We
have a very personalized approach to advising on clients’ financial affairs.
We work with a wide range of client objectives from conservative to aggressive.
We do not have a single investment approach or "cookie cutter" approach that
applies to all clients. Each client is treated uniquely and is provided
with an investment approach that helps meet their needs, objectives and "investment
personality."
Our existing clients know us as compassionate, knowledgeable and caring advisors who are deeply committed to helping them create financial plans and actions having the goals of achieving financial independence during their lifetime and multi-generational wealth for their heirs. We offer a broad array of advice for clients, primarily in southeastern Michigan, but also for those who move away. For many, it represents "one-stop" advising for all their financial needs.
The following sections describe these different investment and financial advisory services:
We will work with you to create an investment plan which will define your overall investment goals and develop an investment strategy designed to help meet your needs for safety, liquidity, income, capital appreciation and diversification. Depending upon your existing portfolio and investment objectives, RIS may seek to improve the portfolio’s performance with diversifying approaches that may lead to better overall returns, more consistent returns and lower potential risk. But remember, diversification does not ensure against market loss.
An
investment plan will recommend:
After the plan is agreed upon, RIS helps the client manage their individual mutual funds, stocks, bonds and variable annuities as well as their assets in their employer’s 401k, 403b, or TIAA-CREF retirement plans on an on-going basis. These variable annuities, 401k, 403b and TIAA-CREF assets remain where they are now. They do not have to be moved. RIS has clients with individual, joint, trust, IRA, profit sharing plan or other retirement accounts.
Most
mutual funds, stocks, bonds, variable annuities and IRAs can be transferred
to our management services platform without selling the investment and triggering transaction
costs. While we do not normally initiate the purchase of commission-based
mutual funds and variable annuities, we do manage them as on going transferred investments of
our clients. We subscribe to many Wall Street advisory services, and we have
access to most Wall Street analysts’ ratings on individual stocks to help us
manage client assets.
RIS
offers online access to most of our clients'
accounts. For assets custodied at Pershing, there is additional information.
You can see stock quotes on a 20-minute delay, your current holdings and balances,
and transaction history on our web site. While you cannot enter transactions
on-line, you can see all these family investments in one location.
As an alternative approach to using individual stocks and mutual funds, RIS also partners with SEI Investments, a mutual fund selection advisor, to help manage client assets. SEI Investments gives us the ability to have our clients’ funds managed by the best institutional money managers in the U.S. and overseas. SEI identifies well-qualified institutional money managers in each of 11 investment categories and then allocates portions of the clients’ assets in a manner that the client and RIS have agreed upon.
Ordinarily, clients would need $100 million or more in assets to have access to all of these specialty managers, but through RIS, these minimums are reduced to $100,000 or even less. A client’s SEI holdings, balances, and transactions are also available through our web site.
This wide array of investment approaches demonstrates our ability to offer one-stop advisory services. You can use individual stocks, individual mutual funds, or SEI and continue with employer retirement plans. Of course, you can choose a combination of them. We will help you choose what you think is best for you.
As the size of 401k, 403b and TIAA-CREF assets grows to be a fairly large portion of family investments, clients have found our monitoring and advice to be an important aspect of managing the family’s total investments. RIS advises on 401k, 403b and TIAA-CREF assets of employees or retirees of the University of Michigan, Michigan State University, Eastern Michigan University and other Big Ten schools as well as Ford, GM, Pfizer, and many other employers.
Based
upon your specific objectives, we will recommend which funds or accounts and
what percentages to use in your plan. Periodically, we will re-evaluate the
funds in your plan and determine which funds to avoid and which to use. When
changes should be made, we will implement the appropriate changes.
We pay particular attention to diversification of your 401k/403b plan in conjunction with your other investments. Frequently, we find that prospective clients are invested in a number of mutual funds, but they do not necessarily provide much diversification. For example, a client may have 5 investments, and they may contain the same stocks that go up and down together.
The
difference between a good advisor and the typical 401k or 403b investor is that
a good advisor tries to anticipate the future rather than react to historical
results. The key to successful investing is not what did well in the past but
trying to determine what will do well in the future. The important thing is to act rather
than react and to look forward and try to anticipate what types of investments
will do well in the future.
The
typical non-professional investor tends to manage their funds through the rear
view mirror by reacting to short-term past performance and chasing performance.
It leads to buying certain funds after they have gone up (too high) and selling
after they have gone down (too low).
Studies have shown that employees and retirees, when left to their own devices, tend to significantly underperform the stock market averages. They tend to invest too much based upon their emotions, which often leads to bad decisions (buy high, sell low). Dalbar recently reported that average equity mutual fund investor earned 7% less than the S&P 500 over the last 20 years ending December 2008. The S&P 500 earned 11.8% over those 20 years.
