In the recent local news for the 8th or 9th week in a row, among other news sources the Seattle Times has reported the winners and losers in a “mutual fund scorecard.” Since Mid -March 2014 we have been barraged with newspaper articles, TV commentaries, and related advertising showing how fabulous the five-year mutual fund returns are. However, beyond the media hype, let’s evaluate the reality of the recent hubbub. Financial news and information is not like fruit that you can cut out the rotten spots, tossing them aside. While the media may not intentionally be cutting out the rotten spots (or are they?) the result is the same to the reader: less than the full picture…the tip of the iceberg.
First let me reiterate that Goldbloom Wealth Management, LLC evaluates the performance of the money managers we partner with 10 or more year timeframes, in addition to our rolling ongoing evaluation in the short run with an 18 month to 24 month outlook. These time frames include not only the 2008 downturn, but also the downturns that occurred between 2000-2002. That's how we know how a money manager is really performing and that’s one way we’ve chosen the selected few institutional money managers with whom we partner from the hundreds we can choose from. When we evaluate track records utilizing factors including but not limited to return on investment, we are taking into account highs and lows over a time frame we expect most of our client relationships will exceed. That's the concept that we're going to be reviewing in this edition of the newsletter in addition to the team and tools we have assembled to allow you, your family and friends to “sleep at night” during these recent market highs.
Many times mutual funds are measured in three and five-year increments by the mutual fund industry. Unfortunately, within that time range there's much that the figures don’t show. For example, because the historical market low of March 9th, 2009 has recently had its five-year anniversary, the financial crisis that brought the market down to that bottom is no longer included within the measurement of the five-year return. That leaves a lot of room for misunderstanding, especially in a suitability environment of the typical broker-dealer where all the details don't have to be described or disclosed. Instead, they can pick and choose which details to present in order to make a sale.
For example, there are 15 American Funds, A-class funds with up to a 5.75% load, that were classified as “winners” by an article in The Seattle Times. I am not sure how paying almost 6% up front to invest makes these “winners??” Also on the list is the competitively priced Vanguard Total Stock Market Index Fund (VTSMX) which has a 5-year (and Vanguard does not charge an up-front 5.75% load) annualized return of over 23% according to Morningstar as recently reported in the Seattle Times. Just two years ago, at the end of 2012 this same fund’s 5-year return was only 2%. Imagine if that return in that 2012 VTSMX was combined with the same 5.75% load as its American Funds neighbors! Regardless, as much as it’s “accurate” to present the Vanguard fund as yielding a 23% return over the last 5 years, does that really paint the complete picture of its performance? Isn’t it more important that you know how investments fare in both good and bad times? …it’s easy to do well when the market is up but it’s a lot harder to fare well in times like the approximate 18 month fall ending in March 2009. How does this kind of reporting today really serve you, especially if you are in your retirement years when you may need access to your funds sometime in the future (and the market isn’t at a record high)?
Similarly, those working with the typical advisors at brokerage firms who are bound only to the “suitability standard” may very well be getting presented only the tip of the iceberg. It’s not inaccurate, but in my opinion it’s certainly not the right way to make decisions about your family’s future and the future of your retirement – there’s a lot at stake.
Perhaps due to the record highs of present, or perhaps because more of our clients truly understand what we do and remember their own experience in 2008, we are getting more and more requests for our second opinion service. I am glad to say we have been able to help many of our clients’ family and friends better understand their exposure and real costs of their investments. This will undoubtedly help some avoid the next downturn, whenever it occurs. In the meantime our clients in a “wealth preservation” strategy are designed to experience a solid return with a range of appropriate to no risk exposure, depending on individual goals and decisions we make based on those goals of the particular client. I am also very glad to report that during these “second opinion” appointments we do sometimes meet people who are getting good, objective advice. Unfortunately these folks are a clear minority of those that walk into our offices, as most times we find we can either decrease risk or cost, and many times affect both areas positively while keeping performance and ROI potential stable or even improving it.
So help a friend by suggesting they allow us to give them a no obligation, easy going, second opinion – there’s really nothing for them to lose. We will do a “know your number” exercise, and help them to see exactly what would happen to their investments if 2008 occurred again, and how much it really costs them to be in the relationship they are in (not necessarily what it says on their statements). On another note, keep an eye out for our new website and reestablished client portal coming before the end of the second quarter. We are excited to re-launch this resource to you.
Thank you again for the opportunity to be of service!