Travis Allen, CFA, CFP®, RICP®

Travis is a Wealth Management Advisor and owner of Custom Wealth Planners. Travis has been working with high-net-worth families for more than 15 years. He specializes in retirement distribution and tax planning. Learn more about Travis here.

Jason Zweig from the Wall Street Journal has a great quote I often think about when guiding clients through the noise of the investment industry.

There are three ways to make a living:

  1. Lie to people who want to be lied to, and you’ll get rich.
  2. Tell the truth to those who want the truth, and you’ll make a living.
  3. Tell the truth to those who want to be lied to, and you’ll go broke.

I’m going to use this post to speak my investment truths. I hope it connects with enough of you to keep me from going broke…

I got my start in the investment industry right out of college on the cusp the the 08-09 financial crisis. (the irony is I would’ve killed for a job at Bear Stearns or Lehman Brothers at the time) I landed in the banking world as a Portfolio Manager handling the investments for high-net worth individuals and institutions. The lessons learned in those early years are plentiful, and have shaped many of my core beliefs around how investments should be managed.

My perspective started to shift a few years into that role. I began to notice that much of the investment advice being provided within our industry did not come about through stringent historical or evidence-based study. Instead, its foundation was based on sensationalist claims around predicting the future (which is not possible), overly sophisticated strategies seeking to justify the advisor’s value (but rarely delivering it), and short-term back-tests trying to prove the superiority of one investment approach over the other (unable to confirm if performance would persist over time). This all boiled down into fancy talking points and marketing puff pieces attempting to allure clients through promises of high return, often coupled with additional assurances of less risk than any alternative. I’m here to tell you that not only did many of these strategies often lack evidence, they rarely produced consistent results.

The truth is that the investment industry has largely become commoditized. What that means is that the difference in returns from one investment strategy to the next will have very little to do with an advisor’s ability to predict the future, choose one mutual fund over the other, or provide access to some proprietary or exclusive investment opportunity (more often a focus on these tend to detract from returns). What we find is that over time, the core of an investors return is a function of two key factors:

  1. Overall Investment Allocation – How they choose to allocate between safer/stable vs. risky/growth assets.
  2. Their Behavior – Do they have enough purpose and conviction around the strategy to stick to it through both the good and bad times.

Yes, there are other necessary factors to ensure you’re getting the most out of your portfolio (see below), but those can prove fairly marginal without a solid foundation addressing the two items above.

Another shift in my perspective began to emerge as my focus evolved from Investment-Only to Financial Planning (integrated with investments). Investment portfolios exist primarily to serve a single purpose; provide for some known or unknown financial need in the future. That’s why we’re unable/unwilling to provide clients casual investment advice without first engaging in some level of planning to ensure the investments are aligned with desired outcomes. If you’re wondering what that looks like, see my previous two posts here (Buy the Boat), and here (What’s On the Horizon)

There are a number other key tenets that drive our approach on managing client investments. I’ll cover just a few of them here…

Straight-Forward over Complex – Far too much of our industry is focused on adding complexity to substantiate high fees and give the perception of sophistication. As a CFA Charterholder and a former CAIA designee (alternative investment designation), I’ve spent my career learning about the various trading strategies, hedge funds, private equity, and other complex investment options available to the modern investor. Yes, there are some amazing results that can come out of these options. The problem is those results tend to be few and far between, and the persistence of strong performance over time is questionable at best. Add to that the illiquidity, leverage, tax inefficiency, and concentration risk, and you end up with strategies that conceptually sound good, but are often filled with more disappointments than value add. We prefer to keep things straight-forward without the mess. That doesn’t mean we’re complacent or lacking strategic foresight into the development of strategy. Instead, our focus is on more easily understood and time-tested strategies that prioritizes results, not sensationalism.

Nobody can Consistently Predict the Future – Early in my career I played the game where I cherry-picked a handful of statistics to support a slick sounding story about what the future had in store. I could spin some pretty amazing storylines and implications around how we should be investing. Some were right, others were wrong. In either case, the eventual outcome had nothing to do with my ability to predict the future. As I’ve progressed in my career, I’ve become convinced no one out there is able to do so on a consistent enough basis to add value. I’d encourage you to challenge those who pretend to, and add to the skepticism with each random statistic and data point offered. Request audited track records with recorded predictions and success rates before putting any credibility into someone making such claims. You’ll find most will quickly soften such prognostications once you stand up to the nonsense.

The reality is you (or your advisor) doesn’t need to predict what the future holds to develop a strategy capable of great results. Invest dollars needed over the short-term as though the worst is right around the corner, and dollars needed over the long-term as though the best is yet to come. You’ll be pleasantly surprised just how good the results can be, and far less anxious having found an all-weather strategy that’s not reliant on predicting an unknowable future.

The Goal of Investing is to Provide for a Future Need – Not to maximize returns, beat an arbitrary market index, or find the next hot stock.

With us starting every client engagement with the development of a financial plan, we’re able to outline a roadmap for achieving life’s priorities and create a personalized benchmark that we monitor results against. This removes the irrelevant nature of what others may define as the goal of investing (i.e. beat the market), and brings far more purpose/conviction to why we invest the way we do. It’s also been our experience that this greater sense of purpose leads to far greater likelihood of clients sticking to their plan and achieving the results they desire.

