Investing for dividends or total return?

We are often asked about investment style and strategies.

One question we are asked is: whether we focus on high dividend paying stocks?

Or, do we invest for total return? Investing for total return means investing for a combination of growth and income from stocks, but not putting the primary emphasis on the dividend yield.

We recommend investing for total return. While dividends are an important component of a portfolio’s long term overall return, we do not recommend that you invest primarily in high dividend paying stocks.

While each client and investor is unique and has their own personal goals, a common goal is for your assets to grow over time. Thus, our focus is on what strategy will provide the long-term investment growth that you desire.

Some clients, particularly those in retirement, want income from their portfolio to provide for their living expenses, as well as other goals, such as charitable giving or gifts to family members. We view the optimal way to get this income is from the total portfolio, regardless of whether it is from the actual dividends of the mutual funds that we recommend or stocks that you may own. The income (withdrawals) that you desire do not necessarily need to come from only the interest and dividends that the portfolio earns, the withdrawals can come from the principal, particularly if the principal is growing over time.

We recommend focusing on the amount of your capital and its growth over time, rather than the annual dividend yield of the portfolio. If the stocks within the portfolio grow at a greater pace than the dividend yield, then you will be much further ahead.

Let’s look at a hypothetical example based on a sample of 6 large US company stocks which have greater than average dividend yields and compare them to the S & P 500 over the past 5 years. The dividend yield of these companies (dividend payout/stock price) is around 4%, whereas the S&P 500 dividend yield is around 1.90%.

If you had invested $500,000 in each of the 6 companies (GE, IBM, Pfizer, Verizon, Wal-Mart and Enterprise Products Partners, a large energy company) five years ago, you would have the following:


As you can see, the growth of the diversified portfolio did much better, increasing $2 million more than the 6 high dividend paying stocks. This means that you would have much more capital to withdraw from the diversified portfolio, regardless of whether it came from dividend income or the principal, even after accounting for capital gains taxes.

But what about the dividends? For the high yielding stocks, they would be paying about $161,000 annually, based oeir current value.

The S&P 500 is currently paying a dividend yield of 1.87%, or approximately $111,700 per year.

While this is $49,000 less than the 6 companies are paying in dividends per year, you would have $2 million more in investable assets from which to draw cash, if you needed it. We think most investors would rather have the more significant growth of their investable capital than the higher annual dividend income, as that amount is a fraction of the growth in the capital.

This is only an example, and a rather small one, but we feel it is very illustrative. If other stocks and different time periods were tested, the figures would certainly be different. However, I think the general conclusion would be the same, which is that a broadly diversified portfolio of companies will provide you greater investment capital over the long term than a collection of high dividend paying stocks. For example, over the past 10 years, 5 of the 6 stocks significantly trailed the S&P 500, so the conclusion would be the same over that longer time period, for these companies.

In the actual portfolios which we manage, we stress global diversification across many industries, geographic sectors and sizes of companies (large and small, growth and value). We do not recommend just investing in US Large companies, such as the S&P 500. This was used for only for comparative purposes in this post.

High dividend paying stocks tend to be companies which are having difficulty. They are often companies which are growing slower than the overall stock market, or even declining as a business.

  • IBM just announced their 21st consecutive quarter of declining revenue.
  • So while IBM’s stock pays a 3.73% dividend yield, which is double the S&P 500’s dividend yield, IBM’s stock performance has greatly lagged the S&P 500 over the past 5 years, losing almost 1% per year versus growth of almost 15% per year by the S&P 500.

One theme that I have noticed in recent years is the concept of legacy stocks, which many of these high dividend paying stocks are. These are companies which were in their prime in past decades, are in industries which have gone through significant changes or are quickly evolving now. In general, they are not the companies that are growing and providing the returns which have been driving world-wide stock markets.  We would recommend modifying your portfolio for the future if it now consists heavily of individual legacy stocks.

