Shakespeare Blog: View from the Lake

Group 512

Shakespeare Investment Philosophy:

Celebrating 25 Years

Written By: Nick Ziarek, CFP®, CFA

25th anniversary

As we look back on 25 years for Shakespeare Wealth Management, we are reminded about the foundations that helped shape the firm and our core values. One guiding principal and a key tenet to any successful financial plan is a disciplined and well-rooted investment philosophy using clear and fundamental methodologies to create an unwavering plan.

Fiduciary Standard

Shakespeare’s investment philosophy begins with the fiduciary standard, which requires us to provide the best advice possible and place the interests of the client above our own. Other advisors may be held to a lower standard called the suitability rule. This rule only requires advice be suitable for a client’s needs and disregards fees, high commissions or other conflicts of interest.

Principles of Shakespeare’s Investment Philosophy

Investors are constantly bombarded with the latest news and market movements that can spur a feeling of needing to do something different because of what they now know. Reacting to those headlines and letting emotions or gut feelings drive decision making is a long-term loser’s game. Shakespeare’s investment philosophy is anchored by four core principles:

Asset Allocation: Having the right mix of stocks and bonds is vital to the long-term health of your portfolio. Investors must strike a delicate balance between the desire to be conservative and preserve principal, with the necessity to invest for growth and keep pace with inflation.

Diversification: Portfolios should be diversified between domestic and international equities, small and large companies, and value and growth stocks. Simply buying the S&P 500 is no longer an automatic diversifier, considering the top 10 names make up over one-third of the index. For fixed income securities, investors need to consider both long and short duration bonds, investment grade and non-investment grade bonds, and fixed rate and floating rate bonds.

Efficient Markets: In the digital age, information is shared instantaneously around the globe. World markets make immediate price adjustments to securities and asset classes to reflect the new data. That isn’t to say efficient markets are always rational, but the value today is the market’s best guess based on the known information.

Market Timing is Impossible: Deciding when to get in or out of stocks requires two things: A) Knowing when markets have reached a peak and it’s time to sell; and B) Knowing when the bottom has been reached to start buying again. No one has been able to consistently sell at market peaks and invest at market lows. Those who espouse to do so should be avoided.

Investment Methodology

Our portfolios are built for the long-term. The old rule of thumb of reducing risk throughout retirement needs to be reconsidered. Today a retired, 60-year-old couple in average health has a 64% probability one of them lives to 90 years old! If even one of them is in excellent health that probability jumps to 70%.

History has shown over long-time horizons there are three main drivers of returns:

1 – Equity Premium: Stocks have long-term outperformance over bonds.

2 – Size Premium: Investors are better rewarded for investing in small cap stocks compared to large cap equities.

3 – Value Premium: Lower volatility value stocks provide additional returns relative to growth stocks.

Using the depth of research on these drivers and a focus on long-term planning, we position our portfolios to optimize success for our clients.

With investing comes risk. Our portfolios are intentionally built to minimize risks we can control, including tax liability and investment expenses. Low-cost, passively invested exchange-traded funds (ETFs) drive down underlying trading and management costs within portfolios. The overall expense ratio within our equity portfolio is 0.22% compared to the average of 1% for an actively managed mutual fund.

Whether investors have taxable accounts (joint or trust account), tax-deferred accounts (401ks or IRAs), or tax-free accounts (Roth IRAs) it is important to view the accounts as one large portfolio. This allows us to leverage the tax efficiencies of each account type. Income producing securities, such as bonds or other income producing securities, may be better positioned within Traditional IRA accounts while growth orientated investments are first placed in brokerage accounts to take advantage of their tax efficiency. Utilizing ETFs instead of mutual funds, when possible, adds an additional layer of tax efficiency to the portfolio.

Adapting to Changes

Don’t confuse passive investment vehicles with passive management of one’s portfolio. Our strategy is actively managed through disciplined and regular rebalancing. Through regular investment committee meetings and constant monitoring of the investing universe, we aim to ensure client portfolios remain aligned with their investment goals, while minimizing costs and increasing tax efficiency.

For 25 years, Shakespeare has provided custom, comprehensive financial planning for our clients and built portfolios to meet your goals. We look forward to many more to come.