During a recent conversation about how to invest her portfolio, while looking at our model portfolio offerings, a client remarked about our Closed-End Fund (CEF) Arbitrage model: “Well this one appears to have the best potential for higher returns, without taking on any more risk than the ‘Conservative’ model. Why wouldn’t everyone choose CEF-Arb?”
… to test how much they spin the truth. Over the past year, I’ve had a very aggressive investor ask me to help him find the “investing silver bullet,” that will make a lot of money with little risk. In fact, I’ve had many clients ask for this over the years – just none as headstrong as this one. He is convinced that there is a way to make a lot of money – likely trading options – without risk of losing principal. He was so convinced that early in the year, he gave me $500 to subscribe to a weekly options advisory that sends 2-3 daily emails with trade recommendations. The website boasted of 546% gains in a month.
A few weeks back, I attended a due diligence forum in Denver, Colorado with 361 Capital, an alternative asset manager fairly new to the mutual fund space. They currently manage five funds across three strategies: long/short, counter-trend managed futures, and “macro opportunity”. In looking over the offerings, the macro opportunity fund has been a dismal failure since launching two years ago, and was not even mentioned at the forum. That’s okay – I wasn’t planning any diligence on it given its performance history.
In order to determine our investment allocations in client portfolios, we look at investment fundamentals like cost, risk, efficiency, etc. We also consider how the funds will be affected by key economic themes each year. For 2016, we are considering how the following three themes will affect our investments:
The “safest sounding” decision would be to convert your retirement savings into lifetime income by purchasing an immediate annuity that guarantees you monthly payments for as long as you live. While that may feel “safe”, we need to consider the hidden “risks” of such a product. First, immediate annuities don’t often include an annual cost-of-living increase. Second, you undertake risk that the insurance company can’t fulfill their promise (AIG on the verge of collapse in 2008?). Most importantly—you lose your flexibility, and your principal; there will be no money for your heirs. That is one HUGE, irreversible decision: to hand over your nest egg to an insurance company for the promise of lifetime income.
When I began working with Adam and Joyce, I was excited to learn exactly what an “Independent, Fee-Only Registered Investment Advisor” was. According to Investopedia, a “registered investment advisor (RIA) manages the assets of high net-worth individuals and institutional investors, and sits on the buy side of the investment field.” Needless to say, this definition didn’t quite help me to understand what Sommers Financial Management does for our clients.