Your Need, Ability, and Willingness to take Risk Should Drive Overall Strategy – Closely related to the above, far too many develop an investment strategy based on things other than personal needs of the investor (i.e. market predictions). Be sure your advisor can tie the strategy recommended directly back to the specific needs of your long-term financial plan. The Need translates back to the return needed to achieve the short and long-term goals you’ve laid out. Your Ability is dictated by the need to access dollars over the short to intermediate term and the unpredictability of the markets. Your Willingness has to do with your experience and temperament around dealing with the volatility of investing. All three of these will require robust analysis, long-term projections, and deep discussions around proper expectations when investing. They can also be in conflict with each other which may require sacrifices or trade-offs to one over the other. This is why taking investment advice from a television program, magazine, or casual advice from a friend or neighbor rarely works out for investors over time.

Diversification – This has become a generic buzzword in our industry that has lost its true meaning. (all your eggs in one basket?) This is more than just having multiple baskets. We regularly see new clients come in with dozens of holdings, many operating in the same areas of the market and having performance that closely tracks each other. Our approach to diversification is to be very purposeful to own investments that perform very differently from each other across various market environments. By definition, this means your portfolio should always own something that is disappointing you. If the entirety of the portfolio is up at the same time, that likely means it will also all be down at the same time. True diversification allows you to cut out some of the extremes you’d otherwise see, provide a smoother and more consistent return experience, and set the stage for adding value through rebalancing. (discussed next…)

Rebalancing – Another buzzword often lacking full understanding. At it’s simplest explanation it follows an inarguable formula for investment success: Buy Low, Sell High. A consistent theme of the markets over time is that they are cyclical in nature. Periods of good performance is often followed by periods of poor performance. (and vice versa) If you strategically diversify your portfolio (as noted above), you can use this to your advantage. When certain areas of the portfolio are disappointing you, that can be a sign that it’s time to rebalance. (i.e. sell high what’s performing well, buy low what is not) As simple as that sounds, it’s something that is so rarely executed on without professional guidance. Let’s think back to the COVID experience of 2020. So few would’ve suggested March 2020 be a time to be buying stocks. That’s exactly what I did for most of my clients. No, I did not have a crystal ball that told me how the COVID crisis would play out. What I did have was a purposeful investment strategy for each client, a stock market that had lost about a third of its value, and the discipline to take advantage of the opportunity short-term volatility provided. The S&P 500 bottomed in late March and recovered all of its losses by August of that year (believe it or not, posting strong double digit returns for the full year). It doesn’t always play out that quickly, but the value of rebalancing regularly persists over time. To capture this value, you need to first ensure you’re truly diversified, have a system for monitoring your overall allocations, and maintain the discipline to execute when the opportunity arises.

Taxes Matter – It’s not the return you make, it’s the return you keep. Be sure you (and your advisor) are assessing investment results and opportunities on an after-tax basis. Some quick items to be aware of:

  1. Asset Location: If you’re like many, you have different accounts that hold investments. (IRA, 401k, Roth, Taxable Brokerage, etc.) The IRS applies different tax rates for investments held in a taxable accounts depending on the type of return it generates. (as high as 40.3%; as low as 0%) A lot of nuance to this, but the punchline is you should be very strategic around where you choose to own certain types of investments. By doing so, you can reduce Uncle Sam’s take and enhance your net of tax return you achieve.
  2. Tax Cost Ratio: For investments held in taxable accounts, Morningstar has put together this handy metric to help determine how much of your return is being lost to taxes every year. If you have a taxable brokerage account, its worth a quick review of this metric to determine if any changes need to be made. Anything much over 1% should be scrutinized. Unfortunately, we regularly run across new clients who are losing upwards of 2-5% per year to taxes. Sometimes that’s not a sign of a bad investment, just one that is better held in a tax-sheltered account. (IRA, 401k, Roth)
  3. Tax-Loss Harvesting: A silver lining of down markets and diversification is the ability to sell assets at a loss and capture that for tax purposes. That loss can be used to help offset future capital gains, or up to $3k can offset ordinary income for the current tax year.
  4. Tax-Smart Rebalancing: As noted above, rebalancing can provide great value to a long-term portfolio. You do need to be wise about the tax ramifications of doing so however. If done in a taxable account, seek to rebalance investments that receive long-term capital gain treatment. (which is taxed at lower rates) Even better, seek to do any necessary rebalancing in tax sheltered accounts to avoid any current year tax implications.

Regular Evolution of the Markets – As much as we seek to hone in on strategies that stand the test of time, the nature of markets, investment options, and our own understanding will continue to evolve. The benefit of working with a fee-only advisor is that our compensation is tied directly to the assets that we manage. (and thus to the performance of those assets) This helps align the interests of our clients with our own financial interests. It also keeps our focus on bringing things to the table that adds value to our clients, and puts the execution around those ideas in the forefront.

This is the final of three bigger picture posts about the new business. (sorry for the length on this one) We’ve officially started onboarding existing clients late last month. From here on out we’ll look to publish regular content that gives you a peek into the kind of things we’re discussing with them and highlighting some actionable items that may apply to you. If there are any particular areas you’d like to get our perspective on, please let us know.

Hope everyone is having a great Summer.

Working with a financial planner is having a guide in an ever-changing landscape. The plan is a living document because financial planning is a process, not an event. The plan should change as often as life does for you. Goals change when life goes into transition. Children and grandchildren are born. Divorce, disease, death — life happens, and situations change.

The plan’s purpose is not to predict the future. Rather, get clear about reality, align your financial and emotional capital to the goals, and course correct along the way. The true value in planning is not any single product, plan, or investment, it’s the process and the relationship that it builds.

Welcome to Custom Wealth Planning’s blog where founders Travis & Clay share their thoughts on topics that cover Money, Mindfulness, & History.

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