I hope this post finds you well, and that you and your families are making the most of these early holiday season days. I wanted to deviate from my typical investing/financial planning topics to discuss an exciting project that I have been involved with for the better part of 3 years. I also wanted to take a moment to wish my readers a very happy Thanksgiving and joyful start to the holiday season. I’m fortunate that so many of you turn to this forum for investing and personal financial guidance, and I’m dually honored that many of you continue to ask me such insightful and though provoking questions. Thank you for reading my blog posts with such interest, it has been, and continues to be a pleasure to write them for you.
My wife, Julie, and I have been as busy as ever – our boys make sure of it. Both Henry and Logan are growing so quickly now and offering us new surprises every day. Just a few short weeks ago Henry started to crawl. Logan has been having a great first year at school, and loves being a big brother to Henry.
It's astounding, sometimes, to look back at life before the growth of our family. I know I speak for both Julie and myself when I say, we can't imagine a world without our boys. They have changed our lives in such amazing ways.
Before Logan was born, Julie and I began exploring the option of collecting and storing his umbilical cord blood. We had heard of the science and knew that cord blood was rich in uncontroversial, life-saving stem cells. Through research, we discovered that the possibilities of stem cell use were vast. The science was, and still is, developing rapidly, and new uses for stem cells are discovered every day. At the time, I became convinced that the possibilities would not only change medicine forever but, because there is no “expiration date” for stored cord blood, these stem cells could provide security for my son years down the road. As a father, of course, Logan's safety has always been my greatest priority. Ultimately, Julie and I made the decision to store his cord blood.
Going through the process myself, it became my belief that every family should have access to this potentially life-saving technology. Unfortunately, because all of this is relatively new, the decision to store cord blood is too often a financial one. As a financial advisor and young parent, this point really resonated with me. We chose to store Logan's cord blood with a 'big name' in the industry, and, while I knew I'd made the right decision, I also felt that the cost of this service was prohibitive. Parents should not be forced to pay the marketing costs of these large companies to keep their children safe.
I founded Genecord (www.genecord.com) in early 2011 in an effort to make private umbilical cord blood storage and processing more accessible and affordable to new parents. I wanted to take part in the future of regenerative medicine, offering one product at an honest price. Now, after almost 3 years of arduous work, I am happy to report that Genecord has been successfully running with a team of cryopreservation and tissue banking pioneers, amazing customer support staff and a state of the art cord blood laboratory facility. We have been processing and storing cord blood units from across the United States, and we've been receiving a great deal of positive feedback from our customers.
This all started because we wanted to provide the best future for our son. Now, because of him, I educate new parents-to-be on the importance of stem cells and cord blood storage, and, maybe most importantly, I have proven that this decision doesn't have to be a financial one. I am very proud of what my team has accomplished so far.
Both Julie and I love to share our experience with this new science, so, if you know anyone who is expecting, please don't hesitate to ask us for more information. Our program consists of collection, processing, and 20 years of storage. Feel free to contact me, and I'd be happy to provide you with all the details.
This has been an amazing journey. Thanks so much to all of you for the support so many of you have shown along the way.
Jason M. Gilbert, CPA/PFS, CFF
As the end to 2013 quickly approaches, you’re probably starting to think about how to rebalance your portfolio. Most individual investors don’t really think about asset allocation when crafting their basket of investible securities. If you did structure your portfolio with certain objectives in mind, there is no doubt that your allocation now is different from what it was at the beginning of the year. Market forces, for better or for worse, change the relative weight of assets in a given portfolio. If equities perform well, you might find yourself too heavily weighted in this particular asset class, with insufficient downside protection or cash flow yield. If stock prices go down, you might worry that you are no longer able to reach your financial goals in the timeframe you initially set.
Assuming you created a portfolio with a strategic objective and allocation, have you developed a strategy for dealing with these changes? You'll probably want to take a look at your individual investments to ascertain whether they still fit your investment philosophy, but you'll also want to think about your asset allocation and how any periodic adjustment of it would help you achieve your investing objectives.
Obviously, simply making no changes would be easiest. On an emotional level, if you’re happy with your portfolio’s current return profile it may be difficult to make any significant changes. We are all guilty of subscribing to a “if it ain’t broken, don’t fix it” mentality. Of course, allowing the status quo to persist may affect how well your investments will continue to match your goals, especially during unexpected (and eventual) turns in the market. At a minimum, you should periodically review the rational for your investment choices to ensure that they still hold.
It might feel counterintuitive, but selling the winners and buying the losers (or other investments in underrepresentitive sectors) can bring your asset allocation back to the original percentages you had initially set. This ‘constant weighting’ of relative investment types ensures that your portfolio grows at a proportional rate, factoring in all asset classes represented in the portfolio.