  • Wal-Mart is facing tough competition from Amazon and online retailing.
  • EPD is facing challenges due to the significant decline in energy prices.
  • IBM is struggling to compete against numerous technology companies.
  • Verizon is facing wireless competition which is causing revenue/subscriber to drop, as well as issues with content and keeping subscribers to their various businesses.
  • Pfizer is quite profitable, but large pharmaceutical companies are always looking for the next major drug.
  • GE has struggled as a company over the past 10+ years. It has undergone a significant transformation, purchased new subsidiaries and sold off other segments of their business.

Each of these companies may succeed in the future. That is not the key issue for us, as investment advisors

Our role is to provide you with the optimal investment strategy that will be durable and successful over the next 5, 10 and 20 years. We are confident that a globally diversified strategy of stock mutual funds will far outperform a portfolio consisting of high dividend paying stocks in the long run.


Notes: The above example is for illustrative purposes only. The mutual funds which we recommend own each of the above individual stocks, as a small percentage of certain funds. The illustration does not include the impact of advisor fees and taxes, which would affect actual investment results, but would not change the conclusion of the illustration.

The five year annualized return for the stocks cited above, which is the basis of the calculations in the illustration, are:

This means that the average return per year, over the past 5 years, for WMT (Wal-Mart) was 3.29%. During that same time period, the S&P 500 fund returned an average of 14.77% per year, over the past 5 years.

Warren Buffett: The Rest of the Story

The announcement sounded routine: Warren Buffett’s Berkshire Hathaway offered last week to purchase a Texas utility, Oncor, for $9 billion. Berkshire would also assume Oncor’s debt, so the deal has a value of about $18 billion.*

But the interesting story is not this announcement. The interesting story is what has occurred over the past 10 years, leading up to this. This is where the real investment lessons are.

In 2007, three of the biggest and seemingly smartest financial firms purchased Oncor’s predecessor firm, TXU, for $45 billion.

Goldman Sachs’ private equity arm, along with KKR and TPG (huge private equity firms) bought TXU in October 2007. TXU, the energy firm, relied on coal-fired plants to produce its electric power. The investment firms based this huge transaction on their prediction that natural gas prices would rise. The investment firms predicted that as natural gas prices rose, TXU would have a competitive advantage over other power companies.

At the time of the 2007 purchase by these top private equity firms, this $45 billion deal was the largest leveraged buyout (LBO) on record. The 3 firms invested $8 billion of their own money and they borrowed the remainder from others, by issuing bonds. It was reported that in 2007, after the leveraged buyout, the renamed Energy Future Holdings had more than $40 billion in debt.

Enter Warren Buffett….in late 2007. Berkshire Hathaway purchased $2.1 billion of these Energy Future Holdings bonds that were needed to finance the TXU leveraged buyout. The bonds were called “high-yielding,” which means they were risky and below investment grade. Buffett must have agreed with the investment thesis that natural gas prices would increase.

Some of Wall Street’s best and brightest were very wrong. In 2007, natural gas prices were around $7-8 per BTU (British Thermal Unit). After a brief spike upward in 2007-08, the price of natural gas has plummeted ever since. Natural gas has traded in a range of $2-$5 per BTU from 2008 to today.

Due to the significant decrease in natural gas prices, Energy Future Holdings struggled financially and was unable to handle its huge debt burden. By April 2013, KKR, TPG and Goldman Sachs had written down the value of their $8 billion investment to zero (a 100% loss).

In 2013, Berkshire sold its $2.1 billion of bonds at a loss of $873 million (a 41.6% loss). In one of his annual shareholder letters before 2013, Buffett wrote that he had “totally miscalculated the gain/loss probabilities when I purchased the bonds.”*

Energy Future filed for bankruptcy protection in 2014. It was the biggest bankruptcy of a private equity-backed company since the 2007-2009 financial crisis.

In 2007, Energy Future was valued at $45 billion.

Berkshire is offering approximately $18 billion for Energy Future’s remaining operating unit, Oncor. It is unclear whether Berkshire’s offer will be successful, as it requires regulatory and creditor approvals and another entity may submit a competing offer.

So what is the learning? What are the lessons from this experience?

