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Asset Management vs. Financial Planning

At a 100,000-ft level, we do two things in our financial advisory practice: Asset Management* and Financial Planning.  Although these two functions are distinct, they are very much interrelated.  Both are essential components for our client families’ long-term success, but it’s important to understand and appreciate the differences:
(* Asset Management also falls under the monikers of  “investment management” or “portfolio management”)

Asset management is about asset allocation, expected returns, risk tolerance and time horizons.
Financial planning is about making wise choices about the use of debt, setting up college savings plans, tax efficiency, estate planning and ensuring your insurance needs are taken care of.

Asset management is about managing investments.
Financial planning is about managing investors.

Asset management is about portfolio construction and risk management.
Financial planning is about comprehensive planning and emotional management.

Asset management is about measuring portfolio performance by comparing results to predetermined index benchmarks.
Financial planning is about measuring your performance against your true benchmark — your goals.

Asset management is about allowing your money to work for you to help you reach your financial goals.
Financial planning is about helping people define their goals, dreams, desires and fears.

Asset management is about creating a process that guides your actions in a wide variety of market environments.
Financial planning is about implementing a plan and making corrections along the way as life or market and economic forces intervene.

Asset management is about creating a portfolio that can survive severe market disruptions.
Financial planning is about creating a financial plan that can survive severe life disruptions.

Asset management deals with financial capital.
Financial planning deals with human capital.

Asset management is about growing and/or preserving your wealth.
Financial planning is about understanding why money is important to you personally.

Asset management is about where to invest a lump sum.
Financial planning is about how and when to invest a lump sum.

Asset management is about asset allocation.
Financial planning is about asset location.

Asset management is about creating policies to guide your actions in the face of economic and market uncertainty.
Financial planning is about helping people make better decisions with their money in the face of uncertainty that is impossible to reduce.

Asset management helps you understand how much you need to earn on your investments to meet your future spending needs.
Financial planning helps you understand how much you need to save meet your future spending needs.

Asset management helps you figure out where to take your money from when you need to spend it.
Financial planning helps you figure out where to spend your money in a way that makes you happy.

Asset management helps you grow your savings to meet future consumption needs.
Financial planning helps you plan and budget for future consumption needs.

Asset management is about creating a long-term process to guide your actions in the markets.
Financial planning is about creating systems that allow you to spend less time worrying about your money.

Asset management is about reducing the anxiety that comes from the volatile nature of the markets.
Financial planning is about reducing the anxiety that comes from making important decisions with your money.

Asset management involves growing your wealth so some day you can become wealthy.
Financial planning involves figuring out what a wealthy life means to you.

To get the most benefit from asset management, you really need comprehensive, well thought-out financial planning.

25 Important Documents You’ll Need Before You Die

death-dossierDesign your “Death Dossier” soon or you could be setting up your heirs for frustration and financial pain:

25 Important Documents You’ll Need Before You Die
The Essentials
• Will
• Letter of instruction
• Trust documents
Proof of Ownership
• Housing, land and cemetery deeds
• Escrow mortgage accounts
• Proof of loans made and debts owed
• Vehicle titles
• Stock certificates, savings bonds and brokerage accounts
• Partnership and corporate operating agreements
• Tax returns
Bank Accounts
• List of bank accounts
• List of all user names and passwords
• List of safe-deposit boxes		 Health-Care Confidential
• Personal and family medical history
• Durable health-care power of attorney
• Authorization to release health-care information
• Living will
• Do-not-resuscitate order
Life Insurance and Retirement
• Life-insurance policies
• Individual retirement accounts
• 401(k) accounts
• Pension documents
• Annuity contracts
Marriage and Divorce
• Marriage license
• Divorce papers

Learn more in this article

Class of 2018: Financial Advice That will CHANGE YOUR LIFE

PDS-CommencementThe following is a brief excerpt from the commencement address by Dr. Chris Mullis to the graduating class of Providence Day School on May 31, 2013. The full text of Dr. Mullis’ speech, that includes career advice, financial guidance, and a few pearls of wisdom, can be found here.

