Webinar: The Critical Importance of an Investment Plan

High-net worth investors need and deserve better advice and lower fees. We aren't  talking about a generic, financial plan generated by software, based on data input by the mass advisor, but a custom crafted, living investment focused document built just for your unique situation.

Do you have an investment plan, designed precisely for you? One that accounts for your unique situation and can confidently navigate large declines and exuberant run ups?  

0:00 Good afternoon, and welcome to the wealth factor webinar. The topic today is the importance of having an investment plan. And from a wealth factor perspective, when we talk about planning, it's purely from an investment perspective, it doesn't mean that there aren't individual financial considerations that go into the foundation of that plan. But we're not talking about the what the math advisor looks at as a financial plan, something that's really more holistic. I believe that the value that can be added is much higher on the investment side versus the overall financial picture side. And that I believe, magnifies as the size of investor 0:53 and investor goes up 0:55 as an investor. If you think about it from a classification perspective, high net worth ultra high net worth investor? It starts to make far more sense for those investors to have a team of experts, tax estate, etc. and absolutely does there need to be does that team including an investment experts need to have a coordinate and perhaps to some degree have a quarterback. But I don't think a any one individual, especially whether somebody coming from the investment industry is the right person to be driving that process, perhaps organizing it, perhaps quarterbacking it, but beyond that, I don't think it makes sense. And so my focus from an investment perspective is plan based and investment advice 1:51 centric. 1:53 So, 1:55 before I get too far in, 1:57 I'm going to say a few words for mine. Compliance friends for compliance purposes and read these, so I get it right. This call is for informational purposes only and may be recorded. statements made during this call are subject to risk and uncertainties, some of which are significant in scope. And by their very nature beyond the control of wealth factor, there can be no assurance that such statements will prove to be accurate and actual results in future events could differ in a material way from said statements. Historical results are not necessarily indicative of future performance. So, I'll start out with for those of you who don't know me a bit of background, I started my investment experience in the building up of the tech bubble. And and so my perspective from from an investment standpoint is very much feel filled with cycles of boom and bust environments where we see prices declining materially, the person in the tech bubble, the financial crisis. And now what we saw what we've seen so far this year, I started my career out doing trading work for a alternative asset manager in the Portland area. I had the opportunity to build, start my own business, which was called my first business called Bandon Capital Management. I launched that business in 2007. Within that made the decision to launch a mutual fund. I did that in 2011, and manage that for a number of years. That mutual fund happened to be in an area of the industry that was fast growing, and that attracted the attention of a public company who ended up acquiring my mutual fund business line from me, and I joined them acting as a managing director. In I started, I launched well factor at the beginning of 2017. The goal for well factor from a business perspective is to take what was a a more national focus to my my investment business activities and bring them more local. There were some personal motivations of not needing to travel as a part of that as as my, my family is becoming a significant priority. So launched that in 2017. So well factor is a Lake Oswego based and focused investment advisor. What we do is provide customized plan oriented investment advice. We deliver that through managed portfolios that are again, customized, we build those portfolios, almost exclusively based on indexes, and they're largely comprised of stocks and or bonds. The accounts 4:57 are client accounts 4:58 are held in their industry. names and held at third party independent custodians. And we generally act as fiduciaries on behalf of our clients. We charge a point three 5% fee based on the assets that we manage for clients up to the first 10 million in assets, and then point 1% on assets over 10 million. 5:25 So 5:26 a couple quick 5:28 slides to share 5:31 both our philosophy and then kind of a I think it's always helpful to spend a little time on the longer term context before we get into details. And so the core driver for wealth factor is rooted in the idea that investors should focus on efficiency. And so we are philosophy we call risk smart and there are three different component parts to that. The first is what we call portfolio Spark, which is really a reference to the structural efficiency in which the investment advice, or the portfolio is being delivered. And so there are two key 6:11 components here. 6:12 The first is based on the idea 6:16 that picking and timing investments 6:19 on are both unlikely to be successful, and then an inefficient activity. So to the extent that you're dependent on picking a stock or picking a sector, or timing, any of those any types of investment decisions, those take lots of energy and effort, which which would drive 6:43 fees or costs up, 6:45 and then they also increase complexity too, which again, probably also drives fees up. The second component of being portfolio smart is the avoidance of layers as well as complexity. So I believe layers Management layers of different component parts, increased complexity and reduce efficiency. And so number one being portfolio smart. Number two being fee smart. And the point three 5% fee at well factor is you is certainly unique relative to industry norms. And then they you know, in addition to our fee structure when we're basing our investment portfolio deliverable for clients on indices, allows us to maintain simplicity, and then cost efficiency. The last component is tax smart. And this is an area that is often an afterthought for both individual investors as well as the advisory community, but it's my belief This is one element