Wednesday, February 27, 2013

Finding your one thing ...

I enjoyed a blog post from Bernie Greenberg, a colleague in Denver that specializes in estate planning and trust administration discussing the benefits of "specialization" and specifically entrusting specialists to handle a specific need you have.
Bernie hit the nail on the head with this post, I've been talking with my oldest son about this topic just recently.  It took me about 10 years to figure this concept out in my own life, which culminated in myself selling my first business in my early 30s to focus on my second business.

I firmly believe that you can only be REALLY good at ONE thing ... and the more 'things' you try to be good at, the worse you are at all of them.  Bernie speaks about hiring specialists, but the same concept applies to your own life ... specializing on being great at one thing vs. being a 'jack of all trades' results in quality output and ultimately more happiness for you and the people you deal with whether they are your family members, customers, co-workers or your employer.

In fact, if you haven't noticed our company slogan is "the power of one" ... which has multiple meanings, but mostly is oriented about this concept of keeping things simple and just doing one thing really well.

City Slickers - Find your one thing ...

In our industry, we have the same problem that Bernie speaks of, most investors who hire a professional to manage their investments, hire a 'Financial Planner' or  'Financial Advisor' or even an "Investment Advisor" that ultimately do a terrible job of helping their clients grow their investment and more importantly protect their investment from declines in the market.

The reason for this terrible performance is that they are not specialists.  Most Planners are really good at taking an average person (that has little time or desire to do it themselves) and allocate their portfolio based on the person' risk tolerance and future needs.   They are great at creating financial plans (i.e. if you want to retire with xx dollars in 20 years, you need to earn xx percent a year and save an additional xx a month to achieve your goal), but most are terrible at managing the actual investments.

Managing money is a full time job ... watching the markets requires total attention and expertise.  Good financial planners AND the super wealthy know this, and as a result hire a specialist, called a "Money Manager". 

While planners are smart enough to do this, their time and focus are usually oriented around customer retention and quite simply sales ... getting new customers ... NOT on managing their current customers' portfolios.  A 'Money Manager' will work with a Financial Planner and use the Planner's recommendations to invest the clients' money.  The huge advantage here is that you have one person is creating the plan for your future, and the other actually implements the plan.  But more so ... the Money Manager is 'managing' your investment on a day by day basis, watching over and protecting your investments, keeping them safe from decline.

This is why 97% of all Financial Planners underperform the market year after year after year ... it's 'the one thing'.  It's about focus and specialization, and just not having enough time in the day to do two things really well ... so instead they do one thing (planning for your future) well, and one thing poorly (managing your investments).

Bernie ... thank you for your post ... I enjoyed it ...

Check out Bernie's blog post at ... specialization

Similar questions this post answers:
what is a financial advisor?
what is a financial adviser?
what is a financial advisor in Denver, CO?
Difference between a financial advisor and investment advisor?
Difference between a financial adviser and investment adviser in Highlands Ranch, Denver CO?

Tuesday, February 26, 2013

weak bounce

In my post from last week when we moved our clients fully to cash (resnn-moves-fully-to-cash), I mentioned that after a decline, the strength of the bounce is very indicative of the future direction of the market.

When a market declines fast and then bounces back with equal to better vigor it shows strength, but if it bounces in a weak manner it identifies a probable bad outcome.

When a market drops, a bounce is almost always likely because value players use it as an opportunity to get into the market at a lower price, also people that missed out on the first rally are usually wanting to buy a lower prices ... so the bounce is imminent, but the strength of the bounce is very important to watch.

If there are lots of buyers, then the volume and price will show solid strength during this rally attempt, but lack of buyers and you get a rally attempt that fails quickly as the buying dries up.  If you think about it ... if I have $10,000,000 and want to put that to work in the market ... it might push the market higher for a few hours, but if a few billion comes into the market ... the buying will last longer and quite possibly will absorb all the selling that is occurring and move the market to new highs.

It is simple supply and demand ... and watching how the supply (people selling) is being absorbed by the demand (people buying) is very telling.

Today's strong decline was definitely not positive action for the market and Friday's one day rally definitely was not very convincing.  As the demand dried up (no more buyers), the selling took over and we saw a dramatic reversal.

A healthy rally should last for many days, which obviously did not occur.

We need a strong counter-attack by the buyers today in order to get the market back on track, otherwise I expect continued selling into the weeks' end.

