If it’s too good to be true….

Blog post #481

Bernie Madoff, who ran one of the largest Ponzi schemes ever, died this week in jail at age 82. He defrauded investors of almost $65 billion in paper losses, which came to light in 2008 during the Great Financial Crisis.

There are lessons to be learned from the Madoff incident, as well as how the regulatory system which governs investment advisory firms like ours changed for the better.

Madoff bilked many wealthy families, in NY and Florida particularly, as well as charities, institutions and endowment funds in the US and globally. They were lured by his years of positive returns and reputation as a leader on Wall Street.

The key lesson is that Madoff “reported” years and years of only positive returns to his clients. They became more confident of his firm and referred others. Madoff never reported down periods once his Ponzi scheme got going in the 1990s. That is not realistic.

We often talk about when you invest in stocks there will be frequent time periods that your investments will go down. We all know that, but these very wealthy individuals and institutions kept believing that Madoff was so good that he never lost money.

Our advice to you is that if returns are too good, or seem consistently too good, you should look at that investment concept/manager/advisor very carefully and with lots of skepticism.  No one can invest in the stock market and always generate positive returns.  No investment only goes up and never goes down (that we know of).  This is advice that you should always remember and discuss with your family, especially your kids or grandchildren, as they learn about investing.

After the Madoff scandal, the Securities and Exchange Commission (SEC), which governs our industry, encouraged Registered Investment Advisers (RIAs) to place their clients’ assets in the custody of an independent firm (like Fidelity or Schwab), unlike Madoff did. This is what is referred to as the custody rule. WWM does not have custody of your assets. When you open an account with our firm or make a future deposit, you write a check payable to the custodian (or wire funds directly to the custodian). You will never write a check to WWM. The funds are paid directly to the custodian, such as Fidelity Investments or Schwab. Madoff did not use an independent custodian like Fidelity, which is how he was able to pull off the Ponzi scheme.

When you want a disbursement of your assets, the custodian will never write a check to WWM.  The funds are only disbursed to the account holders, their bank account or if you want a check sent to another party, multiple forms are required for security purposes.  When you open an account, want to link your bank account to your custodian or get check writing privileges, there is always lots of paperwork.  All these steps, documents and requirements are to prevent a Madoff-like scenario from occurring again.

For nearly all of our client relationships, WWM is considered to not have custody over these assets. The assets are held at an independent custodian (Fidelity or Schwab) and WWM has no control or withdrawal privileges over these accounts.

There are situations where RIAs such as WWM can have “custody” rights for certain clients, at the client’s request. For example, WWM (or the firm principals) have been named as Trustee for several client accounts, at their request or in their estate planning documents. In these situations, we still use an independent custodian, but we are considered to have custody, or control of client assets. Because of the SEC custody rules, we must annually disclose these accounts to the SEC. WWM is then subject to an annual surprise exam by an independent CPA firm, to protect the investors’ assets and verify that those assets actually exist. This surprise examination provides another set of eyes on the clients’ assets, thereby offering additional protection against the theft or misuse of funds.

We take our responsibility to invest and safeguard your assets very seriously. We want you to know that we are diligent about adhering to our regulatory obligations. We know that Fidelity and Schwab work hard to maintain their custodial relationships with you very carefully.

We hope that a Madoff-like scandal never occurs again, but we know there will be other fraudulent incidents in the future. There are constant cyber-security threats ongoing all the time. We must all be careful and diligent.

We work hard to build our trust with you. And we plan to keep that trust.

Talk to us. We want to listen. We want to assist you, your family members and friends.

 

 

What a quarter and what a year!

Blog post #480

As we all know, the last 12 months have been unlike any that we have liked though before.

With further vaccine production and distribution, hopefully the US and world will gradually return to more normalcy in the coming months and years.

Financially, the past 12 months and the past quarter have provided excellent returns for investors of diversified portfolios.

We each have stories of how we have adapted to the Covid environment or how we have changed things in our lives. For me, purchasing a Peloton bike after Thanksgiving 2019 proved to be fortuitous. I have been more disciplined to ride consistently, as well as adding stretching and strength training, than I ever have in my life.

I have developed a discipline and routine that I want to continue for years to come. Exercising must be a lifetime commitment. This should be a habit that I continue for weeks, months, years and decades to come, similar to the best practices for long-term savings and investing.

Just as in investing and striving to reach financial goals, my exercise practice has been based on:

  • developing a plan,
  • being disciplined about exercising,
  • diversifying my exercises and types of rides,
  • and make adjustments as needed, over time.

