Election and Investment Planning

The election of 2012 is finally here. How will this affect your financial future? How will this affect your investment decisions?

For many, the election and the impending "fiscal cliff" have been influencing their financial decision making. For some, these issues have led to a lack of decision making, as they are waiting for these issues to be resolved, before moving forward with financial decisions. Some are even waiting to allocate funds to stock investments until they can "see" more clarity.

For our clients, we have been discussing these issues, but have certainly not allowed these issues to control our decision making or our actions. We adhere to the following motto: focus on what you can control and focus on things that matter, and especially when these two intercede.

How does this apply to the financial advice we have been giving to clients throughout 2012?

We have adhered to the financial plans that we have developed for our clients. For clients with stock allocations, that has been very beneficial during 2012. With many US and International broad stock averages up by approximately 10-15% for 2012, this is far superior to just holding cash, while waiting for these issues to be resolved.

We have actively pursued various strategies for our clients, to take advantage of the market volatility which has existed in 2012.

• For clients that purchased stock funds in early 2012, we did tax loss selling in the 2nd quarter of 2012, when the market declined. If we had not done this at that time, and waited until now, there may not be tax losses to harvest. Thus, these clients will have tax benefits, and still have unrealized gains. Our clients benefit from our monitoring of tax loss selling throughout the year, not just at year end.

We have met with clients during the year, and assisted them with their estate planning matters and charitable gifting (working closely with their attorneys). The future of estate tax rates is not known. However, with uncertainty comes opportunities that must be addressed and analyzed.

Once the outcome of the election is determined, one aspect of uncertainty will be removed. However, many issues will remain unresolved. Uncertainty will always exist, it is just the issues that change. As advisors, we guide our clients to handle these unknowns.

No one has an accurate crystal ball to know what the financial and tax impacts will be regarding the “fiscal cliff” issues, and how they will be resolved. Many “Wall Street experts” will make post-election predictions and recommendations, but do they really know? Will they be accurate?

Our investment strategy is not based on guesswork. By developing a globally diversified portfolio, we provide a solid and effective investment strategy. We know that structuring an investment portfolio that minimizes taxes and can reduce dividend distributions (if desired) will always be advantageous, and this is one of the strengths of our firm.

We know that decisions must be made. By assisting our clients with these decisions, we enable them to have the comfort and financial security they desire.

In these times of change, volatility and uncertainty, we can assist you with your important financial and wealth management decisions.

From Lottery Tickets to Real FInancial Planning

Except for three lucky lottery ticket holders this weekend, for the rest of us, real financial planning and wealth management is still a very important priority.

Our goal for our clients is to help them achieve a sense of financial comfort and security. For each client, this may mean something very unique and different.  Our objective is to assist them in making good financial decisions, allocating their investments properly and working with them over time, so that they will be able to handle the volatility (the ups and downs) of the stock market.

While winning hundreds of millions of dollars Friday night sounded great, the reality is that your financial success will be the result of a few key decisions that you make over the course of your lifetime.  Note that I did not state many decisions, but a few key decisions.

These key decisions may include:

• Having a proper team of advisers, including a financial advisor and an estate planning attorney.
• The spending decisions you make, particularly on how much to spend on your house, cars and vacations. Are you living within your means and saving money on a regular basis?
• Deciding to stick with an investment plan, or jumping in and out of the stock market, because you are scared or can't handle the ups and downs in the short term. For example, if you got out of the stock market during 2008 or 2009, or during the summer of 2011, those may have seemed liked good decisions at the time. However, they were probably not decisions that in the long run were in your best financial interest. 

Some of the benefits that our clients receive, or they have told us they have received, are:

• Less financially related stress, as they know that they have a good long-term investment plan in place and a team of advisers they can talk to.
• An investment plan that includes minimizing your taxes in a very effective manner.
• A real understanding of the high costs of their investments. When we begin to work with clients, many are very surprised about the true cost of their previous investments, which they were not fully aware of. We can almost always reduce this cost.
• A lot less mail, and thus, less time that they have to spend dealing with their investments.
• Knowing that they have a wealth management firm that has the client's interest as a priority, which comes ahead of the firm's financial interest (we actually have a legal obligation to put the client's interest first, which not all financial advisory firms can say or do).

