Premier Financial Group

How to Plan For and Achieve Financial Success

admin — Fri, 01 Jul 2011 03:07:45 +0000

During challenging economic times like these it can be all too easy to forget the financial basics. It is not uncommon for people to do nothing during times of uncertainty. Sometimes doing nothing can be the right thing to do, but often it can be detrimental to your long-term financial success. During difficult times, getting into action and planning for the future is often beneficial and can reduce the stress and anxiety that uncertainty brings. The following are some possible steps you can take that may help you to both assess where you are today as well as to help you establish what actions you need to take to move things ahead with regards to your financial well-being.

Set financial goals. Establish short-term, intermediate, and long-term goals. Include specific dates and dollar amounts and measure your progress periodically.
Create a budget. Budgeting can be a means to achieve financial success. Often people feel that a budget is restraining but it can actually give you more control. This can free you up to afford to do the things that give you satisfaction and joy. If you feel you already know where your money goes, you may want to take on the following challenge: keep track of every dollar you spend for one month. We promise you’ll be surprised and possibly shocked by how much some of your “small” expenditures add up to. Putting a budget in place can be the most important step to putting your money to work for you rather than being controlled by it and falling short of your financial goals.
Automate your savings and investments. The more you automate the process of adding to your savings as well as to investment accounts like IRAs and your 401(k), the less likely you will stop contributing when times are tough. You will also benefit from lower prices when the stock market is down. Automating your contributions can help you stay on track with your goals.
Use credit wisely. Credit card debt is the number one obstacle to getting ahead financially. Purchasing on credit can be costly and having too much debt can get you into financial trouble. Using credit wisely and paying off your credit cards will help you meet your goals.
Use insurance wisely. It’s important to have the necessary insurance coverage such as health, disability and life insurance, but overdoing it in these areas can also be costly. Often people are talked into paying too much for life and disability insurance which may include buying whole life policies when term life may be suitable. Seek advice from a financial planner who is not compensated for the purchase of such policies and evaluate a more appropriate and lower cost choice. Then use insurance as a way to protect your family and financial well-being so that you can sleep better at night.
Understand risk and accept it. It has often been said that there are no guarantees in life. Benjamin Franklin once stated that, “In this world nothing can be said to be certain, except death and taxes.” Life is full of risks. Many of the financial disasters that people experienced over the past decade were related to the significant amount of risk that investors took. Understanding how risky something is can be tricky, so getting advice on the particular area you are evaluating can be key. Seek advice and input about the level of risk you have in your portfolio and seek help to evaluate your appropriate level of risk moving forward.
Use common sense. Diversify your portfolio and risk. Keep your expenses under control. Reinvest the earnings of your portfolio. The old adage “If an investment sounds too good to be true, it probably is” is a statement that, if heeded, would have kept people away from many financial disasters such as Bernie Madoff. Often investors are sold on the benefits of an investment while the potential risks and costs are not shared or are passed over quickly. Ask questions and get a second opinion.
Maximize your employment benefits. Benefits such as a 401(k) plan, flexible spending accounts, and medical and dental insurance can be a significant help to you in achieving financial success. Make sure you are maximizing these and taking advantage of the ones that can save you money by reducing your taxes, help you to capture employer matching contributions, or help you to reduce out-of-pocket expenses.
Create or update your estate plan. Seventy percent of Americans do not have a will or estate plan in place. You can protect your loved ones as well as your assets by clearly defining what should happen with your estate. Having this complete should provide you with peace of mind knowing that you have eliminated this uncertainty for your family.
Become an informed investor and consider hiring professional advice. If you have been managing your portfolio yourself, have been working with a financial advisor but rarely receive guidance, or you just lack confidence in your current investment portfolio or overall strategy, it may be time to shop around for the right advisory firm for you. Set your expectations for the type of advice you would like to be receiving and then speak with advisors about their services and strategy.

If you are shopping for an advisor, please consider calling our office to come in for a free personal consultation. We will help you to see:

Where you are financially
Where you’d like to be at retirement
The best way to get there

Inflation and Your Investments

admin — Sun, 10 Apr 2011 04:17:32 +0000

Last month we made the case that inflation is not a near term concern. We did however caution that the longer term outlook is more troublesome given threats to Federal Reserve independence, growing budget deficits and concerns about the US dollar.

As promised, this month’s Premier Perspective will share our views and the current best thinking around how to protect your assets from an adverse inflationary scenario. We will discuss the relationship between inflation and stock/bond prices and will introduce the best ways to minimize the impact of inflation risk on your portfolio. This newsletter is designed to provide you with clarity and a framework for enhancing your financial peace of mind as it relates to your investments during these uncertain times. While inflation is just one of many factors that can contribute to unrest and worry among investors, there are well documented ways to minimize the negative impact inflation can have on you as an investor and thus enhance your peace of mind around this issue.

Inflation and Stock Prices

There is some disagreement as to the relationship between inflation and stock prices. Dimensional Fund Advisors, the nation’s leading institutional asset class fund provider, notes that “inflation is just one of many factors driving stock performance. US market history since 1926 shows that nominal annual stock returns are unrelated to inflation.”¹

While we certainly acknowledge that a host of factors affect stock prices and that it is hard, if not impossible, to identify exactly what the market is truly reacting to at any given time, there is evidence that the price people are willing to pay for stocks (the markets’ price to earnings or PE ratio) is inversely related to the rate of inflation. History shows that when the rate of inflation is below 6%, the market has traded at significantly higher PE multiples, meaning that people were more optimistic and willing to pay more for stocks. Such an environment would generally be more positive for market returns. Conversely, when the rate f inflation has been higher, the PE ratio has been considerably lower, meaning that investors are less optimistic about stocks and willing to pay less for them. This type of environment has tended to be much more challenging for stock performance.

Exhibit 1

Assuming that inflation does become a significant problem going forward, exhibit 1 would indicate that we might reasonably expect lower PE ratios and tougher sledding for the markets as a result.

Additionally, economists Bekaert and Engstrom note that high inflation coincides with heightened economic uncertainty and high risk aversion, neither of which bode well for the equity markets.²

Inflation and Bond Prices

Inflation is said to be the number one enemy of the bond market. During a highly inflationary environment, interest rates move higher, and as most fixed income investors know, interest rates and bond prices are inversely related.

During the heightened inflationary period of the late 70’s and early 80’s, AAA rated corporate bonds sold for 44 cents on the dollar.³

In addition, inflation tends to seriously erode the principal value of bond holdings over time. So, while principal protection strategies are often desirable by investors, at a 4% rate of inflation, a dollar is cut in half every 18 years. Therefore, over the life of a longer dated bond at even moderate rates of inflation, the real future purchasing power of your initial principal investment could be cut in half or worse.

