Atlantic Capital Management

Atlantic Capital Management (128)

Thursday, 27 June 2013 00:00

Why Is It Wise to Diversify?

Submitted by

A varied portfolio is a hallmark of a savvy investor.

You may be amused by the efforts of some of your friends and neighbors as they try to “chase the return” in the stock market. We all seem to know a day trader or two: someone constantly hunting for the next hot stock, endlessly refreshing browser windows for breaking news and tips from assorted gurus.

Is that the path to making money in stocks? Some people have made money that way, but most do not. Many people eventually tire of the stress involved, and come to regret the emotional decisions that a) invite financial losses, b) stifle the potential for long-term gains.

We all want a terrific ROI, but risk management matters just as much in investing, perhaps more. That is why diversification is so important. There are two great reasons to invest across a range of asset classes (stocks, bonds, real estate, commodities, currency), even when some are clearly outperforming others.

#1: You have the potential to capture gains in different market climates. Think of different asset classes as different markets. If you allocate your invested assets across the breadth of asset classes, you will at least have some percentage of your portfolio assigned to the market's best-performing sectors on any given trading day. If your portfolio is too heavily weighted in one asset class, worse yet, in one stock, its return is riding too heavily on its performance.

So is diversification just a synonym for playing not to lose? No. It isn’t about timidity, but the wisdom of risk management. While thoughtful diversification doesn’t let you “put it all on black” when shares in a particular sector or asset class soar, it guards against the associated risk of doing so. This leads directly to reason number two...

#2: You are in a position to suffer less financial pain if stocks tank. If you have a lot of money in growth stocks, either individual stocks or funds (and some people do), what happens to your portfolio in a correction or a bear market? You’ve got a bunch of losers on your hands. Tax loss harvesting can ease the pain only so much.

Diversification gives your portfolio a kind of “buffer” against market volatility and draw downs. Without it, your exposure to risk is magnified.

What impact can diversification have on your return? Let’s refer to the infamous “lost decade” for stocks, or more specifically, the performance of the S&P 500 during the 2000s. As a USA TODAY article notes, the S&P’s annual return was averaging only +1.4% between January 1, 2001 and Nov. 30, 2011. Yet an investor with a diversified portfolio allocating a 40% weighting in bonds would have realized a +5.7% average annual return during that stretch.1

If a 5.7% annual gain doesn’t sound that hot, consider the alternatives. As T. Rowe Price vice president Stuart Ritter noted in the USA TODAY piece, an investor who bought the hottest stocks of 2007 would have lost more than 60% on his or her investment in the 2008 market crash. Investments indexed to the S&P 500 sank 37% in the same time frame.1

Asset management styles can also influence portfolio performance. Passive asset management and active (or tactical) asset management both have their virtues. In the wake of the stock market collapse of late 2008, many investors lost faith in passive asset management, but it still has fans. Other investors see merit in a “relative strength” style that is more responsive to shifting conditions on Wall Street, one that fine-tunes asset allocations in light of current valuation and economic factors with an eye toward exploiting the parts of market that are really performing well. However, the downside to active portfolio management is the cost; it can prove more expensive for the investor than traditional portfolio management.

Believe the cliché: don’t put all your eggs in one basket. Wall Street is hardly uneventful and the behavior of the market sometimes leaves even seasoned analysts scratching their heads. Without divine intervention or clairvoyance we can’t predict how the market will perform; we can diversify to address the challenges presented by its ups and downs.

William C. Newell, Certified Financial Planner (CFP), is president of Atlantic Capital Management, Inc. a registered investment advisor located in Holliston, Mass. With Wall Street access and main street values Atlantic Capital Management has been providing strategic financial planning and investment management for over 25 years.

Saturday, 20 April 2013 00:00

Financial Independence at Risk

Submitted by

A recent and disturbing finding from the AARP Public Policy Institute’s year-long “Middle Class Security Project” is that unless we are able to reverse the trends that threaten the middle class, many of today’s middle-class workers - especially those in their 20s, 30s, 40s and 50s - will not have a middle-class retirement. In fact, 30 percent of those currently in the middle class will become low-income retirees.

This middle-class squeeze is not just a challenge for the 50-plus population of tomorrow. The combination of high unemployment, low saving rates, decaying pensions, lower home values, higher health costs and longer mortality will inhibit people’s ability to accumulate a sufficient retirement nest egg. To avoid the pitfalls of under-saving, you must be proactive in preparing for a comfortable retirement.

The first place to begin is to assess and take control of your financial circumstances. You cannot control your finances if you have no idea what your financial situation looks like. So start your planning by calculating your personal net worth. It will serve as a snapshot of your financial health, a summary of what is owned (assets), less what is owed to others (liabilities). The formula is: assets – liabilities = net worth.

There are a number of reasons why an individual or family should prepare a net worth statement on an annual basis:

  • A score card: Preparing an annual net worth statement allows an individual to keep track of progress toward meeting long-term financial goals. Ideally, your net worth should increase each year. Always keep in mind that paying down debt is a no-risk investment;
  • A financial inventory: Your net worth statement is a useful financial inventory; it should be updated each year and kept with your Will and other estate documents. This allows your loved ones (who you might not otherwise share this information with) to easily know what your estate looks like in the event of your demise;
  • A planning tool: The net worth statement also serves as a planning tool. For example, a review of the net worth statement may show that an individual or family has too few liquid assets (for emergencies), that there is too much debt relative to assets or that investments are too heavily concentrated in one area, or there is just not enough savings overall to support your current lifestyle during your retirement years;
  • Lenders may need it: An individual’s net worth is required information on most loan applications. In addition to bank loan offices, college financial aid programs will usually require information on the parents’ net worth when a child applies;
  • For certain investments: Certain types of high-risk investments require prospective investors to have a minimum level of net worth before they are allowed to invest money.

Preparing a personal net worth statement is easy:

  • List and then add up the value of your Assets. Assets might include bank accounts, money owed to you, investments, personal property, retirement plans and real estate;
  • List and then add up the value of your Liabilities. Liabilities might include college loans, credit card balances, auto loans and real estate mortgages. It may be necessary to contact the lender to get the current balance on a loan or account;
  • Now subtract your total Liabilities from your total Assets. You now have the difference between what you own and what you owe...your personal net worth.
  • If your assets are greater than liabilities, then you have a positive net worth. Conversely, if your assets are less than liabilities, then you have a negative net worth. Your goal should be to have a positive net worth and to make your net worth grow from year to year.

    Now you know where you stand financially; this is the first step toward financial independence. Awareness of your circumstances allows you to become proactive in your planning, to avoid a decline in your standard of living, or worse...such as becoming dependent on your adult children.

    In my next installment I will talk about how to manage your cash flow and take control of expenses so you can save more.

    William C. Newell, Certified Financial Planner (CFP), is president of Atlantic Capital Management, Inc. a registered investment advisor located in Holliston, Mass. With Wall Street access and main street values Atlantic Capital Management has been providing strategic financial planning and investment management for over 25 years.

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