This article provides a list of recommended reading from among the many hundreds of articles that I have authored in the past several years. Note that I have personally written all the content that you will find on the six personal finance and investment websites referenced below. You can reach us by using the contact form below.

Enjoy!

The Skilled Investor website

Note that you can find all of my other financial websites, by going to The Skilled Investor website and clicking on the red colored links in the left hand column on any page of The Skilled Investor website.

On the front page of The Skilled Investor website you will find an index of pages with major categories and subcategories. Within the subcategories there are lists of articles and the front page tells you how many articles are in any subcategory. There are many articles in addition to those listed below, which you can find by clicking on the subcategory links below that have arrows in front of them.

Here are some suggested personal financial planning and investment management articles within the major categories and subcategories. Article titles are descriptive and should help you decide which articles you want to read first.

Personal Investment Management

• You must stay invested in the securities markets to earn market risk premiums
• Commodity futures in your investment portfolio — Is there really any future for individual investors?

• Excessive investment costs are a huge problem for individual investors

• How much do hidden mutual fund trading expenses cost you?

• Is it worth paying higher bond mutual fund management fees?

• Pay less to get more (Part 1 of 2)

• The heavy burden of recurring investment fees (Part 1 of 2)

• Understanding one-time investment fees, such as sales loads

• What is the cost to individual investors of sub-optimal portfolio diversification?

• Why is diversification valuable to individual investors?

• Can a limited number of stocks provide complete portfolio diversification?

• How many mutual funds are needed for a well-diversified portfolio? – Commentary

• Chance creates the illusion that investors can beat the stock market

• The illusion of superior professional investment manager performance

• Distinguishing between true investment skill and luck

• What have average investment asset class risk premiums been over long periods?

• Asset class investment risk premiums — your reward for taking investment risk

• How stable have common stock market returns been over time?

• How are asset class risk premiums and the risk free rate of return related?

• How do return expectations of investors compare to historical stock returns and risk premiums?

• Calculating your investment wage and the opportunity cost of your time

• The value and opportunity cost of your investment time

• Passive Personal Investment Strategies are More Time Efficient with Better Returns and Risk Control

• 15 Value-Added Individual Investor Activities

• What else should you read about investing?

• A caution related to classic investment books

• How can individual investors trust, when so much investment information is rubbish?

• How investment securities are valued — snapshots in time

• Introduction to investment valuation and securities risk

• The confusing investment securities market motion picture

• What is efficient market pricing in the securities markets?

Personal Financial Planning

This is a must shortened list of available articles, because there are many other personal financial planning articles posted on The Pasadena Financial Planner website. See a selected list below.

• The Problem — Straight answers about personal financial and investment planning are difficult to find

• The Solution – Only follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient

• Traditional versus Roth tax-advantaged plan contributions

• Factors that tend to favor Roth tax-advantaged plan contributions (Part 1 of 2)

• Summary Table of Traditional IRA and Roth IRA Tax Rules

• Executive Summary of VeriPlan

• VeriPlan’s 10 Financial Planning Tools and Financial Calculators

Financial Advisors, Investment Counselors, and the Financial Industry

Are Your Best Interests the Same as the Financial Services Industry?

• Financial science drives industry product development, but not necessarily toward the best interests of individuals

• The investment industry is not your investment partner

• How to lie with statistics: Investment performance charts (Part 1 of 2)

• Many individual investors are not fooled by an ethically challenged securities industry

• The securities industry calls marketing and selling – “advising”

Payment of Investment Advisors, Financial Planners, and Investment Counselors

• The economics of the financial advisory industry

• Does it matter how financial planners and investment advisors are paid?

• Can you really get free and objective investment advice, when you pay investment sales loads? (Part 1 of 2)

• How expensive is advisor compensation paid via sales loads?

Selecting a Financial Planning Advisor or Investment Adviser

• Preparing to interview a financial planner or investment advisor

• Questions to ask when hiring an investment advisor – Part 1 – Background and training

Regulation of Financial Advisors and Investment Advisers

• Regulation of financial planners and investment advisors — Introduction

Frauds and Scams by Financial and Investment Advisers

• Avoiding financial planning and investment advisor frauds and scams – Overview

• Avoiding financial advisor frauds and scams – The Never-do list — Part 1

Best No Load Funds website

Click “Sitemap” in top banner for a list of articles. Suggested reading:

• 7 Ways to Pick the Best Noload Mutual Funds and ETFs

To find articles that focus on each of these seven selection criteria, either click on the numbered headings within this article or go to the Sitemap.

No Load Bond Funds website

Click “Sitemap” in top banner for a list of articles. Suggested reading:

• No Load Bond Funds
• The Top 14 Low Cost Taxable United States Bond Mutual Funds (Low Minimum Deposit)

The Skilled Investor Blog

(associated with The Skilled Investor website)

You could read these selected articles:

• Where’s Waldo? – The illusion of superior professional mutual fund manager performance.
• Why only one Warren Buffett? The illusion of superior professional mutual fund manager performance.

Low Cost S&P 500 Index Funds website

You could read these selected articles:

• Top 10 S&P 500 Index Funds
• Buy an S&P 500 Index Fund with Low Costs

The Pasadena Financial Planner website

Click “Sitemap” in top banner for a list of articles.

Suggested reading:

• Your Family Financial Planning
• Your Family Financial Planning Process

The two articles above summarize “10 Financial Planning Steps in the Right Direction,” a recommended personal financial planning process. There are individual articles with more details about each of these 10 steps. You can find them by clicking on the bold section headers within the two articles above, or you can find them by clicking the “Sitemap” link on any page and looking for the articles that are numbered 1 through 10.

In addition to these financial planning process articles, read:

• Living Expense Tracking Methods
• Asset Allocation, Investment Asset Tax Location, and Emergency Cash Management

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See: Fee Based Pasadena Investment Advisor >>>

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Larry Russell, Managing Director

MBA – Stanford University, MA – Brandeis University, and BS – M.I.T.

Lawrence Russell and Company Pasadena, California 91103

(626) 399-9579

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

A truly independent financial planner and fee only investment advisor

(Regarding compensation, I provide financial planning services only on a fixed fee or hourly fee for services basis, and solely under a contract that we agree upon. I do not charge any form of asset fee. In addition, to avoid all conflicts-of-interest, I do not accept commissions or compensation of any type from the financial industry.)

Start a conversation today — Send a message using this contact form

Financial Planning Pasadena CA

Use the top fee only financial advisor — helping clients in Southern California, including Altadena, Tujunga, Walnut, West Covina, La Canada, West Hollywood, West Los Angeles, West Toluca Lake, and Pasadena.

Families need an objective financial planning process. In addition, they need to be in control — whether or not they have a family financial planning consultant. With a well-designed and personal financial plan, you can optimize your financial affairs over your lifetime. You can greatly reduce the waste of your money and your time. I recommend the 10 steps below for personal financial planning and personal investment management.

To find an in depth article for each step, just click on the Sitemap link at the top of this page and look for the articles numbered from 1 to 10. You can reach us by using the contact form below. Please enjoy reading this article. Thank you!

1 – Personal Financial Planning

Because you must live with the results, you need to take full responsibility for your financial and investment success or failure. Delegating financial planning and investment decisions to advisers largely on faith can be very dangerous. Naive hope without adequate personal financial knowledge, attention, and control can be very risky to your personal and family welfare. The only practical solution is for you to increase your personal financial planning and investment knowledge and skills.

Educating clients about scientific investment and financial planning is extremely important to me. As such, I have written many educational materials that are of interest to my clients and the general public. My objective financial publications on The Skilled Investor website and blog are often the reason that people learn about my fee only independent financial planner and investment advisor services.

Your questions are important to me, and you should expect there to be a factual basis for any strategies and recommendations that I make. Please ask any and all of your questions, as we work together. During the course of developing a comprehensive, personalized plan for you, if you are interested, I can provide copies of educational materials that I have written and copies of original scientific finance papers that are particularly applicable to your situation.

2 – Financial Planning Tools

The single most significant financial lever that individuals control directly is their management of personal expenditures. The second is their lifetime effort to obtain sufficient income. Most people simply do not save enough of their current income to fund adequately their future needs.

To analyze your financial affairs in detail, we will use VeriPlan. VeriPlan is a very sophisticated and customizable computer planning model that I have developed. VeriPlan enables you to view graphical projections of your family’s income, expenses, assets, and debts across your lifetime. Data inputs reflect your particular situation and include all your assets, including cash, bonds, equities, property, real estate, private equities, and business interests.

Step 2 is a very important step, because this is where we construct your baseline financial plan and measure your current financial circumstances and goals and intentions for the future. To develop your customized lifecycle model, we will work together to gather information, adjust assumptions, and evaluate the effects of different financial decisions across your lifecycle. For more information about VeriPlan, see: Personal Finance Software for Your Lifetime.

VeriPlan can vary future expected investment returns by asset class, and it automatically analyzes the details of your taxes and investment expenses. Any and all assumptions can be changed for instant “what-if” testing. The model’s risk analysis capabilities evaluate how well your future assets would cover normal and extraordinary expenses, if market or personal circumstances were to disrupt your plans.

Excessive and unnecessary investment costs can substantially undermine your lifetime investment returns. VeriPlan automatically projects the returns you will waste with such fees, if you do not choose more cost-efficient investments.

3 – Investment Risk Tolerance

Investors with different levels of risk tolerance are more satisfied investment strategies that are better aligned with their risk preferences. Differences in risk tolerances mean that more risk-averse investors are personally more satisfied with a lower risk portfolio despite its lower expected returns. Less risk-averse investors are more satisfied with portfolios characterized by higher risk and higher expected returns.

While there are a variety of approaches to the measuring relative investment return and risk preferences, we do not believe that a simple “check-a-few-boxes” survey is sufficient. Therefore, you can expect that we will discuss your feelings about risks and rewards. We will assess together your likely behavior in the face of financial risks that might actually materialize.

We will also discuss the implications of adopting a particular investment risk profile relative to that of the average investor. Furthermore, we will test the financial projection implications of your risk preferences using VeriPlan. With VeriPlan modeling your particular financial situation, you can better appreciate the projected outcomes of different investment allocations associated with your risk preferences.

