Will you even remember this occurred?

Late last year, most global stock markets dropped sharply. On Christmas Eve, the US markets had their worst Christmas Eve ever.*

Since Christmas, 2018, worldwide stock markets have risen dramatically and have recouped a large portion of the late 2018 decline.

In 66 trading days leading up to Christmas Eve, the S&P 500 declined 19.8%. However, in the 33 trading days December 26th to February 13, 2019, the S&P 500 has increased 16.6%.**

The chart below represents the above trading period, from 09/20/2018 to 02/13/2019.***
 

 While we believe that holding a broadly diversified global portfolio is in the best interest for most long term investors, I’m using the S&P 500 only for the illustrative purposes in this blog post, even though the S&P 500 consists of only US based large companies.

Global stock markets have increased significantly over the past 7 weeks despite many concerns about trade issues, the US government shutdown and worries about slowing economies in the US and globally.

This is a good reminder that even though you and others may be worried, and rightfully so, it does not mean that the stock market has to decline at that same time you have worries. The past few months are a terrific example of why we often remind you to focus on the long term, and not on the short term.

We believe it is nearly impossible to consistently and accurately time the stock market, to know when to get out and then when to get back in. You have to be right twice. To be a profitable market timer, you have to be able to do that over and over, and be correct to time the high and low points. This is not a game we advise you to play.

Though it can be difficult to handle markets when they decline quickly and sharply, we recommend that you adhere to your personal stock allocation plan, and not react to short term fluctuations and volatility.

Do you remember the decline in stocks which occurred in early 2016? Do you remember what caused this….3 short years ago? I assume that most of you do not remember that decline.

Just to refresh your memory, it was because of worries about China’s economy in January of that year. By early February, 2016, worldwide stocks began to climb again.

Three to five years from now, most investors will likely not clearly remember the late 2018 drop in stocks. It may have been worrisome for you to experience, as most major declines are scary to experience. But over time, the markets generally recover and go higher. And the memory of these declines fade.

But if your focus is on your long term future and long term financial plan, you will realize that declines like this are normal.

If you are in retirement, this is why we discuss with you the amount of fixed income savings that you have, and how long that can last you. We refer to this as your “Foundation.” For example, assume you are withdrawing around $80,000 annually from a $2 million portfolio. If you have $1 million of that portfolio in fixed income investments (50%), then you have over 12 years of annual withdrawals which are not subject to the volatility of the stock market….and that is without even including any interest on the fixed income investments. So you would really have 13 or more years of safe funds to rely on for your annual living.

If you think like this, you will hopefully be better able to tolerate the down periods in the financial markets, as you would know that you don’t actually need the stock portion of your savings for many, many years, for at least a decade in the example above. Thus, while the decline of 2018 was not pleasant for anyone, with this type of framework, you would realize that it is not directly impacting your current ability to live or your future standard of living.

It is this type of perspective and planning that we strive to develop with you, based on your age, income, expenses and savings.

We cannot predict when future major declines will occur, but we know there will be major declines in the future. On average, a major decline of around 20% or more occurs at least once every 5 years.

We want to work with you to develop a financial plan that begins to resolve your financial issues and concerns, such as how much money you may need to retire. And then we want to provide you with a plan and solution to live through your retirement years with the goal of reducing your stress that is related to financial issues.

We cannot eliminate down periods of the stock market. But we can work with you so you can strive to better handle down periods.

Let’s Talk.

*“The Stock Market just booked its ugliest Christmas Eve plunge-Ever”MarketWatch.com, by Mark Decambre, 12/24/2018

**“Stock Market Counterfactuals”awealthofcommonsense.com, by Ben Carlson, 2/08/2019

***S&P 500 ChartMorningstar.com

Trade wars, volatility and the stock market

As President Trump and his administration have discussed placing tariffs on various products, and China has reacted with similar tactics, worldwide stock markets have generally gone down.

First, a quick example of what you should not do. You should not over-react.

Wednesday morning I woke to CNBC reporting that the futures for the DJIA 30 stock index were down more than 600 points in pre-market trading. That represented a decline of 2.5% from the prior day’s close of 24,033.

However, by the end of Wednesday, the DJIA increased nearly 1% for the day. Other indexes were up even more. The broader large company S&P 500 was up 1.16% and the small company Russell 2000 gained 1.42%.

