October 6, 2008: An Important Note to Our Investors (None of this information should be construed as advice for any one investor and is for informational purposes only.)
Dear Friends –
We continue to be encouraged by the resilience you have shown in these tumultuous times by having received only a handful of calls and emails. We take this as a positive sign that we’ve communicated that times like these do not call for panicked response. In fact, it's times like these that are exactly the conditions that cause us to design portfolios the way we do.
Some of you have said that, although you appreciate the extra communication, it hasn't been necessary. If you're one of them, I do apologize for sending yet another email - but over-communicating right now is one risk I'm willing to take. We want to reach out to you as often as we can – but more importantly - as often as your needs and your situation requires. If that means you could use more contact than what you're receiving from us now, please let us know.
The massive volume of "data" available creates a significant challenge when trying to provide relevant information. Frankly, a lot of what we see is a load of ... well...you know the word. In no way do I, or would I, trivialize the severity of the current events. I know my usual sarcasm is also probably inappropriate under the circumstances and I will try to refrain. I'm frustrated though by the "self-fulfilling prophecies" of the media vultures who are capitalizing on an opportunity. The result of their fervor is that all of us pay a heavy price with the additional volatility the unrest and negative sentiments these reckless publications create.
We hope you know that we're in this with you – and absolutely understand the emotions and reactions you may be having. As you probably know, the firm's income is based on the value of the portfolios of our clients. What's more, our own portfolios as well as the TFT 401k and our immediate family members all are invested in portfolios just like yours with a variety of risk exposure ranging from balanced to the most aggressive.
As an investor, my personal money is positioned in the most aggressive portfolio we recommend and my accounts are down about 26%. While I'm not thrilled about this fact any more than you might be with the returns on your account, this number is in line with the risk calculation (Standard Deviation) described in my Investment Policy Statement. Standard deviation is just a fancy word that number geeks like me use when measuring risk. And perhaps the aggressive portfolio is a bad example as very few of you are invested in it – but since it's the one I'm in I wanted to speak to you from the heart and my own reality.
A popular song asks "Should I stay or should I go now?" ... The level of risk that's right for you is a complex question with many factors to consider. It certainly encompasses a lot more than just your "time-horizon" and current age. The following is a short list of some of the things we consider when making a recommendation to keep or change a portfolio:
Have your goals changed?
Have you taken a new job?
Have you gotten married or divorced?
Have you lost your job?
Have you had a child?
Have your kids moved out (or back in!)?
Are you needing to provide financial support or housing for a parent?
Have you had a recent health concern?
Do you have a variable rate mortgage?
Do you owe more on your house than what it's worth?
Are you involved in a lawsuit?
Has your home equity line of credit been cancelled by your lender?
Have you lost your health insurance coverage?
Do you have significant credit card debts?
Is your cost of living more than your take home take-home pay?
Have you stopped contributing to your retirement account because of reduced cash flow?
And one of the most important...
Are the current market conditions keeping you up at night but you haven't wanted to call and "bother" us?
I could go on but you get the point. The bottom line is that if your financial or family circumstances have changed since we established your portfolio and investment policy – then we need to talk. We can review your overall situation and come up with a recommendation to stay where you are or make an adjustment. Read through the questions above to see if any apply – we want to make sure your position is still on track. Let me be clear – we don't believe in market timing and any change recommended will NOT be a function of whether the market is up or down!
We can't predict any market movement either up or down - and tomorrow will bring an entirely new set of what are currently unknown facts that will change the future. So - no crystal balls or mystical mumbo jumbo...we will use the facts we know and then strategize on how to best position you based for both now and the future. In your planning, you must keep an eye on the long term while but balances those alongside the needs of today.
In spite of my sometimes uncontrollable sarcasm, please know how seriously we take our job as your financial coaches and we will do everything in our power to help you create and maintain the life you want.
If you want to talk, please call the office and set a time – we welcome the opportunity. If your needs are urgent and an appointment isn't practical - you can reach me on my cell at 760-419-6183.
