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What do you think of the stock market? Where's it headed?
You may find this surprising, but our answer to this question is not time sensitive. We think the long-term prospects will always be bright. Since 1925 the stock market's average annual return has been a little over 11% while long-term bonds have returned just over 5% and treasury bills and cash investments even less. What do we mean by long-term? Twenty years or more, but remember this is your entire investing horizon, not simply the amount of time until you plan on retiring. If you're fifty-five, you could easily be looking at a thirty-five or more year planning horizon. Likewise at sixty-five you're still looking at twenty-five plus years. As far as our short-term view of the market, anything can and often does happen. Thankfully if you're a long-term, diversified investor, with a sound financial plan, you shouldn't particularly care about short-term random market movements. In summary, no matter where the market may be today, we like its long-term prospects, but we have no idea where it's headed next month, next quarter, or next year for that matter.
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What's so great about diversification?
A diversified portfolio is one of the last "free lunches." It works this way. When diversified, you definitely reduce risk without necessarily giving up reward. For example, many clients come to us with a 401(k) that is overloaded in their company's stock. Hopefully the stock has been a great performer up until that point because then we offer our heartfelt congratulations. But in the next breath, we will suggest that they consider diversifying to reduce risk. You see, from that point forward, no one knows for certain what will happen to that company's stock. Of course it could go through the roof, but then again it might just fall through the floorboards instead. Or it just might provide a good solid return for the next twenty or thirty years. Who knows? Certainly not us and quite honestly not you either.
With a diversified portfolio, a long-term time horizon, and a generous dose of patience, as an investor you will be rewarded. If your portfolio should fall on hard times because the economy is suffering, time will heal it and you will succeed. However, even with a long-term time horizon, and plenty of patience, there is no guarantee that any specific company's stock will deliver the returns your investment plan needs.
In the exception to every rule category, there are some tricky tax rules (and opportunities) with respect to company stock in 401(k) plans, so before you do anything please make sure you have a qualified tax professional explain your options.
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What do you think about timing the market?
We think it's a dangerous and expensive investment strategy that many investors/gamblers find too seductive to resist. First of all, by definition, timing the market means attempting to load up on stocks or other securities when prices are rising and unload and/or sit on the sidelines as prices fall. Sounds great in theory but very, very difficult to consistently do. Similarly, many investors today try to time the buying and selling of individual securities. This is also very risky as for every confident buyer - think about it - there is an equally confident seller. Common sense with a touch of humility would suggest that you're not going to be right all the time.
When you factor in the costs of constant buying and selling, this further reduces your odds of "beating the market." The seductive part is very real in that almost everyone seems to know or have heard of someone who got rich in the market somehow. For every winner whom you've heard about, doesn't it stand to reason there is a loser? A strategy that relies on timing the market, no matter where your information comes from, much more closely resembles gambling than investing. Be careful, or better yet, don't do it at all!
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What are the keys to being a successful long-term investor?
It depends on a lot of things. However, for most success means creating a well thought out, suitable, cost-effective investment plan, and patiently sticking with it. The Fox Financial approach is one that emphasizes human behavior management just as much, if not more so, than it does money management. This is not to say that it is particularly easy to help clients keep in check the very powerful human emotions of fear and greed, but it's a heck of a lot easier than trying to successfully time the market for the next forty years.
Perhaps the real key here is defining the term "successful." Because our clients typically have anywhere from 35% to 75% of their portfolios invested in diversified stocks, it makes sense that an expected long-term rate of return will fall somewhere between what a portfolio kept in the bank would return and what a portfolio invested entirely in stocks would produce. So in this case "successful" means achieving a return within this range, skewed one way or another, depending on your particular asset allocation, which is determined by your individual circumstances.
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By working with a professional shouldn't we expect to "beat the market"?
We wish it were that easy. Our clients would be happy, we'd be happy, and everything would be great in the world. Unfortunately there is a little thing called the risk/reward tradeoff that gets in the way. This tradeoff is the great equalizer. This is why no reasonable investor can expect to receive double-digit returns year after year with no risk. Likewise, this is why you should not expect your federally insured bank or credit union accounts to outperform the stock market over any considerable length of time. In order to even attempt to consistently "beat the market" year after year you must be willing to take on an amount of risk that is almost always inconsistent with what a person planning for or enjoying retirement should accept. What we try to do is help clients maximize return for the given amount of risk that they are willing, and is prudent, for them to accept. This amount of risk is defined very simply as that which will allow you to sleep comfortably at night no matter what is happening in the stock market day-to-day, week-to-week, quarter-to-quarter, or even year-to-year. Remember, long-term investing is just that. Pace yourself and set realistic goals.