4 – Investment Diversification Strategy

Diversification is genuinely a financial planning and investment “free lunch.” A fully diversified portfolio is a key contributor to improved investment risk management. Diversification has become an axiom of personal investing, because the specific risks of businesses and other investment entities can be reduced or eliminated from a portfolio without reducing expected returns. As such, our investment recommendations will usually focus on very low cost mutual funds and very low cost exchange-traded fund (ETF) investments.

A significant portion of a portfolio may sometimes become concentrated in a single investment entity, which increases the overall risk of the portfolio. While undesirable, there sometimes are good or unavoidable reasons for investment concentration. In such circumstances, we will provide recommendations on possible ways to ameliorate the associated risk. If there are not good reasons to maintain the current level of concentration, then we will discuss how to reduce this concentration.

5 – Investment Asset Allocation

Your risk preference relative to the average investor with the average portfolio will influence your asset allocation. Appropriately setting your personal asset allocation in line with your personal risk tolerance is a critical decision for every investor. Because the average risk-averse investor holds the average portfolio asset allocation, this becomes the starting point in determining how a specific individual’s portfolio might diverge from that average allocation.

VeriPlan supports several mechanisms for allocating assets permitting a comparison of projections based upon different asset allocations. Anticipating allocation adjustments that may be needed in the coming year, we will also discuss how near-term net income might be invested to reduce the need to reallocate some of your portfolio in the future. If asset withdrawals are required to cover anticipated retirement expenses or other living expenses, we will recommend how to do this most cost and tax efficiently. Our goals will be to establish a durable approach to asset allocation and to minimize costs and taxes.

See Part 2 — Pasadena California Financial Planning >>>

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Larry Russell, Managing Director

MBA – Stanford University, MA – Brandeis University, and BS – M.I.T.

Lawrence Russell and Company Pasadena, California 91103

(626) 399-9579

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

A truly independent financial planner and fee only investment advisor

(Regarding how I am compensated, I work only on a hourly fee or fixed fee for service basis, and only under a contract agreed upon with you. You will not have to pay any asset fees. Furthermore, to avoid all conflicts-of-interest, I do not accept compensation or commissions of any type from the financial industry.)

Start a conversation today — Send a message using this contact form

Financial Planning Consultants in Pasadena California

Find the best personal financial planning consultant for those who need financial planning help in the Pasadena area including residents of Altadena, Arcadia, Baldwin Hills, Baldwin Park, Burbank, Eagle Rock, Glendale, La Canada Flintridge, La Crescenta, Monrovia, and Pasadena.

To find an in depth article for each step, just click on the “Pasadena Financial Planners Sitemap” link at the top of this page and look for the articles numbered from 6 to 10. Note that you can reach us by using the contact form below. Please enjoy reading this article. Thank you!

6 – Personal Investment Strategy

Given the extremely large number and variety of available securities, investors need a rational basis to select among them. Without rational selection criteria and a good understanding of which factors are more or less likely to increase risk-adjusted returns, investors will make poor decisions based on false assumptions.

We will begin with the presumption that portfolio investment strategy would focus on broad-based, market oriented financial investments that can be acquired economically and held inexpensively in your portfolio for an extended period. We will provide a set of recommended investment vehicles and percentage allocations including a recommended minimum number of investment positions within each particular area. Consideration will be given to domestic versus international, value versus growth, small versus large capitalization, and other investment vehicles that may move the portfolio away from a broad market orientation. Of course, investment cost and tax implications will heavily influence these recommendations.

Consideration will be given to your existing investment portfolio to determine what parts should remain and what should change. We will discuss a transitional plan for those parts that we recommend to change, and our recommendations will consider the cost and tax implications of making such changes. When appropriate, recommendations will also address adjustments that counterbalance any financial concentration that you may have elsewhere in your portfolio.

7 – Investment Management Fees

Even with optimal investment strategies, there is still substantial room to improve upon net investment performance through continued and vigilant focus on controlling investment costs and tax realization. The investment fees extracted by the financial securities industry are grossly excessive. Excessive costs imposed on “retail investors” have increased substantially during the past several decades on both a total cost and a percentage of returns basis.

At the same time industry deregulation, market innovation, and increased competition have provided many new and useful mechanisms for investors to manage their assets in a much more cost- and tax-efficient manner. It is not hard to cut your investment costs, but you have to be conscientious and vigilant. I will help you to become an extremely cost-conscious investor, and I will help you to remove all those hands that may currently be in your family’s financial wallet.

For your current asset holdings and for new investments we will model details of taxation and investment expenses in the projections. Recommendations will be provided which are designed to reduce investment costs, to reduce and defer tax recognition, and to shift tax realization toward lower tax rates.

Recommendations for new investment will focus on very low cost, passively managed investment vehicles. A very wide variety of very low cost cash, fixed income, and equity investments are available through low cost channels, and there is no reason to purchase more expensive vehicles that are not expected to provide any better return or risk reduction.

8 – Insurance Risk Management

The world is fraught with numerous potential risks – financial and otherwise. Insurance can be purchased for a wide variety of situations, but the issue is always value and affordability. Many people could spend all their investable capital on insurance and have nothing left to invest and build a financial cushion for the future. Therefore, we can discuss a budget for insurance expenses and your preferences for risks you are willing to bear and risks you wish to ensure.

While value, affordability, risk exposure, and risk tolerance should affect insurance purchase decisions, insurance is often sold and purchased emotionally. The issue is where to set a rational rather than emotional balance between expected risk and return.

9 – Efficiency of Personal Investing Strategies

Time in life is the most precious and perishable asset that a person has. It should be spent enjoyably and efficiently. Scientific investment strategies that rely on relatively efficient financial markets allow people to minimize their time commitment to personal financial planning and personal investment management. Yet, on average, you can still expect to obtain optimal risk-adjusted portfolio returns that are near the market’s return

We recommend an annual review of your personal finance and investment plan on approximately the anniversary of your initial plan. At that time we will update your personal financial planning model and recommend any appropriate changes. In the interim, we can work together to implement recommendations that you accept and to perform other financial planning services that you want.

10 – Independent Investment Counselors and Financial Advisors

Pick financial planning and registered investment advisors solely to obtain objective and high quality advice. Specific investment advice is potentially of high quality, if it is carefully customized to your particular needs and is given by an adviser who is very knowledgeable, highly competent, and completely independent. If you agree with the advice being given, then buy the recommended financial products through the most inexpensive channel possible.

We do comprehensive personal financial planning exclusively. We do not sell securities and do not hold assets in custody. We do not sell insurance, nor do we provide accounting services or legal advice. However, as part of our business development and networking efforts we make efforts to become acquainted with high quality professionals who can provide specialized assistance. In developing a plan for you, part of our focus will be on providing you with recommendations on how to acquire appropriate professional services both easily and economically.

See: Personal Financial Planning Pasadena CA >>>

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Larry Russell, Managing Director

MBA – Stanford University, MA – Brandeis University, and BS – M.I.T.

Lawrence Russell and Company Pasadena, California 91103

(626) 399-9579

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

A truly independent financial planner and fee only investment advisor

(Concerning my compensation, I perform services solely on a hourly fee or fixed fee for services basis, and only under a contract agreed upon with you. You do not have to pay any form of asset fee. Furthermore, to avoid all conflicts-of-interest, I do not accept compensation or commissions of any kind from the financial industry.)

Start a conversation today — Send a message using this contact form

Pasadena Financial Planning

Benefit from the best fee only investment advisor helping for those in the West Los Angeles area, including Altadena, Arcadia, Baldwin Park, Burbank, Eagle Rock, Glendale, Glendora, Hollywood, Irwindale, La Canada Flintridge, and Pasadena.

This is one of the “10 Steps in the Right Direction” that make up The Pasadena Financial Planner’s personal financial planning and personal investment management process. For a summary of these ten steps, see “Your Family Financial Planning.” To find an in-depth article for each step, just click the Sitemap link at the top of this page. Also, you can reach us by using the contact form below. Please enjoy reading this article. Thank you!

Without a rational personal investment system based on scientifically verified investment management strategies, individual investors will make inferior decisions based on false assumptions.

Given the extremely large number and variety of available securities, investors need a rational basis to select among them. Thousands of brokerage firms and investment management companies compete for the investment assets of individual investors and their families. Unfortunately you cannot rely upon securities industry personnel to tell you what is the best investment strategy for you. You can be much more assured that they will tell you to do what benefits them and the profits of their investment management companies. Unfortunately, many financial services industry personnel will say or suggest practically anything, if they think it will help to close the sale more quickly.

There are many investment advisors and investment counselors who provide good advice. Unfortunately, it is often very difficult to tell good advice from not-so-good advice. Most securities industry personnel are trained to sell and are not trained to make the best investment decisions on your behalf. They are trained to inspire trust and develop a rapport with you. Many simply do not know how to provide advice that is in the best interests of their clientele. If they are just trained to sell to you, why should they know what is in your best interests?

In addition, there is also an incredible amount of historical performance chasing and unnecessary investment risk taking that goes with individuals’ investment money. Unwittingly or otherwise, many investment counselors and individual investors pursue highly inferior personal investment management strategies.

There is not reason to guess or to wing it, when your investment money and future retirement is at stake. There is a very large body of statistical investment research that can instruct any interested person about what tends to work and what tends not to work with personal investment strategies.

If you can not find scientific evidence to verify a personal investment management strategy, then just do not do it. Do your research and find out what works and what does not. For more information about scientifically based personal investment strategies, see these articles on “Personal Investment Management.” These articles are published on our sister website, The Skilled Investor.

The best investment strategy for lifetime personal finance and retirement planning

To cut to the chase about what tends to work best with investment strategy and retirement planning, The Pasadena Financial Planner has concluded that all forms of active management that cannot be cost justified should be driven out of personal investment strategies. Individual investors need to choose a comfortable, very low cost, low tax, risk-adjusted market investment strategy and let it run over time. Maintenance should be minimal and low cost, and the urge to chase “beat the market” mirages should be heavily restrained. Investors’ strategies should focus on broad-based, market-oriented investment funds securities (mutual funds and ETFs) that can be acquired economically and held inexpensively for an extended period.

