Author: brianl

(1) If you don’t understand how an investment works, don’t go there. Inverse and leveraged ETFs fall into this category for most people…swaps and other derivatives often underlie these securities. There are plenty of high-quality investments (like stocks & bonds) that are much easier to understand. It’s better to be safe than to get burned by an investment that zigs when you’re expecting it to zag.

(2) Do due diligence. You wouldn’t spend thousands on a car before doing a little bit of research on it, would you? You would at least get the CARFAX report, right? The same can be said for most investments. You should have some prior knowledge of an investment’s risk/return characteristics and know how it would fit into your overall portfolio BEFORE you pull the trigger.

(3) Think long-term by tuning out the noise. Part of the noise I’m talking about here is daily price fluctuations. If you’re a long-term investor, you can (and should) ignore those. You can also ignore most of the investing “experts” you see on TV (or the internet these days); they are usually featured for the conviction they display when the camera is rolling and not necessarily their investing prowess.

(4) Don’t go robo. Why? Think 2008. Faulty algorithms were largely to blame for the sub-prime mortgage crisis in 2008. Algorithms underlie robo-investing programs. Also, having come into existence in 2008, the technology is largely untested in severe market down-turns. The robos might work fine in a down-turn. Then again, they might not. I don’t know about you, but that’s a risk I’d rather not take with my money.

(5) Consider working with a credentialed (CFP® or CFA) human. They can often be more objective and level-headed with your money than you can during times of market tumult. In other words, most of them aren’t going to sell all your stocks after the market has bottomed. They will have considered your risk tolerance and time horizon when crafting your asset allocation and are thus prepared to help you weather just about any financial storm that might come along.

 

Brian Littlejohn is the Founder and CEO of Sherwood Investment Management, a fee-only financial advisor firm in Sonoma County, California. Brian is a CERTIFIED FINANCIAL PLANNER(TM) professional who specializes in investment management. He holds a MBA and a Master’s Degree in Financial Analysis. He has over a decade of experience helping clients achieve their financial goals and occasionally teaches investing and financial planning courses as an adjunct professor.

Brian sat down and spoke with Investopedia last month as part of its Advisor Insights program.  A transcript of part of the conversation is below:

INVESTOPEDIA: What inspired you to become an advisor?

BRIAN: I think it’s really been a combination of two things: (1) having a keen interest in the subject matter…answering often life-changing questions like Will I be able to retire early? How can I use my resources to help make the world a better place? and (2) helping others…I think I may be genetically predisposed to service…I was an officer in the United States Air Force for eight years before joining what I would call a very service-focused wealth management firm in Colorado.  A big piece of the helping part is educating clients.  Personal finance can be a rather daunting place without knowing the laws, knowing the jargon, and knowing the underlying math involved.  Some of it isn’t very intuitive.  One example I like to use is if you lose 40% of your portfolio’s value, you must gain 67% to get back to square one again.

INVESTOPEDIA: Can you tell us about your practice?

BRIAN: First things first…integrity is paramount at Sherwood.  We set the highest ethical standards for ourselves and stick to them.  Above and beyond that, we’re fiduciaries so we’re obligated to act in our clients’ best interests at all times.  We take that obligation very seriously…it permeates all we do.  If we’re not convinced that something will be good for our clients, we don’t get involved.  Period.

Along those same lines, we’re completely independent.  We’re not owned by a larger firm as many practices are these days.  I think most people would be surprised by how many financial services firms are owned by larger companies that they probably haven’t heard of before.  It’s similar to Yum Brands owning KFC, Taco Bell, and Pizza Hut.  We’ve all heard of those mainstream brands…Yum not so much.  That’s the way it often is in financial services.  Anyway, our independence means that we’re completely free to do what’s best for our clients and that’s exactly how we…and they like it.

Additionally, I should mention that we’re fee-only.  We never receive commissions for pushing certain investment products.  That helps to keep our interests aligned with those of our clients.

