I’m excited to be writing this financial column in NorthBay biz. Working as a registered investment adviser for the past 15 years, I’ve come to view educating clients as an essential part of the service we provide. I love to help people maximize their financial assets, while avoiding the many potential pitfalls.
Serendipitous circumstances in the late 1980s reawakened my long-time interest in stocks and investing. I began offering investment advice as an adjunct to my estate planning law practice and soon registered as an investment adviser.
By the early 1990s, I was learning the nuts and bolts of bond investing under the tutelage of George Bull, now CEO of Redwood Trust, the very successful mortgage real estate investment trust headquartered in Mill Valley. During my eight years as a member of the Mill Valley City Council, we did several public debt issues with the able investment assistance of people like Marc Pressman, now of the Wulff, Hansen firm. We also, with George Bull’s guidance, arranged private refinancing to retire the outstanding public debt of the local sewer agency, saving the agency hundreds of thousands of dollars in financing costs.
Over the past decade and a half, I’ve had the enormous good fortune to get to know, work with and learn from some of the best and brightest minds in the investment advisory business. These include people like Bob Bingham of Bingham, Osborn and Scarborough, Deb Wetherby of Wetherby Asset Management and Craig Litman of Litman/Gregory, to name a few. These are people who have built very successful advisory firms on foundations of the highest ethics, the best technical knowledge of the financial markets and extraordinary client service.
Four years ago, I brought my long-time friend, Jim Brock, into the business to form Larkspur-based Raub Brock Capital Management Inc., a fee-only investment advisory firm registered with the U.S. Securities and Exchange Commission. In managing our clients’ investments, we are guided by three primary values: integrity, insight and disciplined implementation. This column will focus on these same values.
Financial assets are nearly miraculous. Properly cared for, they produce the wherewithal that lets their owners meet not only life’s necessities but truly enjoy its pleasures. However, to an unfortunate extent, many in the financial services industry are more focused on their own bottom line than that of their clients. A recurring theme for this column will be how to spot and avoid this pitfall.
I’ll also explore some of the conventional wisdom extant in the investing world. Having begun my legal career as a trial lawyer, I continue to view “what everyone knows is so” through the litigator’s lens—show me the evidence! Thus I’ll try to identify what I know that isn’t so, so we can avoid basing investment decisions on it.
The marketing folks at Charles Schwab’s institutional side have identified three basic categories of investors. The first category is made up of those who are self-directed. They do their own research, make their own decisions and do their own trades at discount and online brokerage firms. The second group, for lack of experience, time or interest, delegate investment decision-making and implementation. The third category lies between the first two—people who want to make their own decisions but who also want a second opinion. These are the ones who seek a professional to look over their shoulder from time to time to tell them how they’re doing.
Because it’s so important to understand the basic concepts of investing and portfolio management, I’ll strive to make this column useful for you, regardless of which category you fit into. After all, an informed investor makes better decisions.
This month, I’ll begin with “risk-free return,” a concept critical to understanding investment portfolio construction and evaluation. Risk-free return is what any investor can and should achieve without paying anyone for it. It’s the return you receive from an investment that promises a return over a very short time. Stocks cannot, by definition, be risk-free because there are no promises of either income or safety of principal.
The most commonly used measure of risk-free return is available from short-term bills issued by the U.S. Treasury. With this easy but often overlooked strategy, any investor can purchase Treasury bills in denominations ranging from $1,000 to $5 million, without fees or costs. You can set up an online account directly with the U.S. Treasury at www.publicdebt.treas.gov. Under “Bills, Notes, Bonds and TIPS,” click on “Individual Investors.” Yields on Treasury bills typically closely track the federal funds rate set by the Federal Reserve. The federal funds rate is now more than 4 percent, having risen from just 1 percent in mid-2004.
It’s important here to make sure you don’t confuse risk-free return with risk-free investing. You can, and indeed likely will, fail to meet your investment goals by limiting yourself to risk-free investing. Historically, Treasury bill yields have barely kept pace with inflation. In 2003 and 2004, as the Fed strove to stimulate the economy, Treasury bill yields were less than the rate of inflation, so your Treasury bill investments would have actually shrunk in value in real terms. But with rates rising, Treasury bills are once again a wise choice.
Understanding risk-free return so that you do not pay someone to achieve it is an important first step. But when evaluating your performance as an investor, you must always subtract the risk-free return available in a given period from the return you actually received. This way, you can judge whether you’re being rewarded for the risks you’re taking. With Treasury bills now at more than 4 percent and likely to remain there throughout 2006, be sure you subtract that number from your actual returns when you look back at year’s end to evaluate how your investments performed.
This column is not intended as investment advice. You should consult your own adviser in determining whether to incorporate any of the opinions expressed here in your investment decisions. Fax comments to 707-546-7368 or e-mail to DRaub@NorthBaybiz.com
