OUR PHILOSOPHY
The greatest value we provide is ensuring that clients meet or exceed their “Measurable Objectives.” A financial planning foundation must be built to provide meaningful advice on all lifetime financial decisions. All financial planning and investment assumptions must be substantiated by empirical data. We believe objective, fiduciary advice is critical to a lasting client and adviser partnership.
Financial Planning Assumptions
A solid financial planning foundation is enormously valuable for making financial decisions, but only if the underlying assumptions are credible. While there is always uncertainty about the future, realistic expectations for income, spending, tax profile and investment returns are critical. Unlike many “free” financial plans, our plans include tested assumptions that fall between conservative and realistic, increasing the probability that your “Measurable Objectives” will be met or exceeded.
Investment Return Assumptions
History demonstrates that long-term (7-12 years) investment returns are driven by valuation – the price you pay for the investment relative to underlying fundamentals. Unfortunately, valuation tells us little to nothing about likely outcomes over shorter time periods which are driven by the vagaries and fluctuations in human psychology. It is essential to match investment risk with timing of cash flow needs.
INVESTMENT PHILOSOPHY
``Investors do not fear losing money as much as they fear solitude, by which I mean taking risks that others avoid. When they are caught losing money alone, they have no excuse for their mistake, and most investors, like most people, need excuses. They are, strangely enough, happy to stand on the edge of a precipice as long as they are joined by a few thousand others.`` - Michael Lewis
INVESTMENT BENCHMARKS
Investment returns should be measured over a minimum of five-year rolling periods, and preferably over a full market cycle. More importantly, returns should be benchmarked against each client’s unique objectives. Comparing against an index such as the S&P 500 is arbitrary at best and at worst, very dangerous to your wealth. Measuring against a market index leads to playing the relative returns game and to the phenomena alluded to in the quote above. Targeting absolute returns instead, we believe, provides a higher probability of achieving your “Measurable Objectives.”
INVESTMENT VOLATILITY
When viewing historical returns for a specific investment or market as a whole, the impact of market volatility isn’t clear. When one digs deeper, she will discover what we call “The Ugly Math of Investing”. Simply stated, volatile returns averaging the same as a steady annual return will not produce as much growth as the steady return. This is a surprising discovery for most and has its most pernicious effects on retiree portfolios.
INVESTMENT CYCLES
Investment cycles track economic fundamentals (e.g. corporate earnings, income, employment, inflation) over the long-run. Valuations (price compared to fundamentals) also cycle from high to low and back again over long time periods. In the short-run, psychology dominates market movements and is much trickier to predict. While it is extremely difficult, if not impossible, to time the market consistently over one’s lifetime, it is possible and prudent to control your exposure to risk at different points in the cycle.