 Check out our original post from last week here ... resnn-moves-fully-to-cash

Society of Physician Entrepreneurs (SoPe)

For all our physician (and non-physicians as well I suppose) clients ... I'm enjoying a great post at Linked In's Group page for the Society of Physician Entrepreneurs (SoPE), discussing the issues around finding and working with 'quality' Financial Advisors compared with working with 'quality' physicians.  And how both industries are dealing (or not dealing) with the 'bad apples' on a regulatory basis.  

Check out the post here ... Society of Physician Entrepreneurs (SoPE)

Monday, February 25, 2013

caution is warranted

The market fell hard today ... with all the indexes down between 1.5 and 2%.  What's most impressive about this decline is that the market opened UP roughly 0.7% today ... so the total drop from open to close was quite severe.

If you follow our posts, we moved our clients fully to cash last week protecting their portfolio's fully from any decline, but I still wanted to write a post to encourage extreme caution if you manage your own portfolio.

The market seems to be forming a topping pattern and unless we have a seriously positive news event that changes the direction ... I think the best days are behind us and we have some definite downside coming.

As you hopefully know by now, I do not pretend that I can predict the future direction of the market, but rather take current queues from the data to identify shorter term strength and weakness.  Having said that,  using basic technical analysis to forecast out some possible outcomes of this decline ... I am expecting a minimum 5 - 7% drop from the highs that we hit last week.  If this occurs, this would wipe away all the gains of 2013.  At this point, I don't expect to see a larger fall than that ... but time will tell.

"Long-term success in the stock market is not determined by how much you make in good markets, but rather by how much you're able to preserve in the bad ones" ... protecting your capital is the most important criteria to wealth building/

If you have any questions or comments related to the market, please feel free to reach out to me directly, otherwise please be careful out there ... there are better times to be invested than now, and sitting out of the market (in cash) waiting for those moments is the most prudent action in times like these.

Stay careful out there ...

Randall Mauro
Resnn Investments, LLC

Thursday, February 21, 2013

Resnn moves fully to cash

Yesterday and today's action confirmed our concern that the market struggling to go higher.  We have been seeing weakness in the data for awhile and as a result have not been fully invested in the market for over a month now.  The Nasdaq's lagging strength to the rest of the market has been a concern throughout this entire rally.  It was as if the Nas was being pulled up by its' shirt collar and not rising easily ... this is not a healthy rally should look, and although we did have some decent gains a long the way without widespread support there remains some concern that resulted in our cautiousness.

As you have heard me say time and time again, capital preservation (protecting your investment) is our number one rule.  If the market does not provide us with a healthy environment, then we simply choose not to take part.  Making certain your portfolio is safe is and will always be our utmost priority.

Today, we moved fully into a cash position ... completely out of the market.  Time will tell how long we will sit out, protecting our capital ... could be just a few days, or a few weeks.  But we will not make a move back into the market until we feel comfortable that the climate has changed.

Looking at the market technically, I am expecting that over the next week the market will move up again to try to overtake the previous high ... and how effectively it performs that task will help us to determine how risk oriented we want to be.  The first move down in a correction is less telling than the subsequent rebound or attempt to move up again ... so we will be watching this rally attempt closely.  We want to see conviction in the buyers as price moves back up to convince us that this is a market that we truly want to be invested in.

I will send more updates as we progress through this correction, but know that your portfolio is completely protected and will continue to be regardless of the outcome.

If you have any questions or comments, PLEASE reach to me personally.


Randall Mauro
Portfolio Manager
Resnn Investments, LLC

Wednesday, February 20, 2013

Smarter Investing by watching the Pro's ...

“The greatest education in the world is watching the masters at work.” - Michael Jackson

Let’s face it … the quickest way to become great at something is by learning from the best and if you want to be a ‘Professional’, you need to do what the Pro’s do.  In investing that means learning from the Institutional Investors. 
Pension Funds and Hedge Fund of Funds consistently outperform the market year after year, while our own ‘local’ financial advisors and brokers consistently do the opposite. 

I’ve often wondered why is that?  Why do the “big boys” who handle billions of dollars outperform while the local Merrill Lynch, LPL Financial, Transamerica advisors consistently perform worse than if you were to just take a buy and hold approach?

In my line of work I'm fortunate to work with both types of investor.  I literally take part in hundreds of calls a month with potential clients from all walks, and am continuously amazed at how different these two types of investors approach an opportunity.

It’s obvious … retail investors, we have a lot to learn from the big boys …

Generally the difference I see is in the due diligence and investigative process that the two groups partake in. 