What to Do About It

Given this information, what should the average investor do to protect themselves from a potentially adverse inflationary scenario? How do you gain peace of mind around this issue when there is so much uncertainty that surrounds it?

By understanding the two main ways you can address the issue of inflation and your investment portfolio, you will have more clarity around this issue and be in a better place to make a more educated decision with your money.

An investor can deal with inflation by either hedging its immediate effects or by attempting to earn a total return that outpaces inflation over time. Your risk tolerance, investment goals, and age can determine which of these strategies is most appropriate for you.

Hedging Inflation Risk

Hedging, in this specific context, would mean owning assets whose values tend to rise with inflation. Candidates for hedging include retirees dependent on their investment portfolios to meet living expenses, fixed income investors and others who would experience a diminished standard of living during an inflationary period.

As we define it, an appropriate inflation hedge would be an asset that:

Has moderate inflation adjusted or real returns
Is low risk (has minimal variability of real returns)
Has low correlation with other assets negatively impacted by inflation (has dissimilar price movement to stocks and bonds)

When we look to the investment marketplace for inflation hedges, we hear a lot about gold, oil and commodities. It is very true that these assets are correlated to inflation, meaning they rise in value in a nasty inflationary cycle.

As you will see in exhibit 2, however, gold, oil and commodities are enormously risky assets whose annual price fluctuation is far more extreme than we have seen in the stock market over time.

What few investors know is that short term treasuries and especially treasury inflation protection securities (TIPS) are both very effective inflation hedges with minimal risk. Over their respective sample periods, these assets (one month and one year treasury bills and TIPS) have all produced positive inflation adjusted returns while controlling risk. They also exhibit low correlation to more traditional assets like stocks and corporate bonds, which provides additional portfolio diversification. For those investors who are more risk averse, these assets would be much more appropriate inflation hedges than the exposure to gold, oil and commodities that many market pundits recommend. ⁴

Total Return Strategy

In a total return strategy, an investor attempts to outpace inflation over time by holding those assets most likely to produce strong inflation adjusted returns over the long haul. Such assets, like stocks, come with higher volatility and more near term sensitivity to inflation as we discussed previously.

Candidates for a total return approach to combating inflation risk would be younger investors who still have earnings capacity and time to recoup any short term inflation related losses, those investors managing assets for the next generation (kids/grandkids) and other asset pools with long time horizons such as endowments, scholarship funds and community or private foundations.

Since the time of reliable market data (1926), stocks have produced a return that has outpaced inflation by slightly more than 6% a year.⁵ Of course these premium returns have come with much greater levels of risk, making a significant stock allocation more appropriate for a long term rather than a short term hedge.

Perspective and Practical Takeaways

Please note that this newsletter is not about market timing or making drastic portfolio reallocations due to your concerns about inflation. It is about understanding how high inflation affects portfolios and what assets could support your goals in that environment.

Remember that the stock market is nothing more than a reflection of the aggregate views of all investors. Given this reality, the current chatter, viewpoints, and subsequent investment positioning around inflation are already reflected in market prices.

Also remember that, in the short term, the markets react to news. If the news around inflation becomes more negative going forward, stock and bond prices will reflect this reality. Assuming the news around inflation gets better, stock and bond markets will reflect that reality.

For you, as an individual investor, know that the marketplace is grappling with the potential for inflation just as you might be. Stock and bond prices already reflect current views about inflation, so making aggressive portfolio changes around headlines and hype does not make sense.

We would, however, strongly recommend that you:

Determine whether an inflation hedging or total return strategy is most appropriate for you. Given your risk tolerance, phase in the lifecycle, and goals for the money you are investing, one of these strategies may be more appropriate for you than the other.
Review your fixed income allocation and determine how much your current holdings are exposed to inflation risk. Bonds with longer maturities and bonds with higher yields are more sensitive to inflation as they react more aggressively to moves in interest rates. We have long advocated for high quality, short duration fixed instruments and note that very few investors are positioned this way.
Understand that many supposed inflation hedges are highly volatile investments. Commodities, gold and oil, while positively correlated to rising inflation, are incredibly risky instruments, with historic volatility nearly twice that of the stock market. Treasury inflation protection securities (TIPS) have far superior risk adjusted returns and are a very solid vehicle for hedging inflation risk.
Accept that the stock market already reflects current views about inflation. It will only be when and if the news and collective wisdom of the market become more positive or negative around this issue that stocks and bonds will react accordingly.

Closing Remarks

We are well aware of the concerns shared by many investors. We are living in uncertain times and know how hard it can be to create and maintain financial peace of mind. We have learned over the years that by focusing on three key areas of your financial lives, you can be more freed up than ever before. Our three step process for helping clients create and enhance their own peace of mind has been instrumental for hundreds of investors over the past two years and can be for you too.

Are you ready to stop worrying and get proactive around your finances? If so, please give us a call at (800) 331.7212.

¹Bryan Harris, “Managing Inflation Risk.” January 2010

²Bakaert and Engstrom, “Inflation and the Stock Market, Understanding the Fed Model.” September 2008

³George R. Hoguet, “Inflation and Stock Prices.” September 2008

⁴Index start dates: 1 mo treasuries 1926, 1 yr treasuries 1941, TIPS 1998, Commodities 1991, Gold 1975, Oil 1979

⁵Bryan Harris, “Managing Inflation Risk.” January 2010

The Sidelines

admin — Fri, 01 Oct 2010 05:51:22 +0000

A Few Questions

Are you one of the many Americans who have lost faith in the stock market, the economy and the political system?
Have you sat in low interest bearing investments as the Dow has risen over 4,000 points in the last 18 months?
Are you contemplating whether or not it is time to get off the sidelines and back into the market?
If you answered yes to any of these questions, we invite you to continue reading this newsletter, which is designed for you.

The Facts

Let’s not kid ourselves. Many American investors have had a really rough ride. The last decade has produced two of our nation’s worst bear markets in history, shed light on numerous scandals within major brokerage firms, and exposed many cases of financial industry fraud. We have seen explosive growth in the amount of litigation brought against financial advisors and their firms, and it seems there’s no end in sight for Wall Street’s abusive practices.

The financial services industry is the nation’s second most hated industry group (tobacco being the only industry more deplorable than the one in which we operate), garnering the approval of only16% of Americans.

Given this confluence of negative factors, it stands to reason that you might get nauseous at the mere thought of investing your assets in the market or working with a financial advisor.

We’re here to tell you that there is hope. There is a better way to experience the markets and have a trusted advisor relationship. If you are one of the many investors who has thrown in the towel and cursed the markets and financial professionals, swearing never to trust either again, we want to give you some encouraging news.