So as the first quarter of 2012 ends, with the US stock market up a very surprising 12%, and international markets up even more, please take a moment to consider your investment decisions.

Are there any key decisions you could make today, other than buying a lottery ticket, that will have a significant impact on your financial life, 10, 20 or 30 years from now?

What We Learned in January 2012

• Markets continue to surprise analysts, which is why we do not think that Wall Street forecasters add value. The major US markets were up in January, 2012, with their best January in 15 years. Few people would have predicted these gains. As we focus on the long term, the stock allocations of our clients benefited.

• Foreign markets did better than US markets in January 2012. This is the opposite of what occurred during 2011. This further shows that stock markets cannot be accurately forecasted on a consistent basis.

• During numerous meetings with prospective clients, we saw examples of portfolios that were not even close to being properly diversified. We also saw many illiquid holdings, where these people could not readily access their funds. Other brokers had placed them into investments which may take months or years to get their money. We have never recommended such investments. Liquidity and flexibility are important.

• Almost 60% of the US large companies that have reported earnings in 2012 have exceeded their forecasts. The economy and companies continue to be resilient, despite ongoing world economic problems and political uncertainty.


• We continue to learn in many ways, both live and through technology. Keith attended a national conference in Arizona. Via Twitter, Brad closely followed many of the sessions that were held during the AICPA Personal Financial Planning conference.

• Watching the movie "Moneyball" reminded me of when I read the book, when it was first published. The theme of both the book and movie, as well as our investment philosophy, is that it is hard or impossible to predict which baseball players (or stocks) will be successful in the future. Acquiring baseball players that few want (they are like out of favor stocks) can be cheaper and can provide a greater return on your investment. Moneyball is the baseball equivalent of "value investing," which is a key component of our investment philosophy.

Book Review: The Behavior Gap

The Behavior Gap, by Carl Richards


If a picture is worth a 1000 words, then the sketches drawn by Carl Richards are certainly valuable. Richards' newly published book, “The Behavior Gap,” is even more valuable and highly worthwhile reading.

Richards has created a very unique and elegantly simple way of conveying financial thoughts by drawing sketches, using a Sharpie pen. These sketches are featured in weekly blog posts in The New York Times. Richards is a financial planner based in Utah.

In The Behavior Gap, Richards has done an excellent job of combining numerous sketches with a very forthright narrative of financial topics and life lessons. The book is well written and full of excellent advice, a lot of which is much deeper and more meaningful than they initially appear.

Richards clearly writes about topics ranging from the importance of the process of financial planning, as opposed to getting a thick financial plan, to happiness, money, and great conversations, and how all of these are so interrelated.

Richards writes: “Simplicity is both beautiful and functional. And yet, people are often disappointed when I propose a simple solution to their investment or financial planning problems. Such solutions can often be reduced to a simple calculation on the back of a napkin… Our attraction to complexity distorts the way we approach our financial goals. The simple options that have the largest impact and your financial success require discipline, patience, and hard work.”

We have a number of Carl's framed prints in our office already. This book will be a valuable addition to accompany those sketches.

How a Financial Advisor Can Add Value

These are some of the ways that we provided value for our clients during 2011:

• Listened. We have listened and talked with them, to help them handle the volatility of the stock markets. As a result, they have been able to maintain their investment plans, which will benefit them in the long run.

• We have adhered to our cornerstone investment fundamentals: recommending globally diversified stock portfolios, holding very high quality fixed income investments, focusing on asset allocation, and the use of Investment Policy Statements.

• We have rebalanced our client portfolios throughout the year, focusing on the discipline of buying asset classes when they are low and selling them when they are higher. Similarly, we have done tax loss selling throughout the year, as applicable, not just at year end.

