By: Paul Sutherland, CFP ®
I believe in the concepts of creative renewal, creative destruction and disruptive technologies. I also believe that as companies grow they risk creating bureaucratic systems that suppress the very ideals that made them successful in the first place. In order to succeed and be sustainable, all companies, including FIM Group must serve their clients now and well into the future. We are all aware that, particularly in investment management, clients and prospects rely on past performance as an indicator of future success. A friend carried this concept quite far in a book she wrote titled Strategic Insight: The Power of Standing in the Future, which explains how orienting our lives (and our livelihoods) toward the future can help us strategically plan ahead in order to maximize our potential for success. That's why our job at FIM Group is to "stand in the future" and make sure that we are structuring our client portfolios thoughtfully and consistently, and base our research on facts rather than on hearsay, emotion or the fad du jour.
Recently I got to thinking about what's best for clients and wrote down the following:
- Don't screw up
- Help clients achieve goals
- Deep "bench" or experience and talent
- Stability and perpetuity
- Sustainable culture of performance
I then measured FIM Group's performance against this "best" list and realized that, even after 27 years, FIM Group is still true to our core values. Of course, as FIM Group's founder and CEO, anyone reading this should discount my qualitative, biased assessments. Thankfully, however, quantitative measurements are on our side.
FIM Group's performance statistics clearly demonstrate that we have done well at helping clients achieve their goals – of staying retired, building wealth and preserving what they have accumulated. FIM Group also employs 30+ team members, is profitable, and has had prolonged employee and client retention. Contractually, we are fee-only, are guided by stringent regulations and are structured on the principals of virtue and integrity.
Everyone Is Unique, but We All Want the Same Thing
Each of us is unique; however, when it comes to investing, most of us want to have our portfolio do one or two things: 1) Provide us with a steady, resilient income now or in the future; and 2) Grow at a rate that exceeds inflation. What's tricky is "how" to invest to achieve these goals. A major factor is "trust" – trust in the economy, trust in economic forces and trust in the human spirit. This trust issue, however, is compromised by the media and its drive for viewers and ratings. If we see an investment lose its value quickly then we conclude that the economy is rigged, people are crooks and those who are wealthy got "lucky." Looking more closely to those who are successful, you'll find that they "trust" that the world is a reasonable place that rewards hard work, virtue and courage (risk-taking). Of course businesses go bankrupt, people lose jobs and tragedies occur, but business goes on and we move forward.
My wife Amy and I just returned from Haiti, where we visited some of the charities we support, and were reassured about the goodness of people. We met schoolteachers, former college students, housewives, empty-nesters and businesspeople, all of whom, upon hearing about Haiti's continued blight, went to help. Amy and I were quite moved by the stories we heard involving children orphaned after the earthquake, and infants with TB, AIDS or cholera. We even stood on the dusty ground in front of the hospital where, just after the earthquake, a woman's husband had to deliver their baby, because the hospital building was unstable and the doctors were inundated with victims. What's interesting is that the father of that child felt it was less risky to deliver his baby outside the hospital rather than inside. And the travelers to Haiti, though deeply moved by stories of despair, had the foresight to take precautions like seeking appropriate preventative medical treatment before going, not drinking the water while there and avoiding areas of town that appeared unsafe. Despite all the reasons they "should not" go, the travelers mitigated their risk as much as possible to go to a hot, dusty, unsafe place to help people they didn't even know.
Investing is similar in ways – we don't know all the people in the supply chain of the global economy. We can take precautions by doing research, due diligence and our own preparedness, but there is a leap of faith. We also know that most people are good, and we can chose to work with good, reputable companies and avoid the others.
Trusting the Economy
I think that when all is said and done that the average long-term investor fails because he/she does not trust the basic economy, capitalism or people in general. Economies are about people in action. I think that the investing community (myself included) has allowed ourselves to see "risk" as a component of investing that is defined in a way that is irrational. Consider sports. When a basketball player shoots the ball, he is taking a risk. We know that a good basketball player will make most of his shots, but he will also miss a percentage of them. So to reduce risk should he quit shooting baskets? If he misses 10 baskets in a row should he quit? Anyone who knows sports understands that athletes are going to have "slumps." Similarly, a farmer doesn't quit being a farmer because of a bad season. If we define risk based on these examples, then farmers won't plant that extra 20 acres because there might be a dry spell, or the athlete won't shoot the ball. Investors can "think" they are protecting their longterm portfolios by owning short-term bonds or cash. As we have mentioned in many letters, cash or short-term bonds reduce volatility, however when the risks are low and probability high of great performance on stocks and other long-term investments, then owning cash or bonds just to reduce "risks" is imprudent. They realize the "risks" are mainly shortterm and invest in a way that is counterproductive to good results and inconsistent with science, behavior economics, common sense and logic.
