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Six Tips for Surviving Challenging Markets

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Here are six tips to help cope with challenging market environments:

1. Stay Engaged

When you sell an investment simply because it has declined in value,  it becomes impossible to benefit when it rebounds.  The same is true of the broad market in general.  Many of these major upside moves can happen quickly, often in just a few days.  To avoid missing these key days, you may want to consider staying invested and avoid panic selling. Consider this hypothetical example furnished to us by the folks at Principal Financial Group:

An individual who was invested in the S&P 500 from January 2, 1991, until December 31, 2010 would have turned a $10,000 investment into $58,137.02 for an average annual return of 9.20%, while an investor who panicked and sold their positions during this same period and missed the 10 best trading days in this period would have seen their return fall from 9.20% to 5.47%. [Source: Ned Davis Research]

The lesson is clear: No one can predict when the market will experience its best days.

2. Keep a Long-Term Focus

Studies show that time is your ally.   Of the three types of investments studied (stock funds, bond funds, and asset allocation investment options), the average investors in asset allocation funds held their investment options the longest (an average of 4.30 years) over the five time periods studied (1-, 3-, 5-, 10-, and 20-years).  It’s little surprise that these investors successfully weathered one of the most severe market declines in history (2000-2002). [Source: Dalbar 2010 QAIB study]

3. Have a Diversification Plan

According to the Dalbar study, investors guess incorrectly about the market’s direction 50% of the time.  So, diversification helps guard against those errors; but, many people mistake duplication for diversification by buying multiple mutual funds not knowing many of the underlying holdings are identical.

Choosing different management styles and market capitalizations of equities and bonds isn’t as simple as you’re lead to believe on television.  When was the last time you heard a financial entertainer the impact of highly correlated assets?   It’s boring stuff and makes for poor television, which is why it isn’t discussed, but it’s what you need to know.  Quality diversification enhances the benefits of asset allocation so investment balances are less affected by short-term market swings than they would be if you invested in a single asset class.

If you are an investor who is nearing retirement, consider consulting your advisor about this issue.  Remember, asset allocation/diversification does not guarantee a profit or protect against a loss, but it will likely make your journey much smoother.

4. Utilize an Auto-Rebalance Strategy

Historically, business cycle contractions last about one-sixth as long as expansions.  Now may be a good time to re-evaluate your risk tolerance. If you want a professionally managed investment option to handle this complicated task, you might want to consider a unified managed account (UMA).  It’s an option that simplifies your paperwork, virtually automates the rebalancing process, gives you consolidated reporting while providing the diversification of management, styles, and investments needed to do the job right.  UMAs can hold mutual funds, index funds, ETFs, institutional separately managed accounts, and more.  A UMA is not an investment; it’s a type of account you use to execute your investment plan.  Ask your advisor or – shameless plug – feel free to contact me for information about UMAs. 

There are also target-date and target-risk asset allocation funds available on the market; but, tread carefully.  Different funds with the same target date or target risk can still have very, very different holdings, styles, and risk profiles.  Not everyone retiring in the same year has the same financial picture or ideas about how they want to make the financial journey.  As you can tell, I’m not a big fan of ‘cookie-cutter’ solutions.

5. Keep Your Focus

Discipline is something everyone has until panic sets-in.  Quite often, that’s when an advisor can show the most value.   Successful investing is a marathon, not a sprint.  The tortoise did win the race, you know.

6. Get Regular Checkups

Too many individual investors are still stuck in the old paradigm under which their advisor, actually a broker, would call them with investment ideas or changes they should make.  Today, with the emergence of the fee-only – that’s different from fee-based – business model utilized by ‘pure’ Registered Investment Advisors (not dually registered to sell securities, too), the new paradigm operates more like other professional practices in law, medicine, or accounting.  In short, you need to make an appointment for your checkup, at least annually.   And, today, with online meeting technology, you can even do it without getting in your car… so there’s no excuse.   Get your checkup!  If you don’t, your financial health will likely suffer.

If you like information UMAs, you can request it here:

 
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The Independent Financial GroupSubscribe to IFG Insights letters for individual investors. 

Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, Keep up to date with IFG on Twitter: @JimLorenzen

Waiting to Fund Your 401(k)? Not Good.

Jim Lorenzen, CFP®, AIF®

In fact, that may be the most expensive mistake you’ll ever make!

When I was young, my father told me, “Jim, if you just save 10% of everything you ever make – and start NOW – you’ll never have to worry about money the rest of your life.”   

Parents.  What do they know?

The fact is, the “start NOW” part is the most important part of that sentence!  I didn’t know it, of course; but, saving during those early years truly does make a huge difference!