Those who reacted and sold stocks before 2 pm on Wednesday likely lost real money. Those who were patient and did not react to the early am news of the intensifying trade dispute ended the day with nice gains.

What is going on with International trade?

Irrespective of your politics, we are going to start with the assumption that trade should generally be fair and free between all companies and countries. Unfortunately, there is currently not a level playing field between countries. We are not going to deal with the specifics in this post.

How President Trump and other worldwide leaders resolve this issue remains to be seen. There is no way to predict an outcome. US leaders have threatened, but not yet actually imposed any new tariffs. This is an important distinction. No tariff changes have yet to be imposed by either the US or China. Each side has developed lists of products and potential tariffs, but these are all subject to negotiations which could take months to resolve. They will likely continue to add or modify these lists and threats for strategic purposes. For further reading on the topic, see below.***

Whether the actions by the Trump administration are successful in improving the US trading position with China, as well as addressing intellectual property rights, remains to be seen.

In the short term, the loss in stock market value has been significant, but not devastating. No one can accurately predict the long term impact to stocks from the trade battle which is brewing.The trade dispute is causing the stock market to be more volatile.

But let’s look at the word volatility. Volatility actually means when something changes quickly or unpredictably. You didn’t see the words “down,” “loss” or “gain” in that definition.

Volatility does not just mean when the markets suddenly go down.

Most people thought 2017 was NOT volatile because markets generally only went up. Last year was technically quite volatile, based on the true definition, as stocks did change a lot and few predicted the large increases.

Investing in stocks inherently involves volatility, both down and up. You must be prepared for this, for all sorts of reasons, both expected and unexpected. We work with you and structure your portfolio and asset allocation so that you can handle the volatility.

For more on handling volatility, you may want to watch this videoTuning Out the Noise.

Our general investment philosophy emphasizes smaller companies over larger companies more than most traditional financial advisors. We recommend this because historical financial and academic data shows that smaller company stocks outperform larger company stocks, though small companies are inherently more risky.

In terms of the current trade issues, our tilt toward smaller companies could be beneficial, as the impact of the trade dispute, real or threatened, could be a greater negative to larger companies than small companies. Only as an example, a smaller company which sells products primarily in the US or not to China may be impacted less than Boeing, which would be directly affected by potential tariffs on aerospace.

As we often say, it is not beneficial to try to time the markets. That is not a winning long term strategy. So, we do not recommend any significant asset allocation changes in response to these trade issues if your portfolio is properly structured and globally diversified.

Whatever occurs in this trade dispute, we hope that the leaders of all sides consider the impact of their words, positions and actions on their citizens and companies, as well as the global community.

You can be assured that we will provide you with updates, advice and commentary, as it is needed.

If you found this helpful, please feel free to share it with your friends and colleagues.

 

***I highly recommend the WSJ  article”Tariff Showdown Shifts to Intense Negotiation Period,” dated April 4, 2018.

What are you earning on your cash?

You should no longer be satisfied with earning next to nothing on your cash sitting at the bank.

After years of very low short term interest rates, you can now earn meaningful interest on cash and short term money.

Unfortunately, the interest rate at your bank may not have increased and may not increase much in the near future.

Thus, this is a simple but important item you should review and possibly take some action on. It could be worth a decent amount of money.

The 90 day US Treasury bill is currently yielding around 1.75%.

If you have excess cash that you do not immediately need and you are not earning at least 1% on your funds at the bank, you should be contacting us to discuss this.

For example, if you have $100,000 in your bank earning a .01-.05% (which is likely your bank’s current interest rate), you could earn $1,750 annually, based on current interest rates, less our investment management fees, rather than a few dollars.

If you have significant funds in the bank, the money could be invested in short term fixed income investments and the interest rate could be higher than stated above if you may not need the money in the next 90 days.

A few factors to consider:

  • The Federal Reserve is likely to increase short term interest rates by .25% at least twice more this year, with additional increases most likely in 2019.
    • Thus, it is reasonable that the 90 day Treasury bill and other very short term investments will be yielding 2-2.50% by late 2018 or during 2019.
  • If you do not need the money in the immediate future, your cash could be invested in various short term conservative investments, such as Treasury instruments, CDs or corporate bonds.
  • As always, we act in a fiduciary manner.  This means that we would only recommend you take these steps if it will be financially beneficial to you and make sense for your overall situation.
  • For the short term investments we recommend, they can generally be easily liquidated within a few days.  So there is no reason not to take advantage of these better interest rates if your bank is not offering interest rates on your excess cash funds of greater than 1%.

