Our most important advice

This is NOT the top 10 Financial New Years resolutions you should make for 2016.

This is NOT the typical list of what you should do to improve your financial life.

Instead, I’m listening to the writing advice of my 21 year old son, a college senior.

What is the most important advice we can give someone?

Use a financial advisor who has extensive experience throughout your life. There are a few critical, key decisions that you make in your life. Just as you want a medical specialist handling a serious medical condition; shouldn’t you utilize the advice of an financial expert throughout your life?

You don’t want to make big mistakes, especially with certain issues. Our advice can help prevent you from making major mistakes that may have long term implications for you and your family. However, many times people only realize their mistakes in hindsight. Or they don’t even realize they made a less than optimal decision or action.

By working closely with a financial advisor, you can take the first step in this process. We can identify issues, problems and solutions which you may

 not be aware of. We can make recommendations on big and small matters. We can help you with difficult or important decisions, as well as make something intimidating, like estate planning, easier to deal with and complete. We can also help with small, incremental things, which over the long term of 10-20-40 years, become really important steps to your financial security.

Focus on your future cash flow. We know that as you age, a greater and greater concern is your financial security…. the fear of running out of money. So working with clients to address this issue will be an even greater emphasis for our firm in the future.

We want to help our clients understand and mange not just their investments, but how their financial assets will convert into future cash flows. It is these future cash flows which will support your future desired standard of living. After talking and planning, we will manage your investment portfolio so you can live the life you want, while providing you with a greater level of comfort and security so that you will not run out of money.

Greater longevity, health care costs, uncertainty and volatile stock markets make future planning complex. It is our role to analyze these complicated issues and make them simpler for you.

We cannot promise what the future will bring. We can provide you with greater clarity about complex matters. We can discuss the concerns that you have, so you will have greater confidence in your future.

If this essay resonates with you and you are not currently a client of ours, we welcome talking to you. Years from now this could be the decision or action you view as one of the key decisions you ever made.

If you are a client, please feel free to email this essay to a friend or relative who you think would benefit from talking to us. That small step could be the key, which years from now, they would view as one of the most beneficial things you ever did to help them.

We wish you and your family a happy and healthy 2016!

Year End Review Q and A (and much more)

What were some of the biggest surprises or events of 2015?

  • The huge decline in oil and commodity prices.
    • The greater than 40% decline in oil and gasoline prices since January 1, 2015 shows how difficult it is to make financial predictions. I doubt anyone would have accurately predicted these price levels a year ago, let alone a few years ago.
  • The sharp decline of the stock market worldwide in late August, and then the subsequent recovery which recouped those losses by early November.
    • This re-iterates our strong belief in not trying to time the market and to remain fully invested in the stock allocation that is appropriate for you.
 Are there other implications or lessons to be learned from the huge drop in oil and gas prices?

Technological innovation is a major cause for the drop in oil prices, and thus gas prices. These innovations, which were not envisioned 10 years ago, have enabled oil to be found and produced at far lower costs and in more places. The drop in oil prices and the continued technological improvements throughout the energy sector is globally transformative and will generally have huge long term positive implications.

What do you think of the Federal Reserve action this week to increase short term interest rates?

As we discussed in our blog post 2 weeks ago, Interest rate liftoff and the impact on you, we view the Federal Reserve action to begin increasing short term interest rates as positive, as it reflects strength in the US economy.

We expect short term interest rates to increase very gradually over the next few years. As traders try to guess the timing of these Fed moves, this will likely cause short term volatility in the stock and bond markets. Remember, volatility is temporary and comes with investing in the stock market. It is not always enjoyable to live through, but just as this summer’s volatility came and went…so will future volatile periods.

What should investors be focusing on now?

Investors should remain focused on their long term goals, not on short term stock market returns or performance. You should view your portfolio performance over many years, not months. You should review if your strategy is working well, when actually tracked over 3-5 years, or longer, against appropriate benchmarks.

So how are the funds that you recommend performing?

The mutual funds we recommend are performing very well, as compared to their respective category benchmarks (for example, how does a US large value fund compare against other US large value funds?). In nearly every asset class, they are in the top quartile over the past 3, 5 and 10 years. Most of the funds are outperforming their category averages by a distinct amount annually, over the past 3-10 years.