Remember, the goal here is to make good investment decisions that will grow your net worth during healthy markets and protect it during uncertain times … to refine your decision making process so that you do not end up like most retail investors that end up making little to nothing while their Investment Advisor/Financial Planner/Broker gets paid for making bad decisions that ultimately cost you future profits.

In my next post, I will share a few examples, which show the stark difference between the Retail investor and Institutional.  Hopefully through this, it will help you improve your own due diligence process.
click here to read part 2 of this post

Similar questions this post answers:
what is a financial advisor?
what is a financial adviser?
what is a financial advisor in Denver, CO?
Difference between a financial advisor and investment advisor?
Difference between a financial adviser and investment adviser in Highlands Ranch, Denver CO?

Tuesday, February 19, 2013

Would you date her?

I get asked almost daily what is the single most important clue that I use to determine when the market is changing direction, and although our trading decision process is completely formulaic, non-emotionally driven ... we can learn a lot by looking at recent history and comparing the price and volume movement to itself.

The single biggest factor in our decision process is consistency.

It sounds silly, but I look at being in the market as dating ... If the market were a person ... would you date her (or him)?  The things we look for in a potential spouse are the same clues we look for in a healthy stock market.

does it act rationally and reasonably?
does it act out of character?
are you seeing out of norm clues?

When the market starts topping and getting ready for a change (moving from an uptrend to a decline), there are subtle clues that are always there.  And more times than not you can look at a price/volume chart alone to see them.

Simple analysis to find out if the current movement is out of the norm for its' recent history.  Yesterday we had the single largest drop in over 3 months ... that is one clue.  We also had a much larger spread (the amount of movement from the high of the day to the low of the day) than normal.  All subtle clues.

In 1987 when the market dropped over 20% in three days ... our model was out of the market 8 days beforehand.  The clues were there if you looked carefully for them.  When markets start acting out of the norm (for themselves), it's probably time to take note and act cautiously.

Monday, February 18, 2013

What the Pro's do, that you don't

In my last post smarter-investing-by-watching-the-pros, I talked about how there is a clear difference between the way that retail investors (regular Joe’s that are investing their own money) and institutional investors (businesses that invest for others’ including pensions and large municipalities) go about investigating a particular investment style.  And this difference in my opinion has a huge impact ultimately on how much money they make or retain (with a bad investment) over time.

I wanted to provide some specific examples to show the clear difference between both of their approaches …

Retail Investors are wowed by performance numbers – the higher the number, the more frothy and excited they tend to get.  As much as we say we don’t … we still all buy into the get rich quick ‘scheme’, and are willing to overlook certain red flags in pursuit of this.  The biggest “red flag” is to consider how the advisor fees will ultimately impact the performance.  Finding out the fee is easy to do, but looking at the historical performance and calculating the ACTUAL NET return on investment (after fees) is something that isn’t provided by Advisors. 

Institutional Investors on the other hand don't care about Gross Performance numbers, they phrase their questions to identify the bottom line AFTER FEES.  

So many Investment Advisors show market beating returns to a prospective client, and simple analysis will show that after fees the majority of all Investment Advisors underperform the general indexes substantially.  Institutional Investors will insist on AFTER FEE performance numbers, because again, they are concerned only with determining what is THEIR bottom line, not the theoretical bottom line.

How to get around this … again … a little math and you can figure out the after fee performance yourself, but an institutional investor will directly ask the Investment Advisor to provide the numbers, and I think this is a great idea.  The reason … it sheds some light into how forthcoming the Advisor is with you.  He should have nothing to hide and shouldn’t have a hundred excuses as to why he underperformed in a certain period.  He should be willing to show you without any effort on your part … and if he hesitates … you should take this as a red flag and invest elsewhere.

Sounds crazy but because of what I said above, Insti’s don’t get hung up on a higher fee structure.  Because they are only concerned with the AFTER FEE performance … it really doesn’t matter what the fees are, as long as AFTER FEEs the returns are market beating.

I’ve seen many retail investors just close down when they hear a large fee structure and don’t stop to consider the real performance after fees.  They’d rather pay a 1% fee on a strategy that returns 5% a year, than 2 or 3% on a strategy that returns 15% a year … doesn’t make sense but I see it often. 

The reality is that there is probably a reason for the higher fee structure.  Most Investment Advisors invest their clients’ money in simple Buy and Hold approaches which take very little time to implement, but are prone to large downside risk during market declines while strategies that are more defensive in nature tend to take significantly more time and resources to implement, and therefore are justifiably more expensive to run.  I know in our case, our overhead is quite sizeable, because we are analyzing the market and potentially taking protective actions with their client portfolios’ every single day. 

