Tag: Asset allocation

Investing like Bill Gates

Bill Gates’ fortune has ballooned to $82 billion according to the Wall Street Journal. It puts him at the top of the Forbes 500 list of the world’s richest people. And it’s not due to the price of Microsoft stock.

Over the years, Bill Gates has done what any savvy investor does, he’s diversified. He has sold about $40 billion of his Microsoft shares and has given $30 billion to charity. So what’s he done to get even richer? He has hired a money manager. The man’s name is Michael Larson and Gates has given him his “complete trust and faith.”

Gates gave a party in Larson’s honor, toasting him by saying that “Melinda [Gates wife] and I are free to pursue our vision of a healthier and better-educated world because of what Michael has done.”

The way Bill Gates has managed his fortune is a lesson for every investor. There are three distinct things that are worth noting.

1. Diversification. The first rule of risk control – making sure you don’t lose your money –  is diversification. This issue has been beaten to death, yet we still see people with portfolios which are concentrated in one or two stocks. This is often the case of an employee who has bought his company’s stock over many years. Small business owners are even guiltier. Often their single biggest asset is their business. It’s even more important for the owner of a chain of dry cleaners, fast food outlets or a real estate developer to build an investment portfolio that will be there if their business declines. Only about 15% of Gates’ fortune is invested in Microsoft stock. If Microsoft were to close up shop tomorrow, Gates lifestyle would not be affected. He would still be immensely wealthy. Many business owners can’t say the same thing.

2. Hire an investment professional to manage your money. Gates knows computers and computer software. He’s smart, savvy and knows that he lacks investment expertise. Gates hired Larson in 1994, realizing that if he was going to diversify he had to hire someone who was an expert investor to manage his money. The Gates fortune grew from $5 billion when he hired Larson to $82 billion today. Larson has autonomy to buy and sell investments as he sees fit. His portfolio includes stocks, bonds and real estate. He has a staff of about 100 people to help him do the hard work of managing the Gates fortune.

3. Focus on what you enjoy and do best. Because they have someone they can trust managing their money, Gates and his wife can pursue their vision. Most people’s interests revolve around their family, their work or hobbies. Managing the family investments is a distraction from what people want to do. Besides, few people are investment professionals. That’s why Gates example is worth following. Unless you have Gates’ wealth you can’t afford your own dedicated, private, investment manager. But there are investment managers – like Larson – who manage the assets of multiple families.  They can take care of your investments while you focus on the things that are important to you.

Gates gets an update on his investments every two months. Not every investment has been successful, but they are good enough to have returned Gates to the top of the wealth list.

If you are still managing your own money, or have an account with a broker who calls you with investment ideas from time to time, isn’t it time to think about the way the richest man in the world handles his money? Call Korving & Company and let us show you what we can do for you.

Don’t make these common mistakes when planning your retirement.

Planning to retire? Have all your ducks in a row? Know where your retirement income’s going to come from? Great! But don’t make some basic mistakes or you may find yourself working longer or living on a reduced income.

Retirement income is like a three legged stool. Take one of the legs away and you fall over.

The first leg of the stool is Social Security. Depending on your income goals, do it right and you can cover part of your retirement income from this source. Do it wrong and you can leave lots of money on the table.

The second leg is a pension. Many people have guaranteed pensions provided by their employer.  But these are gradually disappearing, replaced by 401(k) and similar plans known as “defined contribution” plans. If you don’t have a pension but want a second guaranteed lifetime income you can look into annuities that pay you a fixed income for life.

The third leg of the stool is your investment portfolio. This is where most people make mistakes and it can have a big impact in your retirement.

Mistake number one is leaving “orphan” 401(k) plans behind as you change jobs. These plans often represent a large part of a typical retiree’s investment assets. Our advice for people who move from one company to another is to roll their 401 (k) assets into an IRA. This gives you much more flexibility and many more investment choices, often at a lower cost than the ones you have in the typical 401(k).

Mistake number two is trying to time the market. Many people are tempted to jump in and out of the market based on nothing but TV talking heads, rumors, or their guess about what the market is going to do in the near future. Timing the market is almost always counter-productive. Instead, create a well balanced portfolio that can weather market volatility and stick with it.

Mistake number three is “set it and forget it.” The biggest factor influencing portfolio returns is asset allocation. And the one thing you can be sure of is that over time your asset allocation will change. You need to rebalance your portfolio to insure that your portfolio does not becoming more aggressive than you realize. If it does, you could find yourself facing a major loss just as you’re ready to retire. Rebalancing lets you “buy low and sell high,” something that everyone wants to do.