To better illustrate my point, consider the following example*:
*If we invested $1 in the following
assets in 1925, they would be worth as
of 12/31/2010 (adjusted for inflation):
- Large Stocks – $244
- U.S. Government Treasuries – $6.88
- U.S. Corporate Bonds – $7.60
- U.S. Treasury Bills – $1.68
- Gold – $5.62
- Cash – $.06 (due to 85 years
of mostly inflation)
If we invested $1 in various asset classes
in 1925, they would be worth as of
12/31/2010 (not adjusted for inflation):
- Large Stocks – $244
- Small Cap Index – $10,650
- Large Cap Index – $ 2,980
- Long-term Bond Index – $94
- Treasury Bills – $20
- Inflation – $12
While these statistics give only a very general assessment of the returns from various asset classes, I feel they clearly illustrate the point that despite their ups and downs, stocks are worth holding. Owning bonds exclusively as part of a long-term investing strategy is irrational over a long period considering the returns investors sacrifice in exchange for less volatility. Even if we looked at returns over various 20-year periods, statistically equities (stocks) would perform better than bonds, cash, CDs and fixed annuities. That's not to say that owning bonds is beneficial. As part of a long-term investment strategy, owning bonds makes sense when, for example, yields are especially high relative to the price-earnings ratio or dividend yield. Also, for short-term time horizons, bonds provide the predictability of giving a certain period when you should get your cash back. Right now well-selected dividendpaying stocks seem like bargains for the income investor, especially when compared to most bonds, CDs, fixed annuities or money market funds.
Hard Work, Optimism and Trust
I think that studying long-term investors illustrates the "how" and "why" wealth is created and concentrated in societies. The rich in most economies got that way through owning, managing or investing in business. The investors with patience and foresight trusted that people would engage in commerce and that good management in good industries could create wealth through the growth of their business. By chatting with the Haitians, Amy and I discovered that many were discouraged by the poverty, bureaucratic systems and lack of education and threw up their hands in defeat. Others, though, were optimistic and had believed that there is only one way for Haiti to recover, and that is to improve. They felt a desire to help Haiti despite all the work and time it would take. Investing takes work and it's challenging. America has a history of overcoming obstacles, and those who saw obstacles as challenges prospered. The Chinese symbol for crisis is the same as the symbol for opportunity. Perhaps that is one reason China has survived for all these years and is currently prospering. China's society and leadership realized that while a billion people could be a problem, it also had some advantages like low labor costs and giant domestic market(s). China embraced its challenges, stood in the future and, with an attitude rooted in creative renewal, creative destruction and seeing opportunity in crisis, has thrived. Will they have ups and downs along the way? Of course they will. Will they quit trying and shut down? I doubt it. All they have to do is look at the history of the greatest country in the world – the United States of America. Our history shows that hard work, patience, optimism and trust are rewarded. The bottom line is that in life – and investing – fear, cowardice and reducing the risk of failing by not trying are the recipe for failure. Hard work, common sense, trying and trying again, expressing virtue and studying history are the recipe for success yesterday, today and into the future.
By: Suzanne Stepan, CFA®, CFP ®
Most of us have probably read or heard about oil prices in the news currently. Especially lately, it seems that oil has been a greasy topic on many levels. The entire hubbub about oil recently prompted a client to ask, "Any chance we should purchase some oil futures and hold them for a few months?" Both the question and my answer are worthy of sharing with our readership.
First, let's review the meaning of futures contract as defined by Investopedia (www.investopedia.com): "A contractual agreement, generally made on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a predetermined price in the future. Futures contracts detail the quality and the quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash."
Keep in mind that the client's inquiry came after a seven-day rally in oil prices. An abundance of information has recently been highlighted throughout the media on why the price of oil is rising. The client also mentioned that the question was prompted following a discussion with a friend who felt that oil futures were the place to invest right now.
There are many inherent risks that need to be fully understood before investing in crude oil futures. Oftentimes we take notice of the extraordinary success story of the one person who made a fortune trading futures, yet rarely heard is the saga of the futures traders who lost the shirt off Oil Futures By Suzanne Stepan, CFA®, CFP ® their backs. For every trader/investor who makes a dollar in oil futures, there are several who are losing their hardearned money. In keeping a logical head, let's explore some basic criteria used in deciding why or why not an oil futures contract would make sense in an investment portfolio.
