In a highly volatile investment world, how can you build a plan for long-term success? What does it take to sift through thousands of investment opportunities and identify the relative handful that complement your specific goals, time horizon and risk tolerance?
At Promontory Financial Planning we believe that a consistent, disciplined approach to portfolio management offers the best chance for success. For every client, a tailored investment strategy is developed, incorporating asset allocation and diversification designed to meet your precise needs. Our investment philosophy is focused on meeting clients’ objectives while managing risk. The most important part of the approach is understanding our clients and their needs. Only then can we begin building an investor’s particular investment strategy. We believe this comprehensive approach to discovery and assessment leads to the most critical conversations we have with our clients. Only when many planning questions and goals have been fully discussed and defined can the investment process begin. Unfortunately, we find many firms jump straight to the product they are selling rather than having a plan and purpose first. Once we get to know our clients we then follow an investment process which is based on the following principles:
- Goals: The investment process can begin when we understand what we are trying to achieve. In this conversation, a number of questions need to be thoroughly explored: Retirement? Income generation? What specifically are your goals and objectives? Near-term? Long-term? Mandatory? Discretionary? What are the risks to be guarded against in the process?
- Asset Allocation: Creating strategies with appropriate diversification among asset classes and between investment approaches, both of which are critical drivers of investment success. This balanced approach helps diversify risks. As one asset is zigging, others tend to zag.
- Portfolio Design: Broad market index diversification and smart beta offerings start by identifying return and risk source(s) including market factors such as; large, small, momentum, earnings, low beta, value and growth. Our portfolios utilize 7 major asset classes, 12 sub asset classes and over 5,000 individual securities titling to factors that have historically added value above and beyond a benchmark over time.
- Tax Management: Helping investors to keep more of what they earn through year-round efforts to reduce tax obligations. Taxes—especially when not managed properly—can erode investment gains and minimize progress towards your financial goals. In non-qualified accounts, our strategies do the following to help manage taxes: Tax-lot Accounting, loss harvesting, wider rebalancing range, tax-aware trading, gain/loss offset, transition of low cost-basis stocks.
- Risk Management: Using rebalancing to control behavior is one way to buy low and sell high while reducing risk in a disciplined, non-emotional way. To do this, we bring your investment portfolio back to your target allocations on a regular basis, usually at the end of each calendar quarter. Automatic rebalancing eliminates emotions like greed and fear. If an asset class like equities has appreciated so that its value is above the long-run target, you sell those assets down to your target weight (taking some profits—that is, selling high). At the same time, you invest in the asset classes that did not do as well (that is, buying low) to bring them up to your target allocation. This also happens at the individual security level. If one company has a great run, it is wise not to get to greedy and trim the position back to an appropriate weight.
- Costs: Keep cost low. Studies have found that lower fees usually equate to better long term results with investments. To do this we start with our own fee schedule. We do not sell commission-based investments and believe they are a major conflict of interest. 12-b1 fees are inherent in A shares, B shares, C shares and have commissions built into the funds. We avoid these products. We are fee-based and charge a fee for our advice. Our fee is usually 20-30% lower than what we see other fee based advisor charge. Once a plan is mutually agreed upon, we implement with proven low-cost institutional no-load mutual funds, ETF’s, smart beta strategies and index funds.
- Behavioral Finance: “Be greedy when others are fearful and fearful when others are greedy” This is the classic Warren Buffet quote. The problem is, most people do the opposite. When markets are down, they sell. When the hot stock tip from a work colleague gets spread around, people buy. Unfortunately, it’s usually at the top when that hot stock is about ready to cool off. Quantitative Analysis of Investor Behavior, a financial services research firm DALBAR concluded that psychological factors, such as emotional investment decisions caused by intermittent market volatility, are the single largest cause (45%–55%) of the “disease of investor underperformance” among equity and fixed-income investors. Our process helps take the greed and fear out of investing and places an emphasis on discipline, patience and investing to meet your goals.
- Manage Volatility: Limiting downside volatility (or potential loss) of an investment is important because the rate of return required to recoup a loss is always greater than the loss itself. Furthermore, the gap between an initial loss and the subsequent gain required to break even becomes more pronounced as the magnitude of the initial loss increases. For example, if an investor loses 10% on an investment, an 11% gain will be required to recoup that loss. A 50% loss would require a return of 100% to break even. The implications of these statistics should be clear: When large losses occur, every percentage point counts. This means that the potential downside of a stock portfolio is at least as important as its potential upside. While it may not be possible to avoid volatility completely, one can attempt to manage it by investing in stocks that experience lower-than-average volatility. These stocks have also historically experienced higher returns with lower risk measured by standard deviation.
- Avoid bad investments: Ponzi schemes, speculative investments, get rich quick tips, performance chasing ideas, and some insurance and annuity products are packaged up and marketed as investments. The old adage rings true, “if it sounds too good to be true, it probably is.” There is plenty of ‘investment’ garbage in the world today. We challenge people to perform due diligence on investments and the person giving you advice. Are they licensed and registered to do so? How much experience and how long have they been in the industry? Do they work for one specific firm selling a specific product or are they independent with access to multiple strategies? Are they a fiduciary? Do they have a college or Master’s education in finance? Are they a CERTIFIED FINANCIAL PLANNER™? If not, get your advice elsewhere. We invite the public to review our records directly from the regulatory source at the SEC (Securities Exchange Commission). http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx
- Follow the CFP® Planning Process: 1) Establishing and defining the client-planner relationship 2) Gathering client data and determining goals and expectations 3) Analyzing and evaluating the client's financial status 4) Developing and presenting the financial planning recommendations and/or alternatives 5) Implementing the financial planning recommendations 6) Monitoring the financial planning recommendations.
- Buckets or different pools of money: By segregating your wealth into specific diversified but complimentary buckets we can invest your assets into an appropriate time frame and risk profile. For short term needs, like maintaining your current lifestyle, we build a conservative income portfolio. For your long term goals (10 plus years) we can build a diversified growth strategy. Then once you retire, you can distribute assets from your short term conservative portfolio and gradually move money from one bucket to the other as the markets and your time frame dictate. We find these different buckets help give clients confidence knowing that a short term safety bucket will help them weather a financial storm. This also allows the long term bucket time to rebound without having to taking a distribution at a low point.