First, there is a huge sell-off in stocks starting in 2008; then, the big rally back higher this past year.  It really didn’t matter what stock you owned in either case as most moved in tandem. 

Now what?  In general, I would argue that stocks aren’t overly cheap; and, stocks aren’t extremely overpriced.  So, what do you do in this confusing time?

In a recent article in The New York Times titled When Stocks Stop Moving Like a Herd, Paul Lim gets it right in several respects:

It is easier to invest when all you have to do is jump in when everything is moving up, like the past year, and critical thinking about specific investments is less relevant.  Just get the direction right and you win…but that dynamic is changing fast.

The equity markets appear to be moving towards an environment that will reward those who can find value.  You can still purchase growth stocks, but it would behoove you not to overpay for them.

Active management can be a key contributor to performance during this type of uncertainty because of the opportunity to tilt your portfolio towards undervalued investments and adjust to new information.

The quality of your advisor will play a big part in the results you see over the next few years.  A well-defined investment process and experienced team is as important as ever.

Keeping Paul’s ideas in mind, I wanted to give you a few tips that could really help your portfolio results during the next few years.

1. Review how much of your portfolio is indexed versus actively managed — I would argue that a higher allocation to actively managed assets is appropriate in this uncertain economic environment.  Increasing volatility expands the chances of finding interesting opportunities.
2. Make sure your investment selection process includes a valuation screen and doesn’t just focus on growth.  If history repeats itself, we could see value stocks outperform growth stocks in the years ahead. (Note:  We believe our internal stock strategy of growth at a reasonable price is particularly timely in this type of economic environment.)
3. Evaluate your advisor’s investment philosophy and strategy — can they communicate it to you so you understand it?  Does it make sense to you?  Did they stick to it or did they abandon it during the recent financial meltdown?  What did they learn during the past few years and what adjustments are they making?  A high quality advisor is more important now, than ever.

Do you have any investment tips to add that you’ve been successful with?

Honestly, this is a tough one for me to discuss and for most financial advisors worth their salt.  Why?  Because no one likes to get fired, especially if you are doing your best work and honestly care about your clients and want to do so in a truly professional manner.

However, there are times when…it’s time!  What do I mean by that? 

Well, the best way to describe it is by focusing on the best advisor-client relationships I have had over the past twenty years, and the common characteristics of those relationships.  Hopefully, this will provide you with a way to evaluate your current advisory relationship and make the determination yourself.

Best Relationship Themes:

Authenticity—Openness and transparency about who you are as a person and what you care about.  Living in your own integrity and not trying to be more or less than you really are.

Compassion—True care and concern for the other person and their life that transcends any type of financial arrangement or service expectations. 

Gratitude—Appreciation for the contribution the other person makes to the shared life journey.

Grace—A willingness to allow the other person to grow and change as they live their life.  Forgiveness when the outcome isn’t as expected.  Patience to allow adjustments to occur.

There are others that could have easily been selected and arguably are also important like effective communication, shared expectations, and commitment; however, these four themes separate the excellent relationship experiences from just the average. And, since we have a choice, don’t we all want the best relationships possible?

If you don’t have these themes in your advisory relationship, is it time for you to make a change?

David Swensen, the brain behind the well-chronicled success of the Yale Endowment investment portfolio, pioneered an approach that pushed the boundaries of traditional portfolio management.  By adding large concentrations of illiquid assets (real estate, private equity, hedge funds) to the traditional liquid portfolio, he produced excellent results, especially during the tech bubble of 2000. 

As you might have guessed, just about the time individuals and large institutions started copying Yale (and Swensen), the strategy had a tough year last year and produced large losses.

Why the Yale Model of Investing Doesn’t Work for Everybody – Justin Fox – Harvard Business Review

I recently read this insightful blog post by Justin Fox at Harvard Business Review and took away five key points that I thought wealth creators could benefit from and I’m sharing them with you. 

