Why Independent Research?

Plans Fail in a Vacuum
Financial Planning has been presented to investors as a well-packaged document full of projections, charts and very authoritative text, with lots of small text to give it a more sober tone. If the investor just follows the plan, they will achieve their lifelong goals, because it says so right in the Financial Plan.

The charts, graphs and projections are based on what is usually purported to be actual investment results over a given time frame, be it the past 5 yrs, 10 yrs or 20 yrs. But what about the next 5, 10 or 20 years? No answers. A multitude of projections based on the past, but nothing new based on economic research is usually provided.

Risk is usually measured not as the potential loss of real dollars but in an abstract way through Standard Deviation. “Your portfolio has a Standard Deviation of 16 Mrs. Jones, which is obviously better than a Standard Deviation of 17.” Thank goodness it is 16 and not 17 - 17 could have been disastrous!

Investment Research – How Does It Apply to Me?
Investment Research on-the-other-hand is many times presented without giving any context. Are they writing to institutional investors, traders or you? Would that make a difference?

“We think XYZ is a perfect fit for a long term portfolio”. This sounds like a great recommendation. But is it? Are they really saying that they think the stock is going to stink for a long while before it finally turns up again, but they have no idea when that might happen? When they say “perfect fit”, what are the other investments in the portfolio to which they refer? Are there other invests the investor should have in their portfolio that make this one “fit”?

Many times someone from the financial media will press an analyst for his single favorite stock pick. Just because it is this analyst’s favorite does not mean it is a good investment for everyone, nor does it mean that an investor should go out and overweight their portfolio with that stock.

Acme Brokerage may have a “Recommended Asset Allocation” or “Model Portfolio” that is 60% stocks 30% bonds and 10% cash. They are obviously bullish with such a heavy weighting in stocks. Or are they? Many times the asset allocation model is meant for institutional investors not individuals. Many brokerages employ floors and ceilings on these allocations.

Knowing where these are would tell you more about how they really feel about the asset allocation and the markets. If you found out that they had a floor (minimum) allocation of 55% for stocks, then 60% isn’t really all that bullish. If they had a ceiling (maximum) allocation of 10% for cash and they were at 10%, what does that tell you about their view of the markets? They are at their highest cash allocation possible, sounds pretty bearish.

Many institutions have written policies that require certain minimum allocations in stocks and bonds and maximum allocations in cash. But do individuals? Are you required to be in stocks and bonds at all times, regardless of market conditions? Of course not.

Putting It All Together
The Cornerstone Commentary is where financial planning and investment research merge. The resulting information is then presented in a way that is relevant to the individual investor.

If you have any questions, comments or observations, we would love to hear from you. And if you know of anyone you care about that could use this information, please feel free to forward the article(s) to them.

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