Calculating the Client’s Savings Rate
This week I updated a client’s financial plan and refined my financial planning template by adding an additional metric. I have added an output page entitled “Savings Rate” which calculates the client’s total savings rate and distinguishes between taxable and tax-deferred savings.
The template I use (which has evolved over a period of five to six years) is a unique tool, in my estimation. Every output page is full of useful information as opposed to fluff and provides me with a high-quality, comprehensive picture which enhances the task of prudent decision-making. I am very excited about this.
Investment Management
Managing a client’s portfolio is the lifeblood of any successful RIA firm. Therefore, it’s important to know how each and every account is allocated and to have a snapshot of their total holdings. This includes assets held with you as well as those which may be held at another firm for some reason.
It’s equally important to keep abreast of current market conditions. One of the first things I do each business day is turn on CNBC to see if the futures are up or down. I also keep an eye on the U.S. dollar versus other currencies, primarily the euro. Finally, I look at the price of oil. With a picture of my client’s accounts and a view of the markets and the economy, I can determine if I need to make any adjustments.
For example, earlier this year I bought an oil ETF when oil was around $38 per barrel and later sold when it hit $70. During this time, I also acquired a couple of new clients. Since I had already bought into oil, these new clients didn’t have it in their portfolios. So at one point, I had some clients in and some out of oil. What I needed to be able to do was to see who had it and who didn’t. I could do this by searching for a particular security and viewing the report which shows all accounts that hold it. However, when you consider that each account has a number of different securities, knowing how each is allocated is very important to me. I have developed a method to track this and will share it in a future blog.
So how do you manage this process? How do you keep a close eye on the broad and subcategory allocation of each account under your purview? I’d like to hear your thoughts and, as always, thanks for reading.
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Mike,
Regarding your question pertaining to new clients, I almost always try to place new clients into their respective model almost as soon as the money arrives. I view your oil dilemma as follows, if current clients account allocation still contains oil thats a bullish view toward oil. In other words, oil is still in your accounts because you believe it will continue to rise in price. If you’re willing to hold it for current clients, why wouldn’t you be willing to hold it for new client’s monies? If your concerned with the potential outcome of adding new money toward an asset category that has increased in value substantially (bearish view) then maybe it shouldn’t be in your model and profits should be taken, or maybe some type of stop loss should be used to limit new clients losses and protect current clients gains. A great example I can share is new money that arrived in May of this year. The market had increased substantially, and I could have 1) waited to invest the equity portion of new clients account or 2) go right into the desired model….going right into the model clearly has worked very well (even though at the time I felt scared to make that decision). At the time, I simply used trailing stop loss orders (still there today) to mitigate potential downside risk from equities that had gone parabolic in March & April. So the way I keep an eye on asset allocation, is portfolio modeling and weekly reviews of all asset classes. Hope this helps.
Mike,
What are you using as your oil ETF? USO does not really follow price of oil closely, any other ETF you use?
Thanks,
Mike
Hi Mike,
I use OIL. You should call them to get info on it. I don’t know if any track oil closely. This is an ETN (Exchange Traded Note) and as I understand it, has some tax benefits. Again, you should look it up and call them to get more info.
Hope this helps,
Mike
I’ve read many of your posts and respect the work you do for your clients. However, if you beleive that risk and return are related, as I do, why would you think that placing a “bet” on the price of oil benefits the client? What if you were wrong about the price of oil and it went down? Your clients are investors not speculators, correct? Aren’t you subjecting your client to risks in their portfolio that are unnecessary or even excessive? The only way that this may be a benefit is if you’re measuring your effectiveness on absolute returns that are not adjusted for risk. In full disclosure, I’m a passive manager, and do not understand why other managers try and game the market, when even the most well known people in the industry can’t so it with any consistency. I think managing money this way make the focus of the plan on returns and not the clients objectives.
I’d be interested in your thoughts.
Regards,
Jason
Jason,
I am tactical with a portion of the portfolio and would buy oil only when I see a definite trend. For example, I bought it earlier this year when oil was priced around $35 a barrel and sold at $71. I have been out of it for a few months now. Although I am tactical, most of what I do is strategic, meaning I hold to a model portfolio.
As far as you comment on risk, the ETF I use for oil has a correlation of .46 to the S&P 500 Index, so it actual reduces the risk of the portfolio and improves the risk/return relationship. So you see, it is not a “bet” at all. Besides, oil would only comprise about 4% of the portfolio anyway.
I hope this is helpful.
Mike
Mike,
I don’t beleive that what you did reduces the risk in a portfolio. I agree that adding a commodity position reduces volatility if you buy and hold it as a part of a model portfolio. My guess is that the correlation coefficient was calculated over a longer time frame then a few months. My point is you made a judgment call that the price of oil was low, bought oil, then sold when you thought the price was too high. Call it strategic or tactical, but I call it a sector bet or market timing, and the empirical evidence seems to show that this doesn’t work in the long run. And you see..if something doesn’t work then it won’t work when you do it with a very small (or tactical) percentage of your portfolio either. Other factors have to be considered as well, like what did you buy after you sold the Oil ETF, fees, and taxes (if account was taxable)? You got this one right, this, but what about the next call you get wrong? If you are able to make calls like this on a consistent basis, then you will be able to do something that almost nobody can do. This is just the way I view the world and respect your opinion. Thanks for the discussion.
Take care,
Jason,
In the past I too viewed the world as you do. However, this is not market timing at all. Yes, I did buy when Oil was priced low and sold, not because I thought it was too high, but because we had some nice gains (40%+) and I wanted to take some of this off the table. You see, what we experienced was abnormal. I can’t say if this will work in the future, but I won’t get into a position unless I believe that a definite trend exists. It’s a judgment call. That’s the “art” part of this business. You may be overly concerned with the “science” part of it. The way I understand market timing is that some believe you can simply plug in some numbers and with formulaic logic, it will provide signals on when to buy and when to sell. I am strategic (long term) with the majority of the portfolio, but do try and capture alpha where I can. Your belief that ‘you cannot make calls like this on a consistent basis’ is perhaps based on Modern Portfolio Theory. Remember, it’s a “Theory.” As a part of MPT, the efficient market hypothesis, the premise of which is that the markets are efficient, purports that because of this, you cannot out guess the markets. Try convincing the multitude of investment managers who do what you say cannot be done, on a daily basis. While I understand and respect your position, I respectfully disagree.
Take care!