Knowledge Is The Antidote To Fear - Ralph Waldo Emerson

Most financial advisory businesses grew rapidly during the last decade. This was, however, the greatest bull market in history! For most of the past decade, simple investments in individual stocks, private accounts or even mutual funds have met investor’s expectations. But the 1990’s are over, and with it the realization that it’s not so easy. Financial advisory firms are laying-off thousands and investors are now wondering what to do.

Surveys performed during 1998 and 1999 showed investors expecting annual returns averaging 20% or more. Since the stock market’s return for the 1990s was about twice its average rate of return, any regression to the mean would lead to below average returns for the next 5 to 10 years, most likely in the 5% to 7% range. Since most investors have suffered significant losses over the past two years, they are now forced to rethink their approach to investing. Without much real analysis, many investors have already begun to reshape their portfolios by pulling money out of stocks and moving it into bonds and real estate. However, this is the exact same type of mistake that got them into technology in 1999, bonds in 1994, and real estate in 1989. It’s just not that easy!

In order to look credible after having done so poorly for their clients over the past two years, many financial advisors are finally suggesting that their clients move substantial portions of their portfolios into bonds. The advice appears reasonable because bonds have done well lately and are more conservative than stocks. However, the easy money in bonds has already been made and yields are at historic lows. So, let’s step back for a moment and see how much money you can make on bonds over the next 10 years. Currently a 10-year U.S. Treasury Bond will pay you about 5.2%. Now for the part that will trip-up most investors – interest rates will likely rise over the next few years from these low levels. If interest rates rise just 2%, up to only 7.2% over the next few years, today’s 10-year bonds will drop 12% in value. If you hold the bond until maturity, you will get your 5.2%, but if you need or want to sell it anytime in between, you are more likely to lose money as interest rates are more likely to rise over the next few years.

As has been the case over the past several years, only skilled advisors have been able to advance their clients’ portfolios. With both the stock and bond markets offering below average returns for the next few years, it will take a superior advisor to achieve above average returns. Using the past as prologue, your investing experience over the past two years indicates the competency of advice you will receive going forward. More than any time in the past 20 years, you will need a trusted advisor, with skill and experience, to manage your portfolio in the decade ahead.

Published in Westlake Magazine – February 2001

NASDAQ Math: 85 – 39 = 12.8

In 1999 the NASDAQ went up an astonishing 85%, and then followed that feat with a stunning –39% drop. Most investors would assume that 85% - 39% would leave them with a return of 46% for the two years combined. Would you believe it is only 12.8%, which averages to only 6.2% per year. Let’s see how this works. If we assume you start with $1,000,000 and it grows 85%, you have $1,850,000 after one year. The following year, your $1,850,000 drops -39%, leaving you with $1,128,500. Your money grew by only $128,500 over two years, for a total return of 12.8%.

Even more disturbing is the fact that the typical investor lost more money because they were late to the party and then hung on too long to falling favorites once the party ended. If your financial advisor must call you before making any changes to your portfolio, they will be too slow to react to changing market conditions. If your advisor works for a brokerage firm, bank, or most independent financial planning firms, they are not allowed to manage your portfolio, but can only suggest securities and investment products to you. They must call each and every client, one at a time, in order to make a change. When opportunities or threats present themselves, they are unable to act in a timely manner for all their clients. Worst yet, when you’re ignored and must call your advisor to take action, you still pay them for implementing your idea.

The major brokerage and financial planning firms have seen this problem growing so they have instituted two programs to hide from this threat. First, some of their salesmen have reinvented themselves as “consultants” to sell clients to outside programs or wrap accounts. Second, they have instituted fee programs. Both of these schemes still have the same old flaw, making you pay high fees for low flexibility and marginal service. Because wealthy individuals have become more informed they have insisted on a better way – that way is wealth management.

True wealth management is gaining control of your financial situation and creating a strategy to insure that your wealth is not squandered by taking speculative or unnecessary risks. The key difference between us and “them” is that we manage our clients’ portfolios. We work with our clients to understand their goals and then create and manage a complete portfolio. We take care of business, which to us is protecting and growing your money. If you’d like to understand the difference that professional wealth management can make, please call 805-495-4405 to R.S.V.P for one of our upcoming events.


Portfolio Development Thursday, February 15 at 6pm
How to create, monitor, and maintain an all-weather portfolio

Retirement Planning Tuesday, February 27 at 6pm
Covering pension & 401(k) rollovers, early retirement, and IRAs

Stock Options Seminar Thursday, March 8 at 6pm
Covering ISO and NQSO employee stock options

This article appeared in Westlake Magazine – February 2001.

Client Update – January 10, 2001

Most investors will be glad to say goodbye to the year 2000. The S&P 500 had its worst performance in over 10 years and the NASDAQ suffered its worst loss ever, down 39%. As expected, most Wall Street pundits predict a rising market in 2001 (as they did for 2000). The idea that the market could perform poorly two years in a row seems inconceivable. They will continue to predict the good times until they are wrong several times in a row and then they’ll switch to predicting bad times, but by then we’ll be back into good times.

There are still excesses in the technology sector despite the recent decline in the NASDAQ and tech stocks. Some tech stocks have fallen a lot, but the NASDAQ bubble is not fully deflated. The NASDAQ still sports a P/E ratio of 110, when its long-term average is around 40. That implies that some combination of prices falling over 50% or earnings doubling should take place.

The erosion of stock market wealth will clearly affect spending in the months ahead. Perhaps spending cutbacks will be severe enough to cause a recession instead of a soft landing. However, the Fed will keep lowering rates until it succeeds in stabilizing the economy.

The current shape of the yield curve suggests that the credit markets expect rate cuts of 100 basis points over the next 12 months. The Fed lowered the real fed funds rate to 0% in the early 1990s due to U.S. economic weakness. A similar move today would imply a fed funds rate of 2.5%, much lower than today’s 6.2%. This gives the Fed a rather large net to catch the economy should it fall.

On a more positive note, reasonable values are available in some sectors and many previously neglected stocks are now attracting interest. We will continue to prudently allocate money to those sectors that are the most reasonable and attractive.

While the stock market is no longer extremely overvalued, there are still dark clouds over upcoming earnings announcements. As far as the near term is concerned, we continue to advocate a conservative stance.