Let's consider a hypothetical example. If your equity allocation in a portfolio that originally represented 50% is now at 70%, rebalancing would involve selling some of the stock and using the proceeds to buy back enough of the other asset classes to bring the portfolio back to 50% in equities. Similarly, if stocks now represent less of your portfolio than they should; to rebalance, you would invest in stocks until they once again reach an appropriate percentage of your portfolio. Maintaining relative percentages not only reminds you to take profits when a given asset class is doing well, but it also keeps your portfolio in line with your original risk tolerance.
When should rebalancing take place? One common practice is to rebalance a portfolio whenever a particular investment represents significantly more than it’s intended share of the portfolio (we call this a ‘tolerance band’); say, 5% to 10% of the total portfolio. One could also set a regular date for rebalancing, say, tax time or year-end.
You could also adjust the mix of investments to focus on companies and sectors that are expected to do well in the future. This is obviously a more speculative approach, and one that more active individual investors attempt to employ. I would not recommend this strategy as a sustainable practice for long-term portfolio growth.
A Hybrid Approach
You could also combine the above two strategies by maintaining a constantly weighted asset allocation with one portion of the portfolio. With another portion of the portfolio, you could try to take advantage of short-term opportunities, or test specific sectors that you believe might benefit from a more active investing approach. By monitoring your portfolio, you can always return to your original allocation.
A Bottom Line Approach
Another plausible solution is to set a “bottom line” for your portfolio; that is, a minimum dollar amount that the portfolio cannot dip below. If you wish to be active with your investments, you can do so--as long as your overall portfolio stays above your bottom line. I do not advocate active management in this fashion, but with this strategy you could theoretically move the portfolio to very conservative allocation (more conservative securities or cash) to protect that baseline amount. Keep in mind that many speculative investments are illiquid, which presents additional and significant problems when trying to exit losing positions.
Key Rules for Rebalancing:
Don’t forget about taxes and transaction costs
Frequent rebalancing can trigger tax consequences and expensive transaction costs. Check on whether you’ve held particular securities for over a year. If not, you may want to consider whether the benefits of selling immediately will outweigh the higher tax rate you'll pay on short-term gains. This doesn't affect qualified accounts such as 401(k)s or IRAs, which are tax deferred.
I hope this information is helpful to you as you work to rebalance your investments for the year ahead. Please do not hesitate to contact me should have any questions about this article or if you are interested in discussing specifics about your portfolio.
Jason M. Gilbert, CPA/PFS, CFF
After the most recent crisis, investors are undoubtedly concerned about potential insolvency issues that may arise with their investment custodian. Some of my clients have articulated this concern, and have asked whether it makes more sense to consolidate investment assets at one brokerage firm, or segregate accounts by institution as a form of makeshift diversification. Some articles have been written on the matter, but I find that there is a lack of general understanding in/around the safeguards that have been created specifically to protect investors who hold assets at regulated brokerage firms.
In arguably all cases, when a brokerage firm ceases to continue as a going-concern, customer assets are safe and able to be transferred to another registered brokerage firm. Here’s how:
A note on 'clearing' versus 'carrying' firms
It’s helpful to differentiate between clearing and carrying firms. When you open an account with a carrying brokerage firm, the firm not only handles your orders to buy and sell securities but it also custodies the securities in the account (inclusive of cash). Because these firms generally hold assets for a a large number of customers, they are required to carry a much higher level of net capital than clearing firms, which limit their activities to clearing and settling trade commitments.
A historical note
Historically, brokerage firms that have faced financial insolvency have handled the calamity in different ways. Some have been able to find a buyer to stave off indebtedness. Bear Stearns, for example, was bought by J.P. Morgan in 2008. Other firms self-liquidate, as did Drexel Burnham Lambert in 1990. When a brokerage firm self-liquidates, securities regulators, including the SEC and FINRA, work with the firm to make sure that customer accounts are protected and that customer assets are transferred in an orderly fashion to one or more SIPC-protected brokerage firms.
In short, “Is it safer to use multiple brokerage firms to custody my investments?”
Investors’ assets are separate from the brokerage firm and solely belong to the customer. A brokerage firm’s failure should not result in loss of customer assets. If in an extremely unlikely circumstance a client’s assets are lost (i.e., theft or fraud), account holders would be protected by SIPC up to the limits discussed above. To protect yourself against theft and fraud, choose a well-know brokerage firm that is regulated by the SEC, member to FINRA/SIPC, and that publishes audited financials and statement of Financial Condition by a reputable audit firm. You may also wish to review FINRA BrokerCheck, a free tool offered to help investors research the background of both FINRA-registered broker-dealers and investment advisor firms. Lastly, many brokerage firms actually carry "excess SIPC" insurance that provide additional protection beyond SIPC's limits through private carriers. Maximum amounts may vary by firm, but you may wish to seek out a brokerage firm that carries these additional limits.