During March 2020, as Covid cases worsened throughout the US and world, global financial markets dropped significantly…and then started an incredible rebound on March 23, 2020 (way before the economic recovery began!!).

As we have written about before, we recommended to our clients to remain disciplined throughout the Covid crisis.  Stick with your asset allocation plan.  Buy low.  Rebalance by selling fixed income and gradually purchasing stocks.

One year later, as we reflect on the past 12 months, being disciplined and sticking to your plan has been financially rewarding. Just as we benefit by doing different types of exercises (cardio and strength, not just cardio!), having a diversified portfolio has been rewarding.

Since the market bottom, but particularly since the beginning of November, 2020, the factors (or asset classes) that our firm emphasizes have far outperformed the broad US market indices, such as the S&P 500 or Dow Jones Industrial Average. While large US growth stocks have done well for many years, late 2020 and the first quarter of 2021 have been outstanding for US small company stocks, US large value and US small value stocks. So far in 2021, International value, small and small value company funds have far outperformed US large growth stocks.

A financial academic would believe that the benefits of owning stocks, called the equity premium, should exist every day. That would mean that they expect that stocks should be positive every day. But we know that over the short term, or sometimes for years, this does not occur. Stocks can be very volatile in the shorter term. However, over long periods of time, the equity premium does exist, as the benefit of owning stocks for the long term far exceeds other investment classes, such as cash or fixed income (bonds).

We recommend globally diversified portfolios, which means that we recommend stock investments in nearly all broad sectors, such as large and small, growth and value, US and Internationally. But we recommend a tilt, or more exposure, to small and value companies, as well as investing internationally. We recommend this because these asset classes provide greater expected returns (premiums) and diversification benefits, than just owning US large company stocks.

By being patient, and rebalancing to maintain exposure to these varying asset classes, we are now seeing the benefits of remaining disciplined and owning small company stocks and value stocks, as these factors are providing significant rewards in their performance.

All these are factors that help you towards your financial goals.

I need to do different types of exercises to remain fit and healthy over the long-term. In our opinion, your portfolio needs to be well diversified for long term success.

I need to be disciplined to exercise many times per week. You need to be disciplined to be a successful investor.

I need to change my workouts as I get stronger or want to focus on different parts of my body. We need to rebalance and make adjustments to your portfolio, based on changes in your life and changing market conditions.

We wish you good financial and physical health in the future! We are confident that we can assist you with your financial needs, but we are not yet prepared to expand into exercise training (though Michelle Graham may be able to help you)

Talk to us. We want to listen. We want to assist you, your family members and friends.

 

A Philosophy You Can Stick With

Blog post #479

“The important thing about a philosophy is that you have one you can stick with.” 

~David Booth, founder and chairman of Dimensional Fund Advisors (DFA).

That was the beginning of a blog post I wrote in July, 2013, almost 8 years ago. The philosophies and concepts from that blog post have endured the test of time.

Prior to founding this firm in 2003, after the tech bubble crash, I spent many years researching how best to provide investment advice. How would WWM be different? How could we provide a better experience for our clients than they were having with their existing financial advisors or by investing on their own?

I read extensively. I went to conferences. I attended my second AICPA Personal Financial Planning conference, in Philadelphia in 2001. I went from exhibitor to exhibitor and talked to many firms. And then it happened. I found the book that would change my business life, and the lives of our clients. It was my “aha” moment.

On the Friday afternoon train ride after the conference ended, I started reading “The Only Guide to a Winning Investment Strategy You’ll Ever Need,” by Larry Swedroe. I could not put it down. I read until late Friday night and throughout the weekend. I had found an investment philosophy that we could stick with. Today, we still strongly believe in many of those concepts.

For almost 20 years, we have strived to provide clients with an investment and financial planning experience that would enable them to meet their financial goals. We have used a consistent market philosophy and systematic investment process that provides transparency and clarity, which can increase your confidence that these strategies will deliver upon their objectives over time.

Many people view investing and the stock market as trying to make accurate predictions or forecasts.

They may ask, is now the right time to get into the market? Is now the right time to buy Apple, Google or Netflix? Is it safe to invest now, since the economy seems to be recovering? Great, in which case I’m going to move money from cash into stocks. But what if the market has already made its big move? How do you know when is the right time to buy or sell?

We take a different approach. One that is rational, understandable, disciplined and consistent. Instead of trying to make predictions and guess which stocks will do best, our strategies rely on decades of research into the expected returns that have benefited investors over the long term. Having a realistic view of the markets can help take the guesswork out of investing. You should be able to relax more by knowing that your strategy is built on a solid philosophical framework and a strong track record.