I’m obviously not implying that you should be happy to pay higher fees, or that you should assume a more expensive fund is better at their analysis, but just be smart in your due diligence … don’t get hung up on the fees by themselves, without considering the bottom line.

The same principle applies to paying taxes - so many of us get hung up on paying taxes, that we immediately dismiss a short term strategy that results in higher taxes than a longer term strategy ... this is silly to me.  Again, you need to weigh the impact ... as an example in 2012 Resnn Investments returned over 26% AFTER FEES for our clients ... these were short term gains which is taxed at a higher rate than a long term trading strategy, but ... if you do the math it is still significantly better than the 13.4% return the S&P 500 returned for the year and therefore significantly better than 99% of all Investment Advisors performance for the year.  In a worst case scenario, you have a 20% tax difference between short term capital gains and long term capital gains ... so take 20% of the 26% return (5.2%) and then deduct that from the return (26% - 5.2% = 20.8%) ... you still earned 7.4% better than 99% of all others out there.

Again, you need to consider the tax impact on your investing decisions, but don't throw out the idea of using higher tax strategy just because ... weigh the impact before making your decisions.  Remember ... look at the bottom line after paying ALL fees (including taxes).

Institutional’s most important criteria is risk control and preservation of capital.  They will quickly pass on an amazing strategy if there is little risk control within the strategy.  They know that it is a lot easier to lose money than to make it … so having proper defensive structures in place to protect their capital is imperative.

retailer’s on the other hand, focus on chasing performance … they are most concerned with “how much you will make me”, and not on “how much could I potentially lose”

Insti’s will ask questions like … “what’s the worst case scenario?”  when do you exit a losing trade?”, “do you have preset levels and preset exit points that are setup ahead of time?”.

Insti’s look for investment strategies that offer TRUE diversification for their portfolio’s, not perceived diversification.  Bottom line, you need to figure out how closely correlated all of your investments are, so that if we have a decline it has minimal impact on your portfolio.

2008 - no safe place to invest
Investment Advisors are GROSSLY guilty of implying safety with diversification to their clients.  I hate to use such strong words, but we’ve all been brainwashed to put 30% into international markets to help reduce the impact in the event of a US market decline, but if you look at 2008 … this type of diversification doesn’t work.  ALL world’s markets declined between 30% and 70% in 2008 … there was no safe market to put your money.

So Insti’s want to find investments that are ‘inversely correlated’ to each other.  They want to make sure that their money is invested in strategies that perform independently from each other .  In fact, this is one of the main reasons why our strategy is so popular with the institutional players … because we are pulling out of the market (going to cash) during volatile times, this inversely correlates with their ‘long only’ (stay in the market) strategies and offers dramatic protection for them.  

Don’t think by having your money in 10 different equity mutual funds that you are safer than if you picked one fund.  Proper diversification is not about picking many different stock market investments, but rather picking strategies or industry sectors that move independent of each other.  A typical Insti investment portfolio looks something like this …

long only US market
long/cash US market
emerging international
currency trading
bond investing (but be careful as many of these correlate with the US market)
oil / natural resource market
long/short US market (this closely correlates to the long only … so they will use these sparingly)
liquid real estate (reits)
distressed investments
some international exposure, but they are careful to note that the long only US market exposure above usually has a large international exposure

Retail Investors want to know what’s the BEST CASE scenario … what’s the biggest return you’ve had … which means Advisor’s and Financial Planners have learned that they can pick and choose graphs that show their hot performance periods and hide their weak performance numbers.  Insti’s are concerned with risk and worst case scenarios … they’re thrilled that you beat the market by 40% last year, but they spend much more time looking at the years’ you didn’t beat the market.  They want to know how often and why you underperformed.

Insti’s want to know what they can expect, and consistency as a result is critically important.  They want to work with people that perform the same year after year after year.  And in fact, would much rather invest in a strategy that returns 10% consistently than one that returns 40% in the first year, -10% the next and 100% the third year even if the second strategy returns more.  In analyzing historical performance, they are looking for this consistency more so than performance.  

This may sound obvious, but most people I know don’t follow this Institutional rule … If you want the best performance, you need to hire the best.  You don't hire your brother-in-law, or your buddy from college, or the financial planner on your kid's soccer team ... you find the best and hire them.  This takes a little work to do this, but the first rule is that you need to find them, vs. them finding you.

