It seems like only yesterday that Norm Rosinski invited me to write a monthly investment column for NorthBay biz. Seven years and 101 columns later, it’s time for me to retire from this effort. I should be retiring from my investment career, too, but my firm is busier than ever, growing rapidly enough to be recognized recently by Forbes as one of the nation’s top 50 “emerging” investment managers.
In each column, I’ve endeavored to provide readers with at least one useful insight to help them navigate the often-treacherous shoals of finance. So here in my swan song, I will revisit some ideas from earlier columns that I’d like you to remember when you think of me, stated in the form of guiding principles. Here we go.
Maxim 1: Protect yourself at all times. The function of Wall Street is to part the investing public from its money. You should assume that someone who recommends that you purchase a financial “product” like a mutual fund or a variable annuity and who (or whose firm) will receive a commission on the sale, has their interests at heart, not yours. (I’m using the term “Wall Street” here very broadly to include people only remotely connected with lower Manhattan.)
If you have any doubts about whether a particular “product” is beneficial to you, buy an hour or two of time from an independent fee-only financial planner or investment adviser and ask for a second opinion. And don’t look to the government regulators to do much to protect you. The SEC has demonstrated time and again the phenomenon of “regulatory capture,” the seemingly inevitable tendency of regulatory agencies to demonstrate greater concern for the regulated subjects than for the general public.
Maxim 2: Insist that your adviser act as a fiduciary. Every investor ought to understand the meaning of “fiduciary” before ever seeking investment help. Here’s a useful definition of the term: “An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit.”
Over the past seven years, I’ve devoted several columns to the seemingly endless debate over whether all who purport to give investment advice should be held to a fiduciary standard (putting the client’s interest ahead of the adviser’s). Enough already—if you hold yourself out to give investment advice to members of the public, then you should be held to a fiduciary standard. You might find the following video informative on this issue: www.youtube.com/watch?v=Dg5RRMAc1GY.
If you’re checking out potential advisers, ask them if they’ll put in writing that they and their firm will act as fiduciaries toward you. If they hesitate, go elsewhere.
Maxim 3: Trust, but verify. Never, ever give your adviser direct access to funds in your account. Always insist that your money and securities be held by a separate, well-recognized custodian like a Schwab, Fidelity or TD Ameritrade. When you deposit money to your account, the check should always be made payable to the custodian, not to your adviser. Following this one simple rule would have saved Bernie Madoff’s investors’ untold pain.
Maxim 4: Expect to pay for advice, but get what you pay for. Not everybody needs investment advice. And of those who do, not everyone needs continuous supervision. There are many different business models for giving investment advice. At very low cost and with a modicum of discipline, you can build your own successful investment portfolio. If you don’t want to spend a lot of time doing your own research, find a financial planner or investment adviser who, for an hourly fee, will prepare a recommended portfolio that you can construct yourself from low-cost, readily available mutual funds and exchange-traded funds. If you choose to pay an asset-based fee, you should get continuous supervision of your investments, along with knowledgeable and experienced financial advice and planning.
Maxim 5: Losses are worse than gains are good. To illustrate, our firm’s 20-stock portfolio suffered a decline of about 41 percent from October 2007 to March 2009, a very painful decline that took 20 months from which to recover. Investors in an S&P 500 Index fund saw a decline of 51 percent during the same period that took three and a half years from which to recover. Investors in a fund tracking the Russell 1000 Growth Index experienced a 62 percent decline and have yet to fully recoup their losses. It’s simple math: It takes a 100 percent gain to offset a 50 percent loss. And that’s for those who hold on to their investments. Those who freaked out during the nasty tumble in 2008 and stayed in cash ever since have made their losses permanent.
Maxim 6: Always consider risk, not just returns. A corollary to Maxim 5. One hears and reads endlessly about investment returns, but rarely about the risks undertaken to achieve those returns. While it’s true that few actively managed stock mutual funds have outperformed a low-cost S&P 500 Index fund over the long term, that’s primarily a function of the high expenses associated with operating most mutual funds, which can easily run 2 percent per year considering both the published expense ratio and other expenses that are inherent in trading that aren’t included in the published ratio.
Vanguard, the former home of index fund champion John Bogle, not only runs some of the biggest index funds, but also offers a low-cost dividend-oriented fund called the Dividend Appreciation Index Fund (VDAIX), which, over its lifetime, has handily outpaced its S&P 500 counterpart and has done so with only 83 percent of the risk.
Or consider the venerable Vanguard Wellington Fund, started in 1929 just before the Great Crash. Wellington (VWELX) is typically about two-thirds stocks, one-third bonds, with the stock side focusing on dividend payers. Over the past 15 years (as far back as my Morningstar web source goes), Wellington has not only out-performed a two thirds-one third mix of Vanguard’s S&P 500 Fund and Total Bond Market Fund, it’s done so with just 89 percent of the risk. In the 2008 to 2009 meltdown, the biggest decline in VWELX was -32.5 percent, compared to -35.1 percent for the mix of the two index funds. Over that 15-year period, the total return of the Wellington Fund has been 175 percent, vs. only 111 percent for the two-index fund mix. Take that, Mr. Bogle.
So, dear readers, I hope you’ve found my efforts useful and enjoyable. I’m often struck by how powerful and beneficial financial assets, properly deployed, can be in improving people’s lives. If in my small way I’ve helped you achieve those benefits, then the effort has been worth it.
All the best,
Dave