Here’s a little lesson that will prove just HOW important it is.    I’ll keep the numbers simple for my little hypothetical comparing Fred and Gary.  

Let’s start both of them at age 25; this would give them 40 years before the normal retirement age of 65, though many today are working or even starting businesses past that date.   Also, to keep our hypothetical simple, let’s assume that each saves only $2,000 a year and never increases their savings, and that they earn an average annual return of 8%.

Fred saves $2,000 a year for ten years from age 25 to age 35 and stops saving.  But, he does leave his money in his account to accumulate at 8% until he’s 65.

Gary waits until he’s 35 before starting.  But, Gary invests $2,000 a year, beginning at age 35, for thirty years… all the way to age 65.  Who won?

At age 65, Fred, who invested during only the first ten years, ended up with $291,546.  Gary, who invested for thirty years but started ten years late, ended up with $226,566… almost $65,000 less!    In fact, for Gary to have tied Fred, Gary would have had to invest $2,573 a year – 29% more – each year for all thirty years!

Fred invested for only ten years!  But, it was the FIRST ten!   What if Fred hadn’t quit after ten years?  What if he’d kept going to age 65?  His final number, on only $2,000 a year, would have been $518,113?  That means those first ten years, by not investing, cost Gary $291,547!

Do the math:  Those first ten years, by not investing $2,000 in each year, cost Gary $29,154 per year! 

What if Fred had invested $3,000 each year instead of $2,000?   That would have been an additional $40,000 in savings over that 40-year period; but, given the same returns, the ending dollar figure would be $777,169…. $259,056 more!     And, all of it accomplished on $250 a month!

So, the $40,000 would have purchased a nice car – or, it would have created over a quarter million dollars in additional wealth!   How does that new car look, now?  Pretty expensive, huh?

But, the market is risky, you say?   Good!  You’d better hope it is!  Without risk, you don’t get volatility; and without volatility, investors would have a hard time building wealth.  Volatile markets actually work in favor of the person who’s building; but, that’s another article.

In the meantime, think about what a publisher can accomplish starting early enough!   Then, when sale-day comes, you’ll be adding additional value to a base-line that could be pretty sweet!

Dad was right, as usual.  Tell everyone you know:  Start NOW.

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner®and An Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.  Twitter; @JimLorenzen

Plan Sponsors: Retirement Plan Insights Archive.

Written by Jim Lorenzen, CFP®, AIF®

May 10, 2012 at 8:00 am

Portfolio Diversification – Don’t Be Fooled

Jim Lorenzen, CFP®, AIF®

Too often you’ll see senior executives and business owners make the mistake of putting all their eggs in one basket – their own company.    Depending upon the value of a single business isn’t a good planning strategy.  The same intelligent people who would never put their entire life savings into a single stock will still often bet their entire future on the fortunes of a single business, simply because they own it or work for it.

“But, Jim!  Warren Buffett has ALL his money in his own company, Berkshire Hathaway!”  

True enough; but, you neglected to mention that Berkshire Hathaway’s business is investing in scores of other businesses.  Berkshire IS diversified.

Proper diversification is a simple concept to understand; but, how to do it?  Today, the ‘flavor of the month’ is the target-date fund.  The idea is to select the fund with a target date that coincides with your retirement date!  Like all strategies, it has its advantages and disadvantages; but it’s most likely always better than no strategy at all.  The advantage is an obvious one:  It’s easy to do and it frees you from having to make a lot of allocation decisions – at least seemingly. 

The disadvantage is hidden inside the advantage:  You’re not making decisions that, maybe, you should be making.   For example, suppose your target date is 2027, 15 years from now; should everyone with that target date have the same allocation?  If one person has saved only $100,000 and someone else has already amassed $1.2 million through investments, inheritances, and maybe other sources, should  both of them be investing the same way?  Do both of them have the same `return’ requirements or risk profile?

The answers to those and other questions will help determine what the appropriate allocation should be for each investor.  Those participating in 401(k) plans should ask their employer about available tools or advice; but it’s likely everyone should get professional advice which will encompass their entire financial picture.

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Jim Lorenzen, CFP®, AIF®Jim Lorenzen is a Certified Financial Planner™ and An Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.  The Independent Financial Group does not sell financial products or securities and nothing contained herein is an offer or recommendation to purchase any security or the services of any person or organization.  Twitter; @JimLorenzen

Plan Sponsors: Retirement Plan Insights Archive.

Fund Expenses Do Matter

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

For the Up-Teenth Time…..

You’ve just been introduced to the Acme Tactical Strategic Allocation Contrarian Fund of Funds with an overlay manager who monitors the other managers to make sure the overall fund objectives are met.

Run.