At my investment advisory firm, we developed complex computer algorithms and use them to manage our clients’ investment portfolios. But the basic steps you need to take to manage your own money well are deceptively simple. First, live within your means and avoid being caught up in rapid lifestyle inflation. You will not live like your parents when you first start out. Second, save and invest your money wisely. Let me elaborate on this point.

Wealth accumulation depends on three factors: how much you save, the rate at which your money grows, and how long you save. That last factor, time, is very, very important. There’s an urban legend that Albert Einstein once said that compounding interest is the most powerful force in the Universe. That quote is likely misattributed but the message is spot on. If you save $5,000 a year for 40 years and earn 8% annually, you will eventually have $1.3M. But if you delay starting for merely 5 years, your results after 35 years will be only $860k. That 5-year delay preserved $25k of short-term capital but ultimately cost you >$400k in the long run. Time is the most powerful lever in the machinery of investing. Nothing else comes close to it.

So what do you need to do? Start saving and investing right out of high school regardless of how hard you think it hurts or how unpleasant the tradeoffs. Even if you set aside only 5% of your paycheck starting out, do it to get into the habit of saving. Delaying getting serious about investing until my 30s was a significant financial mistake on my part. No one ever sat me down and explained how important it is to start investing early. Now that we’ve had this little talk, you’ll never be able to say that no one told you.

Managing Your Portfolio: One Father’s Advice

Writing letter to a friend.Arthur Zeikel, president of Merrill Lynch Asset Management, sent his daughter a letter teaching her some investing basics.

Enjoy!

———

Personal portfolio management is not a competitive sport. It is, instead, an important individualized effort to achieve some predetermined financial goal by balancing one’s risk-tolerance level with the desire to enhance capital wealth. Good investment management practices are complex and time consuming, requiring discipline, patience, and consistency of application. Too many investors fail to follow some simple, time-tested tenets that improve the odds of achieving success and, at the same time, reduce the anxiety naturally associated with an uncertain undertaking.

I hope the following advice will help:

A fool and his money are soon parted. Investment capital becomes a perishable commodity if not handled properly. Be serious. Pay attention to your financial affairs. Take an active, intensive interest. If you don’t, why should anyone else?

There is no free lunch. Risk and return are interrelated. Set reasonable objectives using history as a guide. All returns relate to inflation. Better to be safe than sorry. Never up, never in. Most investors underestimate the stress of a high-risk portfolio on the way down.

Don’t put all your eggs in one basket. Diversify. Asset allocation determines the rate of return. Stocks beat bonds over time.

Never overreach for yield. Remember, leverage works both ways. More money has been lost searching for yield than at the point of a gun (Ray DeVoe).

Spend interest, never principal, If at all possible, take out less than comes in. Then a portfolio grows in value and lasts forever. The other way around, it can be diminished quite rapidly.

You cannot eat relative performance. Measure results on a total return, portfolio basis against your own objectives, not someone else’s.

Don’t be afraid to take a loss. Mistakes are part of the game. The cost price of a security is a matter of historical insignificance, of interest only to the IRS. Averaging down, which is different from dollar cost averaging, means the first decision was a mistake. It is a technique used to avoid admitting a mistake or to recover a loss against the odds. When in doubt, get out. The first loss is not only the best, but is also usually the smallest.

Watch out for fads. Hula hoops and bowling alleys (among others) didn’t last. There are no permanent shortages (or oversupplies). Every trend creates its own countervailing force. Expect the unexpected.

Act. Make decisions. No amount of information can remove all uncertainty. Have confidence in your moves. Better to be approximately right than precisely wrong.

Take the long view. Don’t panic under short-term transitory developments. Stick to your plan. Prevent emotion from overtaking reason. Market timing generally doesn’t work. Recognize the rhythm of events.

Remember the value of common sense. No system works all of the time. History is a guide, not a template.

This is all you really need to know.

When this article was originally published in 1995, Arthur Zeikel was president of Merrill Lynch Asset Management in New Jersey.

Source: Forbes

Salary You Need to Afford the Average Home in Your State

The map above from howmuch shows how much salary you need to afford the average home in your state.  This a quick snapshot of housing affordability across the United States.