As we have strong CPA backgrounds, we have provided financial advice about many topics to our clients, such as:

• We have advised numerous clients on various aspects of their mortgage refinancing decisions, so they could take advantage of historical low interest rates.

• Made recommendations for our clients’ 401(k) plan investments, as we consider those retirement assets part of their overall investment portfolio.

• Assisted clients with college tuition planning, which ranged from evaluating section 529 plan decisions and investment options, to advising grandparents who wanted to make major prepaid contributions.

• Advised a number of clients on significant Roth conversions, which will have huge long-term benefits for these individuals, as well as future generations of their families.

• Helped a number of clients with charitable planning, including the planning, establishment and investing for charitable family foundations. These will benefit both the families now, as well as numerous charities in the future.

• Required minimum distribution planning, for clients who are older than 70 ½, who are required to take distributions from their various retirement accounts.

Other things we have done, which benefit our clients:

• We have attended numerous national conferences, as well as participate in biweekly peer group phone conversations with fellow advisors, to learn, share ideas and become better advisors.

• Read. We are voracious readers, of everything from the Wall Street Journal and the New York Times, both in paper and digital forms, as well as trade publications, books, blogs, Twitter and podcasts. We are continuously reading and learning.

• Blogging and Twitter: this will be the 28th blog post that I have written during 2011. Writing blog posts is a great way for us to communicate our thoughts and views on a timely basis, which we hope is valuable to our clients and prospects. Brad is also very active on Twitter, which is a terrific way for us to communicate with others, both in terms of sharing information that we find valuable, as well as connecting with numerous people throughout the country that we learn from every day.

Part of our core investment philosophy is recognizing that we do not have a “crystal ball” and cannot predict the future. We focus on what we can control, to the best of our ability, on behalf of our clients.

• As financial advisors, our guiding principle is to provide our clients with a greater sense of comfort and security, so they can enjoy and focus on the other aspects of their life.

We are truly appreciative for our clients and the many referrals that we have received in 2011, as our firm has continued to grow. We hope that you and your family have a very enjoyable holiday season and that 2012 brings you good health and happiness!

Investing: Can an Advisor Add Value?

Do you want this person/fund to manage your money?  Is this the right fund for you?

Resume:

• Beat the S & P 500 every calendar year from 1991-2005
• Named "Portfolio Manager of the Decade" in 1999 by Morningstar
• Barron's included him on its "All-Century Team" in 1999
• Fortune Magazine desribed him as "one of the greatest investors of our time" in 2006 profile
• And then there is this fact:  For the five year period ending December 31, 2010, this fund was LAST among 1,187 US large cap stock funds, as tracked by Morningstar.

The fund and fund manager described above is Bill Miller, manager of the Legg Mason Capital Management Value Trust for 30 years, who recently announced his retirement, effective in April 2012. The facts of this stock mutual fund performance clearly shows why it is nearly impossible to consistently predict the "best" fund managers over a long period of time.

After his great track record and much publicity, his fund was in the 98th or 99th percentile in 4 out of the last 5 calendar years, through 2010.  Through October, 2011, his fund is in the 82nd percentile. (per Morningstar data).

How can someone who is so "good," then become so unsuccessful?

This is a key question, which every investor must consider, in determining their advisor and investment philosophy. Was Miller lucky?  Did he lose his touch?  How do you know if your advisor or mutual fund manager will do the same?

Understanding what occurred with this fund, and how common this inconsistency in mutual fund performance is, is the basis for one of the fundamental investment philosophies that we adhere to. We recommend this strategy for your investment success, over a long period of time.



To describe the different philosphies, Bill Miller picked stocks for his fund that he thought were "value" stocks. He believes in active investing; that he could identify the best stocks to own that were undervalued. We believe that no one has the ability to consistently identify fund or money managers that can outperform a respective benchmark, over a very long period of time. Thus, we adhere to a "passive" strategy, which means that we recommend a very globally diversified set of stock mutual funds that hold a set of stocks in each "asset class," without making predictions or claiming to have a crystal ball.

