Investment Advisor Archives | R | W Investment Management

Key Questions for Long-Term Investors

Asking the right questions and following a few key principles can improve your odds of long-term investment success.

Whether you’ve been investing for decades or are just getting started, at some point on your investment journey you’ll likely ask yourself some of the questions below. Trying to answer these questions may be intimidating, but know that you’re not alone. Your financial advisor is here to help. While this is not intended to be an exhaustive list, it will hopefully shed light on a few key principles, using data and reasoning, that may help improve investors’ odds of investment success in the long run.

1. What sort of competition do I face as an investor?

The market is an effective information-processing machine. Millions of market participants buy and sell securities every day, and the real-time information they bring helps set prices. This means competition is stiff, and trying to outguess market prices is difficult for anyone, even professional money managers (see question 2 for more on this). This is good news for investors though. Rather than basing an investment strategy on trying to find securities that are priced “incorrectly,” investors can instead rely on the information in market prices to help build their portfolios (see question 5 for more on this).world equity training graph

Source: World Federation of Exchanges members, affiliates, correspondents, and non-members. Trade data from the global electronic order book. Daily averages were computed using year-to-date totals as of December 31, 2016, divided by 250 as an approximate number of annual trading days.


2. What are my chances of picking an investment fund that survives and outperforms?

Flip a coin and your odds of getting heads or tails are 50/50. Historically, the odds of selecting an investment fund that was still around 15 years later are about the same. Regarding outperformance, the odds are worse. The market’s pricing power works against mutual fund managers who try to outperform through stock picking or market timing. As evidence, only 14% of US equity mutual funds and 13% of fixed income funds have survived and outperformed their benchmarks over the past 15 years.

us based mutual fund performance

Source: *Mutual Fund Landscape 2017, Dimensional Fund Advisors. See Appendix for important details on the study. Past performance is no guarantee of future results.


3. If I choose a fund because of strong past performance, does that mean it will do well in the future?

Some investors select mutual funds based on past returns.  However, research shows that most funds in the top quartile (25%) of previous three-year returns did not maintain a top-quartile ranking in the following three years. In other words, past performance offers little insight into a fund’s future returns.

top ranked funds chart

Source: *Mutual Fund Landscape 2017, Dimensional Fund Advisors. See Appendix for important details on the study. Past performance is no guarantee of future results


4.Do I have to outsmart the market to be successful investor?

Financial markets have rewarded long-term investors. People expect a positive return on the capital they invest, and historically, the equity and bond markets have provided growth of wealth that has more than offset inflation. Instead of fighting markets, let them work for you.

growth of a dollar graph

US Small Cap is the CRSP 6–10 Index. US Large Cap is the S&P 500 Index. Long-Term Government Bonds is the IA SBBI US LT Govt TR USD, provided by Ibbotson Associates via Morningstar Direct. Treasury Bills is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. US Inflation is measured as changes in the US Consumer Price Index. US Consumer Price Index data is provided by the US Department of Labor Bureau of Labor Statistics. CRSP data is provided by the Center for Research in Security Prices, University of Chicago. The S&P data is provided by Standard & Poor’s Index Services Group. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.


5. Is there a better way to build a portfolio?

Academic research has identified these equity and fixed income dimensions, which point to differences in expected returns among securities. Instead of attempting to outguess market prices, investors can instead pursue higher expected returns by structuring their portfolio around these dimensions.

dimensions of expected returns chart

Relative price is measured by the price-to-book ratio; value stocks are those with lower price-to-book ratios. Profitability is a measure of current profitability based on information from individual companies’ income statements.


6. Is international investing for me?

Diversification helps reduce risks that have no expected return, but diversifying only within your home market may not be enough. Instead, global diversification can broaden your investment opportunity set. By holding a globally diversified portfolio, investors are well positioned to seek returns wherever they occur.

index portfolio charts

Number of holdings and countries for the S&P 500 Index and MSCI ACWI (All Country World Index) Investable Market Index (IMI) as of December 31, 2016. The S&P data is provided by Standard & Poor’s Index Services Group. MSCI data ©MSCI 2017, all rights reserved. International investing involves special risks such as currency fluctuation and political stability. Investing in emerging markets may accentuate those risks. Diversification does not eliminate the risk of market loss. Indices are not available for direct investment.


7. Will making frequent changes to my portfolio help me achieve investment success?

It’s tough, if not impossible, to know which market segments will outperform from period to period.