A Shift in Focus

We understand that, given the recent experience outlined above, investor sentiment is incredibly negative. To compound matters, the financial media – which we remind you is designed to play on your emotions like fear and greed – continues to pound the table with a laundry list of negative forces facing the nation, the economy, and the global capital markets.

Yet while media pundits and others continue to remind us of how bad things are, the market is skipping to a different tune.

The Dow is up over 4,000 points since the March 2009 lows, while the more representative S&P 500 has posted even more impressive gains of over 70%. If we look a bit closer, there are other factors aside from the strong market performance that indicate there may be a light at the end of the tunnel.

Corporate Balance Sheets/Earnings
Global corporations are in balance sheet repair mode. Many have been reducing debt and leverage while streamlining operations and improving efficiencies. Earnings reports have been constructive overall, with the majority of S&P 500 companies exceeding analyst estimates. American companies have several trillion dollars of cash that, when deployed, should have a meaningful impact on the economic system and the markets.

Mergers and Acquisitions
Many companies are beginning to put cash reserves to work. Merger and acquisition activity is on the rise, with nearly $450 billion in deals announced so far this year. This represents an increase of nearly 36% over the previous year.

Strong merger and acquisition activity suggests that many corporations are comfortable with their prospects going forward and that they are willing to make significant investments to increase shareholder value. While the media has portrayed the fact that companies are hoarding cash – which is likely true to some extent – the numbers indicate that the hoarding argument is exaggerated.

Stock Buybacks
A stock buyback is when a company repurchases its own stock from shareholders. While some argue that a share repurchase program might indicate that a company has limited growth opportunities (why would they buy back stock rather than investing directly in the expansion of their company?), others claim that buybacks show confidence among corporate management. When a company feels its shares are undervalued – the most common publicly cited reason for buybacks – it will take shares off the market. Less supply of shares should lead to price increases given constant demand.

Share buybacks, which total $267 billion to date, are up nearly 400% on a year over year basis and serve to refute the hoarding argument while showing a willingness among companies to prudently use reserves.

Bringing it Home

Despite the doom and gloom, there are legitimate signs that the markets are undergoing a healing process. While our nation faces significant challenges, none of them are a secret to the markets. As such, current assessments about the impact of these challenges are already reflected in market prices and will have no further impact until the collective wisdom of the market becomes either more optimistic or more pessimistic about the future.

What to do About it

This takes us back to our original questions. If you are tired of earning next to nothing on your money as the market continues to push higher or if you are looking for a way to get back into an investment portfolio, we can help.

There are proven ways to minimize the risk in your portfolio while maximizing your odds of having a successful long term investment experience. You can also work into an investment portfolio in such a way so as to avoid the common blunder of placing all your assets at the wrong time.

There are many privately owned Registered Investment Advisory companies that are legally obligated to put your interests ahead of their own. Premier is one of them. We welcome the opportunity to share with you another way to experience the markets and the client/advisor relationship.

We are not commissioned sellers of financial products and want to be a resource for you and those you care about. If you are ready to get off the sidelines and take proactive steps toward implementing a planning and investment process designed to get you to where you would like to be, please give us a call.

Planning For Your Retirement

admin — Sun, 01 Aug 2010 21:53:32 +0000

Recent studies indicate that retirement is the leading financial concern for Americans. Given the growing uncertainties around the future of Social Security and Medicare, and the approximate $11 trillion hit to our collective net worth due to the financial crisis, it is easy to see why this is the case.

While evidence indicates that the burden of securing a comfortable retirement falls squarely on our shoulders (the days of corporate and government pensions seem numbered), many Americans are failing to be proactive around saving for their retirement.

If you need to get serious about your own retirement planning, or are concerned about the planning needs of your employees, children, or grandchildren, this newsletter is for you. It will introduce a six step process that will help focus your retirement planning efforts and provide you with a framework for securing the type of retirement you or your loved ones wish for.

STEP #1 – Acknowledge that procrastination around financial matters is the costly norm in our society

Hockey legend Wayne Gretzky aptly notes that “procrastination is one of the most common and deadliest of all diseases and its toll on success and happiness is heavy.” Take for example that:

Only 44% of workers have done a retirement needs calculation
Average credit card debt per household exceeds the median 401k balance
Only 20% of workers feel they are doing a good job of preparing financially for retirement
Just 13% of workers are confident they will live comfortably throughout retirement

As we see it, a U.S. culture dominated by materialism, a lack of financial education among our nation’s populace, and a general distrust of financial advisors and the financial markets has led many to shy away from seriously addressing their retirement needs.

STEP #2 – Commit to not being one of the millions of Americans failing to be proactive around their retirement planning needs

An unknown author once said that “there’s a difference between interest and commitment. When you’re interested in doing something, you do it only when circumstance permits. When you’re committed to something, you accept no excuses, only results.”

It seems fair that we each ask ourselves whether we are interested in securing a comfortable retirement or truly committed to this process. If you find yourself lacking a real commitment to saving for your retirement, talk to your trusted advisors, your spouse or your accountability partner about how to get moving in the right direction.

STEP #3 – Undertake a goal-setting and visioning process

Visioning, or painting the picture of the ideal rest of your life is an important part of the retirement planning process. Without a clearly defined ending place in mind, it becomes difficult to engage in a meaningful planning process.

After defining what your ideal retirement looks like, you will need to put a price tag on that retirement and put a specific, goal-centered action plan in place that will allow you to get where you would like to be.

For example, a goal relating to retirement could be that you wish to generate a 30-year, inflation adjusted, pre-tax income stream of $20,000 from your retirement account.
Setting a retirement goal in this way will allow you to calculate a retirement accumulation target and will help you identify the level of annual savings and rate of return needed to meet your goals. From this point, a planner can make educated recommendations as to the appropriate positioning of your assets and construct a portfolio that is truly aligned with your specific needs and goals.

STEP #4 – Identify the most appropriate retirement savings vehicles

Whether you are a new investor looking to save a modest amount in a tax advantaged way, a business owner looking to play catch up by saving a very large amount in just a few years, or somewhere in between, there are numerous retirement plan structures appropriate for your diverse needs.

We have found that working collaboratively with your investment advisor, CPA, and in some cases, a retirement plan third party administrator will yield the best results in determining which retirement savings option is right for you.

STEP #5 – Align your portfolio with the evidence

After identifying an appropriate retirement savings vehicle, it is crucial to implement an investment approach that maximizes the likelihood of you having a successful long term experience.

While the financial media and the majority of financial advisors continue to focus on which stocks, sectors, or funds to own and which to avoid, evidence shows that this focus is misguided.