Monitoring your short term interest income is not something that most people have focused on in recent years.

Now is the time to review and take action.

Don’t be content with earning pennies on your cash.

Give us a call or send us an e-mail and let’s talk about this!

 

Traveling and Investing Successfully

To be successful at both investing and travel, you should….
  • Be open minded and adaptable
  • Be willing to try new things
  • Plan
  • Be patient
  • Seek out the advice of experts.

If you want to go on a two week trip to a foreign country, most people would develop a plan before they leave. You would likely consult an experienced travel agent, even in today’s internet age, if you are going somewhere you are not familiar with. Working with a travel agent, you would set an itinerary, pick the cities you want to visit and possibly things you may do during the trip.

In planning for your investment future, this longer journey requires goal setting, discipline and should include using a skilled navigator to advise you and your family, as advice will frequently be needed. If investing is not your area of expertise, a trusted advisor will help you handle volatility and constantly changing markets.

While traveling, you may incur challenges that require adjustments. You may be hit with bad weather. You may have flight problems. Have you planned for these kinds of contingencies? How well do you handle change?

In investing, we know that the unexpected should be expected, but most investors don’t plan for this. Our philosophy and investment strategy alleviates a lot of these types of issues, as we recommend broadly diversified portfolios and discuss your tolerance for risk in advance.

In the last week, two events occurred which significantly affected certain investors.  The unexpected did occur.

Some investors who desire high current income from their portfolio (they focus on yield) invest in energy master limited partnerships (MLPs). Last week, many of these MLPs lost 10% because of a federal regulatory decision which will significantly reduce their cash flow. This was not expected and the underlying investments not only incurred large losses in value, but their future income distributions may be cut. These investors have been hit with a double whammy, as they lost principal and their income may be reduced.

Facebook lost approximately 10% of its value in the past week due to the disclosure that certain data was released to other companies.  While Facebook has been an outstanding stock and is held within the large company mutual fund which we recommend, a decline like this shows the risk of owning just a few stocks, rather than many.

Some people purchase vacation homes or are attracted to buying a time share after only a few visits to an area. Years after buying the time share or 2nd residence, the initial luster may wear off. You may tire of visiting the same place every year. The beach that once seemed exciting becomes routine. The restaurants don’t change. You miss the variety of seeing new things and having new experiences. While the logic of acquiring the vacation home may have made sense initially, after many years, it may no longer be optimal for you. But now you are stuck with real estate that may not be so easy to sell. In this case, change may be hard.

We see a similar pattern with many others we meet with (non-clients) who have held what we refer to as “legacy stocks” for decades. These are stocks which may have performed well for many years, but have significantly underperformed broad stock market averages for numerous years. Some of these stocks have not grown or even declined over the past 5-10 years, while the broad US and global stock markets have increased dramatically. They may no longer be optimal investments. Examples of these would be companies like GE, Proctor & Gamble, General Mills, IBM, many retailers and others in industries which have faced stiff new competition or have not adapted to change in the economy. Companies like Ford, Coca-Cola, Pfizer and Merck have either hardly increased in value over the past 5 years or have increased, but far less than broad market averages.

This is where adaptability and being open minded is vital. Are you willing to consider new or different investment approaches? To our valued clients, we appreciate that you were willing to consider our investment strategy, which at one time was new to you.

For those who hold these types of legacy stocks, or focus mainly on the dividend or yield of their investments, we encourage you to be open minded to other investment strategies. You may have unrealized capital gains and don’t want to incur capital gains taxes. You may like the dividends you receive, but they may decline in the future, as has occurred with GE. As we will discuss in a future blog post, focusing on your capital and the total return of your investments is much more important than your annual dividend income.

As your travel plans may have to change mid-trip and you may need to adapt for the duration of the trip, it is important to be open to reviewing your investment strategy. You should be willing to review if the companies you own have adapted and will be optimal as the economy is always evolving and changing. What may have been a solid strategy 10 or 20 years ago may not be the optimal strategy for the future. Our globally diversified investment strategy is structured so that you can benefit from changes in the economy, without subjecting your portfolio to unnecessary risk.

 

 

 

 

 

Uncertainty and Financial Planning

The future is always uncertain.