Buy the cheapest, most broad based investment mutual funds and exchange traded funds (ETFs). Buy and hold them. Otherwise get on with your real life. For more information about scientifically based personal investment strategies, see these articles on “7 Ways to Pick the Best Noload Mutual Funds and ETFs.” These articles are published on our sister website, Best No Load Mutual Funds.

Three key concepts are important to consider when deciding on the best investment strategy for your personal investment portfolio.

First, the current price of a security represents the market’s consensus about its potential future value, given the various advantages and disadvantages that all investors see in holding or selling that security. As such, the current security price is a weighted average valuation forecast of events that might or might not occur. Market prices are the best available assessment of forward-looking, risk-adjusted fair market value.

Through securities market prices, a wide array of investors with differing predictions and varying concerns essentially “vote” on the expected or likely future value of a security through its current price. Investors’ evaluations of the value of securities may vary widely. What one person might see as a great bargain, another might consider grossly overpriced. Without this divergence of opinion over current securities values, there would be no trading of securities. Given the immense volume of securities trading that occurs daily across the world’s securities exchanges, it is clear that there is no shortage of significant differences of opinion about current market values.

Second, securities prices represent the current valuation consensus on a risk-adjusted basis. Risk refers to the expected size and likelihood of future up or down price variations or volatility. As such, not only do prices reflect expected returns, they also reflect the panoply of concerns, optimism, risks, and euphoria about how a wide range of factors might affect the price in the future.

Third, given this highly speculative, future-oriented, and risk-adjusted valuation process, there are bound to be very significant price fluctuations as time goes on. This variability is the natural side effect of the market’s communal, self-interested valuation process and is neither good nor bad. It seemly means that speculation about future investment value has been, is, and will always be subject to risk and uncertainty.

The problem with trying to predict future securities market values is that the future is fundamentally unknowable, until it arrives.

While history can be instructive about what might be more or less likely in the future, history tends not to be predictive. Securities prices exhibit only a very tiny level of predictability within a very large range of random fluctuations. The blending of expectations about future returns and risks into current securities prices means that the situation is subject to a wide range of either insightful to specious predictions. Unfortunately, you can only guess which predictions are insightful or specious, until after the fact.

The volatility of prices across time provides an opportunity for just about anyone to develop a supposedly predictive theory on how the markets actually work and to offer selected data to support their arguments. The only reliable way to sort through what is true or false is to rely upon the investment research studies of highly disciplined academics who carefully test these theories against market price data that is unbiased.

Individual investors are usually better off, when they ignore concerns about whether the securities markets fairly value investment securities.

If there is a reasonably large and liquid market where investors interact through “arms length” transactions, then individual investors should simply accept current market prices and avoid the usually futile temptation to second-guess current values and try to beat the market. While some securities prices will eventually be shown to have been either too high or too low relative to their subsequent prices, the reasons almost always have nothing to do with current market pricing mistakes by the securities markets.

Current securities market prices do a pretty good job of reflecting information that is already know. Statistical studies demonstrate that errors tend to cancel each other leaving little opportunity of investors – especially amateur individual investors – to identify, trade, and profit on these current pricing errors. In effect, especially among individual investors, those who appear to have done better than the market were largely lucky and those who did more poorly were simply unlucky.

Instead, prices tend to change over time due to unpredictable future events which occur and cause the securities markets to revalue securities. New information continually changes forward-looking expectations about expected future investment values. Since this new information becomes known only if and when it happens, there is no way to have reliably predicted it. Speculation about a range of possible future events will influence current prices, but only time will tell what actually will happen.

Some full-time professional investment managers and professional securities analysts might be able to discern when a security is more likely to be under-valued or over-valued. On average, before their added costs and taxes are considered, active professional mutual fund managers have been shown to deliver performance that is modestly better than passive index benchmarks. However, across all professional investors there is no evidence that they can consistently beat the markets, after their added costs and higher taxes are taken into consideration.

Unfortunately, the average professional investment fund manager charges several times his added-value through increased investment fees, costs, and taxes.

For the individual investor trying to identify and hire only “superior investment managers,” this effort is highly uncertain, usually futile, and subject to a great deal of error and dumb luck. Except for cost reduction, there are no reliable metrics to predict superior investment fund performance and to identify superior money managers before the fact.

So, where are all the perennially superior traditional money managers who can be hired economically to manage your money and that of thousands of others for a superior return? They are not to be found. Individual investors spend an excessive amount of time and money looking for investment mutual fund managers who will almost all turn out not to be the next Warren Buffett in the long run.

The lowest cost investments will always mean adopting a passive index benchmark investment strategy. The logical decision of individual investors is to avoid all costly activism and not to pay a substantially more for a very poor chance of winning versus a much larger chance of losing. Instead of trying to beat the market or trying to find a mutual fund manager who will beat the market net of his substantial added costs, individual investors should focus their efforts on:

• becoming better educated about investing rather than just relying naively upon advisors to do the right thing for them
• earning income and saving adequately to fund their investment program
• understanding their relative investment risk tolerance and choosing an investment asset allocation that is appropriate for their personal risk profile
• using rational selection methods to acquire a low cost, low tax, broadly diversified, passive market-based portfolio
• applying time and energy to investment activities that tend to increase personal financial welfare, while eliminating time spent on activities that undermine it.

Invest passively in very low cost, very broadly diversified index funds across the world. Save more to build your assets. Do something else that you actually enjoy, instead of wasting your time and money playing amateur individual investor.

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See: Registered Investment Advisor Pasadena >>>

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Larry Russell, Managing Director

MBA – Stanford University, MA – Brandeis University, and BS – M.I.T.

Lawrence Russell and Company Pasadena, California 91103

(626) 399-9579

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

A truly independent financial planner and fee only investment advisor

(Regarding how I am compensated, I provide financial planning services only on a hourly fee or fixed fee for service basis, and only under a contract that we agree upon. You will not have to pay any asset fees. Furthermore, to avoid all conflicts-of-interest, I do not accept compensation or commissions of any kind from the industry.)

Start a conversation today — Send a message using this contact form

Registered Investment Advisor Pasadena

Use the services of the top independent investment advisor in SoCal — I will help client locally and remotely including those in and around Glendale, La Tuna Canyon, Los Feliz, North Hollywood, San Gabriel, South Pasadena, La Canada Flintridge, La Crescenta, Monrovia, Rosemead, and San Dimas.

This is one of the “10 Steps in the Right Direction” that make up The Pasadena Financial Planner’s personal financial planning and personal investment management process. For a summary of these ten steps, see Your Family Financial Planning. To find an in depth article for each step, just click the Sitemap link at the top of this page. Also, you can reach us by using the contact form below, and you can subscribe to our Objective Family Financial Planning Blogs by clicking the orange RSS icon to the left. Please enjoy reading this article. Thank you!

Setting your personal investment asset allocation is a critical decision for every individual investor.

Asset allocation can be viewed as an extension of the Global Investment Diversification strategy principle to multiple types of assets, such as equities versus fixed income securities. Asset allocation is also how you blend your personal investment risk preference into your investment asset portfolio.

Appropriately setting your personal asset allocation in line with your personal risk tolerance is a critical decision for every investor. The percentages that are allocated to various asset classes tend to change slowly over time, so it is important to get it right at the outset.

Investing and asset allocation is all about risk-adjusted investment returns related to your overall investment asset portfolio. Because the risk and return characteristics of various asset classes are not completely correlated, changes in their market prices sometimes off-set each other. Therefore, you normally can assemble an investment portfolio with lower overall investment risk, when compared to the risk of each of the individual asset classes that make up your portfolio. In effect, the various asset classes provide additional diversification benefits that go beyond the investment risk reduction benefits that can be achieved through full diversification within each individual asset class.

What is an investment asset class?

At the outset, a word of caution about the proliferation of “asset classes” promoted to individual investors is useful. Whether you invest through broadly diversified index mutual funds or diversified exchange-traded funds (ETFs), the largest and most established investment asset classes are stocks/equities, bonds/fixed income, and cash/cash equivalents. Stocks, bonds, and cash are sometimes referred to as financial assets, and most often these financial assets are priced and traded on real-time securities markets.

Real estate property is an additional asset class, which creates some complications related to portfolio diversification. The great majority of individual investors with some financial assets also tend to be real estate property owners. For many, their real estate assets – usually their personal residence – can grow in value over their lives to become a very substantial and even majority part of their personal investment asset portfolios. Since this real estate equity is in a homes, which also provides shelter, then these real estate assets really function as a financial asset reserve of last resort after equity, bond, and cash financial assets are exhausted, usually during retirement.

Common stocks, which are one of the largest and most well established investment asset classes in the world, have been sliced and diced into a myriad of confusing segments.

The financial services industry is ingenious in its invention of new asset classes and its balkanization within even traditional investment asset classes. You may already be aware, for example, that the stocks or equities asset class already offers a large boatload of investor confusion. Even if you decide to invest only in mutual funds and/or ETFs for diversification and you intentionally avoid the daunting task of picking individual stocks, you still are confronted with extraordinary complexity. Stock investment fund choices include: small-cap, mid-cap, large capitalization, domestic, international, global, value, growth, core, sector, industry, hybrid, long-short, socially conscious, green, active, passive, index, Class A shares, Class B shares, Class C shares, and on and on and on.

Armies of securities industry sales and advisory personal compete for your attention and advocate that you assemble your personal portfolio according to differing and supposedly superior portfolio optimization techniques. Often, it is unclear whether these asset class segment inventions truly are beneficial to investors. Of course, the associated fees seem to guarantee that this segment proliferation will always be beneficial to the securities and financial services industry. The more complex things get, the more you seem to need someone to help you to fiddle with and to rebalance your portfolio. That, of course, costs more, too. Plus, you get to pay more repeatedly, because the fiddling never stops in this noble pursuit of more optimal risk-adjusted portfolio returns. Unfortunately, the additional costs most often outweigh the additional benefits.

