Conversations - Summer 1999
LWA NEWSWe are currently in the process of redesigning our
web site. The design team is
working on a layout that is much more client focused.
We will keep you posted on the results and the date of its unveiling. Diahann volunteered her time to help staff the USA
Today’s Investment Planning Hot Line on July 8 in Dallas.
The Hot Line was part of the Institute of Certified Financial Planners’
annual conference. Diahann attended the annual meeting of the World
Association of Women Entrepreneurs in Brussels, Belgium.
Clare accompanied her and was able to meet with one of our clients who
lives in Brussels. Diahann’s scheduled dates for appearance on
CNBC’s Power Lunch with Bill Griffith at 12:50 in the afternoon are:
8/19, 9/8, and 9/27. TAX/ESTATE PLANNING
ACTION REQUIRED The House of Representatives in Washington saw the
introduction of two bills to revise the estate and gift tax structure.
Both bills were referred to the House Ways and Means Committee for
consideration. HR 8 Proposes to phase out the estate and gift tax over a
ten-year period. HR 86 Calls for the immediate repeal of the estate, gift
and generation-skipping transfer taxes. It is extremely important that you call your
Congressmen and Senators to voice your support for the elimination of death
taxes. As you know, this tax gives
up to 55% of your assets to the government when you die. So pick up those phones, write those letters, and send
those e-mails today. Passage
of these bills would substantially streamline the estate planning process for
most of you, while maintaining more of your assets to benefit your heirs.
If you need more information on who to contact, please let us know. We
are continuing our series on Investment Topics. As you may recall from our last newsletter, we plan to run a
series of four articles this year on investment principles that address some of
the typical questions you ask us. Each quarter we will highlight an investment topic that we think might be of interest to you. This quarter’s topic is Asset Allocation. For the remaining two quarters, we will cover Rebalancing and the Tax Issues on Investments. ASSET
ALLOCATION CONCEPTS
Asset
Allocation is the process financial planners use to distribute a client’s
portfolio amongst the various asset categories; for example, large growth
stocks, intermediate bonds, real estate, money market instruments, etc.
Selecting the appropriate asset allocation, implementing it and
maintaining (called rebalancing) it are the most important determinants of
investment success. Several
respected studies have shown that investment policy (asset allocation) was the
most important determinant of portfolio performance. In one widely quoted study of investment performance of
pension plans, 94% of the performance was attributable to asset allocation, with
the remaining 6% attributable to factors such as market timing and security
selection. Market
timing and security analysis, policies used by day traders and many others,
often receive a disproportionate share of the financial press’s attention.
Asset Allocation is often regulated to the back pages, if addressed at
all. When designing a client’s asset allocation, the
financial planner develops an optimal portfolio by considering and offsetting a
client’s ability to assume risk with their need for growth (performance) in
the portfolio. Asset classes are
included at various percentages based on their ability to contribute to
performance and offset risk. At Lassus Wherley and Associates, we develop custom
asset allocations for each client based on their risk tolerance, growth needs,
and overall financial goals. To
design these portfolios we use statistical software that calculates future
average annual returns over a long period of time and volatility (risk) for
various asset classes and market expectations, developed by Diahann and the
Investment Team. Asset classes are considered for the mix, based on
their ability to meet the overall financial goals and their contribution to
long-term performance. We are
looking for asset classes that will work efficiently together in the portfolio.
Ideally, a portfolio will include assets that perform well in various
market situations, such that some component of the portfolio is always reaching
its optimal performance conditions. A
client’s overall financial situation and goals also have to be considered in
designing the portfolio. For
example, real estate investment trusts (funds that invest primarily in
commercial real estate) can be extremely useful in designing an asset
allocation. Many of you will note
that these were not included in your allocation.
The reason for many of you is that you already hold a very substantial
real estate investment—your home. Additional
real estate investment may not be prudent for you. If
the financial goal is shorter in nature, many asset classes will be excluded by
the planner because their market cycle is too long for the stated goal.
For example, a college savings account where the child will need the
funds in two years, will have a very limited selection of asset classes
available for investment because of the risk that many asset classes could be
undervalued when the funds are needed. As
many of us here at LWA tell you our clients, our families and friends, asset
allocation is not glamorous, front-page financial news.
It doesn’t return the absolute highest return in any short-term period,
nor does it return the lowest. For
the long-term, it is a proven winner for those who can hold the course.
It is straightforward, solid investment strategy that requires insight
into the various asset classes and discipline.
More
on the discipline next quarter, when we address Rebalancing. MUTUAL FUND HIGHLIGHT
This quarter
since we are addressing asset allocation, we thought that it would be a good
idea to spotlight a fund that has a unique role in a portfolio – the Rydex OTC
Fund. The fund typically holds a representative sample of securities included in
the NASDAQ 100 index. The Rydex OTC
Fund is unique in that it falls into the Large Cap Growth asset category, yet
the fund holds over 65% of tech stocks which makes it look more like a specialty
technology fund. The fund is heavily weighted in the tech sector, making it very
risky because of its volatility (it may have wide swings in performance).
This fund would fit into a portfolio that already has a good base in a
diversified large cap fund, like an index fund that follows the S&P500
index. While you might say that other funds also hold tech stocks,
it is the concentration that makes the Rydex OTC Fund. Another
aspect of the Rydex OTC Fund is that they openly accept market timers into the
fund. This greatly increases the
portfolio turnover and potentially the risk level of the fund. The fund’s
manager, Mike Byrum, sticks to only the largest and most liquid stocks, which
has given it a huge advantage over the typical technology offering in recent
years. The recent performance has
made this fund a top performer – for now.
However, the volatility means you really
have to focus on the long term to hold this fund.
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