What are some key trends or observations that you feel are important for the future?

  •  Investors should continue to focus on what they control. By this we mean their portfolio should be broadly diversified, they should utilize low cost investments and be mindful of tax minimization of their portfolio holdings.
  • Too many people focus on trying to pick the right stocks or “best” active mutual fund managers. This has been proven not to be a winning strategy, especially if you actually quantify your results and costs.
  • Others hold onto stocks which may have been good blue chip stocks many years ago, but have vastly underperformed the markets in the past 5-10 year ago. This is especially a key issue with people who have gone through life transitions and inherited stocks from parents or spouses, and are reluctant to make changes to these holdings.
  • With the rapid changes in technology and innovation, we feel our globally diversified strategy is even more important than in the past. For example, while we cannot identify which technology stock will be very successful over the long term (and don’t think others can consistently predict this in advance either), we will benefit from holding these stocks within our diversified portfolios.
  • As people are living longer, planning should emphasize your future cash flow needs, not just your portfolio balance.

What about bonds?

Investors should avoid “high yield” or “junk” bonds. We do not recommend these to our clients, as the increased risk is not worth the additional interest that you may receive. See the end of our blog post last week which discussed this topic, How do you define financial success?. If you own any of these types of bond mutual funds, please contact us to review your holdings.

Are you positive about the future?

Yes. Absolutely. One of the books that I have purchased, but not read yet is titled “The Rational Optomist.” That is how we would describe our feelings about the future. Our economy, government and the global society certainly have problems to address and overcome, but in the long run, society will continue to advance. Companies will continue to innovate and prosper. To invest successfully, you must remain positive about the long term and the ability for companies to progress and succeed.

What book has had the most impact on you in the past year?

The Moral Case for Fossil Fuels, by Matt Epstein. While I am only about halfway through this book, it is extremely thought provoking. I’m not sure that I agree with all of the author’s opinions, but he is challenging “conventional wisdom” with hard facts and concepts that I have not seen elsewhere.

Our objective is to provide you with the most successful investment and financial experience we can. We rely on academic data and continual learning, not crystal balls and unproven forecasts. We are not like a traditional “Merrill Lynch” stock broker.

Epstein’s provocative book has caused me to look at the energy issue with new perspective. In general, most people think we should have more alternative energy sources, beyond oil and coal. He vividly describes a scene in Gambia in 2006, where infants died because the hospital did not have reliable 24/7 electricity. He states that until alternative energy sources can be produced in tremendous mass, then stored or provided 24/7, people need to understand how integral fossil fuels are to the advancement of our society over the past 100 years.

Epstein defines his standard as the quality of human life. He states that fossil fuels have “enabled billions of people to live longer and more fulfilling lives” with very clear, distinct facts and examples.

For me, one of the key takeaways from this book is to challenge conventional wisdom and future forecasts when providing advice to our clients. We have to be prepared for the unexpected, and to help our clients cope in a world with many unknowns.

By relying on facts and data, continually learning and challenging ourselves with many opinions and sources, we will be better financial advisors. Our clients will be better because of that.

How and why do you write these blog posts?

Brad writes these blog posts each week. They are not outsourced or written by a non-member of our firm. Keith and Michelle review and edit them.

I write them to educate you, our clients, potential new clients or friends. I write them to help you better understand the financial world, our investment philosophy or to encourage or motivate you to take some action, to improve your life or your financial well-being.

Writing these essays helps me to be a better advisor. By writing almost every week throughout the past 18 months, I am forced to be much more aware of what is going on in the world and what may be relevant and important to communicate to you.

As we conclude 2015 and begin a new year, I hope that these weekly essays are as valuable to you as they are to me in writing them. I look forward to keeping you informed and help you cope with our constantly changing world, so you and your family can be more financially secure.

Note: This will be my last essay for 2015. I will not be writing an essay next Friday. I expect to send out the first blog post for 2016 on January 1. Have a happy holiday season and best wishes for a healthy and successful 2016.

How do you define financial success?

Defining success, and specifically financial success, can be very personal and subjective.

A speaker at a recent national investment conference I attended stated that men tend to evaluate investment success based on their principal balance, performance and returns.  Women are different, as they tend to be much more focused on their annual cash flow.  Women are generally more concerned about not running out of money.