Instead of trying to predict the market, we work with you to determine an appropriate allocation to stocks, based on your needs, goals, timeframe and willingness to take risk. We view your life and your finances in a comprehensive manner and try to help you with advice as you need it.

Once we determine an appropriate allocation to stocks based on your individual circumstances, we design a broadly diversified portfolio of stocks which covers many asset classes, both in the US and globally. We strive to increase your expected returns by giving greater weight to small cap, value and high profitability stocks in US and International stocks. We don’t recommend this because we think these asset classes will do better over the next 6 months, but because they should do better over the long-term.

We know the future is uncertain. This is why we recommend broadly diversified investments, in both stocks and fixed income, as well as utilizing mutual funds and ETFs with very low costs. We strive to control those things which are controllable.

We utilize investments with clearly defined parameters, so that we can help you to understand the range of outcomes and what you are invested in. We do not invest in hedge funds or alternatives that are like black boxes, where we don’t know what’s inside. This transparency should enable you to invest with greater confidence.

Although the US stock market has returned about 10% a year on average, returns for individual companies and individual years can vary wildly. It’s always important to look at the big picture. A huge win on an investment bet today doesn’t mean much if you lose it tomorrow.

We spend a lot of time talking with our clients. We educate our clients about our philosophy and how markets work. If you are retired or withdrawing from your portfolio, we work with you to develop a withdraw strategy that meets your goals. We want you to realize there will be down markets, as they occur every 3-5 years, on average. We want you to be prepared to handle these periods, so you can stick to your long-term financial plan. We want you to be able to stay in the markets. Investing is a lifelong journey.

Having a philosophy that we believe in enables us to be more disciplined and helps you to adhere to your financial plan. We are fee-only financial advisors. This enables us to be independent and always act in your best interest.

If you have an investment philosophy you can understand and stick with, you can focus on activities within your control. You can remain diversified, minimize your fees and costs, and determine your savings rate (or withdraw plan), as well as your long-term asset allocation plan.

We hope that sticking with our philosophy helps you to feel comfortable and secure.

Talk to us. We want to listen. We want to assist you, your family members and friends.

Looking forward and backwards

Blog post #478

We often find things when and where we least expect to.

This past weekend, I attended a Bar Mitzvah ceremony for my cousin’s son.  I was one of less than 20 people who were physically in attendance.  Instead of hundreds gathering, it was mostly virtual.

Prior to the service, I read a few pages of quotes at the beginning of the prayer book. Two of them particularly resonated with me. While these are not directly related to financial or investment matters, each could be relevant to your financial well-being and your financial future.

Life is a continual process of getting used to the unexpected.

~Unknown

We know that the future is unknown and unpredictable. Change and unexpected events are part of our personal lives, as well as in financial markets. The world keeps changing. You must make decisions all the time. Some are big and important, some are small. Change is constant. We can help you deal with change and the unexpected.

Our firm’s investment and financial planning philosophies are rooted in accepting that we can’t accurately predict the future. We recognize that market timing and individual stock picking are not the best strategy for the core of your long-term portfolio, to enable you to reach your goals.

We plan and develop strategies, such as how much risk you need to take, that are not dependent on our ability to predict the future.  These should help you to get used to the unexpected things that occur in your life, as well as in the world and the financial markets.

Life can only be understood by looking backward.

But life must be lived by looking forward.

~ Menachem Mendel, 1800s Rabbi

This is logical and simple. Financial decisions must be made looking forward, but as this and the first quote tell us, we don’t know what the future will look like.

We don’t know what interest rates or inflation will be. We don’t know what broad stock market returns will be over the next 1, 3, 5 or 10 years.

We do know that we can learn a lot by what has happened historically and financially in the past.  We can use the past, which we study and try to understand, to provide you with advice and recommendations for the future.

  • We use historical financial data to help us develop financial strategies. We look to the past, to help us plan for your future.
    • Financial history shows that broadly diversified, global portfolios have outperformed the S&P 500 (US large companies) over the long-term. Thus, we recommend broadly diversified portfolios to our clients.
    • Financial data tells us that mutual funds and ETFs with much lower than average expense ratios outperform those with much higher internal expenses. Thus, we use less expensive investments when possible.
    • We know that interest rates are near historic lows, so you should be refinancing any debts that you have.
  • We know that risk and return are related, so we try not to take excess risk with fixed income investments, as these are the “safe” foundations of your portfolio.