Our job as advisors is to help clients reduce the influence of emotions in investing and get clients to focus on what should do well in the future. It is sometimes difficult for individual investors to do that because they may not have the educational training, investment experience and perspective, emotional detachment and the time to put it all together to act in a timely manner.
Many
of our clients and prospective clients are too busy to coordinate their different
investments or don't have the background or interest to do it. They would rather
be doing other things, yet they understand that it is important to have them
coordinated.
Some new clients say that they have "his and her accounts all over the place." There is no coordination, and they want help pulling it together now and on an on-going basis. We help people do that. We provide quarterly reports that summarize all of the balances of your investments, and we will coordinate with your CPA and estate planning attorney, if desired.
Some new clients have never coordinated their 401k, 403b, IRA and other plans with a family advisor in this way. When we help them do that and provide other insights, they feel much more comfortable with their investing and the belief that their retirement dreams may be attainable.
Over the years, many people have tried to find seasonal tendencies or historical patterns in the stock market and use their findings to improve upon their investment performance. Yale Hirsch, founder of the Stock Trader's Almanac, has researched and written about many of the seasonal tendencies of the stock market. He tested an approach of investing in the Dow 30 Index (which is made up of 30 large company stocks) on October 31, then selling the investment on April 30 of the following year and repeating this process every year since 1950. This simple study divides the calendar year into "the six strong months," where the average return has been positive for the past 60 years and "the weak six months," where the average return has been negative for the past 60 years.
As shown in the following table, which excludes the effect of dividends and transaction costs, he found that almost all of the gains of the stock market since 1950 have been earned in a six-month strong period each year from October 31 to April 30. The strong six-month period averaged 6.8%. The weak six-month period averaged a loss of -0.1%. Buying and holding the Dow 30 Index over that same time period averaged 6.7%. If an investor would have invested $10,000 in the Dow 30 Index only during the weak six-month periods since 1950, it would be worth $9,543 in 2009. If an investor would have invested $10,000 in just the strong six-month periods since 1950, it would be worth $507,573. Buying and holding the index for the whole year each year, the $10,000 would have been worth $484,395. Again, as mentioned above, following historical returns does not assume any future result will be positive.
The following table shows the results of Yale Hirsch's study.
| Dow 30 Index Returns between May-Oct and Nov-Apr of Each Year | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Year | Dow 30 Index |  |
Weak May-Oct Return |
$10,000 Invested |
|
Strong Nov-Apr Return |
$10,000 Invested |
|
12 mo. Nov-Oct Return |
$10,000 Invested |
|
| Apr 30 | Oct 31 | ||||||||||
| '50 | 214 | 225 | |
5.0% | $10,498 | |
6.9% | $10,690 | |
12.2% | $11,222 |
| '51 | 259 | 262 | 1.2% | $10,629 | 15.2% | $12,311 | 16.6% | $13,085 | |||
| '52 | 258 | 269 | 4.5% | $11,107 | -1.8% | $12,089 | 2.6% | $13,428 | |||
| '53 | 275 | 276 | 0.4% | $11,150 | 2.1% | $12,337 | 2.4% | $13,756 | |||
| '54 | 319 | 352 | 10.3% | $12,296 | 15.8% | $14,284 | 27.7% | $17,563 | |||
| '55 | 426 | 455 | 6.9% | $13,140 | 20.9% | $17,266 | 29.2% | $22,687 | |||
| '56 | 516 | 480 | -7.0% | $12,216 | 13.5% | $19,590 | 5.5% | $23,933 | |||
| '57 | 494 | 441 | -10.8% | $10,899 | 3.0% | $20,183 | -8.1% | $21,997 | |||
