The Wise Investor’s Mantra: Diversify, Diversify, Diversify

Unless you’ve been living under a rock, you probably know these are not happy times for investors. A casual glance at the financial headlines would lead to the conclusion that the best place to put your money may be under your mattress—preferably in euros.

A recent front page story in The Wall Street Journal led with a story about a couple who planned to retire this year, but now can’t because of the failing economy. Instead of quitting their jobs and retiring to sunny Arizona, they will continue to work because they can’t sell their home and have suffered a 20% decline in the value of their retirement plan. The story went on to talk about how bad things are for investors.

Reporting like this really gets my goat. While I am sure the reporter’s facts are right, the story would lead casual readers to conclude that the average investor has lost 20% so far this year. What the reporter didn’t mention was that this particular couple must have taken a very concentrated position on a handful of stocks or a few specific sectors.

Let me explain. At the time this story was written, the S&P 500 was down no more than 14%. The S&P 500 is an index, representing an investment in the 500 largest US companies. Because this couple’s retirement funds did much worse than the S&P 500, they could not have been diversified, even in stocks. That’s the story the reporter omitted. Had this couple understood the safety and power of investing in a diversified portfolio of asset classes, they probably would be retired today.

A diversified portfolio will not have more than about 40% in the US stock market. It will also have international stocks, high quality bonds, junk bonds, TIPs bonds, commodity funds, REITS, and market neutral funds. Investors who are diversified among five or more asset classes have seen very minimal losses this year. I would guess that the average diversified portfolio had very small or no losses during the first quarter of this year. That’s a far cry from the poor couple who lost 20%.

It still amazes me that asset class diversification is the exception rather than the norm. Of the hundreds of portfolios I’ve seen over the past 25 years, maybe 1% had any type of serious asset class diversification. That’s sad in a day and age where extensive investment knowledge is available to anyone with access to the Internet.

If history is any predictor of the future, and I’ll bet it is, we are probably nearing a market bottom and the worst is behind us. I base that on several factors. First, the average recession since 1945 has lasted 11 to 16 months. Most bear markets bottom around the sixth to ninth month of the recession, meaning we should see a market bottom around May to July.

Second, I am hearing and reading about more and more investors starting to panic and switching from stocks to bonds or cash. My experience is that investors, left to their own means, typically sell-out or buy-in at precisely the wrong time. I call this “the big mistake.”

This market decline will be no different, mark my words. Just at the time things look the darkest for the economy, hordes of investors will decide to fold their tents and sell-out. Soon after that sell-off, the market will bottom and start its bumpy march upward; leaving behind those who panicked and sold out.

So what’s the cure to getting through times like this? Diversify your portfolio in five or more asset classes, set your allocations, and sit back and relax.

Wisdom from the masters

Sometimes the most powerful wisdom comes in compact packages. A great quotation can sum up a lifetime of experience in a few words, giving us all valuable lessons. Sometimes a quote itself can tell the whole story. But often the meaning must be teased out of it. Here are some of my favorite examples.

“Rule #1: Never lose money. Rule #2: Never forget Rule #1.”
- Warren Buffett

On the surface, what could be simpler than this? Just don’t lose money. But what does this really mean? Is Buffett suggesting investors avoid buying anything that might lose money? I have personally promised that anybody who invests in stocks, either directly or indirectly, will eventually lose money. I hope the loss will be temporary, but investors who react quickly to losses by selling their holdings lock those losses in, making them permanent.

Warren Buffett is the famous CEO of Berkshire Hathaway (a company that in many ways resembles a mutual fund because of its wide investment holdings). That company has lost considerable money from time to time on its own investments. So has he violated his own rules?

In my view, this quote is about the difference between being an investor and being a speculator. That difference has to do with the probability of getting a return on your investment. An investment is something that has a high probability of generating a positive return. A profit, in other words. A speculation includes the possibility of a positive return, but also a relatively realistic probability of no return or even a loss.

Buffett has become good friends (and co-philanthropists) with Bill Gates, co-founder and chairman of Microsoft Corp. In the days when Microsoft was a new darling of the stock market, Buffett took a pass on buying Microsoft stock, saying he didn’t understand the technology behind it. (Relatively few people did, and relatively few of us still do even today.) Technology stocks tend to fall into two camps: Overwhelming successes like Cisco and Google and Microsoft, and eventual duds like most of the early makers of automobiles and computer hardware. Therefore, technology stocks tend to be speculative. I think that may be what’s behind this quote from Buffett. What do you think?

“If you spend 15 minutes a year studying the economy, that’s 10 minutes too many.”
- Peter Lynch

I wouldn’t be surprised if Warren Buffett agrees with this sentiment from the famous manager of Fidelity’s Magellan Fund in its early years. I also agree that for most people, 15 minutes a year trying to figure out the U.S. economy is not the best use of their time. If you’re an economist, or if you’re studying economics, of course it makes sense. But if you’re an investor, there’s no payoff that I have ever been able to identify.

