Where are you on the investment continuum?

Before I came to Seattle, I had the pleasure of working for an asset management firm with close ties to lead researchers, Nobel Prize winners and economic powerhouses. One day, a dear friend to many in the company passed away and I was amazed at the outpouring of respect and love. Gordon Murray left a legacy with his co-authored book, The Investment Answer, written during his battle with terminal brain cancer.iStock_000042398948Small

Instead of traveling the world or living out the remainder of his time on a beach or mountain, Gordon gave the world the gift of what he learned over 25 years working on Wall Street and consulting with financial firms. The book is a light read (around 68 pages) and can be very powerful for those beginning their investment journey. It simply outlines key decisions every investor needs to make on their path to investing.

If you view the market as your ally rather than an adversary that you must time and compete against, give the book a quick read. Gordon and his co-author, Dan Goldie, outline five considerations:

  1. Decide whether you’ll do it yourself or hire a professional investment advisor.
  2. Determine what asset allocation between stocks, bonds and cash is best for you.
  3. Evaluate what specific asset classes you’ll include in your portfolio, and in what ratio.
  4. Consider whether you believe you can strategically and consistently outperform the market or whether you believe obtaining the market return is most in your favor.
  5. Create an execution strategy around when you will buy and sell funds from your portfolio. (For example, will you rotate asset classes? Sell based on trend following dynamics? Periodically rebalance on a definite time frame?)

For a little more history on Gordon and why this book was created, check out this NY Times article.

The nuances of rebalancing

iStock_000019901243SmallI recently received a question from a client of mine about an article that referenced rebalancing a portfolio at the same time each year. In theory, an annual rebalance is not a bad way to go. However, there’s quite a bit more to how we manage the rebalancing process than that.

For Merriman clients, we:

  • Avoid unnecessary transaction costs by using cash inflows and outflows as a tool to rebalance a portfolio back to its target allocation. Cash inflows are used to buy underweight asset classes and cash outflows are used to sell overweight asset classes.
  • Allow assets that are performing well to continue to perform – a documented trend called momentum – by placing tolerance bands around our allocations. This also helps avoid excessive rebalancing transaction costs.
  • Favor rebalancing tax-deferred accounts in December to coincide with mutual fund distributions and Required Minimum Distributions (RMDs), again reducing transaction costs.
  • Help defer taxes by rebalancing taxable accounts in January, when appropriate.

Market performance can also have an impact on the need for rebalancing. If returns are flat for a few years, there is less need for rebalancing. In volatile times, more.

In addition there will be one-off cases such as:

  • Tax loss harvesting. If there is a significant downturn in the markets (think 2008), we can use that as an opportunity to harvest losses to be used against future gains. We did this for our clients in 2008 and it is paying dividends today.
  • Introduction or deletion of an asset class can also provide an opportunity to rebalance your portfolio.

Rebalancing your portfolio is an integral step in maintaining a well-balanced portfolio and reducing its risk. But to do it once a year at the same time every year may not be the best solution for you. Depending on your situation, a more customized rebalancing approach may save you significant money in transaction costs and taxes in the long run. As always, check with your advisor to find out what’s right for you.

Benchmarks, Diversification & Time Horizons – Part 4 of 4

In this four-part blog series from Merriman Research, we’re offering our thoughts on the following important investment questions:

  • When evaluating your investment returns, what benchmark(s) are relevant?
  • What is the rationale for diversification?
  • How should your investment time horizon be considered?

Investors may overlook the fact that these questions are highly interrelated. To properly consider any one, you must understand the context the other two foster. We’ll just have to jump right in to explain. If you missed Part 1Part 2 or Part 3, start there and come back.

Part 4: Historic returns analysis supports diversification & longer time horizons

In this our fourth and final post of this blog series, we offer an assessment of historic index performance data.  We expect that your better understanding of this history will contribute to your appreciation of the benefits of diversification and longer-term time horizons for your financial planning. (more…)

Benchmarks, Diversification & Time Horizons – Part 3 of 4

In this four-part blog series from Merriman Research, we’re offering our thoughts on the following important investment questions:

  • When evaluating your investment returns, what benchmark(s) are relevant?
  • What is the rationale for diversification?
  • How should your investment time horizon be considered?

Investors may overlook the fact that these questions are highly interrelated. To properly consider any one, you must understand the context the other two foster. We’ll just have to jump right in to explain. If you missed Part 1 or Part 2, start there and come back.

Part 3: Thoughts on time horizons – Define and don’t undermine

In general, the appropriate time horizon for an investor depends on when that investor may need the money. This determination can become quite complicated, depending on specific circumstances, and will likely change over time. It can even differ for various components of an investor’s wealth. For the purposes of this article, we can say that the time horizon for the vast majority of our clients can be measured in many years, and even decades – and in some cases can extend beyond an individual’s lifetime (e.g., with generational transfers). (more…)

Benchmarks, Diversification & Time Horizons – Part 2 of 4

In this four-part blog series from Merriman Research, we’re offering our thoughts on the following important investment questions:

  • When evaluating your investment returns, what benchmark(s) are relevant?
  • What is the rationale for diversification?
  • How should your investment time horizon be considered?

Investors may overlook the fact that these questions are highly interrelated. To properly consider any one, you must understand the context the other two foster. We’ll just have to jump right in to explain. If you missed Part 1, start there and come back.

Part 2: Thoughts on diversification – Why is it a good thing?

Investors tend to appreciate diversification in bad times, but not so much in good times. Investors like the idea of diversifying to mitigate losses, but don’t like diversification when it suppresses gains. Just look back at 2013 – the S&P 500 was up 32.4%, but any version of a “diversified” portfolio would have gained much less. A balanced benchmark, along the lines of a 50%/50% stock/bond split, was up about 15% (if we just blend the returns of the S&P 500 and the Barclays U.S. Aggregate).

Why should I diversify?” a balanced client may ask. The answer is To control risk and we only need to look back to 2008 for an example. That year, the S&P 500 declined 37%, whereas a 50%/50% balanced benchmark was down only 16%. (more…)

Benchmarks, Diversification & Time Horizons – Part 1 of 4

In this four-part blog series from Merriman Research, we’re offering our thoughts on the following important investment questions:

  • When evaluating your investment returns, what benchmark(s) are relevant?
  • What is the rationale for diversification?
  • How should your investment time horizon be considered?

Investors may overlook the fact that these questions are highly interrelated. To properly consider any one, you must understand the context the other two foster. We’ll just have to jump right in to explain.

Part 1: Thoughts on benchmarks – What’s the right yardstick for you?

For investors, a benchmark is the yardstick by which to measure the relative success of their investment returns. Broad market indexes, for both stocks and bonds, can serve well to provide a daily status report on how the investment community interprets news and developing trends on the economy, corporate profits and even international geopolitics. And, over time, broad indexes do present appropriate performance standards, which can be used to evaluate an investor’s performance in terms of both achieved return and experienced risk. (more…)