While there's no way to completely remove institutional risk from your investment portfolio, I believe that the benefits that arise from account consolidation should outweigh fears of broker malfeasance; especially when you have hired an investment advisor to craft, implement, and manage a comprehensive investment strategy across your varied investment accounts.
I hope this information was helpful. Please do not hesitate to let me know if you have any questions.
Jason M. Gilbert, CPA/PFS, CFF
Why understand investing styles?
With the wide variety of stocks in the market, figuring out which ones you want to invest in can be a daunting task. Many investors feel it's useful to have a system for finding stocks that are worth buying, deciding what price to pay, and realizing when a stock should be sold. Bull markets, periods in which prices as a group tend to rise, and bear markets, periods of declining prices, can lead investors to make irrational choices. Having objective criteria for buying and selling can help you avoid emotional decision-making. We discuss the perils of emotional decision-making in many of our RGA monthly investment commentaries. Even if you don't want to select stocks yourself, it can be helpful to understand the strategies to which professionals adhere in evaluating and buying investments. If you align with a given investment strategy, you may be better prepared to hire an investment manager who shares a similar investment philosophy.
There are generally two schools of thought about how to choose stocks that are worth investing in. Value investors focus on buying stocks that appear to be bargains relative to the company's intrinsic worth. Growth investors prefer companies that are growing quickly, and are less concerned with undervalued companies than with finding companies and industries that have the greatest potential for appreciation in share price. Either approach can help you better understand just what you're buying—and why--when you choose a stock for your portfolio.
Value investors look for stocks with share prices that don't fully reflect the value of the companies, and that are effectively trading at a discount to their true worth.
A stock can have a low valuation for many reasons. The company may be struggling with business challenges such as legal problems, management difficulties, or tough competition. It may be in an industry that is currently out of favor with investors. It may be having difficulty expanding. It may have fallen on hard times. Or it may simply have been overlooked by other investors.
A value investor believes that eventually the share price will rise to reflect what he or she perceives as the stock's fair value. Value investing takes into account a company's prospects, but is equally focused on whether it's a good buy. A stock's price-earnings (P/E) ratio--its share price divided by its earnings per share--is of particular interest to a value investor, as are the price-to-sales ratio, the dividend yield, the price-to-book ratio, and the rate of sales growth.
Here are some of the questions a value investor might ask about a company:
A contrarian investor is perhaps the ultimate example of a value investor. Contrarians believe that the best way to invest is to buy when no one else wants to, or to focus on stocks or industries that are temporarily out of favor with the market.
The challenge for any value investor, of course, is figuring out how to tell the difference between a company that is undervalued and one whose stock price is low for good reason. Value investors who do their own stock research comb the company's financial reports, looking for clues about the company's management, operations, products, and services.
A growth-oriented investor looks for companies that are expanding rapidly. Stocks of newer companies in emerging industries are often especially attractive to growth investors because of their greater potential for expansion and price appreciation despite the higher risks involved. A growth investor would give more weight to increases in a stock's sales per share or earnings per share (EPS) than to its P/E ratio, which may be irrelevant for a company that has yet to produce any meaningful profits. However, some growth investors are more sensitive to a stock's valuation and look for what's called "Growth At a Reasonable Price" (GARP). A growth investor's challenge is to avoid overpaying for a stock in anticipation of earnings that eventually prove disappointing.
A momentum investor looks not just for growth but for accelerating growth that is attracting a lot of investors and causing the share price to rise. Momentum investors believe you should buy a stock only when earnings growth is accelerating and the price is moving up. They often buy even when a stock is richly valued, assuming that the stock's price will go even higher. If a stock falls, momentum theory suggests that you sell it quickly to prevent further losses, then buy more of what's working. The most extreme momentum investors are day traders, who may hold a stock for only a few minutes or hours then sell before the market closes that day. Momentum investing obviously requires frequent monitoring of the fluctuations in each of your stock holdings, however. A momentum strategy is best suited to investors who are prepared to invest the time necessary to be aware of those price changes.
At RGA Investment Advisors, we think that value and growth are not mutually exclusive. We seek investments with an identifiable margin of safety, a true underlying value, and a cost lower than the asset’s fundamental worth. We use a metric of financial and performance screens to identify investment opportunities, and we follow a watch-list of competitive companies with long-lasting, measurable advantages. We further perform comprehensive financial analysis paired with deep company diligence in order to develop the necessary conviction. We only buy investments within an opportune price range, and we practice patience and diligence when making purchases in client accounts. (Read more about our investment approach here).
Please do not hesitate to let me know if you have any questions on this post or my own investment philosophy.
Jason M. Gilbert, CPA/PFS, CFF
Jason Gilbert is Managing Director of RGA Investment Advisors LLC. He has over 10 years of experience in investment advisory, including portfolio construction, financial strategy, and advanced planning for high-net worth and institutional clients. He maintains an extensive background in both forensic accounting and personal finance, and serves as a fiduciary and trusted partner to his long-standing clients.