| '58 | 456 | 543 | 19.2% | $12,988 | 3.4% | $20,861 | 23.2% | $27,093 | |||
| '59 | 624 | 647 | 3.7% | $13,463 | 14.8% | $23,954 | 19.0% | $32,249 | |||
| '60 | 602 | 580 | -3.5% | $12,986 | -6.9% | $22,290 | -10.2% | $28,946 | |||
| ... | ... | ... | ... | ... | ... | ... | ... | ... | |||
| '83 | 1,226 | 1,225 | -0.1% | $7,538 | 23.6% | $81,066 | 23.5% | $61,107 | |||
| '84 | 1,171 | 1,207 | 3.1% | $7,774 | -4.4% | $77,463 | -1.5% | $60,218 | |||
| '85 | 1,258 | 1,374 | 9.2% | $8,492 | 4.2% | $80,715 | 13.8% | $68,544 | |||
| '86 | 1,784 | 1,878 | 5.3% | $8,939 | 29.8% | $104,775 | 36.6% | $93,656 | |||
| '87 | 2,286 | 1,994 | -12.8% | $7,794 | 21.8% | $127,570 | 6.2% | $99,428 | |||
| '88 | 2,032 | 2,149 | 5.7% | $8,240 | 1.9% | $130,053 | 7.8% | $107,165 | |||
| '89 | 2,419 | 2,645 | 9.4% | $9,011 | 12.6% | $146,405 | 23.1% | $131,924 | |||
| '90 | 2,657 | 2,442 | -8.1% | $8,284 | 0.4% | $147,051 | -7.7% | $121,812 | |||
| '91 | 2,888 | 3,069 | 6.3% | $8,803 | 18.2% | $173,877 | 25.7% | $153,072 | |||
| '92 | 3,359 | 3,226 | -4.0% | $8,455 | 9.4% | $190,308 | 5.1% | $160,912 | |||
| '93 | 3,428 | 3,681 | 7.4% | $9,080 | 6.2% | $202,180 | 14.1% | $183,571 | |||
| '94 | 3,682 | 3,908 | 6.2% | $9,638 | 0.03% | $202,241 | 6.2% | $194,919 | |||
| '95 | 4,321 | 4,755 | 10.0% | $10,606 | 10.6% | $223,621 | 21.7% | $237,181 | |||
| '96 | 5,569 | 6,029 | 8.3% | $11,483 | 17.1% | $261,879 | 26.8% | $300,717 | |||
| '97 | 7,009 | 7,443 | 6.2% | $12,194 | 16.2% | $304,427 | 23.4% | $371,212 | |||
| '98 | 9,063 | 8,593 | -5.2% | $11,560 | 21.8% | $370,712 | 15.4% | $428,560 | |||
| '99 | 10,789 | 10,730 | -0.5% | $11,497 | 25.6% | $465,473 | 24.9% | $535,155 | |||
| '00 | 10,734 | 10,971 | 2.2% | $11,751 | 0.04% | $475,649 | 2.2% | $547,189 | |||
| '01 | 10,735 | 9,075 | -15.5% | $9,934 | -2.2% | $455,625 | -17.3% | $542,625 | |||
| '02 | 9,946 | 8,397 | -15.6% | $8,387 | 9.6% | $499,358 | -7.5% | $418,804 | |||
| '03 | 8,480 | 9,801 | 15.6 | $9,693 | 1.0% | $504,298 | 16.7% | $488,834 | |||
| '04 | 10,226 | 10,027 | -1.9% | $9,506 | 4.3% | $526,137 | 2.3% | $500,123 | |||
| '05 | 10,193 | 10,440 | 2.4% | $9,736 | 1.6% | $534,796 | 4.1% | $520,698 | |||
| '06 | 11,367 | 12,081 | 6.3% | $10,348 | 8.9% | $582,289 | 15.7% | $602,530 | |||
| '07 | 13,063 | 13,930 | 6.6% | $11,034 | 8.1% | $629,630 | 15.3% | $694,764 | |||
| '08 | 12,820 | 9,325 | -27.3% | $8,026 | -8.0% | $579,463 | -33.1% | $465,088 | |||
| '09 | 8,168 | 9,712 | 18.9% | $9,543 | -12.4% | $507,573 | 4.2% | $484,395 | |||
|
|||||||||||
| avg. from 1950 | |
-0.1% | |
6.8% | |
6.7% | |||||
| avg. last 30 years | 1.2% | 7.3% | 8.6% | ||||||||
| avg. last 10 years | -1.8% | 0.9% | 0.8% | ||||||||
| avg. last 5 years | 0.1% | -0.7% | -0.6% | ||||||||
| Past performance does not guarantee future results.
The index information is for illustrative purposes only. Dow 30 is an unmanaged
index which is made up of 30 large company stocks. It is not possible to
invest directly in any index. Source: Stock Trader's Almanac 2009. |
|||||||||||
Investing in just the strong six months has the advantage of earning somewhat better returns historically compared to buying and holding the Dow 30 Index. This study has the index invested for only half the year; therefore an investor's portfolio is subject to stock market risk for only half the year also. Moreover, the investor could invest in money markets or another "non-stock" investment the other half of the year.
While this seasonal six-month study is interesting and insightful, it seems to be missing one element to make it a good investment approach. The study implies that the market will always peak on April 30th and trough on October 31st. What if the stock market was moving upward on April 30th when you would normally be selling in the Hirsch six-month approach? Wouldn't it make sense to delay the exit point past April 30th? Similarly, if the market were going down earlier in April, wouldn't it make sense to exit earlier than April 30th?
