Tag Archives: Investment Policy

The Signal and the Noise (Part 1)

How can we concentrate on what matters?

Radio frequency doubler. Source: Wikipedia

Between Twitter and newspapers and talking-heads and junk mail proclaiming the next turn in the market, what’s a long-term investor to do? How can we stay focused on what we need to know without being distracted by all the noise?

The first step is to understand that most of what’s on the airwaves is static—background verbal clutter of no more consequence than elevator music. The real news that matters for your investing is the news you already know: you just had a child and need to start a college fund; you just turned 50 and can increase your retirement savings contributions; elderly parents needs to arrange their finances to reduce taxes.

Our most significant investment decisions should be driven by our life circumstances. And while those don’t usually make the 10 o’clock news, they’re what we need to concentrate on when we allocate assets, think about investment styles, and even pick stocks and bonds. An effective investment policy starts with the investor – their needs, constraints, resources, and personal concerns. This is what strategic investing is all about: strategies that are tailored to our personal needs.

Sunday morning talk shows may be important for public policy, but our evening kitchen-table-talk is what matters most for our investment policy.

Douglas R. Tengdin, CFA

Investing Rationally?

What do investors want?

Photo: Simon Steinberger. Source: Pixabay

Fifty years ago analysts assumed that all investors should care about is getting high returns with low risk. People who traded a lot, or concentrated their portfolios, or did something other than what conventional finance recommended were labeled irrational.

But what we do seems rational to us at the time. A dress from Filene’s Basement may be just as functional as a $2,000 designer dress, but it may not be as beautiful, or it may not convey the right message those around us. Clothes have a utilitarian purpose, but they also serve our expressive and emotional needs.

The same thing happens when we invest. We want the same things from our investments that we want from the rest of life. We want to feel secure. We want to be true to our values. We want to believe that we can do better. And we don’t want someone taking advantage of us. Our finances should serve these larger objectives – toward the goal of our well-being.

That’s why a company that has no debt, strong management, and a high growth rate may not be a good investment for you if it keeps you up at night. At the same time, we need to know – not just believe – that diversification works: trees don’t grow straight to heaven, and what’s out-of-fashion eventually changes places with what’s in fashion. Investing is an ever-shifting kaleidoscope of fundamentals, trends, and economics.

Artist: Martha Sky Radford. Source: Wikipedia

Behavioral finance teaches us that how we invest can be just as important was what we invest in. Investors want what everyone wants: to feel good about their money.

Douglas R. Tengdin, CFA

Chief Investment Officer

Buy, Sell, or Jump?

Is the market on the edge of a cliff?

Photo: Mercy from Wikimedia Commons: Source: Wikipedia

That’s what a lot of smart people are saying. They cite our political mess, our slow-growth economy, negative interest rates in Europe and Japan, rising corporate leverage, and accounting tricks and they figure a crash must be coming. So, with the stock market flirting with record highs and bond yields near record lows, is it time to sell everything?

The short answer is, probably not. It’s almost never a good idea to panic. The longer answer is, it depends. But it doesn’t depend on the market or the economy. It depends on you. Your investment profile should be determined by your goals and limitations: what you want your money to accomplish; how soon you need cash; what your tax situation is; what other unique factors you may face; and so on. Your investments are just part of your total financial profile.

People have specific needs, like saving for retirement, or funding their kids’ college education. They need most their savings to make these things happen. It’s all well and good for Bill Gross or Jeffrey Gundlach or some other hedge-fund billionaire to say the world is about to end and you should stock up on canned goods and potable water. For them, stashing a million dollars in a flower pot is a drop in the bucket.

But most of us need our money to keep working for us. We can’t afford to play games with it. Stocks may be making new highs, but that doesn’t mean they won’t keep moving higher. And just because interest rates are low doesn’t mean they can’t move lower.

Photo: Eva Kröcher. Source: Wikipedia

It’s dangerous to structure your investments based on what someone else is doing. They’re not thinking about your needs or desires. It’s even more dangerous change what you’re doing based on what some high-profile celebrity is saying. Apart from the fact that billionaires are different from you and me, they’re often “talking their book” – making public comments that support their current investments. This could be malicious, or it could simply be our natural tendency to focus on information that supports what we already believe.

So, is this a good time to sell? If you can’t live with the risk of a significant downturn, sure. If your investment plan requires you to periodically sell stocks, doing so at or near a market high can be a good idea. But this isn’t necessarily a bad time to buy, either. Markets can keep going longer than people expect. Folks who moved their retirement funds into cash when then-Fed Chair Alan Greenspan spoke of irrational exuberance in the stock market watched it more than double over the next four years. And it never came back to that level in the bear market that followed.