The comment could come from any of thousands of analysts who don’t worry about the market on a day-to-day basis. They see their job as identifying companies that are likely to do well in the future.

My approach is to identify asset classes (groups of hundreds and thousands of individual companies) that are likely to do well in the future. Regular readers can probably recite them by heart: U.S. large-cap stocks, U.S. large-cap value stocks, U.S. small-cap stocks, and so forth. I have much more confidence in those asset classes than I do in any individual stocks I might choose.

“The investor’s chief problem, perhaps his worst enemy, is likely to be himself.”
- Benjamin Graham

Ben Graham, considered to be the father of modern security analysis and value investing, was a mentor and teacher to Warren Buffett. Legend has it that Graham awarded a grade of “A+” only one time, and it went to Buffett.

I completely agree with this quotation. If textbooks, research and the “right answers” were enough to make people successful investors, we could all be billionaires. The right answers are out there, fairly easily available to anybody who looks for them. Yet most people fail to achieve a high level of investment success.

Why is that? One big reason is psychology. You know you should buy low and sell high. But doing that doesn’t feel comfortable, and if you’re typical you have a hard time doing it. There’s a Grand Canyon of difference between understanding what you should do and actually doing it. I’ve devoted a chapter of my book “Live It Up Without Outliving Your Money” to the psychology of successful investing. One of the things I show is that your own emotions are among your biggest hurdles.

As investors we tend to trust too easily and place that trust in the wrong hands. We want to believe that anybody we know and like would naturally have only our best interests at heart. As a result, we get taken advantage of too many times.

We want to focus on success and skip over the potential dangers. We feel safer doing what everybody else is doing, even though that is very often the wrong thing to do. We believe we – or the experts we have identified – are smarter than average, so we refuse to settle for the returns of the markets. Instead we ratchet up our level of risk in order to “prove” our superiority. Far too often, this backfires.

“Don’t look for the needle. Buy the haystack.”
- John Bogle

Imagine the countless hours of stock-picking and fund-picking research you could save if you were willing to buy “the haystack” of investing, essentially the whole market. If you actually enjoy sorting through a haystack looking for the elusive pins that everybody else has missed, that’s fine if you regard it as recreation. There’s always a chance, however slim, that you’ll find a really nifty needle. But don’t kid yourself into thinking that picking a few stocks amounts to serious investing.

If you are so highly competitive that you must frantically search for the needle, all I can do is wish you luck. You’ll need it, because you’ll have the company of hundreds of thousands of other investors who think they can hunt better than you can. If entertainment and excitement is what you want, you may find it in the hunt. I just hope you’re also prepared for disappointment.

Those of us who buy the whole haystack expect to outperform most of those frantic seekers. We expect to do it with less risk, less stress and less expense. If your ultimate aim is to get the best return for the amount of risk you take and effort you spend, the haystack is the way to go.

The Wealth Management Quest

Gary Rathbun’s Toledo, Ohio-based financial-advisory business is growing like weeds on steroids. His firm’s assets under management have shot up 600 percent over the past three years to $500 million at last count, and he has notched net income growth of 60 percent to 70 percent a year over that same period. His secret? A little thing called wealth management.

Sure, you’ve heard of wealth management by now. In fact, you probably call yourself a wealth manager. Data collected for Registered Rep.’s annual compensation report show that 77 percent of financial advisors do. But are you really a wealth manager? Do you even know what the phrase really means? It pays to know, because, as Registered Rep.’s annual compensation report shows, only 8 percent of advisors — across all business channels — actually fit the bill. Yet, the income gap between wealth managers and the rest of the industry is widening rapidly. The average wealth manager produced $1.36 million in 2005, a 39 percent jump versus the prior year, while investment generalists — the vast majority of advisors — produced less than half of that, or $670,000, up 31 percent versus 2004.

Wealth management is essentially financial advocacy for one’s clients, says Rathbun, and that means you’re not selling them products, but solving their financial problems. And therein lies the key: True wealth managers get 60 percent or less of their income from investment-related products, according to the definition used for our compensation survey. Fees on consulting services provide the rest.

“Most people and firms equate wealth management with the ability to provide a wider array of products,” says industry consultant Russ Alan Prince, who conducted the survey for Registered Rep. But it’s really a business model that entails offering a broad array of financial planning and investment-management services, using a consultative approach and a network of specialists, he says. Those services include cash-flow management, income-tax planning, investment management, estate tax or transfer planning, retirement planning, risk management, balance-sheet management, trust services and philanthropy. “The wealth-management model feeds on itself — you get wealthier clients because you’re providing the services they want,” says Prince.