through an attention to these details where significant value can be added 8:03 So, 8:05 this page here 8:07 is I'm going to start with this before I go into my comments about the importance of having an investment plan to share some longer term perspective. So, the start of this year has been filled with uncertainty and lots of scary media headlines. And so, the what this is is is a illustrates that there are constantly things in, in the economy in the news in in the geopolitical environments, they give us reasons to be concerned and ultimately reasons not to invest. And so, you know, this we see here that in the 70s are a variety of uncertain uncertainties all the way each decade all the way to 2020 in our current environment where 8:57 we have both the Coronavirus 9:01 pandemic, the concerns of businesses shutting down and becoming inactive. You know, while these are unique to today, the idea or the occurrence of unique things, is it unique, it's been persistent and consistent. And so I believe that in order to be successful investors need to focus on something that's not the scary element of the day or the week, quarter, whatever it is in the short term, and have a plan in place so that the investor can stay consistent with their underlying exposures. In my, if we just look back over the last few handful of weeks, the most scary time was to to be invested 9:55 was likely the very best time 9:57 to buy or not Sell. But if you're if you're allowing yourself to make decisions without a plan, and driven by emotion and an attempt to follow daily information, I believe that that setting yourself up for 10:17 suboptimal outcome. 10:20 So now it's kind of transitioning over towards this concept of, you know, what should we consider as we build an investment plan? And what might, what might that plan look like? And so, you know, starting out here, you know, how should we think about the sorts of periods or periods like this because these are these types of environments that we're in right now are going to be the ones that have the greatest impact to our success. 10:47 And so, let's start out with 10:51 you know, one element I think is really good to just clear out of the way right right away is, is there's going to be bottoms and markets and we are There, the probability that we time those is is really, really low. So if not perhaps completely impossible. And so the any endeavor that we exercise to try to do that, I think it would be a sub optimal that that energy would be poorly spent. Secondly, and as we've largely seen is, once market started going up, it likely will happen very quickly. So once we feel comfortable with the idea of being invested, the the biggest opportunities that we might see it from a fancy market perspective, have largely already passed. 11:44 So a little bit more about 11:47 these sorts of environments. So should we be nervous in environments where we've seen significant declines? I don't know the answer is no concrete. answer to that I mean, you know, naturally Yes, we should, we will feel nervous or we're humans. But again, kind of reinforcing the need, or the benefits associated having a plan is let's go and do an exercise where we look at some data. And so what I did with this exercise is I took the daily returns for the s&p 500 going back all the way to 1927. And then I looked at the rolling 12 month results. So a lots of little 12 month periods because I was using the daily data and identified and then isolated which periods were down at least 25%, over 12 months and down 35% over 12 months. And then I looked at 12:44 the following 12:46 five year periods and 10 year periods to see what the performance was after periods where we had significant declines. And then I broke that into two other segments 1962 1979 and nine In a current in my original analysis, I broke it into lots of 20 year periods. But the there ended up being overlap. And so there wasn't much benefit in doing that. So I consolidated the 1982 current period. But what we see here is in all periods from 1960 on is that there is there were no occurrences where in the following five years, if the stock prices weren't or stock gains, there weren't gains in stocks, or at least the s&p 500. And so, you know, I don't use this to suggest that that's always going to be the case. But really, to push back on this idea that we should be thinking about selling or we should be concerned or nervous after prices go down. And so you know, there's a couple cliches I have in here. You know, one's a quote from Warren Buffett be greedy when others are fearful on the second buy low and sell high. You know, when you say the In in isolation, they feel very obvious. But, you know, I can tell you that the other conversations I was having with both clients as well as prospective s investors in the middle of March, these were the last sorts of things on the average investors mind. And again, 14:21 we have a plan in place 14:23 it there's a framework, so that you can ignore again the scary elements of each specific day, week month, and take advantage of opportunities in the market as they arise. So, as we then shift the attention towards what, what you might consider when building an investment plan, I always like to start with the long term in mind. So investors if you were to if you define and work or if I were to define the the idea of being in it Esther if somebody with a longer term orientation to what they're doing at least 10 years, and so it's the there's a natural challenge in a in publicly traded financial markets where you can sell for all day long every day or buy all day long every day. You know. So I think it's key to, you know, you absolutely want to have that ability to do that. But if you're truly an investor, the transacting regularly is probably counter to to that orientation. And so start with a long term framework. So what what might you is as you build that out, what are some key considerations? You know, first, what percentage of an individual's overall wealth is needed for the near term obligations that part really shouldn't be thought of from an investment perspective and should be excluded Second is that it doesn't make sense to own illiquid assets, whether that's investments in private equity or private companies or real estate, and that the answer that varies based on each individual, but you know, that should be earmarked and then probably some sort of liquid assets to support those assets during