Testing Your Financial Plan

investment allocation, financial stress testFrom The Charleston Mercury, October 18:

Investment returns through September 30th have been quite good. Equity indices are up 13-16%, fixed income indices up 4-6% and liquid alternative funds are generally between the two. So, depending on your asset allocation, your portfolios may be up 6-12% or more year-to-date. Good stuff. 

The question, though, is when you’re doing your financial planning should you assume returns for the first nine months of 2012 will continue indefinitely or use some other numbers? Furthermore, when you do your financial planning how do you factor in unknowns that could derail your financial future? How do you develop and stress test your financial plan so you can sleep at night?

Let’s start with investment returns, the real “engine” of your financial plan. Asset allocation, of course, is the primary factor that determines performance. Despite the stock market’s recent results, the world and the investment landscape seem very uncertain these days. Is your asset allocation designed to protect and grow the assets you need for your successful financial plan? You’ll need to develop an estimated return for your allocation. Historical returns cannot predict the future but give you some direction. Should historical returns go back to 1926? The last decade? Last five years? These days it’s impossible to find a perfectly representative period given the worldwide changes in the last decade and the changes that are occurring every day. Even so, you’ll need to develop a realistic value as a starting point.

Calculate your planning by using your key variables, including assets, investment returns, expenses, inflation and eventual age and develop not just one result but a series of results for your plan. It will show how variations in rates of return each year can affect your results. 

This method is called a Monte Carlo simulation and it calculates the results of your plan by running it many times, each time using a different sequence of returns. Some sequences produce better results, some worse.  Ultimately, the simulation will produce a range of possible results with probabilities of success for a given set of variables.

Next, you will want to stress test these results by considering what happens if bad things occur. Some of the key “what ifs” are:

  • Inflation will be higher
  • You outlive your assets
  • Social security benefits are cut
  • Investment returns are less than expected
  • You incur uninsured health care costs

The Monte Carlo simulation is highly valuable in that it will be able to show you the probability of success of your financial plan if one or any combination of these stress test events occurs.

Stress test your financial plan. You’ll sleep better at night.

Lester Detterbeck is one of a small number of investment professionals in the country who has attained CPA, CFP®, and CFA designations. His firm, DWM Financial Group, Inc., a fee-only Registered Investment Adviser, has offices in Charleston/Mt. Pleasant and Chicago. Les may be contacted at (843)577-2463 or les@dwmgmt.com

DWM 3Q12 Market Commentary


fiscal cliff, multiple asset allocationWith current readings of anemic economic domestic growth, a recession widening in Europe, and a possible “Fiscal Cliff” on the way, it’s ironic how well the stock market and frankly most markets have done in 3Q12 and year-to-date (YTD) 2012.  It certainly didn’t hurt in mid-September when the Fed announced QE3 which is yet another round of government bond-buying designed to jumpstart the US economy and job market. Just how effective is this prolonged monetary policy? Weak US economic data, political unrest in the Middle East and Africa, even a slowdown in growth in China, are just a few of many things that show the situation really hasn’t gotten much better. At some point, the market will no longer reward this so-called “Quantitative Easing”.

But let’s talk about the good news for a little bit – the 3Q12 results:

The average US diversified stock fund posted a 5.3% return for the third quarter and is now up close to 13% Year-To-Date (“YTD”)! Results were also quite nice outside of the US with diversified international stock funds averaging 6.8% in the 3Q12 and now up almost 11% YTD. DWM equity portfolios enjoyed these run-ups.

Bonds chugged along with the riskier debt securities seeing more inflows and thus better returns. This was evidenced by the Barclays Capt’l US Aggregate Bond Index being only up a respectable 1.6% for the quarter (and almost 4% YTD) yet the Barclays US High Yield Index up 4.5% for the quarter (and 12% YTD). It should be noted that DWM fixed income portfolios have really enjoyed great performance both on the quarter and YTD and as such is reflected in your overall return. 