Both of these are very valid ways to judge your financial progress and how well you are doing.  Our role is to make sure that we understand what is most important to you, and help you meet those objectives.

When working with clients, and particularly those who have gone through a life transition, we focus on helping you to figure out how much money you will need each year to live comfortably and maintain your lifestyle.  Discussing this in detail leads to developing a personalized investment plan for you. Providing you with comfort and clarity are key to us.

As life expectancy is increasing, planning so that you and your family have adequate resources for longer periods of time has increased in importance.  Once we understand your cash flow needs, we can implement our investment strategy, which is designed for the long term.  Our focus is not on outperforming a given index for a month or a year.  Our goal is investment performance that will provide you with adequate financial resources throughout your life.  This is true investment success.

Clearly a significant role is for us to provide you with solid long term investment performance.  In terms of stock market performance, academic research shows that the vast majority of active mutual funds and money managers do not outperform their respective benchmarks over the long term.  The mutual funds we have recommended since we started our firm have outperformed the vast majority of the actively managed mutual funds in each of their respective asset classes.  Defined in this manner, we are successful.

Another measure of financial success is whether you have avoided big financial mistakes.  This is another role that we view as very critical.  During your life, you may be faced with some major decisions, which we can assist you with.  When clients have to make decisions about whether to take a pension distribution over their joint lives or a single life, there is usually a definitive answer.  We can assist clients in deciding when to begin taking Social Security or other retirement distributions.  We help clients with multi-generational planning with their estate plans, as well as charitable giving.  As discussed above, we help you to determine how much you can safely withdraw each year, so you can live comfortably, while being confident that you will not run out of money.

One of our core investment philosophies is diversification.  While the 2015 stock market performance for the funds that we recommend in the US and Internationally are up or down slightly for the year, we have avoided some of the major losses that a number of individual stocks and huge hedge funds and private money managers have incurred.  There have been many reports of billion dollar money managers that have lost 10%, 20% or 30% this year, and some have even announced they are closing their funds.  These funds have usually made large bets on specific companies, oil and gas, or other commodity related companies.  By being well diversified across companies, industries and countries, we have avoided these types of “preventable” losses and risks.  We know that being highly diversified the right strategy for your long term investment success.

As interest rates have been so low for many years, we have been very disciplined not to “reach for yield.” This means we have not purchased high yield bonds to get a little more interest rate return, at the potential cost of risking your investment principal.  Many investors may have purchased “high yield” or “junk” bonds for these reasons, but have not fully understood the potential downside.  It was reported in the WSJ on December 10, 2015 that a formerly large bond mutual fund, Third Avenue Focused Credit Fund, which once had $2.4 billion in assets, is down 27% for 2015 and is now blocking investors from being able to redeem their money.  This is an example of why we only purchase investment grade bonds or bond funds.  The risk is not worth it.

Similarly, some stock investors have focused on buying stocks with large dividend yields, to make up for low interest rates on bonds or CDs.  We don’t feel that this is the right strategy, as this is risking investment principal in search of higher yield.  If the stock drops, your net return can be far worse than the potential extra interest you were trying to obtain.  A recent example is Kinder Morgan, an energy company.  This stock, which was considered safe and a source of steadily rising dividends, has lost over 60% of its value in 2015 and just reduced its dividend by 75%.  Likewise, IBM pays above a 3.5% dividend yield, but its stock has been steadily dropping for years and has underperformed the S&P 500 by over 11.5% per year for the past 5 years.

The financial world can be complex.  We can provide you with clarity and answers.  Even though none of us can predict the future, we can work with you to develop strategies and solutions that you will be able to understand, so that you and your family can live comfortably and with peace of mind.

 

Interest rate liftoff and the impact on you

It is widely expected that the Federal Reserve will take its first “formal” step to begin increasing short term interest rates at its next meeting, which concludes on December 16th.

The Fed has kept short term interest rates very low for a long period of time, as they have left the fed funds target range at 0-.25% since 2008. It is likely they will increase the fed funds rate by .25%, to a range of .25-.50% on December 16.

We view this as a positive development. As the economy has strengthened over past years, the Fed is finally able to allow short term interest rates to rise. Fed Chair Janet Yellen, in various speeches and testimony before Congress this week, has cited improvements in the economy and job growth since the 2008-2009 recession. If the economy had not recovered, or was facing another recession, the Fed would not be considering increasing short term interest rates.