An amazing study was done a few years back about people and how they decide on different investment strategies, and amazingly what this study found was that people spend more time picking out their washer/dryer than investments?!  Sounds silly, but think about the long term impact of this.  Most investment decisions once made take little time to maintain … but Institutional’s will take weeks, if not months to make investing decisions to make certain they have identified all the potential issues.  Take the proper time to understand the investment strategy, and if the Investment Advisor you are ‘interviewing’ is making it hard to understand his investment process, it is probably a good sign that you should pass.  The person should be able to explain his process in very clear easy to understand non-technical speak.  You should have a good grasp of what he/she is doing with you money BEFORE you fund the account.

The biggest difference between these two investor types, is that Insti’s leave the emotions out of the decision process.  This is a business decision for them and nothing more.  Retail Investors ‘want to believe’, they buy into the excitement of the strategy and as a result they tend to ignore the red flags.  Related to this, they might invest with a buddy or worse … invest in an advisor just because the person is likeable.  Keep personal emotions out of the decision and focus on the investing process and risk / reward trade off.

Hopefully this post helped you think about how you should approach a very serious decision in your life.  It is more effort to do this the right way, but ultimately getting your money to work for you will have a huge payoff for you over time.  Please feel free to add any comments or questions below …

Similar questions this post answers:
what is a financial advisor?
what is a financial adviser?
what is a financial advisor in Denver, CO?
Difference between a financial advisor and investment advisor?
Difference between a financial adviser and investment adviser in Highlands Ranch, Denver CO?

Sunday, February 17, 2013

The easiest $10,000,000.00 ($10 million) you’ll ever make

I'm going to show you how to make $10,000,000.  Yes, that’s right 10 MILLION.  This isn’t a joke … I am very serious.  In fact, I'm going to be so bold as to say, if you follow my advice I want a ‘finder’s fee’ for showing you how to make this money.  So … I want you to send me a check for 10% … $1,000,000, and you keep the other $9,000,000.  

 Education is golden.  Ignorance is not …

Joking aside … this is a very serious topic that Wall Street AND YOUR INVESTMENT ADVISOR doesn’t want you to see.  In fact, I’m sure they will balk at my analysis, but this is very simple math that you can do on your computer within 10 minutes.

Ok, you ready for my secret that will make you millions??   

Here goes … 

How would you like to make $10 million?
$10 million ~ the easy way (click to enlarge)

FIRE YOUR FINANCIAL PLANNER!   Oh … and if he is an Investment Advisor (IA), Certified Financial Planner (CFP), Financial Advisor (FA) or Broker do the same!  Huh?? 

Here’s the deal … his fees are eating up your profits.

In fact, when I joked earlier about me taking a finder’s fee … that is exactly what most FP’s are doing.  The above chart is using real historical numbers.  If you put $1 million into the Nasdaq in 1973 (40 years ago) and just let it sit (Buy and Hold) you would have ended up with over $30 million.  If you had an advisor do the same, you would have shaved $10 million off of your performance.  Your advisor would have been paid $10 million or 1/3 of your profit for his wonderful buy and hold advise.

But what a minute, you say ... Isn't Resnn Investments a Registered Investment Advisor??  Well ... yes we are.  So should you fire us??   I will elaborate on this later, but it is important to note that the majority of Financial Advisors out there believe in a buy and hold approach, they believe that they can not outperform the market consistently over time and therefore they do exactly what the above chart shows.  But there are some advisors that stand out from the crowd and seriously outperform ... they provide value to your portfolio and AFTER their fees are paid you end up with substantially more than a buy and hold approach.  These advisors are hard to find ... because it takes serious work to pull this off ... but they are out there, and later on I will show you how to find them.  (self plug ... Resnn is one of them :)

But before we go there, I want to share my very first experience with Wall Street which taught me a valuable, albeit expensive lesson about how Wall Street operates.  I remember the visit well.  I was in my mid 20’s and had saved up what I thought at the time was a lot of money … it was roughly 100k.  I felt it was time for a professional to take that money and turn it into something substantial.  I remember talking with my mom as to what I should do, and she suggested I meet with her Financial Planner.  She spoke highly of him and how he can not only help me grow my little nest egg into something substantial, but also to protect it over time. 