Accordingly, it’s better to avoid market timing calls and other unnecessary changes that can be costly. Allowing emotions or opinions about short-term market conditions to impact long-term investment decisions can lead to disappointing results.

annual return index

US Large Cap is the S&P 500 Index. US Large Cap Value is the Russell 1000 Value Index. US Small Cap is the Russell 2000 Index. US Small Cap Value is the Russell 2000 Value Index. US Real Estate is the Dow Jones US Select REIT Index. International Large Cap Value is the MSCI World ex USA Value Index (net dividends). International Small Cap Value is the MSCI World ex USA Small Cap Value Index (net dividends). Emerging Markets is the MSCI Emerging Markets Index (net dividends). Five-Year US Government Fixed is the Bloomberg Barclays US TIPS Index 1–5 Years. The S&P data is provided by Standard & Poor’s Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Dow Jones data provided by Dow Jones Indices. MSCI data ©MSCI 2017, all rights reserved. Bloomberg Barclays data provided by Bloomberg. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.


8. Should I make changes to my portfolio based on what I’m hearing in the news?

Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad. If headlines are unsettling, consider the source and try to maintain a long-term perspective.investment chart for investment RW

9. So, what should I be doing?

Work closely with a financial advisor who can offer expertise and guidance to help you focus on actions that add value.  Focusing on what you can control can lead to be better investment experience.

  • Create an investment plan to fit your needs and risk tolerance.
  • Structure a portfolio along the dimensions of expected returns.
  • Diversify globally.
  • Mange expenses, turnover, and taxes.
  • Stay disciplined through market dips and swings.
Source: Dimensional Fund Advisors LP.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss.
There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision.
All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.

August 2018 – The Idaho Business Review honors Boise Financial Advisor Brooke Ann Ramstad, CFP® as one of 15 financial professionals in the State of Idaho recognized for Excellence In Finance

Photo of Brooke A. Ramstad, CFP®

R|W wishes to congratulate Principal and Investment Advisor Brooke Ann Ramstad, CFP® for being nominated and selected as a 2018 Honoree for the Idaho Business Review’s Excellence in Finance.

The 2018 honorees are among “the best of the best” in the financial arenas of banking, corporate, investment and professional.

To earn the award, each submitted an application and was judged by a selection committee of past IBR Excellence in Finance honorees, who reviewed and rated them in the areas of leadership, mentorship, achievements, community leadership and community service.

Idaho Business Review’s Excellence in Finance awards program celebrates financial professionals in banking, corporate, investment and professional, whose fiscal accomplishments set a high bar for their company and Idaho’s business economy.

Brooke A. Ramstad, CFP® began her career with R|W in 2008. As a CERTIFIED FINANCIAL PLANNER™ professional and Principal, she meets with families to map out realistic long term financial goals while delivering a diversified, low-cost investment strategy. Brooke is a native of Wenatchee, WA (The Apple Capitol of the World) and a 2000 graduate of the University of Washington with a Bachelor’s of Arts degree in Romance Linguistics. A lifetime member of Kappa Kappa Gamma sorority, Brooke now serves as the Philanthropy Advisor to the Zeta Pi chapter of Kappa Kappa Gamma at the College of Idaho. When not enjoying the Boise River Greenbelt with her husband and two young children, she is a passionate Ambassador for the Women’s and Children’s Alliance. Brooke is also a member of the Idaho Women’s Charitable Foundation, the Idaho Chapter of the Financial Planning Association and will forever be a fan of “The Wonder Years”.

Link: https://idahobusinessreview.com/2018/08/13/ibr-honors-15-for-excellence-in-finance/

What can a tax-smart financial advisor do for you?

A recent survey  found  that most affluent investors want their financial advisor or financial planner to have tax expertise and be able to guide in tax-efficient strategies.

That’s smart. With recent changes to the tax code tax-efficient investing strategies are one of the few ways to keep more of what you make.

As an inactive, non-practicing CPA and Investment Advisor holding the Chartered Financial Analyst designation, I find that my tax background helps better serve our clients. With these dual perspectives, we can:

  • Discuss opportunities for clients to increase return without increasing risk
  • Consider tax ramifications of investment strategies before implementation
  • Suggest tax-efficient estate planning strategies
  • Avoid the negative tax surprises that can happen when your investment advisor doesn’t consider your tax situation

Even small incremental efficiencies can equate to significant amounts over time, depending on your income tax bracket.