Mistake number four is to assume that the planning process ends with your retirement. The typical retiree will live another 25 year after reaching retirement age. To maintain you purchasing power your money continues to have to work hard for you. Otherwise inflation and medical expenses are going to deplete your portfolio and reduce your standard of living. Retirement plans should assume that you will live to at least 90, perhaps to 100.

Retirement planning is complicated and is best done with the help of an expert. Check out our website and feel free to give us a call. We wrote the book on retirement and estate planning.

Market Myth #2: It’s all about beating the market.

For many amateur investors the object is to beat the market.  They are abetted in this belief by the many magazines and newsletters that make the market the benchmark of what a successful investor should emulate.  People spend hours scouring the media looking for stock tips and investing ideas as if investing was a sport, like horse race, where the object is to beat the others to the finish line.

The fact is that “beating the market” does not address any individual’s actual financial goals.  It’s a meaningless statistic.  And it’s dangerous.

The fact is that most professional investors don’t beat the market on a consistent basis.  Even index funds, designed to replicate the market, don’t actually beat the market.  At best they provide market rates of return minus a fee.  Attempting to beat the market exposes the investor to more risk than is prudent.

Your portfolio should be built around your needs and consistent with your risk tolerance.

What does this mean?  Your portfolio should provide a return that’s keeping you ahead of the cost of living, that allows you to retire in comfort, and is conservative enough that you will not be scared out of the market during the inevitable corrections.

Want to create a portfolio that’s right for you?  Contact us.

What to do when couples disagree on investing

It’s well known in the investment business that women are more risk averse than men. There are, of course, exceptions and I should qualify that by saying that’s true of “most” women and men.

In most cases this does not cause problems when couples invest. That’s because there is usually a division of labor with one spouse making most of the investment decisions. However, when spouses collaborate on investing, a significant difference of opinion can cause a lot of stress in a marriage. Differences in money management styles between two partners can ruin a marriage.

That’s the time for the couple to meet with a trusted financial advisor who can provide unbiased advice and professional expertise. Getting an intermediary involved in what could be a serious dispute usually helps. This often allows a couple to come to an understanding that both can agree works for them.

If you and your partner have disagreements about money and investing, get in touch with us.

And don’t forget to read the first three chapters of BEFORE I GO.  It’s free.

Investment Mistakes Millionaires Make

Think millionaires don’t make investing mistakes?  Think again. The deVere Group asked some of its wealthy clients to tell them about the biggest investing mistakes they made before getting professional guidance. It demonstrates that the rich are not that much different. Keep in mind that many people get rich by starting a successful business or inheriting money. That does not make them smart investors.

Here’s a list of five common investment mistakes, and how to avoid them:

5. Focusing Too Much On Historical Returns

Too often investors look at stocks, bonds and mutual funds in the rear view mirror, expecting the future to be a repeat of the past. This is rarely the case. It’s why mutual fund prospectuses always state “past performance is no guarantee of future results.” Too many investors buy into last year’s top investment ideas, only to find that they bought an over-priced lemon. Investment decisions need to be made with an eye to the future, not the past.

That’s why we build portfolios based on what we think the markets (& investments) will do in the next 6-36 months. Of course we also look at track records, but in a more sophisticated way than buying last year’s winners.  And when investing in mutual funds, it’s vitally important to examine who is responsible for the fund’s performance and if that person’s still managing the fund.

4. Not Reviewing the Portfolio Regularly

Things change and your portfolio will change with it, whether you watch it or not. If you don’t watch it you could own GM, Enron or one of the banks that closed during the crisis in 2008. Every investment decision needs to be reviewed. The question you always need to ask about the investments in your portfolio is “if I did not own this security would we buy it today?” If the answer is “no,” it may be time to make changes.

We review your portfolios regularly, to make sure you’re on track with your stated goals.  We also offer regular reviews with our clients and prepare reports for them to show how they are doing.

3. Making Emotional Decisions

The two emotions that dominate investment decisions are greed and fear. It’s the reason that the general public usually buys when the market is at the top and sells at the bottom.

We help take the emotion out of investing.  We have a system in place that helps keep emotion out of the equation.

2. Investing Without a Plan

Most portfolios we examine lack a plan. In many cases they are a collection of things that seemed like a good idea at the time. This is often the result of stockbrokers selling their clients investments without first finding out what they really need.

