Our Investment Philosophy

And what it means for you…..

At Fraser Financial, we treat every client like the unique individual they are. We work diligently to get to know our clients so that we can structure an investment plan that is specifically suited to their goals and requirements. That said, we do want to share with you our general philosophy and approach to investing.

It's Your Money
Risk Tolerance
Diversification & Asset Allocation
Fixed Income
Market Timing
Taxes
Expenses
Las Vegas Accounts
Realistic Expectations
Closing Thoughts

It's Your Money

Fraser Financial manages client portfolios on a non-discretionary, fee-only basis. That means that we will contact you regarding purchases and sales of securities before any transactions are processed. You are free to accept or reject any of our recommendations. Money is personal. Investing is personal. We believe strongly in client education and we will do our best to steadily increase your knowledge on investing, as well as other issues, over time. Then, together, we can work to achieve your goals. We may disagree from time to time. In such instances, we will defer to your wishes. After all, it is your money and your future.

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Risk Tolerance

One of the first things we ask investment clients to do is to complete a risk tolerance questionnaire. These forms help us assess your general attitudes toward investing and risk vs. reward. Remember, we are customizing our advice specifically for you. So we need to get to know you and understand your goals and your fears. Don't be surprised if you have conflicting emotions as you answer the questions. Most of us have at least two personas driving our investment decisions. One may be the gambler who is willing to risk it all for a high payoff. Another may be the worrier who, even with money in the bank, frets over where the next mortgage payment will come from. We ask that, as you complete the questionnaire, you do your best to be honest with yourself. Indeed, many clients who thought they had a high-risk tolerance in the high flying markets of the late 1990s have discovered they were mistaken. We'll review your answers together and determine a strategy that will let you invest with comfort and enthusiasm.

For married couples, we will ask that each of you complete a separate set of questionnaires. It is not uncommon for couples to have differing investment sentiments. We want to help you reconcile those differences and be sure that any strategy we develop works for both of you.

Remember that risk has many faces. Certainly the increased investment risk you take to obtain high returns is one of them. But we encourage you to remember that there is also the very big risk of not being aggressive enough to achieve your goals. If you took $100 and put it in a drawer for 10 years, you would still have your original $100, correct? The answer is no, not if you consider inflation. Historically, inflation runs an average of 3.5% per year. So even if it still looked like $100 in 10 years, it would only buy as much as $70 would buy today. As you can see, you have to take some risks just to overcome the effects of inflation over time.

Finally, there will be those of you who may want to take what we feel is unnecessary risk. You may have already accumulated sufficient assets to provide, with growth over time, the future you envision. We will encourage you to think of it this way. You are playing in a football game. It's the 4th quarter and there are 15 seconds on the clock. It's first down and your team has the ball and a 2-point lead. Are you going to try and throw the ball for a touchdown? Or will you take a knee when the ball is snapped? It's a good question. There is no need to take more risk than is necessary. There will be times when we may remind you to "take a knee."

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Diversification & Asset Allocation

We believe that diversification is a must. Over the long-term, a strategy of diversification will help insure that you reach your goals while keeping risk at a minimum. There is strong, historical evidence that the investment sector that performs the best today might not necessarily perform the best tomorrow. Since you don't have sure knowledge of what the "new hot stock / sector" will be, and no one does, it's best to spread yourself among many. The varying returns should balance out over the long-term to provide an overall rate of return that will allow you to achieve your goals while minimizing risk.

Asset allocation is the process of dividing investments among different kinds of assets, such as stocks, bonds, real estate and cash, to optimize the risk/reward tradeoff based on an individual's specific situation and goals. Once we determine your risk tolerance and goals, we will determine an asset mix that should provide the needed return over the long-term. This mix may include individual stocks and bonds, cash, and real estate. We may also use mutual funds (investment companies that hold a variety of investments tailored to different investment objectives) or iShares which are tied to specific market indexes or sectors. This will be particularly true in several cases. First, when clients are starting their savings plan, their initial investments may be small. In this case mutual funds or iShares provide a way to diversify quickly among many investments. Second, we often advise mutual funds when diversifying into international or small cap (smaller companies) investments. Information on these investments can be scarce and we feel fund managers are often better at monitoring these sectors. Finally, we often use technology funds to diversify among smaller companies in this sector. Technology may still be the growth sector of the future, despite recent horrendous losses. But, as we now all know, there will be many losers as well as some big winners. Holding just one small company may produce huge returns IF you can pick the winner. But you may lose your entire investment. Buying a broad mix provides growth potential with reduced risk.