Well documented and supported research shows that globally diversified portfolios of low cost index or structured asset class funds offer the highest probability of long term investment success. Sadly, in our more than 20 years in the business, we have rarely reviewed a potential client portfolio that was truly aligned with this evidence.

STEP #6 – Commit to follow-through and discipline

Business philosopher and motivational speaker Jim Rohn notes that “discipline is the bridge between goals and accomplishment.” Without commitment, discipline, and follow-through, the achievement of your financial goals becomes increasingly challenging. We understand that remaining faithful to your investment program is often easier said than done.

Markets experience significant ups and downs. People get sick or laid off. College tuitions need to be funded. Homes and/or vehicles often need repair. Too often we see that these factors lead people to stop contributing to their retirement accounts, or worse yet, withdraw money prematurely from these accounts or take a loan from them.

There are several practical things you can do to help yourself remain committed to your financial future. The first is to educate yourself about the markets. Evidence shows that educated investors tend to be more tolerant of market fluctuations and tend to stand by their financial plans in both good times and bad. This leads to a more successful investment experience. The second is to build a cash reserve that will allow you to meet unforeseen needs without tapping into your retirement account or stopping contributions. Finally, you can automate the investment process by linking your checking account or payroll directly to your retirement account. This can help you avoid the temptation of finding other “more useful” purposes for funds destined to go toward your wealth accumulation needs.

Concluding Remarks
We know that retirement planning is a major concern for many Americans, but that it is a highly procrastinated item. We invite you to implement this six step purposeful planning process as we have seen how well it works in helping people achieve their financial goals.

As always, please feel free to use us as a resource if you would like more information on this topic. We are not commissioned sellers of financial products and are committed to being a resource for our community.

We know that the future of Humboldt County, in large part, will be driven by the financial success of its residents. We hope that our communications with you and our ongoing support to our client base are contributing positively to the overall wealth and financial awareness of our community.

If you would like to learn more about how the financial planning process can help you achieve your goals and sleep better at night, please see the enclosed invitation to our upcoming presentation.

Tug of War

admin — Tue, 01 Jun 2010 05:34:10 +0000

As the stock market has moved significantly off its lows in 2009, we have found that individuals fall into two main categories. On one side, we find those who cheer the market’s advance and speak to legitimate signs of recovery. On the other, we find those who curse the system, citing no apparent reason for the significant gains we have seen.

This of course leads many to question which viewpoint is correct and where the market is headed over the near term. At Premier Financial Group, unlike the vast majority of firms in our industry, we are not in the short-term forecasting business. It is well documented that making economic and market predictions is fraught with challenges, and that making investment decisions based upon one’s near term outlook is generally problematic.

We certainly empathize with a person’s desire to know what the future holds, as we would all like that certainty when facing our investment decisions. However, rather than search for the unknowable, we find it more productive to focus on what we do know and on what our clients need. Given an enormous amount of empirical evidence, we can confidently state the following:

At any given moment, the stock market is a representation of the aggregate views of all investors – both positive and negative. In other words, market forecasts and the subsequent positioning of investors are already reflected in market prices.
In the short run the market reacts to news and news by its very definition, is unpredictable. If future news-flow improves, the stock market will move higher. If news-flow deteriorates, markets will drift lower.
At the current time there are both positive and negative forces impacting the markets. On the positive side we have growing GDP, improving corporate profits, and a strong rebound in consumer sentiment and in the prices of industrial metals, commodities and cyclical stocks, all which would indicate that an economic recovery is under way. On the negative side we have political uncertainty, growing federal budget deficits, concerns about the US dollar and our nation’s credit rating, many more commercial and residential mortgages that need refinancing, tight lending conditions, high unemployment, and uncertainty overseas. Which side wins this tug of war in the near term is truly anybody’s guess.
Over time, owning businesses, i.e. stocks, has rewarded investors more than lending via the bond market.
Owning small company stocks has historically been more rewarding than owning large company stocks.
Owning value stocks has been more rewarding than owning growth stocks.
Keeping your fixed income exposure short in duration and high in credit quality will provide security to an investment portfolio and provide a stable source of funds upon which can be drawn during difficult market periods.

The Simple Truth

The truth of the matter is that no one knows what the near future holds for the stock market. Not you, not us, not the equity research departments of brokerage firms or other financial institutions. Continuing to focus on the noise – things like hot stocks and the headlines – tends to detract, rather than contribute to your financial

peace of mind, sense of security, and portfolio performance. The good news is that very little of the hype and market analysis streaming from brokerage firms and the financial media really matters to you as an investor.

A Shift in Focus

Rather than focusing on whether or not problems with Greece and other nations are leading to the ultimate demise of the European Union (a topic of some concern no doubt), we propose that you direct your attention to the portfolio decisions that will offer you the highest probability of meeting your goals over time.

For example:

Do you have enough liquidity to weather a future decline in the markets or continued economic weakness?
Is the money you have in the stock market long term in nature and can you tolerate a short or intermediate term decline?
Is your fixed income portfolio short in maturity and high in credit quality?
Is your stock portfolio well diversified and does it emphasize the most rewarding areas of the global markets?
Are you aware of your total investment expenses and are those expenses reasonable in light of the services you receive?
Has your portfolio been reviewed for tax efficiency and has the tax liability regarding your investments been significantly eroding your return?

Closing Remarks
 We understand that many investors find themselves confused, lost in conflicting viewpoints that point either to a true economic recovery, or nothing more than stimulus induced bounce. After more than two decades in the advisory business, we find it more meaningful to focus on those planning decisions and portfolio construction techniques that really matter to you. Rather than speculating about the future direction of the markets, we invite you to focus on yourself.

Tuning out the noise, identifying your goals, positioning your assets accordingly, and working with a trusted advisory team will bring you comfort, security, and confidence during these uncertain times. Reading Investor’s Business Daily, watching Squawk Box, and debating the legitimacy of the recent stock market recovery will likely do the opposite.

The Pitfalls of Chasing Yield

admin — Thu, 01 Apr 2010 07:41:55 +0000

With interest rates hovering near zero, many investors are concerned with what they are earning on savings, money market accounts, certificates of deposit, and other fixed income investments. The tendency among both individual and institutional investors is to seek higher yielding alternatives. Recent history reminds us of the dangers inherent in this approach.

This newsletter will expose the risks of chasing high yielding fixed income or equity investments and show you how to generate cash flow through a “total return” approach to investing.

The Dilemma

During periods of strong market performance, the true risks particular to a given investment are often masked. Over the past 25 years, our advisory team has found that these risks are seldom fully disclosed to clients.

Famed investor Warren Buffet sums it up by saying that, “it’s only when the tide goes out that you learn whose been swimming naked.” During the recent market decline, many bond managers and income oriented investors were reminded of the true risks involved with the capital markets.

