Investment Strategy

Buying an investment when the price is low and selling when it is high.  The concept is simple, the discipline is not.   It is more likely for financial professionals to hear clients say, “Why would I buy that loser stock, mutual fund, you fill in the blank?  XYZ is booming let’s buy it instead!”

It makes sense psychologically to want to participate in something that is doing well and disassociate with something that out of favor.  Financially, this is not always the case.  Having an investment strategy to follow can curb the urge to buy high and sell low.  If you work with a reputable financial advisor, you probably already have an investment strategy.

An investment strategy should address your short and long term financial goals. The end result of a properly implemented investment strategy should be a diversified portfolio across all of your investment accounts.  The strategy should be based on your tolerance for risk, your time horizon and your overall financial goals.

Once in place, an investment strategy should include a plan for rebalancing your account on a fairly routine basis.  Rebalancing means bringing your portfolio back to the target asset allocation.  Profits can be taken from investments that have become over weighted (selling high) and used to purchase investments that have become under weighted (buying low).

Of course there are actually loser investments out there as well as some winners who haven’t reached their full potential.  For that reason, it is important to work with an experienced, accomplished and trusted advisor to help you make these decisions.

No it is not a new REM song, but it is a new trend for 401k plans.  Employers are now choosing automatic enrollment as a way to increase employee participation in retirement plans.  The typical method of enrollment in the past has relied on employees to actively seek enrollment, once eligible.  Due to regulatory changes, employers can now automatically enroll eligible employees.  Employees who are not interested in participating could choose to opt-out, but must do so by a set deadline.

As a financial planner, I am very excited to see this new trend.  There are so many reasons that employees don’t sign up to participate in the company 401k.  Rarely is it the case that employees don’t want the benefit.  It is more likely the case that employees don’t understand the benefit, think they are too young to save for retirement, or procrastinate.  The fact is that saving for retirement is one of the keys to financial freedom, and the compound effects of saving early is tough to beat.

Automatic enrollment is great, but then what?  How are the passive participants’ funds invested?  The disconnection between 401k participants and investments still exists.  Employers are also trying solve the asset allocation dilemma for 401k participants.  Now, employers are offering a diversified account as a default instead of a money market default.

I have personally seen 401k accounts with staggering amounts of risk due to single fund or single stock risk.  The diversified account default option is particularly helpful to participants who have limited investment experience.  It is often young, new employees who are likely to benefit the most from the new 401k automation.  These employees usually don’t have a financial advisor or any investment experience.  They are also the participants who elect to stay with the money market default when they are the ones who benefit the most from the compounding aspect of a well diversified growth account.

The automation is not just for new employees.  Existing employees who are not actively electing to contribute or manage their 401k accounts are being enrolled and placed into the default diversified account as well.

Getting Smart About Annuities
by Anne Tergesen and Leslie Scism

There are a number of great, successful investors that I have a great deal of respect for. Jim Rogers, Marc Faber, Jeremy Grantham. These investors are clear-eyed realists whose thought processes are sound, logical, and based on facts and experience versus hope and blind optimism. They do not get caught up in the froth and frenzy of Wall Street and, instead, make their judgments based on their own independent assessment of the facts.

I tell you all of this in order to reference the following comments from Jeremy Grantham. I get asked virtually every day (like I have some secret answer!) where the bottom of this market is, when is the best time to buy stocks. My stock answer is, “I don’t k now, but let’s have a clear plan and discipline that will gradually get us back into equities.” One of the things we do very well at BNY Mellon is to establish a very clear investment strategy with our clients that helps take some of the emotion out of the decision making process, then sticking with the discipline. If you do not have such a game plan, evidenced in an Investment Policy Statement, let us help you with one.

Now, Jeremy Grantham’s comments:
In his latest market commentary, legendary manager (and longtime bear) Jeremy Grantham of Grantham, Mayo Van Otterloo explains that it’s all too easy for terminal paralysis to set in when faced with a crisis market, and recommends a battle plan.

Key excerpts:

So almost everyone is watching and waiting with their inertia beginning to set like concrete. Typically, those with a lot of cash will miss a very large chunk of the market recovery.