Non-traditional investment asset class concerns

Beyond stocks, bonds, cash, and personal real estate holdings, there are numerous other perhaps real, but very often fanciful or false asset classes that are promoted to individual investors. A few of the alternative asset classes and associated investment products that are pitched to individual investors include: commodities generally, gold, foreign exchange, hedge funds in 57 varieties, infrastructure, managed futures, private equity, limited partnerships, variable annuities, etc. Once you stray beyond stocks, bonds, cash, and real estate, the proliferation of additional asset classes and investment vehicles seems virtually unlimited.

Unfortunately, many of these alternative asset classes and investment products are fraught with problems for less sophisticated (and even for more sophisticated) individual investors. Here is the rub. How can you tell whether an alternative asset class might genuinely be beneficial to add to your portfolio? Which of them should you hold?

Generally, the alternative investment asset class sales argument goes as follows:

“A) This special ‘new asset class’ has had very high returns. While this asset class also has had very high risk, if you had put this new investment asset class into your portfolio in the past, the risk would have been moderated. That is because values in this new asset class historically has zigged, when values of the other investment asset classes have zagged.

“B) Therefore, this new investment asset class might increase your future returns and could even reduce your portfolio’s overall risk. This is a great opportunity for you. You should put 5%, 10%, or x% of your total assets into this asset class. We have introduced some swell new investment products that address this asset class. It is too bad that you did not buy these investments years ago, before the run up in values. Unfortunately, we did not offer these investment products back then, because we have only introduced them recently in response to the loud clamor of investor demand. Of course, none of this loud investor demand has anything to do with us in the financial services industry loudly promoting these great future investment opportunities based on our back-fitted, data mining discoveries of selective “coulda-shoulda-woulda” superior historical investments.

“C) Pay no attention to the high fees and high costs of buying into this asset class with these new investment products. These extra costs are small in comparison to the potential payoff to you. Pay no attention to those naysayers behind the curtain, who may argue that historical performance is not predictive. Ignore their suggestions that this asset class was just cherry picked from the historical investment returns records, because of its past performance. Pay no attention to the ‘Nerds on Wall Street‘ behind the curtains.

“D) Do not listen to anyone who says that you could be paying a very high price to put a lot more risk into your portfolio with no assurance of a superior payoff in the future or reduced risks. What is that you say? You want a guarantee. Oh my, I am sorry, but there simply are not guarantees in investing. However, do not worry now. You can just trust me. We have done our research. See this 4-color brochure on the product? This is a nice silk tie I have isn’t it? Let me tell you about the swell tropical place I stayed, when I was on vacation. Oh, just sign here, while we chat.”

Heard this one before? Did you put in your money? How did it work out? How did you sleep?

An individual’s risk preference relative to that of the average investor influences the asset allocation that would tend to be most beneficial from a risk-adjusted portfolio performance point-of-view.

Your personal investment risk tolerance should determine your investment asset allocation. Investment always involves risk. If your personal capital is not at risk, you simply are not holding an investment. All investors — small or large – skilled or unskilled — irrational or rational — sophisticated or unsophisticated – must navigate the same uncertain securities market and economic waters to get to their financial goals. While investing involves significant complexity, much of which is unnecessary, an investor’s ability to tolerate risk or the occasional, inevitable, and unpredictable stormy waters will dictate whether they can stay in the markets in the bad times, as well as the good times.

By analogy, those who cannot tolerate rough waters, should sail in a bigger, safer, and slower boat (more cash and bonds and less stocks). Those who can better stomach the storm can sail in smaller, faster boats (more stocks and less cash and bonds) and perhaps go faster while exposing themselves to greater risk. On average historically, greater risk has yielded greater rewards, but investors need to be aware of their limitations and choose the appropriate investment boat, given their risk tolerance and fortitude. If the average investor sails in the average investment boat, then the more risk averse investor should choose a larger, slower boat, while the more risk tolerant investor should choose the smaller faster boat. Risk tolerant investors tend to be frustrated by the lower performance of slow boats, while risk averse investors in small fast boats may experience fears and losses (however temporary) that they simply cannot tolerate.

Virtually all investors are risk averse to some degree. Therefore, securities markets are expected to pay a positive, albeit uncertain, future return or risk premium. Otherwise, no investor with greater or lesser risk aversion would be willing to put their capital at risk versus storing their money in a more certain asset with lower risk. Those few who crave risk have casinos or day trading or Forex or commodities or some other  ”zero-sum-plus-costs” game, where they can give their money away to the “house” slowly or quickly — and hopefully they enjoy themselves during that foolish process.

Because the average risk-averse investor holds the average portfolio asset allocation, this becomes a reference point in determining how a specific individual’s investment portfolio asset allocation might diverge from that of the average investor’s asset allocation. The question becomes: “What is the average asset allocation of the average investor?” The aggregate values and relative proportions of the financial markets will define this average asset allocation.

Defining the average asset allocation of the average individual investor

For the rest of this discussion, we will focus on getting rough estimates of the primary financial asset classes — cash, bonds, and stocks — to develop a point of reference for the “average investor.” Of course, there are other asset classes that some individual investors hold, such as real estate and private business interests. These other classes need to be taken into account when developing a comprehensive family financial plan. Nevertheless, cash, bond, and stock financial asset interests tend to be the most easily changeable in their composition. Each of these financial asset classes can be readily converted into the other through modern real-time securities markets, and thus an asset allocation plan with infrequent rebalancing is prudent.

Measuring the average asset allocation of the average investor is therefore the goal. This should be pretty simple, correct? Just measure all financial assets held directly or indirectly for the benefit of individuals (in our case US residents) and figure out the proportions of cash, bonds, and stocks. These asset class proportions then become the average asset allocation reference point for the average investor. A more risk averse investor would then hold a portfolio the skews toward less investment risk, and the converse would be the case for a more risk tolerant investor.

However, this is only half of the puzzle, because the average asset allocation is not always stable over time. Economic cycles and securities market cycles exist, and their movements are correlated. The economy grows more quickly at some times and goes into a reversal during recessions and depressions. Securities market cycles tend to anticipate business cycles, but without any reliable assurance that the direction and strenght of current securities market anticipation is accurate. The prescience of securities markets can only be measured in hindsight, after changes in the economy have become clear and the future that was anticipated by securities markets becomes the past or history.

Since the turn of the century and the millennium, the US and the world has experienced extraordinary financial times. Two decades of expansion in the 1980s and 1990s peaked in a technology/communications/financial bubble that collapsed in 2001 and was followed by an anemic recovery and growth cycle from about 2003 to 2007. Without strong US job growth in this growth cycle and driven by rising US consumer debt obligations and a US housing value bubble, the US then lead the world into another financial or “credit crunch” crisis that was far worse than the dot com crash.

In the fall of 2008, the world stared into the abyss of global financial crisis, akin to Calypso’s maelstrom in “Pirates of the Caribbean: At World’s End.” It did not matter whether you were in a big slow investment boat or a small, speedy investment boat. Without the real world “special effects” of massive global government intervention in the securities markets, we would have found the end of this unfolding securities horror movie would have been to find most large boats and all small boats in Davy Jones locker at the bottom of the economic ocean.

In panic, those who could not stomach this maelstrom fled to the “dry land” of government guaranteed cash investments, and away from stocks and even bonds. The remainder of this article provides a few numbers that tell this disturbing financial tale. For purposes of setting an asset allocation strategy, one needs to decide whether to pay attention to the average asset allocation “normal” of the last several decades or to decide that what we just have collectively endured is the “new normal,” which it likely is not.

Average Asset Allocation Percentage Data for 2004

To understand the overall asset allocation percentages of the major financial asset classes, in mid-2004 I performed a detailed analysis of all US personal financial asset ownership held directly by individuals and indirectly by institutions for the benefit of individuals. Concerning the average portfolio of the average investor, I reviewed detailed data from the US Federal Reserve Bank which tracks total personal assets across all kinds of personal accounts including brokerage, tax deferred, pension, insurance, trust, and other accounts. The Fed’s June 2004 Z.1 report indicates that total U.S. personal financial assets were approximately $26.9 trillion dollars. In total in mid-2004, the percentage allocation across the major financial asset classes was 26.9% in cash and equivalents, 18.9% in fixed income, and 54.2% in equities.¹

For purposes of comparison, the Investment Company of America’s (ICI) end of 2004 estimate of total US domiciled mutual fund assets, which is a subset of the personal assets that the Fed tracks, totaled $7.5 trillion dollars.² The percentage allocation was 27.7% in cash and equivalents, 19.7% in fixed income, and 52.6% in equities. The mid-2004 Federal Reserve and the end of 2004 ICI numbers are remarkably similar. This gives confidence that these figures represent approximately the average asset allocation of the average personal portfolio. Analyzing the Federal Reserve data takes quite a bit of time, whereas the ICI data can be analyzed and understood much more quickly.

The average asset allocation at the mid-point of economic and securities market cycle can serve as a baseline for the asset allocation of the average risk-averse investor.

Therefore, if we summarize the Federal Reserve Z.1 assets data and the ICI mutual fund assets data for 2004, about 27% of assets were in cash and equivalents, 19% were in bonds and fixed income assets, and 54% were in stock and equity assets. With the benefit of several years of subsequent hindsight, the end of 2004 was roughly the middle of the last combined business and securities market cycle.

For an asset allocation comparison taken near the tail end of the market cycle prior to the credit crunch debacle of 2008/2009, I also looked updated ICI data for total U.S. domiciled mutual fund assets in November 2007. (U.S. domiciled mutual funds would include both domestic and international stock, bond, and cash investment assets.) The ICI reported that, at the end of November 2007, U.S. domiciled mutual fund assets totaled $12.1 trillion, which is about a 60% increase over total assets in mid-2004.³

Even with this huge, $4.6 trillion increase in total mutual fund value, the late 2007 percentage allocation was 25.7% in cash and equivalents, 17.0% in fixed income, and 57.7% in equities – again reasonably similar to mid-2004 with a moderate shift of value toward equities. The proportion of asset value in the equities asset class rose about 5 percentage points, as the business/economic cycle and securities market cycle advanced and matured.

