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Archive for the ‘Thought Piece’ Category

How Important Segments of Wealthy Customers Open Up to Social & Mobile Media

Tuesday, January 31st, 2012

Important Segments of Wealthy Clients Are Opening Up to Social Media

This chart summarizes a lot of our insights with regard to segmentation of wealthy customers and their usage of social media and mobile apps. Put in a nutshell, we are seeing that particularly the entrepreneurial segment and the “young & hungry” are aggressively using social and mobile media, followed by “Old Money” and the “Mittelstand”  (managerial class and owners of medium-sized businesses) segments.

It is a development that will profoundly influence the business of wealth management over the next decade. As social media are increasingly entering the financial industry, clients will demand new solutions and communication patterns from their banks and advisors. Another development shows, that recommendations from peers will become critical in the decision making process when choosing a new provider. The brand of financial players can also be heavily influenced through discussions and sentiment on social networks. In summary, social and mobile media are a strategic challenge, involving communication, sales and marketing efforts of every financial player. Be ready.

 

The Age of Viral Information

Friday, December 3rd, 2010

“Information is moving from being the bedrock of market efficiency to a source of crisis. The risk for the market is not the news itself, but what news gets drilled home through so many channels that people act on it; we cannot anticipate when information might go viral and sweep the markets.”

This is Rick Bookstaber on why information is becoming a source of risk. Interesting throughout. It will be one of the critical tasks of any financial institution to monitor and, if necessary, counteract this flow of viral information. As our study on Wealth Management and Social Media has shown, most banks are not prepared at all to deal with social networks and viral information.

 

Excellent Post on Buy & Hold & Rebalancing

Monday, September 13th, 2010

“But let’s not forget that there are no silver bullets in portfolio management. Instead, success comes only through diligent monitoring and managing of the asset allocation. That starts by diversifying widely and planning on routine rebalancing every, say, year or two, or more frequently if you’re opportunistically inclined. Yes, there’s more, much more to do, if you’re up to the task. But the thousand-mile journey still starts with the first two steps: asset allocation and rebalancing.”

Find the whole article here. Excellent and informative through-out.

 

“No human or strategy can consistently beat the market”

Monday, August 9th, 2010

James Altucher is one of the least arogant and most knowledgeable hedge fund managers I have come across. He is a great investor but has also started some great businesses like stockpickr.com. In addition, James has written several books on investing. The Kirk Report has just run a long interview with James:

“The only three things that are important are discipline, persistence, and psychology. Without those three things there isn’t a strategy in the world that will work for you. With those three things, just about any strategy will work.(…)No human or strategy can consistently beat the market. The best traders I know are some of the most humble guys out there and have no arrogance on their market opinions at all. They are able to switch opinions and strategies very quickly. I would say that over the years any arrogance I had about any strategy has probably disappeared and now I’m appreciative of just about any strategy out there as long as it comes with persistence, discipline, and positive psychology.”

Very  wise words, indeed.

 

Why Investing Has Become More Democratic Than Ever

Tuesday, July 20th, 2010

I am pondering one sentence I stumbled upon today:

“It is ironic that the markets are now at their most democratic at time when returns are at their nadir.”

This is from the blog abnormal returns, a great source of financial debate. Basically, indivividual investors today have all the tools and vehicles to free themselves from unhealthy advice and make their own decisions:

“The ironic thing is that at a time of poor returns, the information and tools available for investors have improved dramatically. This is largely a function of the rise of Internet. Abundant data, cheap trades and an explosion in investment vehicles, i.e. ETFs, have made it ever more possible for individuals to manage their portfolios how the largest institutions did just a few years prior.”

I still think that this investor heaven is a far cry from what most private investors do today. Most individuals are still entrusting their wealth to a bank or a wealth adviser who is not free of conflict of interest when picking investment products for their clients. Most private investors still believe their advisers when they tell them how to time the markets or pick individual stocks or bonds. And on top of everything, most investors still pay way too much money to their wealth managers. It will be a long time until the majority of private investors really takes investing in their own hands. But, in any case, the revolution has begun and it offers too many advantages to individual investors to be stopped. Particularly in times of low returns the weaknesses of trading-oriented and active stratgies of most wealth managers become very clear to investors.

 

Your Are Not So Smart

Thursday, June 24th, 2010

Do you think you have based your investment decisions on years of cool rational analysis and experience? Well, you might be in for a surprise. Following up on our last blog post about behavioral finance, read this great post on confirmation bias.

“Half-a-century of research has placed confirmation bias among the most dependable of mental stumbling blocks.”