S&P 500 during the late ‘90s. Source: Bloomberg

So don’t panic just because some financial guru says we’re facing financial Armageddon. I can’t remember a time when the talking heads on TV didn’t say that. The market has probably already “priced in” their issues. That’s why bull markets climb a wall of worry. The time to really get concerned is when no one else is.

Douglas R. Tengdin, CFA

Chief Investment Officer

On Tipping (Part 1)

Psst: want a quick stock tip?

Photo: Stuart J. Whitmore. Source: Morguefile

Lots of folks ask me for a quick tip. It’s natural when they hear that I help people manage their money. After all, if you can find the next 10-bagger before it goes parabolic, you could spin the straw of your savings account into retirement gold. Or we think.

But investing isn’t like that. It’s not about getting lucky. When we invest, we put our money to work among economic enterprises where we don’t know the future. That’s an inherently risky undertaking. So many things can go wrong: the economy could fall into recession, gridlock might shut the government down, fickle consumer tastes can change.

But competent business managers can cope with change and even thrive. And contrary to Dilbert’s vision of the pointy-haired boss, most managers are competent. That’s why IBM has been able to reinvent itself four times during the last four decades. That’s why Apple could create the whole notion of mobile computing. A growing economy means more good things happen than bad things. We just don’t know what we don’t know.

Photo: Laura Musikanski. Source: Morguefile

But what we do know is our own plans and aspirations. If we understand ourselves—what we need, how much risk we can handle, how soon we need the money—that knowledge implies certain things about how to invest and what to buy and sell. That’s why investment advice should be tailored to the person receiving it. Not everyone can handle investing in tech stocks. Not everyone should. Sound investment decisions grow out of a deep understanding of our present and future financial assets, liabilities, income, and expenses. It’s more like accounting than gambling.

So, want a quick investment tip? Make a plan.

Douglas R. Tengdin, CFA

Chief Investment Officer

Driving, Putting, and Asset Allocation

“Drive for show, putt for dough.”



Bob Hope putting in the Oval Office. Photo: Oliver Atkins. Source: National Archives.

That’s an old golf saying – attributed to Bobby Locke, the South African golfer dominant in the ‘40s and ‘50s. He won the British Open four times in eight years. He was so good that he was banned from the PGA Tour. He didn’t drive the ball very far from the tee, but on the putting greens he was a genius. He had an unorthodox style that put a tremendous amount of overspin on the ball, and he had a great eye for reading breaks.

Putting isn’t very flashy or photogenic. It doesn’t generate those iconic images of golfers with a club over the shoulder, staring down the fairway. But skill on the greens can take a lot of strokes off your score. After all, on an average golf course you use your driver 14 times or so, and your putter 30 or 40 times.

In investment management, there’s a similar expression: forecasts are for show, investment policy and asset allocation are for dough. It’s exciting to talk about what the market is doing, what the next challenge is for the economy, what Washington might or might not do with tax policy. Forecasts get featured on in the papers and on financial news shows. It’s wonky to get into earnings and revenue projections for the entire market and for individual securities.

But it’s in the nitty-gritty of investment policy and financial planning that the real money is made. What’s the money for? Could we tolerate a 50% downturn? How quickly will we need to use these funds? These kinds of questions don’t make headlines, but they’re the real money-makers for individuals and institutions putting cash to work in the markets. It’s been estimated that asset allocation is responsible for 70% to 90% of the variation in investment portfolio performance.

Source: Wikipedia

So don’t get freaked out by the latest news about North Dakota’s budget problems or Chinese industrial production or some mega-store’s earnings-per-share. These things are interesting, but what really counts how our investments fit into our lives—or our organization’s income and expenses. In other words, what our investment policy is. That’s the simplest way to take “strokes off the game” in finance.

Because it doesn’t matter that much how far you drive off the first tee. It’s the final score that counts.

Douglas R. Tengdin, CFA

Chief Investment Officer

Time Management?

Time Management?

Time is our most precious resource.

Source: Pixabay

We can’t make more of it, it’s difficult to manage, and everyone wants some of yours. We can try to stretch time, to enjoy an event or experience for longer, but the clock ticks relentlessly forward: time waits for no one.

When we’re investing, the length of time an investment can be held is the single most important factor to consider. Given enough time, risky investments become safe, and safe investments become risky. Over the last 30 years, risk-free T-Bills have averaged 3.3% per year—barely above inflation. By contrast, the S&P 500—with all its ups and downs–has grown 10.6% per year.

