A Word From The Advisor
One Size Doesn't Fit All

The once broadly accepted notion of ‘stocks for the long run’ has been somewhat tarnished lately. While equities represent a substantial portion of many investors’ portfolios, putting one’s faith solely in an undiversified equity portfolio tempts fate. Every investor needs to deeply consider his or her life cycle needs when determining their asset allocation. Rather than just seeking general equity exposure, the well-designed portfolio should address the appropriate risk/return profile based on each client’s individual time horizon.

Clients often ask where we think the equity market is heading. Certainly we have a view, but our success and that of our clients does not depend upon market timing. Without question, the decline in equity prices over the past 20 months has created attractive opportunities and entry points for selected equity purchases. In the current environment, even following a 30% run-up from March 2009 lows, stocks are still down 37% since October 2007 and we believe they represent good opportunities.

That statement begs the question of whether the stock market will re-test the March 2009 lows, or build from here on the ‘green shoots’ of a recovering economy. The answer is: we don’t know. Remember, we don’t focus on predicting market movements. Instead, we employ what we believe are sound and thoughtful investment strategies to garner upside potential while carefully protecting investors on the downside.

To achieve these goals, we rely on the broadest set of tools – from US equities to global investment strategies to fixed income and balanced portfolios – to address clients’ unique and changing needs. We provide these investment options to clients in a highly personalized manner. This “wow” level of service for valued clients is what distinguishes our firm.

At Oakwood, we understand market pitfalls and exercise a consistent discipline. We don’t allow the noise of the market to interfere with our judgment. We take time investing our portfolios. We don’t just leap into markets or chase the latest fad or momentum investments. Yes, we are cautious, at the cost of perhaps lagging in a suddenly rising market. However, our ability to protect positions on the downside has served our clients well over the years. We can manage in any environment because of our ability to manage risk and to offer viable solutions.

The impact of our approach gets reflected back to us in client contacts on a regular basis. Just looking back over the last week …

Approaching Retirement

Horace Higsbottom* (“HH”) has invested his retirement savings with Oakwood for more than a decade. We met Horace for lunch on Monday at his golf club in the Valley. Now 60 years old, HH is overseeing the sale of his successful printing business to new and younger owners, so he’s mostly focused on improving his golf game. In the early part of his career, HH put all available funds into his business. About 12 years ago he began to seriously prepare for retirement. Unfortunately for HH, the S&P 500 is now roughly where it was then, although corporate earnings in 1997 were higher than those projected for 2009! If HH had bought into the popular dogma of ‘stocks for the long run’, he would have ended up basically treading water for the entire period of his investing. And now, anticipating the proceeds from the sale of his business, HH wonders whether he should put any new money into equities.

When we started working with HH, we structured his portfolio at 60% stocks, 40% bonds. As he approached age 60 (and began to implement his plan to sell the business) we readjusted his asset allocation to a more conservative 40% stocks, 60% bonds. As a result, HH outperformed the S&P 500 and achieved positive returns.

We told HH that at this stage of his life, it’s perfectly appropriate to weight his portfolio toward fixed-income investments. However, with equity prices declining by close to 50% from October 2007 through March 2009, equities became fairly and then attractively valued. While recommending that HH continue to direct a portion of his assets into equities, we did not suggest an equity index fund, because his time horizon wouldn’t comfortably accommodate the overall market’s expected volatility. Nor does he have the luxury of excess time to recover if there is another substantial, but unexpected, decline in equity values. We therefore designed a lower volatility (beta<1) equity basket for HH which effectively balances his higher allocation to fixed-income investments and provides enhanced returns. In order to preserve capital for later in his life, we can also shift the profits to rebalance from equities into more fixed income over time.

Within fixed income, we advised HH to buy tax-free bonds due to his current high-tax bracket. Other benefits include a stable stream of revenue and preservation of capital. Normally in retirement, income levels decline, but in HH’s case, after selling his business he will continue to be in a high tax bracket.

