Investment research is an ongoing process here at 228 Main. What opportunities might the fall have in store?
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investment advice
Your Real-Life Money
Numbers on a screen are never the whole story: how does your money move, and how does that align with what you’re trying to do in your life?
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The Funny Business of Fear-Based Peddlers
Electricians deal with electricity. Plumbers work with pipes. The work of grocers is all about… yes, groceries.
One might think that investment advisors, therefore, advise about investments.
It is a funny business. The work of some investment advisors has virtually nothing to do with investments. They traffic in fear, not investments. Our clients know that investments and markets go up and down. It is an integral, inescapable part of striving to achieve investment returns: we learn to live with volatility. Some fear-based advisors portray normal market volatility as some kind of horrible risk that nobody should face.
The “solutions” they offer to cure the fears they hype often include “guaranteed” products whose returns will inevitably reflect the current relatively-low interest rates available. We recently saw a proposal of this type, offering a product with a surrender charge of up to 14% that lasted ten years. It was a bold suggestion for a 75-year-old, a ten-year surrender charge.
The proposal came from a supposed investment advisor. In cases like this, we’ve discovered from you that this sort of professional cannot answer your questions about the stock market, nor comment in detail about ownership in any particular company, nor communicate the long-term potential of long-term investments… because they do not actually do much work with investments.
They provoke fear of investing in order to sell high-commission, high-expense products. This is a sales tactic. It is not investment advice.
So what to do? When you come across an offer that’s attempting to scare you, we suggest you hold onto your money and get a second opinion before you proceed. Yes, the world has risks. We are all about sorting out the ones that we can reasonably live with.
But the risk of getting locked into a poor deal from a fear-based peddler? That’s one to be wary of, no matter what they call themselves.
Clients, if you would like to talk about this or anything else, please email us or call.
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Play the audio version of this post below:
The Funny Business of Fear-Based Peddlers – 228Main.com Presents: The Best of Leibman Financial Services
This text is available at https://www.228Main.com/.
Values and Principles
Writing the Book on Investing
In the 21st century, it is possible to be more open about every aspect of business than ever before. Digital communications enable us to describe in real time what we are doing, why, how, and for whom with a level of detail that was not possible in the last century.
We have always had a well-defined investment process. We know what we want to own, and why. Since 2015 we have been able to share insights about our views, thinking, philosophies, strategies, and tactics here on the blog at 228Main.com. Those of you who are regular readers have perhaps gained a good sense of what we are about.
It is time to take it to the next level. We are working to comprehensively document our investment management process, from philosophy to research sources to investment selection methods to portfolio structure to tailoring client fit to trading protocols to client and account review process. We will be writing a book.
As great thinker Morgan Housel wrote, “writing crystallizes ideas in ways thinking by itself will never accomplish.” So we expect to come out of this exercise with a tighter, better-defined set of processes and protocols. No guarantees, of course.
This will take time and effort. What are the other advantages in doing it?
• To provide even greater clarity for you.
• To gain a comprehensive business operating manual.
• To help new associates understand what the enterprise is about.
Bottom line, this is a step toward greater sustainability, one of our major objectives for the years ahead. Clients, if you would like to talk about this or anything else, please email us or call.
Who’s the Expert?
We listen to you about the things you know best, we talk to you about the things we know best.
You are the expert on certain topics. What are your thoughts and feelings about retirement? Where do you want to live? What is your philosophy about a legacy to future generations? We respect your expertise about your personal goals and objectives.
Our business proposition is that we are the experts on certain topics. Of course, there are many experts on every topic. But what may set us apart is this: we won’t pander to your thoughts and feelings when we know better. Penny marijuana stocks? The latest technology hype? That hot concept that everybody is talking about? If we believe it won’t be good for you, we aren’t participating.
It would be easy to go with the flow, to deliver whatever anyone might desire. But one of our fundamental rules is “avoid stampedes.” As contrarians, we believe the crowd is sometimes very wrong. When an investment idea is at the peak of popularity, it may be overpriced and due for a fall.
Our attitude about this may cost us in the short run. When we refuse a transaction, it sometimes upsets people. But if it turns out that we helped someone avoid a potential loss, they may connect the dots and reward us with a higher opinion about our intentions and integrity.
We aren’t this way because we are saintly. It is simply a more effective way to live. When we put you in charge of certain things, we do not have to worry about them.