We strive to provide you guidance and advice that will be timeless, that will be effective for years into the future. We don’t advocate fads. We stress diversification

A diversified portfolio may not be exciting at times, but it should help you reach and maintain your goals.

Talk to us. We want to listen. We want to assist you, your family members and friends.

 

Lifetime advice

Blog post #477

The advice is simple. Living it is much harder.

You should remain invested in the stock market for the long-term, regardless of what is happening in the world, in a diversified manner, at a level that is consistent with your need, ability and willingness to take risk.

This means you should not get out of the stock market in a significant manner or go mostly to cash, no matter what is happening in the stock market, economy, politics or other factors.

This means that if you are in the accumulation phase, when you have money to invest and have a long-term time perspective, you should keep investing in stocks on a regular basis, irrespective of what else is going on. This is what we do.

In general, you should only change your stock allocation when your financial or life circumstances change. This means that your stock allocation will likely change as your wealth grows and as you get older, but not due to external factors.

Why are we writing this? Because regularly investing in the stock market and sticking to your stock allocation, through good and bad, is some of the most important advice we can convey to you as financial advisors.

Some people struggle with these concepts. They may get very nervous during a downturn and want to go to cash. Others are hesitant to invest in the stock market now or at other times because they think the market is “overvalued,” at a peak, or for some other reason (like a “potential” oncoming recession or the fear of higher future taxes).

We feel you need to have a guiding set of investment principles and stick to them. For our firm, remaining invested according to your long-term plan is one of these core principles.

But sometimes, should we make an exception to our own core principles?

Last year was one of those times when we challenged our long-held belief. When the pandemic began and started spreading outside of China during January and early February, I became increasingly concerned about Covid. I began questioning if this was a time to sell or reduce client stock allocations. As Covid started spreading in the US in late February 2020, Keith and I talked about this extensively, for hours, over many days.

Was the onset of Covid a reason to try to time the markets? After much consideration, we determined that there was no way that we could time the markets successfully, as you need to determine when to sell (February 2020) AND be able to determine when to buy back into the markets. We had no way to rationally figure out when to buy back into the market. We knew this downturn was different than most prior downturns, but we also knew that most prior major downturns seemed unexpected and unique at that time. We decided to adhere to our core philosophy and recommended that clients remain invested.

  • In hindsight, we made the correct decision by staying in the markets. Instead of selling in February/March 2020, we recommended that clients should gradually begin buying stocks after the markets had dropped significantly.

We knew from past financial history that markets generally rebound way before “the all-clear signal” is readily visible. Stock markets tend to be very forward thinking. By the time it eventually seems “safe” to get back into the markets, the markets have usually already advanced much higher from their bottom.

This is exactly what occurred in late March, which was the approximate bottom for the S&P 500. The stock market rebound began when lockdowns in the US were just starting and Covid had not even reached its worse impact, medically or economically. We made the proper decision not to temporarily get out of stocks due to the Covid pandemic, as US and global markets have strongly rebounded since March 2020, to higher levels few would have predicted a year ago.

To be a better investor, you should try to understand the following concepts:

  • No one is consistently able to accurately predict the future of the stock market. Market timing does not work.
  • The long-term path of the stock markets, US and globally, are upwards.
  • Declines in the stock market are temporary. The long-term historical path for the stock market since the 1920s has been upwards, with declines along the way that have been temporary. We do not see any change in that long-term pattern.
  • Peaks in the stock market are temporary, as they are exceeded by higher highs. This means that at some point in the future, the highs of today will be replaced by higher levels.

So you are prepared in advance, we want to remind you what normal declines are in the stock market when you own a broadly diversified portfolio.

  • It is normal for stock markets to decline at least 10% during almost every calendar year, from top to bottom, at least once during a year.
  • It is normal that stocks will drop a lot, like 20%-30%-40%, or more, every 3-5 years.

Addressing these issues of market timing and continuing to invest on a regular basis are some of the most important services that we can provide in our relationship with you.

  • If these are concerns or issues for you, we would be pleased to discuss this with you. We can listen to each other and work through your concerns, so we can determine an appropriate stock allocation for you and your family for the long-term. That stock allocation should enable you to have the ability to remain invested and learn to get more comfortable, so that your money can work for you and to help you reach your life and financial goals.

We want to work with you to develop a financial plan that includes an asset allocation to stocks that you can live with, when markets are rising and when they are dropping. That is how you can be a more successful long-term investor.

Talk to us.  We want to listen.  We want to assist you, your family members and friends.