If an investor could find a system that would speed up or delay the entry and exit points, one might be able to increase the returns of the strong six-month periods and possibly avoid more losses in the weak six-month periods. One financial advisor has studied various indicators and has found that a MACD signal, a popular short-term momentum indicator, can better pinpoint entry and exit points as the two calendar dates approach.
We have studied the MACD signals applied to Yale Hirsch's six-month study and have found that they may significantly enhance the historical results shown above. We call the approach with the MACD signals the Seasonal Investment Approach. We have studied the Seasonal Approach applied to the Dow 30 Index and S&P 500 Index over periods of bull markets, bear markets and flat markets. We have studied the average returns over various periods, the losses in loss years and gains in good years as well as six other measures. In general, the MACD signal improves the results of the table shown most of the time.
The ebbs and flows of the stock market are affected by cash flows as well as psychology of the markets. As the market enters the fall and continues into the spring (the strong six months), investors begin to receive extra chunks of cash. Cash comes from mutual fund dividend payments in November and December, corporate bonuses in December through February, heavy contributions for 401ks, 403bs, pension and profit sharing plans in the First Quarter and IRA contributions before Apri1 15th. On the psychological side, Wall Street analysts are naturally optimistic and are touting their favorite stocks at the start of the year.
In the spring and summer of the year (the weak six months), the flow of extra cash tends to dry up somewhat, depriving mutual funds and investors of sources of funds to put into the market. Wall Street and investors are more concerned about vacations and enjoying the summer. Cash flows turn negative as investors withdraw cash for vacations and tax payments. September seems to live up to its reputation as the worst performing month of the year. Wall Street analysts return to work after Labor Day and begin trimming their earnings estimates for the remainder of the year. October is volatile because it is the last month of the fiscal year for mutual funds, and the funds do a lot of trading to finalize their taxable gains and losses for the year. October is also the month that most often ends a bear market and begins a new bull market. All of these summer and early fall events leave the market much more susceptible to corrections until the next strong money-flow season starts in the late fall.
Because activities just described are tied to the calendar year and are not likely to change, it is highly probable that the six-month seasonal trends will continue in the future much as they have in the past. To enhance the results of the six-month cycle identified by Yale Hirsch, all you need is a system to better pinpoint the entries and exits as the October 31 and April 30 calendar dates approach.
First, in the retail investment arena, it is not in brokers' best interest to recommend a seasonal approach that would focus all of his or her commission generating activities into six months of buying or in some cases just two days each year. How can they handle all of their clients in those two days, and what do they do the rest of the year? They are just not set up that way. Further, mutual funds and brokerage firms do not want 30% to 50% of their clients' assets moved out of their funds to defensive positions for six months each year. They are afraid that the money will not come back, and the extra trading makes their job much harder. Therefore, it is not surprising that mutual funds try to convince investors that buying and holding is the best approach while brokers try to encourage trading year around.
Second, there are three basic types of institutional investors. The first group involves the pension funds, insurance companies and bank trust departments. They generally have a relatively constant mix of stocks and bonds (e.g. 60%/40%) and seldom move away from such ratios by raising or lowering cash levels. Mutual funds are literally mandated to be fully invested, with the exception of a small amount of cash to handle potential liquidations. Investors who use the equity funds to invest in equities don't like it when a mutual fund has significant cash positions. The third group of institutional investors are very active in their management. They are constantly buying and selling stocks and bonds and sometimes going short. They will not hesitate to go short or raise significant cash to accomplish their objectives. These investors have no interest in limiting their activity to being invested for only six months a year and being defensive for the other six months.
From our perspective, the benefits of the seasonal investment system are such that we believe we should offer it to our clients to improve their results with us. We had to modify our business to facilitate this kind of active portfolio management, and most major institutions won't do that.
There
are three steps to the Seasonal Investment Approach. First, we work with each
client to determine how much to increase or decrease the equity mix to
meet their specific risk tolerance and goals. For example, should the equity
range be between 40% and 60% in equities for a particular client? This client
would have 40% invested in equities during the weak period after April and 60%
in the strong period starting in October or November. Another client may want
his or her equities to range from 35% to 70%, while another may range from 50%
to 90%. The range depends upon the risk orientation of the client.
We prefer to make the equity changes in a tax-deferred account so that there are no tax consequences from changing the portfolio, although there may be some instances where it will work in a taxable account. Existing 401k, 403b and TIAA-CREF accounts also work well for this activity because there are no transaction fees associated with the changes. In other tax-deferred accounts such as IRAs, we like to use mutual funds rather than individual stocks to change our equity mix. Again, this reduces transaction costs. This approach can also be used with SEI accounts.
