Cornerstone

Risk Tolerance and Diversification- More Important than Ever

Know Your Risk Tolerance

Investors should never take more risk than they have the ability, willingness, or need to take.  Violating this rule is what led to the failure of Lehman, Bear Stearns, AIG, and others.  They all took on so much leverage that they had to be right in their predictions all of the time, not just in the long run.

Diversification is the Key

Low correlating risky assets have a nasty tendency to have correlations rise just when those low correlations are needed the most.  Thus, investors should make sure their portfolios have sufficient, high-quality fixed income assets to reduce portfolio risk to an appropriate level.  Also, it is important to ensure the fixed income used in the portfolio is of the highest quality.  Investors should stick only with Treasuries, bonds of government agencies and the highest rated municipal bonds.  Also, municipal bonds should be judged based on the underlying rating, not the credit insurance.

Other fixed income investments such as high-yield (junk) bonds, convertible bonds, emerging market bonds and preferred stocks should be avoided, as their risks do not mix well with equity risks, thus could have the risk show up at the wrong time.  Those willing to take incremental risk should do so by increasing their equity allocation.  The incremental expected returns can then be earned more tax efficiently, and the risks can be for effectively diversified.

Active Managers Cannot Protect Investors from Bear Markets

All crystal balls are cloudy, which is why Warren Buffet concluded:  “The only value of stock forecasters is to make fortune tellers look good.”  Active investment firms tout their ability to protect investors from bear markets, but some of the largest demonstrated they could not even protect themselves.  If their money managers could protect investors, why did firms like Lehman Brothers and Bear Stearns go belly up and Merrill Lynch have to be rescued by Bank of America?  As evidence of their lack of ability to forecast events, consider that in 2008 Lehman spent $761 million buying back its own stock at an average price of $49.60 and Merrill Lynch spent $5.27 billion buying back its stock In 2007 at an average price of $84.88.

There is no reason to think that they would manage their clients’ risks any better.  Investors don’t need to pay large, Wall Street fees to have their money managed.  Large fees are only likely to make managers rich, not investors.

Large individual funds fall in the same category.  In 2008, the hardest hit sector was financial stocks.  Financials comprise a significant portion of the asset class of value stocks, so let’s look at the performance of some well-known actively managed value funds:

 

Value Mutual Funds

Active Managers	%
Legg Mason Value Trust	-55.1
Dodge & Cox	-43.3
Dreman Concentrated Value	-44.9
Weitz Value	-44.9
Schneider Value	-55.0
Columbia Value and Restructuring	-47.4
Benchmarks
Russell 2000 Value Index	-28.9
Russell 1000 Value Index	-36.9

Of course, some actively managed value funds beat the benchmarks.  However, how would you have known ahead of time which ones they would be?  As the SEC’s required disclaimer states:  Past performance is not indicative of future results.  Thus, the prudent strategy is to use only passively managed funds.

Cornerstone Wealth Advisors Selected as a FIVE STAR: Best in Client Satisfaction Wealth Manager (SM)

  

For the second year in a row, Cornerstone Wealth Advisors, LLC has been selected as a FIVE STAR: Best in Client Satisfaction Wealth Manager (SM).  The following is a press release posted January 15, 2009:

Press Release

Kansas City, KS (January 15, 2009) - In the January issue of Midwest CEO and the April issue of KC Magazine, the 2009 FIVE STAR: Best in Client Satisfaction Wealth Managers (SM) are announced.  Midwest CEO and KC Magazine formed a partnership with Crescendo Business Services, an independent research firm, to identify the "best in client satisfaction" wealth managers serving the Kansas City area.  In June, Crescendo surveyed, by mail and phone 25,000 high-net-worth residents in the Kansas City area and subscribers of Midwest CEO and KC Magazine.  An additional 3,500 surveys were sent to leaders of financial service industry companies.

On the surveys, recipients were asked to select only wealth managers whom they knew through personal experience, and to evaluate them based upon nine criteria: customer service, integrity, knowledge/expertise, communication, value for fee charged, meeting of financial objectives, post-sale service, quality of recommendations and overall satisfaction.

