In the late 1990s and early 2000s, it was different. We were full time CPAs, not financial advisors. We worked closely with our tax clients and they often requested that we review their investments and join them in meetings with their brokers.
Now, we are financial advisors, managing investments for individuals and families, helping you meet your financial goals and providing guidance with other financial matters.
There is one former client’s investment experience from my CPA days that I will never forget. This is one of the instrumental events which led to the formation of our financial firm. You benefit from this “experience” and the lessons learned, in the advice you now receive from us.
A past client I will call “Joe” was a successful doctor in the late 1990s who was planning to retire soon. He had accumulated a good amount of money and expected to be comfortable during his retirement years.
His brokers were relatives. Thus, you would think they would have been extra careful with managing his money. In the mid-1990s, he had a stock allocation of approximately 50%. During the late 1990s, he was heavily invested in technology stocks, as many people were in those days. The tech stocks kept rising and he was enjoying the ride.
By 2000, I was getting concerned. Joe had an adequate amount of money to gradually begin retiring. I met with him and his wife a number of times and wrote him letters of caution during 2000 and 2001. The stocks, and the technology stocks in particular, had rapidly increased and the stock allocation in his profit sharing plan grew to beyond 85% in 2000. I recommended that he reduce his stock allocation. Take some profits. Be much more diversified. Please, sell some of the tech stocks.
But Joe did not listen to me. His advisors held onto the stocks. His portfolio got crushed as the S & P 500 and NASDAQ (mostly technology stocks) went down 3 years in a row during 2000 – 2002. As a result, he couldn’t retire when he wanted to. He went from what should have been a very comfortable retirement to needing to work for more years, in an attempt to rebuild his savings.
Watching and advising people during those years, but not being able to actually manage clients’ investments, were key in the decision to create what is now WWM. We remember the past and learn from the mistakes we observed.
This time is different. Those are four important words, which are often mentioned by people regarding their investments. What is different now?
We often say that we cannot predict the future. We truly believe this. Can you predict the future? Thus, one of our core responsibilities is to provide you and your family with guidance and at the same time realize we are providing guidance, knowing that the future is inherently uncertain.
But if you are a client of our firm, this time will be very different for you than it was for Joe, due to the many disciplines and investment strategy that we utilize.
All our clients have written investment plans. Joe did not have an investment plan of any type, as we define it. Put simply, how much risk did he need to take? If Joe didn’t need to be really aggressive to meet his retirement needs, why did his brokers allow his stock allocation to be over 80%? We work with you to determine a stock/fixed income allocation based on your financial needs and goals, your risk tolerance and timeframe. This is the basis for a written investment plan.
We rebalance. As the stock market increases, we sell stocks and take profits (called “rebalancing”), so you can remain in alignment with your investment plan. As Joe did not have an investment plan, his advisors didn’t sell or take profits.
Once you have an investment plan, say 50% in stocks and 50% in fixed income, we monitor this. If stocks increase, as they have done over the past few years, then we would not allow your stock allocation to continue to grow to 60%, 70% or 80+%, as that is more risk than would be in your best interest.
We recommend being globally diversified, among many asset classes. Joe was not diversified. He was very heavy in the hot stocks of the late 1990s, owning AOL, Intel, Cisco and numerous growth funds loaded with similar types of companies. He was not adequately diversified. He had limited or no allocation to US large value or US small value stocks, International stocks, real estate or emerging market stocks.
Owning a globally diversified portfolio does not prevent major losses. However, as various asset classes often move differently, it is a rational way to structure your portfolio. For example, there is significant academic evidence that a globally diversified portfolio should outperform one that consists solely of US Large companies. See our blog post, Benefits of Global Diversification, for further information.
Being globally diversified means your portfolio will perform differently than major US market indexes, and quite differently some years. We expect this to occur. As the overall portfolio we structure is very different than the S & P 500 (an index of 500 large US companies), the performance of your portfolio should be different than the S & P 500. As we recommend allocations to small, value, International and Emerging Markets, all which have greater long-term expected returns than US Large companies, this should be to your benefit in the long term.
Joe was not diversified, as we define it. If we had a firm in the late 1990s and you were a client, we would have underperformed the Large Cap indexes. This may have tested your patience with our investment strategy. But if you were patient and disciplined, you would have been rewarded in the long term, as our investment strategy would have done very well in the succeeding years. When US Large and technology stocks got crushed in 2000-02, small and value stocks did very well.
Why are we discussing this? Because this time is not different. What is different is your advisor and our advice.
This time can be different for our clients because:
- you have a written investment plan, based on your needs and risk tolerance
- we rebalance to keep your portfolio aligned with your plan
- you are very diversified
- we are disciplined and help you to be disciplined
- we work with you so you will adhere to our successful long term investment strategy