Second, we work with each individual client to determine what equities to invest in during the strong period. Generally, those would be investments options, mutual funds or exhange-traded funds (ETFs) that would tend to do well in up markets. Then, during weak periods, we would recommend whether the client should invest the cash from the equity sales into money markets, short-term or intermediate-term bond funds or TIAA Real Estate.
Third, we might use the MACD signal to determine when to increase or decrease our equity mix.
Operationally, it would function as follows: When you give us standing authority to move x% of your portfolio, then we will outline for you how the process works in both strong and weak periods. Then, on the day we choose to implement the equity change, we execute all the transactions to shift the mix to each client's desired ratio of equities.
We are not going to more fully explain the Seasonal Investment Approach and its benefits on the web site. You need to come to our offices so we can show you in more detail how it works, how well it has done, and how it might apply to your portfolio.
The Seasonal Approach is a modified buy and hold approach. In general, once each fall it signals when to become fully invested. Then, once each spring, it signals when to reduce clients' equities. Therefore, it may have reduced equity exposure for about six months a year. If financial crises, negative global events or other corrections occur during the weak period, then the client is less exposed to these events. However, if these negative events occur in the November-April strong period when the investor will be fully invested, the system would not help preserve the investor's finances by itself. On the other hand, if a client's general approach is to buy and hold, they would likely be fully invested any way. Adopting the Seasonal Approach does not preclude the client or advisor from making judgments about the market when the client is normally fully invested in equities. Some unusual economic or market conditions may warrant changes outside the time frame of seasonal changes.
The Seasonal Approach provides a discipline to answer the question that many investors ask themselves - "Aren't there times when I should be fully invested and times when I should reduce my equities?" It is extremely difficult to decide effectively to increase or decrease an investor's equity mix on an undisciplined basis. Emotions cloud people's ability to assess situations. All successful active portfolio management systems require a discipline to remove emotions. Our Seasonal Approach is a relatively simple discipline. It generally involves only two straightforward changes each year. It has been analyzed over 60 years and has worked well in the past.
Prolonged
bear markets or prolonged flat markets are what worry many investors the most.
This is where the Seasonal Approach appears to be so beneficial. An investor
following the Seasonal Approach simply cannot remain fully invested through a
prolonged bear market (such as we experienced in 2000-2 and 2008-9). The investor moves
to a reduced equity position every six months.
Prolonged flat markets are also a worry. There have been three prolonged flat markets in the last century when the stock markets were flat for 17 to 25 years. If you would have bought and held U.S. stocks over those periods, your portfolio would not typically have increased. While the stock market was roughly the same at the beginning and end of those periods, the markets fluctuated in between. An effective active management approach might have been able to attain reasonable returns during those flat periods. While we are not predicting a flat market from 2000 to 2015, what will your current investment approach return if such a period does occur?
No one can accurately predict where the stock market will be 5 or 10 years from now. However, we suggest investors use an active strategy to try to respond to the kind of investment environment with which we will be presented. We believe too many investors view the stock market with rose-colored glasses and are not adequately prepared for challenging financial markets we may experience in the next five to ten years.
There is no such thing as a perfect investment system. But, the Hirsch six-month studies seem to show that there is a seasonality that pervades the stock market which may enable investors to get similar returns to buying and holding by being fully invested in just the strong six-month period and on the sidelines for the weak six-month period. Good returns with potentially half the equity risk are possible because you're fully invested for only half the year.
The
objective of the Seasonal Approach is to work towards reducing the investors'
stock market risk during historically weak periods. This can lead to reducing
the losses in these weak periods. This approach is consistent with one of our
favorite phrases. "Sometimes the best way to make money is to not lose money."
No investment strategy, including this seasonal approach, can predict gains. Using this strategy could result in significant losses.
(Past performance does not guarantee future results. Please contact us to obtain our ADV for a more complete description of our fees and services.)
Another important stock market pattern to consider in setting the equity
percentage in a portfolio is the 4-year Presidential Election Cycle. This approach
involves analyzing the returns in each of the four years of the presidential
cycle. Studies have shown this cycle has a heavy influence on stock returns – pre-election
years are the most favorable, and post-election years are the least favorable.
Historically, we know almost every presidential administration has pulled out all stops in the way of monetary and fiscal stimulus to make sure the economy and stock market are strong going into presidential elections. Then, they usually allow the excesses of those programs to correct during the first two years of the next cycle. As a result, post-presidential election years average only 4.0% returns and have the most frequent losses -53%. (See the chart below.) On the other hand, pre-presidential years average a gain of 17.7% and have not had a loss year in the last fifteen such years.
In light of these average return and frequency of loss statistics, one might question why an investor should buy and hold his or her equities and have the same amount invested in equities during all four years.