Top five places where you need the highest salaries to afford the average house:

  1. Hawaii: $153,520 for a house worth $610,000
  2. Washington, DC: $138,440 for a house worth $549,000
  3. California: $120,120 for a house worth $499,900
  4. Massachusetts: $101,320 for a house worth $419,900
  5. Colorado: $100,200 for a house worth $415,000

Top five places where you need the lowest salaries to afford the average house:

  1. West Virginia: $38,320 for a house worth $149,500
  2. Ohio: $38,400 for a house worth $149,900
  3. Michigan: $40,800 for a house worth $160,000
  4. Arkansas: $41,040 for a house worth $161,000
  5. Missouri: $42,200 for a house worth $165,900

Source: howmuch

Location, location, location!

As we head into the spring real estate season, many of our clients are busily buying and selling properties.  As the old adage goes, location, location, location.  The fascinating visualization above underscores the importance of geography in median housing prices and land valuations.

Blue dots represent the value of an acre of land, and the red circles indicate the median value of a home. The bigger the blue dot and the larger the red circle, the more expensive it is to become a property owner. Small circles and dots likewise indicate a very low cost of purchasing property.

A couple of things stand out:

  • An acre of land is much more valuable in the Northeast compared to any other part of the country
  • Median home prices generally high in the Northeast as well
  • There’s a noticeable decline of both land and housing prices in southern and midwestern states

Source: howmuch

What Assets Make Up Wealth?

This is the time of year where our office is busily updating our clients’ net worth statements.  Net worth is the best measure of both your current financial health and the financial progress you’re making over time.  Remember that your net worth, simply put, is the sum of all the financial assets you own minus all of the debts that you owe. Almost every good financial decision you can make serves to either grow or protect your net worth. For example, saving and investing increase your the financial assets you own, while paying off debt decreases the amount you owe.

The Visual Capitalist recently published the fascinating chart below that examines how the composition of assets varies by net worth.

It’s readily apparent that the asset mix changes greatly between lower and higher net worths:

Primary Residence:
This is by far the most important asset class for all net worth tiers up to $1 million.

Vehicle:
For the $10k net worth tier, the value of a vehicle is more than investments such as pensions, IRAs, mutual funds, stocks, etc.

Stocks:
The proportion of directly-held stock increases up the tiers, and billionaires hold a significant portion of wealth in stocks.

Business Interests:
Most multi-millionaires or billionaires are not liquid, and have most of their wealth in business interests.

Equifax Data Breach: What You Need To Know

Late last week Equifax announced it was hacked and personal information for 143 million Americans was stolen. If you use credit of any kind (credit cards, home mortgages, student loans, etc.) as most people do, there’s a 50% chance your personal information is involved. Here’s a run down on what happened, the risks, and the options you should consider to mitigate the impact to your personal finances.

Who is Equifax?
Equifax is one of the big three credit reporting agencies in the United States. It collects large amounts of personal information about anyone who has received credit through credit cards, mortgages, car loans, and student loans. Companies use credit reports from Equifax (plus TransUnion and Experian) to extend credit to consumers and conduct background checks for employment and housing.

What happened?
Hackers broke into Equifax’s database and stole personal information for 143 million people. The breach lasted from mid-May through July 2017. Equifax revealed the data breach publicly on September 7, 2017. Stolen information includes people’s names, Social Security numbers, birth dates, addresses and, in some cases, driver’s license numbers. Hackers also accessed credit card numbers for some 209,000 people and dispute resolution communications for about 182,000 people.

How could you be at risk?
Hackers have or will very likely sell this personal information to criminals who can then perpetrate identity theft. With that information, they can open bank accounts, new credit cards, or even drivers’ licenses in your name. Criminals could also file fraudulent claims for your tax refund or your Social Security benefits.

What steps should you consider?
Remember there’s a good chance that you’ve been exposed. To mitigate the potential damage, the Federal Trade Commission recommends you take immediate steps to protect your information from being misused:

  • Visit Equifax’s website, www.equifaxsecurity2017.com
  • Find out if your information was exposed. Click on the “Potential Impact” tab and enter your last name and the last six digits of your Social Security number. Your Social Security number is sensitive information, so make sure you’re on a secure computer and an encrypted network connection any time you enter it. The site will tell you if you’ve been affected by this breach.
  • Whether or not your information was exposed, U.S. consumers can get a year of free credit monitoring and other services. The site will give you a date when you can come back to enroll. Write down the date and come back to the site and click “Enroll” on that date. You have until November 21, 2017 to enroll.
  • You also can access frequently asked questions at the site.