I remember that beautifully sunny day so well.  I had the windows rolled down in my Honda and well … I could see the future as I drove.  I knew that next year I would be driving back to see my new financial advisor in a Mercedes … and maybe if we was as good as my mom said he was (my mom by the way has subsequently let him go), I would maybe even be driving back in a few years in my new Ferrari!  I know this all sounds silly in hindsight … but I certainly have seen this irrational exuberance in the financial world time and time again with most people that are starting out in the market. 

We all know that there literally is no better way to grow your money than investing in the stock market.  Real estate and private equity investing come very close and ahead some years, except there is no liquidity with these types of investments).  We’ve all seen the movies with the Gordon Gekko types being chauffeured around New York and taking private jets … “This is your wake up Buddy” … so hey … you can’t blame the wet behind the ears investors for thinking they will be the next one in line to the pile of money just waiting for them.

All that glitters isnt always gold …

I remember walking into the lobby of this high rise, boy it was impressive at that time in my life with the large ceilings and granite from floor to ceiling, then into his office with Leather everything.  I remember his desk looked like something I would’ve seen on a tour of Versailles.  I remember shaking his hand and admiring his suit … he was impeccably dressed.  As we talked, he would occasionally flick through a few screens on his multi-monitor computer (remember this was 20 years ago ... very cutting edge).  If anyone was going to get me in that Ferrari … it was going to be this guy!

Although he made it clear that normally he doesn’t handle clients with as little net worth as I (thanks a lot!), he was graciously going to do my mom a favor (what a great guy!) and take me on as a ‘client’.  When I left I felt on top of the world … we came up with a plan to properly “diversify” with an appropriate reward/risk level that I was comfortable with.

Well, the reality is when he said “diversify” … what he really meant was to keep some of the funds in my pocket, and ‘diversify’ some of my funds into his pocket.  I didn’t realize this for about a week, when I decided with my new knowledge of investing that I would go to to find out what amazing new investment products my “advisor” had put in me to turn my 100,000 into millions.  I learned a lot on that Saturday afternoon.  The first thing I learned was that of the 6 mutual funds he put me in, all of them severely underperformed the market averages and that were a few thousand (no joke) mutual funds that performed better over the past 1, 3 and 5 years!  What the?!?!?!?

Valuable lesson #1 – remember that brokers, advisors, financial planners need to get paid.  I know it was quite ignorant on my part … but I guess I never really pondered how they got paid.  I guess I assumed they were like bankers and there was not an issue of trust.

So … why the heck did he pick underperforming funds??  Well, remember my broker needed to find a way to get paid … so he picked from a small universe of funds that collect (from the customer) a commission (call a load) and pay it to the broker.  He put me all in funds that charge a 5.75% load (or sales charge) which means that on day 1, my 100k immediately became $94,250.00 … look-y there my broker was right,  I was now diversified!

This was it … my first experience with Wall Street … my first hour with a ‘professional’ and I was already down $5,750.00.  In all actuality this was a pivotal point in my future career and one that I am truly thankful of.  I learned more in that hour than most learn over their entire life.  You can truly outperform in Wall Street, but you have to know how to play the game and you can’t always trust the professionals. 

Accepting defeat and humbled, the next week I went down to my mom’s advisors’ opulent office one last time to close my account.  I remember half listening to him try to talk me out of liquidating my account, I remember him trying to justify sticking around since I was already suckered.  Well … he said it differently … “you’ve already paid the fees, now is the worst time to sell.”  This schmuck put me in crappy investments, charged me a boat load to do so and had the nerve to try and sucker me to stick around!   

I have a mantra that I believe strongly in, that I didn’t learn until much later in life, which applies to the market as well as life in general … “It’s ok to be wrong, it’s not ok to stay wrong”.  In hindsight, this was a very inexpensive lesson for me, time to lick my wounds and move on.

In a future post, I will continue this discussion on Financial Planners and Investment Advisors, but know for now ... that unless this person is providing a substantial value to you ... you should fire them and save the $10 million.

Saturday, February 16, 2013

Do you need a Financial Advisor / Financial Planner?

People assume that at a certain wealth level they need a financial planner, and although having one can be quite a benefit, many people have them for the wrong reason which ultimately costs them hundreds of thousands + over years of time.  In fact … if you had $1 million invested earning just 5% a year, managed by a Financial Planner charging you just 1%, you would have paid him/her almost $1 million in fees … if you earned 10% a year … his fees would have taken over $3.6 million out of your pocket!  Most planners charge more than 1%, so the numbers would obviously be proportionately higher … I even have a client that pays 5% a year … say whattttt??