Some advisors adhere to strict asset allocation. That is, once they determine an asset mix that is suited to your risk tolerance, they periodically "rebalance" your portfolio to maintain the desired mix. To rebalance, they sell investments in sectors that have outperformed and may buy in sectors that have under-performed. This is consistent with the sage advice to "Buy low, sell high." Certainly, we will constantly try to insure that your portfolio includes a variety of fixed income and equity, a variety of asset classes and sectors (some examples: technology, healthcare, financial, retailers, utilities), and a good mix of small cap vs. large cap investments as well as a value vs. growth component. But rebalancing by selling "winners" can have adverse tax effects. When possible, we would prefer to keep your portfolio diversified by investing new savings in under-weighted areas. Indeed, if the underlying fundamentals of a particular investment remain strong, we prefer to hold it for the long term, regardless of whether it is currently outperforming or under-performing the market.

From time to time, we may discuss over-weighting a particular sector that we think may outperform over the long-term. For instance, as baby boomers age, it is probable that the financial and healthcare companies will do very well on the whole, (though individual companies may show markedly different performance). There are other factors to consider. Government regulation of healthcare issues could greatly impact profits in this sector. These are some of the things we will discuss with you as, together, we make investment decisions. Bottom line: if we diversify among good companies, fixed income investments and mutual funds and maintain a long-term focus, you will improve your chance of achieving financial freedom.

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Fixed Income

Strict asset allocation technique often requires that some portion of your portfolio be invested in fixed income investments like bonds or bond funds. Traditionally, the percentage would depend on your age with younger investors placing a small portion of their portfolios into fixed income and those nearing or in retirement placing a significant portion of their portfolios into fixed income. Historically, equity investments such as stocks and stock funds have outperformed fixed income investments. Therefore, we frankly feel that our younger clients (age 35 and below) have little need for fixed income investments when making long-term investments (if their risk tolerance allows, adding fixed income can reduce overall volatility). Additionally, we caution our mature clients that, even at age 65, they may have a long and, hopefully rewarding, retirement ahead of them, perhaps lasting 30 to 35 years. We encourage them to retain a portion of their portfolio in equities, when necessary, to insure that they don't run out of money before they run out of time. Note: We do strive to include high yield investments like REITS in most portfolios. While they are not considered "fixed income" they usually have a high yield. It also is important to note that currently the gains produced by growth are taxed more favorably than the income provided by fixed income investments.

That said, there is a difference between investing in fixed income for the long-term and using relatively short-term "cash" investments such as Treasury Bills, Treasury Notes, and CDs. We encourage clients to maintain an emergency cash fund, which we often hold in shorter term cash investments. For clients who are already in or nearing retirement, we may suggest that such a cash emergency fund equal 3 to 4 years of annual expenses. This way, they will likely not be forced to liquidate in a down market. Finally, any funds that will be required within the next 3 years to fund upcoming expenses such as a new car, a house down payment, or college tuition payments should be held in short-term cash investments. Indeed, if you don't plan to leave the money in the market for a minimum of 5 years, you shouldn't put it in the market at all.

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Market Timing

We do not believe in market timing. Over the past 70 years, there have been as few as 30 days when the market moved sharply up. If you hadn't been invested in those days, the overall return of your portfolio would be greatly reduced. We don't know when those days will occur. Therefore, per our research, we think it is better to be in the market than out if you have a long-term investment horizon.

But facts and research have little effect on the emotions involved with investing. There have been various instances when clients have come to us with a lump sum to invest. If we put it all in the market at one time and the market declines sharply shortly thereafter, (this has happened in the past and will happen in the future), it can be very painful. Some clients are simply not emotionally suited for this. This is why it is very important for you to answer the questions on your risk tolerance tests very honestly as this will help us determine your particular investment temperament. If we determine that there is a high probability that you would experience high levels of discomfort in such a situation we will recommend dollar cost averaging.

Dollar cost averaging is an investment strategy where you divide the funds available into various "piles." Then you invest each pile according to a pre-determined time schedule. This way you add investments at various prices during various market conditions. For example, if you had 100,000 to invest, we may decide to invest 8,333 per month for 12 months. This should ease your entry into what could be a very volatile market.

As with most investment issues, timing your entry into investments is client specific. We will work with you to determine a strategy that is suited specifically to your needs and temperament.

