January 2014 Client Letter

In this letter:

  • 2013 investment returns — the best and the worst
  • Protecting yourself from Target and Neiman Marcus
  • Precedent AM is giving back
  • Tax efficiency adds dramatically to returns
  • Early test of business continuity: snowing, cold, and open
  • A new planning model for the next generation

Welcome to 2014! My daughter turns 12 this year, and my son just passed the 10 year mark, and most of you knew me when they were both born — seems very surreal sometimes. While I am watching my hair gray, it would be hard to be more excited about the future. Two years ago, I turned off the TV and started reading volumes of information about any and every topic. Here is what I’ve learned:

  1. We have our challenges (knew that already)
  2. Life is incredibly complex, and wonderful
  3. The future is very bright and will amaze us
  4. Opportunities are everywhere

I like how Seth Godin describes taking advantage of opportunities as “picking yourself”. We don’t have to wait to be picked in life, like a playground team lineup (I was usually picked last — tall, lanky, and quiet). If you can see the problems, the solutions and the opportunities to serve others, it’s time pick yourself and get to work. There is plenty that needs to be done.

2013 Investment Returns — The Best and the Worst

The headline of the year was the total return on US stocks as measured by the S&P 500 index, ending up 32%. But the markets are much more complex and varied than the headlines or the handful of large stocks driving the S&P 500. Depending on your mix of assets, returns in 2013 ranged from positive 66% to negative  52%. The most common asset classes performed as follows:

US Stocks (S&P 1500) — up 32.8%
International Stocks (MSCI ACWI exUS) — up 15.3%
Emerging Markets (MSCI EM) — down 2.6%
Real Estate (DJ US Real Estate) — up 1.8%
US Bonds (BC US Agg) — down 2.0%
US Inflation Protected Bonds (BC US TIPS) — down 8.6%
High Yield Bonds (iBoxx Liquid HY) — up 5.9%
Commodities (DJ UBS Commodity) — down 9.1%
Gold (London PM Fix) — down 27.6%

We owned each of these asset classes in our portfolios except commodities and gold. Yes, we completely avoided the two biggest losers. But before you pat me on the back, there are long-term fundamental reasons why we don’t include gold and commodities in our portfolios — one of which is not that I magically predicted they would fall in 2013.

How about the really big positive and negative returns I mentioned above? Here are the best and worst asset classes and sectors from 2013:

The industries that lead me to believe the future is very bright were also some of the best performing in 2013. These were led by the Nasdaq Biotechnology index posting a return of 65.6%. Runners up were Aerospace and Clean Energy.

The only thing worse than owning gold this past year was having to spend massive amounts of money to dig it out of the ground and store it. The MSCI Select Gold Miners index fell 52.2% in 2013.

I won’t pretend to know where the markets or the economy are headed for the coming year, and you should probably ignore anyone that does. Far more important is the reality that 94% of our clients are fully on-track to meeting their financial planning goals, and these plans have been built to withstand wide swings in the market, and to hold up under numerous economic scenarios.

Protecting Yourself from Target and Neiman Marcus

Over the holidays, Target had credit and debit card data stolen on 40 million customers, and counting. Then last week, Neiman Marcus made a similar announcement. This stuff is unavoidable today unless you pay cash for everything. (Checks won’t help you — that string of numbers on the bottom of your check is gold for a data thief.) And quite frankly, I think the convenience and embedded protection is a worthwhile trade-off — there is no 800 number to have lost cash reissued.

Here is what you can do:

  1. If you shopped at Target or Neiman, immediately call your card company and have them issue you a replacement card with a new number. Then just make sure there was no fraudulent activity in the meantime. If there was, your credit card company will correct it.
  2. Don’t shop with a debit card. Save it for the ATM machine and use a credit card for shopping. The protection you receive is far greater on a credit card.
  3. Get a credit monitoring service if you don’t already have it, and pay attention to the emails the service sends you. I pay $15 per month for credit monitoring from American Express. Lifelock is another option at $10 per month (I probably should switch now that I’m seeing this in print). And Target customers can get it free for one year at https://creditmonitoring.target.com/.

Precedent AM is Giving Back

After our successful launch in late 2013, Precedent Asset Management provided financial support to Rock Steady Boxing, an incredibly unique organization based in Indianapolis that dramatically improves the quality of life for people with Parkinson’s disease.

We have a number of clients that are impacted by Parkinson’s, and this is the first of many ways Precedent AM is giving back to our clients and community. During 2014, Precedent Asset Management will donate an additional $100 to Rock Steady Boxing for each new client referred to us by our existing clients.

Tax Efficiency Adds Dramatically to Returns

One of the lesser-known aspects of our portfolio management process is the extent to which we employ tax-efficient strategies for clients in high income tax brackets and portfolios over $500,000. In addition to the strategies outlined in my recent year-end planning letter, we work closely with Parametric to manage index portfolios of directly held stocks in client accounts, rather than mutual funds, and to provide a tax overlay for any other managers in the client portfolio.

A careful combination of deferring gains, managing holding periods, harvesting losses, and paying attention to tax lots and wash sale rules, has consistently added an average of 1.7% per year to the after-tax returns of investors versus the index after taxes. The after-tax return is even greater when compared to mutual funds, which have a unique set of tax problems. A good summary of Parametric’s research and process can be found here.

Early Test of Business Continuity: Snowing, Cold, and Open

Precedent Asset Management might be a new firm, but we have worked hard to ensure that everything about our organization is designed to serve clients better than ever. When our main offices in Indianapolis were hit with snow, sub-zero temperatures and a city-wide weather emergency for several days, we got to have an early test of our business continuity plans.

We didn’t miss a beat. Every team member was working with full resources, our phone lines were staffed with real humans answering every call, and our financial planning and investment management work continued without interruption. Our account custodians and other partners were also all up and running.

A New Planning Model for the Next Generation

We are passionate about providing holistic financial planning to anyone that needs it. But for decades, financial planning services have generally been limited to those with substantial assets to invest. We’re going to change this.

Precedent AM is now offering financial planning on a subscription basis to ensure that our services are accessible to clients with few assets, but in need of solid planning. Since that is where most of us start, we are introducing a planning model for anyone that values good advice as much as they value their cable or cell phone service. Here it is:

$995 initial planning fee and $125 per month, which includes:

  • Balance© financial management and collaboration software
  • 90 minute initial planning meeting (in-person, phone, or online)
  • 60 minute planning follow up call and written recommendations
  • On-going advisor check-ins by email
  • 60 minute follow up meetings every six months
  • Easy to understand recommendations and action steps

One of the most common reasons I hear that a client hesitated to call is that they didn’t think they would “qualify” to work with us; and for each one of these, there are likely many others that didn’t reach out for the same reason. That reason is now gone as we set a new standard for the delivery of financial advice.

That’s it for now. I hope you found this informative, and that you are already making 2014 a great year! Please drop me a note or give me a call if you need to chat about any of these items, or anything else.

All the best,

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