The Fed does not completely control interest rates. The Fed can take actions which influence the direction of interest rates, but interest rates are actually based on expectations of the many traders and institutions in the financial markets. For example, while the Fed has not yet acted, the 2 year Treasury note has risen from .25% as of 1/1/2013, to .68% as of the beginning of 2015 to .96% as of today. Short term interest rates have already risen by almost .75% in anticipation of the Federal Reserve beginning to raise interest rates.

One key is the pace of interest rate increases. The media will likely focus on whether or not the Fed actually takes its first step to raise short term interest rates on December 16th. What is more important is the Fed’s guidance and eventual actions regarding the pace and amount of future rate increases.

We think that the Fed will increase short term interest rates very gradually, such as .25% per quarter over the next year or two. If they follow this pace of increases, then the fed funds rate would be around 2-2.50% in December 2017. As short terms CDs and Treasury Notes pay very low rates today, the rates paid on these investments should increase correspondingly.

The impact on the stock and bond markets: The impacts of the Fed’s actions are tied closely to expectations and surprises. The challenge for the Fed Chair is to manage expectations, in a world and economy which are continually changing and obviously unpredictable. Given the fragile but recovering state of the US and worldwide economies, we would expect interest rates to rise very gradually over a period of years. The goal of the Fed is to encourage U.S. economic growth, with a dual mandate of fostering maximum employment and price stability, which they define as keeping inflation at around 2% annually.

Most people do not like surprises, and the unknown. Wall Street is no different. As the Fed grapples with issues surrounding interest rates, particularly when and by how much each future change should be, this is a source for volatility for the stock and bond markets.

As the future is unknown, this volatility is normal. The media will dwell on it. The stock market may over-react, both up and down, as it always has in the past. We feel the best approach is to focus on the long-term, and to have a well diversified portfolio of both stocks and fixed income holdings. We do not think that it makes sense to make bets on specific companies, industries or to risk your investments by trying to guess what the Fed will do. We would prefer to hold bonds or other fixed income investments of varying maturities, which will gradually adjust to whatever interest rates are in the future.

Mortgage Rates: As we have stated in the past, it is most likely better to get a mortgage today than a few years from now. In general, we would not advise you to pre-pay an existing mortgage, as mortgages with current very low interest rates will likely be a great asset to have 5-10-15 years from now.

Oil and Technology: There has been a huge drop in the price of oil over the past year. You see this when you put gasoline in your car. There is currently a tremendous worldwide glut of oil. Prices per barrel of oil were in the $80s-90s during 2013-2014. Since October 1, 2014, the price of oil has declined from $70 to around $40 per barrel today. This is a drop of 50% from a few years ago. Technological advances and other factors will likely keep oil prices well below past historical prices, which will benefit most aspects of the economy. This is likely to keep inflation low, which allows the Federal Reserve to raise interest rates, but not too rapidly or too high. Low oil prices translates into greater corporate profits (except for energy producing and related businesses), which is generally good for the stock market.

Summary: We remain very optimistic about the financial future. Now is an appropriate time for short term interest rates to continue their gradual rise. If there is volatility surrounding this action, you should not be deterred by it. It is normal for additional volatility to occur around the time of Federal Reserve meetings.

If you have questions about the impact of rising interest rates on your portfolio, please contact us.

Giving Thanks

Warren Buffett has often cited what he calls “winning the ovarian lottery,” which he feels Americans win the day they are born in the US. In lengthier speeches on the same topic, he cites the many aspects of your life which are determined at birth: the political and economic system you are born into, your health, gender, skin color and your level of intelligence.

While our country is certainly not perfect, we are thankful for its many virtues and the opportunities it has provided to so many of us.

As we will soon celebrate Thanksgiving Day, we hope you appreciate the good fortune that so many of us have, simply by being born and able to live in the US.

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We are truly thankful for our clients, who have placed their trust in our firm.

We are very thankful for the referrals that our clients and friends have made, as we have been able to assist their friends and relatives.

We are thankful for the clients who have requested our advice for matters beyond investing and financial planning, such as helping them with life transitions, estate planning, real estate transactions and the sale of businesses.