There couldn’t be a better time to work with the wealthy: Their numbers are growing, the economy is strong and equity markets are humming. The number of American households with a net worth of $1 million or more, excluding their principal residence, grew to a record 8.9 million last year, according to TNS Financial Services, a British market research firm. And there are over one million individuals with $10 million or more in net worth — the ideal wealth-management client — in the U.S. (including foreign nationals), says Prince. These individuals control $91 trillion in assets. “They control more wealth than the rest of the global population together. So where do you want to be?” continues Prince.

Rounding Up the Experts

Rathbun’s firm, Private Wealth Consultants, which he runs with his two partners, employs 12 staff members catering to 220 clients. The firm does everything from paying bills and sorting mail to taking care of credit cards, even organizing personal security. While that may sound a bit like a family office, he says the key difference is that he has a client minimum of just $1 million, whereas most family offices have a minimum of $25 million to $50 million. (His average client has $6 million to $7 million.) The firm charges 1 percent on assets under management, and, depending on the complexity of a client’s consulting needs, it also charges a monthly retainer of $5,000 to $10,000, or an hourly fee.

How does he make it work? Rathbun and his partners do all of their clients’ investment management in house, but they turn to outside experts for their clients’ other needs. In fact, he says he probably spends about 30 percent of his time helping clients solve problems that he can’t solve himself — by referring them to specialists in what he calls his “network.”

For most wealth managers, using outside experts is essential, because it can get very expensive to have top talent on your payroll. For example, although Rathbun started out in the business as an insurance agent and still has an insurance license, he has a “super specialist insurance guy” in his network. He also has individuals or firms that specialize in personal security and real estate financing, as well as several individuals who specialize in asset protection and one guy who is a “genius” at offshore protection. In all, he has “very intimate relationships” with 14 different specialist individuals or firms in the network and 50 other individuals he can use as backup. The specialists usually charge his clients a separate fee of which he takes no cut.

It wasn’t easy developing the network. That’s because Rathbun does a lot of due diligence on these individuals. “It’s very hard to get people with the same level of service and integrity that will provide for the client as I do,” he says. Despite the hard work it takes to develop and maintain, the network of specialists is crucial for another reason: It’s the source of all of his client referrals. “The point is affluent people don’t refer their wealth managers to other affluent people,” explains Rathbun. Some 70 percent get their wealth manager via referral from attorney or CPA, according to Prince & Assoc. research. The more specialists he has, the more problems he can solve and the more willing these guys are to refer their wealthiest clients.

But selecting clients can take just as much care as selecting the specialists you work with, says David Feruchi, a partner with Feruchi Company in Essex, Conn. You don’t want to waste your time on someone who isn’t going to be a lifelong client. “We had an introductory meeting with two members of a family on Tuesday, and they were joined by their accountant,” says Feruchi. “We were essentially kicking each other’s tires to see if there is a basis for moving forward, a way for us to add value to them in their financial lives. Sometimes that introductory phase is one meeting, other times it’s a series of phone calls, meetings, lunch, breakfast. It’s a sort of a courtship.”

Catching On

Many of the large Wall Street firms are providing wealth management to clients successfully through their private client divisions, but they’re also pushing it on the retail side — less successfully. Independent broker/dealers are also trying to turn their advisors into wealth managers so they can have a crack at the wealthiest clients.

“The idea that all these firms are converting to the wealth-management model is hype,” says Prince, an industry consultant. “It’s all advertising campaigns. They may have changed their business cards and stationary, but they’re doing the same things. They’re mostly investment manager advisors,” he says. “Everybody runs around saying look at our platform — look at what we can do — but advisors don’t know how to use the products. They have specialists to help, but most of the specialists aren’t that special.”

These big firms face a number of challenges. For one thing, because it’s impossible for a single individual to be an expert in all areas of wealth management, it requires a team approach. But the grid compensation system used by most institutions favors personal production, discouraging advisors from getting terribly excited about joining teams, says Philip Palaveev, a senior consultant with Moss Adams. “And compensation systems provide a very strong motivation for behavior,” he adds. “Also, while advisors have been encouraged to team up, the institutions haven’t provided good models of what these teams should look like. What should the roles and responsibilities of team members be? How should they structure client relationships and compensation models? In some cases, some institutions have tried to force-marry the advisors — sometimes these stick, but in a lot of cases they don’t.”

In addition, many of the firms are still arranged in product silos. Advisors may have access to experts in different wealth-management disciplines, but these experts may be in a different city or a different office, with a separate boss and separate budget and sales goals to meet — an arrangement that is not conducive to sharing or networking, Palaveev says. In the private client groups at large wirehouse firms, by contrast, all of the specialists are inside the same group, on the same team, in the same profit center.