Meanwhile the proportion of asset value in both cash and debt securities declined modestly. Cash has been redeployed somewhat, and bond asset values have declined as debt instruments have came under pressure in the credit crisis of the second half of 2007. Nevertheless, the change in percentages has not been dramatic. These figures demonstrate that, overall, about 55% of total asset value is held in equities, about 25% in cash, and somewhat shy of 20% in bonds.

These 2004 to 2007 proportions represent the average holdings of the “average” investor across all personal financial assets held in U.S. personal accounts, either directly or indirectly through institutional holdings on their behalf. Depending upon your relative tolerance for investment risk compared to the “average investor,” these average percentages are instructive concerning what an average individual investor’s asset allocation would be.

What happened to the average asset allocation during the recent credit crisis of 2008 and 2009?

While we can only hope the the credit crunch, financial markets crash, recession, and near depression of 2008 and 2009, is an aberation and not the new normal, it is instructive to look at a few data points to see what happened to the apparent asset allocation percentages at certain points during this crisis. Here I will use ICI mutual fund data.

Following a grinding decline in stock market values beginning in late 2007 and culminating in the free fall collapse of equity values near the end of 2008 and beginning of 2009, the stock markets bottomed out in March of 2009. The the equity markets began a recovery that was surprising to many if not most investors. (Note that this is being written in October of 2009 and thus I cannot predict (nor can anyone else) what will happen going forward.)

Measured at the end of the first quarter 2009, the ICI reported total US domiciled mutual fund assets of $9.2 trillion dollars or very close to 50% of the $18.2 trillion dollars in mutual fund assets held by investors across the globe. ⁴ For US mutual funds, 41% of total assets were held in cash equivalent money market mutual funds, 20% of assets were held in bond funds, and 39% of assets were held in stock or equity mutual funds.

In effect, when compared to the 2004 and 2007 figures above, there was roughly a 15 percentage point shift from stock funds to money market funds.(In aggregate the total value of US mutual fund asset almost $3 trillion lower than the total value near the end of 2007.) While only a small part of this shift in percentages can be was due to actual net redemption cash flows out of stock funds, the real explanation was that the collapse of stock market values accounted for the vast majority of the shift in overall percentages. Assets did not have to move. Equity values had just collapsed, as expectations about the future economy contemplated a severe depression.

And then the recovery of 2009 reversed trends in aggregate asset allocation percentages

Now, let’s take a look at the latest available figures at the time of this writing, which were for the end of  September, 2009. ⁵ The ICI reported total US domiciled mutual fund assets of $10.6 trillion dollars representing an increase in total mutual fund asset values for about $1.4 trillion in that six month period. For these US domiciled mutual funds, 34% of total assets were held in cash equivalent money market mutual funds, 21% of assets were held in bond funds, and 45% of assets were held in stock or equity mutual funds. In effect, when compared to the end of March 2009 figures above, there was roughly a 6 percentage point total value shift in favor of stock funds and a 1 percentage point shift in favor of bond funds — all away from money market funds. Again only a  small part of this shift in percentages can be accounted for from actual net cash in-flows into stock funds.

The vast majority of the last six months of equity market appreciation was due simply to a recovery of equity market values and not due to cash in-flows. Those who were in the market benefited with paper gains, just as the vast majority of them had paper losses as the markets collapsed in 2008 and early 2009. The real question is whether current aggregate asset allocation percentages are the new normal, or just a transition from a severe securities market crisis back toward the historical norm. This is a critical asset allocation decision for investors.

If you were an average investor and held the average asset allocation of 2004 to 2007 and had an investment policy to retain that asset allocation through periodic re-balancing, then you would have been a net buyer of equity assets as securities market values collapsed in 2008 and early 2009. While perhaps emotionally challenging to anyone, this “buy equities into a crisis” (and “sell them into a growth cycle”) strategy would have positioned you for the recovery that occurred in 2009. Most who flew to cash did so after most of the collapse in equity values had already occurred (buy high and sell low), and they were sitting in cash on the sidelines in surprise as equity market values recovered. The investment research literature has repeatedly shown that market timing is an inferior strategy. In the next few years, we will undoubtedly seem more studies that repeat this finding. Even if another maelstrom reoccurs, this will be yet another opportunity for investors to achieve dramatically inferior portfolio performance, when they do not have a well-defined long-term asset allocation and re-balancing strategy in place and when they do not have the will to implement it consistently over time.

Professional advice about your personal investment portfolio asset allocation

If you are confused by asset allocation and all these investment product choices, hire a genuinely competent, knowledgeable, and objective financial advisor to help you. However, if your financial advisor or investment counselor is the one promoting alternative investment classes, perhaps you might want to run the other way.

In particular, you might want to run away, if your stock broker, investment counselor or financial adviser will get paid to sell these alternative asset class investments to you. Furthermore, if you answer just a short investment risk questionnaire and your investment advisor quickly classifies you as a conservative, average, or aggressive investor, be wary. If your advisor quickly starts selling, this might be a very good time to head for the door. An advisor with wrong strategy on commission can be a very large part of the problem rather than the solution.

For more information about personal investment portfolio asset allocation, see these articles on “Asset Allocation and Personal Investment Risk Tolerance.” These articles are published on our sister website, The Skilled Investor. Again, you can subscribe to our Objective Family Financial Planning Blogs by clicking the orange RSS icon to the upper left.

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See: Pasadena Financial Advisors >>>

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Larry Russell, Managing Director

MBA – Stanford University, MA – Brandeis University, and BS – M.I.T.

Lawrence Russell and Company Pasadena, California 91103

(626) 399-9579

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

A truly independent financial planner and fee only investment advisor

(Regarding how I am compensated, I perform services only on a hourly fee or fixed fee for service basis, and only under a contract that would be agreed upon with you. You will not have to pay any form of asset fee. In addition, to avoid any conflict-of-interest, I do not accept commissions or compensation of any type from the financial industry.)

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Pasadena Investment Adviser

The best fee only financial and investment advisor in Pasadena California – serving individual investors in cities such as Azusa, Eagle Rock, Rancho La Tuna Canyon, San Gabriel, South Pasadena, Sunland, Tujunga, and Pasadena.

Footnotes:

1) Federal Reserve Bank, Federal Reserve Z.1 Report. June 10, 2004. http://www.federalreserve.gov
2) Investment Company Institute. “2004 Mutual Fund Fact Book.” Note that while the balanced or mixed mutual fund category is relatively small and usually constitutes about 5% of total mutual fund assets, this category consists mainly of bonds and stocks. For purposes of analysis, I assumed that the proportion of assets in the balanced or mixed category was 50% bonds and 50% stocks and I allocated these dollar amounts to the primary bond and stock asset categories to eliminated the mixed category.
3) Investment Company Institute. “Trends in Mutual Fund Investing, November 2007″ (The same procedure for balanced or mixed mutual fund assets as decribed in the note above was applied.)
4) Investment Company Institute. “Worldwide Mutual Fund Assets and Flows, First Quarter 2009″ Supplementary Table S4 (The same procedure for balanced or mixed mutual fund assets as decribed in the note above was applied.)
5) Investment Company Institute. “Trends in Mutual Fund Investing, August 2009″ (The same procedure for balanced or mixed mutual fund assets as decribed in the note above was applied.)

This is one of the “10 Steps in the Right Direction” that make up The Pasadena Financial Planner’s personal financial planning and personal investment management process. For a summary of these ten steps, see “Your Family Financial Planning.” To find an in depth article for each step, just click the Pasadena Financial Planners Sitemap link at the top of this page. You can reach us by using the contact form below. Please enjoy reading this article. Thank you!

Investment diversification is a genuine financial “free lunch.” Diversified investment funds are key contributors to optimal investment risk management.

Diversification has become an axiom of personal investing, because the specific risks of businesses and other investment entities can be reduced or eliminated from a portfolio without reducing expected returns. When you hear that you should diversify your investments, this means that you should diversify your investments completely and globally – now and always. The investment research literature repeatedly demonstrates that a fully diversified, low cost investment strategy is superior. Get diversified. Stay diversified. Be globally and fully diversified all of your life.

Post-Credit Crisis Commentary Concerning:

Diversified Investments

NOTE: Best personal investment and financial planning practices are durable and wouldn’t change because of market cycles. The article below was written years ago and doesn’t need to be revised. In light of the more recent financial market crisis, the additional comments in this colored box were published recently to emphasize the durable wisdom contained in the detailed article below.

The best investment strategy is to seek complete market diversification at the lowest investment cost using passively managed and globally diversified index mutual funds. You can reduce the volatility of your personal portfolio significantly and track the return of the market with relatively small investment costs. Other strategies tend of be sub-optimal, involving greater portfolio volatility and risk — and accompanied by higher costs in term of expenses, taxes, time commitment, and stomach acid.

Nothing that has happened in the credit crisis changes the value of broad market diversification. Some uninformed post-crisis commentary has questioned the wisdom of diversification, which only indicates a failure to understand what diversification can and cannot do for you. Diversification across a portfolio can and does mitigate volatility over time. However, when systemic factors across asset classes are in motion in the securities markets, then there is nowhere to hide, as occurred with the credit crisis. As over-leveraged investors (AKA speculators) across a variety of asset classes scrambled for liquidity, selling pressure increased broadly and asset values crashed generally, albeit, not uniformly. Those who were very broadly diversified felt less pain, but still felt pain.

However, if you really like the potential for a lot more pain, then don’t diversify. Sooner or later, that pain is much more likely to come to an ill-diversified investor’s portfolio compared to the porfolio of a broadly diversified investor.

Of course, ill-diversified investors chasing tactical and active strategies are always hoping for outsized returns for the added risk. Sadly, only a minority of active investors will get lucky, and it is largely luck (of the lack thereof) that is at play here. The percent of the lucky minority achieving excess returns tends to diminish with time — as excessive fees and taxes eat away at illusory excess returns — proving the foolishness of active strategies.