We are thankful that our clients understand the importance of focusing on their long-term goals, and not on short-term market swings, as this will provide them better long-term investment results.

We are truly thankful and positive, and hope you are as well.

We wish all of you a very Happy Thanksgiving, and hope you are able to share it with those who are most important to you.

Note: As next week is Thanksgiving, there will not be a weekly blog post email next Friday.

Financial and Tax Figures for 2016

As 2016 is nearing, you should be aware of the following financial and tax amounts:

$18,000: amount which can be contributed to most 401(k) and 457 plans for 2016.  If you are older than age 50, you can contribute an additional $6,000 above those levels for 2016.  Both of these are the same as the 2015 contribution limits.

$5,500 and $1,000: maximum amounts which can be contributed to Traditional and Roth IRA accounts for 2016, which are unchanged from 2015.

$5,450,000: the 2016 federal unified credit against the federal estate tax for one person, which is an increase of $20,000 from the 2015 amount of $5,430,000.  For a married couple, $10.9 million of assets can pass estate tax free upon death, if they had not previously used any of their unified credit during their lifetimes.

$14,000: the 2016 annual gift tax exclusion amount, which is unchanged from 2014 and 2015.  This is the amount you can gift to any one individual without affecting your federal estate tax exemption (or unified credit).  If you are married, a couple can give $28,000 to a person.

Zero: the percentage increase in Social Security benefits from 2015 to 2016.  Because the Consumer Price Index, as calculated by the government did not increase form the 3rd quarter, 2014 to 3rd quarter, 2015, there will be no cost of living increase to Social Security recipients for 2016.

$118,500: the maximum amount of wages (or self-employment earnings) subject to the 6.2% Social Security withholding tax.  This amount remains unchanged from 2015, as by law, the wage base must remain the same if there are no COLA benefit increases.

Unlimited: the amount of earnings subject to the 1.45% Medicare tax.

$15,720: the amount a worker under full retirement age can earn, if also collecting Social Security benefits, before Social Security benefits are reduced.  This limit is the same as in 2015, after which benefits are reduced for every $2 earned about this limit.

 

The October Surprise……and More

October made up for August and September

August was a bad month for stocks, worldwide.  The negative headlines were everywhere.

September was again a bad month for stocks, both in the US and internationally.

When it was least expected, October turned out to be a great month for most stocks indexes, throughout the US and elsewhere.  October’s major indexes gains offset the losses of August and September.

The lesson:  No one can predict when markets will increase or decrease.  By staying invested during the ups and downs, you will benefit over the long term by the positive returns which stocks have provided.

Investing in the New Economy

One of the benefits of our investment approach is that by owning a globally diversified portfolio, with exposure to so many companies and industries, you do not have to try to pick the next hot companies.  You already own them and benefit from their growth.

Ten years ago, I don’t think many people would have accurately predicted that each of the following technology related companies would be among the 10 largest US companies by stock market value:

  • Apple
  • Google (now legally named Alphabet)
  • Microsoft
  • Amazon
  • Facebook

What is the Right Alternative?

The Wall Street Journal has been full of stories and headlines in recent weeks of hedge funds that have vastly underperformed the general markets in the past few months.  Alternative investments, like hedge funds, which try to “outperform the market” or provide downside protection with their “stock picking ability, ” have rarely been able to consistently meet these objectives over the long term or with consistency.

Numerous hedge funds are closing, due to their underperformance and investor discontent.  While the markets may be flat or slightly up for the year, that is much better than the double digits losses many hedge funds are reporting, due to bets they have made on certain companies or sectors, such as energy, commodities or health care.

This example is another way to provide you with confidence in our investment approach of broad global diversification with very low costs.  These hedge funds appeal to large institutions and very wealthy individuals, but come with huge fees (sometimes 2% annually plus 20% of their profits), high turnover and volatile performance.  We know that the slow and steady performance of our investment philosophy will provide you with the best long term investment experience, while diversifying and minimizing your risks.  These factors will enable you and your family to meet your long term goals.

For many reasons, we do not think these types of alternative investments make sense for almost all investors.  The “right alternative” is implementing and sticking to the core investment philosophies which we have discussed in these essays and adhere to on behalf to our clients.

An Extraordinary Guide

Imagine swimming 2.4 miles, biking 112 miles and then running a marathon, 26.2 miles, without stopping. This is an Ironman Triathlon*.

