By Gary Pittsford, CFP®
President and CEO, Castle Wealth Advisors, LLC
Clients often ask, “What are we doing to protect current asset levels?” This is a very difficult time as most of you already know, not only for our U.S. economy, but also the European economy and other economies around the globe.
For most of our clients, our main job is to make as much return as possible through interest rates, dividends, and capital gains, with the smallest amount of risk that a prudent investor would take.
Every day in our office we are working on ideas to reduce risk for our clients in their portfolios, measure risk that our clients are exposed to, and manage risk based upon the changing environment that you read on the front page of the Wall Street Journal and every major newspaper around the world.
After 2008 we adopted new investment allocation ideas for our investment clients that strive to give them more downside protection in case the stock market falls, and also gives our clients more protection from inflation and the declining value of the dollar.
I think every serious wealth management firm like ours is working very hard these days to reduce, measure, and manage risk for clients. A couple of months ago one of our investment clients mentioned that he felt that lots of trading in his account translated into good management. He was surprised that we did not do a lot of trading in his account. We have found over the years that a lot of trading only increases costs, makes stockbrokers a lot of money, and usually hurts the annual return.
In equities we feel that the safest place to be, for now, is large value blue chip stocks that pay dividends. Most of those companies are based in the United States, but some of them are based in other countries. When appropriate we buy individual stocks to help hold down cost. Sometimes for better diversification we will use an ETF which has low fees. We also will buy mutual funds if the manager has proven that their experience and track record is worth the cost.
In fixed income we must be very careful because interest rates are at historically low levels. That means that when interest rates start rising all bond values will go down. There are still good bonds to be bought. High quality corporate bonds are paying more than U.S. Treasuries. Floating rate bonds will give our clients more protection as interest rates start going up. During this low interest rate environment we want bond maturities to be shorter, which gives our clients more safety. Monitoring interest rates and bond values is almost a full time job.
Real estate values are something that we watch closely. Residential real estate is something that we watch because it has a big impact on all consumers in the U.S. As consumers’ personal financial statements improve so will our American economy. We are now seeing positive reports that housing in some of our major cities has increased 1% or 2%. Industrial real estate is starting to be occupied more, but commercial real estate values are still soft.
Some of our clients own a lot of real estate through their companies, and other clients own no real estate at all except for their homes. If it is appropriate for some clients we purchase real estate investment trusts (REITs). By purchasing REITs we can take advantage of real estate values increasing and also income properties. Historically, REITs can be a good source of income for our clients. Real estate can also be a good hedge against inflation.
Diversifiers is the term that we use for the assets in our clients’ investment accounts to give them more protection in this fragile and ever changing economy. Balanced risk funds provide income and less volatility. Diversified portfolios such as Permanent Portfolio are a good choice during bad times. In the last 20 years Permanent Portfolio has only had two down years and one of those was in 2008. In some of our diversifier investment choices our clients are exposed to gold, oil, silver, natural gas, commodities, inflation protected securities, preferred securities, and convertible securities.
Every client is different and that is why every portfolio that we manage for our clients is different. We want our clients to know that based upon their personal financial goals, each portfolio that we look at for them intends to provide them with the right investment choices to minimize their risk and give them good investment return.
Warren Buffet wrote an article in February for Fortune Magazine and said that here in the U.S. where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965. It takes $7 today to buy what $1 did at that time. The dollar bills that you have in your wallet may look the same size that they were 20 years ago, but actually they are much smaller.
We must help our clients manage their liquid investments and their personal wealth so that they can stay ahead of inflation, income taxes, and shrinking currency values.
Managing assets has a little bit to do with buying and selling investments, but reducing, measuring, and managing risk combined with generating interest, dividends, and capital gains is where we are better off focusing our time.
Gary Pittsford, CFP®, is President and CEO of Castle Wealth Advisors, LLC. Castle specializes in helping families and closely held business owners with valuations, succession planning, estate and income tax analysis and retirement income security. Castle’s senior partners work with clients throughout the country in making logical decisions that help them fulfill their personal and business financial goals. For more information visit www.Castle3.com, call 1-888-849-9559 or e-mail Gary directly at .