For example, somebody recently asked us about our goals for the year—how much new business, how many new clients, and so forth. We think you are in charge of where you do business, not us. We learned a long time ago that the best way to grow our business is to grow your buckets. That is our goal, and it has nothing to do with chasing strangers around.
This helps us focus on getting better, on being more deserving of your trust. It frees us of wasting time on things we cannot control. We have more time to communicate with you about the things on which you are the expert—your goals and aspirations.
When we communicate freely back and forth about our different areas of expertise, good things may happen. Clients, if you would like to discuss this or anything else in more detail, please email us or call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Regulation and Structure: Changes Ahead?
The investment world is changing rapidly in the face of evolving regulation and market forces. This article describes how coming changes may affect us—and you.
Clients know we have been affiliated with LPL Financial (LPL) for a very long time, since 1994, in fact. The relationship actually has two parts. LPL is both a registered investment advisor with the Securities and Exchange Commission and a broker/dealer regulated by FINRA.
As an Investment Advisor Representative of LPL’s SEC-registered investment advisor, I offer investment advisory accounts under LPL’s auspices and rules. These arrangements are fee-based, and hold me to a fiduciary standard where your interests must come first. As a registered representative of LPL, I offer securities on a brokerage basis. This is more of a sales-type situation, where my legal obligation is to present recommendations that are ‘suitable’ when made.
In practice, we have always strived to put your interests first, to focus on improving your financial situation, no matter the legal form of our relationship. This has worked well as a business strategy. It frees us from worrying about our needs or goals, since the better off you are, the better off we figure we will be. But the world is changing.
We see two main impacts of evolving regulation.
1. The investment advisory side of the business will become increasingly important, since the fiduciary relationship is more in keeping with the spirit of the regulations.
2. The brokerage side of the business will have fewer choices and more restrictions as investment firms seek to limit the conflicts of interest that come with wide variation in compensation and fees on brokerage products.
As we think about how to best serve your interests and meet your needs, we have reached some tentative conclusions:
A. The increasing emphasis on fiduciary investment advisory accounts fits well with the trends that make sense for us and for you. Our research and portfolio management processes are more effective and more efficient than ever before, and we continue to hone our processes.
B. In order to preserve the ability to continue to offer our traditional research-intensive, contrarian, value-oriented philosophy, we may have to form our own registered investment advisor. We would only take this step if our methods and philosophies become difficult to implement under LPL’s rules.
C. If we do form our own registered investment advisor, we would probably operate as ‘hybrid’ advisors using LPL Financial on the brokerage side, and to hold client assets, provide accounting and statements as they do now on the advisory side. Your assets would not be going anywhere different. The change would be minimal.
The irony is that if we were doing what everybody else is doing, life would be simple and we would not have to think about changing our structure to maintain our practices. In our opinion, we are different—and YOU are different. Generally, you and we are less sensitive to volatility, more focused on the long term, and more confident that things work out over time.
In a sense, the regulations codify conventional wisdom with which we disagree. The short version of this essay: we will do what we need to do to continue to bring you our philosophy and strategies and methods. Clients, if you have any questions or comments about this or any other issue, please email us or call.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risk, including possible loss of principal.
A Tale of Two Theories
Psychologists have a strategy to help cope with anxiety called the “dual model strategy.” It works like this:
You have a concern about some imminent disaster, which you believe is the source of many troubles for you. This is “Theory A.”
The alternative is that your concerns may actually be unfounded, but your fears themselves are creating your troubles instead. This is “Theory B.”
When it comes to investing, Theory A probably sounds like this: “The problem is that the economy will crash and I will lose money.” Theory B would then read: “The problem is that I worry that the economy will crash.”
If Theory A is correct, the proper plan is to pull your investments out of the market and put your money someplace safe. But there are two problems. First, we’ll never know if Theory A is correct until it is too late. Second, the economy and the markets have eventually recovered from every previous downturn. If you act on Theory A, there’s a good chance you may end up hurting yourself by acting at the wrong time. But Theory B—the idea that your worries are the real problem—is something that we can always work on.
The question is, how do you cope with your anxieties about the market? Perspective is important. Most of us are in this for the long haul, and are counting on our investment basket to provide for us for years and decades to come. Watching the market slide may be nerve wracking—but if you look back over the years, the speed bumps are barely noticeable.
