Our Role as an Advisor: Getting Started

A number of months ago, we met with another professional at his office, to discuss our business and his. During the course of the meeting, he asked what differentiated our practice from other advisors. We discussed a number of items, but we knew the best way would be for him to really experience our services himself.

So, after a number of discussions, he and his wife met with us, at our office. We talked about their past investment experiences, their lack of a financial plan ("I just pick stocks and have mostly not done too well"), how they now really want to get serious about their investments and feel they need professional advice. We asked them questions. Like many clients, their desire was in line with our fundamental goal, to have a greater sense of financial comfort and security, as well as clarity.

During our discussion, they asked us questions, which we answered in plain English. I drew some pictures and sketches on a legal pad, to explain our investment philosophy. Their conclusion: our philosophy is logical and makes sense. They liked that we are globally diversified, and realized that their current portfolio had almost no exposure to international stocks at all. We feel that international investments should have a significant place for almost all investors.

We recommended that we evaluate their current investments, which we call a "portfolio review." The emphasis of this analysis is not on performance, it is on how one's investments are allocated. We base our investment decisions on academic research, which teaches us that investment returns are based mostly on investment asset allocation, not individual stock picking. We will present this information in a clear, easily understood manner.

As part of the discussion, we all came to the conclusion that this couple had "made it" financially. They had accumulated adequate assets. However, they were risking this comfort by allocating so much of their assets to stocks (say 60- 70%). This was an uncessary risk for them. In our role as advisor, we recommended that a much more conservative asset allocation made more sense, given their age and financial assets. The primary goal should now be to preserve the majority of their assets, to provide them the comfort and security they desire.

We then talked about the allocation to fixed income, the assets I refer to as "the foundation." We talked about why it made more sense for their fixed income investments to be in individual bonds or CDs, to be generally held to maturity, and not in bond funds (as I've blogged about a number of times). For this, and most others we meet with, this advice is new (and quite welcome). They did not realize that they could be at great financial risk, if interest rates eventually rise, with their bond funds.

Finally, we talked about another potential investment they are considering, an annuity product another person had recommended to them. We are analyzing this product, with very surprising results. What the couple understood to be the great advantage of the annuity product (the terrific guaranteed return), did not turn out to be what they thought. The guaranteed return only represented a small part of the total investment, and only if certain conditions were met. The annuity had very high fees, withdraw restrictions and surrender charges. Investments that we recommend have none of these. We are fee-only advisors, and our fees are clearly explained.

This is a typical example of how we begin to work with a new client. We meet with them a number of times. We want our clients to understand how we work, how we invest, what our philosophy is. We want them to be very comfortable with us. We want them to understand that we clearly understand their needs. To realize that we will utilize our extensive financial experience as CPAs to assist them with their investments and financial planning, as well as their tax and estate planning, along with their other advisors.

Many Quick Thoughts

With the great assistance of my son, and others, I've tried to adopt and learn about new technologies, including what is referred to as "social media" (which is what this blog is). This can be a great way for us to communicate our thoughts to clients and others in the community.

In addition to blogging, I've begun to post thoughts on Twitter, over the past month or so. Many people post multiple times a day and include all kinds of personal information. That is not my intent. I've tried to write selectively, as a way to quickly inform others of financial information or present our investment philosophy in quick bits.

For those of you unfamiliar to Twitter, each post can only be 140 characters. As I enjoy writing, it is actually a unique challenge to say something meaningful in that short space.

What follows is a sample of some of my Twitter thoughts. If you want to follow me, my "Twitter" name is "wassermanwealth."


Recession ended in June 2009. Announced today, 15 months later, by Natl Bureau of Econ Research. Very timely. And stock market soars. Logic? (9/20/10)

Recession ended 6/09. More evidence of why you cannot predict the future, or rely on those predictions for your investment strategy. (9/20/10)

One day interest rates will rise. Then, bond prices will fall. Bond funds will get hit hard. We have a different strategy. Are you prepared? (9/16/10)

Financial risk and return are related. The greater potential return, greater the risk. How much risk do you need to take? Do you know? (9/16/10)

With uncertainty & media pessimism, stock markets up in 3rd Qtr. That's importance of remaining disciplined & sticking to investment plan (9/15/10)

Are you focused on positive or negative? Looking LT or ST? Warren Buffett, Monday:"This country works. The best is yet to come." Retail sales+ (9/14/10)

US National Debt almost $14 Trillion. That is $155,000+ per US family. Congr Bud Office says 2020 largest budget item will be interest pmts (9/13/10)

WSJ survey of top schools 25 for recruiting: 6 are in Big Ten. Univ of Michigan # 5 with #1 Business School, # 6 Engineering. ((9/13/10)

Warren Buffet turns 80 today. For his investing success and then charitable giving to Gates Fdn, he will impact the world for generations. (8/30/10)

Before today, all US asset classes were negative for 2010. Could you have predicted which one was positive? with a double digit increase? (8/27/10)

Only US asset class with positive 2010 returns is real estate. Evidence that you cannot predict markets. Re-emphasizes our philosophy. (8/27/10)

If Congress does not act by 12/31, LT cap gains rates increase 15 to 20% and dividends become ordinary, meaning from 15% to as high as 39.6% (8/26/10)

Morningstar study confirms that lower a mutual fund's cost, greater likelihood of it's success. This has been one of our core beliefs. (8/26/10)

Stocks down in June. Up in July. Down in Aug. Does it affect your LT goals? In 5, 10 years will you remember? Do you have solid foundation? (8/25/10)

Volatility of past months is reminder that no one can predict market moves. So plan and focus on long term. Key to success is discipline. (8/25/10)

How Bonds can be Painful

We have written on numerous occasions about the "risk" that many investors may be subject to, when they think they are investing safely. The Wall Street Journal published an article today, titled "Treasurys Can be Painful, as History Shows," which clearly states the same point.

