Strategic Investing

Last night I had a discussion with a friend of mine about his financial advisor. His advisor works for a large brand name advisory firm and has many clients. We talked about his performance last year and this year to date. Last year his account was down approximately 40%, and that was with my friend asking him to keep roughly half of his account in cash because he didn’t feel comfortable with where the market was and the current economy. This year my friend picked six stocks that he wanted his advisor to buy for him on his own, and those stocks have brought his account back up to 80% of its original value. As with many traditional managers and advisors, my friend’s advisor bought only individual stocks for his account.

Doubtless, this story is true for many people across the country. I felt the need to share something that I have learned about the different types of advisors in the financial world: typically, an advisor’s personality lends itself to be either great in sales or great in investment analysis. Rarely, is a person talented in both. Based on what you read earlier in this post, do you think the advisor above is a salesman or an investment analyst? I personally know this advisor. He is a great guy, very relational, and legitimately wants the best for his clients. From what I have seen and he has told me, he has a very large number of clients in his book of business, and he spends time meeting with them as well as prospecting for new clients. I get the feeling he does not have much time for studying individual companies their performance.

What I want our readers to understand is that there a several differences in what we do and what my friend’s advisor does. For one, we don’t believe that the old buy and hold strategy in today’s equity market will work long-term. There is too much instability in the economy. Also, we do not limit our portfolios to investing in only stocks and bonds. We believe strongly in alternative investments used by endowments and institutional investors. The endowment model has been our cry from the company’s beginning in 2000. We combine assets in a portfolio that have very little correlation to each other, which reduces volatility and creates more predictable returns. We accomplish this by using other fund managers who are some of the most talented and sought after in their fields. By spending our time monitoring your accounts’ performance as well as each fund manager, it allows us to spend more time caring for you and helping you plan for retirement. The difference compared to our friend described above is we know that we cannot be experts in the different asset classes needed to provide you with true diversification, but we can find the experts and give you access to them.

What we are doing is not new; large endowments have been investing in this manner for years, and their constant steady returns even in a weak economy is a testimony to the strategy. We believe that over time investors will begin wanting more from a manager than buy and hold. This strategy worked well when the country was in a growth stage but a more strategic investment style is needed now. Let us know if you have any questions.

Roth Conversions

Next year there will be a once in a lifetime opportunity (at least thus far) to convert your traditional IRA into a Roth IRA with the ability to spread the taxes out over two years. Also, starting in 2010 there will be no limit on who can convert their IRA into a Roth. In the past if your household income was over $100,000 you were not allowed to convert.

If you're unfamiliar with the difference between IRAs and Roth IRAs here is as simple a definition that I can give: For a traditional IRA you contribute pre-tax dollars which brings your taxable income down now, but when you take it out during retirement it is taxed at ordinary income tax rate (you don't know what that will be by time you get there). In a Roth IRA you contribute after tax dollars, but your account grows tax free. When you take it out you don't pay any taxes on it. Also, with an IRA you are required to start taking distributions at age 70 1/2 based on life expectancy, whereas in a Roth there are no required minimum distributions.

So you see the benefit of being able to convert your IRA to a Roth: your money can grow tax free from now until you retire or need the money. This conversion may not be right for everyone. One major reason that may keep it from being beneficial is if you don't have the capital to pay the taxes. More than likely you wouldn't want to pull money out of your IRA to pay taxes because there are penalties when pulling money out of your IRA before 59 1/2.

There are many other issues to consider when deciding whether or not to convert. Read more about the conversion in the articles below. If you want to talk more about it we'd love to hear from you.

Yahoo Finance- Converting an IRA into a Roth?

Money-Zine.com 2010 Roth IRA Conversions

Is the economy really on the road to recovery?

Warren Buffet in the article that is linked below, says that inflation is on the way and he said that he would rather have more stocks at a DOW at 9000 than long on bonds. That doesn't mean that Buffet is for buying more stocks but likes them better than owning bonds with looming inflation.

We have been talking for some time that inflation has to happen with the amount of money that the Fed is printing. Every program that the current administration has gotten passed costs money and money that our country does not have. When a person lives beyond his or her means, it catches up to the person and their credit is cut off. Our country has far out spent its ability to repay and some of our creditors are beginning to say NO to buying more of our debt. The dollar has to fall in value. Stocks on the other hand, are going up in value based on earning reports being better than expected. However, these earnings are improved on a net basis mostly due to cost cutting not improved sales!

We also have a country that is very good at saving into 401(k)s. Most people who are investing in a 401(k) have not changed their investment allocation since they enrolled. So, as money from monthly savings pours into these stock mutual funds, the manager has to buy stocks! This in itself causes markets to move up. More dollars chasing a stock that has not moved due to additional profits will however increase in price because more firms are buying it.

Our stance remains the same. Lets stay well diversified in a assets that will perform well in a poor or stagnate economy and stay out of the US stock market on a long only basis. I am very excited that our hedge fund long short managers have done well in this short rise in the market but mark my words....there is going to be profit taking a ride back down.


http://finance.yahoo.com/news/Buffett-to-CNBC-Invest-in-cnbc-2854963522.html?x=0&sec=topStories&pos=1&asset=&ccode=