Our Investment Philosophy
and what it means for you…
At Supporting Your Choices, we treat every client like the unique individual they are. We work diligently to get to know our clients so that we can structure an investment plan that is specifically suited to their goals and requirements. That said, we do want to share with you our general philosophy and approach to investing. Please remember that we make alterations when prudent as indicated by Client circumstances.
It’s Your Money
Supporting Your Choices manages client portfolios on a non-discretionary, fee-only basis. That means that we will contact you regarding purchases and sales of securities before any transactions are processed. You are free to accept or reject any of our recommendations. Money is personal. Investing is personal. We believe strongly in client education and we will do our best to steadily increase your knowledge of investing, as well as other issues, over time. Then, together we can work to achieve your goals. You may disagree with our recommendations from time to time. In such instances, we will defer to your wishes. After all, it is your money and your future. That said, because we are fee only advisors, always remember that our recommendations are based on what we think is best for you.
One of the first things we do before making investment recommendations is discuss your risk tolerance. Remember, we are customizing our advice specifically for you so we need to get to know you and understand your goals and your fears. Don’t be surprised if you have conflicting responses. Most of us have at least two personas driving our investment decisions. One may be the gambler who is willing to risk it all for a high payoff. Another may be the worrier who, even with money in the bank, frets over the next mortgage payment. We ask that you do your best to be honest with yourself and with us. Indeed many clients, who thought they had a high risk tolerance in the high flying markets of the late 1990s and before the market crash in 2008, have since discovered that their risk tolerance was lower than they thought. Our goal will be a strategy that will let you invest with comfort and enthusiasm.
Remember that risk has many faces. Certainly the increased investment risk you take to obtain high returns is one of them. But we encourage you to remember that there is also the very big risk of not being aggressive enough to achieve your goals. If you took $100 and put it in a drawer for 10 years, you would still have your original $100, correct? The answer is no, not if you consider inflation. From 1913 through April of 2014, inflation averaged 3.22%. So even if it still looked like $100 in 10 years, it would only buy as much as $73 would buy today. As you can see, you have to take some risks just to overcome the effects of inflation over time.
Finally, there will be those of you who may want to take what we feel is unnecessary risk. You may have already accumulated sufficient assets to provide, with growth over time, the future you envision. We will encourage you to think of it this way: You are the quarterback in a football game. It’s the 4th quarter and there are 15 seconds on the clock. It’s first down and your team has the ball and a 2-point lead. Are you going to try and throw the ball for a touchdown? Or will you take a knee when the ball is snapped? It’s a good question. There is no need to take more risk than is necessary. There will be times when we may remind you to “take a knee.”
Diversification & Asset Allocation
We believe that diversification is a must. Over the long-term, a strategy of diversification will help insure that you reach your goals while keeping risk at a minimum. There is strong, historical evidence that the investment that performs the best today will probably not be the “best” tomorrow. Since we don’t have sure knowledge of what the “new hot stock / sector” will be, and no one does, it’s best to spread yourself among many. The varying returns should balance out over the long-term to provide an overall rate of return that will allow you to achieve your goals while minimizing risk.
Asset allocation is the process of dividing investments among different kinds of assets, such as stocks, bonds, real estate and cash, to optimize the risk/reward tradeoff based on an individual’s specific situation and goals. Once we discuss your risk tolerance and goals, we will determine an asset mix that should provide the needed return over the long-term. This mix may include individual stocks (usually these are held by the Client at the time of the engagement) and bonds, cash, and real estate. Most of our recommended portfolios use mutual funds (investment companies that hold a variety of investments tailored to different investment objectives) or Exchange Traded Funds (ETFs — also tied to specific market indexes or sectors) as they provide portfolio diversification.