Article continues:

Diversification is really not an option, if your goal is optimized, risk-adjusted personal investing. Diversification is not an optional part of family investment strategy, if that family wants to sleep well at night. When you are less than fully diversified, every day that you wait exposes you to investment risks that the securities markets tend NOT to compensate through better returns. When you are less than fully diversified, your investment portfolio risks are higher than they need to be without a reasonable expectation of getting any likely additional returns.

When you chose an active management strategy versus a passive one, try to time the markets versus staying put, buy individual securities versus funds, favor certain economic sectors versus full domestic and international diversification, etc., then you are much more likely to lose than to win. This is simply because the road you are taking is unnecessarily rough and unnecessarily winding, and you have less certainty that you will reach your goals. You might overshoot in performance if you are lucky, but you are much more likely to under-perform, because of the various higher expenses and costs that continually drag down active strategies. The longer your time horizon the greater the chances that you will fall behind a passive, lowest cost, market investment strategy.

A passive strategy targets a market return and can still be a bumpy ride — especially if you are not fully diversified globally and you have not adopted an asset allocation that is appropriate to your tolerance for investment risk. Nevertheless, the attendant risks are lower and potential variations are narrower than active strategies. Furthermore, passive strategies that drive down investment costs and expenses to the bare minimum are not continually burdened by repeatedly having to pay the financial services industry a much larger and undeserved share of your returns. It is hard enough to finish a marathon without carrying water for the financial securities industry at the same time.

Full global investment diversification using the broadest, cheapest, most passive index mutual funds and exchange traded funds (ETFs) is the most optimal strategy for the individual investor.

Few in the industry will tell you this, because a lowest cost, global, and passive diversification strategy is the least profitable to the financial services industry. The securities industry looks upon you as a naive “retail investor.” The industry trains its representatives to sell to you the most profitable products that it can at “retail” prices.

Through visible and hidden fees and other costs, these “retail” prices are heavily marked up to compensate the industry and its very highly paid sales force. Who do you think is paying for all those tall buildings, brass fittings, mahogany tables, woolen suits, and expensive silk ties? Who pays the industry’s huge salaries and bonuses? Does the money just come out of thin air, or does it come out of your investment assets and your investment returns?

Few will tell you this fundamental truth about the superiority of cheap, passive, fully diversified broad market investing. Everyone in the industry gets paid somehow, and there is far less profit in promoting a low cost, fully diversified investment strategy. However, there is real money in it for you. In the long run, you will tend to save more money, to save more time, and to save yourself from emotional consternation, when you use a very low cost, fully diversified passive investment strategy.

Complete investment diversification has become an axiom of personal investing, because the specific risks of businesses and other investment entities can be reduced or eliminated with a fully diversified portfolio without reducing your expected returns.

A fully diversified portfolio is an absolute investment necessity. Increased diversification reduces portfolio risk without a corresponding reduction in expected portfolio returns. Diversification is genuinely an investment “free lunch,” and it is a key contributor to improved investment risk management. A very high degree of diversification can be achieved through investing in a variety of low cost passively managed index mutual funds or exchange-traded funds. Such investments are also among the lowest cost investment vehicles available to individual investors in the financial markets. Given that this alternative is easily and cheaply available, the relevant question is never whether a portfolio should be fully diversified.

Through investments in broad-based index mutual funds and exchange-traded funds, diversification is relatively easy and inexpensive to achieve. Attempting to become broadly diversified through the self-assembly of a portfolio of a large number of individual securities is far more difficult and much more costly.

Portfolio self-assembly is much more likely to result in higher risk with returns that lag the market. Buying individual stocks and bonds instead of diversified funds provides you with no advantage whatsoever. The industry likes it, because individual securities trading generates fees and keeps the charade of beating the market going. However, when you buy individual stocks and bonds, you are less than fully diversified, and you are exposed to more risk. Plus, you also get to waste your money and time for nothing. Pay more and get less. What kind of value added is that? You are better off ignoring that kind of investment counseling and financial advice.

Also, see these articles for more about the value of diversification: “The value of diversification to individual investors” and “What is the cost to individual investors of sub-optimal portfolio diversification?” These articles are published on The Skilled Investor, and they report on important investment research studies on asset diversification. Note that The Skilled Investor is one of our sister publications, and it is the longest running of our family of websites.

A significant portion of a investment portfolio may sometimes become concentrated in a single investment security, which dramatically increases the overall risk of a personal investment portfolio.

While generally undesirable, there sometimes are unavoidable reasons for investment concentration. Unavoidable reasons for lack of diversification can include owning a private business or being a key member of a company management team who is required to own company stock by an employment agreement with the company. In such circumstances, you should seek expert guidance on possible ways to mitigate the risk associated with your concentrated investment position.

Nevertheless, for 99.9+% of investors, there is absolutely no good reason to maintain a high level of concentration in an individual security. Immediate steps should be taken to reduce the exposure. How many failed public companies like Enron and WorldCom do investors need to see crash and burn, before they realize that excessive concentration does not pay and can lead to very significant personal financial peril?

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See: Investment Advisors in Pasadena California >>>

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.

Larry Russell, Managing Director

MBA – Stanford University, MA – Brandeis University, and BS – M.I.T.

Lawrence Russell and Company Pasadena, California 91103

(626) 399-9579

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

A truly independent financial planner and fee only investment advisor

(Concerning compensation, I provide financial planning services only on a hourly fee or fixed fee for service basis, under a contract that we agree upon. You do not have to pay any asset fees. In addition, to avoid all conflicts-of-interest, I never accept compensation or commissions of any kind from the financial industry.)

Start a conversation today — Send a message using this contact form

Pasadena Financial Planners

The best fee only investment advisor for clients in the Pasadena area, including these towns South Pasadena, South San Gabriel, Studio City, Sun Valley, Sunland, Tujunga, and Pasadena.

This is one of the “10 Steps in the Right Direction” that make up the Pasadena Financial Planner’s personal financial planning and personal investment management process. For a summary of these ten steps, see “Your Family Financial Planning.” To find an in depth article for each step, just click the Sitemap link at the top of this page. Also, you can reach us by using the contact form below. Please enjoy reading this article. Thank you!

Your personal savings rate is the single most important personal financial planning lever that you control directly through your lifetime efforts to earn income and to manage personal expenditures and your family budget.

Economists call the potential of each person to earn money, pay expenses, and still set aside financial savings their “human capital.” For most people, their personal human capital is all they have financially, until they convert some of their human capital into more durable investment assets.

Over their lives, individuals must rely increasingly upon assets to replace earned income. Without the good fortune of receiving substantial inheritance and gifts or winning the lottery, you can invest – only if you save. When saving to fund an investment program, you must live within both your current and future economic means.

Saving money adequately across your lifetime is the most difficult challenge that you and your family face.

Prior to retirement, you must produce earned income to cover current expenses. Furthermore, you must produce excess income and control your expenditures to allow for adequate personal savings rates. Your personal savings rate will largely determine whether you will build up enough assets for the unknown and uncertain future that lies decades in front of you. In retirement, your cash flow management challenge shifts from saving for retirement to retirement expenditure management. Your retirement investment assets and investment income must be adequate for your retirement expenses, yet you cannot know how long your retirement savings will last.

In relative terms, your lifetime investment management strategy is a piece of cake compared to the challenge of earning, controlling expenses, and savings. Personal savings and cash flow planning are relatively difficult, while optimal lifetime investing is relatively straightforward.

A positive difference between current earned income and household expenditures – or plain old financial savings – usually results from awareness and intentional control of personal consumption.

Expense control allows for personal savings, personal investing, and eventually deferred consumption of investment returns and the investment principal, if necessary. Those who are better at managing their savings plan tend to be much more conscious of their expenditures. They tend to be more aware of the level of their current personal expenses relative to their current earned income. In short, they are better at personal financial planning and family cash flow management.

Personal savings rates increase with conscious planning and better expenditure decision-making. Better expenditure control results from a conscious decision made at the time of each purchase. Across your lifetime, the quality of your personal financial decision making at the point of purchase will determine much of your overall financial success.

Each purchase potentially involves a “need versus desire” decision. Some people do this better than others. Some plan ahead and understand their limitations. Many simply do not.

The Pasadena Financial Planner believes that lifetime financial success is dominated by both the quality of personal consumption decision making and knowledge of one’s current financial limitations. In the long term, many frugal people of modest means will end up more secure financially, when compared to higher earners with less conscious understanding and control of their expenditures.

Most people simply do not have a high enough personal savings rate to meet their retirement savings and other future financial needs.

Your cumulative lifetime labor earnings are variable and uncertain. Your human capital is perishable. Personal income volatility has increased significantly at all income levels in recent decades and people must exercise increased discipline to restrain spending in a fluctuating income environment. The passage of time steadily diminishes your total personal earning potential. Furthermore, illness and injury can randomly slash the value of your potential human capital, while disrupting your life, while permanently altering your best-laid financial finance and savings plans.

The Bureau of Economic Analysis of the U.S. Department of Commerce has tracked the national personal savings rate since 1952, as part of its “National Income and Product Accounts” and “Flow of Funds” reporting. From the 1950s through the 1980s the national national savings rates fluctuated around the 9% to 10% range. In the early 1980s, these rates began to decline. In 2006 and 2007, they have turned slightly negative. Only after the dreadful global credit crunch of 2007 to 2009 had devastated credit availability and forced both lenders and borrowers to change dramatically their easy borrowing and lending practices did this trend reverse. In 2009, the US savings rate began heading toward the high single digit percentages and people spent less, saved more, and paid down their debts more quickly. Whether the national savings rate will approach or exceed 10% and stay there is a significant question. This savings rate will have a great impact on the long-term financial security of many millions of US families.

A negative national personal savings rate means that for every dollar someone saves, another American goes more than a dollar into additional debt. This American savings trend (or lack thereof) is very disturbing, since a sustained long term savings rate of 10% to 20% is usually required to save adequately for secure and comfortable retirement.

Therefore, the first thing you must get right is your financial savings program. To ensure that your personal savings rate is high enough to build up an adequate asset base, you must understand, track, and project your cash flows. You cannot know the adequacy of your savings rate and your progress toward your investment goals without measuring your current progress and projecting your future cash flows.

