The goal of this blog is to explain how a slight increase in returns or a modest reduction in fees can have a significant impact on the long-term value of an investment portfolio. 

There are a few housekeeping items with regards to the assumptions used for the graphs.  The graphs assume no contributions or withdrawals and a starting value of $1mm.  The purpose is to show how slightly different returns/fees can affect your portfolio over time.  For example, the graph below shows seven portfolios earning slightly different yearly returns ranging from 4% to 7% over a 30-year period.

As we can see from the chart, early on there is no noticeable disparity between the portfolios, but by year 10 we can start to visually see them. Those gaps widen the longer the time horizon. At year 30, we can see a difference of $465,385 between the portfolios earning 4% and 4.5%, while the difference between the 6.5% and 7% portfolios is $903,584. The larger variance in these values is due to compounding and exponential growth when it comes to investing. Even though each portfolio starts at $1mm, the future growth happens on all prior growth. For example, if you earn 7% your first year, you now have $1,070,000.  Now any future gains are not based on the $1mm initial investment, but $1,070,000. The formula is as follows, T = P(1+R)^x.  T stands for your account value at the end (unknown), P is for the beginning value, (1+R) is the return rate, and ^x is the number of periods to be compounded.

On the flip side, we have fees. Just like returns, fees have an impact on your portfolio value over time. There is one big difference though, savings on fees are nearly guaranteed and are in perpetuity. That means if you can lower your fees by 0.25%, you will save that money each year. Below I have created a graph to show the difference in portfolio values over a 30-year period when we compare retail shares vs. institutional shares vs. our fees. The retail and institutional examples assume the advisor charges 1% (which is average) and NO COMMISSIONS, while VHFA shows our average client fee (Management fee plus mutual fund expenses).

As we can clearly see above, fees are a major factor in long-term performance. The difference between the institutional and VHFA fees (1.76-1.33 = 0.43) adds up to $422,782 over the course of 30 years. This is why it is so important to understand fee structures including whether your advisors are getting commissions or have revenue sharing agreements, if they are over-charging or have high mutual fund fees, and how the fees accumulate over time.

Additionally, you should verify whether an advisor offers full service financial advice by bundling financial planning and wealth management services together when considering if the fee is fair and reasonable. Advisors that bundle services could include retirement planning, and collaboration with your tax and estate planning professionals along with portfolio management.  Our firm bundles all services into a single fee schedule.

Modest improvements in portfolio returns and minor reductions in fees can have dramatic long-term impacts with regards to portfolio values which will increase the chances of having a financially successful retirement.  Make sure you understand the services that will be provided, and how and what you are being charged before hiring an advisor.  

Talking to your children and/or grandchildren about wealth can be a daunting task. There is no one-size-fits-all approach and is based on your children/grandchildren’s situation and maturity.  A simple question such as, “If you were to win the lottery, what would you do with all the money?”, can be a great way to gauge their maturity and determine the level of details that can be discussed. It is also a good way to measure their financial knowledge and start a conversation about financial topics such as type of accounts, type of investments, the power of compound growth, etc.

General topics based on age

Teens - Depending on their level of maturity, this can be a great time to discuss simple financial concepts. Talk to them about how fortunate they are to have parents or grandparents who work hard to provide them with a good life, the importance of living below your means to enable yourself to invest for your future, and to give back to those less fortunate. You could even go as far as creating a family mission or value statement.

20’s - This is the time to start discussing more details, but not exact values. Talk about the assets the family owns, whether it be stocks, bonds, real estate, or a business. You can discuss how to protect those assets with insurance, the types of accounts used, allocation of those investments and why. Some of these topics might require other professionals such as an accountant, estate planning attorney, insurance agent or financial advisor to be involved. This is also the time to share stories of how the wealth was created and maintained, and that it requires proactive effort to build and keep wealth.

30’s+ - This tends to be the age when people are starting to have families of their own and are mature enough to have specifics shared with them. It can be a good idea, if you have multiple children/grandchildren, to have a family meeting to share the specifics with everyone all at once. This can remove the opportunity for one or more children to feel slighted or left out of the discussion. It can also be effective to have a trusted financial professional to help facilitate the discussion and explain more complex topics such as Powers of Attorney, how the estate plan is structured, who the executor of the estate will be and their role in the process. 

Being an executor is a thankless yet important task in which most people do not have the knowledge or expertise to serve as the sole responsible person. Most will need help from other professionals to fulfill their duties and obligations. Our website includes a Personal Document Locator which will help organize your information and will assist your executor. 

Although each family is different, we believe it is important to discuss finances with them.  An initial meeting followed by on-going conversations will serve to make family members aware of the overall situation, provide opportunities to educate the next generation and set them up to be financially successful as well.

There are plenty of different types of bonds. They include government, corporate, municipal, mortgage, and treasury bonds.  All of them have different time frames from a couple of months to 30 years.  They all present their own risks.  For example, government, municipal, mortgage and treasury bonds are more interest rate sensitive.  This means they will move more in price when interest rates change. Corporate bonds, on the other hand, are more credit rate sensitive. That means the interest rate paid on those bonds are determined by the risk of default by the company.  That is not to say credit risk will not affect treasuries, government, mortgage or municipal bonds, or that interest rates do not affect corporate bonds, they just have a lesser impact. 