Source: Bloomberg

If your goal is to retire in 30 years, safe investments don’t help very much. But if you want to retire in 5 years or less, having all your money in stocks is foolish. There can be multi-year periods where you’d have to draw on the funds when the market is down.

Safe investments keep you from having to sell stocks after they’ve fallen—turning temporary price fluctuations into permanent losses. But the longest duration investments—those that in the short-run are the most volatile—are the ones that return the most over a long period.

Having an investment plan that takes time into account is critical to investment success. Because there’s always enough time, if we use it well.

Douglas R. Tengdin, CFA

Chief Investment Officer

Timing Is Everything

How important is time to an investor?

Photo: Petr Broz. Source: Wikipedia

The length of time investors have to plan for is the single most powerful factor in their investment process. If time is short, investments with the highest potential return are the least desirable, because they entail the greatest risk. But given enough time, assets that appear risky become desirable. Time transforms investments from least attractive to most attractive—and vice versa. Our time horizon has a major impact on our investment strategy.

This is true in the natural world as well. I’ve been to the coastal redwoods in California, and they’re awesome. John Steinbeck called them “ambassadors from another time.” In many ways, they are. They regularly reach ages of 600 years or more, and some are over 2000 years old. Their natural resistance to disease and insects allows them to grow slowly and gradually. But they have to. The high rainfall in their coastal habitat leaves the soil with few nutrients.

By contrast, stumbling into a thicket of pin cherries in the Northeast woods can leave you breathless, but in a different way. The undergrowth can be so thick it’s easy to get disoriented. Pin cherry trees sprout and grow quickly, taking advantage of any disturbance in the forest canopy. But they only live 20 to 40 years, and they’re an important source of food for many types of animals.

It would be foolish to say that either tree is more successful. Each has adapted to its environment. What works in one context doesn’t work in another. That’s why, for investors, the typical time period we use to calculate returns—one year—may be misleading. A single year simply doesn’t match the time available to different investors with their differing objectives and constraints. Different assets—and asset mixes—are appropriate in different circumstances.

Average return and dispersion of return for various asset classes over different time periods, 1926-2010.

Source: Jay Sanders, CPA

So if you’re worried about the market, be sure to ask yourself how much time you have until you need the money. Because the quickest way to turn a temporary fluctuation into a permanent loss is to sell the asset.

Douglas R. Tengdin, CFA

Chief Investment Officer

Trading vs. Investing

Are you a trader or investor?

Source: Gratisography

I started out as a trader. In the ‘80s I bought and sold Treasury Notes and Bonds—as well as futures and options—almost every day for a mid-sized bank. I used technical and fundamental analysis, subscribed to charting services, and practically lived on my phone. Trading was a tonic that got into my blood.

Continue reading Trading vs. Investing

It’s the Process, Stupid

The dollar is strengthening. Is it time to sell? Stocks have pulled back. Is it time to buy? Interest rates are rising–wait, no they’ve fallen. And the economy is uncertain. What’s an investor to do?

Source: Wikipedia

When investors get caught up in the latest economic or political news, their portfolios can begin to look like a “Rube Goldberg” device: over-engineered and underperforming. This became clear last week, Continue reading It’s the Process, Stupid

The Heroic Investor

Can investors be heroes?

The early epics are sometimes called heroic literature. They start and finish with a singular character. The Illiad, Odyssey, and Aeneid are epic poems that focus on Achilles, Odysseus, and Aeneas respectively, with their particular character qualities. Generations of readers have heard or read of Achilles’ strength, Odysseus’ cunning, or Aeneas’ leadership through these works. Each one of them uses his particular ability to accomplish his mission. But they must also overcome distractions or obstacles would keep them from reaching their goals.

In the same way, investors should focus on their own particular strengths and avoid getting sidetracked. All of us has something we’re good at–whether it’s on the job, or a hobby, or just some area that fascinates us. These particular skills or interests can give us insight into a business or company. For example, if you like to go fishing, you may know which companies make the best-selling boats, tackle, and beer-coolers. You can use that information when you invest.

At the same time, each of us knows why we want to invest—what our objectives are. In fact, we’re the only ones who do. It’s crucial that we articulate what we want in order to get where we need to go. A written investment policy is a good start.

The Greek and Roman heroes had special skills but also had special trials to overcome. Investors should try to understand and adapt to their own strengths and weaknesses as they try to get where they’re going.

Douglas R. Tengdin, CFA

Chief Investment Officer