 

Source:  *27 Principles Every Investor Should Know, by Steven J. Atkinson (Illustrations by Dan Roam) July 2019

Why do we……?

Blog post #476

While many of you have been clients for well over a decade, some of you are newer to WWM and our investment philosophy. We want to help you to have the best chance to reach your financial goals. We hope this post provides you with a summary of why we adhere to certain philosophies and practices.

Why do we use mutual funds and ETFs, rather than individual stocks?

To provide you with the best chance for financial success, we believe it is better to own diversified mutual funds (or ETFs, exchange traded funds, which are used interchangeably in this post), and not a portfolio of individual stocks. Investing in only a few companies is much riskier, in general, than investing in the markets as a whole. It is also difficult to pick which stocks will outperform the market over the long-term. We believe that it is very difficult to identify successfully, in advance and consistently over a long period of time, which individual stocks will outperform the markets.

We strongly believe that investors should be well diversified in many respects (by size of companies, by industry sector and geographically), which mutual funds and ETFs can provide. For most of our clients the core of your portfolio should be in mutual funds or ETFs, even if you want to invest in a handful of individual stocks as well.

Why do we use “passive” stock strategies and not “active” managers? And what about index funds?

There are huge amounts of academic and financial data that show money managers who “actively” try to pick and choose stocks to buy and sell generally underperform their asset class peers over short- and long-term periods of time. These “active” funds tend to be much more expensive, which is a hard hurdle to overcome. They trade more, which adds to expenses and causes more taxes, compared to a buy and hold approach. See these past blog posts, 10 Things You Should Know and 10 (or more) Things You Should Know, where we provide more details on how few active managers have been able to outperform their respective benchmarks.

Thus, when developing a strategy to strive for long-term financial success, we follow the data that “passive” money managers generally outperform “active” managers. It is very difficult to identify successfully, in advance and consistently over a long period of time, which money managers and mutual funds will outperform. Active managers may have some hot years of outperformance, but very few consistently outperform their peers or benchmarks over long time periods, such as 5 or 10 years or more.

The funds we utilize are similar to index funds but different. Index funds must track a specific index and they have little flexibility. A passive approach allows for the diversification and buy and hold benefits of indexing, with additional flexibility, such as not being strictly tied to an index. For example, if an index fund had owned Gamestop in the past few weeks, the index fund would not have been able to sell, as they need to hold the stocks in the index they track. A passive fund would have the flexibility to sell Gamestop, as they don’t have to strictly adhere to a specific index.

Why do we believe in utilizing so many different asset classes?

We make many of our investment decisions based on historical academic data and investment research, along with our own investment experience. We recognize that no one can accurately predict which type of stocks (asset classes) will outperform another asset class over the long-term.

To structure a portfolio to reach your goals, whether your goal is to grow your portfolio or to be able to feel secure and maintain your lifestyle, we apply these concepts. We want your portfolio to be very diversified, as that reduces individual stock risk. Being diversified does not eliminate the risk of investing in stocks, but it reduces the likelihood of incurring huge mistakes that are hard to overcome.

Financial research shows that the following applies, over varying long-term time periods, some back to 1926:**

  • Small stocks outperform large company stocks, both in the US and Internationally
  • Value stocks outperform growth stocks, both in the US and Internationally
  • International stocks and Emerging markets stocks (of undeveloped countries) have outperformed US Large Caps during many time periods.

We tilt most portfolios toward these factors, while remaining broadly diversified. While this data may be true over long-term periods, say over 10 years or more, it does not mean these trends (“factors”) will apply all the time or every year.

What this means to you is that we do not invest in only the S&P 500, as other asset classes have outperformed the S&P 500 over long periods of time. Financial research shows that a broadly diversified portfolio should do better over the long-term than owning just the S&P 500, so we do that.

Why do we believe in global diversification?

We recommend investing globally for the same reasons. Financial research shows that over the long-term, a broadly diversified portfolio, which includes US and International stocks, as well as large and small company stocks, with both value and growth, has outperformed owning just the S&P 500.

For example, from the period 2000 – 2010, a globally diversified portfolio would have far outperformed the S&P 500, as that index did poorly for those 10 years, while many other asset classes did quite well. In recent years, the opposite has been true, as the S&P 500 has outperformed International stocks. But as the world is constantly changing, no one can know what sectors or regions will do best over the next 5-10+ years.

Thus, we recommend some International exposure for most clients.

Talk to us.  We want to listen.  We want to assist you, your family members and friends.