There is only one cure for terminal paralysis: you absolutely must have a battle plan for reinvestment and stick to it. Since every action must overcome paralysis, what I recommend is a few large steps, not many small ones. A single giant step at the low would be nice, but without holding a signed contract with the devil, several big moves would be safer. This is what we have been doing at GMO. We made one very large reinvestment move in October, taking us to about half way between neutral and minimum equities, and we have a schedule for further moves contingent on future market declines. It is particularly important to have a clear definition of what it will take for you to be fully invested. Without a similar program, be prepared for your committee’s enthusiasm to invest (and your own for that matter) to fall with the market. You must get them to agree now – quickly before rigor mortis sets in – for we are entering that zone as I write. Remember that you will never catch the low. Sensible value-based investors will always sell too early in bubbles and buy too early in busts. But in return, you may make some important extra money on the roundtrip as well as lowering the average risk exposure.

For the record, we now believe the S&P is worth 900 at fair value or 30% above today’s price. Global equities are even cheaper. (Our estimates of current value are based on the assumption of normal P/Es being applied to normal profit margins.) Our 7-year estimated returns for the various equity categories are in the +10 to +13% range after inflation based on an assumption of a 7-year move from today’s environment back to normal conditions. This compares to a year ago when they were all negative! Unfortunately it also compares to a +15% forecast at the 1974 low, and because of that our guess is that there is still a 50/50 chance of crossing 600 on the S&P 500

Last week I met with several new additions to the Implementation Resources team. Staying on top of the news and strategies of each practice area represented by our implementation resources is a value added benefit to our clients. The common thread of my meetings seemed to be a back to basics approach.

First, I met with Steve Barth who is a partner and the chief investment officer at Bennett Thrasher Wealth Management. He is a CFA and CPA. We discussed how he is managing this difficult market environment. Steve led me through his asset management strategy which utilizes the talent available in the Atlanta area. One note that struck me was a comment he made about the credit rating on fixed income. Choosing a quality credit rating on fixed income has always been important, but bond insurance has perhaps offered a false sense of security about the safety of riskier bonds. This is particularly true when we now experiencing an environment where the insurers are rated lower than the issuers. An interesting predicament?

Speaking of insurance, I also met with Weldon Baird managing partner of The Baird Group in Atlanta. Weldon represents Northwestern Mutual with an emphasis on executive benefits, income replacement and wealth transfer strategies. Weldon was kind enough to host a luncheon for financial professionals with guest speaker Brian Henning, J.D. who is the managing director of specialty markets for Northwestern Mutual (NW).

Brian took a break from the cold weather in Milwaukee and joined us as we discussed how NW has “weathered” the current economic storm. He too commented on the benefits of a sticking to the basics and continuing a common sense approach. NW has remained solid because they haven’t strayed from the basics with “gimmicky” products. The leadership at NW resisted the allure of easy upfront earnings and continued to provide the same straightforward quality insurance products they have provided for years.

So what we are learning, hopefully, is to avoid the too good to be true – get rich quick schemes. Instead, develop a well thought out financial plan with a common sense approach in order to provide you and your family a sturdy financial foundation.

Do you have a new normal?  I know I do.  There is nothing quite like starting your own business only to learn that you have to take on cancer too.  By the way, did I mention that I also have a toddler?  Life changes for all of us and creates opportunities and new perspectives on how we manage our money.

Navigating the current economic crisis and the change that has come to America and our global nation is another “new normal” and begs a great question about investing:  where do I put my money?  Since I am no longer a broker I can’t tell you to pick stock A or dump stock B, but I can tell you how to think about investing.  And the basis for making these decisions is really no different than times prior to the economic crisis.

What is your risk tolerance?  Are you going to come unglued If your account is off 20 or even 50 percent?  What is your time horizon?  Will you leave your money invested for years or months?  How much income do you need?  Do you need capital preservation with inflation protection or do you need to maximize your growth?

These are questions that financial advisors have asked their clients for years.  And believe it or not, Warren Buffett, Bill Gates, and even President Obama cannot provide you with the answers.  Risk tolerance, time horizon and cash flow are personal and specific to each individual.  Address these issues first, as all prudent financial advisors will recommend, and you can take comfort that you are much more likely to implement the appropriate investment strategy for your specific situation.