Is your Planner worth $3.6 million of your hard earned money???  He might be … but before you decide you need a planner … weigh the costs to the benefits.  Think how much harder you will have to work into your retirement years to make up that missing $3.6 million.  The worst is when I talk with people that have a Planner strictly for the wrong reason.  We have many Hollywood celebrities as clients and they are notorious for having a Planner strictly because it is the same planner that Steven Spielberg uses!  Think about how ludicrous that is … would you hire the same gardener or pool cleaner or computer guy as a famous person just because of the status you feel??

As you probably figured … let me state that that I am not a Financial Advisor / Financial Planner, I am a Money Manager.  The difference between these two career types is substantial, which I will define a little later.

So … what is a Financial Planner … a DECENT planner is someone that is well versed on financial options for their clients, they generally ask a whole bunch of questions to find out information about you that helps them to organize your financial world appropriately.  Particular items of importance are – your risk tolerance (how much risk are you willing to take to grow your money), where you are financially at this moment in time, your age, family circumstances (wife with three kids), current and future bills you have (college expenses for your children, retirement plans, etc). 

The process is supposed to be very focused around YOU and your particular situation.  And this is the main difference between good and not good … poor planners will try to fit you into a ‘canned’ solution, whereas a good planner will create the plan around your needs. 

And to go to the other extreme, Planners at the top of the game help with estate planning, tax situations, business planning, insurance needs, liability protection, even paying your bills … the list is endless, and generally the more the need the higher the cost.

Most planners also handle investments, which I have a big issue with.  Most planners are terrible stock pickers and do not manage your investments properly.  They have little understanding of how financial markets work and tend to encourage a Buy and Hold approach, which isn’t necessarily bad … BUT you should not be paying a Planner 1 – 2% a year to buy and hold.  

Study after study shows that 99% of Planners underperform the market year after year after year for their clients.  In fact, many of them underperform even before fees are removed, then removing fees and you are generally making very little.  I have a client that when we looked at his previous Advisor’s statements over the past two years, we realized that while the market made 9% … he earned 5% before fees and 1% (2% a year) after fees were removed.  Huh???  This is typical …

This is an important point … most people assume that since the Planner “does this for a living”, they will handle your investments better than you could yourself.  That at least before their fees they’d outperform the general market, but 9 times out of 10 … the Planner has literally underperformed before fees.  This is why when interviewing a new Planner that handles investments, I encourage you to ask for historical returns AFTER fees are factored in, and compare them to a buy and hold approach (which I will show you how to do later).  Most planners that handle investments will try to avoid showing these numbers, in fact … I have yet to find one that does!!

I always say … you can be really good at one thing in life, not two … and a Planner that also handles Investments is stretching himself too thin in my opinion.  That is where Money Managers come into the picture … good financial planners know that there isn’t enough time in the day to be great at both, and so they hire Money Managers to actually “manage” the investments, while the Planner focuses on the Client needs.  This is really the best arrangement (most profitable for the client), hire the planner for his “planning” expertise, and then hire a Money Manager to implement the ‘plan’.  By hiring a money manager that understands the inner workings of the market, your returns are almost always market beating … since that is their focus.  We work with many Financial Planners that realize their limitations and have us handle their client’s day to day investment process.  The two work well together, but having one person do both almost always results in a costly unimpressive return that over years dramatically impacts your bottom line.

VERY IMPORTANT TO NOTE … Financial Planners are NOT licensed or regulated by any government agency!  In fact, my 14 year old can decide today that he wants to be a Financial Planner and hang a sign over the door and be giving people financial advise today … it’s actually kind of scary … which is also why most planners are dishing out bad advice and costing more money than they are worth.  My first experience with a Financial Planner in my mid 20’s resulted in the person taking my investments and moving them to loaded mutual funds that paid the Planner 6% in fees the day the account was opened.  So, on day one I lost 6% of my net worth!  What’s worse … when I spent a little time AFTER the fact researching the investments he put me in, they were mediocre at best!  This should be criminal in my opinion … and the sad thing is that most Planners do similar things … not thinking of their clients’ best interest, but rather their own pocket book.

Now with this said, there are “certification” programs that people can take to have a higher financial planner distinction.  CFP stands for “certified financial planner” and although again, there is no governmental agency regulating the industry, they have at least passed a few hardy exams that require a fair amount of studying.  But it is important to note, this is NOT like a physician where it takes years of schooling in order to achieve the three letter distinction. 