Furthermore, wealth management is time-intensive and requires some investment. “There is a lot of discovery [of client's financial needs], a lot of front-end work. It’s very service-intensive and there’s a lot higher cost,” says Dennis Gallant, of Gallant Distribution Consulting. “That’s offset when it’s done properly by the pursuit of wealthier clients, a larger share of their wealth and client retention. But it has to be done properly.”

Making the switch from a traditional financial-advisory business is no simple feat. “You really have to switch gears,” says John Waldron, a wealth manager at LPL. “The way you do things, the way you sell your services, your firm. It’s hard for me even to accept a new insurance product my friend tells me about. Even though I understand its application and where it fits into the planning process, it’s really hard to bring that in. People are afraid to change even though they think it may be better. Especially for big producers who think like employees, they’re not going to think the model is broken if they’re making $1 million to $3 million a year.”

Not to mention the fact that so many advisors seem not to know what wealth management is. “Advisors are still trying to figure out what is an advisor versus what is a broker,” says Palaveev. “Nevermind trying to figure out what is a wealth manager, an investment consultant, a financial planner, etc. The terminology confusion is massive.”

Small Steps Forward

That said, firms are beginning to make some progress — offering specialized wealth-management training, providing compensation incentives for creating teams and increasing the number of wealth-management specialists available to advisors both in the home office and remotely in the field.

Smith Barney, for example, has created a designation called the “qualified private wealth-management specialist.” These individuals, who have to pass an intensive internal exam, are the only ones who are allowed to take on referrals from the investment banking side of the business. Only 65 individuals have taken and passed the exam so far, according to one high-level Smith Barney advisor, and only one of them passed it on the first try. In the near term, the firm wants all of its advisors to join teams and have a private qualified private wealth-management specialist on their team. Smith Barney has also been providing a series of wealth-management training conferences to its advisors, and there are salaried estate-planning and insurance experts in each Smith Barney branch.

In addition, the firm recently changed its compensation system to encourage the formation of teams. Today, if you’re on a team that has been approved by the firm, and contingent on certain production levels, you can get a payout that is equal to the payout of the highest paid person on your team.

“That resulted in $25,000 in extra pay for my team members,” says the Smith Barney advisor, who has not yet taken the wealth-management test but aspires to. “We recycle that money back into the business,” he says. There are 10 advisors on his team, but he also networks with four partners in the firm who specialize in corporate health-plan services, endowments, high-level 401(k)s and Taft-Hartley. “In order to properly serve the wealth-management client, you have to break yourself out of an individual operation to the swat team approach,” he says.

A.G. Edwards has also created new compensation options to encourage the formation of teams: allowing Chairman’s Council-level producers, or those with $700,000 in production or more, to introduce a salaried advisor to the team. “We’re not hiring grunts,” says Chuck VanGronigen, senior vice president and assistant director of branches for the firm. “We’re hiring people who are credentialed, trained, ready to represent A.G. Edwards to clients. They may have a portion of their book that they deal with exclusively, or they may be experts in a certain product area. It could be any of those things.”

To make sure its advisors know how to use the wealth-management products and platform it offers, Linsco Private Ledger has overhauled its advisor training and has 20 salaried wealth-management specialists on staff. “This year, we modified our training. In the first quarter we went to 23 cities and trained 1,000 advisors on a face-to-face basis, focusing on helping them understand the resources available to them to help them more efficiently process business in the local market,” says Bill Morrissey, senior vice president of advisor consulting services at LPL. “We’ve assembled a tremendous platform to serve advisor clients. The next challenge was helping advisors get their arms around the platform.”

Some firms are outsourcing their wealth-management training to others. This year, Securities America began offering the top 15 percent of its advisors a $7,000 discount (or 36 percent) on a wealth-management training program put together by CEG Worldwide, says Paul Lofties, the director of wealth management at the firm. The program filled up quickly, and the firm already has 25 people on the waiting list for the next round. Each of the advisors participating has an individual coach who they speak with on a monthly basis in between intensive quarterly group training sessions. The b/d is also in the process of forming a virtual network of outsourced partners who are experts in things like business succession planning, mergers and acquisitions, and it’s developing a directory of the core competencies that different advisors at the firm have so they can network with each other.

Jeff Carbone, a Securities America advisor who is going through the wealth-management training program, says he was very uncomfortable with it at first. “Why uncomfortable? Because I’ve been doing business for 14 years in a way I was comfortable with. Because I thought it was about quantity not quality,” he says. What does he like? “It just helps us to think bigger.” Indeed, he’s only been in the program for two months, and he just won his first $50 million client.

GRID GAMES

The big brokerage firms haven’t made any major changes to their compensation grids lately, but they are tweaking them around the edges.