For investors that are purchasing or holding bond funds, and particularly bond funds that hold securities with maturities that are longer term, of greater than 5 years, they may face significant investment losses in the future, when interest rates rise.

As the WSJ article stated, as the stock markets have risen in September, 10 year Treasuries have lost 2.2% and 30 year bonds are down by 6.9%. Note that if interest rates rise, the price of bonds fall. If you own a bond to maturity, this should not be a major concern. If you own bond funds, this is a major problem, that should be discussed with us and corrected.

As we base our investment decisions on our understanding of how financial markets work, and not on predictions, we try to learn from the past to prevent current or future problems. In 2003, the 10 year Treasury bond yield increased by one percent in a two month period. This resulted in an 8.2% loss in that two months. During a 13 month period beginning in October 1993, 10 year Treasuries rose 2.4%, which resulted in a 10.6% loss for investors of these bonds.

On Friday, the 10 year Treasury yielded 2.746%. When the economy improves, and if yields rise to 4%, bond fund investors would lose approximately 7%, for that maturity. Holders of bond funds with maturities of 20-30 years could face losses of at least 10%. We feel the losses could be much more severe, as it is likely that investors will flee bond funds all at once, which would further exacerbate the losses, as funds are forced to sell securities en masse to meet redemptions.

The fixed income component of an investor's asset allocation is critical to their investment success. To truly provide a client with comfort and security for the long term, given that interest rates are at all time lows and in the mid-long term will likely increase, we feel that investors would greatly benefit from holding individual fixed income investments, usually to maturity. This would prevent the losses described above.

See also post dated August 18, 2010, on the same topic.


Source: Wall Street Journal, 9/20/10, Treasurys Can Be Painful, as History Shows

What I've Been Reading

The following are some of the books that I've been reading over the past month. Some are investment or business oriented, others are related to personal productivity or improving one's life.

If you would like to discuss any of them, just contact me. I'd love to talk about any of them.

The Investment Answer, by Daniel Goldie and Gordon Murray; this is a concise, well written investment book, which is very consistent with our investment philosophy. Highly recommend it. You can read it in an hour or two.

The End of Wall Street, by Roger Lowenstein. Another book on the financial crisis of the past few years, written by a top financial journalist/author. I have previously written about The Big Short, by Michael Lewis, which is primarily focused on the mortgage backed securities crisis. This book is much more broad in its coverage of the entire financial crisis and how the government and large financial institutions dealt with the crisis. I'm only part way through this book, but recommend it if you want a further understanding of what took place. Very objectively told.

Good to Great, for the Social Sector, by Jim Collins; This is a short supplement to the classic business book, Good to Great. If you run a business, Good to Great should be required reading. At least skim it to get the main points. This supplement is written for non-profit organizations. Very well written and thought provoking. I read this as preparation for a non-profit board retreat that I participated in.


The Compound Effect, by Darren Hardy; The Promise Doctrine, by Jason Womack; and Thrive, by Alan Weiss; highly recommend each of these books, which focus on different aspects of personal productivity and managing your life. They are each excellent in their own respect!


The 100 Best Business Books of All Time, by Jack Covert; this is terrific compilation, organized by topic. The author of this book provides a summary of each of the 100 books, with a few page description of the main ideas of each book. An excellent resource. I am proud of the fact that I have read a significant number of the books featured in this book.

Tale of Two Days. How Can it be so Different?

If this is not evidence of the inability of being able to accurately predict the short term direction of the stock market, then nothing is.

I left my office Tuesday afternoon, 8/31/10, to attend a non-profit committee meeting. It was 3:45 pm, shortly before the US stock markets closed for the day (and month). I turned on my Sirius radio to CNBC. I heard gloom and doom. The few Wall Street analysts said things like: no strategy is working in this market. It is not a stock picker's market. You can't identify a sector or sectors to successfully invest in.

Then a commercial break. The market closed at 4 pm. The day was flat, but August was a down month. They repeated all the stats. More gloom and doom. The worst August in many years for the US stock market. How should we react? Where to turn to next? Nothing is working. On and on....for my 25 minute drive.

The next day, the world changed, at least in China, and then for the US stock market and markets around the world. How could "everything" change from gloom to giddiness overnight?

The next day, Wednesday, I was moving my son up to the University of Michigan, to begin college. Mid-day, I left his new dorm to shop for some things. Turn on the radio. The Dow is up approx. 250 points! The markets end up being up 2-4% for the DAY, depending the asset class. A good portion of the losses for the month of August are erased in one day.

Is this rational? No. Why? What happened? The markets react to new news. Overnight, China reported good economic news. Then reports of better housing starts were reported.

What can be learned from these two days? For us and our clients, this is further re-enforcement of many of our philosophies, all in 2 days!

You cannot predict the stock markets or the future. No one can accurately, consistently and over a long period of time. Not even Warren Buffet.

Develop a plan for your individual situation and stick with it. Be disciplined....until your personal situation warrants a change in strategy. Your personal plan cannot be based on what you think will happen in China, Japan or anywhere else, as you cannot control those things.

This is why we recommend trying to focus on the long-term, as the markets' short term volatility cannot be predicted or anticipated. Reacting to short term swings will not lead to a successful investment experience.

If you want security and comfort, in the long term, you have to focus on the long term and not react to the "noise" of these daily or monthly swings in the markets.

Obviously, we all want more "good" days than "bad" days. Academic research shows that the markets will provide more good than bad days (more positive returns than negative returns), but you need to have a good strategy to be able to experience these positive opportunities.