Some advisors adhere to strict asset allocation. That is, once they determine an asset mix that is suited to your risk tolerance, they periodically “rebalance” your portfolio to maintain the desired mix. To rebalance, they sell investments in sectors that have outperformed and may buy in sectors that have under-performed. This is consistent with the sage advice to “Buy low, sell high.” Certainly, we will constantly try to insure that your portfolio includes a variety of fixed income and equity, a variety of asset classes and sectors (some examples: technology, healthcare, financial, retailers, utilities), and a good mix of small cap vs. large cap investments as well as a value vs. growth component. But rebalancing by selling “winners” can have adverse tax effects. When possible, we prefer to rebalance by investing new savings in under-weighted areas or by changing investments in retirement accounts. If the underlying fundamentals of a particular investment remain strong, we suggest you hold it for the long term, regardless of whether it is currently outperforming or under-performing the market.
From time to time, we may discuss slightly over-weighting a particular sector that we think may outperform over the long-term. We will discuss this with you as, together, we make investment decisions.
Bottom line: if we diversify among good companies using a variety of investments and maintain a long-term focus, you will improve your chance of achieving financial freedom.
We usually use fixed income investments to reduce overall portfolio risk. The addition of some fixed income investments may reduce portfolio volatility without diminishing long-term returns. However, historically equity investments such as stocks and stock funds have outperformed fixed income investments. We caution our more mature clients that, even at age 65, they may have a long and, hopefully rewarding, retirement ahead of them, perhaps lasting 30 to 35 years. Growth of their assets is usually required to maintain lifestyle so we often recommend that they keep a significant portion of their portfolio in equities. It is important to note that currently the gains produced by growth of are taxed more favorably than the income provided by fixed income investments.
There is a difference between investing in fixed income for the long-term and using relatively short-term “cash” investments such as Treasury Bills, Money Market Accounts, and CDs. We encourage clients to maintain an emergency cash fund which we often hold in shorter term cash investments. For clients who are already in or nearing retirement, we may suggest that such a cash emergency fund equal 3 to 4 years of annual expenses. Finally, any funds that will be required within the next 3 years to fund upcoming expenses such as a new car, a house down payment, or college tuition payments should be held in short-term cash investments. If you don’t plan to leave the money in the market for a minimum of 5 years, you shouldn’t put it in the market at all.
Income in Retirement
For retired Clients, we work to provide a regular “paycheck.” This paycheck is funded by cash reserves. We recommend an amount that, with projected portfolio income to include realized capital gains, will cover 2 to 4 years of expenses. As necessary to replenish the cash reserves, investments will be sold annually if markets are sound. However, when markets are down, we may decide to wait until a recovery to make sales.
Over the past 70 years, there have been as few as 30 days when the market moved sharply up. If you hadn’t been invested in those days, the overall return of your portfolio would be greatly reduced. We don’t know when those days will occur. Therefore, per our research, technically it is better to be in the market than out if you have a long-term investment horizon.
But facts and research have little effect on the emotions involved with investing. There have been various instances when clients have come to us with a lump sum to invest. If we put it all in the market at one time and the market declines sharply shortly thereafter, (this has happened in the past and will happen in the future), it can be very painful. Some clients are simply not comfortable with this. That is why it is very important for you to discuss your risk tolerance very honestly as this will help us determine your particular investment temperament. If we determine that there is a high probability that you would experience high levels of discomfort in falling market, we may recommend dollar cost averaging or a strategy that puts part of the money in the market lump sum and uses dollar cost averaging for the remainder.
Dollar cost averaging is an investment strategy where you divide the funds available into various “piles.” Then you invest each pile according to a pre-determined time schedule. This way you add investments at various prices during various market conditions. For example, if you had 100,000 to invest, we may decide to invest 8,333 per month for 12 months. This should ease your entry into what could be a very volatile market.
As with most investment issues, timing your entry into investments is client specific. We will work with you to determine a strategy that is suited specifically to your needs and temperament.
We are proud that our staff has a strong background in tax and can use this knowledge for your benefit. As stated earlier, diversification is a must to reduce risk and achieve long-term success. But before we sell any investment we will determine the tax implications and discuss them with you.