Any comprehensive cash flow projection must also include planned future cash requirements for living expenses and special requirements, such as a down payment on a house, college expenses, retirement, charitable giving, and estate bequests. Projected personal financial requirements provide the baseline expenditure plan over which you can overlay various income and investment return scenarios to test the adequacy of your current savings and investment plans.

When you work with The Pasadena Financial Planner, we will use VeriPlan to analyze and project your lifetime financial affairs in comprehensive detail.

VeriPlan is a very sophisticated and customizable computer planning model that I have developed. VeriPlan enables you to view graphical projections of your family’s income, expenses, assets, and debts across your lifetime. Data inputs reflect your particular situation and include all of your significant assets, including cash, bonds, equities, property, real estate, private equities, and business interests.

This comprehensive lifetime financial planning and cash flow modeling process is very important. We measure your current financial circumstances and model your goals and intentions for the future within this framework. To develop your customized lifecycle model, we will work together to gather information, adjust assumptions, and evaluate the effects of different financial decisions across your lifecycle. For more information about VeriPlan, see: Lifetime Financial Planning Software.

VeriPlan can vary future expected investment returns by asset class, and it automatically analyzes the details of your taxes, investment expenses, and retirement investment plans. Any and all assumptions can be changed for instant “what-if” testing. The cash flow model’s risk analysis capabilities evaluate how well your future assets would cover normal and extraordinary expenses, if market or personal circumstances were to disrupt your plans. Because excessive and unnecessary investment costs undermine the lifetime investment returns of most people, VeriPlan automatically projects the returns you will waste with such excessive investment fees, if you do not choose more cost-efficient investments.

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See: Pasadena Investment Adviser >>>

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Larry Russell, Managing Director

MBA – Stanford University, MA – Brandeis University, and BS – M.I.T.

Lawrence Russell and Company Pasadena, California 91103

(626) 399-9579

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

A truly independent financial planner and fee only investment advisor

(Regarding how I am compensated, I provide financial planning services solely on a fixed fee or hourly fee for service basis, and only under a contract agreed upon with you. You do not have to pay any form of asset fee. Furthermore, in the interest of avoiding all conflicts-of-interest, I do not accept commissions or compensation of any kind from the industry.)

Start a conversation today — Send a message using this contact form

Financial Advisor Pasadena

Serving clients throughout the greater Pasadena, California area including these cities: Alhambra, Altadena, Arcadia, Azusa, Baldwin Hills, Baldwin Park, Burbank, Glendale, La Canada, La Crescenta, La Tuna Canyon, La Verne, Los Feliz, Monrovia, Montrose, North Hollywood, Pasadena, San Gabriel, San Marino, South Pasadena, Sunland, Temple City, and Toluca Lake.

This is one of the “10 Steps in the Right Direction” that make up The Pasadena Financial Planner’s personal financial planning and personal investment management process. For a summary of these ten steps, see Your Family Financial Planning. To find an in depth article for each step, just click on the Sitemap link at the top of this page. You can reach us by using the contact form below. Please enjoy reading this article. Thank you!

You need to develop your own personal financial management skills, because you must live with the results of your financial planning and investment management decisions.

People face formidable challenges to lifetime financial success and their ability to retire with financial security. Throughout your life, you must decide for yourself whether any particular personal financial planning or investment management concept is fact or fiction. One thing can be guaranteed: there will be no shortage of ideas proposed to you by others about what you should do with your money.

Post-Financial Crisis Update About:

Personal Financial Planning

NOTE: The best individual investment and financial planning rules persist and wouldn’t vary due to market cycles or financial crisis. The article that follows was written years ago and requires no changes. Given the subsequent financial market crisis, the update comments in this box were written more recently to emphasize the enduring wisdom contained in the detailed original article below.

The financial crisis has demonstrated clearly that there really are no “smart money” managers — at least none that you can hire to work in your interests after all of their costs are considered. Furthermore, when the financial tide went out, so much fraud and malfeasance was uncovered that only the most gullible of people still believe that wide swaths of the financial services industry actual operate in their best interests. Individuals or “retail clients” are a huge industry profit center. The profits are immense, the fees are ever-present, and the bite out of your wallet is huge over the course of your lifetime.

The original point of this article was that people need to do their homework and to develop some sophistication in dealing with their own finances and with the industry. Only you and your family will have to live with the results of your financial decision-making throughout your life. The industry will extract its exorbitant costs up front and along the way. Pay less to the industry and you will have more assets for longer. If you don’t have any assets, you won’t get the time of day from the financial industry.

You need to get educated, and you need to be skeptical. While the industry has very polished song and dance routines in a vast rainbow of flavors, most of what you are told to do is not good for you. The vast majority of the supposed “financial innovation” that you encounter is designed to lighten your wallet. Only a minority of the investment, mutual fund, ETF, insurance, annuity, education, retirement, and other specialized financial products that you encounter have any long-term validity demonstrated in the objective financial research literature. Your best interests come after the best interests of the financial services industry. It is a simple as that.

And, by the way, all that wool, silk, brass, and mahogany looks impressive, but who is paying for it? (Hint: find a mirror.) The pay scales and bonuses of the financial services industry are astonishing compared to any other industry. This is even more bizarre, because from what I can tell, the average value-added of this service industry to the average person is negative! Start being skeptical and stop deferring to the supposed wisdom of the latest slick financial industry sales pitch.

Article continues:

Even when you delegate decisions to an investment counselor or financial advisor, you and your family still must live with the consequences. You must learn about investing.

You must make intelligent and informed decisions about whether the financial planning strategies and tactics recommended to you in the financial media and by financial advisers are personally valid for you and your family. The vast majority of financial ideas proposed to you during your lifetime will be suboptimal, self-interested (not yours), simply wrong, and/or just plain rubbish.

Many people have inadequate knowledge and skills about personal financial planning and personal investing.

Some of the saddest financial stories concern naive older people who get robbed of their lifetime savings by some smooth-talking slime bag financial scam artist. These fraud victims have no way to recover the lost lifetime assets. Before the fact, they needed to know better to avoid being duped. However, they lacked the knowledge, skills, and judgment to know better.

Only through a lifetime of taking personal responsibility and intentionally educating yourself will you learn how to manage your money. Only by taking personal responsibility will you learn to navigate around the amazing number of potential pitfalls associated with personal financial planning and personal investment management.

Is it reasonable to expect that you would have such expertise? You may be an expert in your profession or trade, and you may earn substantially more than you need to meet your current expenses. However the dilemma is whether and how you will also learn to manage, grow, and protect your financial assets. As you develop your financial expertise, you will increase the chances that your assets will grow sufficiently to fund your family’s future financial needs, while you become less dependent on your earned income.

Personal financial planning and investment management requires knowledge that is different from professional and career skills.

This situation makes self-direction of your finances problematic. Furthermore, this situation creates a great temptation simply to trust someone else to manage your financial affairs and investment strategy — hopefully in your best interests. (Remember to cross your fingers and keep them crossed!)

The Pasadena Financial Planner believes that people who are successful in their careers and have the ability to generate substantial investable income must also become more successful concerning the management of their money during their lifetimes. You must develop both career professional skills and personal financial planning skills to increase the probability of achieving lifelong financial success. In financial affairs, trust is often given, but not always reciprocated. Many people are just too naive and trusting, when others have an eye on their pocketbook.

Many people need help from financial planners and investment counselors. However, they base their advisor selection decisions on “trust” and the recommendations of friends and colleagues. Frustrated with complexity of personal finance and investing, they want to find someone they can “trust.” Then, they want to hand over the keys and let someone else drive.

Unfortunately, the entire financial services industry uses a “we are worthy of your trust” marketing message. Yet, it is difficult to find another service industry where so much is paid for so little genuine value in return. Much of the trust that individuals have if mis-placed and ill-founded.

Personal financial planning and asset class investment management advice from the financial services industry is often shallow and inappropriate.

While advice might seem plausible, many financial industry proposals are simply not good for you. The financial services industry writes its marketing material to sound reasonable to individuals. Some financial ideas reasonable, but many are not. Most recommendations involve the purchase of financial and investment products that are simply far too costly and far too risky.

The vast majority of personnel in the financial services industry are taught how to sell the most profitable financial products. Relatively few genuinely understand finance and investments from the perspective of what is really best for their clients. Even fewer have an incentive to act in the best interests of their clients.

Most often, the interests of the industry and the client are in conflict. Most often, the financial services industry will win, as it delivers excessively expensive and overly risky financial and investment products to its overly trusting clientele.

Without adequate personal financial knowledge and oversight, delegating personal finance and investment decisions to industry financial advisers can be very risky to your personal and family financial welfare. You will have to live with the consequences of poor or bad decisions long after your advisors have perhaps passed from the scene and even retired on their fees.

Naive trust, faith and hope are not a reliable path to financial success, when you are dealing with the financial services industry. There are simply too many potholes, conflicts of interest, and hands in your wallet. The only practical solution is for you to increase your personal investment knowledge and skills.

Information from the financial services industry furthers its interests, as brokers and financial counselors sell risky and expensive investment products and financial services to you.

For example, when hundreds of broadly diversified mutual funds and exchange-traded funds (ETFs) are available at extremely low costs, there is ABSOLUTELY NO GOOD REASON for individuals to do so much buying and selling of individual securities. Yet, millions frantically buy and sell equity securities in efforts to beat the market.

Egged on by the financial media and the brokerage industry, millions of people waste huge amounts of their valuable personal time in these pursuits. Most will fail miserably in their efforts and will suffer substantially increased risks, costs, and taxes in the process. Most will obtain substantially inferior performance results relative to the performance of broad securities market indexes.

Yet, the vast majority will never bother to check their net performance against passive benchmarks. They will just keep trusting and never really know how very badly they have done compared to a passive investment program that would have required far less time, less risk, lower taxes, and much lower industry fees.

Individual investors need to do a much better job of distinguishing personal finance and investment planning fact from fiction.

They need to base their decisions on financial strategies and tactics that have been validated scientifically. Individuals must become better informed. Otherwise, they must rely naively upon the supposed goodwill of investment counselors and financial advisors who have very strong incentives to sell expensive financial products to them.