Beginning in 2002, with low interest rates and an economic and market recovery on the horizon, investors’ appetites for higher yields grew. Given that rates on traditional interest bearing investment vehicles were very low (like they are today), investors looked elsewhere.
Many turned their attention to complex mortgage related securities, high yield bonds, global shipping companies, Canadian Royalty Energy Trusts, and high interest-bearing preferred stocks sold by many brokerage firms.

During the economic boom spanning from 2002 to mid 2007, these investments performed quite well, however their risks were masked. Retirees and the managers of pension, hedge, and mutual funds poured billions of dollars into these vehicles, blind to the true risks involved with them. Brokerage firms and their advisors amassed huge profits creating and selling these instruments, but led their clients to huge losses when the economic, credit and corporate profit cycle rolled over. Investments that were once championed as safe vehicles appropriate for yield oriented investors, fell apart in the ensuing years. Take for instance the following:

Given that yield oriented investors tend to be retirees or others with fixed monthly obligations who place a high priority on safety of principal, these types of losses are enormously disruptive and can lead to real hardship.

The Solution

We have long cautioned investors against chasing higher yields in their fixed income portfolios and from targeting their retirement income needs solely from interest-bearing investments. Instead, we favor a total return approach to investing that targets the generation of portfolio cash flow through both the income and capital gain it generates.

Our total return approach consists of three components which help retirees meet current living expenses and unexpected cash needs, enhance their financial peace of mind, and provide for some portfolio growth to offset the negative impacts of inflation over time.

The first component of our strategy is about liquidity and safety. We advise retirees to maintain at least a year’s worth of living expenses in a safe money market account that is readily accessible.

Second, we encourage clients to maintain another several years worth of living expenses in high-quality, short duration bonds which provide income, reduce portfolio volatility, and provide a safe source of funds to draw from.

The final component of our strategy involves maintaining a highly diversified global equity portfolio that is tilted toward the most rewarding segments of the capital markets. Dividend and capital gain distributions can be used to replenish cash reserves and the short term fixed portfolio as needed. During challenging market periods, cash flow needs can be met by drawing on one’s money market account or fixed income portfolio to avoid selling equities at depressed prices.

We have found over the years that this approach has given our clients a sense of security, confidence and peace of mind. Most importantly, it has allowed them to maintain some exposure to the stock market, thus enabling them to keep up with the rising cost of living over time.

Vanguard’s Findings

Vanguard, one of the few mutual fund companies we recommend, recently conducted a study on portfolio spending. The study highlighted the two main approaches for generating portfolio cash flow – the income approach, which targets yield oriented investments (like bonds) and the total return approach, where a balanced portfolio of stocks, fixed income and cash investments is utilized.

Using real market data, a $1,000,000 starting portfolio value and a 5% distribution rate, Vanguard compared the two approaches and how they fared over various 30-year historical periods. The report concludes that “a decision to move entirely into bonds significantly decreases the portfolio’s ability to sustain the desired level of spending over the long run” and that “the total return approach is the more prudent, and most likely only viable, long-term spending method.” The study, which covered more than 80 years of historical market returns, produced the following results:

Inflation-Adjusted Ending Balances

For an investor contemplating how to go about generating portfolio income, this study has powerful implications. The traditional approach of purchasing a portfolio of corporate or municipal bonds, guaranteed annuities, or other yield oriented investments to generate retirement or other income is fraught with risk. For example, as retirements grow longer due to the increasing life expectancy of Americans, the traditional approach leads to a high likelihood of you outliving your money.

The total return approach, in which a reasonable targeted amount of cash flow is withdrawn from a balanced portfolio’s income and capital gain, has a much higher likelihood of lasting 30 years or more. That time horizon would apply to many of today’s retirees.

Closing Remarks

If you are an investor frustrated with low yields on your investments and are looking for alternatives, we strongly suggest that you steer clear of common yield-oriented investments such as high yield or long term corporate and municipal bonds, preferred stocks, and royalty trusts. These are highly risky instruments that can lead to significant capital losses.

A total return approach that focuses on maintaining sufficient liquid reserves, a fixed income allocation of short duration, high quality bonds, and a globally diversified equity portfolio tilted toward the most rewarding areas of the global capital markets will offer the highest probability of long term success and can increase the longevity of your portfolio.

2009: The Year In Review

admin — Tue, 01 Dec 2009 05:39:48 +0000

Just over a year ago, with the global capital market system in disarray and investor fears and mistrust reaching all time highs, we committed to reaching out to our community in an effort to educate and empower local investors. We are dedicated to helping you make better investment decisions and it is in this context, that we create this monthly Premier Perspective.

As a result of this outreach, we are pleased to share that some of you have joined Premier as new clients. Many others have responded favorably to our newsletters and we greatly appreciate your support. Please know that we are open to any feedback you may have and would entertain any ideas for future newsletters. As always, we encourage you to share these Premier Perspectives with any friends, family members or colleagues who might find them beneficial.

This month, in an effort to emphasize the importance of these concepts as they relate to your financial well being, we will review the core themes introduced throughout the year. They were:

How to build wealth in the markets
What to look for in an advisor
The importance of full disclosure
The benefits of diversification
How our own behavioral biases impact our investment success
How to create financial peace of mind
Building Wealth in the Markets

1. Building Wealth in the Markets

Contrary to popular belief, building wealth in the capital markets is not rocket science. While a majority of financial institutions, money managers and financial professionals justify their existence by creating an imaginary level of complexity, the simple reality is that each of you can dramatically improve your odds of having a successful investment experience by taking a few simple steps.

As indicated in the newsletters titled “Best Kept Secret” and “Fall from Grace,” most advisors endorse an unproven and speculative approach to the capital markets that tends to produce disappointing long term investment results. Historic investors such as Warren Buffet and others encourage you to ignore the incessant stream of misinformation stemming from the financial media (and perhaps your own advisor or his or her firm), and incrementally buy low cost index funds and hold them for long periods of time.

We have endorsed this approach for well over a decade, recommending a globally diversified portfolio of asset class funds that target the most attractive areas of the world’s capital markets. Our long-term clients and our own personal investments have benefited significantly from this approach.

2. A Trusted Investment Advisor

We know that suspicion of investment advisors has never been higher. Most advisors endorse unproven, speculative investment vehicles and operate under limited client protective measures and disclosure requirements. “Traits of a Quality Investment Advisor” urged you to seek an independent advisor who:

Provides independent, unbiased financial advice free from conflicts of interest
Values credentials such as the CFP and continued education
Has a thorough understanding of your entire financial picture including your goals, hopes and vision for the future
Communicates with you proactively in both good times and bad
Works closely with your tax professional and attorney to ensure that your legal, tax and financial planning needs are addressed and met

Ensuring that your advisor meets these criteria will enhance the likelihood that you will have a positive long term financial relationship.