We integrate the findings of the Seasonal Approach and Presidential Election Cycle to develop an equity allocation strategy for each year. In post-election years, we are inclined to use our full authority to reduce equity exposure in weak periods and in pre-election years, we might limit the use of our full authority.
Again, as mentioned above, no investment strategy can guarantee that losses will not occur.
We utilize at least four investment sectors to try to increase potential returns, complement and/or increase the diversification of investment portfolios. These four sectors are small-cap equities, international equities, (international) emerging market equities and commodity index funds. While these kinds of investments may have higher returns than the Dow 30 over various time periods, they also have higher volatility and riskiness when they are bought on a buy and hold basis. As a result, many investors avoid investing in these sectors or limit their investments in these types of assets to a very small portion of their total portfolio.
Through active management of such funds, we try to reduce the volatility of these funds and the frequency of annual losses, potential results that are more acceptable to investors. We utilize various securities to make investments in these small-cap and international sectors.
As discussed in various areas of this web site, we are particularly concerned about rising interest rates and rising inflation as they may affect investment returns in the future. It is difficult to find investments that will do well in periods of rising inflation and rising interest rates. We have found one investment sector that responds favorably to these conditions. Not surprisingly, we find that commodity indices go up when inflation goes up.
Over the last 36 years, the Dow 30 Index has lost money for a calendar year on 10 occasions. Interestingly, we found that commodity indices tended to do well in those 10 years. Specifically, the Goldman Sachs Commodity Index had gone up in 6 of those 10 years. These findings encouraged us to look more closely at the use of commodity index investments in portfolios.
The key to reducing the volatility of an investor's portfolio is having investments that will go up when other investments go down. This is a fundamental principle of the Nobel Prize-winning Modern Portfolio Theory. Investments that go up and down together are called highly-correlated investments. Investments that go up when others go down (and vice versa) are called negatively-correlated investments. Many investors' portfolios are dominated by large cap stocks. We have shown below how large-cap stocks correlate with small-cap stocks, international stocks, long-term bonds and T-bills (money markets). The first chart shows that large-cap stocks are highly correlated with small-cap stocks and international stocks; they are mildly correlated with the Goldman Sachs Commodity Index and T-bills; and they are mildly negatively correlated with long-term bonds.
The second chart focuses on the correlation of the Goldman Sachs Commodity Index with various sectors. It shows modest negative/positive correlation of the Goldman Sachs Commodity Index with various sectors. Since large-caps and small-caps and international investments tend to dominate the equity mix of most investor's portfolios, the addition of a commodity index investment that tracks the Goldman Sachs Commodity Index has the potential to complement the results of a portfolio in times of difficult stock markets. And, that is the kind of investments we are looking for to add to the portfolios.
We believe over the next 5 or 10 years that investors will increasingly use commodity index investments to try to complement and diversify their portfolio.
Diversification is one of the most important investment concepts. Each investor needs to ask themselves whether they are adequately diversified or only partially diversified. We like to use 5 to 9 approaches to diversifying large-cap equity investments in an investor's portfolio. We divide them into passive and active approaches.
Passive diversification using:
Active diversification using:
We typically recommend the first 5 investment categories to most clients for diversification purposes. Exactly how much people have invested in U.S. and international equities may have an important impact on their returns and risks.
Ask yourself, "why should I have the same invested in equities all year
or all four years when I know that":
Whether we recommend using approaches 6 through 9 with a client will depend upon the size of the portfolio and where assets are custodied. Call us and we can explain how these last four approaches may apply to your financial goals.
Decisions on the exercising of stock options are not quite as simple as some option holders tend to think. Our advice on when to exercise, and whether to exercise and hold or sell, depends upon a variety of factors. These factors include the amount of your direct and indirect stock holdings, the size of your gains in unexercised options, the expiration of the options, the likelihood of receiving future option grants, the size of the annual fluctuation in your company’s stock price, the current price in that range, what Wall Street analysts are recommending on your stock and your thoughts and concerns about the company in the future. We can help you develop a stock option exercise strategy that provides a framework for both current and future exercising.
Most
people don’t know it, but a large company’s stock may fluctuate
50% to 100% in a typical year. A stock may range from $40 to $70 or $40 to
$80.
Small company stock prices may fluctuate even more. Obviously, it is a big
difference whether you are selling at $40 or $70. We help a number of
Pfizer, Ford and and other employees with their stock option strategies. Pfizer,
for example, had annual fluctuations of 72% over the 5 years ending
12/31/00. Ford had annual fluctuations of 54% over
the same period. GE’s was 50%, Merck’s was 57%, AT&T’s was 94%, Intel’s
was 114% and Microsoft fluctuated 110%.
