Dear ,
This is a mid-month bulletin, something I will do only rarely when I have more urgent or timely topics for discussion. I do have an sense of urgency regarding the issues discussed below. They are longer than usual but I hope you'll take the time to read, digest and take action.
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It's Time to Act!
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We're all aware that the economic and investment markets
news over the last half of 2008 was unrelentingly negative. Equity markets were
down in late October almost 50% from the level at which they entered the year
and the fixed income markets offered almost no safety. Aside from cash and
Treasuries, there were precious few safe havens. Consequently, many, if not
most, investors have suffered rather significant losses. If you did have in
place an effective asset allocation, you mitigated some of the losses but
still, you were probably underwater for the year. You're not alone.
I have had the good fortune to talk with many people, both
clients and prospective clients, over the last several months as I've
transitioned from the institutional investment management side to the individual
side. I've also spent many hours reading the news, periodicals and blogs
regarding the economic and credit crises. I have come to recognize that many of
us are moving through the 5 stages of grief originally proposed by Elizabeth Kubler-Ross in 1969. She applied the fives stages to any traumatic life event. It's undeniable that 2008 was a traumatic life event for most everyone:
Consider:
Stage 1 - Denial - as the crisis began to build in early 07
and into 08 (really it was earlier than that but it reached national
consciousness in 07), most investors either overlooked or ignored the news
assuming the fallout would not reach them. Even Fed Chairman Ben Bernanke
denied the depth of the impending crisis by suggesting they had the sub-prime
crisis well contained. However, the reality, in retrospect, is that we, as
market participants, were simply in the denial stage.
Stage 2 - Anger - as we entered the fall, we moved from denial
to anger as first Bear Stearns, then Lehman, then Wachovia, Merrill Lynch,
Citigroup, Washington Mutual, and so on, failed or approached the brink of
failure. We watched as the first "bailout" vote failed and our representatives
expressed anger regarding the "socialization" of the financial sector. Further,
we watched as certain members of Congress refused to acknowledge their own
roles in the unfurling crisis and anger and resentment grew. The Anger stage
lasted at least through early November (really, this one isn't over yet!).
Stage 3 - Bargaining - post-election, many thought the new
President-elect would solve everything, that the bail-out funds would get banks
lending again, that the coordinated global action would release pent-up
liquidity. Market participants began to bargain - more regulatory oversight for
more liquidity. Whatever it takes, just make it go away!
Stage 4 - As we entered 2009, the unrelenting drumbeat of
negative economic data continued. Poor retail sales, more layoffs, recession,
depression, double-digit unemployment, etc, etc. How could it get any worse?
Why bother even trying to make things better? What's the point? I'm giving up
on the markets and investing everything in cash!! Sounds familiar, right?
Whether you or someone you know, you've heard those comments somewhere over the
last month. We're now in stage four of grief - depression. This is, I think,
the point at which market participants are scraping the bottom. That doesn't
mean we're done, but I do think it's time to move on to stage 5.
Stage 5 - It's time! Whether you have losses you don't want
to realize or you're dissatisfied with the advice or service (or utter lack of
service) you've received to date, it's time to accept that what happened in
2008 happened. It's over and done with. It's time to confront the challenges
posed by recent economic and market performance and move forward. You can address
your investments, you can change your advisors, you can make those positive
steps that will begin the process of recovery!
With the new year just starting, now is the time to sit down
and review your financial plan, implement a new plan, change your asset
allocation, and develop a process for gradually implementing the plan over the
course of 2009. This will make it possible to do so in a deliberate, healthy
progression. Losses can be realized responsibly, if necessary, and new
strategies designed to get you back on track can be implemented. If you're not
happy with your advisor, or with yourself as your advisor, consider bringing
one in (yes, I am available) or schedule a meeting with your current advisor
and express your concerns. Doing so doesn't mean liquidating your portfolio,
realizing all of the losses and starting from scratch. A competent advisor will
work with you to transition your portfolio constructively and on your
timeframe. Don't let the sense of fear driving the current economic and
investment climate paralyze you.
If you have not used an advisor and are
thinking of doing so, I want to be your advisor. If you have an advisor with
whom you're unhappy, I can provide a second opinion and help prepare you for a
discussion with your advisor. In either case, I will be happy to call you or
meet with you to listen to your concerns.
So, I say, move on, let go of the grief over your current portfolio,
and challenge yourself and your advisor to improve your financial health in
2009!
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Can You Help?
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I am focusing my efforts in 2009 on three groups -
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individual investors looking for financial and
estate planning advice and/or who want a professional to assume the investment
management of their portfolios,
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non-profits needing consulting and investment
management for their endowments and,
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institutions (non-profit and for-profit) who
are considering establishing a retirement plan or who are unhappy with their
existing plan and are looking for a change.
I believe individual investors should evaluate their
financial health as if they were a foundation. Essentially, the intent of
financial and estate planning is to ensure that enough income is generated to
build and protect an endowment and meet current on-going expenses. The intent
of investment management is to ensure the endowment continues to grow so that
the foundation (your legacy) can exist in perpetuity. This ensures a legacy for
your children and future generations. When you consider yourself a foundation your
perspective changes, particularly as regards your investments. It is
appropriate and, in my opinion, ideal to pursue an absolute return objective.
This means an institutionalized view of asset allocation that includes
allocations to alternative investments. Few individual investors and financial
advisors have experience in this asset class. I do.
I believe smaller non-profits can benefit from the services
of an investment advisor. These organizations are working hard to provide a
much needed service to our communities. Many are primarily staffed by
volunteers. They are, hopefully, successfully building an endowment which will
help ensure the non-profit continues to achieve its mission. At the same time, these
organizations are trying to recruit and retain talented staff members. Their endowment
needs are very similar to those of individuals and their retirement plan needs
are very similar to those of small for-profit businesses.
