Happy Clients; Terrified Prospects


Four years ago, on March 9th, 2009, US stocks collapsed to a 12 year low.   A financial crisis rooted in overleveraged purchases of junk (or even fraudulent) securities claimed, in quick succession, Bear Stearns, Lehman Brother, Merrill Lynch (forced into a shotgun marriage with Bank of America) and AIG. Investors panicked, selling good securities at deep discounts to fair value.

Our own clients were not immune - 6 families fired us in March 2009, which signaled the moment to take the remaining clients fully invested. Four years later, those clients are at record levels in their portfolios net of deposits and withdrawals (not surprising as the major US averages have also returned to record levels.)   More importantly, the 30% of our clients who depend on their portfolios for their retirement received their monthly draw without fail through the entire crisis. Meanwhile, millions of other investors have had the miserable experience of going to all cash during the crisis, only to watch stocks rally 144% over the next 4 years.

We're not Bernie Madoff!

Prospective clients recognize that they can't retire with their all-cash strategy, but they're terrified to start investing again.   These prospects don't trust the banks, don't trust the government, don't trust the media and don't trust advisors like us. Every initial conversation starts with us explaining how we're not the next Bernie Madoff. Specifically:

  1. We don't self-custody - we always work through a third-party custodian - "trust, but verify!"
  2. Our clients' funds are always held in separate accounts.
  3. We only invest in liquid, publically traded stocks, bonds, mutual funds. If you can't look up a security on Yahoo Finance, it can't be in your portfolio.
  4. We send monthly performance statements, which have to match up with the monthly custodian's statements mailed directly from the custodian.
  5. Our clients can review their accounts online at any time.
  6. We have no lockups - a client can withdraw funds at anytime and can cancel their relationship with us at anytime.
  7. We have no access to our clients' funds other than to submit our monthly advisory fee.
  8. We provide a detailed report monthly of how our advisory fee was calculated.
  9. We give references - cheerfully!

Still, the overarching skepticism remains - all advisors are crooks! Which seems unfair to the tens of thousands of good advisors who collectively manage over a trillion dollars of clients' assets. Here are resources that an investor can use to research the background of any advisor, whether Registered Investment Advisor (RIA), Broker/Dealer (BD), or Financial Planner (CFP).

How to start investing again

We'll be frank - the market seems toppy to us. Our forecast for stock gains was 8% for all of 2013, and the market has already exceeded that forecast. Two things will happen. Either we get a 5-10% pullback as the market digests the XXX gains since May 2012, or a buying panic ensues as investors react to the "Dow Record!" headlines. So we're a little cautious right now - nothing does more damage to a new relationship than a sharp 10% decline in a client's assets. Instead, we're scaling clients into the market 25% at a time, and if we did see a 10% pullback, we would invest more aggressively.

We practice true diversification by making sure that our clients exposed stocks and bonds, but always have cash for emergencies. We keep the average maturity of our bond exposure short right now (durations range from 3-5 years) because we know interest rates will start rising in 2014. We're willing to take on credit risk right now because US corporate balance sheets are stuffed with cash, so default risk is low. In stocks, we have exposure to US markets of course, spread across growth and value styles, large, medium and small cap stocks. We also maintain a certain exposure to developed markets such as Japan, Australia and Europe, a smaller exposure to emerging markets in China, India, Africa and South America, and a small exposure to a basket of commodities.

We carefully compare our portfolios to the relevant benchmark. We don't obsess about beating benchmarks; instead, we use those benchmarks to alert us to problems. For example, a portfolio running 2% BEHIND its benchmark is an obvious concern, but a portfolio running 2% AHEAD of its benchmark may indicate that we're taking on risks that we don't understand and need to research.

This may seem like too much work for a do-it-yourself investor, but this is the minimum effort you need to make to run your own investments. We have plenty of Wall Street professionals among our clients. At the end of 50 hours/week at their job, the last thing they want to do is spend 50 hours/week at our job.

The media is not necessarily your friend

You can pretty much ignore anything you hear on CNBC, Fox News, CNN and MSNBC. Those networks are in the business of delivering eyeballs to advertisers, accomplished by scaring you half to death. Remember the countdown clock to the "Fiscal Cliff" in December. The implication was that your electricity would turn off at midnight if Washington couldn't revise the tax code. We referred to that event as the "Fiscal Bunny Slope." Now we've lurched through "The Sequester," which will cause some pain to some people and trim a small amount from 2013 economic growth. This event, and the upcoming fight over raising the debt ceiling, is not the end of the world.

Why investors should be optimistic.

As we have said repeatedly, an investment in the S&P 500 is an investment in the world economy, because at this point 60% of S&P 500 revenues come from non-US operations. Current stock market levels are justified by current revenues, earnings and cash on balance sheets, so the downside is currently limited. Earnings growth will slow in 2013 compared to 2012 but will speed up again in 2014. Why? US unemployment, which was stuck over 8% for the longest stretch since the Great Depression is now falling, at present 7.7%. We forecast a 7% rate by the end of 2013 and 6% by the end of 2014. As people return to work, household formation will increase with the attendant expenditure on housing, cars, furniture etc. People already feel better about going out to dinner and doing some discretionary shopping, which of course leads to more employment and better feelings about the economy.

It would help if the circus in Washington fell off the front pages, but corporations such as General Electric, Google, Boeing, Proctor & Gamble and Pfizer don't sit around worrying about politics - employees there are working hard on products which will be delivered 5-15 years from now.

What should you do if you want to work with our firm on your investments?

First, call us! We're very friendly. Ask us all the questions outlined in the SEC pamphlets above. Read our ADV! If you like what you see and hear, know that we need to learn a lot about you. We have a questionnaire that asks for obvious biographical data, but also thought questions such as:

  • Are you single, married or in a relationship?
  • Do you have dependents, which could be your children or your parents?
  • What is your career situation?
  • Have you thought about a target age to retire?
  • Do you own property? What kind of mortgage do you have?
  • What are your liquid assets? Stocks, bonds, mutual funds, ETF's, cash?
  • Have you worked with an advisor before? Tell us about that experience!
  • What are your short, medium and long term financial concerns? For example, you may be concerned about college tuition for your children in 1 year, a second home purchase in 5 years, and retirement in 20 years.
  • Do you expect to inherit assets from your family?
  • What is the "Purpose" of your wealth?
  • Anything special that pertains to you!

We will ask us to give us copies of all your current investment statements, information about your 401K, any pension benefits you may receive and copies of your current Social Security statements. We will enter all this information into our financial planning module, which gives us a baseline report of what your retirement may look like if you make no changes in your current strategy. We can then show you a range of alternatives which we believe will improve your situation.

You may have questions about estate planning, college tuition planning, life insurance or any number of topics related to your financial life. We have years of experience answering these questions and maintain a network of professionals such as accountants, bookkeepers, financial planners, trust and estate attorneys and even divorce attorneys should specialist knowledge be required. You may want to talk to our references - of course!

Finally, if you decide to work with us, we will send you the account applications necessary to move your assets to the custodian and our "Investment Advisory Agreement," which outlines the rights and responsibilities of each party. As we mentioned above, there are no lockups and you can withdraw funds or cancel the agreement at any time.

Your retirement is up to you. The longer you avoid taking action, the harder it will be to obtain the lifestyle in retirement that you desire.