Here are some other steps to take to help protect yourself after a data breach:

  • Check your credit reports from Equifax, Experian, and TransUnion — for free — by visiting annualcreditreport.com. Accounts or activity that you don’t recognize could indicate identity theft. Visit IdentityTheft.gov to find out what to do.
  • Consider placing a credit freeze on your files. A credit freeze makes it harder for someone to open a new account in your name. Keep in mind that a credit freeze won’t prevent a thief from making charges to your existing accounts.
  • Monitor your existing credit card and bank accounts closely for charges you don’t recognize.
  • If you decide against a credit freeze, consider placing a fraud alert on your files.A fraud alert warns creditors that you may be an identity theft victim and that they should verify that anyone seeking credit in your name really is you.
  • File your taxes early — as soon as you have the tax information you need, before a scammer can. Tax identity theft happens when someone uses your Social Security number to get a tax refund or a job. Respond right away to letters from the IRS.

Our CEO Chris Mullis visited Equifax’s website to determine if his family’s information was exposed. His information is not involved, but unfortunately his wife is not so lucky. Equifax immediately allowed Chris’ wife to enroll in its TrustedID Premier monitoring program. Their personal experience just underscores the fact that basically one of every two Americans is likely impacted by the Equifax data breach.

Please take steps to protect yourself from this data breach and share this alert with family and friends.

If you have any questions or need any help, please give us a call.

Student Debt Linked to Worse Health and Less Wealth

student-debtThe negative effects of student debt are significant and persistent according to a Gallop poll.  Those who borrowed more than $25,000 are less likely to enjoy work and are less financially and physically fit than their debt-free peers even 24 years after graduation.

Gallop examined five elements of well-being:

  • Purpose: liking what you do each day and being motivated to achieve your goals
  • Social: having supportive relationships and love in your life
  • Financial: managing your economic life to reduce stress and increase security
  • Community: liking where you live, feeling safe, and having pride in your community
  • Physical: having good health and enough energy to get things done daily

Financial and physical well-being show the strongest relationship with student debt.  Conversely, social well-being appears to have the weakest debt link.

“These results offer a new dimension of how college debt affects the rest of your life and it gives us more cause for concern,” said Brandon Busteed, executive director of Gallup Education.

Source: Gallup

Skin in the Game?

skin
Would you eat at a restaurant where the chefs didn’t eat their own cooking? Would you have joined the Hair Club if the president weren’t also a client? Then why would you invest according to an advisor’s guidance if that advisor doesn’t follow his or her own advice?

Portfolio manager Mebane Faber suggests,

Next time you sit down with your advisor, ask him or her a simple question:

How do you invest your own money?

Don’t settle for a simple “well, uh, I have some stocks and bonds, and, umm, some CDs”…ask them specifically what their allocation percentages are, and what funds they use etc.  Many find it very uncomfortable to disclose and many will refuse to do so!

As far as fund managers, many managers don’t even invest in their own funds.  (Here are a few articles on how little managers invest in their own funds here, here, and here.)

In addition, many commentators are willing to provide you with plenty of advice but just try getting them to disclose how they invest their own money – impossible!  How many commentators can you identify that invest in their own funds and are transparent with where they invest? They are happy to give you advice, but forbid they tell you how they invest!

We Eat Our Own Cooking!
The principals of NorthStar Capital Advisors place nearly all of their investable wealth in the same type of diversified stock and bond portfolios that we manage on behalf of our clients.  We also inform and educate our clients on how we are cooking via this personal finance blog, quarterly performance reports, and around the clock access via phone and email.

So, next time you are talking with your advisor or broker, or hear someone giving lots of financial advice, ask them one simple question: “What do you do with your money?”
Nothing on this website constitutes either the provision of investment advice or solicitation to provide investment advice. Investment advice can only be provided through a formal investment advisory relationship. Copyright © 2018 NorthStar Capital Advisors - Charlotte, NC. All Rights Reserved.