Part 2 of 2: Your Financial Wellness is Like Going to the Doctor; Take our Financial Wellness Assessment

doctor-chartLast week, I talked about how comprehensive financial planning is an on-going job and not a one-time shot in the dark. That being said, everyone needs a starting point. For those of you already working with a professional financial planner like DWM, you’re on the right track. For those of you who aren’t, you may want to try our complimentary Financial Wellness Assessment.

It’s found by clicking below or going to our home page and clicking on the button: Button

The “test” takes only about 5 minutes. There are questions relating to your planning for retirement, to specifics about your employer-sponsored retirement plan, to estate planning, insurance, etc. You also have the option, although it is not required, to provide your portfolio details so DWM can provide specific follow-up. 

After the inputs have been entered, you will receive a Financial Wellness Scorecard identifying what areas – like goals, insurance, investments, mortgage, etc – are in need of improvement, on track, or are in good status.

Please note: By no means is this tool a substitute for real comprehensive financial planning. However, it is a really nice way for those that haven’t fully dived into financial planning yet to get their toes wet and get a quick, painless glimpse into the financial planning world. And based on the results, it could present a starting point for crucial needs you may have, and what areas a professional wealth manager like DWM could help you with.

So go ahead and take the DWM Financial Wellness Assessment today and think about getting that “baseline” I talked about in last week’s blog. By the way, I recently went back for a check-up physical and got the results. Since I already had my baseline, I wasn’t only able to see what looked like pretty good results but also that my numbers had improved since the initial visit. The “trend is my friend”. Is your financial trend your friend?

Part 1 of 2: Your Financial Wellness is Like Going to the Doctor; ESTABLISH A “BASELINE”

doctor-chartIt wasn’t too long ago that I turned 40 years old. That magic number really didn’t do much for me. I felt the same mentally as I did 15 years earlier. Physically, I felt generally the same too; definitely playing more basketball now than I ever did. But when one turns 40, everyone pushes you to start seeing the doctor on a regular basis. I never had a regular doctor; never needed one. But here I was a day over 40 and like a good boy, I looked up the local doc and scheduled myself a physical. This included going in once for blood work and then basically a follow-up with the doc to go over the results. Pretty painless really.

The good news is that they doc said everything looked pretty good. But the most important thing was that we now had a BASELINE to compare against for future tests.

As I thought about it, this is very similar to what we do for our clients. Since DWM started over a dozen of years ago, we have helped our clients with comprehensive financial planning. Clients provide complete and accurate data, and using our expertise along with our state-of-the-art software, we help them develop a goal-based comprehensive plan. We give them 24/7 access via the cloud and regularly review and update the plan/scenarios.

When clients start the financial planning process, it’s very similar to that first physical I took a couple years back. The data they provide is pretty raw and usually we have little to compare to. In fact, many have to consciously track their spending for several months before they have a good feel for what it is. Data is not always so “black and white” and may need some work. But that’s okay! By developing an initial plan, one that may really be a “rough draft”, we in essence have created that BASELINE for future planning.

Once this BASELINE or initial plan is developed, it can be tweaked and updated for changes to the client’s livelihood. Furthermore, the client while working along with DWM, knows what they’re looking for now to make the plan more relevant and thus a better guide for their long-term situation.

Because at the end of the day, the plan is only as good as the assumptions built into it. If someone wants to kid themselves that they’re going to win the lottery in 10 years and be able to ride off into the sunset, the plan is frankly a fraud and worthless to the client and the planner involved. On the other hand, by putting forward accurate data and making realistic and/or conservative assumptions, now we have a plan that is worthwhile – one that point outs your strengths and weaknesses and what needs work, what’s on track, etc.

As one can see, this kind of comprehensive financial planning is an on-going job and not a one-time shot in the dark. That being said, everyone needs a starting point. For those of you already working with a professional financial planner like DWM, you’re on the right track. For those of you not working with DWM already and getting the ongoing service described above, stay tuned for next week’s blog on our complimentary FINANCIAL WELLNESS ASSESSMENT.

WSJ: “Actively Managed or Index Funds? Why Not Both?”

passiveactiveicecreamWe agree. We’re not alone. A recent WSJ survey showed that 42% of investors own both active and passive funds, while 36% own only actively managed funds and 22% own only index/passive funds. Some investors swear by index funds and some love only active management. It really shouldn’t be an either or decision.

Use indexes/passive funds for efficient markets. As the Economist pointed out in their February 22nd issue, “The costs of actively managed funds are higher than most investors realize”. Think of it, an active fund needs to do research, make lots of trades, spend lots on marketing to “sell” their strategy and therefore, their cost of operations can be 1.50% or more. An index fund merely replicates an index and cost can be as low as .05%. Is it any wonder that 60%-80% of actively traded equity funds fail to beat their market index each year? And, 60% to 90% of actively traded fixed income funds fail as well. Why? Active management has to overcome high fees, transaction costs and tax ramifications.

Expenses matter. A 1% difference in performance over long time periods can really add up. $100,000 invested that earns 6% for 30 years grows to $574,000. At 5%, it only grows to $432,000; a 25% reduction.

We believe that traditional capital markets work and price securities fairly. Despite what the financial press and fund marketing literature suggests, study after study shows the majority of active managers underperform. So, yes, passive/index funds are superior to active funds for equity and fixed income- traditional efficient markets. But, what about non-traditional inefficient markets?

Use actively managed funds for inefficient markets. The last two decades have seen a great proliferation of investments that are not correlated to the stock market. Many are publicly traded and easily redeemable. They often follow hedge-fund like strategies designed to reduce volatility. These liquid alternatives may include arbitrage funds, global tactical allocation funds, closed-end specialty funds, MLPS, and long/short funds. Studies have shown that adding non-correlated assets to a portfolio can improve return and reduce volatility.

These actively managed alternative funds will typically have an operating expense ratio in the 1-2% range. This is understandable. They do considerable research. Their trading costs are often higher due to the use of derivatives and lots of trades. And, yes, they have marketing costs to educate and inform prospects and clients. One benchmark for these funds might be an “absolute return” of 1-6% above LIBOR.

“Use a mix of passive and active funds to bring down overall expenses and to hedge against market crosscurrents” was the conclusion of the WSJ article March 4th. Again, we agree. The bulk of a portfolio, equities and fixed income, should be in index/passive funds, with a weighted average operating expense of perhaps .35% or lower.

Passive and active funds perform differently in various market conditions. While stocks were up 30% last year, fixed income did poorly and a basket of liquid alternatives we follow had an absolute return of 4%. Then, in January, when stocks lost 3-4%, fixed income rebounded and this basket of liquid alternatives was slightly positive. In short, a nice blend of passive and active funds is designed to help investors participate in the upside of markets and protect in down markets. And, because DWM is committed to protecting and enhancing our clients’ net worth and legacy, that works well for us and our clients. Very well, indeed.