 

 

** Source: DFA 2020 Matrix book, with data through 12/31/19, as well as other information.

Market Update – January 2021

Blog post #475

As 2021 begins, the US and the world are very different than they were a year ago.

Financial markets continuously change in response to new information and unexpected events. Stock and fixed income prices move on earnings and future expectations.

What are we seeing and what are we doing?

The way that we manage your investments and strive to help you reach your financial goals are consistent and disciplined, with the flexibility to change as needed.

As uncertainty always exists, we recognize that no one, including us, can accurately and consistently predict the future. For example, no one could have predicted Covid in December 2019. Even if someone had predicted the Covid pandemic, we doubt that they could have predicted and accurately timed the rebound and strong gains in nearly all asset classes since the onset of Covid. Similarly, we cannot predict the continued impact of Covid, how successful/fast the vaccination process will be, or the impact of new Covid strains.

We remain committed to key investment principles, such as broad diversification across many asset classes, utilizing investments with very low costs, and active tax management (as applicable). These are all things that we can control and should benefit our clients.

Stock update:

Asset classes that are performing well so far in January 2021 are many of the same asset classes that performed well late in 2020 (see index definitions below). Over recent months, many asset classes are outperforming US Large stocks, as defined by the S&P 500, which is a reversal of US Large stocks outperforming most other asset classes during recent years. For illustrative and informational purposes, below are selected asset classes and return data for their respective indices that we recommend to clients:

Consider the significant gains in the sample of asset classes provided above, which have occurred since November 1. If we recommended getting out of the market or significantly reducing your stock exposure before the election, or shortly after the election, when many political changes became more likely, you may have missed out on these gains. This is why we encourage you to adhere to your asset allocation plan and focus on the longer-term, not on political proposals.

We do not make investment policy decisions based on political matters, such as potential tax increases or the size of the Federal deficit.  Financial markets, which include the stock and bond/credit markets, very quickly incorporate all known information into prices and valuations. The financial markets clearly know about the potential for personal income tax increases on high-income taxpayers and corporate tax increases, even though no one knows what proposals will become enacted or when they will be effective.

We will provide our clients with advice about these tax and other changes, as they affect each person or family. However, we do not recommend basing your long-term investment strategy on political matters, as the stock market has done well under both Republican and Democratic Presidents. There are so many other factors that impact the direction of stocks beyond just who is in the White House or what party controls Congress.

Given the significant gains in many asset classes since last March, and particularly in recent months, we are reviewing client portfolios for rebalancing (selling some stocks) for those clients whose stock allocations have exceeded their IPS (Investment Policy Statement) stock targets. This is the disciplined implementation of buying low (which we encouraged you to do starting last spring) and selling high, after significant stock increases.

We also want to remind you that stocks have increased almost straight up since early November. There has not been a significant decline in the markets (of 10% or more) since the major decline last February-March. We are not predicting a near-term decline but reminding you that 5-10% declines are normal. They frequently occur when you least expect them. You must always be emotionally prepared for these types of pullbacks, which are temporary, not permanent, and a part of investing in stocks.

We hope that information like this is helpful for you to adhere to your asset allocation plan, despite whatever uncertainty and changes are occurring in the world.

Talk to us.  We want to listen.  We want to assist you, your family members and friends.

 

 

*Indices used for the above asset classes are:
US Large stocks: S&P 500
US Large Value stocks: Russell 1000 Value
US Small Cap stocks: Russell 2000
US Small Cap Value: Russell 2000 Value
International stocks: MSCI EAFE NR USD
International Value: MSCI ACWI ex USA Value
Emerging Markets: MSCI EM NR USD
Disclosure: This data is provided for illustrative purposes only and do not represent actual mutual funds or ETFs, or actual client portfolios. We recommend more asset classes to clients than is provided above. These indices represent asset classes, which do not have fees. The actual mutual funds or ETFs would have internal expense ratios, which would reduce the returns provided above. These figures also do not include the deduction of WWM advisory fees.

 

Why this is so important

Blog post #474

One of the most important services that we provide for clients is preparing a written Investment Policy Statement (IPS) for them.

Developing a written Investment Policy Statement, along with a diversified portfolio, are critical for making the investment process more disciplined and systematic, and less emotional. For most long-term investors to meet their various financial goals and objectives, they need to be able to stay in the financial markets.

Having a written Investment Policy Statement can increase the likelihood that you will adhere to your plan (during both good and bad markets) and give you a better chance of attaining your financial goals.

