I believe…
…that my clients are best served by following a logical process for making prudent investment decisions based on an Investment Policy Statement (i.e., the client’s general instructions to me regarding how the investment portfolio is to be managed). This process produces a customized written investment plan that incorporates my client’s primary investment goals, the right amount of risk (not too little, not too much), the investment time horizon (when funds will actually be needed), taxes and other important elements of my client’s personal situation.
- A written plan allows you to thoughtfully make investment decisions in advance instead of as a reaction to market events when emotions can affect judgment.
- A written plan frees you from the anxiety of wondering “should I be doing something right now?” or “what should I do next?” The Peace of Mind a written plan provides may not be quantifiable but it can be very valuable.
…that my clients have a responsibility to themselves and to their family to take an active role in making investment decisions to the best of their ability. Investors should never abdicate responsibility and simply leave it up to the advisor to “do whatever you think is best.” Designing a realistic investment plan should be a collaborative effort with clearly defined roles for the client and the advisor.
- Making sound investment decisions is not rocket-science. An investment strategy does not have to be complicated to be effective.
- The average investor should be able to understand the fundamental reasons supporting any investment strategy. If not, then the problem is more likely to be the strategy or the advisor’s ability to explain the strategy than the fault of the client. Never invest in anything you don’t understand!
- It is the responsibility of the advisor to satisfactorily explain the reasoning supporting a recommendation in order to allow the client to understand the pros and cons of alternative courses of action and make an informed decision.
- Expenses matter. Clients have a responsibility to ask the advisor about any and all fees and to assure themselves that they are receiving fair value in return.
…that there are times when an investor needs the services of an expert and other times when he or she is more than capable of supervising the investment plan.
- You need an expert to design a realistic, prudent investment strategy and investment plan that meets your requirements as specified in your Investment Policy Statement.
- You need an expert to guide you and help you avoid the “unknown unknowns”, the “amateur mistakes” and other hidden dangers.
- You need an expert to provide objectivity, to give you a “reality check,” to dampen enthusiasm during good markets and overcome depression during bad markets.
- You need an expert to periodically perform a detailed review of your portfolio and evaluate results - not only how the portfolio has performed in absolute terms but how the portfolio should have performed (i.e., relative to the market as a whole) and whether the current strategy is helping you achieve your goals.
- You don’t need (and shouldn’t pay for) a manager to “watch” the portfolio in between regular portfolio reviews. The presumption is that by “watching” a portfolio you can avoid market declines or spot trouble in advance. The reality is that “watching” without a specific definition of what you are watching for and precisely what you are going to do when you see it, is a complete waste of time and energy (not to mention money). Accepting the fact that unexpected events will occur is good policy. Believing that any advisor is going to foresee an unexpected event and protect you from it is wishful thinking.
…your advisor should not only possess professional expertise (as evidenced by education, experience and credentials) but also a genuine concern for you as an individual. Your advisor must be honest, not just in an ethical sense, but in terms of being truthful about what he can or cannot do for you. While no relationship is entirely without conflicts of interest, conflicts should be kept to a minimum and those that cannot be eliminated should be fully disclosed.
- Ideally your advisor should accept, in writing, a fiduciary responsibility i.e., a legal duty to act primarily for the client's benefit in matters connected with the undertaking and not for the fiduciary's own personal interest.
- An hourly rate is the most equitable way to pay for investment advice. Commissions and annual fees based on the value of your portfolio are not easily correlated to the actual work involved. Compensation based on hourly rates means that you pay for advice on a when-needed basis.
- As an Accredited Investment Fiduciary®, compensated at an hourly rate, I have no financial incentive to recommend any specific investment product or strategy. This also allows me to recommend the most cost-effective investment vehicles which can save you a significant amount of money.
Some additional principles:
- Normal human emotions can produce irrational investment decisions from amateurs and professionals alike. We all occasionally need a “reality check.”
- Just because an opinion is popular doesn’t mean that it is true. A lot of otherwise intelligent people once believed that the Japanese stock market, internet stocks and even Beanie Babies were solid investments.
- Managing risk is more important to long-term success than maximizing return. It’s easier to avoid a big loss than it is to recover from one.
- There is no risk-free strategy. “You don’t get something for nothing.” You cannot avoid all risk - in the end, you must choose which risks you are willing to accept.
- Investors constantly receive contradictory advice. You need to be familiar with business, finance, statistics, (market) history, and human behavior in order to separate good advice from bad. Education, experience and judgment are needed to distinguish useful information from raw data.
- An investor must understand and believe in his or her plan to carry on with it during bad times. There is no long-run if you can’t live with it in the short-run.
- The annual costs of managing your money can significantly affect your returns in the long-run. Reducing fees and expenses increases your return.
- There is no perfect investment strategy that will work in all markets. A strategy that now produces the highest return can rather suddenly turn into a strategy that loses the most money.
- Markets are cyclical not linear so you can’t pick winners simply by looking at historical data. Many forecasters are simply “predicting the past” (not the future).
Contact me for a complimentary, no-obligation introductory meeting:
Call Kent at (650) 952-5488 or Email Kent at Kent@quacera.com