3. Full Disclosure

As we shared in August, “the concept of full disclosure, as it relates to your relationship with an investment provider, is probably not a hot topic at your dinner table. We think it should be.”

A 2009 Humboldt State University marketing department survey revealed that full disclosure was the most important aspect when deciding who to trust with their investments. Premier Financial Group is the only firm in Humboldt County that is legally obligated to act in the best interests of our clients and to disclose all important information relevant to their financial decision making process.

In “The Right to Full Disclosure” we encouraged investors to seek an advisor who will disclose to them, upfront and in writing, their specific services and fees, their compensation structure, the types of clients they serve, their educational background, details regarding any industry related disciplinary action, their business activities and affiliations, and any conflicts of interest that might affect the objectivity of the advice they deliver. This will provide you with greater clarity and will help you make more informed decisions about your finances.

4. Diversification

Our September newsletter, simply titled “Diversification,” highlighted the enormous amount of misinformation regarding the topic. We cited Jim Cramer’s notion that a 5 stock portfolio is diversified, and the more common industry belief that a handful of mutual funds constitute a well constructed portfolio. These glaring examples show how this important investment topic is abused by the financial media and many investment professionals.

We indicated that properly diversified portfolios consist of many thousands of individual securities, and that true diversification will allow you to more reliably capture market returns while increasing the odds of you having a successful long term investment experience.

5. Behavioral Biases

Two months ago we wrote “Behavioral Finance.” This was a newsletter highlighting the well documented fact that our own human behaviors can be our worst enemies with regards to our investments. We noted that recency and availability biases tend to cloud one’s judgment and lead to more emotional, rather than rational financial decisions.

We encouraged you to think about your own investment decisions and to consider how these behavioral biases may have impacted you over the years. We recommended that you limit your exposure to the financial media as they play on emotion, and encouraged you to ask your advisor how he or she controls his or her own behavioral biases when making recommendations to you.

6. Financial Peace of Mind

In November we shared with you our corporate mission statement “to assist clients in all aspects of accumulating, preserving, enjoying and distributing wealth to achieve financial peace of mind.” Our newsletter “The Five Key Steps to Creating Financial Peace of Mind” recommended that you:

Maintain sufficient liquidity and insurance coverage
Simplify your financial affairs by consolidating accounts
Hire a trusted advisory team bound to the fiduciary standard and full disclosure rules
Own a properly structured and diversified portfolio
Address your advanced planning needs

We argued that these steps, if taken in tandem, would give you greater clarity around your finances, provide you with an enhanced sense of security, and increase the likelihood that you will have a more successful long term financial experience.

Closing Remarks

Like many investors, we are frustrated with the state of our industry, the business practices of major investment firms, and the amount of misinformation that plagues the investing public. We are a stand for raising the bar in our industry and delivering the Premier experience to more investors. We continue to make our case against major investment firms with large advertising budgets, and are confident that our continued outreach will help enlighten and educate you and lead you to a more sound financial future.

This year, our Premier Perspectives provided a framework for making more educated investment decisions. We introduced several key themes that, if implemented, will increase the likelihood that you have a more successful long term investment experience.

In 2010, we will build on this foundation, provide you with more information about how these topics relate to your future, and do more to share our personal and professional passions with you.

May the New Year bring you and your loved ones many blessings!

The Five Key Steps to Enhancing Your Financial Peace of Mind

admin — Sun, 01 Nov 2009 07:54:36 +0000

Uncertainty disrupts peace of mind

We’re living in uncertain times. Geopolitical instability, the national deficit, a fragile economy, a weak dollar and concerns about health care, social security, and the state budget give rise to much apprehension. Add in the stock market volatility seen over the last two years, mounting job losses and the potential for higher taxes going forward, you have a recipe for significant worry and confusion.

The Good News

Despite this laundry list of negatives, there are steps you can take today to enhance your financial peace of mind. This newsletter will give you five action steps that will bring greater levels of peace and certainty to your financial life. If you are like most, greater clarity around your finances will often free you up to enjoy more of those things you love.

1. Maintain sufficient liquidity and insurance coverage

In rising markets, people prefer not to talk about building cash reserves. People prefer to avoid talking about insurance altogether. The truth however, is that maintaining sufficient liquidity along with an appropriate amount of insurance coverage to cover catastrophic events are the cornerstones of sound financial planning.

We have long advocated that you maintain sufficient liquidity to provide a stable source of funds upon which to draw, in the event of a job loss or extended market downturn. Among those affected most significantly by last year’s market decline were retirees living off the returns generated by their investment portfolios.

Whereas this strategy works well in rising markets, the risks inherent in this approach became evident last year. If you are retired, we recommend that you maintain several years’ worth of living expenses in safe, liquid assets that will help you maintain your standard of living and provide staying power during troubled times. If you are in your working years, you should maintain 6 to 12 months living expenses in cash, depending on your job stability and attractiveness in the workforce. Maintaining sufficient liquidity will provide you with an added sense of security and help prevent the sale of assets at potentially disadvantageous prices in the event of an emergency.

We also advocate that you maintain appropriate amounts of life, health and disability insurance as well as an umbrella liability policy that offers protection from many adverse situations. Your advisor and insurance agent should recommend appropriate coverage amounts.

2. Simplify your financial affairs

We are continually surprised by the amount of unnecessary complexity in people’s financial lives. Individuals often have multiple advisors and numerous investment, bank, checking and money market accounts.

You may think that having multiple advisors and numerous accounts is another way to diversify your holdings, however, we find this most often has to do with a lack of trust. We advocate that you consolidate your investment accounts with a trusted advisor and your banking relationships with a stable institution.

This tends to provide you with greater clarity around your financial picture and will ensure that you receive more holistic and integrated advice.

3. Hire a trusted advisory team bound to the fiduciary standard and full disclosure rules

As you have likely gathered by now, we do not hold Wall Street or the brokerage industry in the highest regard. As our colleague Ron Ross, PhD, notes in his groundbreaking work, The Unbeatable Market:

“Most investors’ overall goal is long-term financial peace of mind. Unfortunately, Wall Street leads its customers in the opposite direction—toward stress, confusion, excessive activity, and unnecessary risk. No other industry could get away with such disregard of its customers’ objectives.”

We are concerned for all investment clients that the vast majority of financial professionals (employees of brokerage firms, banks and insurance companies) are under no legal obligation to act in your best interests. Nor are most advisors legally obligated to disclose all the information relevant to your decision making process. We have seen firsthand how conflicted much of the advice stemming from these institutions tends to be and are a stand for more objectivity and more stringent client protective measures.