Now consider the challenge of being blind, and having the goal of competing and finishing an Ironman Triathlon.

Caroline Gaynor has enabled female blind athletes to accomplish this incredible goal, by acting as their guide. In 2010, she became the first female to guide a female blind triathlete in an Ironman Triathlon*. Subsequently, Caroline has guided 10 blind female triathletes in over 30 triathlons,** including 6 Ironmans. She has guided in 2 Ironman Triathlons in the past month alone.biking guide pic

I heard Caroline’s very moving story of acting as a triathlete guide at the BAM Alliance Annual Conference, which I attended this past Sunday – Tuesday. Caroline’s inspiring speech captivated the audience. Beyond her obvious physical accomplishments, was Caroline’s view of her role in assisting blind triathletes. Caroline’s goal is how she can best enable the blind triathlete to reach their goal. She feels it is their race, not her event. Her role is to do whatever she can to enable the blind athlete to succeed.

Consider the incredible level of trust which the blind triathlete is placing in Caroline, as her guide. The two are tethered together during the swimming and running parts of a triathlon, and ride a tandem bicycle for the biking portion. For an Ironman competition, Caroline and the blind triathlete are connected and working together for up to 17 hours.

While swimming, the blind triathlete cannot hear (due to being in the water). Caroline functions as her eyes and ears, protecting the tethered blind athlete from other swimmers. Throughout the event, Caroline’s role is to anticipate challenges and obstacles, such as curves, bumps, elevation changes and other competitors while on the road. Caroline must determine and communicate the challenges and problems which the blind triathlete cannot do on her own.

Caroline has to adapt to the different styles and abilities of each triathlete she guIronman picides. The blind triathlete and Caroline usually do not train or practice together prior to Caroline acting as her guide. Caroline must act quickly and decisively, but in a calm, confident and reassuring manner throughout the event.

Caroline is an associate for Dimensional Fund Advisors (DFA), providing support to investment firms such as ours. DFA is the primary investment firm we recommend and use for stock investments. DFA has grown to become one of the 10 largest mutual fund companies, with approximately $400 billion under management. Our firm has a fiduciary responsibility to put our client’s interest first, ahead of our own interest. DFA and Caroline have been successful by understanding their clients (and triathletes) and helping them to achieve their goals.

Caroline understands the blind triathlete’s goal, which is to complete the event safely and successfully. For an Ironman event, where each part of the event is far longer than in a triathlon, the goal is to finish in 17 hours and to hear the event announcer’s words, “Mary Smith, you are an Ironman.” That means the teamwork, trust and effort were successful.

When functioning as a guide, Caroline will not hear her name called at the end of an Ironman competition. Caroline’s role is to assist the blind triathlete in reaching their goal, to hear their name called out. Caroline enabled someone else to compete, she earned their trust and confidence, she anticipated issues that arose throughout the event and protected her triathlete.

Caroline Gaynor is an extraordinary guide, incredible athlete and role model. We can all learn from her.

To learn more about Caroline Gaynor, see Carolinebikes.com or on Twitter, @carolinebikes

*Ironman Triathlon: A sequence of long-distance triathlon races consisting of a 2.4 mile swim, a 112 mile bicycle ride and a 26.2 mile marathon run.

**Olympic Triathlon: A sequence of standard distance triathlon races consisting of a 0.93 mile swim, a 24.8 mile bicycle ride and a 6.2 mile run.

Financially “scary” things you should avoid

  1. Market timing.  It does not work.  You cannot be consistently right in trying to get in and out of the stock market and predict the highs and lows.
  2. Junk Bonds.  The additional interest that low quality bonds pay are not worth the additional risk, as there is a much greater chance of not getting your principal back.  These are also know as “high yield bonds.”
  3. Hedge funds.  In general, they do not outperform assets class mutual funds, especially after considering their very high internal costs, high turnover rates which cause higher taxes and illiquidity.  They have not proven to be worth the risk, even though they are marketed to reduce risk.
  4. Municipal bonds which are all from one state.  Diversification is very important, even in fixed income investing.  You should own bonds from many states, not just your state of residency to avoid state income taxes.  If you only own bonds from one state, the risk of default is more concentrated.
  5. Mutual funds or money managers that do not equal or outperform their respective benchmark or peers.  Why invest in a mutual fund that is underperforming?  You need to review this over time, to see if your investments, funds or money managers are underperforming.  We can assist you with this, if you would like.
  6. Mutual funds or investments which are all in one asset class, usually US large companies.  You will have a more successful long term investment experience by being globally diversified, which means owning many assets classes, such as US small value, International Value, Emerging Markets and Real Estate.
  7. Owning investments which generate high taxes in your taxable accounts.  We can reduce our clients’ taxes by focusing on where certain investments are held (in a taxable or retirement account).