1. Don’t chase yesterday’s stars — By the time the strategy is well documented and discovered and lots of money has poured in, the excess return provided by the approach is usually gone. 
2. Keep learning— Swensen and team don’t keep static portfolio allocations.  Theirs isn’t a buy-and-hold-type approach.  The strategy stays the same, but they adjust their portfolio allocations to match what they believe will happen in the future based on research, judgment, and experience.
3. Stick with it— One of the reasons that Swensen (or Buffett for that matter), is successful is that he has developed a strategy for investing and he has the patience and gumption to stick with his approach and believe in it over the long term.  One bad year doesn’t cause the strategy to change.
4. Trust is required — Find a good, smart person (or team) to run a strategy, especially a person who is in it for the long haul, and then don’t dwell excessively on quarter to quarter results.
5. Design the strategy for your needs — Yale’s model works partly because it is good for Yale.  It was designed and executed for their needs and requirements not someone else. 

How does your portfolio strategy stack-up to this?

We just added to the Learning Center a new investment resource that helps explain the benefits of portfolio diversification.   

Using historical returns of stocks, bonds, and diversified portfolio mixes, we summarize the performance outcomes for the best, worst, and median 10-year periods. 

Our research shows the following:

1.  Lower portfolio volatility means less risk of decline in portfolio value.

2.  Stocks win when they are doing well but diversified portfolios do better when times are tough.

3.  Diversified portfolios provide better risk-adjusted returns.

Note:  Remember that historical performance is not a guarantee of future results.

We just went through a fascinating core values process answering the question:  What do we believe in? 

The one that jumped out first was that we care about people.

At Highland, this value is at the core of who we are as individuals and as a team.  It has such a strong presence that if you don’t care about people, and genuinely helping them, you probably won’t fit in very long. 

Why does this matter?

Well, our hope and desire is that this core belief will yield the following implications for those who come into contact with us giving off the following benefits: 

We will be proactive in addressing client needs before they are aware of them. 

We will tailor our services to clients needs and not expect them to understand our process. 

Our goal is that every interaction with us will be pleasant and leave clients feeling energized and empowered.   

We will enhance our clients’ lives.

We will reduce stress and worry so clients are free to pursue the things they value most.

We will enable our clients’ to live their life without thinking about money. 

This may sound too good to be true or some kind of “Four Seasons of wealth management”, but this is what we are attempting to do.

For anyone who has stayed at a Four Seasons Resort, you immediately appreciate that the experience is designed to be very different from what you might find at any other hotel.

Employees (from front desk to maintenance) smile and say hello when they pass you; they ask how to make your stay better; they understand that they are providing you with an exceptional experience and not just another hotel transaction. 

I am willing to pay more for that experience because it makes my life better and more enjoyable.

Is your financial life the best it can be?  If you aren’t sure, take our quick wealth diagnostic and find out. 

Isn’t it interesting how exceptional service can improve our lives?  It’s also funny how it can catch us off guard when it happens.

Why is this true? 

For starters, we have gotten used to poor service — from banks to airlines to restaurants — so we don’t expect anything better.  We have lowered the bar for service too far. 

Because I am a west coast guy, I typically fly Alaska Airlines on most of my personal and business trips, and most of them are good experiences. However, you don’t have to spend much time traveling to find out that so few people in the travel chain seem to care anymore, e.g. hotel staff security, ticket agents, and many flight attendants.  Maybe they’re so burned-out from frustrated and irritable travelers that they have lost the ability to care. 

I want more than just a plane flight when I travel. I want an experience that includes comfort, service, and someone who cares about and will respond to my needs.

I like it when I arrive at my hotel and people smile and say hello, and when they ask me how I am doing and if there is anything I need to make my stay better.  I like it when I pick up my rental car and the location is convenient and I can pick up and drop off the car easily and quickly.  I like it when I arrive at the airport and the ticket agents and flight crew are happy, friendly, and pleasant and go out of their way to make my travel experience excellent. 

The funny thing is that we accept and expect much less most of the time.  Receiving better service starts with expecting more. 

Are you settling for poor service in some area of your life?  How can we as individuals raise the bar?