An IPS document means you have a target for your asset allocation plan. You don’t just have a bunch of investments that are randomly thrown together. You have a written investment plan based on your current situation, your goals, needs, time perspective and tolerance for risk. This provides both you and us, as your advisor, with discipline to act rationally in a world full of unknowns and uncertainty. 

The IPS that we develop for each client states their overall asset allocation target, such as 70% stock / 30% fixed income, or 40% stock / 60% fixed income. It states what % of the stock allocation would be invested in the US and Internationally. It then identifies target allocations for various asset classes, such as US Large stocks, US Large value, US small and small value stocks, as well as for International asset classes and Real Estate.

For clients of our firm, having an IPS may seem logical as we have always used them.  However, some other brokers or financial advisors may not develop IPS documents or asset allocation plans for their clients.  If you don’t have a plan or target, how can you properly monitor the risk of your portfolio?

An IPS may sound like an impersonal document. But behind this Policy Statement is our understanding of your personal, family situation and your goals. We talk with you to learn and understand your objectives and concerns, before we prepare your IPS. Everyone is different and unique. Two people of the same age and assets may likely have different IPS’, as they are unique with different past experiences and different future goals. While the IPS is an unemotional document, preparing an IPS for each client is a very personal process.

Having an IPS allows us to manage portfolios in a rational manner. This means that we are not reacting to current events with guesses and predictions. We act and provide guidance in a disciplined manner. For example, during the onset of the Covid crisis last winter and spring, IPS’ provided us and our clients with the structure to buy stocks when markets fell, as we worked to maintain their stock allocations in the desired range. This enables us to help our clients maintain their stock exposures during times of great uncertainty and volatility, when your emotions may be telling you it’s time to get out of stocks.

Having an IPS with target asset allocations prevents your stock allocation from getting either too high or too low. When markets or specific asset classes go down, we would review buying more. This was mid-2020. When stocks increase, such as they have done very strongly in past months, we review client portfolios to see if their stock allocations have grown to exceed their target stock exposure. This is what we are doing now and have been doing over the past few months. This provides the discipline of buying low and selling high.

Your IPS would also clearly state that there will be times when your diversified portfolio will vary from major stock market indexes, such as the S&P 500. A diversified portfolio is very different than an index which is comprised of just US Large stocks. This means there will be periods, which could be months or years, when a diversified portfolio will underperform or outperform a major market index. We talk about this likelihood for portfolios to be different than major US indices with our clients in advance, to manage their expectations.

Your IPS can be revised. This is generally done because of changes in your financial situation over your lifetime, not usually due to changes in current financial markets. The goal is that the IPS is a long-term document that is not influenced by short-term ups and downs of the stock market. It is impacted (and modified) by changes in your life, your finances and your goals.

Isn’t the goal of investing to help you reach your financial goals? Then working with a financial advisor that uses a written Investment Policy Statement should be an important part of your financial planning.

 

Note: As a reminder, the blog will be emailed to you every other Friday going forward.

 

Talk to us.  We want to listen.  We want to assist you, your family members and friends.

The Positive of 2020

Blog post #473

Despite the terrible pandemic and all the difficulties that it has caused this year, the financial markets appear to be finishing 2020 in a very positive manner.

Nearly all US and International asset classes have good returns for the year, some with very healthy gains that are far above their asset class’ historical annual average rate of return.

The 4th quarter (as of this writing, on 12/16/2020) may be one of the best quarters ever for many asset classes, even for asset classes that were underperforming earlier in the year. The fourth quarter of 2020 has produced significant gains across the board, and particularly for small and value stocks, both in the US and Internationally. International and Emerging Markets have outperformed US Large stocks in the last few months.

Thus, despite the hardships that many are experiencing due to the pandemic, diversified stock investors have been rewarded in 2020, on top of very significant gains in 2019.

We want to emphasize a few points:

  • This reinforces the importance of sticking with your stock asset allocation plan, regardless of what is going on in the world or your concerns (as valid as they may be).
  • By sticking with your investments over a long period of time, you are additionally rewarded by the effects of compounding. As your portfolio increases, additional gains added to them have an even greater effect. This is how wealth and assets can build over long periods of time.

As I was contemplating what to write this week, I read about the incredible charitable giving of more than $4 billion that was announced this week by MacKenzie Scott. This brings her pandemic related giving to almost $6 billion for 2020. I didn’t recognize the name MacKenzie Scott. I learned that she is the ex-wife of Amazon founder Jeff Bezos.