It would have been very reasonable in 2000 or 2005 to put money into Bill Miller's fund, based on his past track record. Let's see how his fund did, and compare it to one of the funds that we use, in a similar asset class. Bill's fund is a large company value fund, so we will compare it to Dimensional Fund Advisor's (DFA)US Large Cap Value III fund (DFUVX).

For the 10 years ended 11/29/11, $10,000 invested would have grown as follows (per Morningstar.com):

• Legg Mason Fund:           $8,363 (a loss of $1,637)
• DFA US Large Value      $15,388 (a gain of $5,388)
• Vanguard S&P 500         $12,627  (a gain of $2,627)

By using the appropriate long term strategy, as your investment advisor, we can add significant value. We can provide you and your family with a solid investment strategy, that will result in greater comfort and sense of security.

Other Conclusions:

The Lost Decade:  There has been much written about how the past 10 years ended in 2010 were considered the "lost decade," where investors made no money. This was true for many investors. While the  figures above are for the 10 years ended in November 2011, the DFA US Large Value fund was very profitable over this period. This shows the importance of diversification and owning more than just the S&P 500 as the basis of your portfolio.

Costs and expenses: 

We believe to be most successful, you should focus on the things that you can control. Thus, evaluating mutual fund expense fees should be an important part of your investment approach.

Bill Miller's fund charged various up-front fees, depending on which "class" of the fund that an investor used. None of the funds that we recommend charge such fees.

The annual expense ratio of Miller's fund is 1.75%. This means that each year, the fund subtracts 1.75% in fees, from whatever the actual performance is. The comparable DFA fund that we utilize, DFUVX charges .14%, one of the lowest expense ratios in the industry, for this fund category.

There are many other lessons to be gained from reviewing the experience of this fund and this fund manager, as well as carefully evaluating most mutual funds, or your own investment portfolio.  
  
Important notes:  The above examples are illustrative only. No one fund should constitute an investment portfolio. The above figures do not include an investment advisory fee, which our firm charges, separate from mutual fund fees. Legg Mason's fund would have charged a load, which is not included in this information.

Sources:  Morningstar website, 11/30/11; article by Weston Wellington, Dimensional Fund Advisors, dated 11/29/11

11 Wealth Management Tips for 11/11/11

1. Have a written investment plan, based on your need, willingness and comfort to take risk. It does not have to be fancy. But it is extremely important.

2. Regularly rebalance your portfolio. Be disciplined about this. It will help you to buy low and sell high.

3. Evaluate your portfolio performance against a set of benchmarks, at least annually.

4. A significant part of your stock portfolio should be invested in international and emerging markets.

5. Recognize that you do not have a crystal ball and cannot predict the future. Recognize that no one else can predict the future either. If you are using an advisor, and he or she regularly makes predictions or "bets," you may need to make a change. Do not focus on past performance, as it is not an indicator of future performance.

6. Diversification. Always. For everything. You should own large and small companies. Growth and value companies. In many countries and industries. Understand the reason to own smaller and value companies.

7. Know when it makes sense to own municipal bonds. Know which municipal bonds sectors to avoid, due to higher historical default statistics. If you own municipal bonds, they should be diversified across many states, not just the state you live in.

8. If you have significant fixed income investments, like bonds or CDs, you should not own bond funds. And definitely not long term or low credit quality bond funds.

9. Focus on what you can control. Focus on costs and your asset allocation. You cannot control or influence any company, industry or the stock market.

10. Review your estate plan documents and retirement plan beneficiary designations, to make sure they reflect your wishes and are accurate. If you have a revocable trust, make sure that it is actually funded.

11. Use a fee-only financial advisor. Their interests will be aligned with your interests. Find an advisor that can provide many benefits and value. They can help you plan for the future. They can listen to you, so you can handle volatile markets and prevent big mistakes. They can save you time, improve your investment experience and provide your family a greater sense of comfort and security.

I hope this list is helpful and provides you with real value. If there are items on this list that you are not familiar with, or would like to discuss further, please contact us.

