Investment Guy

My gift to you:  Your very own crystal ball. 

Every quarter we review portfolios and performance with our clients.  Over the past year and a half, the markets are so volatile on a weekly basis that by the time a quarterly report is being reviewed things have changed significantly and the report is old news.  Reviewing a portfolio is, and will continue to be an important exercise, but the most valuable part of our conversations are always about preparing for tomorrow. 

Most people spend too much time worrying about yesterday instead of preparing for tomorrow.  This often happens in the world of investments.  Too much time is spent looking at past performance. 

People tend to chase performance by selecting investments that outperformed over the last 1,3, and 5 years.  How likely is it that the same investments that beat the markets yesterday are going to perform tomorrow?  Slim to none.

The best thing you can do for your current portfolio is to look at what you own today, and decide if its what you want to own tomorrow.  Think about your future…

Look into your own crystal ball and ask yourself these 2 questions:

1. What investments do you want to own in the next 1,3, and 5 years? 
2. What are you concerned about for the next 1,3, and 5 years? 

Alternative Energy? ♦ Muncipal Bonds? ♦ Gold? ♦ Social Security going bust? ♦ Inflation running rampant? ♦ Deflation? ♦ Oil? ♦ Taxes going up?  ♦ Monthly income? ♦ The dollar?

There are investments that you can position in your portfolio that will make money under any of these circumstances. 

This list will change frequently, and will be different for everyone.  If you’re not talking about the next 1,3, and 5 years you will always be chasing yesterday’s winners, and missing out on tomorrow’s.

I was speaking with a prospective client last week about our investment process, and she asked what Asset Allocation was. 

If you don’t know the answer to that question, your current advisor is doing you a disservice.   For those of you not familiar with Asset Allocation, here is the answer:

Asset Allocation is both an investment philosophy and an investing discipline.  It combines the idea of diversification with a defined strategy.  An asset allocation should be customized and tailored to each individual investor based upon their individual risk tolerance, goals, and timeframe to meet those goals.  There are many questionnaires available to help you determine your investor profile.

The practice of Asset Allocation is based upon numerous research studies, most notably that of William Sharpe and Harry Markowitz.  They won the Nobel Prize for economic sciences, for their contributions to the science of portfolio management.  Their studies suggest that a well diversified Asset Allocation plan may effectively reduce risk while maintaining or possibly even increasing the portfolios rate of return.  More importantly, asset allocation has been shown to be responsible for up to 91.5% of a portfolio’s performance.

For more information, take a look at the Importance of Asset Allocation .

The goal is to invest your money in a variety of asset classes, in amounts determined by your specific, customized investor profile.  An asset allocation plan should be tailored to meet your needs as determined by your risk tolerance, your goals and the timeframe for meeting those goals. 

For example, here are some of the different asset classes:

• Large Cap US Stocks
• Small Cap US Stocks
• International Stocks
• Corporate Bonds
• Government Bonds
• Alternative Investments

Take a look at this Callan Chart and you will see that every year (give or take) a different asset class is the top performing asset class.  By subscribing to this theory, you may be more likely to have at least a portion of your money invested in a top performing asset class, year after year.

This is a simple overview of Asset allocation.   Asset allocation can be combined with other investing strategies such as dollar cost averaging or annual rebalancing.   Asset allocation does not assure a profit or protect against a loss in declining markets.

This is ‘A lesson in what not to do’ my client said to me.  He asked me to share it with others to hopefully prevent anyone else dealing with the mess that you are about to read.

In May 2009, his father-in-law passed away at the age of 91.  He was a widower, in good health, and still drove at 91.  He lived a simple life, as most depression era children do.  Most of his expenses were on food.  His needs were little and his assets far exceeded anything he would be able to spend.  Sadly, he was involved in a car accident that lead to his hospitalization, and a subsequently a quick deterioration in his health.  He died in a matter of days.

For the past 3 weeks, my client and his wife have been on a scavenger hunt tracking down each of his $100,000 CD’s at various banks to maintain FDIC protection.  With each of 4 IRA’s they have located to date, they discovered that his wife, who died long ago, was named beneficiary.  He assumed that his will and his trust would flow the money as he desired to his 2 daughters.    So far they located total assets of approximately $700,000.  We’re waiting to see what new statements appear in next month’s mail.

Records were not properly kept and beneficiaries were not updated on several IRAs at various banks.  Now the process is delayed in probate.  The importance of reviewing and updating your will and/or beneficiaries is difficult to ignore, yet time and again people do.

Without properly named beneficiaries, wealth that you intended to give to loved ones may be subject to the delays, expenses, and public scrutiny associated with probate. In addition, the assets may not go to the right person, in the right amount, at the right time, which means you could potentially disinherit your heirs. With improper beneficiary designations, you also run the risk of allowing creditors access to your money.

Certainly you can take the time to make sure your IRA beneficiaries have been updated to reflect the proper distributions.  Each year, take an hour to:

• Update your beneficiaries upon the following life changes
  • Marriage, Birth, Divorce, Remarriage
• Name contingent beneficiaries, in case your primary beneficiary predeceases you
• Review your Will

It is surprising how often this happens and how easy to avoid.  Every year, we make sure to address this with all of our clientele, and every year at least one of our clients needs to address this.  Do yourself a favor, and ask yourself:

If you die tomorrow, will your assets go to the right people?