  • Making a prediction about the direction of something like the price of natural gas (or oil, gold or an individual stock) can be very costly, if you are wrong.
    • This is why we do not rely on making predictions as the basis of our investment strategy.
    • Not making predictions may seem counter-intuitive,  especially if you are new to our firm, but we focus on things which we control. As we cannot accurately and consistently predict the future, we do not attempt to base our investment recommendations on predictions.
  • We do not recommend purchasing high-yielding “junk” bonds.
    • Berkshire Hathaway is a huge conglomerate and can afford to lose huge sums of money. They are fine and survived, despite the huge bond losses from these junk bonds. o Berkshire Hathaway is a huge conglomerate and can afford to lose huge sums of money. They are fine and survived, despite the huge bond losses from these junk bonds.
    • We purchase investment-grade corporate bonds in certain industries on behalf of our clients, as we feel the risk/benefit is worthwhile, versus only government bonds or CDs, for most clients.
    • We would not have purchased these types of junk bonds, as the risk-reward is inadequate. The higher interest rates may seem appealing, but the underlying risk of the company’s ability to repay the bond is the primary objective.
    • Our primary concern when purchasing bonds on behalf of our clients is that there should be a very good expectation of getting the bond principal repaid. Risk will always exist, but junk bonds have a much higher rate of default, so buying them is not worth the risk.

A few weeks ago, I wrote a blog post about a book titled The American Spirit by historian David McCullough. He emphasized over and over throughout his brilliant collection of speeches the importance of reading, understanding history and learning the lessons from history. He said you never know where your reading and research will take you and what you will learn.

When I read last week that Buffett and Berkshire was offering to purchase this utility, I had no idea that Buffett had previously lost almost a billion dollars related to the same entity. I did further research and learned about the background of this company. This further reinforced the strength and rational of many of our investment principles.

I hope that my extensive reading about all kinds of topics is of great benefit to our clients, in all kinds of ways.

*Source: WSJ, “Warren Buffett’s Oncor Play Shows Berkshire’s Energy Ambitions,” July 7, 2017
Other sources available upon request.

Mid-Year 2017 Financial Update

As July, 2017 has begun; one-half of 2017 has already past. And for the financial markets, 2017 has been good so far.

We emphasize that you should focus on the long-term, not the day-day or month-month financial market moves. However, an update at this point can be informative.

If you are a client of our firm, your accounts would have increased in the first half of 2017, so you are making progress toward your financial goals.

Diversification is always working….as 2017 has shown.

As we recommend a globally diversified portfolio, with an appropriate allocation of fixed income (based on your need, desire and willingness for risk), your portfolio’s gains were helped by very strong International and Emerging Market gains. Increases in US Large company stocks were strong. US small value, a top performer in 2016, had very small losses for the first 6 months of 2017.


There has been a lack of volatility in US markets for over a year. There have been very few days over the past year when the S&P 500 (an index of the 500 largest US based stocks) declined more than 1%. The S&P 500 went 110 days without a decline of more than 1% prior to March 21, 2017. This is the longest period without a 1% daily decline of the S&P 500 since May, 1995.

Why is this relevant? Because intra-year declines of around 10-14% are normal within most calendar years….and there has not been a decline of this nature in over a year.

Over the past 70 years, there have been 57 “corrections” of the S&P 500, where the S&P 500 index has declined more than 10%. That is an average of one every 15 months.

Other updates:

  • The price of crude oil has dropped significantly from January 1, from $57 per barrel to the mid-$40s per barrel, a decline of over 20%. Oil company stocks and energy master limited partnerships are again significantly trailing major market indexes and most have lost value in 2017.
  • Interest rates have increased over the past year.
    • The 10 year US Treasury Note has increased from 1.37% to 2.33% over the past 12 months, but is actually slightly lower than when the year began.
    • The 2 year US Treasury Note has increased from .6% to 1.4% over the past 12 months and slightly increased from 1.2% in January.
  • There has been no significant or measurable progress on corporate or personal income tax reform. The goal is still for legislation to be enacted by the end of 2017, but that may be dependent on passing health care reform.

You should focus on things that matter to you and things which you can control.

Most of what is discussed above is beyond your control, with the major exception of your decision to work with our firm and to adopt our rational investment philosophy, which is to invest in stocks using a very low-cost, globally diversified investment strategy.

A 4th of July Book Recommendation

The long 4th of July holiday weekend is upon us.

