HOFFMAN,
WHITE & KAELBER FINANCIAL SERVICES, LLC
Investment
managers & Financial Advisors
March 3, 2004
This is the March 2005 monthly Wealth Management newsletter from Hoffman, White & Kaelber Financial Services, LLC. If you do not wish to be included in our circulation, please reply indicating your desire to be removed and we will be happy to oblige. Alternatively, any of your friends or colleagues may receive this on a regular monthly basis by sending their name and email address to info@hwkfs.com. Feel free to forward this to any of your friends who may find it useful. Thanks for your interest and I hope you enjoy the letter.
What color is your parachute? Answer that riddle, and you will have opened
the door to understanding your life, your work, and perhaps what kind of
investor you are or will be.
In 1970, Richard Bolles published
the business book “What color is your parachute?” It was one of the first job-hunting books on
the market and its impact has become the mantra for many. In fact, in 1991, the Library of Congress had
noted it as one of “25 books that have shaped readers’ lives”. And, in the October 2004 airing of NPR’s
Motley Fool Show, it was revealed that the book “has sold over 8 million copies
to date and continues to remain popular to this day”.
The main emphasis of Bolles’ book
is that the job-hunter can improve their effectiveness by figuring out what
they like to do and can do well, then searching for a place that needs people
like them. He also emphasized, in a FastCompany magazine article, “if you don’t take the time
to figure out who you are and what you want to do with your life, you will be
at the mercy of all those forces out there today”.
So, you might ask, what does a book on job-hunting have to
do with investing?
Everybody has his or her own unique personality characteristics. Some people are extroverted, while others are introverted. Some people are warm and friendly while others are short and to the point. The same is true in investing. Investors have their own investing styles. Some are risk takers, willing to gamble large amounts of money on speculative investments. While others prefer the security of cash “under their mattress” even if it means that the actual buying power of their money is being eaten away by inflation.
Most people fall somewhere in between these two extremes,
willing to assume some risk, with the expectation that they’ll be rewarded with
higher returns. The amount of risk you’re
willing to take, both in terms of amounts at risk and types taken, has a lot to
do with your particular investing personality and style. When these traits are well matched with an
investment program, greater opportunities for success will exist; and, when not
well matched, the result can often be disastrous.
As mentioned in our prior newsletters, we strive to provide
articles on various aspects of wealth management to assist your understanding
of why planning for the present and for your future has importance. Yes, we also promote our services; yet, you
will find that we always seek to present thought provoking topics that are
relevant to our wide audience.
This month’s letter is the first of a two-part series that
will touch upon various types of investors, how to find your investment style,
and how to find an investing program that fits.
I suspect that new or novice investors should find this letter useful,
and I’ll not be surprised if the more experienced find it interesting as
well. Lastly, we will finish with a note
on why this year might be challenging for speculators and we’ll also update on
our investment activities.
Investor Category Types
To begin, lets start
by taking a look at the types of investors competing for investment opportunities
in the marketplace:
Individual investors. People who fall in this category are persons
who manage their own portfolio with or without help from professionals. In terms of investment knowledge, personality
and style this is the most diverse group.
This group would not include a corporation, partnership or any other
entity; nor would it include any person in the business giving investment
advice or services for compensation.
Institutional investors. This group is responsible for managing portfolio
investments on behalf of an organization or entity. And, the organizations or entities they
represent come in a number of various types and sizes. Some of the more common “institutions” are
described as follows:
Companies. Traditionally, banks, insurers and private
investment companies (AKA “hedge funds”) are the largest in this group. However, according to Wilmington Trust
Company, many corporate treasurers are currently holding cash in their coffers
and turning to outside investment managers rather than expanding payroll costs
to manage the cash “in-house”.
Pension funds. The New York Times reports, “An estimated $5
trillion sits in thousands of pension funds across the nation, run for the
benefit of private company, state or municipal workers who rely on the funds
for retirement income. Some funds are
huge, with billions of dollars under management, and are overseen by a board of
finance professionals. Many, however,
are tiny, with just a few million [or less] invested. These funds are often run by company
executives or volunteers less versed in the ways of Wall Street.”
Endowments. These are investment funds established for
the support of institutions such as universities, colleges, private schools,
museums, hospitals and foundations. Like
pension funds, the larger ones are generally overseen by a board of finance
professionals and the smaller ones, by volunteers.
Trusts. There are many types of trusts, and they can
be complex. But the best way to think
about a trust is simply this: A trust is
a flexible and advantageous way for a person to leave his or her assets to
future generations and simultaneously reap certain benefits, if he or she so
desires. The trustee is responsible for
carrying out the terms of the trust, and for its investments.
Registered Investment Advisors and
their representatives.
This group is comprised of professional investors who make investment
decisions on a client’s behalf and are often paid fees from assets under
management. These professionals devote
full time and attention to managing your portfolio. They can watch and assess the market and the
different types of securities far better than those who do so only part
time. As with any endeavor, the
characteristic of being specialized provides benefits in the form of knowledge,
contacts, access to unique investment opportunities, computer support systems
and experience.
Broker/Dealers and their
representatives. This group is
comprised of investment professionals who offer recommendations and can help
clients make decisions. These
professionals supply institutional and individual clients with pertinent facts
to assist them in buying or selling stocks, bonds, commodities, and
options. When acting as a broker, a
broker/dealer executes orders on behalf of his or her client; and, when acting
as a dealer, a broker/dealer executes trades for his or her firm's own
account. They may also provide
introductions to registered investment advisors. While most commonly paid
commissions from the transactions they facilitate, some may offer fee
arrangements. Unlike institutional
investors and registered investment advisors, this group has no fiduciary
responsibility to the investors they serve.
