Portfolio Management

Investing is a Marathon, Not a Foot Race

 I had lunch with a friend that turned 40 years old last week.  He mentioned that he runs in a few marathons. He used to run dashes.  A marathon is a lot different from a 100-yard dash.  Preparation is different, psychologically, mentally and physically you prepare differently.  

He changed his portfolio over the last few years because of the market volatility.  This new portfolio was geared towards mitigating risk in the next few months; kind of like a foot race but he is not considering the implications of the next 25.5 miles. Three things came to mind as I was looking at his new selections.  First, I had my research assistant run some analytics on the two portfolios and then compared the old and new. 

Old Portfolio:

  • Centered on equities
  • 10 year plus time frame
  • Partially passive and partially active approach
  • Focus on growth rather than risk, liquidity or safety

New Portfolio:

  • 5 year or less time frame
  • Focused on a possible need for current income
  • Very risk adverse (actually underperforming the market by 2-3% annually)

After taking a look at his portfolio changes and the implications, I offered these three suggestions:

#1 Find a consultant that understands what you want to accomplish.

Sit down and let a planner you trust (that has a similar investment philosophy) really get to know who you are and what your family goals are. Talk about what you want your portfolio to accomplish.  Complete that firm’s financial planning questionnaire, risk tolerance questionnaire, etc.  Start out with someone who is a CFP or has a vast background in working with family planning situations and money.  Pick a person who wants to keep you on track over the next 20-30 years. 

#2 Develop an asset allocation that is right for you.

First you should clearly articulate your goals.  After that is done, get the right mix of asset classes in your portfolio.  Don’t worry so much about the actual investment selection – it has the least amount of validity in the entire process. Look for managers that have 10 years experience and an average or better track record.  If possible select investments that have a small asset base. They may be more nimble than large investments. 

#3 Meet annually with that planner.

And lastly, meet once a year (both you and your spouse) for an hour or two with that planner to discuss your goals, feelings, and perceptions of your planning. Reviewing your financial situation periodically is an important part of the financial planning process; it helps maintain forward momentum, establishes a checkpoint to assess progress, refocus efforts, and ultimately helps you cross the finish line you’ve set for yourself.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision.  Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment.  Prior to making an investment decision, please consult with your financial advisor about your individual situation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily hose of RJFS or Raymond James. Asset Allocation does not ensure a profit or protect against a loss.  Investing involves risk and investors may incur a profit or a loss regardless of strategy selected.

Practicing What We Preach When it Comes to Investing

 When choosing a money manager one of the aspects we utilize to evaluate if they are worthy of our client’s money is whether or not they eat their own cooking. 

According to Morningstar research, money managers who had invested $1 Million or more in the portfolios they managed outperformed 58% of their peers over the 5-year period ended July 2009.

Having their own money on the line is a great incentive to perform putting the managers on the same side of the table as their investors. This is also a belief we carry over to our own practice. Many of us here at the Center invest in the same portfolios we build for our clients.

We also like to understand how our managers are compensated. We find it is very important to choose managers that are compensated heavily on longer term returns as opposed to the most recent year’s performance. This aligns the managers with the clients’ long-term goals such as retirement or education funding. The chart below shows how difficult it is to achieve consistently positive returns over short time periods. The longer the time frame you have, the more likely it is to have positive returns. Most investors get to “hang out” in the green section meaning we have a longer period of time to invest to achieve those positive returns and we like money managers who focus on these time periods as well.

It is important for your Financial Planner to practice what they preach. For example, I just recently met with my financial planner (yes financial planners also need financial planners from time to time!). We evaluated my overall financial plan including retirement and education funding to make sure that our family’s investment and savings goals are appropriately aligned with our overall plan. This is the exact same process we believe in following with our clients.  Our firm encourages this for all of our employees and many take advantage of this excellent benefit.  It is human nature to care more about the process and the investments when you have your own future and money on the line!

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

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