 Our DWM Liquid Alternatives portfolio showed it participates in bullish quarters like this, up around 3.6% for the qtr and up almost 9% YTD. This alternative part of the portfolio will really be needed when, not if, equities markets (and fixed income markets for that matter) turn bearish. 

Nice results, huh?! Unfortunately, that’s where most of the good news ends. Besides some improving housing data, which simply shows a bounce off a very low bottom, it really isn’t pretty out there. Now is not the time to “get out the Dom Perignon” and start dancing in the streets. Now is the time, for those who aren’t DWM clients, to make sure you have reviewed your financial plan, your risk tolerance, and your portfolio asset allocation to make sure it’s ready for the challenging near-term future. DWM clients already have these areas covered. We have many potential big risk events on the horizon: the Presidential Election, a possible replay of the debt ceiling debacle, and then the possible Fiscal Cliff, which is the term referring to the simultaneous spending cuts and tax increases that are slated to take place at the end of 2012 unless Congress takes action and actually comes to agreement on something. 

Frankly, this is a good example to show it’s impossible to time the stock market, as it does not necessarily operate in-line with fundamental data. It’s another reason why a well-diversified, low-cost, multiple asset allocation approach like ours is so prudent in times like these. Rather than trying to “time it”, we use disciplined strategies and vehicles to produce stable and steady returns over time, thereby helping you achieve your long-term financial goals. 

Hope to see you at one of our Fall seminars in either Charleston or Palatine where we will discuss these important items in more detail.  

Brett M. Detterbeck, CFA, CFP®


Business: The Mobile Wave is Coming to South Carolina (and the World)

No, this isn’t another Hurricane Hugo. Yet it is disruptive and transformational. It’s the mobile wave. And, it’s bringing radical changes.

The Agricultural Revolution took place over thousands of years. The Industrial Revolution took centuries. Now the Information Revolution is expected to achieve huge changes in our lives and businesses in a matter of decades.

Michael Saylor’s recent book, The Mobile Wave: How Mobile Intelligence will Change Everything presents an excellent overview of the evolution of mobile computing and what the future may hold. Main frames, minicomputers, personal computers, the Internet PC have led to the fifth wave, mobile computing which features:

  • Multi-touch with an interface that is fun and easy and the use of shapes not symbols
  • Widely affordable
  • Longer battery life
  • Instant-on to for immediate information and communication
  • Apps that inexpensively perform a range of tasks easily and quickly
  • Sensing the world around us through GPS, voice commands, scanning and cameras
  • Easy to carry and available anywhere, anytime.

Is it any surprise that as a result of the mobile wave traditional bricks-and-mortar businesses are being upended, and a huge global digital economy is being created? Paper, credit cards, cash, doctor’s office visits and perhaps classrooms may be obsolete soon.

Two weeks ago, the Charleston area Chamber of Commerce hosted an event featuring ten start-ups focused on “riding the mobile wave.” They were the winners of a competition sponsored by Greenville’s Iron Yard, an organization dedicated to providing innovation, education, mentoring and capital to create a thriving start-up community and develop young entrepreneurs. There were 321 applicants this year from 19 countries.   

Companies included web or mobile products for targeting grocery ads, safe ride-sharing, highlighting athletic accomplishments for non-professional athletes, and others. These energetic, bright (many have Masters or Doctorates in computer science) entrepreneurs have plans to be part of the huge, growing mobile wave. It was exciting to meet these young leaders and to hear their plans and enthusiasm. They get it.

We’ve already seen this year the impact that mobile devices and social networks have had on politics in Europe, The United States, the Middle East and around the world. Mr. Saylor believes that the combined forces of mobile and social software may transform 50% of the world’s GDP in the coming decade. This would remake businesses, industries and economies. By 2025, we may see an almost universal use of mobile computers as our primary means of navigating through modern society.

The Mobile Wave is happening, bringing radical change. We’re right in the midst of this third major revolution, undoubtedly one of the most exciting periods in history.