Registered Investment Advisory firms (RIA’s) are legally obligated to put your interests first and are highly recommended as your primary source for financial advice and investment management services. Knowing that your best interests are at the center of the advisor-client relationship will give you a higher level of confidence and help put you at ease.

We also recommend that you work with an advisory team versus a stand-alone investment provider, advisor, or broker. The vast majority of investment professionals (even those who work in branches with multiple advisors) go it alone. As a one man or woman show, it is impossible to offer clients any promise of longevity or continuity to their planning experience. Working with a team of financial professionals offers your family a multigenerational promise and the continuity, expertise and consistency that you deserve as an investor.

4. Own a properly structured and diversified portfolio

Capital markets are risky. Unfortunately many advisors compound the risk exposure of their clients by recommending poorly diversified and speculative portfolios of stocks, bonds, mutual funds, or money managers.

Knowing that your investment assets are spread out across the global capital markets and allocated toward those areas with more attractive risk/reward profiles will enhance your confidence and allow you to be less fixated on the performance of any individual security.

Additionally, proper portfolio structure and diversification lead to less risk, better performance, and a better long term capital market experience. Truly diversified portfolios consist of multiple, well defined asset classes and thousands of individual securities.

5. Address your advanced planning needs

Amid the daily hustle and bustle, it is easy to overlook important areas of our financial lives. One such area is estate planning, or planning for the accumulation, conservation, and distribution of an estate.

While you may have the intention of drafting a will or durable power of attorney or funding a living trust, individuals and families often go years without truly addressing these important issues.

At Premier we have seen how financially devastating the failure to address one’s estate issues can be. On the other hand, addressing your advanced planning issues (asset transition, charitable gifting, etc.) will provide your financial life with clarity and purpose. Engaging in higher level planning will help your heirs distribute your assets according to your wishes, eliminate the possibility of an unexpected post mortem tax bill and help you support your loved ones and the causes you care about long after your passing.

Conclusion

At Premier we strive to deliver an exceptional long term investment experience and to enhance your financial peace of mind. By maintaining sufficient cash reserves and insurance coverage, simplifying your financial affairs, working with a highly qualified, independent fiduciary advisory team, owning a properly structured portfolio, and addressing your higher level planning needs, you will increase your odds of having a successful long term financial experience and enhance your financial peace of mind.

Taking these simple steps can help bring clarity to your financial life, which in turn, can have an enormous impact on your overall sense of well being.

As noted in our corporate mission statement, our goal is “to assist clients in all aspects of accumulating, preserving, enjoying and distributing wealth to achieve financial peace of mind.”

It is this mission that we are most passionate about delivering to our current clients and that we would especially like to deliver to you. Please feel free to use us as a resource in helping you define, achieve and maintain financial peace of mind as it relates to you and your family.

Behavioral Finance

admin — Thu, 01 Oct 2009 07:45:51 +0000

People often make irrational financial decisions. Behavioral Finance, a relatively new field combining psychology with conventional economics and finance attempts to explain why this is the case.

This month, we will address two of the many behavioral biases that negatively impact our investment decisions, show specific examples of how these concepts relate to recent market activity and give you tips that will help minimize the negative impact these behaviors can have on your long term investment success.

Availability Bias speaks to the fact that people tend to heavily weight their decisions toward information that is more readily available, making any opinion biased toward the latest news. Early this year, investors were being bombarded with a constant stream of negative headlines from the financial media. Amid the following stream of depressing captions, investors pulled billions out of the stock market:

“Financial Crisis, War & the Rise of National Socialism in America”
“Trend Alert: U.S. Has Entered ‘The Greatest Depression’”
“Financial Crisis Spurs Rash of Family Annihilator Murder-Suicides”

According to the Investment Company Institute, a national association which compiles data related to mutual funds, investors redeemed over $52 billion from stock mutual funds in February and March 2009 alone. Many of these assets ended up in taxable and tax-free bond funds. Unfortunately for those investors, the stock market has rallied over 50% from its March lows while bond funds have produced relatively low to negative returns over the same period. Investors influenced by and reacting to the enormously downbeat and highly available stream of information relating to the financial crisis have missed out on one of the most significant rallies in recent history.

Recency Bias refers to the tendency to remember recent events or observations more vividly and to give recent information more weight than historical information. During the heat of the market decline earlier this year, it was very difficult for many investors to keep a historical context of market behavior in mind. Stories of how different this environment was from past bear markets were rampant, and many individuals abandoned their stock positions, favoring “safer” alternatives.
On March 17, just one week after the market bottomed, our firm gave a presentation at the River Lodge in Fortuna where we encouraged investors to set aside their emotions (we know – this is easier said than done) and look at the current environment in a historical context. We made the following points:

When the stock market gets cheap, future returns tend to be favorable and
When investors are highly pessimistic, future returns tend to be favorable

The market’s price to earnings ratio (a measure showing how much investors are willing to pay for $1 of corporate earnings) indicates whether stocks are cheap or expensive. At the time of our presentation, the market had a price to earnings ratio of around 10, low by historical context and reflective of the amount of fear within the system. History shows that future returns from these depressed P/E levels are quite favorable (see exhibit 1). Such was the case this time around as markets have rallied over 50% from the time of our presentation. Despite the evidence and our encouragement, several attendees placed more weight on recent events (huge market declines and intense pessimism) and chose to avoid the equity markets, favoring instead cash instruments yielding approximately 1%. This is nothing new. Evidence suggests that investors tend to abandon stocks near market lows, and rush into them at market peaks.

Exhibit 1

2 Year Forward Returns by Market PE Ratio
At the presentation, we also discussed the relationship between investor sentiment and future market returns. The American Association of Individual Investors (AAII) is a group comprised of over 150,000 individual investors who are surveyed on a weekly basis regarding their outlook for the markets. It has been shown that when survey participants are highly optimistic about the future, that might indicate a high point, or a market top, whereas highly negative sentiment generally coincides with a bottom or a good entry point for stocks. Such was the case here.

In March, negative or bearish sentiment reached an all time high with over 70% of AAII survey respondents expressing a pessimistic view on the markets. As we know in hindsight, individual investors were mistaken as markets have rallied enormously since that time. Investors, and some advisors for that matter, are often told to follow their gut or their instincts with regard to their investment portfolio. Examples such as these, and the very field of behavioral finance, indicate that this is not the best approach for accumulating capital market wealth over the long run.