A simple concept. But it can be difficult to live with and can make financial planning challenging.

However, a close relationship with a skilled and trusted financial advisory firm can reduce your concerns and anxiety about future uncertainty.

Our role as a financial advisor is to assist you, through conversations, information and analysis you can clearly understand, so you can effectively deal with the realities of investing and your future. We want you to be able to live (and sleep) comfortably with the uncertainties of the financial world.

If you want to benefit from the rewards of the stock market, you will always have to deal with uncertainty. You will have to become comfortable with volatility. Our diversified, rationale and understandable investment strategy can help you deal with investment uncertainty.

We are pleased that we have clients who tell us they have been able to experience market ups and downs without worry. This tells us we have succeeded in helping them.

Uncertainty can take various forms, depending on what occurs in your life as well as in the world.

Let’s look at retirement. For many people, this is a potential source of uncertainty and anxiety.

Consider all the unknowns. You don’t know how long you or your spouse will live. You don’t know what future investment returns will be. You don’t know what your cost of living will be and how much it will increase every year. You don’t know what health care or senior living costs you will incur. You may want, or need to, assist your children or grandchildren in the future.

How can you resolve all of these issues and uncertainties?

We provide information, starting points. Understanding. Have discussions. Run projections. Evaluate different options, such as when you will retire and when to begin taking Social Security.

We work through these issues and factors with you. Over time, we analyze your sources of income, your assets and other variables and prepare financial projections. Through discussions and meetings, you will develop greater comfort and confidence….and have less stress about your retirement planning. You will get more comfortable dealing with the uncertainty of the future.

No matter what stage of life you are at, you will face financial decisions which we can assist you with. We can help you make better and more informed decisions, even in a world filled with uncertainty.

We can help you with your 401(k) investment selections. We can advise you on house decisions and mortgage options. As you save for college for a future generation, as a parent or grandparent, we can guide you on the best saving methods and investment choices (and there are many).

We integrate tax planning with investment management. This is a unique strength of our firm, as we are CPAs as well as experienced financial advisors.

As you get older, we help you deal with estate planning laws, which are frequently changing. What happens to your money and other assets in the future is vital and we have worked closely with many clients in this area. We provide significant value to clients in helping them with their estate planning and charitable giving.

If we advise the future generations of your family with their investments, you will have the additional sense of comfort of knowing that their investments are being well managed, now and in the future.

The financial world is continually changing. Tax laws change. Investments are inherently uncertain and volatile. We strive to provide you with advice and guidance so that you can effectively deal with all these forms of uncertainty.

Handling Market Gains

The first few weeks of January, 2018 have begun with strong gains in nearly all global stock asset classes. This follows the significant gains of US and International stock markets in 2016 and 2017. These gains have rewarded many investors.

We want to remind you of some important statistics and how we handle market increases for our clients.

Over the long term, it is normal for the S & P 500 (large US stocks) and many other markets to decline more than 20% in 1 out of every 5 calendar years.

  • However, the S&P 500 has not had a down calendar year since 2008. So there certainly has not been a 20% decline in the past 5 years. While we recommend a globally diversified portfolio which owns many more asset classes than the S&P 500, this data is still very useful for informational purposes.
  • This does not mean that we expect a major decline in the near term, but we want you to be prepared for such a decline.
  • A major decline, such as 20% or more, is not an “if”…. it is a matter of “when” the next large decline will occur.
  • Historically, these declines are temporary, as the markets eventually climb higher.

It is historically normal for the S & P 500 (large US stocks) and many other markets to decline approximately 14% at some point during most calendar years. This is called an intra-year decline.

  • While the market may rise for a calendar year, there is usually a peak to bottom decline averaging 14% at some point during most years.
  • There has not been such a decline since early 2016.
  • We cannot predict if there will be such an intra-year decline in 2018, but we want you to be prepared for it.

We provide advice to our clients for the long-term. We determine your individual stock allocation based on your personal goals, as well as your need, ability and willingness to take risk.

By having a stock allocation suitable to your circumstances, we enable you to benefit from the gains of the stock market as well as limit the downside risk of exposure to losses. Further, through the discipline of rebalancing, we do not allow the gains of the market to dramatically increase your risk. We feel this is a significant differentiator of our firm, on your behalf.

