March 2013 Newsletter

March 01, 2013
Share |

Dear Clients and Friends,

Welcome to Daylight Saving Time and the beginning of spring. The past few months have been very busy. We've re-elected a President, dealt with the expiration of the Bush Era tax cuts, started to work through the budget crisis, and begun the implementation of a national healthcare system. While there are many issues still to be decided and much uncertainty ahead, the equity markets have climbed steadily to historically high levels.

Given all of the current conditions, many clients have asked if we should 'do something' with their investments. Another common question relates to how often we review individual accounts and recommend changes to either the allocation or investment choices.

Let's address the 'do something' question first. When we create an investment plan, the most important decision is asset allocation, which is how much we allocate to stocks, alternatives, bonds, and cash. Many publically available studies show that around 90% of the potential return is derived from asset allocation. Everything else we do - market timing, individual investment selection, etc. - accounts for the remaining 10% or so. Once we've determined our asset allocation (which also sets our risk tolerance), our primary job is to stick to it.

For instance, we may decide a balanced portfolio (roughly half in stocks and half in bonds) is appropriate for a client. If the stock market does very well, and we make no adjustments, it is possible that after some time, the portfolio ends up with much more than half its value in stocks. By periodically resetting the portfolio to match the original allocation, we are automatically selling high (the stocks) and buying low (the bonds), which is good! Conversely, if the stock market goes through a period of decline, the unadjusted portfolio will have a greater share in bonds than stocks. By rebalancing, we are again selling high (the bonds) and buying low (the stocks).

The second question is how often we review accounts for changes or reallocation. The answer depends on several factors, including whether you are contributing to or withdrawing from the account and if there are any tax consequences from rebalancing. Generally, if you contribute or withdraw money regularly, we make an allocation decision each time we invest or withdraw money. If your portfolio is underweighted in bonds and you make a contribution, we will most likely allocate your contribution to the bond portion of your portfolio. It works in reverse for withdrawals. If you are neither contributing nor withdrawing funds, then we review each account quarterly, although we may choose not to reallocate each quarter.

The final question is how we decide to make an investment change. We try to minimize changes by conducting thorough due diligence before we decide to invest. Once we are invested, there are three main reasons why we would make a change. First, there may be a material event in the investment, such as a manager change or a change in the objective of the investment. Second, we may find another investment with the same objective with either a lower cost, higher yield, or higher tax efficiency. Finally, the investment may not meet our expectations over a sustained period of time.

On an administrative note, we are excited to introduce eSignature, an electronic document submission process. Many of our routine paperwork requirements can now be handled via secure email. Several clients have already used eSignature and found the process to be easy and efficient. Thank you for your continued support. We have enjoyed our new found freedom and look forward to continuing to serve you and your families with integrity, passion, and leadership in the years to come. If you have any questions, concerns, or suggestions, please call or email anytime.

Best Regards,

Kary Brownlee, CFP®