Having the Right Strategy

We have adhered to the same investment strategy since we formed our firm in 2003. We take great pride in this consistency, as our philosophy has been proven over time.

As we observe the investment world, we only gain more confidence that our strategy is right for the long term.

Wednesday morning before leaving for work I glanced at an interview with the CEO of Wal-Mart on CNBC, who talked about their plans for the future. He was positive about their prospects and the economy in general. A few hours later, Wal-Mart released a completely different picture. They said earnings would decline 8-12% in their next fiscal year, as greater turnaround efforts were needed in the face of stiff competition and employee wage increases.

The Wal-Mart headlines and news about further restructuring at GE lead me to do some research about their long term stock performances. The data is shocking. It shows that what you may perceive as a great company, or what was once a great company 5, 10, or 20 years ago, may not be such great stock investments.

The information below should reinforce to you that no one can predict how the business environment can dramatically change. The past success of a company does not guarantee its future success and the company’s stock market returns for the future. This is why we do not recommend investing in individual stocks.

Wal-Mart has grown to be the largest retailer in the world. How has Wal-Mart’s stock done? It has trailed the S & P 500** over the past 1, 3, 5, 10 and 15 years. In more recent years, the underperformance is very significant. In the past 3 years, it has underperformed the S & P 500 by over 15% per year. So far this year, after the huge earnings decline announcement on Wednesday, the stock is down 30%.

GE was a great company and had a terrific investment reputation for many decades. How has GE’s stock performed in the past 10 or 15 years? If you had invested $1 million in GE 10 years ago, you would have just over $1 million today. No growth at all. Had you invested in the diversified S & P 500, your investment would have doubled to over $2.1 million.

GE stock returned an average of -2.32% annually over the last 15 years. During the same 15 year period, the S & P 500 earned 4.57% per year, or 6.89% per year greater than GE. Over the past 10 years, GE’s stock averaged .65% per year while the S &P 500 returned 7.72%.  IBM is another great company which has trailed the S & P 500 over the past 15 years. In the past 3 years, it has underperformed the S & P 500 by over 22% per year and in the past 5 years it has underperformed the S & P 500 by 10% per year.

These stocks are examples of three companies which have underperformed the broader S & P 500. There are obviously many companies which have outperformed the S & P 500. This information, while a limited sample, should confirm some of our core investment beliefs:

  • It is difficult or impossible to predict the future.
  • It is difficult or impossible to accurately predict the future of specific companies over long term periods of time.
  • Diversification is key.
  • Concentrating your assets in a few stocks can be very hazardous to your financial future.  You may do OK, but you will likely do much better by being more broadly diversified.  We don’t think the risk of owning 5-10 stocks is worth the benefit of being diversified.
  • Owning broad, globally diversified mutual funds (as we recommend) is the best strategy for long term financial success in the stock market.  These mutual funds should be very low cost.
  • These mutual funds should not be trying to pick the top stocks (“actively managed”), as these type of funds generally underperform their respective benchmarks over the long term.

We recognize that we cannot identify which companies will be the most successful stocks over the next 5, 10 or 15 years. Who would have predicted that Apple would be this successful 15 years ago? Who would have thought GE and Wal-Mart would be significantly underperforming stocks over the past 15 years? Fifteen years ago, the iPhone was 7 years from introduction. While Apple stock has been wildly successful over the past 5-15 years, even after selling 65 million iPhones in its last fiscal quarter, Apple stock has also underperformed the S & P 500 over the last three years.

As our goal is to provide you with a secure financial future, we have adopted the long term investment strategies which will give you and your family the most likely opportunity for financial success.

**The S &P 500 is a broad unmanaged index of 500 large US based companies.