I set Sherwood up as a boutique practice so that I could provide a select number of clients with superior service…the idea being when clients call, they get me.  When clients provide sensitive information, I’m the only one at the firm who sees it.  Larger firms are unable to offer those kinds of assurances. Further, our clients will never be targeted or accosted because someone saw them walk into a big fancy wealth management office because I don’t have one.  I meet with clients at their homes, virtually, or in nondescript public locations.  It’s all very low-key and relaxed.  Our clients also find it to be very convenient for their often hectic schedules.

The second part of our service model is providing excellent financial advice.  Having been in the industry for over a decade now, I’m well-versed in personal finance matters in general and investment management specifically.  I’ve also earned two Master’s Degrees in finance as well as the CERTIFIED FINANCIAL PLANNER(TM) or CFP(R) designation.  However, the degrees and designations themselves really don’t matter…they’re just tools. What matters is being able to advise clients from a position of knowledge…providing them with the highest quality advice so that they are able to realize the best possible outcomes…achieving their financial goals.  That’s the real rewarding part of what we do here at Sherwood.

INVESTOPEDIA: What are your investing values?

BRIAN: We produce customized, tax-efficient, and in most cases diversified investment portfolios for our clients.  Our basic philosophy is that financial markets in relatively advanced economies like our own are largely efficient.  As such, we’re more apt to employ passive investing strategies like index funds when adding these types of exposures to client portfolios.  On the other hand, where economies are less efficient like in emerging markets, we’re more likely to employ active strategies when gaining those types of exposures for our clients.  The technical term for this hybrid type of portfolio construction is called core & satellite.  I know, it all sounds very other-worldly and nebulous like a lot of financial jargon does, but I assure you it isn’t anything approaching rocket science…it’s just prudent investing principles being put into practice.

INVESTOPEDIA: What is the most important advice you routinely give clients?

BRIAN: Don’t watch your investment account balances on a daily basis.  That’s our job.  Go out and do something fun instead.  Take the kids or grandkids out for ice cream.  Play a round of golf.  Start that hobby vineyard you’ve been thinking about.  Sleep well at night knowing that we’ve got your financial future covered.  The markets will fluctuate; that’s what they do.  Together we’ll develop a thoughtful plan at the outset and stick to it through thick and thin times in the market. It’s kind of like marriage.

 

Brian Littlejohn is the Founder and CEO of Sherwood Investment Management, a fee-only financial advisor firm in Sonoma County, California.  Brian is a CERTIFIED FINANCIAL PLANNERTM professional who specializes in investment management.  He holds a MBA and a Master’s Degree in Financial Analysis.  He has over a decade of experience helping clients achieve their financial goals and occasionally teaches investing and financial planning courses as an adjunct professor.

 

As an investment adviser, we act as a “fiduciary” to our advisory clients. This means that we have a fundamental obligation to act in the best interests of our clients and to provide investment advice in our clients’ best interests. We owe our clients a duty of undivided loyalty and utmost good faith. We avoid engaging in any activities that conflict with the interests of our clients, and we take steps that are necessary to fulfill our obligations. We take reasonable care to avoid misleading clients and we provide full and fair disclosure of all material facts to our current and prospective clients. Generally, facts are “material” if a reasonable investor would consider them to be important. We eliminate, or at least disclose, all conflicts of interest that might incline us — consciously or unconsciously — to render advice that is not disinterested. If we do not avoid a conflict of interest that could impact the impartiality of our advice, we make full and frank disclosure of the conflict. We cannot use our clients’ assets for our own benefit or the benefit of other clients, at least without client consent. Departure from this fiduciary standard may constitute “fraud” upon our clients (under Section 206 of the Advisers Act).

Adapted from https://www.sec.gov/divisions/investment/advoverview.htm

 

Here are a couple videos on what it means to be a fiduciary:

https://www.youtube.com/watch?v=Dg5RRMAc1GY

https://www.youtube.com/watch?v=0tgQxvWfi0c

With interest rates on the rise, you might be wondering if you should be worried about the value of your bond portfolio.  Duration and a closely-related measure called convexity can help you find out…

Over the past six months, the benchmark rate on the 10-year Treasury note has risen from 1.4% to 2.4%. When interest rates rise, bond prices fall (and vice versa).  How much a particular bond’s price falls depends on two major factors: how much rates rise and the duration of the bond.