Financial Markets Don't Come with Traffic Signals

It is unfortunate, but true. There are no financial traffic lights that signal “green.”  It’s all safe now…enter the stock market with no risk.

There are no reliable financial traffic lights that signal “red” and you should exit the stock market now.

So, how to handle the volatility that seems to face us? These are things we have been discussing with our clients. For years. Because in our view, “this time is not different.” Just the dates and issues have changed.

You must have a plan. It does not need to be fancy. Working with us, we will help you adhere to your plan. But you need to develop a written plan that provides for an asset allocation that makes sense for you and your family. We help to develop this plan, and how much to allocate to fixed income (cash, bonds, CDs) and how much to invest in stocks, and where, such as US, international, emerging markets and real estate. And we discuss with you the importance of “value” investing.

So what about now? What is going on?

Part of our philosophy is recognizing that we do not have a crystal ball and that we cannot predict the future. That being said, we are realistic and we are optimistic, for the long term. History teaches us that if we are patient, globally diversified investors, we will be rewarded. Most problems will get resolved. Companies, people and countries innovate and are resilient.

We recognize that there are many problems in the world, today. Right now, the financial markets are focused on Greece and European debt. Last year, the markets fluctuated with every drop of news from China. The US debt crisis and the “supercommittee” that is working on the US budget will be the focus in November.

We take a longer view. There are many positives. As Warren Buffett has stated, Mr. Market is usually too optimistic or too pessimistic. We feel that the markets’ decline this summer was overstated and caused more by emotional fear, than financial reality. We don’t think that future corporate earnings expectations have dropped by 15-20%. Many companies are reporting stronger earnings, have healthy balance sheets (corporate cash is at all time highs), have used record low interest rates to borrow cheaply and oil / gas prices have dropped or stabilized. These are all positives.

We also recognize that there are many problems. Governments of all types will need to reduce spending, to reduce their deficits. That reduction in spending will hurt economies and certain sectors. Uncertainty is a hot topic, especially in the press. Some type of uncertainty always exists. That will not change. We focus on what we can control.

Timing the market does not work. While worldwide stock markets declined in the third quarter, much of that decline has been recouped in the first few weeks of October. Just as no one could have predicted the steep decline on July 1 that subsequently ensued, no one could have predicted on October 1 the rally that has occurred.

We wish we had a crystal ball. We wish we had the perfect financial traffic light. Instead, we have a solid investment philosophy (which is not based on predictions and guess work) and financial planning skills that provide our clients with comfort and financial security. What do you have?

Dieting, Exercise and Investing. What's the Lesson?

How do you succeed at dieting, exercise and investing?

Are these unrelated? Not really.

Success at all three requires discipline, consistency and a program that you can stick to over the long term.

So how does this relate to investing? As advisors, we have adopted an investment philosophy that can be adhered to over the long run. It is rational, and provides our client’s with peace of mind, so they can stick with it.

In the past few weeks, the financial world has provided further evidence of why our approach makes sense, which gives us even greater confidence in our long term philosophy regarding stock investing. The markets have been very volatile since July, and our clients with stock investments have incurred losses, as have most others. But there is a distinct difference in approach.

We recognize that we cannot predict the future. We do not believe that we can identify which fund or money managers will do the best over the long run. Thus, we have adopted a philosophy which recognizes this.

A few weeks ago, Fidelity Magellan replaced the manager of this very large mutual fund, after years of underperformance. Over the last 10 years, this fund, once the largest in the world, ranked in the 95th percentile (1 being the best), trailing its benchmark and the S & P 500 by approximately 2.7% per year.

Fidelity, and this manager, have vast resources and a huge, global staff to assist in the research and stock picking for this fund. Despite all these resources, Fidelity’s staff was unable to outperform or come close to its target benchmark on a consistent basis, or even a majority of the time. The lesson: it is hard to pick a good money manager, in advance, that will outperform its respective benchmark, on a consistent basis over a long period of time.

The second example has been a number of reports of hedge funds reporting huge losses or funds that are simply shutting down, due to underperformance or dissatisfied investors. John Paulson, a hedge fund “titan” was an investment hero in 2008, as he placed huge bets against mortgage and financial stocks, and he was right.