At some point in the future we will discuss the blending of tax free and taxable bonds. On the taxable side, we advise against longer term US Treasuries, despite their attractive yields, because they are both expensive and vulnerable to declining prices as interest rates back up. Also, the ongoing drama of California’s budget makes us similarly wary of state bonds.

We do find several very attractive local municipal issues associated with essential services that offer better returns based on the security of dedicated revenue streams where the revenue goes directly to the bondholder (e.g. tuition, ad valorem taxes) as well as pre-refunded municipal issues that are guaranteed by US Treasuries.

During our relationship with HH, we’ve explored ways to assist with tax management, estate planning, insurance and other means of sheltering and transferring his assets. We brought in experts to get the best advice.

Just Starting Out

On Wednesday we met with Brett Vapnik*, a 30-year-old software designer with a charming wife, Sarah and their two kids at his favorite beach restaurant in Hermosa. Brett launched his freelance practice five years ago, and expects to be a disciplined saver for the next two to three decades that he intends to work. But with a mortgage on a modest South Bay bungalow, two cars, and the cost of child care, there isn’t much to put aside. Even more perplexing to Brett is how to approach investing intelligently following the worst market cataclysm since his grandparents were youngsters.

Given his longer time horizon, Brett has the ability to absorb the inevitable volatility of share prices. He benefits from the fact that current prices offer much more reasonable valuation, as well as potential for attractive returns, than we have seen since the mid-1990s. However, there is no guarantee that equities will deliver those returns over the short run (less than five years). So we recommended a customized portfolio for Brett that is weighted more toward selected equity investments, e.g., developed and emerging international markets, which are likely to generate attractive returns over the long run. Our DFA Global strategies are a perfect vehicle for Brett and we encouraged him to begin to invest, at a minimum, his annual retirement allocation into these strategies.

Underlying this investment plan we also encouraged Brett to establish Section 529 savings plans to ensure his kids’ college education, and as sole proprietor in his business to establish a 401(k)-like program such as a SEP-IRA account. Finally, we suggested a term-life insurance policy for Brett and his wife to insure that their family could have additional financial security should either die prematurely.

High Earning Years

On Friday, we had breakfast with Alyssa Abramson* at the club that sits atop her law firm’s Century City office tower. Alyssa is celebrating twenty years as one of the top litigators in her firm, where she’s been a partner for ten years. Alyssa is 45 years old, single, and has worked relentlessly to excel in her profession. Her dream is to retire in France. She is a new client who was perilously overexposed to equities and took a hard hit in the last year. After that experience, she decided to become more systematic and disciplined in her investing, and asked to meet with us.

Alyssa was ready to throw in the towel and sell all her shares earlier in the year. We counseled her against this plan, and in a more expansive discussion about investing, we noted that retail investors are notorious for selling at market bottoms while we as professionals are much more focused on relative value. In fact, the market was clearly oversold, and as the threat of financial system meltdown has dissipated, Alyssa’s equity holdings have recovered nicely. We did take the opportunity to adjust her portfolio, positioning it away from growth stocks which we expect will lag the market in the near-mid term, and moved her more towards dividend paying stocks.

Finding the right fit

At Oakwood, we excel at delivering the best investment experience to our clients. We have the tools and expertise combined with a variety of strategies that are matched and suited to our clients’ diverse needs; beyond that, clients tell us they enjoy the “wow” service.

While each of the three Oakwood investors described above (fictitious names, of course, to preserve privacy) has differing needs tied to distinct circumstances and stages of life, they all share a common desire for capital appreciation. When markets are tough, like today, our commitment to protecting clients on the downside truly distinguishes Oakwood.

Building and implementing a plan of action is a systematic, disciplined, and step-by-step process that readjusts as markets dictate and as goals are reviewed. Everyone is different and one size doesn’t fit all; Oakwood finds the right fit for every client.

* fictitious name to preserve privacy