Does this mean you need to eliminate your Accountant or CPA? Absolutely not! In fact, we work closely with our clients’ CPAs wherever possible.  In an ideal world, you have both your financial advisor and your CPA working in concert to identify ways to reduce your tax bill in the current year and beyond. We certainly don’t minimize the CPA’s role; we simply look for opportunities to add tax-efficient investment strategies as we help implement long term financial planning strategies based on your needs and goals.

Investing without Considering Tax Ramifications

Advisors should be aware of and sensitive to your tax situation, but sometimes problems may be hard to detect unless you know where to look. For example, the client may not disclose all the accounts he or she has, so an advisor won’t know how other accounts are invested and more important what the gain/loss landscape may reveal. But an advisor who is fluent in the tax strategy will ask about other accounts in order to avoid realizing a gain or loss in error thus creating an unanticipated tax issue.

Simply put, a financial advisor with tax experience has the mindset to always be on the lookout for ways to save on taxes. Even if they switch careers, they likely don’t lose that instinct.

On the other hand, financial advisors are usually investment professionals first. They are looking to grow your assets, and tax consequences may not be top of mind – particularly if that advisor is paid on a commission basis.

Combining the long-term investment planning mindset of an advisor and the tax-savings mindset of a CPA, however, can be a beautiful thing.

Seeking an Edge

With long term investing, investors must be comfortable taking more risk to potentially realize higher returns. And as their wealth increases many investors begin to shy away from taking risk.

This is where tax-efficient investing can be critical. By combining proactive tax planning and estate-planning strategies, you can feel more confident about the management of your wealth and the risks you are taking to grow your legacy. It is possible to realize a better return with the same amount of risk by efficiently managing the tax burden.

Whether it be simple management of positions in the right accounts, or harvesting gains and losses in a strategic way, almost every investor can benefit from a tax-smart investment review. In other cases, there are opportunities to create interesting estate-planning strategies that can serve your legacy.

When you employ several different firms for these critical tasks, you may sacrifice potential tax saving opportunities. A tax-smart advisor can often identify these opportunities or deficiencies during the financial planning process.

Awareness is the key. You want an advisor on your team who is looking for ways you can pay less in tax which should increase your returns over long periods of time. The tax-savvy wealth manager is a great asset for any investor.

Avoiding Nasty Surprises

You’ve probably experienced this before: your advisor encourages you to take some profits. Suddenly you’ve got a tax bill on your hands you weren’t expecting, and your cash flow is going to suffer.

Your CPA should always be looking for ways to lower your taxes in the current year. Your financial advisor should be seeking prudent avenues to grow and protect your wealth, based on long term financial planning discussions during the investment planning process. However, these goals of saving tax and growing wealth can sometimes conflict if the efforts are not coordinated.

This is where a strategy like proactive tax-loss harvesting can make sense. You can still take the profits, but you can offset the potential tax bill.

By including tax planning along with your investment planning, you can smooth those situations and minimize surprises.

How to Find a Tax-Smart Advisor

Some might think it makes good sense to consult your CPA for investment advice. But investment planning and implementation are quite different from tax planning. Ideally, you want someone who has experience on both sides. You will be well-served to search for financial advisors with tax and accounting experience.

Of course, also be sure the advisor in question is a fiduciary and check out their compliance record at https://brokercheck.finra.org/.

Once you find an advisor with the capacity to be held to a fiduciary standard, don’t be afraid to ask questions to help you make the best choice:

  • Does he/she or anyone on the team have experience or training in tax planning?
  • How will your portfolio be structured to balance growth with tax savings?
  • What investments make the most sense for your tax situation?

If a prospective advisor doesn’t provide satisfactory answers to these questions, keep looking. To truly grow your net worth, investment expertise is vital, and tax expertise is essential.

It’s best to find an advisor with both.

Photo of Ryan C. Warwick

Ryan Warwick is Principal of R|W , a fee-based financial planning and investment management firm headquartered in Boise, Idaho and serving families nationwide. Our advisors hold the Certified Financial Planner™ designation and the Chartered Financial Analyst® charter and serve as trusted stewards to help families preserve and grow their wealth for over three decades.
This article is solely for informational purposes and not intended to provide specific advice or recommendations for an individual. It is only intended to provide education about the financial industry. Please note that all Investing involves risk and possible loss of principal capital. No advice may be rendered by R|W unless a client service agreement is in place.