Life will change; so should your plan

 In Media Mentions, North Bay Business Journal

Tamra Stern recently sat down with The North Bay Business Journal for a Q&A regarding investment and financial planning advice. Below are her responses.

Tamra A. Stern, partner and director for wealth management for Sausalito-based Main Street Research, shares her investment advice.

What difference does the age of a client make in what you suggest to them as an investment strategy?

The age of a client is of paramount importance to what we would suggest to them in terms of investment strategy.

However, we believe that it is most important to understand each client’s holistic financial picture so we can better understand how much risk they need to take to ensure a successful plan.

Younger clients typically have a longer time horizon and can afford to be more heavily invested in equities, while older clients have a shorter time horizon, so we typically recommend a lower allocation to equities resulting in less risk. Asset allocation, coupled with risk management tools offer a compelling value proposition for our client base on the investment side.

There are certainly many investing “rules of thumb,” such as suggesting that once a person is 50, they should be invested 50% in equities and 50% in fixed income. These approaches can often overlook the intention of the asset base, which may include the next generation and thus change the client’s investment strategy.

While age is a crucial variable in our approach, it all comes back to developing a customized financial plan.

How do you help a client determine what level of risk they are comfortable with when it comes to investing their money? Are there key questions you ask to assess that risk?

At Main Street we typically manage the bulk of our client’s liquid net worth and help clients determine what level of risk they need to take (required rate of return, or RoR) through no-cost, in-depth wealth planning.

This consists of a holistic look at their entire financial situation, including offering advice about estate planning, taxes and insurance.

From this work, we determine what RoR a client needs to have for a successful retirement. This starts the discussion between how much risk they want to take versus how much risk they need to take. We ask many questions surrounding loss aversion and return expectations. This is a helpful exercise for clients to set realistic expectations and offers us an opportunity to educate them.

With faster technology, algorithms to pick stocks and instantaneous investments, are clients making more frequent moves with their money, not being content to stay with investments for the long haul more? What do you tell them if you consider this approach unwise?

We manage our client’s portfolios only on a discretionary basis, which means we make executive decisions related to the portfolio on their behalf.

We find great companies through a rigorous quantitative and qualitative selection process, which leverages proprietary “factor” models.

The idea is to rank the attractiveness of companies.

Our management style is active in nature meaning that we will also sell positions for specific reasons: stop-loss orders, a long period of insignificant growth (“dead money”), sometimes due to management change, and also for profit taking when a stock reaches its target price.

Algorithmic or robotrading may perform well when the market is doing well; however, they are not effective at selling and may perform poorly in a volatile market.

If a client still wishes to invest in different strategies, we encourage them to invest funds from their managed portfolio and open a separate account for their personal trading.

What mistakes do you see individual investors making in the current financial climate?

Taking more risk than they need.

The Great Recession of 2008 occurred 11 years ago, and many investors have short memories. They want to be aggressively invested and are more concerned about making a profit than the downside potential of losing money.

We try to temper this by explaining to them what we refer to as “ugly math”: If your portfolio goes down 50%, you need to go back up 100% just to get back to even.

This can take a decade and can ruin their long-term financial planning. Losing less allows clients to have more “dry powder” when the economy recovers, allowing their wealth to compound and grow more over the long run.

What is your best advice on planning for a financially secure future?

Planning for a financially secure future is something we strive to accomplish with our entire client base.

It is important to help clients develop a complete wealth plan that not only helps capture income such as pensions, interest, dividends and Social Security, but also takes a realistic look at expenses.

Understanding cash flow is difficult for many individuals, but our planning exercise is quite rewarding from an educational standpoint.

We update wealth plans annually, as life happens and changes. If clients’ spending stays in line with their plans and their investments are managed to their specific RoR, then we are putting the odds in their favor for a financially secure future.

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Click here to view the article on The North Bay Business Journal website.