A time to be with family, attend a parade, have a barbecue and see fireworks. Maybe take a vacation.

It is a time to reflect on our great country, which started over 240 years ago.

It is also a great weekend to read a very moving and wonderful new book by historian and author David McCullough, The American Spirit, Who We Are and What We Stand For.  McCullough selected 15 speeches from the hundreds he has given in all 50 states over the past 25 years for this collection. 

From the sample of speeches I have read, I very highly recommend this optimistic book.

The 171 page book is a treasure of history. It is positive. It is inspiring. It is educational. I have learned something interesting on almost every page.

McCullough, one of the most honored American historians in the US, winner of two Pulitzer Prizes, two National Book awards and the Presidential Medal of Honor, reminds us of fundamental American principles and brings to vivid life people and places in American history.

His speeches are clear and succinct. He paints vivid pictures with words as few others I have read.

In these days of seemingly endless negativity, the first speech in his book addresses the incredible accomplishments of Congress over the decades….ending slavery, building railroads, ending child labor, creation of Social Security, the Voting Rights Act. McCullough adds perspective.

“We need to know more about Congress. We need to know about Congress because we need to know more about leadership. About human nature. We may also pick up some ideas.”

McCullough also challenges us as a country in his speeches to face some of the many problems which exist. Inner cities, poverty, violent crime and others. He advocates the core of many of the solutions to these issues “should be history, for the specific and realistic reason that all problems have histories and the wisest route to a successful solution to nearly any problem begins with understanding its history. Indeed, almost any attempt to solve a problem without an understanding of its history is to court failure…”

He stresses learning, history and education. Not just when you are young. Throughout your entire life.

In a 2008 speech at Boston College titled “The Love of Learning,” he says: “information is useful. Information is often highly interesting. Information has value, sometimes great value. The right bits of information at the opportune moment can be worth a fortune. Information can save time and effort. Information can save your life. The value of information, facts, figures, and the like, depends on what we make of it – on judgement.

He later goes on to explain that information and learning are acquired from great books, understanding the proper perspective, ardor and “attended with diligence.” He tells a great example of learning by surprise, on pages 143-45, of how one person’s trip to Europe planted a seed which would change the US’ spread of slavery.

The book provides a context to some of our values as a financial advisory firm. We rely on learning, reading and good judgement. We are continual learners. We base many of our decisions and advice by understanding the history of financial markets, as history can be more valuable than predictions and guesses about the future.

I hope you take the time this 4th of July weekend to learn more about our country’s history. Be positive and read this outstanding book. Buy a copy for a friend, child or grandchild.  Read.  Value our history.

Does your financial advisor invest as they recommend?

Have you asked your financial advisor whether they invest in the same investments which they recommend to you?

You should ask this question.

Depending on your broker or financial advisor, you may be surprised by the answer.

If you are a client of our firm, the answer is a clear yes. The partners of the firm invest their assets in the same stock mutual funds as we recommend to you. And relatives of the partners are invested in the same manner as well.

If you are not a client of our firm, or have an account with a major brokerage firm or bank, the answer from those brokers and advisors will likely be very different. If your advisor is investing differently than their recommendations, that should concern you. It should lead to more questions. Maybe that should lead to a conversation with us.

We feel this is a really important distinction. Our investments and interests are aligned to be identical to yours. We have the same skin in the game as you do. If you are making money, we are making money. If your accounts are going down, our accounts are going down.

I learned many years ago, prior to forming our investment advisory firm, that this was not always the case. In various conversations, I realized that brokers were making recommendations but not investing their own money consistent with their client recommendations. I asked this question. When meeting with brokers who managed my prior firm’s profit sharing plan, I was very surprised to learn that the brokers, who were close in age to myself, did not themselves own the investments they were recommending to our firm. This made no sense to me. This was a defining lesson for me.

I was reminded of this inconsistency while listening to a podcast** which featured a colleague of mine whose firm also works with our back office firm, BAM Advisor Services. Tim Delaney explained that prior to starting his financial advisory firm, he and his father had both experienced situations where they made investments in real estate and other deals, which turned out to be big losers. Tim later found out that the advisors who made the recommendations had not invested their money into these same investments.