Some CPA’s call themselves Planners and although they are much closer to a planner since they have an incredible financial background, they too may not truly be qualified.  The same can be said for lawyers.
Many top notch planners will be Registered Investment Advisors (regulated by the State Securities Commission).

The important thing to note here is that just because someone calls himself a Financial Planner doesn’t mean that they will put you in prudent financial products for your particular situation.  More important than designations is history and comfort level.  Trust referrals over the person’s Bio and trust your instincts when interviewing them for the first time.  And of course, try before you buy as much as possible … which in this case means … if you are going to have them manage your day to day investments … give them a small portion and let them prove themselves to you first before you trust them with your whole nest egg.

With all the above stated, I want to say there are some amazing Planners out there that earn every penny that charge.  I work with hundreds of them every day.  But … there are an equal (if not more) of boneheads that quite simply should not be doing this for a living.  Most aren’t bad people and specifically trying to be bad, they just are putting in a minimal effort and it shows.  They are doing their clients and the entire industry a disservice … and I hope through education we can change the status quo and force these ‘bad apples’ to step up and perform for their clients. 

In my next post, I will talk about why most people hire a planner and do you actually need one or can you do it yourself?

And whether you do, or don’t need one … I want to tell you an amazing way to have the best of both worlds … imagine getting the expertise of a planner without paying $3.6 Million I mention above??
I will also share ways to “interview” a potential Financial Planner to make certain you are getting what you are paying for.

I would LOVE to hear from you on this topic ... feel free to add a comment or question below ...

Similar questions this post answers:
what is a financial advisor?
what is a financial adviser?
what is a financial advisor in Denver, CO?
Difference between a financial advisor and investment advisor?
Difference between a financial adviser and investment adviser in Highlands Ranch, Denver CO?
Do I need a Financial Planner?
Do I need an investment Advisor?
Do I need a Financial Advisor?
What is a CFP?
What's the difference between a Certified Financial Planner (CFP) and a Financial Planner?

Tuesday, February 5, 2013

another reversal day

Huge Up day on Friday, huge down day yesterday (monday) and a huge up day today ... all in all the market hasn't moved up even though each day we have had 1+% gain/losses.

Markets that moves with this intensity with no directional bias are markets that you don't want to be in.  With no direction, the day traders come out and have a field day at the expense of longer term traders. 

Healthy markets don't act this way, and although this doesn't mean we have topped and have downside to endure ... things need to settle down before I will be convinced that we will have a sustainable up move.

Caution is still warranted out there.

Monday, February 4, 2013

I love this thing!

The day after I said "I was wrong" ... and today we had a huge reversal.  So ... the weakness I was seeing was and still is there and although Friday was a nice up move ... all the gains disappeared today.

The Resnn model continues to perform as expected.  Keeping our clients safe during unpredictable times.  Obviously there are going to be days where we are going to be spot on, and days where we are going to disastrously wrong, but over the long run, the strategy we follow consistently and dramatically outperforms the averages in both up and down markets.

As I said in our last post, caution is warranted ... be careful out there.

Friday, February 1, 2013

Resnn dips its' toes back in the water ...

Today we had a nice up move in price (volume on the day was lighter though) and we closed at new multi-year highs for the Dow and S&P-500

I wrote a post over a year ago that was helpful to reread today.  It is called, "contradictions".  It is a good read that details my trading style and philosophy and how I deal with being wrong.

Time will tell, but today it appears that I was wrong, that the weakness I saw over the past two weeks was indeed not weakness.   As a result, we have moved 30% back into the market.  We are still taking a cautious entry because I am not sold on this new up move quite yet.  For a 1% up move, the volume and previous price struggles is causing the model to lean toward the defensive side.

I have a saying that I stand firmly by ... "It is okay to be wrong, but it is not okay to stay wrong".  Fighting the trend is a loser's bet, and with price continuing upward, I simply move back on the train and see how much further it wants to go.

With all the above said, it is important to note that I choose to be wrong by missing out on profit, instead of being wrong and losing money.  Taking a cautious approach when the market is showing weakness will create some incorrect moves like we experienced today, but over the long term it will keep you in the green more times than not.

Being wrong at times is just a reality in the market, the sooner you accept that, the more successful a trader you will be.   I spent a great deal of time in the beginning of my career trying to find a 'Holy Grail' that would predict the market perfectly every time and eventually concluded that a perfect 'indicator' simply doesn't exist.  It is just probabilities ... simple statistics ... if you know your probabilities you can limit your losses and maximize your gains.  

Check out the "contradictions" post, it is a good read for days like this.

Have a great evening!