We always invest with a plan.  You tell us your goals, timeline, etc and then we use that as an investment guide.  We don’t care about beating arbitrary indexes; we care about helping you achieve your plans with the least amount of investment risk possible.

1. Not Diversifying Adequately

One of the biggest risks people make is lack of diversification. It’s called putting all your eggs in one basket.   This often happens when people work for a company that offers stock to employees via their 401(k) or other plan. Employees of Enron, who invested heavily in their own company via their retirement plan, were devastated when their company went broke.   Sometimes investors own several mutual funds, believing that they are properly diversified only to find that their funds all do the same thing.

Nobody has ever accused us of being under-diversified.  We champion broad diversification in every one of the MMF (Managed Mutual Fund) portfolios we create. We choose funds that invest in different segments of the investment market. We own many assets classes (bonds, stocks, etc.). We diversify geographically, including some overseas funds. And we have style diversity: growth vs. value, large cap. vs. small cap. With rare exceptions, there is always something in our portfolios that’s making you money.

401(k) Balances Hit Record High

From CNN

The average 401(k) balance hit $89,300 at the end of the year, up 15.5{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} from $77,300 in 2012, according to an annual tally by Fidelity Investments. Most of the boost came from stock market gains as all three major stock indexes ended the year more than 20{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} higher.
People on the verge of retirement, ages 55 to 64 years old, saw their nest eggs grow to an average balance of $165,200 from $143,300 in 2012, Fidelity said. Savers with both a 401(k) plan and Individual Retirement Account managed by Fidelity had larger nest eggs, with an average balance of $261,400, up from $225,600 in 2012.

The 401(k) has replaced pensions as the way most workers save for retirement.  That’s a problem.  Most employees spend almost no time actually choosing the right funds in their 401(k).  It’s the reason that so many Enron employees lost their retirement when that company went broke.  It’s the reason why so many people lost so much in the crash of 2008 – 2009.

Even when their 401(k) holds most of their retirement savings, employees pay little attention.  The typical worker is given a list of mutual funds available to the plan and told to check off some boxes to say where his money is going to be invested.  The employer does not provide guidance, neither does the investment firm that sold the plan.  The typical “Big Box” broker is not paid to provide guidance, and typically doesn’t.

There is help for the worker who wants his money to grow while controlling risk.  There are a few RIA firms that can help.  If you are one of those whose 401(k) is serious money and you would like to get help, give us a call.

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Getting business owners to diversify

 Successful business owners usually have strong confidence in the growth of their business.  As a result, they tend to invest most of their assets in their business.  They know their business, but are not nearly as knowledgeable about more liquid investments.  They are nervous about putting money into investment they can’t control and reluctant to turn large sums of money over to others to invest for them.

As a result, they often put their financial future at risk because the bulk of their net worth is tied up in the success or failure of their business.

The financial shock of 2008 brought this home to many companies.  Between 2008 and 2010 more than 200,000 small businesses closed.  The failure rate for new businesses is between 50{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} and 70{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}.  Once a business is established, the failure rate drops.  But any number of things can come along; changes in demographics, changes in the economy or even changes in surrounding area can cause a previously thriving business to close.

The challenge for the investment manager who offers to help the business owner diversify is to point out that a total focus on investing everything in his business leaves him and his family in a precarious situation.  One money manager likens it to riding a unicycle when they should be sitting on a piano bench.

The unicycle may be exciting and profitable, but you can easily fall.  The four legs of a piano bench are (1) the business, (2) a tax-qualified retirement plan, (3) a personal taxable portfolio and (4) real estate.  If the business is a huge success, the business owner wins big and, at retirement can sell out or leave it to his children.  If the business fails at some point, the other three legs of the piano bench are there to provide for his family and himself.

One investment advisor persuaded a reluctant entrepreneur to invest $5 million in a diversified portfolio instead of plowing it back into his company. At the meeting where the client finally agreed, his wife gave the advisor the thumbs-up behind her husband’s back, triumphantly mouthing the words, “My kids can go to college!”

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In times of market volatility … remain calm.

FIRST TRUST’S Brian Wesbury has some good advice for people who have been wondering about the market volatility so far this year.