periods of financial strain. And then So, from there, the remaining buckets might be you know, what, what allocation should go to riskier assets versus less risky assets. And there are two elements here, at least from a historical and investment advisor financial planning oriented, you know, construct and looking at this and one is what is the time horizon how long until these assets or investments need to be utilized? That's number one. And number two is the the risk tolerance for each individual investor. And I largely when I create plans, ignore That risk element for each individual investor because the average person wants to be what is comfortable taking risk at the times when prices are high, and they're uncomfortable risk, taking risks when prices are low. And so, you know, we're all aggressive where, you know, we have this tendency if we allow our human decision making to influence what we would do, we're all comfortable taking risk when it feels good, and then not comfortable taking risks when it doesn't feel good. So I think that element should be not necessarily completely ignored, but minimized in its effort, or its, its focus in lieu of a focus on what's the time horizon for the assets. So if, if you're five years from retirement, the composition of risky assets versus non non risky assets should be driven largely by that or if it's 15 years from retirement, or whatever the purpose for the invested assets are No, that should that should drive a much higher target exposure to riskier assets than than somebody with a much shorter time horizon. And then lastly identifying prioritizations and acknowledging that prioritizations change over time. So the two key ones here are income generation versus tax efficiency. And while those two things are not perfectly mutually exclusive, generally income Aryan portfolios are less tax efficient in that they have tax liability each and every year. So then, you know, I think going down a level of detail has developed a structure for targets from a stock market perspective, things like how much geographic diversity diversity Do we want, what's the composition from a size of company perspective, and then what sort of factors drive the how the portfolio is constructed. 18:57 And so the 19:00 It is common to see investment advice, stop there and say, okay, we've created an asset allocation. We're going to vary, we're just going to blindly follow that and ignore everything else. I think that this approach, I Well, first of all, I think that the approach that approach will work. I think that there's opportunities to create a short term plan around that. And I think these short term plans are specifically useful during periods where there is a heightened amount of price volatility. And then, as we're seeing so far this year, price volatility doesn't just mean downside volatility can mean upside as well. And so while markets are moving very fast, I think there's opportunities to put a plan in place to try to cap to to effectively increase the chance that you're buying low and not selling low. And so what Might a plan like that look like. And so, you know, this is an example. And the example could be implemented in in multiple ways, not just this very simple way. And so what this example does is takes and compares a buy and hold portfolio of $3 million to somebody who this is very much apples to oranges, right? To a, you know, somebody who's uninvested and what they might do versus just putting all of that in. Another application for a plan might be somebody who, whose general target exposure is 50% stocks, and 50% bonds, a plan can be put into place to increase their equity exposure after declines from 50 to 60, or potentially even 60 to 70, etc. So, this is just an example that illustrates a methodology to potentially increase risk at points where prices are lower. And so what we have here is, so on the left, it's just to kind of share what this is, is that $3 million portfolio down 30% is kind of a starting point for this analysis, which we did see that at some point during March, but we're well off of that today. And then the buying program on the right suggests that we're going to put in three different one third increments starting at that point where we're down 30%. And then as markets fall from there, increasing the exposure. So I'll pause here and and highlight the the the elements here that are practical. The this program, it just like anything that you might do from an investment perspective, is there are pros and cons. And so the biggest disadvantage to this is that there's a high probability, I think, think that this exposure will never happen, we'll never see those price declines that drive this. And so this, the benefits are a reduced risk and a potential opportunity to participate in as prices revert, but there's a high probability of not getting invested at all. And so I look at this as a strategy that might reduce downside. And so there's a couple of mathematical elements here that can be highlighted. So first, as you look at the decline from and so that that third column percent from the top as you go from down 30%, from the top to down 37.5% from the top, the the percent change of your dollars are actually down 11% during that period. So the math changes in as, as the total size or basis changes, and then that same phenomena occurs and so it As you keep going down, you know when so it's down 30% from the top all the way down to down 50% from the top. And then as we continue to go down, now we see prices 23:08 recovering. And so it from going from down 50% from the top back up to only down 30% from the top, that's a 40% move in those prices. And so you can see that benefit on the on the right side of a investor who is putting new dollars to work at these lower prices, in that they're very quickly back to even or profitable, and then up significantly at the point where markets get all the way back to where they were at former times. So again, this is there's there's this is isn't intended to be a wholesale investment plan or short term plan solution that applies to everybody. But an example of something that can be put in place to minimize the challenge. is associated with dealing with the emotions that are natural during the periods that are where we see the highest amounts of downside volatility and lower prices. https://www.wealth-factor.com/disclosures-and-disclaimers

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