For example, if we agree that your target stock allocation should be 50% of your portfolio, we would invest 50% of your portfolio into globally diversified asset class stocks funds. As the markets increased, we would not allow the stock percentage of your portfolio to increase far beyond your desired stock %, such as to 60-70%, or even higher, keeping in mind tax and other personal considerations.

We saw clients of our past CPA firm whose advisors permitted their stock allocations to grow unrestrained during the late 1990s (we were not yet investment advisors at that time). People would not sell their hot tech stocks and allowed their stock allocation to grow far beyond what they intended (or what was really in their long term best interest). Then they faced huge declines in the early 2000s, when these stocks plummeted.

To allow your stock percentage to grow unchecked would be subjecting you to more risk than we agreed was necessary. We are very disciplined and unemotional about this concept. As the market gains increase the value of your portfolio, we monitor this and gradually recognize gains by selling the best performing stock funds and invest those proceeds into fixed income (generally less volatile investments).

This is a major advantage of investing in mutual funds over individual stocks. It is frequently difficult for people to sell individual stocks, as they get very emotionally attached to them. When is the right time to sell Netflix, Apple, Amazon or any other stock? Who knows? How can anyone consistently know the right time to sell an individual stock?

We discuss with our clients that we cannot predict the future. We accept this as a reality. We cannot accurately time the market. We do not believe anyone else can successfully predict both the top and bottom of the stock market, consistently and accurately…. over the long term.

But we do accept the reality that the general trend of US and global stock markets is up. So if you put these concepts together (we don’t try to time stock markets and the general trend of stock markets are up), these work to your long-term advantage.

To put it simply, you are far better off having been invested in stocks over the past number of years, at whatever stock allocation made sense for your personal situation, than not having been in the market because you had “concerns” or you were “waiting for a correction” (decline) which has not occurred.

Five years ago, the S&P 500 was around 1,500. Today, it is almost 90% higher, at around 2,840. When (not if) the markets do decline from these or even higher levels than now, and even if it is a temporary decline of 20% or more, you would still be way ahead of where you would have been years ago if you had not invested in stocks. Again, we recommend investing in a globally diversified portfolio of stock funds and not just the S&P 500, so this is not an illustration of our performance.

 

This week’s takeaway: You will be a more successful long-term investor by being disciplined and generally sticking to a pre-determined stock allocation. When the market increases significantly, and your stock allocation grows, it is best to rebalance back to your stock allocation percentage (usually by selling some stock funds). This is a winning long-term strategy.

Interest rate changes: what you should know and do

Interest rates have been very low for years. But meaningful changes are occurring.

The 2 year US Treasury note yield increased from 1.20% at the end of December, 2016 to over 2% last week. On a relative basis, that is a huge increase.

According to the Wall Street Journal, this is the first time the 2 year Treasury note has been above 2% since 2008.

This means that you should no longer be satisfied with having significant money in the bank earning .01% or some ridiculously low interest rate close to zero.

You can now earn interest on short term bonds or certificates of deposits that should be somewhat meaningful to you.

Importantly, you should make sure that you do not have significant cash that is not earning interest, or hardly any interest, such as in a bank checking or savings account.

If you have money in an account that is earning nothing or next to nothing, you should contact us to discuss whether we can help you to earn more on this money.

Money market fund returns, or accounts where you have immediate access to your money, are still very low. However, we can provide you with alternatives that offer liquidity within a few days on conservative fixed income investments.

Sometimes small numbers, even 2%, can have a material impact. For example, if you have $200,000 earning nothing, you could gain thousand of dollars of interest income per year.

Give us a call and let’s talk.

The general consensus is that the Federal Reserve will increase short term interest rates 3-4 times this year, .25% at a time. This would likely mean that short term rates will be .75% to 1.00% higher a year from now.

The yield curve is flattening, meaning the difference between short term rates and long term interest rates is decreasing.  Currently, the 2 year US Treasury Note yields around 2%, whereas the 10 year US Treasury Note yields 2.55%, a premium of 0.55% for the longer maturity.  We do not know if this will continue, but for today, it means that if you are a borrower, we would still recommend keeping a mortgage and generally not pre-paying your mortgage payments.

If you are in the market for a new house or mortgage, we still consider mortgage rates to be very low historically. We feel that taking a mortgage today at these rates will prove to be an excellent financial decision for the long term.