Now fast forward to 2011. The WSJ reported today that two of his funds are down 32% and 47% for the year, far worse than market averages. He has placed huge bets on Bank of America, Hewlett-Packard and China’s Sino-Forest Corp. He has been very wrong in 2011. His funds have also lost billions on investments in gold and gold related stocks. Many of his clients are impatient and not willing to wait for his next great idea.

The lesson: There are many. Making huge, concentrated bets are risky. Sometimes they work, sometimes they don’t. When they don't, and your bets are very concentrated, the results can be horrendous.

Diversification, and not making concentrated bets and predictions, does work, which is why that is one of our core philosophies.

Our next post will further explain our investment philosophy.

Sources: Morningstar, for Fidelity Magellan; WSJ for Paulson information, 10/11/11 online

The US Govt Debt Downgrade, Debt Ceiling and You

As I write this on Sunday evening, August 7th, the financial markets and economic news have been extremely volatile and mostly negative over the past 10 days. As always, it is important to take a step back and try to look at events with perspective.


First, the US Government spent weeks haggling over raising the Federal debt ceiling. What is normally a routine process became a very tumultuous one.

The impact: in the short run, the uncertainty of whether the issue would be resolved caused the stock market to decline, prior to the agreement between Congress and the President. In the longer run, the process and agreement has heightened the public awareness of the need for national fiscal responsibility, which is good. (Similarly, Ross Perot raised this awareness before Bill Clinton’s first election, which resulted in many economic positives, such as lower interest rates and good stock markets).

Downgrading of US Government debt by Standard &Poors: The possibility of this action had been rumored, but not widely realized by the general public. Thus, it is likely that financial markets will react negatively to the news.

The impact: This is interesting to consider. If "Wall Street" had an inkling this was to occur, interest rates would have risen or would be rising. Interest rates have done the opposite. Interest rates have been steadily falling, particularly in the past few months. The 10 year Treasury has declined from 3% at the beginning of the year to around 2.45% as of last Friday.

The impact of the downgrade may be long-term positive, if it causes Washington leaders of both parties to realize they need to compromise their hard line positions. Standard & Poors was correct, as they cited the negative political climate and ineffectiveness of Washington in their reasoning. We don't expect the US to default on any Treasury securities. However, the current deal does not make many specific decisions. The really tough decisions are handed to a committee. The huge reductions are delayed toward the end of the 10 year period. And most importantly, the actual deficit is not declining. The agreement is only slowing the rate of growth in the deficit. Thus, the downgrade may force US leaders to actually work on making those tough decisions, and making them stick. If that occurs, that would be real progress.

Oil prices have been declining, and sharply in the past week. The price of oil per barrel was recently in the $95-100 range and is now trading around $84/barrel. This is due to the anticipated decline in the economy, as well as trading factors (normal volatility). Thus, gas prices should remain well below $4, and may go below $3.50 per gallon soon. This is good for the consumer and will provide some needed stimulus to the economy.

Impact to investors:

In tough times, it is good to reflect on the basics, our core fundamental philosophies and consider the thoughts of those we respect the most. With that in mind....

We believe in focusing on the long-term and on matters that we can control. Thus, it is not a winning strategy to try to time the market in the short-term.

I don't think Warren Buffett is waking up Monday ready to sell stocks because of the US debt downgrade. He often says, and has profited from, buying when others are scared (during market declines). It is better to buy when there is fear and sell when others are being greedy. Thus, we would be more inclined to be buyers than sellers now.

It is vitally important to be properly allocated and have a globally diversified portfolio. Properly allocated means having ample cash or fixed income assets, to financially and psychologically handle markets downturns. We work with our clients to have such written strategy plans in place.

One of the greatest benefits that we can assist our clients with is just talking to them, to discuss these events, so they can better understand them and the impact they can have on their personal lives. It is our goal that our clients be able to have greater financial comfort and security, as well as peace of mind.