The last big compensation grid overhaul in the brokerage business was Wachovia’s move to vastly simplify its grid last year, by flattening payout rates to two tiers, say recruiters and analysts. But a number of minor changes are in the works at all of the firms. For one thing, deferred compensation is going up and pay for lower-end producers is going down; firms are trying to offset the cost of escalating recruiting bonuses and to ensure longevity of higher-end producers in a competitive recruiting environment. “The more intensive the recruiting battle becomes, the more intensive deferred comp becomes,” says Phillip Palaveev, senior analyst at Moss Adams. “Firms are just dissatisfied with the well-known trend of top advisors jumping around. And they’re dissatisfied with what they get for what they pay. But they can’t seem to get out of the recruiting game.”

Firms are also pressuring advisors to work with larger clients by lowering or eliminating payouts for smaller ticket trades or by providing bonuses for larger accounts. Merrill Lynch, for example, offers a cash bonus for households with $250,000 and up, says recruiter Danny Sarch, of Leitner Sarch Consultants in White Plains, N.Y.

The drive to switch away from transaction-based commission business and towards ongoing fee-based business continues: Most large firms are still rewarding the latter with higher payouts. And enthusiasm for open architecture is spreading, with firms eliminating rewards for proprietary product sales. “Even the Merrills of the world are becoming more open architecture,” Palaveev says. “It can be very unsubtle — as in higher payouts — or much more subtle — as in subsidized tickets to clients or advisors, or added support or access.” Differential payouts for different types of products are also being eliminated, recruiters say.

Another trend — lower payouts on institutional business. At most firms, the latter are now in the range of 20 to 28 basis points, says recruiter Rick Peterson of Rick Peterson & Associates in Houston, Texas. That’s because institutional business is just not as profitable as retail business. “It’s a straight trade. Institutions don’t give brokers custody of their assets,” Peterson explains.

A HELPING HAND

Desired technical support for advisors, based on differing business models. Wealth managers need the most support, product specialists the least.

What kind of support do you want most?
Percentage or reps answering “yes” to various needs.

	Wealth Manager	Investment Generalist	Product Specialist
Advanced product training	87.1%	76.9%	18.6%
Investment management proposals	28.7	40.7	12.1
Concentrated positions/restricted stock positions	63.4	72.5	4.5
Estate planning	75.2	68.0	2.5
Retirement distribution planning	43.6	63.9	3.5
Charitable giving/philanthropic planning	70.3	69.5	2.5
Retirement planning	45.5	38.8	4.0
Deferred compensation	59.4	33.3	0.5
Asset protection planning	79.2	61.6	3.0
Tax planning	45.5	6.8	7.0
Source: Prince & Assoc., February 2006, 1,281 advisor surveyed.

How Do Mutual Funds and Stocks Differ?

Whether you’re a first-time stock investor or a seasoned veteran, you should understand what differentiates single stock investments from mutual fund investing. First, Some Working Definitions…

Picture a collection of stocks, bonds, or other securities that are purchased by a group of investors and then managed by an investment company. That’s a mutual fund.

When you buy a share in a fund, you’re really buying a piece of a large, diverse portfolio.

Conversely, stocks are shares of a single company.

Stocks vs. Funds:

The Management

When it comes to managing an investment, some investors prefer leaving those details and skills to someone else.

They like having an expert oversee the day-to-day decisions that a changing stock investment involves and see that as a distinct advantage. A good manager, they might argue, has access to information that would cost them an exorbitant amount, even if they had the time and inclination to do the work themselves.

On the other hand, some investors would never surrender control of their investments. Part of the thrill of investing is knowing that when they succeed it was due to their own decisions, these investors might say.

Individual comfort level plays a big part in your investment choice.

Diversifying Matters

When one security in a fund drops, an insightful fund manager may have included stocks that could cushion or offset that loss. Diversification is a big selling factor for mutual funds.

But that’s not to say that an investor couldn’t diversify via his own stock selections.

Liquidity, Liquidity

Fund investors can cash in on any business day.

When you sell a stock, you must wait three business days before the trade settles and your money is released.

The Issue of Red Tape

Mutual fund investors often cite transaction ease as an inviting factor. And it is hard to beat the convenience of having records and transactions handled for you, while periodically receiving a detailed statement of your holdings.

Transacting business with stocks can be a more complicated experience. Placing buy orders, selling shares, or dictating any number of orders can be time-consuming. To some, however, that’s just part of the experience.

In summary, fund investors are often attracted by the overall convenience. By way of contrast, stock investors may tend to be more comfortable with their own investing skills.

Remember the value of both mutual funds and stocks will fluctuate with the changes in market conditions, and when sold the investor may receive back more or less than their original investment amount.