The tax law that was enacted at the end of 2017 did make some changes to home related borrowing. Home equity loan interest is no longer deductible for 2018 and beyond, even if the loan was obtained prior to the law. If you are considering borrowing money for home renovations, a car purchase or other reasons, we would still recommend considering a home equity loan, as the interest rate may be better than other loans. We also recommend you to have a home equity loan, if you do not have adequate emergency cash reserves, just to be prepared.

Further, the new law limited mortgage interest deductibility to interest on the first $750,000 of a mortgage loan. Depending on your personal circumstances, we may still advise you to borrow more than $750,000 on a mortgage, as rates are historically low.

 

This week’s takeaway: Financial advice must be given based on the current environment and the factors involved never remain constant. That’s why you should talk with us before you make financial moves, as interest rates and tax laws are always changing.

Questions to Ask Your Financial Advisor – Part I

One of the best personal finance journalists in the business, Jason Zweig of the Wall Street Journal, wrote a column** last Saturday stating that “the burden of finding someone who will act in your best interest is on you.

“The obligation of those who give investment advice to serve clients, not themselves, is called fiduciary duty,” Zweig wrote. Our firm always acts in this fiduciary manner.Many brokers and other advisors do not. This makes a real difference, whether you realize it or not.

Zweig’s column provides 19 questions to ask your advisor and recommends listening for the best answers.

We thought it would be informative to you, our clients and others, to provide his exact questions and our answers in this and a future blog post.

If you are a client of our firm, we hope you find our answers re-assuring and comforting.

If you are not a client of our firm, discuss these questions with your current broker or advisor, and compare their answers to ours. See which one makes you the most comfortable and confident that your interest comes first. Always.

  1. Are you always a fiduciary and will you state that in writing? Yes, we have always acted as fiduciaries and will always continue to do so. As both principals of the firm are CPAs, we are required as CPAs to always act in a fiduciary manner. This means that we always act in our clients’ best interest, ahead of our own interest. The Investment Advisory Agreements with our clients will be amended this fall to specifically state that WWM will act as a fiduciary to each client.
  2. Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services? No. Our only source of compensation is from the advisory fee our clients pay. We are not paid commissions by any mutual funds. We do not earn more to recommend one type of investment over another. We are different than brokers who may recommend or sell annuities and certain mutual funds, which the brokers may be paid up front commissions of 5-8% and then ongoing compensation as you hold the product (whether you know it or not).
  3. Do you participate in any sales contests or award programs creating incentives to favor particular vendors? No. Never have and never will. We do not receive any compensation from a vendor for any investment which we may recommend. Many brokers receive these types of incentives.
  4. Will you itemize all your fees and expenses in writing? Absolutely yes. We discuss our advisory fee in initial meetings and it is clearly stated in our Investment Advisory Agreement, which you sign when you become a client.
    • In comparing advisors or different firms, you should also review the cost of the underlying investments. We can clearly provide this to you. We recommend stock funds or ETF’s which are among the lowest cost mutual funds in the industry. The average internal cost (expense ratio) was 1.28% for stock mutual funds in 2016.*** We would use individual bonds, which would have no annual expenses or a very low cost bond fund, depending on the size of your portfolio. Other advisors may be much less transparent in this area….and usually much more expensive.
    • In almost 15 years of business, we have never been more expensive in comparing total costs with a prospective client, when all advisory fees and expenses are included.
  5. Are your fees negotiable? We have a standard fee schedule, which begins at 1% for up to the first million of assets which we manage. That fee declines as assets under management increase. We may vary from our fee schedule in certain circumstances, based on the specific situation.
  6. Will you consider charging by the hour or retainer instead of an annual fee based on my assets? No, we do not plan to change the way we charge. We are interested in mutually beneficial long-term client relationships. We want to be very involved with our clients. We want our clients to contact us when they have issues or financial questions to discuss. If we charged by the hour, clients may be hesitant to consult with us as frequently. As stated above, we have found that our fees and the total costs incurred by our clients are very competitive.
  7. Can you tell me about your conflicts of interest, orally and in writing? We strive to be as free from conflicts of interest as possible. As Jason Zweig points out in another column, almost every business has some type of conflict of interest.
    • We do not have the conflicts of interest that many brokers or Financial Consultants may have, such as being compensated more for recommending specific investments or annuities. We advise our clients based on what is in their best interest, not ours.
    • We would have a conflict of interest when advising someone whether they should use money from their investments rather than take a mortgage to purchase a home, for example. We would have a conflict, as we are compensated based on the size of their account. In this situation, we provide the pros and cons, based on the specific situation and recommend what we feel is in that client’s best long-term financial interest.
    • We have frequently told clients to spend money to take trips and gift money to relatives or charities, all of which was in their best interest, but to our financial detriment. We want clients who work with us for the long-term and that means striving to always provide advice which is in their best interest.
  8. Do you earn fees as adviser to a private fund or other investments that you may recommend to clients? No.
  9. Do you pay referral fees to generate new clients? No.

