The Four Pillars of a Successful Investment Experience
I. Chart the Course
Successful investment experiences never occur by chance. That is why our clients entrust their family's financial future to qualified, experienced, and ethical professionals. Long before we invest one penny of our clients' hard earned capital, we take the time to develop a comprehensive, multi-generational Plan. Our clients provide us with a detailed inventory of their current overall financial situation. We analyze all of their assets, liabilities, income, and expenses and consolidate this information into a consolidated Personal Financial Statement. Much like a corporate balance sheet and income statement, this Personal Financial Statement gives us the first piece of information we need to begin charting our course...our starting point.
Because wealth accumulation for wealth's sake is meaningless, we then move into a discussion of goals. Unlike most advisors, our conversations focus on life goals, not financial goals. We force our clients to engage in serious reflection about how they want their lives to look in five, ten, twenty, and fifty years. Where would you like your children to attend college? Where would you like to live? Who would you like to see succeed you at running your business? How do you picture the ideal retirement? What legacy you would like to leave your children? What charities do you hold dearest to your heart? Because everyone has his own unique set of circumstances, values, and priorities, each client answers these questions differently. But the answers to these questions reveal the next piece of information we need...our destination.
Armed with a detailed description of both our starting point and our ultimate destination, we rely on our years of wisdom, experience, and sound judgment to quantify these goals and chart a course from here to there. Our Plans address budgeting, debt reduction, college savings, tax planning, insurance needs, estate planning, business succession, retirement planning, charitable gifting, and anything else necessary to achieve our clients' goals. Once formulated, our Plan governs all future investment decisions.
II. Invest Intelligently
Warren Buffett defines intelligent investing as "the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains - in the future." When considering various investment options such as stocks, bonds, cash, private equity, hedge funds, real estate, commodities, etc, our "reasoned expectations" must be shaped by a thorough analysis of the long-term historical behavior of these asset classes.
Consider the decision whether to invest in the equity of US corporations via the stock market or the debt of the US government via Treasury bonds. Academia has compiled detailed data on both of these asset classes going back well over a century. During that time period, stocks have produced a compound annualized real return of purchasing power of about 5% over and above taxes and the inflation rate. By contrast, US Treasury bonds have produced a compound annualized real return of purchasing power of essentially 0%, net of taxes and inflation. If our client's goals require an in increase purchasing power, US Treasury bonds are likely to disappoint. Therefore, the first tenet of Intelligent Investing is to deploy our clients' capital wisely using asset classes that offer a reasoned expectation of achieving their desired goals.
Once we determine the appropriate mix of asset classes, the next step is to choose appropriate investment vehicles. As an independent, fee-only registered investment advisor, DEM has no incentive to prefer one type of investment over another. We are equally comfortable utilizing individual stocks, mutual funds, exchange traded funds, bonds, CD's, money market funds, cash, or any other type of investment. Furthermore, our independence precludes us from developing preferences to any particular fund company or investment product. Our clients take tremendous comfort knowing that we are free to scour the investment universe to select only the most appropriate investment vehicles to achieve their goals.
The last step in Intelligent Investing involves adhering to an investment approach built upon the very principals espoused by the very founders of Modern Portfolio Theory. Backed by global market data spanning more than a century, our unique Portfolio Engineering encompasses all of the most widely held investment theories into an exceedingly logical, low-cost, tax-efficient, institutional quality investment solution.
III. Diversify Broadly
By definition, investing involves putting capital at risk. Risks such as macroeconomic slowdowns, natural disasters, and short-term fluctuations in market prices are not controllable. However, the risk of an individual company failing, of a particular investment style losing favor, or of one nation's economy outperforming another are all controllable risks that can and should be eliminated. Diversification allows us to eliminate all controllable risks that do not offer any expected reward. Therefore, our portfolios always contain multiple individual securities, multiple asset classes, multiple investment styles, and representation of multiple countries of varying stages of economic development. Having eliminated all controllable risks, our portfolios offer calibrated exposure to only those risks which offer expected rewards.
IV. Ignore the Noise
Once we have developed a Plan, determined the appropriate asset classes, and engineered the most efficient portfolio, our hard work really just begins. Today's investors are constantly bombarded with headlines, news flashes, updates, alerts, articles, analysis, and real time market data...none of which is conducive to adhering to a multi-generational financial Plan. Our fundamental value proposition lies in enforcing the discipline required to adhere to our Plans through thick and thin. Wars, recessions, bear markets, natural disasters, geopolitical turmoil, skyrocketing fuel prices, terrorist acts, and all sorts of other unimaginable "crises" will arise during our collective investing lifetimes. During each and every one, some of our clients will allow the five words that have destroyed more wealth than any bear market to creep into their psyche..."It is different this time." It is during these times that our objective and unwavering counsel will earn our fees hundreds of times over.