Wealth Clarity Blog

Our recent investment snapshot posed this question: “Is the current economic crisis a ‘soft patch’ or the beginning of a double-dip recession?”  I’m starting to wonder if we aren’t instead in a mud puddle.  I recently heard this term used to describe the space between soft patch and recession, and it resonated with me.

In short, our economic outlook is messy – muddy, in fact.  Yesterday’s stock market response showed some of the pent-up concern and frustration with our political circus, our persistently stuck unemployment, and the slow (or absent) economic growth that is lingering like a fog over any sense of confidence.

Is this “Groundhog Day” as it relates to the recessionary period starting in 2008?  Are we heading back towards a repeat of that time frame?  I really don’t think so, primarily because the backdrop is different this time around.  The consumer has taken steps to deleverage and in fact is saving more; businesses have gotten leaner and are generating decent levels of cash flow; and economic indicators including auto sales, home starts, and unemployment are already hovering near their lows.  It doesn’t mean they won’t move lower, but our economic dashboard is already anemic and that isn’t news.  (One important caveat: the European debt crisis could continue to have material global effects.)

Objectively, equity valuations are below historical averages on a price to earnings basis, and the earnings yield (inverse of the P/E ratio) is trending well above 10-year Treasury rates.  This is something even Warren Buffett likes to see!  When compared to other investment alternatives, including negative real rates of return on money market funds, growth assets should not be arbitrarily put in the dog house.

I have found that one healthy way to look at your portfolio is to use the following exercise:  assume that your portfolio is sitting in cash today instead of the current positions you may hold.  Then, look at all of your possible investment alternatives from a risk and return standpoint and ask yourself how you would you allocate the money if you had to right now.  Many times investors can get anchored to their existing holdings too strongly, especially when viewed through the lens of trading costs, unrealized gains/losses, and taxes.  If you try to position your portfolio using the approach above, you can minimize the emotional challenges of making investment decisions.

So, here are a few investment keys for working through this financial mud puddle while keeping you moving towards your goals:

1.  Focus on fundamentals more than you focus on the news—now is the time to hone in on the facts and not get blown around by the ever increasing list of “experts” espousing fear (in most cases.)

2.  Stay agnostic about the investment choices you have—remember that interest rates are at historically low levels, and cash is paying virtually nothing.  This isn’t the case in equities, nor in a few other spaces.  I’m not suggesting increasing your risk posture without great consideration – instead, focus on objectively seeking value where it exists.

3.  Don’t change your investment philosophy or strategy now—my experience has shown that successful investors hold tighter to their investment approach during times of uncertainty.  Better to have an approach and philosophy that you believe in (even if it’s not perfect) than to not have one at all, because the damage caused can be material.

4.  Be nimble—the world changes quickly, and the pace of change continues to increase. Make sure that your investment approach has the ability to make tactical shifts as new information emerges.

5.  Favor quality and cash flow in this potentially low growth environment—going forward, as noted in previous posts about the “New Normal,” adjusting your return expectations downward and looking at cash flow as an important part of return will be critical.  Don’t get seduced into reaching for yield or outsized returns.

How can you work through these types of world stress points?  Be resilient.  Be a survivor, and not a hero. Feel free to contact me if there is a specific question you would like me to address.

Every so often the media uncorks some financial scandal that shakes the business world.  Lately, it seems like we’ve had plenty of them.  It started with the Enron scandal in the early 2000s, then the Madoff scandal, and most recently it’s Rhonda Breard, a wealth manager in Seattle’s own backyard, making dubious headlines.  As you may have heard, Breard pleaded guilty in federal court to stealing over $9 million from her clients over the course of several years.

News of such misconduct both angers and saddens us as wealth managers.  Our priority is to help our clients live life without the anxiety and complexity that accompanies wealth.  Unfortunately, scandals like Breard’s can plant seeds of doubt and undermine peace of mind. 

After talking with my team, we think this is an opportune time to remind our readers of a few key safety measures that should be in place to preserve and protect your assets:

Make sure your statements are sent directly to you from the custodian.  Advisor generated reports showing performance, balances, and positions must reconcile to the custodian’s, not replace them.

Separation of duties is a key detriment to fraud occurring.  At least two sets of eyes across departments see all of the activity that occurs in our accounts.  Different people in our office are responsible for executing account activity and for reconciling it. 

Understand the insurance coverage carried by your custodian and advisor.  Your brokerage assets are protected from loss by SIPC, and from both fraud and error by insurance carried by your custodians.  We have also chosen to carry insurance coverage that would help protect our client’s in the unlikely event of a loss.

For more information about consumer protection, please visit our blog video gallery at:  http://www.wealthclarityblog.com/about/video-gallery.

Even as the economy appears to be stabilizing, there are still plenty of reasons for investors to worry: uncertain markets, continuing bank failures, a changing regulatory environment, persistently high unemployment rates and home foreclosures, and more. I spoke about this in a video earlier this year.

The three key points for people of means to know at a time that provides so many opportunities to worry:

• Don’t make any decisions based on short-term market moves or dramatic news reports
• Find a financial advisor you trust
• Keep your eye on your long-term goals

All easier said than done. Our Wealth Clarity System is designed to help create and sustain a long-term financial strategy based on your specific circumstances and goals. Our clients have found it’s particularly useful to have a plan like this in place during uncertain times.

If you’d like to assess your current state of clarity into your financial matters, you may want to download this 10-item checklist. (It’s a one-page document for you to print out and use, not something that asks you to input any information online.)

And for additional thoughts on how how to manage in difficult times, you may want to read my post from earlier in the year, “Three Success Strategies for Scary Times.”

Last year I was given a small silver plaque as a gift. It sits on my desk and the inscription reads:

What would you attempt to do if you knew you could not fail?

This small, seemingly inconsequential statement has made a significant impact on me because it has the power to shift perspective from fear, worry and doubt into the realm of possibility, passion and opportunity.

Is it glass half-full thinking? Sure. But all of the leadership and inspiration that will be required to make hard choices and changes in our financial markets, in our schools, in our regulatory structure, in our environment, in our consumption, and in our homes cannot all come from President Obama. This leadership and inspiration must start with each of us.

If your actions inspire others to dream more, learn more, do more and become more, you are a leader. ~ John Quincy Adams

What if you could not fail? What would you do? Go ahead—dream for a second. Continue Reading »

How does a long-term investor keep perspective in a world that is driven so significantly by short-term events? This question has taken on added importance with the recent events in the world financial markets. As I write this, however, I am thinking about more than just the recent events. I’m thinking about the “crises” we’ve seen before, and the ones we are sure to see in the future.

I was driving my thirty minute commute to work last week on a day after more bad economic news came out about jobs and loss of national equity. It was interesting to observe the world without the filter of CNBC, CNN or Fox News telling me how I should feel. I know this runs the risk of sounding overly simplistic, but it was a refreshing experience to be unplugged and to see the world through my eyes rather than a media filter.

Construction workers were busily working at constuction sites

The streets I traverse daily on my commute were being torn up by large work crews ready to lay new asphalt.

The Starbucks line was just as long as normal when I arrived to order my tall drip coffee.

Cars scurried into parking garages as attorneys, CPAs, insurance brokers, and dentists all went to work.

In other words, life was still moving in a normal fashion as people went about their lives. I am not being Pollyanna or naïve towards this crisis – just attempting to untangle the “real” crisis and problem from the one that is spun through the numerous communication mediums and talking heads.

As a way to bring clarity to the situation, let me offer the following three suggestions: Continue Reading »