Conversations - Fall 1999
LWA NEWS
Diahann
will be attending the 1999 Women’s Economic Summit of the Americas in Buenos
Aires, Argentina in November representing NAWBO as Immediate Past President. Diahann
is scheduled to appear on CNBC’s Power Lunch with Bill Griffeth at 12:50 in
the afternoon on: 11/17 and 12/8. We
would like to add everyone’s e-mail address to our database.
If you have not given us your e-mail address, we would appreciate it if
you would send it to Robin Rabin, our Administrative Services Manager.
You can e-mail Robin at robin@lassuswherley.com. MAXIMIZING YOUR
RELATIONSHIP WITH LWA AND YOUR FINANCIAL ADVISOR
Like
all good relationships, your relationship with LWA and the LWA staff should be
based on trust and respect. Managing
your investments is a team effort and you are the team leader.
For us to effectively manage your portfolio requires information and
direction from you. The
following are some things that you can do to facilitate our relationship and
maximize the service that we offer to you.
First,
be specific about your goals and concerns.
We cannot address questions or concerns unless we are aware of them.
For most clients, the best way to communicate questions and concerns is
in a letter or e-mail. This allows
you time to prepare your questions and review them before sending them to us.
We find that this format generally results in the most complete question
from you and allows us to provide the most complete answer. Second, read your mail.
We know you get a lot of it from Schwab and us.
The information that we send you are things that we feel you should be
informed about. One of the
characteristics commonly shared by people who are considered financially
successful is that they make their personal investments a priority. They spend time periodically reviewing reports and investment
information. Third, expect market
fluctuations. The stock market is
the talk of the day all over America, but the day-to-day fluctuations have very,
very little impact on the long-term investor.
The market’s ups and downs make for interesting dinner conversation,
but that should be the extent of it. You
should not expect to see us revise your portfolio for ups and downs in the
current market. Finally, ask questions.
You are in charge. If you do not understand something, please ask us to explain
it. 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 Rebalancing. For the last of the four articles, next
quarter we will cover Tax Issues on Investments. REBALANCING
Asset
Allocation, the process we use to distribute a client’s portfolio amongst the
various asset categories, was discussed last quarter. As we reported then, much academic research has been directed
at asset allocation and choosing the optimal mix of investments.
Many studies have shown that formation of the asset allocation is the
most important determinant of portfolio performances. No one would
dispute the importance of asset allocation. The topic receives a lot of press coverage, but it is the
rebalancing that makes the asset allocation work. Without rebalancing, the portfolio would not look like the
original asset allocation within several months. Rebalancing is
the periodic process of bringing the portfolio asset mix back into line with the
asset allocation model. Generally
this means that we recommend that a client sell a portion of the assets that
have performed well and invest in the asset categories that are currently
performing at lower levels of return. While it is
tempting to hold and ride with the best performers, many studies have shown that
a disciplined approach to taking profits and rebalancing produces the best
long-term return. Rebalancing
forces us to sell some of an asset or mutual fund when the investment is high
and invest in another asset when its price is depressed.
We are not timing the market or waiting for the market to peak.
It is a simple disciplined approach to pruning the portfolio. As simple as it
sounds, it is often the step that gives investors the most trouble.
Psychologically, it is so much easier to hold on to the winners and dump
the losers. Rebalancing requires us to do the opposite.
Sell some of the winners and invest in some of the losers (slower
performing segments of the market). Our financial
planners often tell new clients, that the rebalancing is the most important
service we will offer. The concept
is simple, but completing the task takes a lot of discipline. At LWA, we are
continually looking at clients’ portfolios for rebalancing.
These are times when no action is required. The academic
research indicates that rebalancing does not need to be done every time the
portfolio varies from the allocation. Variations
of 5 to 10% are usually considered to be the point where the optimal rebalancing
should occur. Smaller variations
may not be beneficial enough to cover the associated transaction costs.
For the past two years, rebalancing has meant selling equity funds and
investing in debt funds for many of our clients. By using
rebalancing, we have captured some of the gains created by this market and
transferred the investment to under performing segments, generally debt funds. The basic
premise of investing is to buy low and sell high.
Our disciplined approach assures that we do this. A diversified
portfolio, developed from a thoughtfully prepared asset allocation, which is
rebalanced regularly, has been proven to produce the best long-term results. Next quarter we
look at the tax impact of mutual fund investing, just in time for tax season!! MUTUAL FUND HIGHLIGHT
The
Janus Fund has been on our Recommended List for a long time and for good reason.
It is a Large Cap Growth fund that has good long-term performance (3-year
annualized total return of 28% ending 8/99), an experienced manager (Jim Craig
for 13 years), low expense ratio (more money in your pocket) and low portfolio
turnover (lower taxes). The manager
uses a bottom-up approach to choosing investments, looking at the companies, not
the economy, emphasizing companies with strong growth potential. In your portfolio, you will most likely have a mix of passive funds (index) and active funds (stock picking). It is important to have actively managed funds that have a consistent track record without high volatility (wide swings in performance). Janus fits this profile because the manager has a proven track record that has brought him through some tough times. In fact, this fund has had its share of tough years where it could barely keep up with the S&P 500 Index. At one point we took it off our Recommended List for a while. Now it’s back. That’s because it is hard to find funds in the Large Cap Growth asset category that can beat the S&P 500 Index over time. We are constantly watching the funds on our list for changes in investment strategy or poor performance. Janus has proven that even if they stray off course, they can put it back together.
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