These other brokers were selling investments and selling products. They were not following their own advice. We do not sell. We provide advice and recommendations, which we follow ourselves.

Investing our money alongside our clients is one of the guiding principles we have had since the inception of our firm. The exact allocation of the mutual funds I own may be different than yours, based on each person’s specific situation. But if you own a US small value fund we recommended, I own the same one. If you own an International Large Value fund, I own the same one. You get the picture. The same goes for Keith, my partner, as well as each of our parents.

This is another reason that you should be confident and comfortable with our firm and our principles. Your financial future is based on our recommendations and financial advice.

Our financial future is dependent on the same investments.

Shouldn’t it be this way?


**Financial Advisor Success Podcast, by Michael Kitces. Number 25, with Tim Delaney. These podcasts are primarily for financial advisors. This podcast provides a background similar to our firm, as it discusses how Tim transitioned from a full-time CPA to a financial advisor and his relationship with our mutual back office firm, BAM Advisor Services. Tim and I have been in a peer learning group for over 10 years and we talk on a regular basis.



We Bring Good Things to Life

Three years ago, on June 10, 2014, the DJIA (Dow Jones Industrial Average) closed at an all time high, of 16,946

Fast forward to today….3 years later….and the DJIA is even higher, near another new all time high of over 21,300. 

In 2014, would you have expected the DJIA, an index of 30 large US stocks, to be 25% higher three years later, in 2017? 

  • This is why we stress discipline, patience and focusing on the long-term. This is why we try to take the emotion out of the investment process.

On June 12, 2014, I wrote the following blog post: What should you do now, with the stock market near an all time high?  Please take two minutes and read this. I think you will find the perspective startling….and very useful.

At the time, I had just begun a commitment to write blog posts every week (see more on that commitment in this recent blog post).

This is an excerpt of what I wrote three years ago

“What matters most and what you should focus on is developing a proper, globally diversified long term investment plan, so you and your family can benefit from the world’s stock markets over the next 5, 10, 20 or more years… If you are not invested in the stock market right now, yes, we would invest in a globally diversified portfolio for the future. If you are invested now, we would review your portfolio to see if it is globally diversified.” ~ from blog post dated June 12, 2014

A very different story

We do not recommend investing in specific companies, as you will learn why. 

“You should not be thinking about what the economy or specific companies are doing right now. You should not be concerned with how Apple, Ford or IBM will do this week or next year. You cannot control or accurately predict any of this.” ~ from blog post dated June 12, 2014

GE, once a highly regarded company, has been by far the worst performing company in the DJIA since 2001. From a WSJ article** on GE’s stock performance since September 2001, let’s review some data:

  • The DJIA is up 121% from September 2001 to now.
  • From September 7, 2001, when the current CEO took office, to 2017, GE shares are down about 30%.
  • Pfizer, down 11% in the same time span, is the only other current company in the DJIA that was down over these 16 years.
  • At one point during the financial crisis, GE’s stock was down 80% from September 7, 2001.
  • A few companies which have been removed from the DJIA during this period have performed even worse than GE:
    • Citigroup down 84%, was removed from the DJIA in 2009.
    • Alcoa down 58%, was removed from the DJIA in 2013.
    • General Motors and Eastman Kodak both declared bankruptcy.

What is the point? For many years, GE’s tagline was “we bring good things to life.” That may have been true…. for their products. However, they have not brought good financial benefits to their shareholders over the past 16 years.

This is the risk of investing the majority of your money into individual stocks, certain industries or regions of the world. You cannot predict the future.

I doubt anyone would have predicted in 2000-2001 that GE, Pfizer, Citigroup or GM would be among the worst US large company stocks to own over the next 16 years.

How can you know what will be the best or worst performing stocks for the next 16 years? 

This is why we strongly recommend investing in broad asset class mutual funds, on a global basis. By investing in asset class mutual funds, you benefit from the long-term growth of companies and the world’s stock markets, while minimizing the potential impact of the underperformance due to a handful of individual stocks to your portfolio.

Which do you think…. will bring good things to your life?