So if we were playing Jeopardy right now I’d say "I'll take Investment Allocation for $1,000 Alex" – and the box would open with the answer "It depends." So what was the question?
Hang in there and let us know what we can do to help.
With truly our very sincerest regards,
Maureen and Peggy
Some Questions and Responses to our Note (Please note that all names and personal references have been removed for privacy reasons.)
October 6, 2008
Question: My question is: how to evaluate if a sale of assets is indicated now or soon in order to generate capital losses for tax purposes?
Reply: We are using a tax-loss harvesting strategy on the taxable portfolios. Since the portfolio you have with us is a retirement account (Roth IRA), the tax loss harvesting would not be of any help and would only generate expense. We assume then that the question is for another account that is not a retirement account. If that's the case, it would be hard for us to make a recommendation since we don't know what assets you have there or are considering for sale. Please don't for the "30 Day Wash" rule that requires that if you sell your position in any asset, you must not buy it back within 30 days from the sale or the "loss" will be disallowed.
Question: After reading your letter, do you think I should have waited just 2-3 months to put my money in or was the timing okay when I did? I'm thinking long term and won't be needing this money but it would have been nice to buy low.
Reply: As long as you are in this for the long term, the timing of 2-3 months wouldn't have changed our recommendations. The only way we can know if we were at a "low" is when the low is already past! As we've said – we have no crystal balls – just planning and investment strategies that we know are prudent for the long term investor like you.
Question: Thank you for the update. I do need to know if I should add money to my 401k at during this time or just sit still?
Answer: Were you going to add it anyway or is your question in response to the market decline? If it's the first, then yes; If it's not, then no.
Question: Ok, after today's bloodbath on Wall Street even I have a question. Usually I take these things in my stride, realizing I am in for the longer haul, and not bothered about the short term hiccups. However, as the economy winds down and two of our upcoming jobs are canceled, it has occurred to me that there could be a time when the only way we could keep from losing our house would be to pay the penalty and use the money we have in our 401k. Not optimal, but it is a possibility. So, my question is: has your strategy changed over the last month given the financial news, or do you only adjust investment objectives when the client requests an adjustment?
Answer: As a recap to get myself into your head...I reviewed your position which as of last night's close, your 2½ year return is a -16.7%. The circumstances you describe are exactly the kind I was referring to in my letter as a "change" in financial condition that warrants review. If you feel you will be pulling this money within the next couple years, we would definitely suggest reducing the risk level of the portfolio. If you're 100% sure you're going to be pulling all of it, you really ought to move it to a cash account at the bank (hard to say which one though!) Not my favorite answer, but reality is reality. To address your question about strategy - our strategy does not change relative to fluctuating market conditions. This approach would be considered "tactical" which is not consistent with our investment philosophy. Our view, instead, is to own a portion of many "markets" and not try to predict which stock, sector or even asset class will "win the race" this season. With effective diversification and proper investment vehicles, you can reduce the level of the volatility while not sacrificing market rates of return. While we don't disagree that a tactical manager can hit it big (that's when the marketing folks salivate) but we do not believe their return was result of "skill" and, as such, do not want to speculate with your money (or ours!) that they can accidently hit it again, and again and again. We work with serious money – a tactical approach is just not consistent with our philosophy.
Our belief that instead of investors trying to "beat" the market, we just want to "BE" part of many markets. This approach provides a much greater ability to put risk constraints in place and is the same belief we've embraced for the last 12 years as a business. Our conviction comes from many years of watching (and in some cases using) the tactical management style with regular disappointment. We find the "guru" mentality approach hit and miss - that's not adequate.
The market has the potential to reward us - if government would just let it do its thing - but with the potential rewards come, of course, the potential downturn. I appreciate the consistency you've maintained in spite of your family situation changing but do believe that if withdrawal for survival of the family is imminent, we need to make an adjustment. I would obviously prefer not to sell in what feels like a "low" - but we will only know if it is the low after the fact. Let us know how you would like proceed.
