A portfolio is a balanced mix of different types of investments designed for a specific investor’s needs. Too many investors own almost random collections of stocks and funds—which are top heavy in some sectors and deficient in others—rather than well-crafted portfolios suited for all market environments.
What’s more, no two investors are alike. A well-tooled investment plan that’s perfect for one client might cause another sleepless nights. We think it’s crucial to construct portfolios that are consistent with each client’s unique circumstances and risk tolerance. We do not subscribe to a “one-portfolio-fits-all” methodology.
Finally, we never take custody of client assets. Instead, assets are safely held at TDAmeritrade, one of the nation’s largest brokerage firms. Each client receives regular monthly statements and has 24/7 web access to his or her account.
With more than 15,000 mutual funds on the market, no one with a day job can begin to sort through them all. Unfortunately, most funds don’t earn their keep—that is, they return less than good index funds. Identifying and monitoring the handful that are superior is a key part of our job. Just as there are outstanding architects and baseball players, we think some fund managers possess the intelligence, savvy, and corporate culture to beat most competitors. By crunching the numbers, talking to managers, and reading fund semi-annual reports, we try to select those few that are exceptional. Many sectors have no standouts, however; for those we choose low-cost index funds or Exchange Traded Funds (ETFs). As investment advisors, we can often offer our clients lower-cost institutional share classes of funds. We can also frequently gain access to funds that are otherwise closed to new investors.
Can anyone pick funds that will beat the market? Numerous studies show it’s impossible to accomplish this simply by selecting funds that have performed well in the past. Although we’re confident that we possess the tools and experience to pick funds that will top their benchmarks, we can’t guarantee success, and undoubtedly our picks may sometimes lag index funds. Because of this as well as other considerations—chiefly taxes—we favor index funds or Exchange Traded Funds (ETFs) for significant portions of most client portfolios.
Index funds don’t try to beat the market. They aim merely to match the performance of a given index—be it the Dow Jones industrial average, Standard and Poor’s 500-stock index, the broad-based Wilshire 5000 index. or the Russell 3000 index.
Naturally, some index funds are better than others. Fees vary. In addition, some index funds do a better job keeping up with their benchmarks than others. Our challenge is to assemble and maintain the right mix of index and actively managed funds for each client. You, as our client, have the final say in what portion your assets to invest in index funds versus actively managed funds.
SOCIALLY RESPONSIBLE FUNDS
Some investors are committed to socially responsible investing. Do you oppose putting your money in funds that invest in tobacco companies? Alcoholic beverages? Weapons? Or are you looking for funds that favor companies that are environmentally friendly or that treat their employees well? Or all of the preceding?
The problem with socially responsible investing is that the universe of potential funds is limited. What’s more, the performance of many of these funds has been mediocre. To be a successful fund manager, it’s our contention that the manager needs to be passionate about investing.
Unfortunately, most of the socially responsible managers we’ve encountered are passionate—about doing social good, rather than about investing. For that reason, most investors choose to invest in the best funds they can find, socially responsible or not—and give generously to charity.
The good news, however, is that the number of these funds has grown—and we’ve been able to identify a handful of them that we believe are superb.
REAL ESTATE INVESTMENT TRUSTS (REITs)
We offer a real estate investment trust (REIT) management program for clients who choose it. (REITs are specially organized companies that invest in commercial real estate and generally produce high yields. Almost all a REIT’s profits must flow directly to investors). Management is based on data provided by a highly-regarded independent research firm with a track record spanning more than two decades. This firm seeks to identify undervalued REITs based on company financials, management effectiveness, leverage, property type and other criteria. Clients in this program each have their own accounts invested in individual REITs.
Portfolio turnover is high. Since REIT dividends do not receive the maximum 15% tax rate on dividends and most gains are short-term, the managed REIT program is most suitable for tax-deferred accounts such as IRAs and 401(k) plans.
Investing some or all of your equity money in individual stocks makes good sense for some investors. Owning individual stocks saves you on fees and gives you full control over when you sell (and realize taxable capital gains). At TG Investing, we use a highly regarded research service to help us identify promising stocks. Then we ask ourselves questions: What are the risks of owning this stock? Are the major brokerages too optimistic? What mutual funds have been buying and selling this stock lately? Does this stock make sense for an individual client?
The most important decisions any investor makes are what percentage of assets to invest in stocks versus bonds and cash—and how much money to save to afford a comfortable retirement, college for the children and other goals. Establishing sensible targets to help you meet those goals is the work of financial planning. For almost everyone, financial planning is a dynamic process—as time goes by, revisiting your financial plan can be essential. We offer these services to all our clients.