They’ll very probably meet their fund objective okay:  To make money on layers of fees extracted from investor assets.

I’ve always been a little suspicious of funds with long names that contain words like ‘strategic’, ‘tactical’, etc.  I think they charge by the word, but I could be wrong.

These funds will usually have all the typical fund fees for each fund, and often have an additional wrap fee that’s `wrapped around’ all the funds inside.   So, hypothetically, the internal funds could have, say, 1.5% in expenses, wrapped with another 1% or more in overlay fees.   In a case like that, you could be looking at 2.5% or more in total costs!

Did your advisor recommend this fund?  How about advisor compensation?  Oh, it’s included?  Where?   Why?  Why didn’t the advisor simply construct a blend of low-cost index funds for the core of the portfolio and use an active manager for a small portion for return enhancement?  That would have been a lot cheaper, and without getting into risk management theory, would have accomplished most of the same objectives!

Even if the blended indexes representing this exotic offering achieved a return of 10% in its first year, the offering’s underlying portfolio would have to achieved 12.5% just to tie the indexes.  Remember, a 2.5% premium on a 10% market represents a 25% outperformance.  Not as easy as 2.5% makes it sound.

Yes, I think the fund objectives will be met.

But, will yours?

Jim

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Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

March 6, 2012 at 7:55 am

Smart Investors Think Long Term – And Know What Questions To Ask

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

According to a Morningstar study I saw that was conducted in 2010, the odds for those trying to `time the market’ didn’t look too good – and I doubt they’ve improved much – but there are still a lot of financial tv shows picking stocks for all of us.  Are they doing us a favor? 

Anyway, the study I saw analyzed the cost of market timing using the S&P Index over the 10-year period of 1990-2009 inclusive, which comprised 5,044 trading days.

An investor who stayed invested during the entire period would have experienced an average annual return of 8.2%.  Hmmm, didn’t that include the period of the 2008 market meltdown?   But, I digress.  Here’s what the study found:

· Missing only the 10 best days reduced that percentage to 4.5% – almost in half!

· Missing only the 20 best days meant realizing only a 2.1% average annual return for the entire ten-year period!  Returns were cut in half again… and 75% less than the investor who stayed invested!

· Missing the 30 best days meant an average annual return of only 0.1% – for the entire 10-year period!!!  It’s worth noting that those 30 best days may not—and probably didn’t—run consecutively, which makes it even more problematic.  Can YOU guess those 30 days—in advance?

· Missing the 40 best days meant a return of –1.8% as an average annual return for the entire 10-year period; and missing the 50 best days took that percentage down to –3.5%

Other studies I’ve seen show that individual investors do underperform indexes by a wide margin!  The reason seems to be because they react to current events.   One CFO I talked with told me he constantly sees people ‘get out’ after drops only to be left there during rebounds!

Why do they do this?  Maybe because they simply don’t have an investment discipline.  It becomes too easy to react to headlines.   The next time someone tells you they manage their own portfolio, ask them, “If you had a choice of ten managers – nine professional institutional money managers and yourself, would you pick you?  Would anyone else?”

Oh, well.   But, choosing an advisor can be dicey, too.   Smart investors, however, do ask smart questions. 

Here’s a sample set of screening questions you can use.   Ask your potential advisor to answer them in writing before you begin your discussions.   For example:

  • Are you a registered investment advisor, a registered representative, or both?

       Note:  A registered investment advisor (RIA) works for fees.  A registered representative works on commission.   Some `advisors’ are `dually’ registered.   A registered representative (broker) is free to operate under a `suitability’ standard while an RIA is legally required to work under a `fiduciary’ standard, which means the client’s best interest must be paramount.   `Dually-registered’ representatives will often adopt the fiduciary standard for the planning process, then adopt the `suitability’ standard when it comes time to select investments.  Under that standard, an investment may not be in the client’s best interest; but, if it’s suitable, it passes.

  • Do you work for fees only, commissions only, or a combination?

       Note:  If a combination, you want a breakdown on each.  When does the `fiduciary hat’ come off and the ‘suitability hat’ (commissions) go on?  Some adopt fiduciary status for planning but switch to the ‘suitability’ standard when it comes to the investment process.

  • Do you accept fiduciary status and are you willing to put it in writing?

       Note:  If your candidate isn’t willing to accept fiduciary status in writing – for both planning and investments – one has to wonder just what you’re paying them for.  Chances are it might be simply product sales.

  • Who provides the reporting on my account?

       Is it his own firm?  That’s not necessarily bad, but it’s worth knowing.

  • What firm will serve as custodian of my assets?