A. Picking GE, holding it, and taking the chance to vastly underperform the US and global stock markets.

B. Owning a portfolio of high-cost, actively managed mutual funds, which the vast majority underperform their respective benchmarks over most time periods.

C. Owning a globally diversified portfolio of low-cost, asset class funds which benefit from the long-term growth in US and global stock markets, while minimizing risk through multiple forms of diversification.

We recommend C.

**Source:  WSJ, “Under Imelt, GE Was the Worst Performer in the Dow, ” June 12, 2017

The Benefits of Disciplined Rebalancing

A quick philosophy recap:

  • We believe in broad, global diversification. This means owning stocks in the US as well as a significant allocation to international stocks (companies based outside the US). See more on the Benefits of Global Diversification in this blog post from April, 2017.
  • We believe in having an Investment Policy Statement, or a plan for how much you should own of each asset class and how much of your assets should be in fixed income v. stocks. These decisions are based on your specific situation, age, goals and risk tolerance.
  • We believe in rebalancing your accounts throughout the year, based on what is happening in the financial world, not just at year end.
  • We believe in being patient and disciplined.

Why does this matter, today in 2017?

So far in 2017, International stocks and Emerging Markets (smaller international countries) are far out-performing US stocks. For the past few years, non-US stocks had underperformed US stocks.

  • By being patient and disciplined, we maintained the exposure of our clients’ accounts to global investments, not just US stocks. Our clients are benefiting this year for being patient and disciplined. True global diversification works over time.
    • This practice of rebalancing enables an investor to accomplish the goal of buying low and selling high.
  • The year to year changes in the markets are often unexpected. 
    • By the end of 2016, the US small value asset class was the top performer for 2016.
    • For 2016, larger International asset classes underperformed other asset classes.
    • As we rebalanced accounts late in 2016 and early 2017, we would have generally reduced the allocation (or taken some profits) from the US small value asset class and increased the allocation of the International asset class, toward their target allocations.
    • Fast forward to early June, 2017. International and Emerging Markets are top performers and US small value asset class is lagging.  Rebalancing works. But you need to be disciplined and adhere to it.
    • Conventional wisdom is not positive about Europe. Most people feel the US economy is stronger than most overseas economies.
      • However, perceptions and actual stock market returns are often two very different things. International markets are outperforming US stock indexes in 2017.
      • This is why we do not rely on predictions, forecasts or concerns. The financial markets are efficient and act in ways that few can accurately predict over long periods of time.

Our conclusion

You want to have a successful financial experience.

You want a sense of greater financial security and don’t want to worry.

You want to be confident about your financial future and that you will not run out of money.

You want to sleep well at night (at least not be up at night with financial concerns).

By adopting the investment philosophy and principles we have utilized, you should be able to have the financial security you desire and sleep well at night.

Because of the strategies we have adopted for the advice we provide to our clients, we also sleep well at night. And that should be re-assuring to you as well.


Keeping my major commitment (business and personal)

In June, 2014, I made a decision.

I decided three years ago that I would write a weekly blog post that we would email to our clients and others.

Not every once in a while. Not when I felt like it.

I committed to write and publish EVERY WEEK.

I have been disciplined. I have made the time to write. I have written an article almost every week for three years.

Prior to this, I had written over 145 blog posts between 2009 and April, 2014, but only on a sporadic basis.

Why do I feel this is one of the most important things I do as a financial advisor?

By writing weekly, we are able to communicate in a very timely and regular manner to our clients. We are able to convey and reinforce our investment philosophy, principles and beliefs in real time.

Reading these blog posts regularly, you should have greater clarity about your investments. You should have more confidence in our philosophy, especially when the financial markets are challenging. Hopefully, you better understand the benefits of being rationally optimistic, focusing on the long-term and on what you can control, rather than on the day-to-day news and market volatility.

I am convinced that we are better financial advisors because I am writing these weekly blog posts. We are passionate about being excellent advisors. Writing makes me think. We are more aware of the questions and issues our clients raise, as these are likely future blog topics. We are more curious. We research topics to provide information which will be useful to you. I am a continual learner and voracious reader. My reading often turns into content to share with you.