This Week’s Takeaway: Our financial interests are completely aligned with your financial interests. Our only form of compensation is the advisory fee paid by our clients. If you make money, we make money. If your account declines, so does our revenue. These statements cannot be made by many brokers and financial consultants at large financial institutions and banks. Ask these questions. And listen carefully to the answers.

 

**The 19 Questions to Ask Your Financial Adviser, WSJ, August 26, 2017  (link maybe blocked by WSJ paywall)
***2017 Investment Company Factbook, icifactbook.org

Why You Should Have A Written Investment Plan

This could be 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 may help you be more confident and have 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 after a certain asset class performs very well, such as US small value 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, strives to buy low and sell 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 should provide a good outcome.

 

Being Adequately Prepared

Boaters prepare and practice for emergencies. The Boy Scouts motto is: be prepared.

As investors, we all need to be prepared.

As we discussed last week, the long-term average annual return of US large company stocks is 10%

However, each year’s return generally varies from this 10% average. One year may be up, the next may be down. There are years of small gains and others with large losses. Stocks can go down for month after painful month, with seemingly no end in sight.

This is the inherent risk in owning stocks. This is the fear factor. The reality is that broad stock markets can lose 20%-30%-40% or more in a year or two. Individual stock losses can be even worse.

This is why we work with you to develop an appropriate asset allocation to stocks, so that you can emotionally and financially handle the temporary losses (stock market declines) that will be incurred over time.

Let’s focus on two key points:

  • Temporary losses (declines)
  • Declines will occur at various times.

To be a successful long term investor, you need to be prepared for the extent of the declines which will likely occur in the future, just as they have in the past. The timing of the declines are not predictable, just as it is not possible to accurately predict when the gains will occur.

         We do not recommend doing this.

The declines will only be temporary, even though it does not feel this way in the midst of a significant market downturn…unless you panic and sell all of your stocks and go to cash.

Despite periods of temporary losses, the long-term trend of broad stock market averages is clearly positive. To get to that 10% average annual return I cited earlier, the down years are included.

Historically, there are far more positive years than down years. This is why it is rewarding to remain invested in stocks.

However, at some point during most years, there are intra-year declines of (10-14%), on average. This happens even in years which turn out to be very good ones. For example, last year was a good year for stocks and there were two periods of significant declines. You need to be prepared to handle these types of declines every year.

But wait. There’s more. And it’s worse. On average, there have been major declines of greater than 20% every 5-6 years since World War II.

So why are we reminding you of this vital historical information?

We are providing you with this information so you will be better able to handle the future temporary declines when they occur, as they can’t be predicted. But we know they will occur. We know there will be some kind of crisis. It may be caused by a political or economic event. It may be a “correction,” which is just a natural decline in stocks, on the stock markets’ long-term climb to higher and higher new highs.

We want you to be emotionally prepared for these temporary declines, so you can follow our advice and remain invested according to your investment plan. Remember, US stock markets, as well as International and emerging country stock markets, are made up of individual companies. These companies have real worth, assets, earnings and the ability to adapt.

When the markets declined in 2007-2009, some companies did go out of business. But in a broadly-based globally diversified portfolio such as we recommend, the broad decline was temporary. The vast majority of public companies and their stocks recovered and rebounded to much higher levels than before the crisis. The rebound began much before most people were confident in the economic recovery.

When the next downturn or crisis occurs, we must remember these lessons and facts.

And when the downturns do occur, and they will, we will be here to discuss and reinforce these concepts. We will provide you with the confidence to stay invested. That is exactly what we did for our clients during 2007-2009.

This is our role. This is our value. We are here to be truthful and realistic with you. We want you to be prepared.

We hope this is truly helpful to you and your family, today and in the future.