 

Responsible Wealth vs. Responsible Spending

Monday, February 8th, 2010

A friend of mine has drawn my attention to an initiative called „Responsible Wealth”. It aims at the top 5% of income or wealth in the US that “care about economic justice” and asks them to donate some or all of the tax savings from the tax cuts of the Bush and Clinton administration to “tax fairness organizing”. This raises the question if the top 5% do not already pay a fair share of taxes already? To assess this question I looked at data of the Internal Revenue Service (IRS) to get a better idea of the role of the Top 5% in income generation and tax payments:

As it turns out in 2007, the top 5 percent of tax payers earned 37.4 % of adjusted gross income paid 60.6 % of all federal individual income taxes. In comparison to 1992 (when Clinton came in office) the Top 5% had a share of 28% of the total adjusted gross income and a share of 45,9% of all federal income tax. No shift in the relation between share of total gross income and share of tax paid during the Clinton/Bush era. Just for comparison: The bottom 50% of adjusted gross income in 2007 had a group share of 2.9% of income tax.

While “fairness” is always in the eye of the beholder and one can always argue about the “fairness” of single cases and tax cuts I do not see the overall point of the Responsible Wealth Initiative. If the top 5% of the taxpayers account for 60% of all tax payments and the bottom 50% for 2.89% I find it hard to argue that the wealthy do not already “care about economic justice”. Even more so when taking into account that the wealthy in the US spend each year between 2-3% of their investable assets for charity.

I fully agree that the living conditions of the poor can and should be improved, but for me it isn’t a matter of the wealthy being irresponsible, but instead, a matter of the government spending their huge amount of tax money responsibly. The solution to take more and more money from those who generate economic development in order to increase public spending and improve ecomomy is too populist and shortsighted. It would be much more useful for this purpose to demand more effective investments of tax receipts by limiting the influence of lobby groups, streamlining bureaucracy and thinking beyond the next election day.

 

What average long-term returns does your adviser expect ?

Monday, January 25th, 2010

I recommend an excellent analysis in the Wall Street Journal on how financial advisers fool themselves in respect to the expected returns. In a nutshell: A nationwide survey last year found that investors expect the U.S. stock market to return an annual average of 13.7% over the next 10 years. In fact the average answer for estimated average long-term future stock return after inflation, expenses and taxes was 6%.

The author argues that taking in account the previous mentioned performance killers the expected return before costs has to be in the range of 11% to 13% a years. Far above the average historical returns. And if investors have (what is more likely) a mix of stocks, bonds and cash the long-term net returns is more likely around 2%. His conclusion:

“The faith in fancifully high returns isn’t just a harmless fairy tale. It leads many people to save too little, in hopes that the markets will bail them out. It leaves others to chase hot performance that can’t last. The end result of fairy-tale expectations, whether you invest for yourself or with the help of a financial adviser, will be a huge shortfall in wealth late in life, and more years working rather than putting your feet up in retirement. (…) All this suggests a useful reality check. If your financial planner says he can earn you 6% annually, net-net-net, tell him you will take it, right now, upfront.  (…) Unless he is a fool or a crook, he probably will decline your offer. If he is honest, he should admit that he can’t get sufficient returns.”

You should do this test with your adviser and please let us know the outcome.

 

Against Short-Termism

Thursday, June 18th, 2009

This morning I came across this very interesting piece on a speech by Seth Klarman who is the founder and president of Baupost group, a Boston based investment firm specializing in value oriented strategies. Klarman gives a well thought through summary of the financial crisis and its implications for professional but also private investors. He critisizes heavily the short term orientation of many asset managers, a result of wrong incentives but also client pressure. Klarman pointed out, for example,  that the flight into Treasuries exposed many portfolios:

“Having a long-term focus requires keeping the emotions of fear and greed in check.  For most of the last 12 months, fear dominated greed, causing investors to flee to cash, despite its negative yields.  Those investors, along with many who suffered losses on Treasury bonds bought at depressed yields, also paid dearly in opportunity cost – their inability to buy securities at depressed valuation.”

I could not summarize the flawed strategies of many wealth managers better. Reading the whole piece is well worth your time!

 

No More Easy Fortunes In the US

Friday, June 5th, 2009

Bill Gross, famous boss of bond fund management firm PIMCO, says

over the next several decades, the ability to make a fortune by using other people’s money will be a lot harder. Deleveraging, reregulation, increased taxation, and compensation limits will allow only the most skilful – or the shadiest – into … [the] Forbes 400″

In a nutshell, Bill Gross argues that government debt in the US will quickly swell to a point of no return. Consumer deleveraging will fuel the need for even more government deficit spending, plus the effect of aging baby boomers who drain the resources of Medicare and social security. All this may lead to a lot higher interest rates and inflation in the US. There is event the threat that the US of A may lose their AAA rating.

What does Bill Gross recommend to protect your wealth? Diversify out of the US Dollar before central banks and sovereign wealth funds do. And bond investors should stay short term.

My opinion? Read this whole piece of Gross, inhale it, digest it, follow it. Gross’ forecasts have been  much more often right than wrong. He is a very cautious but sharp  investor. In the past, his warnings about overextended credits were frequent, many years before the housing crisis struck. If I had to bet either  on Krugman’s or Gross’ opposing world views? I’d chose Gross anytime.

 
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