Powerful Portfolio – October 2012

Debbie’s Blog

Build your own financial point of view.

Away from the Eye of the Storm: Fundamental Guidelines for a Simpler, Less Expensive, yet Powerful Portfolio
October 30, 2012

by: Debbie Lovett, CFP®

My mind keeps leaping to those on the east coast as Hurricane Sandy begins the havoc that will interrupt normalcy over the next few days. May health and safety prevail as the moments unfold from projections to history. May the many things destroyed by the power of the storm be limited to exactly that – things. Thankfully, Sandy has given us some sort of lead time, although I’m sure those in its path would have welcomed more time, or more accurately, less need for it.

Preparing for a storm is not unlike preparing your financial life.

Are you one to plan? Johnny-on-the-Spot reporters in front of empty bread and battery aisles at the stores tell two stories – that some where prepared enough to buy those supplies, and some will be out of luck when they need them.

Are you one to underweight risk? Pictures of those watching from shorelines and boardwalks don’t strike me as brave, but as reckless.

Are you reliant on past events echoing back? Those whose current preparations have been muted by having survived something similar before this rely more on their history than on current warnings. Will those that got a little wet last time have the same experience with this mega-storm?

Are you confident that you’ll be OK? Is it for others to fill the negative sides of all the statistics?

Connections between one’s life experiences and their approach to their finances are numerous and varied. The field of Behavioral Finance shows strong ties between our humanly inherited flaws (we all to some degree are hardwired with mental shortcuts to get by) and our reactions to investments and markets. Add a stronger layer of each person’s personality into the mix and you have risk takers, procrastinators, safe-haven enthusiasts—all types operating with a handicapped foundation. Your financial life typically is fed by your entire being. When storms come and go, it not only gives us an accurate picture of how we behave in an emergency situation, but also gives us a chance to reflect on how we do or don’t allow ourselves to be “always somewhat prepared” in times of relative calm, too.

Below is a list of guiding portfolio principles that have served numerous successful individuals and families in their quest for wealth accumulation and preservation. They are not your Emergency List, but can certainly put you in good standing when a time for emergency preparation arrives.

SIMPLICITY: Investing does not have to be overly complex to be effective. Broad-based indexation serves as a great core foundation for most portfolios.

LOW FEES: Investing does not have to be expensive to be effective. The less that you spend on fees, the more that you have to invest and grow. You can find numerous high quality investments that charge low to reasonable fees. And when you do pay higher fees, make certain you know why you are paying that premium. Fees come in all shapes and sizes—management fees, commissions, trading costs and the costs of high portfolio turnover (the accumulated costs of many buys and sells).

TAX AWARENESS: Do not pay more in taxes than necessary. The tax characteristics of the entity and the tax characteristics of the investment vehicle matter. 1) Understand the tax consequences of any investment changes before you make them. The tax drag on a portfolio can be formidable if ignored. 2) Undertake pre-investment tax planning to maximize benefits and minimize taxation. For example, it can make sense to hold investments that incur undesirable or complex tax consequences in non-taxable entities such as retirement accounts when possible.

LONG TERM INVESTING: In another blog, I defined long term investing as placing only the amount of assets that can ride out lower market prices at risk. Your assets in the game should be there to play for the long haul. This approach prevents you from having to sell at undesirable prices in order to meet cash flow demands—you simply wait out the storm. Another way of defining long term investing is to consider what your goals are for your portfolio. Is the goal to make the most out of the next three months’ worth of market activity? In that case, your 3 month returns are very important. If it is to sustain your assets, or build them over the next 5 to 10 to 20 years, then longer term performance prospects are key and that 3 month return is not as important. Long term investing does not mean: 1) trying to beat the market through high stakes speculation, 2) trying to beat the market by attempting precise market timing (buying low and then selling high–something that is never easily accomplished), or 3) trying to beat the market through large bets on either market direction or sector favoritism — large being the key term.

CONTRARIAN INFLUENCES: Essentially, take advantage of the greed and panic inherent in the markets. Identify your own targets for buying and selling against market directions and review those for soundness when the triggers are met. This allows calmer heads to prevail. When the markets get to a level where a lot of investors panic and sell, be one of those in line to purchase. Conversely, when the market is soaring and people are piling more and more assets into that momentum, agree to step to the sidelines and take some profits, even if it means missing the last hurrah upward. While this will never guarantee that you are buying at the bottom and selling at the top, it will give you the time-tested advantage of protecting yourself from one of the most common investment mistakes individual investors make — letting emotions overtake good planning in times when the markets vary from the norm.

COMMITMENT TO A PLAN: Not only should your plan be personalized to address your specific goals and beliefs, but it should be reviewed at least annually for possible revisions as your life and the investment environment change.

In short…

In short–storms come and go. Some more devastating than others. Reviewing fundamental guidelines for a simpler, less expensive yet powerful portfolio and comparing them to your own portfolio can provide a nice framework for discussion and enlightenment. Ask your financial advisors (or yourself if you are self-directed) about WHEN your portfolio veers from the fundamentals and why. Why is it complex here? Why am I paying 1.25% there? It can make sense to add complexity and active management costs to a portfolio at times. This does not mean always, however, and in all cases. Perhaps you do have a portfolio and outlook that requires hurricane-like preparations at all times, but this is rare. The easiest way to find out is to ask what risks, exactly, is my portfolio protecting me from? You don’t want to be the one at the battery aisle two days after they’ve sold out, or the one thinking about getting back into the market when it is already up way past expectations. A little bit of thought ahead of time can reap great rewards.


Debbie’s Blog wants you to build your own financial point of view. This is particularly helpful when working with financial advisors. It’s always better when everyone is speaking the same language, and finance is not a language that needs to rest somewhere out of reach. At Blue Prairie Group, we encourage an open and dynamic relationship with our clients, perceiving them as partners, not customers. That partnership is what supports our 98% client retention rate over our ten year history.

Like the shade tree mechanic who knows their way around an engine, you can have that same sort of savvy when checking under the hood of your portfolio.

© Debbie Lovett 2012.