Duration measures how sensitive a bond’s price is to changes in interest rates.  The higher the duration, the higher the sensitivity.  If a bond you own has a duration of 4 and rates go up by 1%, its price will drop by approximately 4%.  If a bond I own has a duration of 6 and rates go up by 1%, its price will drop by approximately 6%.

It’s important to note that a drop in your bond’s price caused by a rise in interest rates isn’t all bad news.  Why is that the case?  The interest that the bond pays you at regular intervals (usually semiannually) can be reinvested at the new higher interest rate.

There are a number of bond characteristics that can affect its duration.  One such characteristic is the maturity of the bond.  As the maturity of the bond increases, its duration also increases.  Another characteristic is the coupon rate of the bond.  As the coupon rate increases, the duration of the bond decreases (and vice versa).

If duration is the bond-pricing Batman, then convexity would almost certainly play the part of Robin.  Oftentimes, duration alone isn’t enough to completely capture bond price movements caused by changes in interest rates.  In these cases, a convexity adjustment is used to fine-tune the price change estimate produced by duration alone.

Convexity is a favorable characteristic for a bond to have.  It causes the bond’s price to fall more slowly when interest rates rise and rise more quickly when interest rates fall.  As such, I highly recommend it!

This has been a very brief conceptual overview of bond duration and convexity.  Financial theory on the topics can get rather rigorous if you’re so inclined.  As always, if you have any questions about anything I’ve written here, please don’t hesitate to get in touch!

 

Note: This article was adapted from a presentation given to College for Financial Planning faculty members on February 7, 2017.

Brian Littlejohn is the Founder and CEO of Sherwood Investment Management, a fee-only financial advisor firm in Sonoma County, California.  Brian is a CERTIFIED FINANCIAL PLANNERTM professional who specializes in investment management.  He holds a MBA and a Master’s Degree in Financial Analysis.  He has over a decade of experience helping clients achieve their financial goals and occasionally teaches investing and financial planning courses as an adjunct professor.

Brian will begin teaching finance courses at the College for Financial Planning (https://www.cffp.edu/).  He is slated to teach a course on investment planning in July.  A preliminary topic outline is below:

Introduction to formula sheet and risk/return relationships
Types and measurements of risk, standard deviation, beta, and capital asset pricing model (CAPM)
Correlations and the “correlation pyramid”
Standard deviation of a portfolio, concept and calculation
Modern portfolio theory and application, capital market line (CML), security market line (SML), and asset allocation
Efficient market hypothesis (EMH) and behavioral finance
Zero, constant, and non-constant dividend discount model (DDM), valuation scenario
Risk/return measurements – Sharpe, Treynor, Jensen (alpha), beta reliability
Geometric, holding period, and dollar weighted returns, net present value (NPV)
Fundamental and technical analysis, ratios, anomalies
Features of fixed income, preferred stocks, convertibles
Bond calculations – TEY, CY, YTC, YTM, PV
Duration – concept and calculation, convexity
Derivatives – options, futures, warrants
Real assets – gold, real estate, property valuation, and various investment choices
Review

…you need a supercomputer to file your return: https://www.nytimes.com/2017/02/01/technology/ibm-watson-tax-return.html?_r=0

 

According to CBS News, the U.S. Tax Code is 70,000 pages.

For Immediate Release

Date: February 23, 2017
Contact:
Sherwood Investment Management
Brian Littlejohn
707.776.7331
brian@sherwoodim.com
www.sherwoodim.com

SHERWOOD INVESTMENT MANAGEMENT IMPLEMENTS AWARD-WINNING RISK ALIGNMENT PLATFORM TO DRIVE CLIENT SUCCESS

Petaluma, CA – Sherwood Investment Management announced it has implemented Riskalyze, the world’s first first risk alignment platform, which mathematically pinpoints a client’s Risk Number® and equips advisors to empower fearless investors.