Writing these blog posts every week takes time and discipline. Writing and self-editing generally takes a few hours each week. Additionally, others in the firm edit, review and put them into final form to email to you and add them to the firm’s website.

We think these weekly blog posts are valuable. We hope you find them informative and help you to be more educated about your investments and the constantly changing financial world.

Do I plan to continue writing these blog posts every week in the future?

Absolutely yes! Even though they are sometimes written in the evenings, on planes or in hotel rooms, I feel these emails have become a vital aspect of what WWM uniquely provides to our clients. While these blog posts do not replace personal meetings and phone calls, they are a way to regularly communicate with you.

We are providing clarity, advice and information on a weekly basis. These are not canned pieces written by analysts in New York who do not know you. When a major stock market event occurs or a tax law is proposed, I expect to write about it within days and hope that you appreciate receiving our thoughts in a very timely manner.

What is a major lesson I have learned by writing on a weekly basis?

A number of years ago, I participated in the Strategic Coach program for entrepreneurs, founded by Dan Sullivan. He introduced a concept called the 4C’s: commitment, courage, capability and confidence.

When I committed to writing every week, it took courage.  I didn’t know if I would be able to do this.  I didn’t know if I would have the discipline or ability.  I enjoyed writing earlier in my life as a high school newspaper editor.  The weekly commitment gave me structure, which led to developing greater capability.  The more blog posts I completed, the greater my confidence has grown.

Dan Sullivan’s 4C’s is a great concept for achieving bigger goals, taking on new challenges or making a significant change in your life.  For me, this circle of the 4C’s has proven to be extremely effective and applicable.

This concept also applies to each you, our clients. At one time each of you made the decision to work with our firm as your financial advisor. This took courage and commitment. It was likely a significant change for you. As you become more comfortable with our capabilities, your confidence in our advice and philosophy will grow.

Thank you for reading!


Oil, innovation and your financial future

Innovation is having a tremendous impact on capping the future price of oil and gas, which is very positive for the economy and your financial future.

The national average of gas is around $2.40 per gallon. A large increase in the price of gas would have a significant negative financial and psychological effect on US consumers and the US economy.

However, due to technological innovations, we do not think there will be permanent or long term significant increase in the price of gas.

Throughout the economy and world, we continue to stress the importance of innovation, and the resilience and abilities of companies and industries to adapt and change. We are rational optimists. What has occurred within the oil industry is another positive example of this.

The recent range of around $45-55 per barrel of oil is likely to remain or be capped on the upside. There may be temporary periods above this range, but technological innovation and cost cutting in hydraulic fracking, horizontal drilling and other techniques continue to make US producers more profitable, even at lower oil prices. If the price of oil increases suddenly, then US producers will increase their production and prices would fall.

What does this mean to you and your financial future?

  • If the price of oil and gas are not likely to increase significantly, that limits a major potential factor of future inflation. Gasoline is a major cost for most individuals. Oil and related products are key raw materials for many industrial and consumer products.
    • This is all positive for your financial future in the long and short term.
  • When we invest in stocks, we recommend broad diversification. We do not recommend placing major bets on specific industries or sectors.
    • The significant innovations in the oil industry and the resulting reduction in oil prices increase the risk, or limit the relative upside, of many oil and gas-related stocks and master limited partnerships.
    • While oil and gas companies may be profitable, stocks in other industries may outperform oil related stocks over the long term, as other industries may have greater pricing power or growth potential.

The background

In past decades, OPEC countries could dictate and control the price of oil, and thus the price of gasoline. This caused major inflation and very negative economic impacts in the 1970s. This may no longer be feasible, as US producers are part of a free market economy.

The price of oil has been in a range around $50 per barrel since August, 2015, almost 2 years. OPEC countries want to gradually raise oil prices. They have been trying to cut back production to raise oil prices in recent months, but their efforts have been mitigated by US producers.

US technological innovation in fracking and shale production are offsetting the OPEC countries efforts to increase the price of oil. The major benefit of this to the economy and you is a “cap” on oil and gasoline prices has developed. If correct, this limits future inflation, as oil and gas are key components of inflation.