Takeaways

We know how challenging it is to be an investor. Information overload, volatile markets, stories of deceitful advisors, and the noise streaming from Wall Street firms and the financial media all infringe on our financial peace of mind and make it hard to build and maintain a quality investment program for the long run. Complicating things further yet are our own behavioral biases, which tend to detract from our success as capital market participants. In order to minimize the potentially negative impact that behavioral biases can have on your investment success, we recommend the following:

Create Awareness: Think about your experience as an investor. Have you bought at the wrong time, sold at the wrong time, or made other subpar financial decisions? Think about how availability and recency biases may have contributed to those decisions and commit to limiting their influence in the future (also easier said than done). Also know that do it yourself investors or investors who do not have an advisor they fully trust are most influenced by behavioral biases.
Eliminate the Source: Ignore or limit your exposure to the financial media. Media conglomerates know that buzz, hype, and playing on our fears sells, and they do this well. In addition to providing shockingly poor investment advice, the media often serves as a detriment to one’s financial peace of mind.
Reach Out: Ask your advisor how he or she reduces the impacts these behavioral biases have on his or her decision making. If your financial professional has not taken the time to research this important field, seek an advisor more familiar with this arena who can help you make sound decisions for the remainder of your investing lifetime. Find a trusted advisor who is legally required to put your interests first and who will be objective in their delivery of financial advice.

Conclusion

The emerging field of behavioral finance provides clues as to why so many people have unsuccessful long term investment experiences. Educate yourself around how your (and most likely your advisor’s) own behavioral biases are serving as a detriment to your wealth accumulation needs, and know that we would welcome the opportunity to partner with you in this effort.

Diversification

admin — Tue, 01 Sep 2009 07:50:45 +0000

The “D” Word

Long before the creation of modern portfolio theory, complex financial derivatives or alternative investments, Don Quixote’s famed sidekick Sancho Panza wisely observed that “it is the part of a wise man to keep himself today for tomorrow and not to venture all his eggs in one basket.”

The unfortunate truth, however, is that this sensible advice regarding diversification can be easy to misapply with regards to your investment portfolio. In an attempt to inform you and help protect you from the common pitfalls that cost investors so much over time, this newsletter will define diversification, expose misinformation regarding the topic and provide you with a blueprint for evaluating your own portfolio.
Diversification is defined as the balancing of an investment portfolio by dividing funds among securities of different industries or of different classes. The rationale behind this portfolio construction and risk management technique is that a portfolio of differing investments will, on average, produce better risk adjusted returns and less volatility than its individual components.

The Problem

Whereas few individuals disagree that diversification is critical to the success of long term investors, there is disagreement about what constitutes a diversified portfolio as well as an overwhelming amount of misinformation regarding the topic.
According to our view of the world (one that is not nearly as mainstream as we believe it should be, due to the successful and misleading marketing techniques of the financial services industry) diversification means to fundamentally own everything. According to the evidence based research of Dimensional Fund Advisors, the institutional asset class fund provider to whom our clients’ investment dollars are allocated, a truly diversified portfolio consists of many thousands of individual securities. Our client portfolios are made up of a global basket of over 9,000 stocks, all but eliminating company-specific and sector risks that have caused and continue to cause investors so much pain. Look no further than the performance of AIG, GM, global shipping companies, or many of the national, regional, or local bank stocks to illustrate the point that owning concentrated positions in individual companies is dangerous.

Regardless of our views, misleading information about diversification is rampant. Take for example a recent publication noting that “studies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to 30 stocks will yield the most cost-effective level of risk reduction.” Such statements completely ignore the current realities within the marketplace, whereby investors can purchase low cost, highly diversified index or asset class funds like we use that contain literally thousands of individual securities. Why own a concentrated portfolio of stocks and take on larger amounts of risk when you can own thousands of stocks efficiently with minimal costs?

Another striking example of bad information regarding this subject can be found in the mainstream financial media. On the “Am I Diversified” segment on CNBC’s Mad Money program, investors call in with their top five holdings and query as to the level of diversification within their portfolios. The host often gives investors who own just five stocks a passing grade with regard to the subject, where in reality, no concentrated portfolio could ever be considered diversified. Giving anyone the perception that owning a handful of securities in any way resembles diversification is misinformed and foolish. This type of misinformation is explicitly linked to the lack of investment success that many individuals have experienced over the years.

Why This Matters to You

Diversification (or the lack thereof) has serious implications for portfolio performance and your ultimate success as a long term investor. The difference between a properly and a poorly diversified portfolio could be the deciding factor on whether or not your financial goals are met. Seem like an overstatement? Consider this: we know that individual investors significantly underperform market rates of return on average. According to Dalbar’s 2009 Quantitative Analysis of Investor Behavior, average mutual fund investors underperformed the S&P 500 (a basket of 500 large U.S. companies) by nearly 6.5% per year for the twenty year period ending 12-31-2008.

Although investors’ behavioral biases often contribute to their lack of investment success (the topic of next month’s newsletter), the severe lack of diversification in many portfolios also plays a key role. After nearly 30 years in the business, we have seen firsthand how grossly under-diversified most investors are and how much that has cost them over the years. Take note that this is rarely the fault of individual investors who trust in their advisors to provide a diversified portfolio. Most investors believe they are well-diversified, however we know that this is simply not the case. We are continually surprised to see how many portfolios completely lack many of the best performing asset classes such as US small cap value, international small cap value, and emerging markets. Additionally, the few portfolios actually containing these top performers are often under-diversified and own a fraction of the companies available in the asset class.

The difference in compound returns between a well and a poorly diversified portfolio over your investing lifetime makes a huge difference, often to the magnitude of six figures or more depending on your level of savings. We are committed to being agents of change regarding this issue and to delivering the kind of investment experience that you deserve.

Recommended Actions

Given the importance of diversification to your success as a long term investor, we would recommend the following:

Review your most recent investment account statement. If you see a list of individual stocks or bonds, or a handful of mutual funds, the chances are you are under-diversified.
Ask your advisor what he or she believes about diversification. If the answer is anything other than fundamentally owning everything, i.e. thousands of securities across the global capital market system, you should be very concerned.
Seek the advice of an independent Registered Investment Advisor or Certified Financial Planner regarding the diversification of your portfolio. Many initial consultations with these professionals are free.

Next Step

As Humboldt County’s only locally owned Registered Investment Advisor, we would welcome the opportunity to analyze your portfolio to determine its level of diversification. Our team can help you learn how to properly allocate your assets so as to reduce your portfolio risk while capturing the world’s capital market returns more reliably. Should you decide to utilize our services for a second opinion, there is no obligation for you to work with us. We are intent on providing value to investors in the community so that they are empowered to make informed decisions about their future. Please utilize our firm as a resource so that you don’t suffer from a poorly designed portfolio.