Mutual funds are sold only by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Our Investment Approach

“Our guiding principle is at the heart of every strategy we build, plan we manage and solution we deliver. We believe that your goals are yours alone and that the only viable strategy is the one that most efficiently supports them.”

- BT Wealth Management .

As a BT Wealth Management Group client, you will benefit from a time-tested investment philosophy based on an integrity our clients have come to expect from one of the Northeast’s oldest and largest wealth management firms. Centered solely on your specific goals, we conduct our investment practices to ensure that we successfully meet your objectives. Our rigorous investment process combines diligence and focus with continuous client communication. In addition, our multidisciplinary team approach enables you to enjoy the simplicity of one trusted relationship supported by many resources.

Our Philosophy

• We believe that each client is unique.
• We manage risk; we do not avoid it.
• We focus on increasing after-tax returns.
• We are advocates of long-term investing.
• We believe success requires a defined process and a diversified portfolio.

Practices

• Each portfolio is crafted individually.
  Your financial advisor will bring you new investment ideas, suggestions and alternatives specifically based on your goals, desired returns and appetite for risk.
• We are measured on performance, not transaction volume.
  Unlike many firms, we do not succeed unless you do. This “shared success” principle ensures that our relationship will be built on a foundation of trust.
• We are singularly focused on investment strategy and asset management.
  This is our core business. We are not distracted by other activities and we never engage in any practice that could put our interests in conflict with yours.

• Contact BT Wealth Management

  To learn more, please e-mail us at wealthmanager@financier.com

“How Do You Envision Peace of Mind?”

Is it …

•  Relaxing on a beach?
•  Sailing on your boat?
•  Playing with your grandkids?

BT Wealth Management is an employee-owned, fcommission-fee-only personal financial advisory firm dedicated to our mission of “Partnering to Achieve Financial Peace of Mind”.

This partnership is not only with you, but also with your other professional advisors to ensure that your financial plans are implemented, reviewed and modified as needed. In addition, we partner internally delivering a team approach for your financial well-being benefiting this and future generations.

Whatever your Peace of Mind vision is… enjoy feeling good about your life and your finances.

CONTACT US

BT WEALTH MANAGEMENT

Raya Ketintang – Surabaya 60265 – INDONESIA

Tel. 62 81 2177 1819 •  62 31 72 52 1577

Focus on You and Your Needs

The essence of the BT Wealth Management Client Experience is to provide a framework that helps us consistently deliver the services you want to support your financial decisions.

We understand that wealth management is more than just the wide range of financial services and solutions you can access at BT Wealth Management— it is how those services and solutions are developed and delivered to help you pursue your goals.

That’s why we offer a customized approach to wealth management, built on a personal relationship and shaped by an understanding of your needs and aspirations. To help manage your wealth, we harness the advisory and investment brokerage capabilities of one of the world’s largest wealth management firms on your behalf.

Our structured approach to helping you pursue your objectives is based on findings from discussions with our clients, our Financial Advisors, and extensive market studies.

We discovered there are clear expectations:

• You would like us to listen to you, which is why we take time to understand you and your situation
• You expect approaches that suit your needs and objectives, which is why we propose customized solutions
• You want to be comfortable with your decisions, which is why after you agree, we leverage our global resources to implement your strategies
• You want to know how you are doing, which is why we periodically review your financial situation to discuss where you are and where you want to be

This is all part of the BT Wealth Management Client Experience — a process that continues throughout our relationship with you. At BT Wealth Management, financial relationships extend over a long time. Sometimes, a lifetime.

Which Investments Do Best in a Recession?

History offers mixed data on safe havens.

Everyone seems to be worried about a possible recession these days. The specter of an economic slowdown has been hovering ever since the subprime-mortgage crisis erupted last year, after which falling home prices led to a reduction in consumer spending, or at least the expectation of one. The latest bad news came Feb. 5, when the Institute for Supply Management reported a sharp drop in nonmanufacturing business activity in January, leading some people to think that we may already be in a recession.

Whether or not we’re in an official recession (defined as two consecutive quarters of negative growth in gross domestic product), most people agree that the U.S. economy is at least slowing down, and it’s natural to wonder what you, as an investor, should do. This recent column by Annie Sorich gives some good advice, which can be summarized in two phrases: Don’t panic, and be prepared. A down market is usually a better time to buy than to sell, and investing steadily through dollar-cost averaging is often your best bet. Also, it’s a good idea to have some savings as a cushion and to have investments in your portfolio that won’t be hurt too badly by an economic downturn.

But how are you supposed to know which investments will do well (or badly) in a recessionary environment? That’s not always a simple question to answer, but some general guidelines can be helpful.