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Is there one particular mistake you see most investors make?
Yes, in fact a lot of advisors make the same mistake. Many people - especially in this day and age of the Internet and up to the second data - spend unbelievable amounts of time, energy, and worry attempting to beat the market. First of all, as mentioned in one of our earlier answers, beating the market is often not an appropriate goal. Secondly, the marketplace does not have a built in reward mechanism that provides investors who put hordes of time into analyzing and trading their securities with higher returns. In fact, many times just the opposite is true. The more trades an investor makes, and the more he or she frets or obsesses over daily valuations, the more the human emotions of fear and greed takeover and the more he or she may be tempted or feel compelled to buy high and/or sell low (just the opposite of course of what we know we're supposed to do). So yes, there is one very common mistake out there and that in a nutshell is the propensity of many to overmanage and overanalyze their investments in a futile attempt to beat and outsmart the market - an objective that for many is fallacious from the start.
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When you are managing portfolios, to what do you pay most attention?
Two things, suitability and expenses. Suitability is defined as having the right asset allocation (i.e. mix of stocks, bonds and other assets such as real estate or cash) in your portfolio for your particular circumstances. These circumstances will largely be determined by finding the healthy balance and equilibrium between your financial goals and objectives and your risk tolerance level. This is where the vast majority of an investor's time should be spent instead of in searching for the stock, bond, or mutual fund of the day or moment.
Expenses are a little less subjective to deal with in that because there is so much competition in the marketplace for the investor's dollar it is relatively easy to find several funds that might be appropriate, and from these, select the ones with the lowest overall costs. Computers do a great job of scanning and filtering funds to ensure they meet certain low expense and high performance criteria. Click here for a more detailed discussion of fees and expenses.
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How much do you charge and why?
Fox Financial is a fee-only advisor. This means that 100% of our revenues are paid directly by our clients either through an annual management fee, paid quarterly, or through an hourly charge. The annual management fee is .75% per year for the first $1,000,000 managed and .50% per year for the balance. The hourly charge is $200.
The fee structure is this way for two reasons. The first and most important reason is to eliminate any and all conflicts of interest. By charging a fee based on assets under management, you can be certain that we have a vested interest in seeing your account grow as this is the only way that our fee income will increase. The thought process here is that responsible financial planning and investing is complicated enough without you having to wonder from time to time why your advisor might be recommending one product over another and whether or not this action is truly in your best interests. So we charge a fee that is easy to understand and calculate, and that puts both you as client, and us as advisor, on the same team always.
Secondly, our investment philosophy is largely buy and hold. We rebalance portfolios only when material circumstances warrant and not in response to daily inconsequential market noise. This approach allows us to charge slightly less than the average fee-only advisor because we are not constantly and needlessly tinkering with our clients' investments. But rather we are spending more time working one-on-one to help our clients feel comfortable with the way in which their portfolios are being managed.
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Are you registered with the State Securities Board and the SEC?
Yes, once a practice's managed assets are over $30 million, a firm must be registered with both of these agencies in order to give investment advice and provide a fee-only planning service. Fox Financial's managed assets exceed this amount and therefore we are registered accordingly.
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Do you have an area of specialization?
Yes, we believe our best work is done in the area of helping clients make very important decisions regarding how best to accumulate and then manage and invest their retirement nest eggs. A big part of this process is helping those in retirement determine a safe rate of consumption. When approaching retirement there are some very important decisions to be made with respect to what to do with corporate pension, 401(k), profit sharing, and other tax-deferred plans. Some of these decisions can be irreversible and we want to make sure that our clients are thoroughly familiar with, and genuinely understand, all their choices.
As a Certified Financial Planner (CFP), Andrew Fox is skilled in the other disciplines of financial planning but when it comes to areas such as estate planning, tax preparation, or insurance counseling, Fox Financial has a network of other professionals to whom we refer clients in need. Or, if a client already has an established relationship with one of these kind of advisors we are more than happy to work with him or her.
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