Some of the tax consequences of holding mutual funds are largely out of our hands. The individual portfolio managers buy and sell stocks during the year. At a specific time during the year, usually near year-end, they distribute a pro rata share of all gains and income to shareholders. Such distributions are taxable.
For those clients holding stocks, we will actively manage your account to use your losses (there will be some) to offset any realized gains at year-end. This will provide a positive tax benefit. Note: You cannot sell a stock for a loss, buy it back within 30 days and still take the loss. This is called a “wash sale.” So we will only sell stocks for a loss when we have determined it no longer suits your investment criteria or a similar replacement is available.
Additionally, we will strive to reduce adverse tax effects by, to the extent possible, placing investments with tax favored income (capital gains and qualified dividends) in taxable accounts and investments that produce income that is taxed at less favorable ordinary income rates (fixed income, REITS) in retirement accounts. Income distributions from retirement accounts are always taxed as ordinary income regardless of the underlying source of the income. This strategy is a great way to increase the after tax return of your portfolios.
Tax is important and we will actively plan to minimize taxes when advisable. But be sure to remember that tax implications should not be the sole determinant in making investment decisions. Diversification and sound investment policies might require that we bite the tax bullet from time to time and move forward.
Supporting Your Choices is a fee-only advisor. The only compensation we receive is from you, the Client. There are no sales loads or commissions on any investments that we recommend. We believe that this helps eliminate any conflict of interest, real or perceived, that could exist otherwise and allows us to base our recommendations exclusively on what we think is best for you. There may be some minimal brokerage transaction fees and mutual fund managers/ETF market makers do charge for their services. We try to keep these charges at a minimum.
We chose TD Ameritrade Institutional as the recommended custodian for client assets because they provide a broad array of investments and good service at a low cost.
Fund expenses will differ according to the fund’s investment style. Index funds and Exchange Traded Funds will usually have low fees, as there is no active management. Actively managed funds, especially International and small cap funds, will typically have relatively higher fees across the board.
Keeping your investment expenses to a minimum improves long-term returns. High expenses can, over time, significantly erode even superior returns.
Las Vegas Accounts
While many of our clients intellectually accept our philosophy of diversification and long-term investing, they may still have a desire to “play the market.” We don’t want to ignore these feelings. We would rather establish a “Las Vegas” account for such clients if they have sufficient assets to warrant such a move. We place a minimal amount (not enough to jeopardize your financial future) into a “Las Vegas” account. Then the clients can trade at will in this account following their “hunches.” We think this strategy accomplishes several things. First, clients who are actively involved in investing often educate themselves on many of the issues involved. This helps in our discussions on investment philosophy. Clients often learn how difficult it can be to assess market conditions and choose investments. Second, by segregating the “play money” from the funds intended to provide for your financial future, we limit the risk so that you will not be more aggressive than necessary with your long-term portfolio.
Las Vegas accounts are not for all clients. Be sure to talk with us about this if you are interested. In most cases we will gladly establish such an account for you with the sincere hope that you outperform the investments that we choose for you.
During the final years of the 1990’s the stock market broke many performance records. Returns were exceptional in many cases. But as we have seen, with financial markets, what goes up must come down. We were reminded of this again in The Great Recession of 2008-2009. At that time we were also reminded that what goes down must come up as markets recovered relatively quickly after March of 2009. Going forward, very aggressive portfolios may return to average long-term returns of 8% to10% though returns may be lower. For those of you who are more cautious, the long-term returns will be lower. The U.S. still faces many challenges: terrorism, pending Social Security insolvency, a Medicare crisis, high trade deficits and aging Baby Boomers. However, if you stick to your savings and investment plan, you should be able to reach your goals.
For most of you, investment planning is just one of the services we provide. It is our mission to integrate this portion of your financial life into a holistic plan that will allow you to obtain your goals, both financial and personal. We feel it is important to structure the entire plan so that you not only reach your goals but you do so with comfort and peace of mind. We are always available to answer your questions. Be sure to let us know how you feel. Success without comfort is hard to achieve. Together, we can do better than that.