Warren Buffett: Stocks Are The Safest Asset ??

Warren Buffett recently penned an interesting article for Fortune Magazine discussing his thoughts on why stocks present a better long-term opportunity than gold or bonds.  The article was such as gem because it provides great insight into Buffett’s way of thinking about investments. His point in a nutshell is this: the most important element of a sound investment is its ability to enable the owner to maintain long-term purchasing power (i.e., stay ahead of inflation). He also points out that the “risk” of an investment should not be measured by its volatility but rather by the probability that it fails to maintain or increase purchasing power over the expected holding period. This is not the way most people look at investments.

He believes owning stocks of quality, dividend-paying businesses (both public and private) are the best way to achieve the objective of maintaining long-term purchasing power. Gold can’t do this because it does not produce anything, such as a cash dividend. Bonds can’t do it now because of the fixed nature of their cash flows and very low returns currently. Therefore, to Buffett, stocks offer the “safest” investment because they have the highest likelihood of delivering returns that will maintain or increase the owner’s long-term purchasing power.

For financial planners, Buffett’s concept of investing has important implications. One of the most important objectives in planning and investing for clients is maintaining purchasing power over long periods, in many cases, decades. We do this through owning equities (common stocks), just as Buffett points out, because they deliver the elements important in maintaining purchasing power. We also invest in stocks because they are highly liquid and provide flexibility in customizing and fine-tuning portfolio investments and providing adequate diversification. Another important aspect of Buffett’s philosophy is the need to plan and think for the long term. By thinking long-term, as Buffett does, the client has a much-improved chance of achieving his/her financial goals and mitigating the impact of short-term market fluctuations.

We would hasten to point out, however, that as financial planners, we do believe bonds and commodities, such as gold, play an important role. Why? Because these assets have low correlations with stocks and thereby offer the benefits of diversification. By incorporating stocks and bonds together in a diversified portfolio, you can provide the growth necessary for a successful plan, while reducing the volatility of the portfolio.

If you have a chance to read the article, we would highly recommend it. Here is a link to it: http://finance.fortune.cnn.com/2012/02/09/warren-buffett-berkshire-shareholder-letter/

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20-Somethings Worried About Retirement ????

……………In Our Continuing Series: “Am I Prepared?”

CNBC ran an interesting article recently that discussed concerns surrounding retirement savings for young people in their 20s and 30s. A few of the key findings in the article:

·         Gen X’ers (people in their 30s and 40s) are less prepared for retirement than baby boomers

·         Young workers do not have a great deal of knowledge about the basics of investing

·         Many younger people are not confident about investing their money or the ability to grow their retirement assets through investments (or should they even invest at all ?)

Given the worrisome projections for social security, the weak economic recovery, and watching their parents’ portfolios implode twice in the past 12 years, the concerns of this age group are understandable. But despite the recent negatives, the options are not as “dire” as many in this age group may currently believe. Here are few reasons why:

·         Time is on their side: people in their 20s and 30s have investment horizons of 30-40 years. This long time horizon mitigates risk by ameliorating the impact of short term market volatility.

·         Most of the world is still focused on growth and prosperity. Global growth of capital investment and business should be positive for global stocks, which provide a source of growth for investments.

·         Valuations for quality stocks are now at multi-decade lows. This implies that the risk/reward for investing in equities is attractive.

·         Despite the market volatility of recent years, over the long-term, planned and intelligent investing has delivered good returns (for example, over the past 100 years, large-cap stocks have delivered annual returns of about 10%).

·         There are many resources available both on-line and off that can help these individuals better understand their options for retirement savings and investments.

Now, about that plan………

Just as in starting a business or performing at your job, creating a simple plan can make a big

difference in getting you closer to achieving your retirement goals. What can you do to get into action ?

·         Start saving now: do a simple budget and determine what you truly need to live on and what you can save. The goal of saving 10% of your gross income is a good one. If you can’t save 10%, try for 5%.

·         Educate yourself. There are many resources now available on line that can provide a good basic understanding of the fundamentals of investing. Investopedia.com has some great information and investing tutorials that are very helpful in gaining a basic understanding of investing.

·         Contact your plan sponsor. If you have a 401k plan at work, the plan sponsor is required to provide ongoing education to its plan participants. Education should be available to you through your plan sponsor’s website or service representative or your HR department.

·         If you truly cannot get help or are completely befuddled as to where to start, you may want to contact a financial professional in any number of venues such as banks, brokerage firms, or financial advisory firms.

As financial planners, we design and implement comprehensive financial plans for all our clients. True, most of our clients are further along in their “investment lives” and may be older and have different needs than people in their 20s and 30s. However, the discipline of having a strong financial plan (or a “plan”) and sticking to that plan for the long term is essential for our clients to reach their goals. The benefit of having a plan is no different for someone in their 20s and 30s. That age is a great time to begin investing and there is every reason to be optimistic that by spending a little time educating oneself and establishing a savings and investment plan in one’s 20s and 30s, they will reap the long-term rewards they are seeking.

Another way in which we at our firm can help a younger investor is through a concept we call “vertical planning”. This is where we will take on as a client a relation or family member of an existing client even if the new clients’ assets fall significantly below our minimum. The established relationship with the existing client (who is a family member) gets them “in the door”. If a young person has a relative or family member that has an existing relationship with a financial advisor, this may be an avenue for that person to obtain assistance and education in beginning a life-long investment program and financial plan.

In our next post, we will elaborate a bit more on the importance of portfolio diversification, asset allocation, and investment horizon and how these impact the retirement and investment planning process and outcome.