This is where the Financial Plan hits the Implementation Stage; in other words, where the rubber hits the road.
We manage our client’s Assets according to the Investment Advice given to accomplish the Financial Plan.
It’s the next logical step in the process. It’s clearly not the starting point, at least not how we see it. Yet time and time again we see people who have assets scattered about with multiple “advisors”, none of whom have any idea the overall needs of the client.
Most people have investments that were “sold” to them. Perhaps by a stock broker, perhaps by an insurance agent, perhaps by their local bank or credit union. Perhaps by their brother-in-law who got a hot tip from the guy who heard a guy talk once, but darn can’t remember his name.
(Or perhaps they were sold on a certain stock recommended by some crazy guy with rolled up sleeves who rants and raves throughout his TV show. Who isn’t an investment advisor, but just plays one on TV. Who is no more a Trusted Advisor than Charlton Heston was Moses.)
We don’t sell investments to our clients. Never have. Never will.
What we do is invest and manage our clients’ moneys according to some basic Principles; core beliefs, if you will.
Principle #1 – Risk and Return are related.
To get a higher-than-average return, one must assume a higher-than-average risk.
Our goal is to manage risk where we can and accept it where we can’t in order to achieve the highest return we can for an acceptable level of risk. Risk, after all, is a future result different than what can be predicted. Another term is Volatility. The more volatile an investment is, the riskier it is.
But typically, volatility is measured in very short time spans.
When we deal with a long-term portfolio and keep our eyes on the horizon versus being distracted by the short-term ups and downs, we find that the rewards to long-term investors greatly offset the risk to long-term investors.
Principle #2 Asset Allocation is the Key.
In the investment world there is a pretty well accepted study that shows that, based on a review of long-term well diversified portfolios, the key determinant in the returns achieved were based on which asset class(es) the portfolios were invested in.
The study shows that 94% of any given return can be explained by the asset class(es) chosen.
Only 4% of the return is explained by which individual stocks within the asset classes were used.
And only the final 2% of the return was explained by when those individual stocks were bought and sold.
Yet time and time again we see the claims of “investment managers” who, in-spite of all the evidence to the contrary, know what stock to buy and when to buy it.
We concentrate on the 94% factor. We concentrate on the Asset Allocation.
We believe in having one asset class that zigs when another one zags. We don’t claim to know which is going to do which at any moment in time, but history has convinced us each asset class will have its time in the lead.
Perhaps the most persuasive case for asset allocation was written several thousand years ago. It comes from the book of Ecclesiastes: “To everything there is a season, and a time to every purpose under the heaven.”
Principle #3 – Diversification is Critical.
Given our choice, we will purchase all stocks in a given asset class. We efficiently do this via mutual funds. (Click on Dimensional Fund Advisors to the right to learn more about the funds we use.)
We do not purchase individual securities for our client. We believe the risk in holding individual stocks brings with it unacceptable, and uncompensated, risk.
Yes, an individual stock may perform admirably for a period of time but no stock has consistently beaten the market year in and year out nor over sustained periods.
Holding a concentration of individual stocks is doomed to failure no matter how great the companies are today.
A portfolio of the greatest stocks of a generation ago, such as Polaroid, Xerox, International Harvester, Penn Central Railroad and Pan American Airways, would be only so much worthless paper today.
Principle #4 Market Timing is Futile at best, Fatal at worst.
It seems so logical that there must be a way to combine all of the resources of the internet, all of the news sites, and all of the charts and graphs, all of the power of today’s computers and successfully predict which way the market is heading.
But it is the Holy Grail of investing. An unattainable goal that seems so near to grasp.
We believe there are two types of people who claim they can time the markets; one, those who don’t know that they don’t know; and two, those that know darn well they don’t know how to time the market.
Yet, a key question is “When is the right time to invest?” There always seems to be reasons not to invest: interest rates are headed up; interest rates are headed down; there is unrest in the Middle East; scandals on Wall Street.
The reasons not to invest are as numerous as the stars in the sky.
But there remains one key reason to invest. The returns of the US and International stock markets over long terms have vastly out-surpassed the returns offered by “safe” investments, such as government bonds and CD’s, which have barely offset the ravages of inflation.
That’s the reason to invest and in the words of my mentor, Nick Murray, “Today is the hardest day there is to invest. But it is the only day we have.”
The day-to-day gains and losses of volatile markets will be long forgotten by long-term investors.
Principle #5 – Discipline reaps Rewards.
We are disciplined investors. We are on a Mission; and it is clear, concise and attainable.
We do not get distracted by the latest investment fad. Hedge Funds, for instance, have no place in our portfolios.
Principle #6 – Costs Matter.
Period.
So, that’s pretty much it, in six straightforward investment principles.
We remember seeing a cartoon of a stock broker who proudly described his principles, but then went on to add “But if you don’t like those, we have others.”
The above are our investment principles. We don’t have others. We don’t have one set in order to sell our service to one client and another to get the business from somebody else.
These are our Principles. They are not negotiable. They guide us, and inspire us, as we go about the awesome responsibility of managing the life savings of our most valuable asset, our clients.