"The word is out. Oil consumption and demand have increased to record proportions." Based on this statement alone it would seem reasonable that oil futures would be a highly rewarding and lucrative investment. However, as we have seen numerous times in the past, demand for any commodity can often become a crazy spiral of mere prediction. There is no guarantee that the price of oil will rise based solely on the premise that demand will increase. The Organization of the Petroleum Exporting Countries (OPEC) has the ability to regulate oil production and therefore raise and lower oil prices. Foreign policy can also have a significant impact on oil prices. The development and acceptance of substitute products can cause demand to diminish. Even if the price of oil rises, there is no indication on how quickly the price will rise and for how long the price will remain high. Because futures have a maturity date, if the price of oil does not hit the contract price at the right time, the holder of the future may lose a significant portion of his investment. Demand is not always cut and dry and can be extremely difficult to predict.
The forecasting of oil futures can be a mystical process. When an investor trades oil, the price is usually not based on the value of oil today. Rather, the price is based on the expected value of oil months or even years from today. Oil futures traders will generally try to purchase oil futures when the price of oil is low and then forecast that the price of oil will rise in the future. Sounds easy enough, right? Yet, if it were so straightforward and riskless, then everyone would be trading oil futures.
On March 6, the U.S. Energy Information Administration (EIA) stated that China's oil demand is expected to increase only 4.5% this year, down from the 5.4% quoted in February. The EIA also noted in its monthly report that demand in the United States is predicted to fall to a 15-year low. When this information was released along with easing geopolitical tensions (which historically have played an important part in the price of oil futures), the previous gains in oil futures had been completely erased. The buck that once lined the pockets of the oil futures holders could very well have slipped away. No sound investment can be based on a predication alone.
At FIM Group we prefer energy exposure held through investments such as Groupe Bruxelles Lambert, a Belgium industrial holdings company that strives to maintain and promote the growth of its portfolio of investments over the medium-term. In addition to diversification, the holding offers a dividend and trades at a discount to its net asset value. While the price of this security may fluctuate, there is a margin of safety in that it trades at a discount and offers a dividend. I much favor the prudent growth investment strategy over the higher risk prediction investment strategy. Therefore, the only prediction I can confidently voice is that by the time this article is published, the investment media will have likely long moved on to the next "sure thing." I chuckle to myself thinking of Benjamin Franklin's quote, "The only things certain in life are death and taxes."
By: Kevin Russell, CPA, CFP ®, AAMS®, CRPC®
One legal document we recommend that all clients have is a Durable Power of Attorney (DPOA). In this article we will explore the benefits and key components of the DPOA. In today's world of longer life expectancies, there is a higher likelihood that family or friends will have to help you manage your financial affairs.
A DPOA lets you nominate individual(s) you wish to act on your behalf should you experience a physical or mental illness that would prevent you from managing your own financial affairs. One of the important items you should consider before creating a DPOA is who you want to act on your behalf, referred to as your attorney-in-fact. In most circumstances, this is a significant other, family member or close friend. You may be granting your attorneyin- fact significant decision-making power, so the person you select should be someone who is familiar with your goals and intentions, and is capable and trustworthy. This person has the legal duty to protect your best interests and keep accurate records while acting on the power you have granted him/her. It is also advisable to nominate at least one successor who can step in if your first nomination is no longer able to act on your behalf.
Next, you should consider how much power to grant your attorney-in-fact. You can make the powers as limited or broad as you want, such as the power to continue to make gifts, power to sign tax returns and represent you in front of the IRS, and power to transfer assets to your trust.
Another item to consider is the type of DPOA you wish to establish. A Standby DPOA becomes effective as soon as you sign it. A Springing DPOA, however, becomes effective when it is determined that you are no longer able to act on your own behalf. A Springing DPOA is not available in some states, so you should check with your attorney for more details. The Durable Power of Attorney is similar to a Limited Power of Attorney (LPOA). However, the durable provision allows your attorney-in-fact to continue to assist you after you have become disabled – most likely at the time he/she is most needed. Typically, an LPOA is very specific to an account and ceases at your disability.
The costs of establishing a DPOA with your attorney are minimal when compared to the complexities and costs of a obtaining a court-approved guardianship/conservatorship for your financial affairs should you become disabled without a DPOA. This document becomes more and more important as you age. For those of you who are over 65, if you have not already done so, we recommend that you forward a copy of your DPOA to your local FIM Group office for our files. If you would like to further discuss the pros and cons of your DPOA, feel free to contact your FIM Group adviser.
There is no Spotlight for this issue.