Stock options can be an important part of building significant wealth. With the typical annual price fluctuations, there are significant opportunities for us to provide value-added advice. Advisory clients are not charged for this advice. It’s part of our wide range of services.
For clients that follow their company’s stock very closely, we can offer an independent second opinion about their company’s stock price. Just because you follow it closely, it doesn't mean you shouldn't get a second opinion. For other clients who do not actively follow their company’s stock price, we may establish an exercise/sales plan and help clients implement that plan.
Some
clients have significant investments in their company’s stock through direct
holdings in private accounts and company stock in their 401k or stock savings
plan. In addition, they may have significant unrealized gains in their vested
stock options. We help clients understand when they may have too much invested
in their company’s stock. If they have too much, we help them decide when and
which of the holdings they should reduce, and how to diversify.
Retirement planning has always been important, but it is even more important today. That is because people are retiring earlier and living longer than they were 10 or 20 years ago. This puts additional pressure on retirement investing since people have fewer years to build a nest egg and more years to live off of it. RIS can prepare retirement plans and projections that will help answer some of the following questions:
How
much will you need to retire and live comfortably?
Most families cannot answer these questions alone, but RIS has the analytical, technical and computer software capabilities to develop projections into the future. If you act now and plan wisely, you may help estimate whether you have enough to retire comfortably.
Find out how you can benefit from our plans and advice.
In addition to planning for retirement, we help clients make the multitude
of specific decisions regarding retirement. Should you rollover your 401k to an
IRA? What issues should be considered before you do it?
Should you take single-life pension or annuity or a two-thirds or one-half survivor
benefit? Should you start Social Security at 62 or wait for the larger post-65
benefit? Do you need to replace the life insurance that the company used to
pay for? How much should you keep in money markets or short-term bond accounts
for emergencies? What are the best investment vehicles for the emergency funds
that pay a good interest rate? Are CDs good for that purpose? Can you really
afford to travel more? What size vacation home can you afford? Should you take
your initial retirement income from your tax-deferred retirement plans or from
your family taxable accounts? Can you handle these other issues without
an advisor? At RIS, we can help provide answers to these questions.
Sometimes different administrators of a company’s benefit office and different
administrators of the retirement plans seem to give conflicting answers to
questions
that employees ask about retiring. Often, you can’t speak to the same administrator
and you know that they have no understanding of your specific situation. You
have to go over all the details over and over again with different people.
Some employees don’t know whether they are confused themselves, or the administrator
is confused or just new to their job. It can be frustrating for you, and you
know that it is critical to avoid any mistake. If we are involved with pre-retirement
planning and thinking, we can help employees make the final decisions that
are required. If we think we are not getting the right answer or getting unclear
advice from the administrator, we don’t hesitate to get another opinion. Employees
are frequently happy to have us involved to try to minimize the risk of a mistake.
Since
we have been involved in many retirements, we know the areas to be sensitive
to and that require special attention. In some companies, it is important for
many families to transfer or rollover their money out of the company’s 401k
into an IRA almost immediately. In other cases, significant tax savings will
be lost if they liquidate or make a distribution out of
their 401k or 403b. You should know whether your employer’s plan fits either
of these situations - or if these two points are of no significance to you.
All transfers should be analyzed carefully.
If
you have investments in your company’s stock in your 401k or stock savings
plan, you should decide whether you want to get the appreciation in your company’s
stock treated as long-term capital gains (15% tax rate). Otherwise, when you
withdraw the money from your plan or a rollover over IRA, you will have to
pay ordinary income tax rates that could reach maximum of 35% now. There are costs
to doing this, but the benefits may be very, very large. It is a complicated
analysis to determine what to do, but it is something that should not be overlooked.
You can lose this benefit if you are not careful. One false step and the benefit
is lost. We can help provide this and other tax reduction strategies in conjunction
with your tax advisor.
An important part of post-retirement investing and any desire for multi-generational
giving is determining whether your tax-deferred retirement plans can be extended
beyond the participant’s life to the spouse’s life and any children’s lives.
Some plans make it impossible or difficult for heirs to continue with tax-deferred
investing by requiring immediate distribution of funds from the plan under certain
circumstances.
It could mean the difference between your heirs receiving a couple hundred thousand dollars in taxable short-term distributions and a couple million dollars over time. We can help you protect your heirs. Many employers do not make these issues known or clear to employees. Don’t make mistakes in this area.
Conversion
to a Roth IRA is something to consider as you retire. If you earn less than
$100,000 in a calendar year, you can convert from an IRA (or other retirement
plans) to a Roth IRA. You have to pay income taxes on the portion that you convert,
but Roth IRAs have significant benefits.