Even so, it is easier to say “stick with the long term plan” than it is to live through short term bumps. There are some practical steps you can take to help cope with your market anxieties, too. Make sure you keep a cash reserve for emergencies: your investment portfolio is not a replacement for money in the bank. Also, as you reach the point in your life when you start to rely on investment income, it’s important to understand where your income is coming from. Even if you fear a downturn in the markets, it may not necessarily affect the ability of your income investments to generate cashflow for you to live on.
The key in all of this is to come up with an investment strategy that you’re comfortable with. If you continually change tactics every time you get nervous you may hurt yourself financially. If you need help coming to terms with your investment worries, please call or email us to talk them out.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.
New Balance for Your Portfolio
Our recent article about finding your strategy provoked interesting conversations. We quickly saw a new framework for investors to reconcile competing needs and desires. This article puts context around the three central tradeoffs investors face.
Current Income or Long Term Growth?
Fortunately, there are investments and strategies that offer the opportunity for long term growth while providing current income. Dividend-paying blue chip stocks are the best example. While suitable as part of an appropriate portfolio for many people, growth with income investments do not provide stability of market value, part of the next tradeoff.
Stable Value or Long Term Growth?
While most people might prefer stability AND growth, it isn’t possible to have all of both. The best we can do is some of each. We ceaselessly seek to inoculate clients against fear of downturns, which are an inherent part of long-term investing. Behavioral Economics suggests that the price of stability is too high And yet most people need some ‘money in the bank’ or stable value holdings. They serve as emergency funds and also build confidence in your investments.
Stable Income or Stable Value?
This may be the most under-utilized concept in the financial world. Investments that provide reliable recurring income fluctuate in value. And investments that deliver stable value do not provide reliable recurring income. Those now planning to retire have seen a vivid example in their lifetimes. Bank deposit interest rates have ranged from more than 1% per month at times to less than 1% per year at other times. In other words, the value was stable but the income was not.
The key concept here is that people living on their capital do not spend statement value to buy groceries or pay the electric bill. Portfolio income is the key to the monthly budget. Therefore, reliability of income could be more vital than stability of value.
Putting it All Together
We can do a better job of managing our goals when we understand that reliable income and long term growth provide opportunities that stable value holdings do not. Think about these ways to build a portfolio that you can live with:
- Set aside an emergency fund so you are prepared for the unexpected.
- Know where your income is coming from for the months and years ahead.
- Plan for rising cost of living with a certain amount of growth potential.
These are major issues, requiring some thought and discussion. We are available; write or call to set an appointment when we can discuss your situation.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
Stock investing involves risk including loss of principal. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Poking Holes: Find Your Strategy
“It’s easy to poke holes in every single investment philosophy or strategy. The trick is to find the one with flaws that you’re comfortable with.” –Ben Carlson, Ritholz Wealth Management
This concise statement makes it clear: every investor faces tradeoffs.
Current Income or Long Term Growth? Some strategies focus on growth in capital over time, others focus on current cash flow. Many investors need some of each. A pure growth portfolio probably won’t pay your bills, and a pure income portfolio may not have the growth to stay ahead of inflation.
Stability of market value or long term growth? This is where we live! We have written about the high price of stability. And we have constantly communicated in every way we know how about the link between long term returns and short term volatility. Everybody we know would prefer having both stable values day to day and wonderful long term returns.
You cannot have all of both—the best we can do is some of each. But it helps to resolve this tradeoff if you make sure your income and emergency funds are sufficient for your needs. If you own the orchard for the fruit crop, you don’t need to care what the neighbor would pay you for the orchard today.
Reliability of Income or Stability of market value? This dilemma is not even recognized by most people, and rarely discussed by investment professionals in our experience. Nevertheless it is a vital point. At one extreme, the kinds of investments that assure stable values have delivered wildly varying income over the years. In the early 1980s one could gain interest of 1% a month on money in the bank. More recently, it has been difficult to get 1% per year. So the person that retired on bank deposit interest of 12% saw a lot of volatility—and deterioration—in their income over time. Meanwhile, anything you can own that produces reliable income over extended periods will definitely fluctuate in market value, sometimes sharply.
Putting it all together: As you can see, every investment strategy has flaws. The trick, as Carlson says, is to find the one with flaws that you’re comfortable with. So we need to understand what is required in the way of stability, current income, reliability of income over time, and long term growth. We can build a portfolio that strives to balance those attributes with tradeoffs that are both acceptable and likely to be successful.
Please call if we may be of service in this regard, or to update our understanding of your situation.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.
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