This week’s newsletter is written by adviser Robin Russo.
A professional adviser should keep you invested through all market cycles.
We believe professional advisers should not sell based on fear or buy based on greed. Professional advisers should not flee from equities at the bottom or chase hot funds at the top. We believe investors should not invest based on emotions. What is this worth to you? Let’s look at the S&P 500 over that last 20 years ending in 2012. The average annual return from 1/1/1993 to 12/31/2012 was 8.21%. And yes, that included two distressing market tumbles, one of which was the recent great recession. However the average equity investor earned only 4.25%. A professional adviser should aim to minimize this disparity in returns by consistently following the investment strategy designed for you. At Rodgers & Associates, we do not time the market. We make investments based on your goals, not on emotion.
A professional adviser should rebalance your portfolio opportunistically or on a systematic basis.
Rebalancing aims to keep your portfolio true to its intended allocation, taking advantage of market advances and market corrections while reducing unintended risk. It aims to restore order by trimming asset classes that have advanced and investing the proceeds in those that have declined. It is the original buy low, sell high strategy and exploits the well-known concept of reversion to the mean. What is this worth to you? This is difficult to quantify but studies have attempted to do so. A 2008 Journal of Financial Planning study demonstrated that advisers who rebalance opportunistically have been able to add between .30% to .45% to the portfolio depending on frequency and the established tolerances. At Rodgers & Associates, we check tolerances weekly and periodically rebalance when we are outside the 10% allowable tolerance in your equity to fixed percentages. So a portfolio with a 60/40 stock to fixed allocation may have a range of 55% to 65% in stock and a corresponding 45% to 35% in fixed, but typically nothing outside these ranges.
A professional adviser should diversify your portfolio, investing in a variety of assets to reduce risk.
To build a diversified portfolio, a professional adviser should pair assets whose returns haven’t historically moved in the same direction, like the obvious pairing of stocks and bonds. Within the stock allocation, there will be further diversification according to market size, stock style and domestic or foreign. That way, even if a portion of your portfolio is declining, the rest of your portfolio is designed to be growing. So, an adviser can potentially dampen the impact of poor market performance on your overall portfolio. What is this worth to you? Again very difficult to quantify, but we have learned that the value of a diversified portfolio plays out over time in conjunction with the first two benefits of using a professional adviser: staying invested and opportunistic rebalancing. At Rodgers & Associates, we invest in the following stock asset classes: Large Cap Value, Large Cap Growth, Mid Cap Value, Mid Cap Growth, Small Cap Value, Small Cap Growth, Foreign Large Value, Foreign Large Growth and Emerging Markets. In our fixed portion we typically employ a short five year ladder of individual bonds and CDs.
A professional adviser should employ tax aware investing to generate after tax return.
We believe all advisers should attempt to offset gains with losses and avoid any short term gains. But a tax aware adviser will go further and position assets in the account to attempt to minimize the income tax impact. This is called asset location. So stocks are located in a taxable account where favorable capital gains rates live and fixed income instruments are placed in tax deferred accounts so the interest is not directly added to ordinary income in the year it is earned. What is this worth to you? Since taxes reduce the net return you receive, optimal location can certainly enhance returns for those investors who have taxable, tax deferred and tax free accounts. At Rodgers & Associates, we review your current taxes and project future years. We look for opportunities by our placement of assets within your accounts and also by our distribution strategy. As your circumstances allow we stress both Roth IRA contributions and Roth IRA conversions, always cognizant of the tax consequences.
A professional adviser should help you plan more effectively for your retirement.
It’s no surprise that an individual who invests more of their income for retirement has a larger balance when that day arrives. Individuals who work with a professional adviser in a comprehensive manner typically save and invest more than those who don’t, according to a recent study by Terrance K. Martin Jr. and Michael S. Finke at Texas Tech University. What is this worth to you? What is peace of mind worth? At Rodgers & Associates we prepare a plan for each of our clients showing the retirement income they can expect from their portfolio given current and recommended savings and investing rates. It is reviewed yearly. There are no surprises.
Robin Russo, MBA, CFP®