Roth IRAs allow tax-deferred investing, no minimum distributions required at 70 ½, no income taxes on the withdrawals, and the withdrawals can be extended over the expected life of the beneficiaries. Withdrawals are tax free after the later of five years from the time the account was established or age 59 ½. Again, instead of hundreds of thousand of dollars for your beneficiaries, it could mean, depending on account values, millions, free of income taxes.
It may be worth your time trying to see if it feasible for you and what the benefits could be for your heirs. If it meets your estate planning desires, we might be able, for example, to help you move your income and expenses around in a single year to keep your adjusted gross income under $100,000. It is best to plan this with you ahead of retirement when you have more options to consider. You may want to delay the initiation of your pension benefits depending on your overall investment situation. Remember that you do not have to convert all of your retirement plan assets to a Roth.
When people retire or get older, sometimes they want to simplify their lives, consolidate their investments and push some of the investment responsibility on to the shoulders of investment professionals. If they are going to be traveling more or spending part of the winter in warmer climates, they want someone watching over their investments and telling them whether they should be doing anything different.
Determining whether you should keep your assets in your old 401k, 403b or other retirement plan is an important decision. In some situations you should be leaving your assets in there to maintain certain advantages while other employer situations suggest that you should move the assets out as soon as possible. We can help you manage your assets in the current plans or can help you rollover your assets (free of tax consequences) to a new IRA plan.
See the first three sections for more details.
Most families have other kinds of financial questions that they seek help in resolving. RIS helps clients deal with some of the following questions:
If you are a grandparent, we would like to ask you the following question: Will your children be able to give your grandchildren the same kind of college education that you gave them? Many grandparents are worried about this. Do you want your grandchildren to have student loans outstanding after they graduate? We would like to help you solve these worries. The following chart projects the cost of different colleges for a person born in 2003. The typical student today graduates in 4.5 years and those 4.5 years of college might cost between $165,000 and $330,000, depending upon the school selected. An Ivy League education may cost more than $500,000.
With the new Section 529 college funding plans, most people’s old approaches to college funding should be re-evaluated. UGMA accounts and separate accounts of parents set aside for college expenses may not be appropriate today. RIS can provide illustrations on how you can fund your children’s or grandchildren’s college education using the new plans. We can help you avoid some of the pitfalls in these very beneficial programs.
Planning for the management and disposition of assets upon your death has always been a complex decision-making process. The reduction or elimination of estate taxes represents only one factor, albeit a significant one, in preparing an estate plan. Despite the uncertainty inherent in the changes to the law and the dubious likelihood of lasting repeal, the need to plan for the disposition of your assets continues to be extremely important for your family.
Even in the absence of the traditional tax benefits associated with trusts, the use of trusts in estate planning still serves a critical function. Long before taxes were a consideration, trusts were used to protect beneficiaries not only from themselves, but also from outside factors that might bear upon the beneficiary’s financial well-being, including disability, divorce and creditors. To the extent you need legal help, we can recommend attorneys with expertise in this area.
We will help you think through the pluses and minuses of annual gifting to your children or grandchildren. If you become an advisory client, we will continue to monitor your situation and make recommendations as the tax laws change or your financial position changes. Find out how the new Section 529 college funding programs may allow for some interesting estate planning strategies.
As part of our retirement planning process, we can estimate what you will pay in estate taxes and income taxes on your retirement plans if you were to die this year. We also calculate the estate taxes you might pay if you die at age 90 with the investment assets, home and life insurance that we have projected to that date. Many people forget that they will have to pay income taxes on their retirement plans as well as possibly paying estate taxes on those assets upon their death.
A few years ago one of our clients started referring to us as "a quarterback of their family affairs." It seemed like an appropriate description of our role with many clients. Some people want someone to work with their other advisors like a tax preparer or estate planning attorney to pull things together, to coordinate their different investments, and to show them how well they are doing periodically. Many are concerned what will happen if they pass away unexpectedly. Who will handle investment matters for their spouse, or their children, if both parents pass away?
What would happen in your family if you should pass away tomorrow? Could your spouse or children jump right into making the necessary financial and investment decisions and answer all the estate planning issues? We can help you pull your financial matters together now and be there if we are needed in the future.
We believe that people want advice that is comprehensive. They want a single plan, not four or five plans. They don’t want to go to a bank to get one set of advice, a broker for stock recommendations, an insurance agent for insurance, a financial planner for retirement planning and an attorney for estate planning matters. While it definitely is not easy to get all that in one place, now you know one place - RIS - that may do it for you.
Other topics:
Retirement Income Solutions, Inc. is an independent Registered Investment Advisor.
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