By July, stacks of surveys had arrived and Crescendo began carefully scoring each wealth manager.  Both positive and negative evaluations were included in the scoring.  Only wealth managers with five years of experience in the financial services industry were considered.

Next, each wealth manager was reviewed for regulatory actions, civil judicial actions and customer complaints as reported by FINRA (the Financial Industry Regulatory Authority) and other regulatory agencies.

Then, before finalizing the list, wealth managers were reviewed by a blue-ribbon panel.  The blue-ribbon panel was comprised of knowledgeable individuals from within the financial services industry.  Although panelist comments were incorporated into the final score, safeguards were built into the review process to reduce the ability of panel members to influence the composition of the final list on the basis of company affiliation.

The resulting list of 2009 FIVE STAR Wealth Managers is an elite group, representing less than 2 percent of the wealth managers in the Kansas City area.  Only 215 of the top-scoring wealth managers made this year's list.  We hope this list serves as a referral network for the 135,000 readers of Midwest CEO and KC Magazine.  Is this list exhaustive?  Of course not.  There are undoubtedly many other excellent wealth managers who, for one reason or another, are not on this years list.

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Research Declarations: As with any research or recognition program, it is important that we provide you the following declarations: 1)The 2009 FIVE STAR Wealth Managers to not pay a fee to be included in the research or the final list of the FIVE STAR Best in Client Satisfaction Wealth Managers. 2) The overall evaluation score of a wealth manager reflects an average of all respondents and may not be representative of any one client's evaluation.  3) The FIVE STAR award is not indicative of the wealth manager's future performance.  4) Wealth managers may or may not use discretion in their practice and therefore may not manage their client's assets.  5) The inclusion of a wealth manager on the FIVE STAR Wealth Manager list should not be construed as an endorsement of the wealth manager by Crescendo Business Services, Midwest CEO or KC Magazine. 6) Working with a FIVE STAR Wealth Manager or any wealth manager will be awarded this accomplishment by Crescendo in the future.  For more information on the FIVE STAR Award and the research/selection methodology, go to: fivestarprofessional.com/wmresearch.

Four Steps to Protect Your 401(k)

For many American workers, just thinking about the damage done to their retirement accounts can be a little painful.  So what can you do to stem the flow of any more money out of your 401(k) or other similar plans?  Here are four ways that might help ease your pain.

Patience is a Virtue

First off, let's start with what you shouldn't do.  Don't stop contributing to your retirement plan or cash it out entirely.  Remember that you are in this for the long run, in most cases you won't need all your savings immediately and your investments should have time to rebound.  If you stop contributing to your plan you will miss out on the wonderful world of compounding income.  In addition, you could also miss out on free money if your employer matches your contributions.

Study Your History

Markets can go up and down, but history has shown that in the long term they go up.  After each big drop througout the years, stocks have rebounded and markets avhe reached new highs.  In addition, for long-term investors a severe bear market can be a good thing.  You can buy more stocks or funds at cheaper prices, and then reap the rewards when the market recovers.

Review Your Investment Plan

The reason you probably set up your 401(k) account was for buying and holding investments, and not for day-trading stocks.  However, it never hurts to review your plan based on your changing personal situation and risk tolerance.  A solid, long-term strategy that involves a well-diversified portfolio should protect your 401(k) or other retirement accounts during rough times (depending upon your risk tolerance and asset allocation).  Also, don't forget to assess your risk tolerance.  Figure out hom much you need to save for retirement and calculate how much to set aside each month to reach your goals.  If you're young, your 401(k) portfolio should hold almost entirely stock funds.  While stocks carry greater risks they also provide greater returns than bonds and money market funds.  Be sure you diversify through funds though funds of large, small, domestic and international companies, as well as growth and value stocks.  In addition, use fixed income securities to reduce your portfolio's volatility.

Avoid the Big Mistake

Working for a company does not mean the stock is a safer investment because you feel like you "know" the company.  A September 2008 article in the Wall Street Journal noted that employees of Merrill Lynch, Morgan Stanley and Lehman Brothers had lost significant amounts of their retirement holdings because of they had substantial amounts invested in their company's stock.  If you haven't done so already, think twice before you load up on your company's stock, no matter how comfortable you are with your employer's current financial situation.