After strong gains in 2013, equities have struggled this year.  Thursday and Friday felt a little panicky.  US stocks were down close to 3{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93}, gold was up, and the 10-year Treasury yield fell below 2.75{030251e622a83165372097b752b1e1477acc3e16319689a4bdeb1497eb0fac93} for the first time since November.  Investors are on edge, short-sellers are a little giddy and we even heard a TV host mention the infamous “Black Swan” again.
It’s hard to tell exactly what triggered the “Risk Off” trade, but last Thursday, even though 15 out of 20 S&P 500 companies beat earnings estimates, weakness in the Chinese purchasing managers’ index set off some selling. So, is this a moment to “run for the hills” or to “pull on your parka and wait it out?”  We opt for the latter.  Right now, there’s a mad rush for a narrative to explain the recent market stumbles.  One is that Chinese weakness hurts commodity exporters.  Another is Federal Reserve “tapering” is shrinking global liquidity, hurting emerging markets.

Still others point to turmoil in foreign currencies in places like Argentina and Turkey.  But we have seen this movie before along with government shut-downs, oil spills and even regional wars.  But the fundamental have not changed, housing is on the rise,  jobs are up despite people leaving the jobs market, oil and gas production is booming and new technology is boosting productivity, growth and profits.  We went to a few stores recently and they were filled with shoppers, parking lots were full and there were long lines to check out.  When large, flat screen, TVs are flying off the shelves, the economy isn’t doing badly.

We may see a full-fledged correction yet, but every bull market has these as part of the pattern.  The problem with trying to time the markets is that without a working crystal ball the timing is almost always wrong; you have to be right about the time to step out and the time to step back in.  It’s at times like this that having an appropriate asset allocation for your risk tolerance and your time horizon shows its true worth.  This is what RIAs do best.   If nothing has fundamentally changed, our outlook remains cautiously optimistic.  We suggest that everyone remain calm.

Adding to Your Returns Four Ways

There are at least four things you can do to get better returns on your money.

  1. Create an asset allocation program and stick to it.  Don’t chase the market up and don’t sell at the bottom.  If you have created an asset allocation that is right for you, it should be robust enough to take advantage of rising markets and allow you to sleep well at night in declining markets.
  2. Be tax aware.  Don’t buy mutual funds in taxable accounts at the end of the year just before they make their capital gains distributions.  Take tax losses to offset capital gains.
  3. Keep an eye on costs.  Investment firms are increasingly turning to fees for services they once provided for free.  Your investment manager should be aware of the fees you are paying and keep them under control.
  4. Re-balance your portfolio regularly.  It may be tough to sell some of your winners and add to the losers, but it works.  It’s really tough to sell on euphoria and buy on fear, but some of our biggest winners were bought when nobody wanted them and they could be bought for pennies on the dollar.

Five lessons to be learned from the Madoff scandal

Five years ago we learned about the Ponzi scheme engineered by Bernie Madoff.  How can you avoid being scammed like the people who lost billions to Madoff?  Here are five things to look for when working with an investment firm:

1. Demand Assets Be Held at Large Custodian

Be sure your assets are held by a large reputable custodian like Charles Schwab.  The custodian will be the one sending you your statements and trade confirmations.  In the Madoff scandal, all of the clients’ funds were accounted for only by Madoff’s firm, and investments were held by Madoff’s wealth management operation, which was at the heart of the scam. If client funds were held at a legitimate, large custodian like Charles Schwab, the scam would have been virtually impossible to carry out since the account statements would flow from the custodian, and the discrepancies would have been exposed immediately.

2. Fraud Diversification

Diversification is one of the primary keys to risk control.  No one should have all of his assets in a  single fund or a single stock.

3. Ask Questions and Demand Answers

When clients asked Madoff questions about his returns and management style, he refused to answer them. This is a massive red flag. Clients are entitled to answers regarding holdings, investment strategies and costs. Failure to provide this sort of information is a major warning sign.

4. If Investments or Strategy Can’t Be Readily Explained, Don’t Invest

Often investment scams are hidden in the obscure, opaque and complicated. Madoff claimed to use a “split-strike” strategy for generating steady returns for investors by investing in the largest stocks in the S&P 100 index while simultaneously buying and selling options against either these particular stocks or the S&P 100 index. If it sounds too confusing or can’t be explained simply, avoid it altogether.

5. If it Sounds Too Good to Be True watch out.

Investors often fall victim to big lies more easily than small lies. Madoff used decade-long consistency to lure investors in. Don’t believe anyone who tells you that you can earn higher returns while assuming a lower risk. If you’re realizing high returns, then you’re also accepting increased risk.

©  Korving & Company, LLC