Riding Out the Storm
According to conventional wisdom, the best stocks to own in a recession are those that don’t depend on economic cycles and are thus capable of doing well through thick and thin. Consumer staples such as food and beverage makers are a good example, as are health-care stocks. After all, people will keep on eating and taking their medicine regardless of what the economy does. On the other hand, stocks that are susceptible to economic and business cycles traditionally do poorly in a recession, prime examples being technology hardware and many industrials. In a broader sense, defensive, relatively low-risk investments, such as blue-chip stocks with steady earnings, are supposed to do well in a downturn, while higher-risk investments, such as small-cap stocks, do worse. Also, hard assets, such as precious metals and real estate, are considered defensive and traditionally do well in a downturn.

For the most part, those expectations are reflected in the market’s behavior so far this year, when recession fears have been highest. For example, among Morningstar’s 12 stock sectors, the two worst performers have been hardware and software, with average losses of 14.82% and 14.04%, respectively, for the year to date through Feb. 8. Next worst have been energy and telecom, both with double-digit losses. Consumer services has been the best-performing sector, with an average loss of “only” 3.99%, followed by health care. When we look at fund categories, there is a similar pattern. Technology and communications funds have been the worst-performing domestic stock categories for the year to date, while the best-performing category (apart from bear market and long-short) has been real estate, despite the weak housing market, with health-care funds not far behind.

A Mixed History Lesson
In reality, however, the markets haven’t always responded predictably to recessions. That’s because other factors, such as the valuations of various asset classes at the outset of the recessionary period, can affect what performs well and what suffers during an economic downturn.

For example, in the last recession, which lasted from March 2001 to November 2001, highly cyclical tech stocks sunk like a stone. At the same time, equally cyclical industrial materials stocks held up quite well, despite the widespread view that they should be avoided during a downturn. That was partly because industrials were so cheap after being beaten down during the tech bubble of the late 1990s. Similarly, small- and mid-cap stocks did quite well in 2001, even though they’re generally considered less recession-resistant than large caps. Again, recent history is the reason: Small caps had been laggards in the late 1990s, so when the market began to sink, they were poised to hold up relatively better than large-cap darlings that had been priced for perfection.

Things looked rather different in the last recession before that, which officially lasted from July 1990 to March 1991. For the trailing six months through February 1991, the best-performing funds included several health-care funds, but also many growth and technology funds, such as 20th Century Ultra .

The worst-performing funds were mostly gold and precious-metals funds, because the price of gold had been falling after rising sharply the previous July and August.

Caveat Emptor
As these examples show, every recession is different, despite the similarities. The 2001 recession followed the popping of a huge bubble in technology stocks and a great run for large-growth stocks in general; the current downturn has followed a dramatic slowdown in the housing market, and large-growth stocks, including many big tech names, have been in the doldrums for years. The 1990-91 recession played out against the buildup to the first Gulf War and fears of a possible oil shortage, but it was also a time when the use of computers and other technology was growing fast enough to overcome the head winds. When the war started in January 1991 and it became apparent that it would not be a long, drawn-out affair, the stock market jumped and the recession was over soon afterward.

These examples also show that it’s not a good idea to try to time the market in reaction to a recession. Someone who was defensively positioned at the time of the 2001 recession would have been in good shape, because even though the recession officially ended in November 2001, a cascade of corporate scandals, led by Enron and Worldcom, undermined investor confidence and extended the bear market for more than a year. On the other hand, as noted above, a new bull market started even before the 1990-91 recession was over, and investors had already been dumping gold and other traditional defensive investments months earlier. The market is generally very good at anticipating both recessions and recoveries, so they’re often priced into the market well ahead of time.

In the end, your best bet is to make sure that your portfolio is diversified, and be prepared to ride out short-term shocks to the market. (You can find some tips and ideas for good stable core stock funds here and here.) If you have a short time horizon and are really concerned about your exposure to economically sensitive areas of the market, you can use the Instant X-Ray tool to get a quick estimate of your exposure, and Premium Members can get a more detailed analysis through the Portfolio X-Ray.

Keep Your Eye On The Money

After this past week I feel like I have just enjoyed a great meal followed by two helpings of rich dessert…with no guilty feeling. A stock market with four up days in a row…NASDAQ up 8% for the week…is life good or what?

We have not been treated to a NASDAQ performance like that in more than seven months. This raises two questions: Is this the end of the Y2K Bear Market, and if so, why the turnaround? To answer the latter, do what any good forensic accountant or detective would do…just follow the money.

The money behind this rally is coming from consumer spending. Retail sales continue to show strong month-over-month gains. April was up 1.2% over March, better than the .6% expected by most analysts. Consumers, the lifeblood of the economy, are driving the economic recovery from the shallow recession of last year by keeping their pocketbooks and wallets open.

Economists, a perpetually skeptical lot, continue to be amazed at the strength of the consumer spending patterns as the recovery grinds on. I fear too many of the practitioners of that dismal science have trouble seeing the forest for the trees.

