stand on the issue.

First, I think Schwab is being disingenuous. They’re entering a segment of the investment management market with well defined pricing, as in other “robos” charge a nominal (transparent!) fee for their advice, but Schwab is using fine print to give the appearance of a cheap product in that market. This sleight of hand occurs at the expense of the client. High cash balances are being justified by Schwab and others by referencing “optionality” created by always having a cash balance and/or the smoothing effects that having cash, a low-to-zero volatility investment, will mute portfolio gyrations caused by exposure to other asset classes. Schwab wrote a huge white paper on the subject.

Shut up, Chuck. 

Schwab’s algorithm is not a cyborg version of Warren Buffett and its clients don’t need “dry powder” or cash on the sidelines for optionality or a smoothing mechanism. Schwab’s clients are coming to the website because they’re not investing experts. They need Schwab to invest their money, not shove up to 30% of it in the Schwab sweep account so Schwab can call the new product free.

Chuck: your clients are giving you this money because they’ve told you they have enough elsewhere, presumably cash in checking and savings accounts, and they want your expertise for equity and fixed income exposure. Why not just give that to them and charge a competitive fee?

Your target audience is obviously Millenials – is this really how you want to introduce yourself to the generation who will inherit some of the Baby Boomer funds that were so carefully cultivated via the brand you’ve been building for decades?

Why does cash suck, anyway?

Cullen Roche would say cash is “invested” at a brokerage account – it’s just in Treasury bills and you get a (small) cut of the yield. He’s right. He would also say that the return on “cash” has been very fair over the decades, and most of all that return has been steadily climbing from the lower left to the upper right of the chart. He’s right on all of that.

Yet, here’s where we disagree. An investment in cash today is a near guarantee of a loss when considering inflation. If my “cash” yields 0.5% and inflation is 2%, then I have a 1.5% loss of purchasing power. Cullen, and others, would say that’s just part of sticking to a longer-term plan where returns of different asset classes fluctuate. They’d say it’s diversifying. Now, I’m all about trying to make as few “active” moves as possible and I am ALL about diversification but “cash” is a special case right now – here’s why.

Short-term investments, like T-bills, can be evaluated almost solely by their yield. There are such small fluctuation effects from their price that there is no major opportunity cost of missing out on a big “run” in yields higher. Yields simply go up or down, with little damage or gain to the principle value. Once yields are higher, an investor can take advantage of them instantly (unlike buying a stock after it’s run up). The value (or lack thereof) in T-bills comes from their yield, not their price changes. Market machinations determine the yield level of interest bearing instruments, and slowly the issuing institutions like the US Treasury will adjust coupon levels.

Roche would also say that no matter what, somebody has to own the cash in the system. True. Cullen takes a very detailed perspective of the financial system itself to justify his defense of Schwab, noting it’s a fallacy of composition to suggest the system could optimize itself away from cash. Also true – somebody does always have to hold the cash. But I’m not talking about the system – I’m talking about what’s best for clients in a micro view. Whatever happens in the macro system is up to the aggregate participants in the system. That’s a market and we have no control over it – only how we react. All we can do is what’s optimal on a personal level and react/adjust accordingly, hopefully infrequently.

So what if interest rates spike and T-bills go from yielding basically nothing to 3%? Well, guess what, anyone can now invest in “cash” at 3%. Those who owned “cash” going into the interest rate spike have nothing to show from their previous minuscule interest received, nor do they have gains from owning an asset that is now more attractive than its recent past.


The true crux of this debate is portfolio management and appropriate allocations. Most rational advisors recommend a static approach that doesn’t change much year to year and “active” decisions are hopefully minimized. One of the main reasons for this hands off appraoch is FOMO, or Fear of Missing Out. If managers try to time the market then there’s an elevated chance they’ll be wrong and they’ll miss an important move in the market going against their hunch. We know that a very large percentage of the overall yearly stock market return comes on just a few days of every year – miss those days and your portfolio vastly underperforms. We also know that active managers are really horrible at beating the market.

The FOMO logic doesn’t apply to cash/T-bills as I described above. There’s really no “gains” to be had by staying invested in cash for the long term besides the coupons they collect and diversification benefits when they actually have a positive real yield. Investors are essentially just “yield takers” in that there’s a nominal coupon to collect and that’s all they’ll get. Not so with stocks – the only logical strategy is one where an investor stays “long and strong” for years in order to capture price gains, any yield offered and to smooth out any bad returns from bear markets. Cash/T-bills are either yielding something worth owning – usually sane operators prefer a positive real return – or they’re not. Right now they’re not.

Stocks, on the other hand, are a different beast. There is a major, potential opportunity cost to consider when jumping out of, or reducing, an allocation to stocks and this effect is being falsely translated to cash and it’s why I think people are so stuck on recommending sticking with cash. Why are stocks different than cash? Again, FOMO. With stocks, you can miss a big run in a short time and miss out on what potentially equates to years worth of gains. If you panicked and sold out of stocks from March 2009 to March 2010, you would have missed out of gains of over 65% in the S&P 500. If equities return 8% on average per year, that little mistake was like missing 8 YEARS of average gains.