       His own firm again?  Again, not necessarily bad, but again worth knowing.  If it’s one thing all the `bad guys’ have in common, it seems to be the lack of an independent custodian.  If a firm has custody of your assets, does the managing internally, and also provides the reporting, where are your checks and balances?  Where is your independent verification?   All those so-called sophisticated investors who lost money to Bernie Madoff and every other crook could have asked this simple question.

  • Are the managers you recommend in-house managers or outside managers?

His own firm again?  Hmmm.  Be careful.  Sometimes a ‘proprietary’ solution won’t transfer so easily if you decide to move to another advisor.  When was the last time an `in-house’ manager was fired in order to use an outside manager?  Thankfully, this isn’t as much of an issue today as it used to be – I don’t think; I’ve been away from that environment for some time now.

Spotting a good advisor shouldn’t be too hard:  A good one will focus on you and not the markets.  S/he will talk about process and risk management and take time to learn about your issues and concerns.

A bad advisor – or worse, a rogue – will focus on investments, returns, and markets.  And, s/he’ll love if you should ask, “What kind of return do you get for your clients?”  That’s a question Bernie Madoff loved to hear.   Only novices and `marks’ would ask it.

Smart investors take a high-level view of portfolio makeup, knowing an 80-year old retiree has a financial and risk profile completely different from a 45-year-old high-earner who’s trying to accumulate assets for the future. 

Remember, success isn’t about being brilliant; it’s about being smart –  and the definition of smart is not being dumb.

 

Jim

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Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Individual Investors Gravitating To RIAs

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

Just as many brokers (registered representatives of broker-dealers) have been moving from their brokerage houses to become independent registered investment advisors over recent years, it appears many individual investors seeking advice are learning who these people are and are following them.

According to TD Ameritrade’s latest RIA survey, trust and customer service are the most important reasons why clients opt to work with registered investment advisors (RIAs) instead of commissioned brokers.

TD Ameritrade’s quarterly query of 502 RIAs, appearing in this month’s issue of Financial Planning,  found that 29% of clients using RIAs said that the RIA’s  fiduciary responsibility to work in the best interest of clients was the No. 1 reason they got their business.    Placing second at 21% was more personalized service and a competitive fee structure, just ahead of dissatisfaction with their current or former full commission broker (19%).

Tom Bradley, president of TD Ameritrade Institutional, said in the report, “The survey results support what we believe is a long term trend of investors gravitating to the fiduciary model… Investors may increasingly seek the confidence that can come from working with independent RIAs who sit on the same side of the table and are required by law to put their clients’ interests first.”

According to the survey, 55% of new business coming to RIAs are coming from traditional full-commission firms.  Not much of a surprise, since that’s where most RIAs came from themselves, including yours truly.

It appears the trend is due to the fact that responsible practitioners want the same thing their seem to desire:  A high level of professionalism characterized by a `client-first’ fiduciary standard coupled with a non-conflicted environment.  

Frankly, it was the reason I began my journey to independence back in 1992; and, it’s gratifying to see that individual investors are finally catching on.

Local Attorney Faces 5 Years In Prison

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

That’s the headline I saw in my local paper a few days ago; and, I have to admit I was surprised.

I didn’t know him, but he was half of a well-respected law partnership that has been in the area for (I think) over two decades.   Now he’s convicted of 34 felony counts and faces up to five years in prison for swindling the estate of an elderly client – in this case, a deceased client – for more than $500,000.

How did this happen?  According to the article, the attorney was executor for the estate and failed to initiate probate for a year after his client’s death and, in the meantime, systematically embezzled the money from his client’s accounts while concealing those assets from the probate court and subsequently filed false statements with the court.

What makes the case interesting is that the attorney had repaid everything he took prior to the filing; but, that didn’t matter, as it shouldn’t.

How do avoid this from happening to you?

Almost all embezzlement scams – Bernie Madoff comes to mind – usually have one thing in common:  The lack of an independent third-party cusotodial firm.  Now, in the Madoff case, checks were made out to Madoff and Madoff supplied all the reporting.

In this case, I don’t know if the investment accounts resided at an independent custodian firm or not.  The attorney may have had control over the accounts, for all I know; but, if there was an independent custodial firm, where was the ‘checks-and-balances’?

Was there a Registered Investment Advisor on the account who would have been receiving independent reporting directly from the custodian, which would have been made directly available to the deceased’s heirs?   Those withdrawals would have shown-up there, no matter what the attorney gave the court… and both the advisor and heirs would have been asking questions immediately – though, presumably, the attorney would have been smart enough not to attempt an embezzlement in the first place, knowing there are other people receiving true reporting.

My guess, and it’s only a guess, is there was likely no independent entity providing the reporting to anyone that could have provided a checks-and-balances. 

There’s a lesson there for all of us.

Jim

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Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.