The consumer is still spending because: A) the largest demographic age bulge of consumers…those 35 to 50…are reaching their peak spending years; B) these consumers have money to spend because they have good, well-paying employment; and C) inflation is in check and interest rates are down, so prices are attractive.

The Federal Reserve held off tampering with interest rates, since data continues to show that inflation risks remain contained so far. Higher productivity from the nation’s work force has helped keep labor costs in check and prices low. This should allow interest rates to remain low as the economy begins to accelerate.As productivity goes up and labor costs go down, business should be able to increase profits. If the profit picture continues to improve and we have no more surprise accounting scandals, maybe we can get a few quarters in a row of increasing earnings…something that should pull stock market bulls out of the barn and into the pasture.

As to whether this is the end of the Y2K Bear Market, I believe it is too early to tell. The signs are all positive, but the stock market is Darwinian in its grinding, relentless march to drive excesses from market valuations. In the process, at some point investors who bought stocks for the wrong reasons in 1999 and 2000 will realize that the pain of holding is greater than the pain of selling. When they are gone, the market will take off and leave behind those who think it will never recover.

From the ashes of the past two years there are some lessons for all of us. First, as a lot, we are not as smart as we were several years ago when an investor could pick any stock and make a little money. That investor still can, but it is now a real stock picker’s market…throwing darts doesn’t work!

Second, real companies with real businesses and real earnings, while their stock will fluctuate with market sentiment, continue to provide sound investment opportunities.

Finally, the consumer is king! As long as he has money and the propensity to spend, our economy will be fine. The great Bull Market that began in 1982 will continue its march, upward and to the right, until the consumer says “Stop.” Keep your eye on the money.

Children and Money

Our children hold our economic future in their hands. As frightening as that may seem, the fact is how they learn to handle money and how they learn to save (rather than spend) will shape the ultimate financial success of our retirement years.

If they learn to save rather than spend, interest rates will stay low and the stock market will remain strong. If they learn self-reliance they will be a productive economic force rather than an inflationary drag on society, all of which makes our retirement savings more valuable.

As a society steeped in the virtues of higher education and entrepreneurial spirit we are poised to put vast stores of wealth into their hands. For example, a child born today, whose family is fortunate enough to save $5,000 per year for the next 18 years in preparation for college, at age 18 will have more than a quarter of a million dollars to manage!

But that is just a small piece of the pie. The younger generations are expected to inherit more than10 trillion dollars from their parents’ estates within the next forty years. That wealth can either be productive or destructive . . .depending upon their management skills!

Fortunately there are some excellent resources available for both parents and children to learn money skills.

Willard Stawski, a stockbroker in Grand Rapids, Michigan, developed a system to teach children money management skills, The Cash University Money Management for Kids. It’s a kit that includes an audiotape explaining the program and various tools such as an Allowance Calculator, an erasable board with a section to list chores for making money and a section for negative behaviors that lead to deductions. The child receives his own checkbook, which can be used to write a check to a parent for an immediate cash need and to track funds. In addition, there is a College Savings Board to list special chores for the child to earn college education funds. The kit is targeted at kids ages 4 to 9 and sells for $24.95. Contact: phone (800) 209-4800 or www.cashuniversity.com.

If you want to put that home computer to use for something besides games and email, here are a few Web sites that teach children and young adults about money and investing.

• Investing for Kids is a site designed by kids that covers a wide variety of topics. It is divided into three levels: beginner, intermediate and advanced. It features a nifty stock market game as well as a bulletin board for questions and comments.
• Kids Bank.com was developed by a bank and teaches about money and banking through the use of cartoon-like characters. This is a great spot to start the younger set learning about money, where it comes from, and how it works.
• Young Investor, (this site is no longer available) teaches the basic concepts of investing through various character guides, from which the child can choose. It contains a handy library with financial articles and a dictionary of financial terms, as well as tips for parents on how to teach their children about investing.
• Independent Means is a site targeted at girls under 20. The content focuses on entrepreneurial as well as investment skills. The emphasis is to teach financial self-reliance to young women. A feature on the site that I found especially meaningful is a book titled No More Frogs to Kiss by Joline Godfrey (Harper Business) which discusses 99 action plans to financially empower girls. This is a must–visit site for parents and their daughters!

Harry Dent, the often-quoted author of “The Great Boom Ahead” and “The Roaring 2000s”, has forecasted a sharp drop in the stock market sometime after the year 2010 as baby boomers stop saving and investing and begin spending. The X factor in his predictive models is our children. Will they be productive? Will they be savers and investors? Will they handle their money, and that which they inherit from us, wisely? If they do, the severity of Dent’s predicted down market will be greatly reduced to all of our benefit. Therefore it makes sense to invest in educating our children now . . .they are our future!