I believe business owners need, and want, to focus on generating
sales and building their business. Employees, too, are focused on building
their careers. Neither has the time to design, implement, understand and manage
a retirement plan, yet, they are doing a disservice to themselves by failing to
implement a plan or by overlooking a poorly performing plan and/or advisor.
For
example, establishing a strong plan has several benefits(whether a for-profit
or a non-profit organization:
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It can strengthen the organization by helping to attract
and retain high quality employees.
- Most plans are web-based and eliminate much of the
paperwork.
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The administrative burden can be minimized.
- Plans are less expensive than most think.
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It can help secure the retirement of the business owners as
well as staff.
I'm
focusing my efforts on for-profit businesses with 5 to 50 employees and under
$20-25 million in annual revenues and non-profits with compensated staff and
endowments over $250,000. I believe these groups are under-served by the
national consulting firms, aren't quite large enough for a national
institutional firm such as Fidelity or Vanguard (which lack personal, hands-on
client service) and other financial advisors don't have the experience I bring
to a relationship.
I hope to add new clients who share my prudent philosophy, who have either tried to manage their own
portfolios and are dissatisfied
with the results or are dissatisfied with the advice they've
received from their financial advisors.
If you
believe I can be of assistance, please consider the following:
- If you've spoken with someone whom you feel I should contact, please let me know and I'll gladly get in touch with them.
- Should the opportunity present itself, I'd be happy to provide a second opinion on asset
allocation and portfolio
holdings.
- I would be
delighted to add people you know to the mailing list for my monthly
bulletin, so they can get a
better sense of the approach that I take to investing. Please feel
free to forward this bulletin on or, with their permission, to provide me
with their e-mail address.
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Lessons Learned |
Most people are, by now, well aware
of Bernard Madoff. He is the "hedge fund" manager
who, in reality, was running a large Ponzi scheme. Charles Ponzi
didn't invent the scheme but was the first to raise substantial amounts of
money using it. Essentially, in a Ponzi scheme, investors are promised specific
returns over time. Frequently, the investment process is not disclosed by the investment
advisor but returns are shown to justify performance. These returns are often
very stable over time, high returns/low risk, leading people and institutions
to commit large sums of money. Madoff had over $50 billion. However, the
reality is that the returns are fraudulent. Early investors are paid with funds
provided the operator, Madoff in this case, by later investors. This circular
effect continues as long as the operator can bring in new funds. When new
investors can no longer be found, the scheme begins to collapse. In most cases,
this happens quickly and spectacularly. Unfortunately, it is more common than
it should be. However, there are steps you can take to ensure you are not a
victim of such a scheme.
First, conduct your own due
diligence. Ask your advisor about his/her philosophy, process, people, and
performance. The Advisor's answers should be transparent and understandable.
Avoid advisors who claim their process is "proprietary" or a "trade secret". As
for performance, risk and return coexist. You cannot increase return without
increasing risk. Understanding this relationship should make a skeptic of
anyone who hears a pitch similar to Madoff. Long-term consistent positive returns
with low volatility, even in bear markets, is unachievable. Further, each
investment advisor will provide you with information on his/her firm. Brighton provides each client and prospect a copy of our
Form ADV part II. This is a document we file as a Registered Investment
Advisor, with the SEC. It provides information on our process, people, fees,
and history. Form ADV part I is available online via the SEC website - www.sec.gov.
Second, do not accept statements
only from the advisor. Your assets are held by a third party custodian, such as
Charles Schwab, Pershing
or State Street.
The custodian provides statements on a regular basis, usually monthly. Require
your advisor to ensure the custodian provides you at least quarterly
statements. Review these statements to ensure they make sense. Question
anything that appears unusual to you, such as an increase in trading or unusual
cash flows. This is your best audit statement of an advisor's performance. Do
not accept statements only from the advisor. It can, however, be a good audit
step, to receive and reconcile statements from the advisor and from the
custodian.
Third, continue to stay diversified.
Diversification not only helps to mitigate the volatility of investment markets
but it helps to minimize the damage done by one poor investment decision. Most
mutual funds, and indeed most hedge funds, will hold numerous positions for
this reason. While the managers are confident in their abilities, they know
they will not be right all the time, thus they hedge their own bets via
diversification. Just as location, location, location is the mantra of the real
estate industry, diversify, diversify, diversify should be the mantra for
investors.
Finally, don't lose faith in
financial advisors. The vast majority are honest, hard-working professionals
with their client's best interests at heart. The financial system operates on
trust backed up by regulation. Ronald
Reagon had a slogan which is
applicable here - "Trust but verify". Further, many advisors operate under a
standard of care. Many are members of organizations with strict Codes of
Conduct, such as the Financial Planners Association (issues the CFP
designation), and the CFA Institute (issues the CFA designation). Both
organizations have strict standards of practice to which advisors must adhere
to maintain their designations.
Bernie
Madoff proved to be a very destructive force. In short order he damaged
the financial security of numerous investors, including his own family, damaged
the credibility of financial advisors and, in doing so, damaged the trust
implicit in the financial industry and necessary to investors long-term
success. However, he also provided very real lessons which when applied, can
ensure you won't share his company.
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As always, I hope you find this bulletin informative. Please let me know if I can be of service. I am happy to follow up with a call or meeting to discuss any concerns you may have regarding your financial well-being. Additionally, I welcome referrals. Please feel free to forward this bulletin to anyone you believe may have a need or an interest. Until next month..
Sincerely,
John P. Middleton, CFA, CAIA
Brighton Financial Planning, Inc. |
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Referrals Pledge
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Referrals are my primary source of new clients. I am deeply appreciative of each referral I receive and will treat each in the same manner in which you are accustomed to being treated by me.
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