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Welcome to our Blog! At Baron Silver Stevens, we feel it is important to empower our clients with information that can positively affect their lives.

Throughout our Blog, you will find interesting articles, updates on our firm, and practical financial planning tips.

Let’s Think About Investment Risk Differently, Here’s How:

Let’s Think About Investment Risk Differently, Here’s How:

 

Most of us know that there are risks when it comes to investing in the public markets and that we should build our investment portfolios within a general level of risk. We take risk questionnaires and use prior life experience to classify ourselves as a conservative, moderate, or aggressive investor (or somewhere in between.)

But what does “risk” really mean?

Traditionally, most asset managers and financial advisors use the term “volatility” or “standard deviation” to define risk. Both of these terms refer to the amount of short term price fluctuation an investment is expected to experience.

The more the price of an investment goes up and/or down, the higher the volatility/ standard deviation, therefore the “more risky” the investment is.  

Although this is all statistically accurate, we think the biggest risk for most investors is a bit simpler- not achieving your financial goals.

Think about it like this: in your retirement portfolio, is the biggest risk:

  1. short term price fluctuation or
  2. in one way, shape, or form, for whatever reason, you won’t have enough money to retire comfortably

Now, hopefully, we are starting to focus on what really matters.

The next step is to ask yourself the following question:

“On a scale from 1-10, 1 being the expected risk and return of cash and CD’s, and a 10 being the expected risk and return of the S&P500, where would you say you are? Knowing if you say a 10, you will get all the ups and all of the downs of the S&P500.”

This is one of the questions we ask our clients that allows us to look at risk differently. We are essentially finding out how much the boat can rock before you want to call it quits.  

We take this number and we pair it with a term called Beta.

In our assessment, Beta shows how closely an investment moves up and down with the S&P500. An investment with a beta of 1 will move identically with the S&P500.

Going back to the 1-10 questions, if you say you are a 6, we build your portfolio to have a Beta of 0.60. This allows us to define risk more precisely and track it over time so we both know where you sit in terms of risk. (A little better than “moderately something”, right?)

But remember, the biggest risk is that you don’t achieve your financial goal. So this conversation about risk is useless without a financial plan.

We need to know where you are and where you want to be. By looking at it this way, we can identify how much money you need to earn on your investments to get you from A to B. We call this your target rate of return.

Based on your target rate of return and how you feel about moving with the ups and downs of the market, we can now determine:

  1. whether or not your goals are realistic and
  2. how to go about investing your money in a way that’s designed to help you reach your goals and keep you invested along the way.
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Why Are We Still Talking About Active vs. Passive?

Why Are We Still Talking About Active vs. Passive?

For the past few years, a big debate in the investment world has been active investing vs. passive investing and which style is better. 

Active investing involves picking stocks with the hopes of outperforming the market or achieving a higher rate of return with lower risk than a particular benchmark. Most commonly, active investing is practiced in the form of purchasing an actively managed mutual fund. Active investing is also commonly associated with higher fees than passive investing.

Passive investing, on the other hand, most frequently involves purchasing an index mutual fund or an ETF that seeks to mirror an index. Instead of trying to beat the market, the passive investment seeks to earn market returns minus fees, and the fees are generally lower than that of actively managed funds. 

But everyone is focused on the wrong things here.

The conversation shouldn’t be about active vs. passive, as if one style of investing is the best for every asset class in every market for every investor. It’s silly to think any style of investment would be good for everyone in every situation. 

The conversation should be about where an active manager can add value, and where they cannot. 

Over a 15-year period, 92.33% of large-cap managers, 94.81% of mid-cap managers, and 95.73% of small-cap managers failed to outperform on a relative basis1. The argument can be made that this is because most markets are efficient and there is so much talent competing in these spaces that most of the alpha is squeezed out.

But active investments can have a place in your portfolio. 

The Wharton Wealth Management Initiative says active managers can add value in the follow ways: 

  • “Flexibility  –  because active managers, unlike passive ones, are not required to hold specific stocks or bonds
  • Hedging  –  the ability to use short sales, put options, and other strategies to insure against losses
  • Risk management  –  the ability to get out of specific holdings or market sectors when risks get too large 
  • Tax management – including strategies tailored to the individual investor, like selling money-losing investments to offset taxes on winners.” 2

Active management can also help psychologically in times of uncertainty. When the market is declining, it feels good to know a person is watching your investments and making active decisions. Knowing a portion of your money is being carefully analyzed by a trained professional is comforting.

Without this type of attention, most people feel like they have to do something themselves to alleviate the pain they are feeling from market declines. This often leads investors to sell depreciated assets resulting in a permanent loss of capital. 

In a nutshell here: the effects on your behavior that an active manager can have is very powerful for long term results. At the end of the day, the only thing that matters is making sure you get from A to B and accomplish your financial goals. So it’s not about active vs. passive. Be more open minded than that. It’s about using both active and passive strategies to help you accomplish your financial goals.

 

1Soe, A. M., CFA, & Poirier, R., FRM. (2017). SPIVA® U.S. Scorecard. RESEARCH SPIVA, 1-33. Retrieved July 17, 2018.

2Active vs. Passive Investing: Which Approach Offers Better Returns? (n.d.). Retrieved July 17, 2018, from https://executiveeducation.wharton.upenn.edu/thought-leadership/wharton-wealth-management-initiative/wmi-thought-leadership/active-vs-passive-investing-which-approach-offers-better-returns

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Barron's Top 1200 Financial Advisors

Barron's Top 1200 Financial Advisors

We are proud to have been recognized for a second year in a row by Barron's Magazine as one of their Top 1200 Financial Advisors in the country.

The rankings are based on assets under management, revenue generated by advisors for their firms, and the quality of the advisors’ practices.

Here is a picture of Michael Silver accepting this award at a Barron's Conference held in Miami in April.

In addition to being recognized by Barron's at the conference, Michael was also one of three financial advisors asked to speak to dozens of the top advisors in Florida about how advisory firms can continue to make a difference in the lives of their clients.

Here is a link to the Barron's rankings:

https://www.barrons.com/articles/americas-top-1-200-financial-advisors-1520651090

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Who does your Financial Advisor work for?

 

Who does your Financial Advisor work for?

Chances are you are thinking that the answer to this question is easy. You're probably thinking that your financial advisor work for a bank, insurance company, or they might even own their own firm, but at the end of the day you are the client and the client always comes first so they work for you, right? Not always the case.

The article linked below explains how at various Wall Street firms, the employer of your financial advisor, can influence the advisor's recommendations by making changes to the way the financial advisor is paid. This is the oldest trick in the book. Want your salesforce to sell more of something? Move the carrot to that product and the sales follow. This gives advisors an economic incentive to make recommendations to you based on whether or not they will get a pay raise, not because of what they think is best for your financial situation.

We hate this type of business. It's not how financial planning and wealth management should be.

At Baron Silver Stevens, we do things differently. We work for you and you only. Our firm is independent, so you can be assured that our recommendations come from what we truly believe is best for you. Additionally, as a Registered Investment Advisor, we have a fiduciary duty to our clients.

Here is a link to the article published in the Wall Street Journal:

 

https://www.wsj.com/articles/merrill-lynchs-thundering-herd-braces-for-pay-clawbacks-1527162126

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