If an “investment” returns nothing for seven years (cash), returns nothing now (cash), and appears to have no return in the foreseeable future (cash), is that a strategy you want to stick with? (No.) The Fed will raise interests rates someday and the conversation will change. Until interest rates rise, cash is a bad holding in an investment portfolio. I can’t buy the notion that any diversification or “smoothing” benefits of cash are really worth a guaranteed negative real return of at least 1%.

Client Balance Sheets

The other nuance of portfolio management that isn’t being addressed, at least from everything I’ve read on this debate, is the distinction between client investable assets and client savings/checking accounts. My approach is a very simple order of operations that does indeed involve being a “yield taker” in certain accounts, but not in a client’s long-term investment accounts where this big debate centers.

  • First, I recommend clients should have a checking account for regular monthly expenses and direct deposit – money in, money out. In this environment it’ll yield next to nothing, which will have to be accepted.
  • Next, an emergency account should be formed containing at least six months worth of expenses. A good online savings account today will yield around 1% (a lot better than Schwab’s robo accounts). Again, a low yield has to be accepted for this money – it’s a client’s safety reserve.
  • Any other near-term goals should be funded in a savings account. One to two years out would qualify as a near-term need.
  • Finally, the rest of a client’s financial assets will go into their investable assets pool. These accounts, whether they’re 401(k) assets or taxable funds, should be split between a suitable mix of equities and fixed income tailored to each client’s risk tolerance and return needs. In my opinion, the only need for a cash balance here is for retired individuals with near-term withdrawal needs or imminent RMDs. The money in this account is here for a reason – long-term growth and income.

Do Schwab and the fans of cash really believe that clients just say “here ya go” and hand over ALL of their financial assets? In my opinion, this would be the only scenario where a large cash balance would be appropriate right now. But we know this isn’t the case.

Optionality – or, You’re Not Warren Buffett


“You WILL give in to the passive side.” -Me, speaking to active managers, if I were the Emperor of Finance.

I’ll try to keep this one quick. If your financial advisor is holding a large cash balance in your account for “optionality,” then you should be concerned. One advisor on Twitter, look it up if you like, is a fan of this strategy and used Warren Buffett quotes to explain his position to me. If an advisor is holding large cash balances for clients because the advisor thinks they’ll be able to make smart moves like Warren Buffett or Ben Graham then the advisor is sorely mistaken and the client may be disappointed to find out they’re paying a premium price for underperformance.

Making active, market timing bets is only for the rare managers like Buffett, who reside in the stratosphere of investing pedigree, and it’s irresponsible to try to recreate their strategies. Trading and timing stocks successfully is really, really, really, really hard – trying to do it with client money in an RIA structure is not prudent. Got a hedge fund with sophisticated high net worth investors? Then, sure, go ahead and active manage your days away. Learn and commit to some of the best rules of thumb from Uncle Warren and Charlie Munger but don’t try to copy them for the benefit of clients depending on your prudence in order to retire comfortably, guys.

Jordan Spieth has a really nice golf swing, but when the US Open comes to my town this summer I’m not going to show up expecting to play on Sunday at Chambers Bay in June because I’ve watched a few videos of him. I’ll leave it to the best golfers in the world – I know my place is playing a twilight round on Monday. The same goes for RIAs. It’s fine to be in the game, but be realistic.

I could keep going and going about cash but the bottom line is that I’m not anti-cash – I’m just anti-cash right now. If cash emits a POSITIVE real yield then I’ll reassess and adjust accordingly. Clients of RIAs hire advisors to make these calls – not to time the market, not to emulate Warren Buffett, and not to throw purchasing power down the drain with sterile cash balances serving non-client interests.

There, now I feel better. Commence the backlash, cash lovers.

What I Believe

Tyler Linsten Uncategorized

In order to get a better idea of what I’m all about, and assuming you’ve already checked out the FAQ, here’s where I stand on many key investing topics. I might have also snuck one other topic in there.

To challenge myself (and to avoid putting you to sleep), I’ve addressed each topic in ten words or less.

Active/Passive: invest passively and pay less to get more. Good deal.

Annuities: useful for the risk intolerant but always opaque and expensive.

Debt: sometimes a necessary evil, extinguish as early as reasonable.

Economics/Economic Forecasts: rarely accurate, typically biased, fun graphs at least.

Emergency Accounts: absolutely necessary, don’t leave home without one.

Fees: major drag on returns, rarely justified, must minimize.

Fiduciary Duty: would you trust someone who’s not required to serve YOU?

Financial Plans: need to be simple, actionable, readable. Unfortunately, usually >50 pages.

Hedge Funds: misunderstood, but not suitable for the average investor.

Inflation: unrelenting, often underestimated, must always be considered.

Investor Psychology: unbelievably important. Emotion must be minimized.

Gold/Commodities: gold a relic, commodities provide little else but potential diversification.

Life Insurance: sold by a broker, therefore requires heavy scrutiny. Still – important.

Mutual Funds: usually vehicle for brokers/managers to cash in – be careful.

(Sorry, brokers)

Politics: market likes DC away from headlines, so I do too.

Risk: not volatility – the probability of incurring a loss.

Seattle Mariners: it takes more than ten words to describe the pain.

Taxes: aim to minimize, but not at any cost.

Is there anything else you think I should address? Let me know!