Built on a Nobel Prize-winning framework, Riskalyze quantifies the semantics of the financial advice industry, replacing confusing and subjective terms like “moderately conservative” and “moderately aggressive” with the Risk Number, a number between 1 and 99 that pinpoints a client’s exact comfort zone for downside risk and potential upside gain. Advisors then build an investment portfolio to match the client’s Risk Number and chart a clearly defined path to the client’s goals.

Riskalyze was twice named one of the world’s 10 most innovative companies in finance by Fast Company Magazine and has appeared twice on the Forbes FinTech50 list.

“We look forward to using Riskalyze to provide our clients with enhanced risk clarity in their portfolios,” says Brian Littlejohn, Founder and CEO at Sherwood Investment Management.

“Sherwood has ushered in a new era of predictability and reliability for their clients by investing in the world’s first risk alignment platform to pinpoint a client’s Risk Number and align their portfolio to fit,” says Aaron Klein, CEO at Riskalyze. “We love working with advisory firms like Sherwood, who are committed to investing in the success of their clients by empowering fearless investing.”

About Sherwood Investment Management
Brian Littlejohn is the Founder and CEO of Sherwood Investment Management, a fee-only financial advisor firm in Sonoma County, California.  Brian is a CERTIFIED FINANCIAL PLANNERTM professional who specializes in investment management.  He holds a MBA and a Master’s Degree in Financial Analysis.  He has over a decade of experience helping clients achieve their financial goals and occasionally teaches investing and financial planning courses as an adjunct professor. To learn more, visit www.sherwoodim.com.

About Riskalyze
Riskalyze is the company that invented the Risk Number®, which powers the world’s first Risk Alignment Platform, empowers advisors to execute the digital advice business model with Autopilot and enables compliance teams to spot issues, develop real-time visibility and navigate changing fiduciary rules with Compliance Cloud. Advisors, broker-dealers, RIAs, asset managers, custodians and clearing firms use Riskalyze to align the world’s investments with each investor’s Risk Number. To learn more, visit www.riskalyze.com.

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http://www.investopedia.com/advisor-network/advisors/67739/brian-littlejohn-cfp-/

A sample of some of the Q&A you can find there is below:

User: Do lower interest rates increase investment spending?

Brian: Generally speaking, yes.  Lower interest rates mean that the cost of borrowing money is cheaper.  People/Corporations/Etc. borrow the cheaper money and invest it in all sorts of things.

User: Do mutual funds pay dividends or interest?

Brian: It depends on the mutual fund.  Some pay only dividends.  Some pay only interest.  Some pay both.

User: What are the risks of rolling my 401(k) into an annuity?

Brian: One risk to consider is interest rates.  If you go with an annuity now, chances are good that you’ll be locking in a relatively low interest rate.  Depending on the terms of the annuity, you may be stuck with receiving payments based on that lower rate for quite some time.

Beware!  Annuities can be tricky…be sure to read the fine print (or have a trusted advisor do so on your behalf).

 

Brian Littlejohn is the Founder and CEO of Sherwood Investment Management, a fee-only financial advisor firm in Sonoma County, California.  Brian is a CERTIFIED FINANCIAL PLANNERTM professional who specializes in investment management.  He holds a MBA and a Master’s Degree in Financial Analysis.  He has over a decade of experience helping clients achieve their financial goals and frequently teaches investing and financial planning courses as an adjunct professor.     

http://money.cnn.com/2016/09/08/investing/wells-fargo-created-phony-accounts-bank-fees/

http://www.rollingstone.com/politics/news/why-the-banks-should-be-broken-up-20160408

 

http://money.usnews.com/investing/articles/2016-07-14/how-to-set-up-an-online-brokerage-account

Brian Littlejohn is the Founder and CEO of Sherwood Investment Management, a fee-only financial advisor firm in Sonoma County, California.  Brian is a CERTIFIED FINANCIAL PLANNERTM professional who specializes in investment management.  He holds a MBA and a Master’s Degree in Financial Analysis.  He has over a decade of experience helping clients achieve their financial goals and frequently teaches investing and financial planning courses as an adjunct professor.