When you deal with a broker, investment counselor, or financial advisor, the financial products they recommend will almost always far more expensive than necessary. You will be sold the dream of better results, while most often the reality in the future will be the opposite. In this very costly environment of “advised” personal finance and investing, depending upon the goodwill of industry representatives can be a very risky strategy.

Significant danger exists in not understanding certain fundamental truths about the financial services industry itself. The structure of the financial services industry creates costly conflicts between the financial interests of individuals and the profit motives of companies in the industry and the self-interest of its sales agents. These financial conflicts of interest are a much greater threat to the welfare of individuals and their families, than is the potential for outright financial fraud that rightly concerns so many people.

The securities industry sells investment products that add substantial and unnecessary costs that are not in the interests of their clients.

Individual investors, sometime referred to as “retail investors,” will never find “free” risk-adjusted investment money lying around. Interactions with the financial markets are a “zero-sum game” before costs and taxes. With all costs and taxes, dealing with that financial industry is a “negative sum game.”

In the short-term, the size of the securities market pie is fixed. When one party gets more, another gets less. In and of themselves the securities markets do not create value, but the industry can siphon away a significant portion of an individual investors’ potential returns through visible fees and hidden costs.

Of course, the capital markets provide an extremely valuable economic contribution to our world through the generally efficient allocation of capital. However, this role does not necessarily mean that investment profits will be shared equitably between individual investors and the financial services industry. Retail investors and the financial industry are in competition with each other over how to split this fixed short-term pie. Investors who understand this conflict can better ensure that they get a more reasonable deal.

The good news is that modern financial markets are competitive and relatively efficient asset price setting mechanisms. This means individual investors cannot consistently “beat the market” on a risk-adjusted basis. While this might disappoint some investors who believe they are smarter than others, in reality this is very good news. On the opposite side, the good news is that competitive and efficient markets mean that individuals need not be beaten badly by the market either. Investor returns can track a market return quite closely at very low cost.

While beating the market is not a reliable strategy, individual investors can still make better decisions by choosing lower cost investment strategies.

Passive strategies targeting the market return do not provide an entirely free ride, because there is always a minimum cost. However, optimal investment practices do amount to a highly discounted ticket, which can get individuals to their financial goals quicker and/or richer.

Without optimal strategies, the risk-adjusted asset class returns of the average investor will lag the market return by a much wider margin. This lag will be due to the inferior gross returns of their sub-optimal investment strategies, which are primarily attributable to their unnecessarily high investment costs and taxes.

Therefore, at the outset, the crux of the matter is to learn what does and does not work in personal financial planning and investing. Accepting what you hear or read about personal financial strategies without demanding proof, is almost certainly the road to a much lighter wallet in the future.

Please click the Sitemap link at the top of this page to find and read about the other steps in this 10 step Family Financial Planning Process.

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See: Financial Advisors in Pasadena CA >>>

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Larry Russell, Managing Director

MBA – Stanford University, MA – Brandeis University, and BS – M.I.T.

Lawrence Russell and Company Pasadena, California 91103

(626) 399-9579

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

A truly independent financial planner and fee only investment advisor

(Concerning how I am compensated, I charge solely on a fixed fee or hourly fee for service basis, under a contract agreed upon with you. You do not have to pay any form of asset fee. Furthermore, in the interest of avoiding all conflicts-of-interest, I do not accept compensation or commissions of any kind from the financial services industry.)

Start a conversation today — Send a message using this contact form

Pasadena Financial Planner

An objective and independent financial advisor for clients in the West Los Angeles area including, for example, financial planning clients in Altadena, Monrovia, Montrose, Pasadena, San Gabriel, South Pasadena, Sunland, Temple City, and Toluca Lake.

(Note that you can reach us by using the contact form below.)

Using hundreds of thousands of what the securities industry calls “producer” employees, the brokerage industry sells investment products and services to clients for transactional fees, asset holding charges, and many other more or less visible investment costs. Governed by the Securities and Exchange Act of 1934, as amended, the legal standard of client care by these brokers is the “suitability” of an investment to a client. However, there is huge latitude in what a suitable investment is and how much it can cost a client.

From the brokerage industry’s perspective, the wealthier the client is the better. Greater assets yield more revenue and higher profit per hour spent with clients. For example, Morgan Stanley’s 2007 compensation plan for their personnel serving retail clients eliminated all compensation for household accounts below $50,000, and it reduced compensation on household accounts under $75,000, unless these client accounts were being charged a percent of assets fee. Clearly, the message to Morgan Stanley sales personnel was and is to chase wealthier fish. Similar messages are given to broker producer employees in all brokerage firms across the industry.

Most registered investment advisor compensation is proportional to client assets — the more assets you have the better for your financial adviser

Another large segment of the financial services industry that serves the public consists of about 100,000 independent investment advisor consultants, who are regulated at the federal and/or state levels. Governed by the Investment Advisers Act of 1940, as amended, and by state laws, these advisors have a seemingly more stringent standard of client care. However, again there is huge latitude in what constitutes minimally acceptable advisor service quality and how much advisory services will cost a client.

Most registered investment advisors deliver services that are charged as a percent of client assets under management. However, often many of these same advisors obtain additional revenues from the securities and insurance industry, when they sell commissioned financial products to their clients.

The wealthier the registered investment advisor’s client is, the better it is for the advisory practice. The greater the client assets under management, the more total revenue for the advisory firm and the higher the client service profit per hour will be.

The economics of the financial consulting industry create a mad dash to catch the wealthy

Whether served by a broker or by an independent financial advisor, if an individual wants personal professional attention, that individual must already have substantial assets that can generate revenue to compensate the advisor. If clients are to be given personalized attention and the valuable time of the advisor, each client must generate several thousand dollars in fees annually one way or another.

The math is simple. For example, if average client servicing requires 20 hours of attention yearly and a profitable hourly rate is $150 per hour, then the required average revenue per client is $3,000 per year. If $3,000/per year is the client revenue minimum for a practice, then the client needs to have $300,000, if the fee is 1% of assets per year. The lower the assets, then the higher the percentage necessarily must be.

Since clients usually balk at much higher percentage fees, the revenue requirements of advisory practices mean that people with less assets will not get personalized services. Clearly, the vast majority of Americans do not fit the industry’s economic profile of a profitable advisory client.

This is why there is so much effort to obscure and hide the true financial and investment costs that clients actually pay. The more the true cost can be hidden and the services promoted as supposedly “free,” then the easier it is to profit from the client, while probably not serving his best interests.

The Pasadena Financial Planner breaks out of this chase-the-rich compensation model

My financial and retirement planning services will be valuable and cost-effective to you. My financial consultant fees will be reasonable, clearly understood, and determined in advance. I can provide you with comprehensive, reasonably priced financial, investment, and retirement planning services on an hourly, fixed fee, or retainer basis. I never charge any fees in relationship to your assets.

For a better understanding of how I operate see: Financial Planning in Pasadena

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See: Independent Pasadena Financial Advisor >>>

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Larry Russell, Managing Director

MBA – Stanford University, MA – Brandeis University, and BS – M.I.T.

Lawrence Russell and Company Pasadena, California 91103

(626) 399-9579

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

A truly independent financial planner and fee only investment advisor

(Regarding how I am compensated, I perform services only on a hourly fee or fixed fee for services basis, and only under a contract that we agree upon. You do not have to pay any asset fees. In addition, to avoid any conflict-of-interest, I never accept compensation or commissions of any type from the industry.)

Start a conversation today — Send a message using this contact form

Pasadena Financial Advisors

Find the best independent financial planner for those living in the San Gabriel Valley, including Arcadia, Baldwin Park, Burbank, Covina, Diamond Bar, Glendale, Duarte, La Canada Flintridge, West Los Angeles, and Pasadena.

• Take the time necessary to understand your family’s personal financial and retirement planning situation in comprehensive detail
• Provide thorough, personalized, and specific financial action plans
• Put you at the center of decisions using a sophisticated and fully automated personal financial planning tool that projects across your lifetime the potential impacts of financial decisions you might wish to make.

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My knowledge of personal financial planning and investing has been developed through:

• education at Stanford University (MBA), Brandeis University (MA), and M.I.T. (BS)
• twenty-five years of corporate and start-up management experience in the business development, financial planning, corporate development, and investment functions
• studying the scientific finance research literature in depth to find evidence about which investment and financial planning strategies work and which do not
• design and engineering of sophisticated lifecycle personal financial planning software to support the development of highly personalized lifetime family financial plans

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Do you want reasonably priced, comprehensive financial planning services from a responsive fee only investment advisor and personal financial planner?

My financial and retirement planning services will be valuable and cost-effective to you. My financial consultant fees will be reasonable, clearly understood, and determined in advance. I can provide you with comprehensive, reasonably priced financial, investment, and retirement planning services on an hourly, fixed fee, or retainer basis.

When delivering my financial planning and investment advisory services, I will never tolerate any conflict of interest. No financial industry incentives will ever interfere with my development of an optimal long-term financial plan for you. My recommendations will focus exclusively on your family’s financial interests.

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See: Pasadena California Financial Planner >>>

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Larry Russell, Managing Director

MBA – Stanford University, MA – Brandeis University, and BS – M.I.T.

Lawrence Russell and Company Pasadena, California 91103

(626) 399-9579

A California Registered Investment Adviser — Certificate 133101

KNOWLEDGE — OBJECTIVITY — HONESTY — DILIGENCE — SATISFACTION

.

A truly independent financial planner and fee only investment advisor

(Regarding compensation, I perform services solely on a fixed fee or hourly fee for service basis, and only under a contract that we agree upon. You will not have to pay any asset fees. Furthermore, in the interest of avoiding any conflict-of-interest, I never accept compensation or commissions of any type from the industry.)

Start a conversation today — Send a message using this contact form

Financial Planner in Pasadena CA

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Serving clients throughout the greater Pasadena, California area including these cities: Altadena, Glendale, La Canada Flintridge, Montrose, Pasadena, Rosemead, San Dimas, San Gabriel, San Marino, Silver Lake, South El Monte, and South Pasadena.

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