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Taxes

We are proud that our staff has a strong background in tax and can use this knowledge for your benefit. As stated earlier, diversification is a must to reduce risk and achieve long-term success. But before we sell any investment we will note the tax implications and discuss them with you.

The tax consequences of holding mutual funds are largely out of our hands. The individual portfolio managers buy and sell stocks during the year. At a specific time during the year, usually near year-end, they distribute a pro rata share of all gains and income to shareholders. To help prevent surprises at tax time, for taxable accounts we actively search for fund managers with good performance, low expenses, and sensitivity to the tax impact they are creating for their shareholders. We call these managers "tax efficient." We also hesitate to buy funds shortly before the "record date" for distributions if large distributions are anticipated. An example: You invest $10,000 in a fund in November. In December, the manager distributes a short-term capital gain of $800 and income of $200. Your fund holdings are still worth only $10,000 but you have to pay tax on the $1000 distribution! This is a situation to avoid in tavable accounts.

For those clients holding stocks, we will actively manage your account to use your losses (there will be some) to offset any realized gains at year-end. This will provide a positive tax benefit. Note: You cannot sell a stock for a loss, buy it back within 30 days and still take the loss. This is called a "wash sale." So we will only sell stocks for a loss when we have determined it no longer suits your investment criteria or a similar replacement is not available..

Tax is important and we will be actively planning to minimize taxes. But be sure to remember that tax implications should not be the sole determinant in making investment decisions. Diversification and sound investment policies might require that we bite the tax bullet from time to time and move forward. Remember, even lottery winners pay tax. It is simply a part of life.

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Expenses

Fraser Financial is a fee-only advisor. The only compensation we receive is from you, the Client. There are no sales loads or commissions on any investments that we recommend. We believe that this helps eliminate any conflict of interest that could exist otherwise and allows us to base our recommendations exclusively on what we think is best for you. There may be some minimal brokerage transaction fees and mutual fund managers do charge for their services. We constantly strive to keep these charges at a minimum.

We chose TD Waterhouse as the recommended custodian for client assets because they provide a broad array of investments and good service at a very low cost. Commissions for orders placed online are a low $15 per stock trade. Mutual fund trades often have no transaction fees or, when they do, it is a low fee of $24 per initial trade. This depends on the fund.

When selecting fund managers, we look for those with good performance yet low expenses relative to other funds in their category. Fund expenses will differ according to the fund's investment style. Index funds and iShares will have very low fees, as there is no active management. International and small cap funds will typically have relatively higher fees across the board.

Keeping your investment expenses to a minimum is key to long-term success. High expenses can, over time, significantly erode even superior returns.

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Las Vegas Accounts

While many of our clients intellectually accept our philosophy of diversification and long-term investing, they may still have a desire to "play the market." We don't want to ignore these feelings. We would rather establish a "Las Vegas" account for such clients if they have sufficient assets to warrant such a move. We place a minimal amount (not enough to jeopardize your financial future) into a "Las Vegas" account. Then you can trade at will in this account following your "hunches." We think this strategy accomplishes several purposes. First, clients who are actively involved in investing often educate themselves on many of the issues involved. This helps in our discussions on investment philosophy. Clients often learn how difficult it can be to assess market conditions and choose investments. Second, by segregating the "play money" from the funds intended to provide for your financial future, we limit the risk so that you will not be more aggressive than necessary with your long-term portfolio.

Las Vegas accounts are not for all clients. There is good evidence that most "day traders" lose not some but all of their money. But be sure to talk with us about this if you are interested. In most cases we will gladly establish such an account for you with the sincere hope that you outperform the investments that we choose for you.

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Realistic Expectations

During the final years of the 1990's the stock market broke many performance records. Returns were exceptional in many cases. But as we have seen, financial markets (as with gravity), what goes up must come down. Going forward, very aggressive portfolios may return to average long-term returns of 10%. For those of you who are more cautious, the long-term returns will be lower. The U.S. still faces many challenges: terrorism, Social Security issues, a Medicare crisis, high trade deficits and aging Baby Boomers. However, if you stick to your savings and investment plan, you should be able to reach your goals.

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Closing Thoughts

For most of you, investment planning is just one of the services we provide. It is our mission to integrate this portion of your financial life into a holistic plan that will allow you to obtain your goals, both financial and personal. We feel it is important to structure the entire plan so that you not only reach your goals but you do so with comfort and peace of mind. We are always available to answer your questions. Always be sure to let us know how you feel. Success without comfort is a hollow achievement. Together, we can do better than that.

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