After their divorce in 2019, she received 25% of Bezos’ Amazon stock, making her one of the wealthiest people in the world. And the third wealthiest woman in the world. She promptly pledged in 2019 to give away the majority of her fortune over her lifetime.

Due to the pandemic, she has rapidly accelerated her charitable giving as she saw the great need. She announced this week that she has provided $4,158,500,000 to 384 organizations in all 50 states over the last four months (you can read about her incredible donations and the charities that she donated to here). She and her philanthropic advisors identified charities and organizations which provide basic needs such as food banks, emergency relief funds, as well as other issues which have worsened due to the pandemic.

As this difficult year comes to a close, I thought it was important to recognize that many of us are very fortunate and grateful, in so many ways. While we and our clients have incurred financial gains this year, many others are struggling.

While none of us can have the impact that MacKenzie Scott or Bill and Melinda Gates are able to, each of us can make a positive difference by donating to assist others who have been affected by the pandemic in some way, due to no fault of their own. We realize that charitable giving is very personal, but we hope this inspires you.

We hope that each of you and your families enjoy safe and Happy Holidays! We wish each of you the beginning of a Happy and Healthy 2021!

Note about the future of the blog: The blog will not be written for the next two weeks, as next Friday is Christmas and the following Friday is New Year’s Day.

The blog will resume on Friday, January 8th and continue every other week beginning in 2021, after writing weekly since June 2014.

Talk to us.  We want to listen.  We want to assist you, your family members and friends.

 

Uncertainty, Change and Financial Guidance

Blog post #472

As the saying goes, the only things which are certain are death and taxes.

In providing financial advice, and for you to deal with your financial future, it is important to distinguish between things which should remain relatively permanent (which should not change), and things which are subject to change (and should be reviewed for changing).

What are principles and things which should not change?
  • You should strive so that your investments be low cost and the money be readily available (be liquid).
  • Your portfolio should be managed with your short and long-term goals in mind.
  • Your portfolio should be managed to be tax-sensitive, to strive to obtain solid after-tax returns. We strive to do this.
  • Your fixed income investments should be high quality. You should not utilize high yield or junk bond / low quality investments.
  • You should be broadly diversified across many asset classes. You should generally have some assets in International investments, as the US does not always outperform International asset classes.
  • Your allocation to stocks should not change due to your emotions or concerns about the financial markets. You should generally not make portfolio decisions based on your emotions or fears.
  • You should always be emotionally prepared for stock markets to decline at least 10% at some point during every calendar year and to drop more than 20-30% every few years. These types of temporary declines will repeatedly occur, often when they are not expected, as part of the stock market’s long-term trend to move higher.
  • Your stock allocation should be set at a level that you are comfortable with, to be able to handle these types of downturns. You should not change your overall allocations frequently.
  • Some advice should rarely change….you should not email your social security number or other sensitive personal data. You should not repeat passwords for important online accounts. You should always use strong passwords.
What are some principles and things which should change or be subject to change?
  • As your financial circumstances change over time, your asset allocation to stocks may change. As we plan with you, your need to take risk may change, which should prompt changes in your asset allocation.
  • You, or your financial advisor (us), should regularly monitor your portfolio for rebalancing. That is a good reason to make some investment changes (some adjustments).
    • When an asset class or specific investment does very well, you should likely take some profits and rebalance the money into other, under-performing assets. This helps to put in place the discipline of buying low and selling high.
  • If you own individual stocks, you should not be afraid to take profits, even if you must pay capital gains taxes. Very few investments go up forever. Don’t be greedy.
  • Estate planning and tax planning strategies should be subject to change, as the laws in these areas change quite frequently. You should consult with experts in these areas.
  • You should review your mortgage and interest rates frequently and be willing to change through refinancing. You should take advantage of opportunities when they are presented to you to refinance. Like now.
  • You should review your use of credit cards for rewards and cash back benefits. If you have premium or point rewards cards, you should review your spending and what cards are best to use. What was good in the past may not be best now.
    • Are airline miles the best way to get benefits from credit card spending? How can you earn the most points or cash-back for groceries? Are you getting at least 1.5% on everyday spending (non-restaurant or travel related) for your credit card purchases?
  • One major key to being financially successful is your level of regular savings. Are you saving money? Are you spending more than you earn? Are you contributing to retirement and college savings programs (as appropriate), as soon as you can? If you need assistance to change in these areas, please contact us.

Change can be hard. We know that. We can help you deal with change, when it is needed.

We would be pleased to discuss any of these topics with you.

Talk to us.  We want to listen.  We want to assist you, your family members and friends.