Investing Caffeine

It has been an incredible roller coaster ride over the last two years, both on the way down, and for those still in the game…on the way up. Most prospects I come across are perplexed with how quickly their portfolios unraveled in 2008 and are scratching their heads with respect to how quickly markets have bounced back in 2009. Am I surprised? Certainly the speed and degree was surprising, but we’ve seen these cycles many times (see earlier story: History Never Repeats Itself, But It Often Rhymes).

For retirees, and those who thought they were near retirement, the impact of this financial crisis has been devastating, and especially for those who capitulated late fall and early winter. Compounding the mental anguish, I see many investors knee-jerking their way into sub-optimal decisions. Most frequently, I see investors parked in a cave earning next to nothing on their illiquid assets and/or piling into long duration bonds. Investors often are unaware of the risks associated with the long-in-the-tooth, multi-decade bull run in the bond market …caveat emptor!

There’s no doubt that fixed income instruments are key in a portfolio – in fact, some of my retired clients have fixed income allocation targets that exceed 80%. What people don’t realize or focus on is the sensitivity to changes in interest rates (called “duration” – the equivalent of “beta” for stocks). Moreover, investors are not managing for inflation risk. While many retirees in their 50s and 60s relax in their bunkers, earning next to nothing on their CDs and money market accounts, inflation is a huge risk as medical, energy, food, leisure, and general living expenses continue to rise with government fiscal monetary and fiscal policies potentially accelerating the escalation of price levels.

To add fuel to the fire, life expectancies continue to increase. Quite simply, many retirees who don’t have their money invested EFFICIENTLY, run the risk of outliving their nest eggs. This is no scare tactic, this is plain reality. Here’s what JD Powers (InsWeb) has to say about lengthier life expectancies:

“For the first time in over 20 years, the American Academy of Actuaries has revised the table to reflect America’s trend toward living longer. The new tables increase the maximum (theoretical) life expectancy to 120 years.”

What Can You Do?

First of all, determine whether you have the time, discipline, and emotional make-up to  handle your finances. Most people think they can succeed on their own, much like the vast majority of people thinks they are above average drivers. The data shows a different fact pattern. If you don’t believe me, check out an 18 year study compiled by legendary Vanguard Group founder, John Bogle (see chart in article here). Plain and simply, the average investor gets destroyed not only by fees, taxes and transactions costs, but also more importantly due to emotional errors and lack of investing discipline  .

If you outsource your taxes to a professional CPA, and your estate planning (e.g., will and trusts) to attorneys, then why wouldn’t you seriously consider outsourcing your investments to a professional? “Professional” is the operative word, because unfortunately many people in the investment industry are more akin to aggressive salespeople than they are professional investors. Since there are so many sharks in the industry, it behooves you to perform your due diligence on advisors under consideration. Here are some items to mark off on your checklist:

1)      Fiduciary Duty?: Does the advisor you’re looking at work for a RIA (Registered Investment Advisor), which has a lawful fiduciary duty to make investment decisions in your best interest. Most brokers only have a “suitability” standard, which is a much lower hurdle to meet.

2)      Compensation: How is the advisor compensated? Many advisors are incentivized to sell, sell, sell because they make commissions by shuffling your investments around. You’re much better off by aligning with a “fee-only” advisor who has a natural incentive in place to make decisions that will grow your assets (for disclosure purposes, Sidoxia is a “fee-only” advisor).

3)      Experience/Credentials: Find out how committed your advisor is to their trade. Would you want a nurse to perform your brain surgery or a flight attendant to fly your plane? Probably not. Find out if your advisor has ever invested money? Or have they just sold products? Do they hold the CFP (Certified Financial Planner®) certification and/or the CFA (Chartered Financial Analyst) designation? Do they have relevant degrees in the field of finance or economics? Less than 5% of all advisors have the combination of these credentials.

4)      Eat Their Own Cooking: Discover whether your advisor uses the same investments in their personal portfolio that they recommend to you? If not, why not? It makes much more sense to partner with advisors that eat their own cooking.

5)      Background Check:  With proper research, investors can become more comfortable with the professional chosen and the status of the firm employing the manager/professional. Several government and professional regulatory organizations, such as the National Association of Securities Dealers (NASD), the Securities & Exchange Commission (SEC), your state insurance and securities departments, and CFP Board keep records on the disciplinary history of the investment and financial planning advisors. Ask what organizations the professional is regulated by and contact these groups to conduct a background check.

By following some of these simple steps, you can weed out many of the shoddy advisors that have conflicts of interest and/or lack the skills and experience to invest your money prudently.  As a function of the financial crisis we are working through, your finances may be muddled or disorganized.  Do yourself a favor and get your financial house in order by finding a dedicated, competent financial advisor that places your interests first.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

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