Investment Style Categories
The term investment style refers to an investor’s basic approach to choosing investments. Understanding your cognitive investment style will allow you to take a planned approach to investing. It will give you a framework to follow, without which, you’ll be making random investment selections based on an advertisement you read or a “hot tip” you’ve heard from a friend, relative or acquaintance.
As I was gathering available research on this subject, I was
quickly getting lost to a dizzying array of explanations for various investor
styles. Despite the many explanations to
be found, most people fall – more or less – into one of three broad
categories: conservative, moderate and aggressive.
For each of these categories, I will use the
descriptions provided by the Foundation for Investor Education as follows:
“Conservative investors. Generally, conservative investors feel that
safeguarding what they have is their top priority. More formally, this approach is called capital
preservation. These investors
want to avoid risk – particularly the risk of losing any principal
– even if that means they’ll have to settle for very modest returns.”
By the way, my online dictionary defines risk as: the possibility of suffering harm or loss;
and also, the expected variability of returns from an investment.
“Moderate investors. Moderate investors want to increase the value
of their portfolios while protecting their assets from the risk of major
losses. They usually buffer the
volatility of growth investments, such as stock, with a substantial portion of
their portfolio allocated to produce regular income and preserve principal…If
you’re not a risk taker by nature, a moderate investing style may be suitable
in any circumstance or financial situation.”
“Aggressive investors. Aggressive investors concentrate on
investments that have the potential for significant growth. They are willing to take the risk of losing
some of their principal, with the expectation that they will
realize greater returns…An aggressive investing style is not for the faint of
heart. It’s best suited for investors
with a long-term investing horizon of 15 years or more, who are willing to make
a long-term commitment to the stocks they buy.”
Your cognitive investing style already exists! You just have to learn how to become familiar
with it. Your style is developed from a
variety of things, including your age, personality, experiences and current
financial situation. “For instance, if
you’re approaching retirement, have burdensome financial responsibilities, or
you’ve lived through major economic upheaval, such as a massive recession or
currency devaluation, chances are you may be a more risk averse, or
conservative, investor…On the other hand, if you’re young, earning a high
income, have few financial responsibilities, and have seen little in the way of
economic hardship, you might be more inclined to take risk.”
As you can see, there is much information to cover when trying to touch upon various types of investors, how to find your investment style, and how to find an investing program that fits. At least, when trying to keep my newsletter to its normal length.
If after reading this introduction, you come
away with a good idea of investor types and some basic investment style
categories, then we’re off to a good start. Next month, we’ll try to expand and discuss
more about investment style and try to offer some insight on how to recognize
investment opportunities that match your style.
For my experienced readers, some who have been aggressive
investors most of their lives, it may be time to take a second look at your
portfolios and re-assess. You may feel
that you have plenty of guts in terms of risk tolerance, although it may be
timely to ask yourself: Are you still
able to take losses in stride? Are you
still able to hang on through the market’s inevitable ups and downs? Can you still withstand the possibility of
your nest egg taking a severe hit? If
not, you may want to revisit your appropriate investing style and strategy!
We’re
At Your Service
At Hoffman, White & Kaelber Financial Services, our focus is to help our clients achieve a more certain future. As such, our wealth management clients gain comfort in knowing that we’ve helped them identify their investment style and that they’ve hired disciplined decision makers whose objective favors consistency of returns and capital preservation rather than magnitude of returns. And, we’re always thinking of ways to help our clients’ keep what they’ve earned!
Hoffman, White & Kaelber Financial Services Investment
Performance Update
More and more, I am reading about interviews with some of our
nation’s more seasoned economists warning that the
For the month ended February 28, 2005, our
one-month performance is up 0.59%, our three-month return is up 2.11%, our
one-year return is off 1.88%, and our average annualized return since inception
is up 9.40%. While volatility (risk)
steadily continues to increase in the equity markets, our risk profile has crept downward further to
+/- 6.18%.
This conservatively low risk level remains consistent with our
strategy. With our expectation that this
statistic gains increasing importance, our Sharpe Ratio improved to a very
respectable 1.31.
Investment pros borrow a tool from the
statisticians—standard deviation—to measure investment risk. It shows the range of returns that investments are likely to earn
over a given period of time and it has two sides, the out-performance and the
under-performance of an average rate of return.
The Sharpe Ratio is a commonly used measure of portfolio earnings quality. In short, the Sharpe Ratio is a measure of return achieved per risk taken. Sharpe ratios can be better than just looking at performance because it incorporates the issue of risk. Some would say it is a measure of a manager’s ability to perform consistently. The number by itself, however, is hard for many to understand without comparing it to something.
Let’s take a look at the S&P 500 Index
for a quick comparison. The Standard
& Poor's 500 Index is usually considered the benchmark for
Are you familiar with Morningstar, Inc.? They are a Chicago-based, global investment research firm, providing information, data, and analysis on the mutual fund industry. They say that a Sharpe Ratio of over 1.0 is "pretty good" and outstanding funds achieve something over 2.0. Using this “yardstick”, we are more than pleased with our accomplishment to date.
For most
investors, the Sharpe makes good intuitive sense because they not only hate to
lose money but they often compare the returns to risk free investing. You owe it to yourself to understand and
consider this measure when making investment decisions.
Is a comfortable retirement or preservation of wealth important to
you?
Want better long-term results from your investments?
Choose Us As Your Investment Manager!
Research us on the web at www.hwkfs.com