By Allen Giese, CLU®, ChFC®, ChSNC®

My dear and lovely wife thinks I spend too many of my waking hours thinking about capital markets and how to best capture the returns that markets produce. Admittedly, it’s become pervasive and all-encompassing to the point that it affects how I view other, seemingly unrelated events throughout my day. For example, I recently watched a popular documentary on Netflix called You Are What You Eat. The documentary covers an interesting study done with 21 sets of identical twins over eight weeks and compares the results of a healthy omnivore diet vs. a healthy vegan diet on a broad set of metrics.

I’m not going to get into a food debate here—I’ll just leave it that the results were a bit surprising, and the program was very interesting and thought-provoking. But the capital markets part that got me going that I really found interesting was a parallel that we run into every day here at Northstar. In the documentary, one underlying thesis was how our diet is influenced by what we’ve been told is good for our bodies, even though there is little to no scientific evidence to back up the claim. The growing body of evidence strongly points to the idea that what we’ve been told in the past is more about supporting highly profitable industry than good health.

Now, it’s true that supporting highly profitable industry is at the heart of capitalism. But the parallel that hit me as I watched the program was how an investment strategy (assuming there even is a strategy) is often fueled by what an investor reads and sees coming from the financial media. Little of it is influenced by solid scientific evidence.

Back in the Stone Age (aka the 1990s) when I was a fledgling advisor, I had no idea that the investment strategy I was taught was more about selling investment products like annuities, high-cost mutual funds, and life insurance than it was about finding the most efficient way to capture the returns that global capital markets produce. That investment strategy marched in lockstep with what the mainstream financial media told the public about investing and further in step with what the big financial product manufacturers (life insurance companies, investment companies, and brokerage houses) most wanted to sell. 

It wasn’t until I happened upon a Fortune magazine article (I think it was in 1998?) that profiled six academics, two of whom had already won Nobel Prizes, that I was exposed to the idea that there were actual scientists out there looking to find the most efficient way to capture returns in global capital markets. The story they told in that article was the first time I heard that expected return doesn’t come from someone’s ability to pick good stocks over bad stocks or their ability to time markets— that the real difference maker was what asset classes were represented in an investment portfolio. And they had the data to support their conclusions.

It almost ruined my young career. I bought in 100% for one basic reason: These scientists weren’t selling anything! They only wanted to know: “What is the most efficient way to capture the long-term return capital markets produce?” How was I now supposed to operate going forward, deeply entrenched in a world that firmly believed you could identify successful stock pickers and market timers?

It took me a year, but I eventually realized I couldn’t. I could no longer deliver financial advice that was first and foremost rooted in the sale of investment products and that put efficiency, cost, and highest probability of achieving goals second. I had to leave.

And that, my friends, is how Northstar Financial Planners was born. We’re coming up on 24 years this summer, and I’ve never looked back. That body of science around modern portfolio theory that we so closely follow has grown and gradually become more the norm than the outlier it used to be.

I sometimes play a mental game where I ask myself, “What would you do differently if you could do it all over again?” In this case, I’d have founded Northstar much earlier—if I had only known. The other thing I’d do differently is try not to spend so many waking hours thinking about capital markets. That would make my wife very happy.