US oil production has been increasing in recent years and has surged to a record of almost 10 million barrels per day. If OPEC tries to cut their production to cause oil prices to rise, then US producers will pump more oil, as it becomes more profitable for them to do so. As oil prices are based on supply and demand, if OPEC cuts and the US producers pump more, then oil prices are likely to stay within a range or even go down.

From an investment perspective, rapid technological innovation has drastically changed the nature of the energy sector and investing in this area. Rapid change and innovation are impacting so many other industries. Trying to predict these changes and which companies will succeed or face challenges is difficult or many times impossible, especially over the longer term.

The rapid pace of change makes our investment philosophy of asset class investing and broad, global diversification all the more applicable and appropriate.

Change and innovation will continue. Our investment style is consistent with your goal of having a successful investment experience and meeting your financial priorities.

We want to wish each of you a happy and peaceful Memorial Day weekend. We hope that you take time to consider the sacrifices of current and past service members, who enable us to have so many of the freedoms that the United States uniquely enjoys. 

For further reading on this topic, I highly recommend the following articles (paywall may be in place):

 “OPEC, Fighting Market Forces, Extends Productions Cuts” The New York Times, May 25, 2017 Stanley Reed

“How American Shale Drillers Flipped OPEC’s Script” The Wall Street Journal, May 24, 2017

Lynn Cook and Benoit Faucon

Why You Should Have A Written Investment Plan

This is a financial recipe for long term investment success.

  • Have a written Investment Plan.
  • Understand it.
  • Make sure it is adequately diversified
  • Stick to it, in both up and down stock markets.
  • Rebalance and review as needed.
  • Repeat.

All our clients have a written investment plan, which they have signed and agreed upon.

A written investment plan does not need to be extremely long, but they serve many purposes. We call ours an Investment Policy Statement (IPS).

All investors should have a written investment plan because they provide clear direction, guidance and discipline for all of your investable assets, including assets in a 401(k) plan.

Having a written investment plan provides you with confidence and a greater sense of peace of mind. Our clients can understand why we are structuring their portfolio as we do, as we have already discussed it with them. We do not make major moves because some analyst in NY thinks now is the time to get into energy stocks or invest more Europe. We have a plan. We have talked about it. And we adhere to it.

Rather than accumulate a bunch of overlapping mutual funds or a collection of individual stocks over the years, buying this hot one and that sector the next year, having a written plan allows you to have a comprehensive, well diversified portfolio for the long term that is aligned with your financial goals.

As a traveler going to a new city, you would use your phone’s mapping app or car’s GPS to guide your way from point A to point B. For an investment portfolio, an investment plan provides similar benefits.

The IPS that we develop provides an agreed upon asset allocation of how much to invest in stocks, fixed income and cash, based on each client’s specific personal needs.

The investment plan describes how the portfolio will be very diversified by asset classes, both within the US and globally. We set limits for each asset class, to minimize the risk of over exposure to certain sectors or asset classes. For example, through the investment plan and the underlying mutual funds we utilize, a client would not incur the unnecessary risk of too much exposure to a certain industry, market sector or geographic region.

A written investment plan provides discipline for buying and selling decisions. We “rebalance” a portfolio when a certain asset class, such as US small value, performs very well, such as in 2016. If that asset class exceeds it target allocation, we consider selling a portion. We would then evaluate the overall portfolio to reallocate those dollars into fixed income or a stock asset class which is below its target weighting. This discipline of rebalancing, which we have adhered to since we started our financial advisory firm, leads to buying low and selling high, without the guessing.

We revise Investment Policy Statements over time as events occur in your life or as you progress towards your financial goals. As you get older, you may become more conservative or accumulate adequate assets so that less stock exposure is prudent. These are valid reasons to change your overall investment policy.

We do not recommend changing one’s investment plan because of market conditions or predictions about the future of the stock market. All too often, this is emotionally driven and not in your best interest. These may be reasons to have discussions with us, but not necessarily to make major changes to your long term financial plan.

Some investment concepts are fads. Having a written Investment Policy is not a fad, it is an important, evolving document for your entire financial life.

Like a great recipe, if an Investment Policy Statement is prepared well and followed, it will provide a good outcome.