Typically, bonds and stocks move inverse of each other.  That is not as true when we are in an inflationary and rising rate environment like we are now.  Unfortunately, 2022 was a storm on all fronts and there has been almost nowhere to hide.  This has been the worst year for bonds and a 60% stock/40% bond portfolio since 1931 (The Great Depression). 

We look to position clients’ portfolios for the future rather than looking in the rear-view mirror. When it comes to bonds, we have already endured the pain of the initial and quick rise in interest rates from the Fed.  There is a silver lining though, the bonds we now hold, even though they are worth less in terms of dollar value, have seen their interest rates nearly tripled in some cases. This means clients will finally get paid for the risk of holding bonds.  For example, the yield on a typical short-term bond fund in early 2022 was slightly above 1%, it is now over 4%.  This is a huge win for those who are in the “distribution phase” of their financial lives.  This will allow the bonds to produce more income to cover withdrawals reducing the need to sell equities.  This is especially important when stocks are down so that an investor does not have to sell for losses to meet withdrawals. 

Bond prices move inverse of interest rates.  As we have seen recently, the Fed has increased interest rates and we have seen prices of current bonds fall.  This happens so that current bond coupon payments are equal to the current interest rates. Let’s consider a 10-year bond that costs $1,000 and has a 1% interest rate ($10 coupon payment) that pays annually.  If interest rates are increased to 2%, the bond that was worth $1,000 @ 1% interest rate would now have to cost $910.17 to match its yield to maturity to the current rate of 2%.

The duration of a bond (lifetime of bond) plays a large part in the price change.  The higher the bond duration the more sensitive a bond is to rate increases or decreases.  If we use the example from above and change it to a 30-year bond, holding all else constant, that bond price would drop to $776.04 with the change from a 1% to 2% interest rate.

Another factor to consider with a higher starting interest rate is that future rate increases will affect prices less (cushion). For example:

-   10-year, $1,000 par, 1% starting rate, 1% rate increase = $910.17 current value = 8.90% drop

-    10-year, $1,000 par, 5% starting rate, 1% rate increase = $926.40 current value = 7.36% drop

As a result, even if interest rates continue to rise the likelihood that a bond will produce a positive return for the year is greater due to the cushion of a higher starting rate.   

Positioning a portfolio should not be based on looking in the rearview mirror or adjusting a portfolio based upon an outlier year like 2022.  Today's higher rates will help to fund withdrawals without having to sell stocks when they are down.  Diversification of bonds between those that are interest rate sensitive and credit rate sensitive or by duration will also serve to reduce overall portfolio risk. 

Everyone is familiar with standard home and car insurance.  There are several other types of insurance coverage that may make sense for you to consider given your specific circumstances.  We have listed below some less common types of insurance with brief descriptions of each.

Titling of insurance if the home is owned by trust/LLC – Many people use trusts or LLC’s to hold the title of their homes. Homeowners often forget to add their trust or LLC as an additional insured on the policy. Adding a trust or LLC to your policy does not cost any extra premium, but it does protect you and the entity that owns the title to your home from lawsuits resulting from injuries that happen at your home.

Umbrella policy – This is a type of policy we recommend to all of our clients since most are considered high net worth and can possibly be targets when it comes to lawsuits. An umbrella policy will ride above your current car and home insurance (if you have the same insurer for both) and add an extra layer of protection. The average annual cost for a $1 million policy is $200 and about $100 a year for each million above that. For example, if you have $500,000 of car insurance and a $1 million umbrella, you would have coverage up to $1.5 million if you were to injure someone in a car accident.

Workers compensation – Covers the medical expenses and lost wages of nannies, housekeepers, care givers, and other household employees who become ill or injured on the job. It also protects you as the employer from liability. Policies cost an average of $750 per year based on a $50,000 salary.

Excess flood – Even if you maintain standard flood insurance, it might not be sufficient. Policies you can purchase through the National Flood Insurance Program are capped at $250,000 for your home's foundation and structure with an additional $100,000 for the contents of your home. Through private insurers you can buy policies for up to $10 million.

Jewelry riders – Standard home insurance policies tend to only have $10 in jewelry coverage per $1,000 of coverage (Ex. $300,000 policy would = $3,000 in jewelry coverage). Therefore, it is important to purchase “valuable articles coverage” to insure the full value. This type of insurance covers items such as; jewelry, art, and collectables like wine, sports memorabilia, coins, etc.

Cyber insurance – This type of insurance can help protect you from identity theft, hacking, cyberstalking or harassment. With this type of policy, you may be able to recover stolen funds and ensure you have the resources to get your life and identity back. The average cost for a policy is $250 annually per $100,000 of protection. 

Although we do not sell insurance, we understand the ability of insurance to transfer financial risks from yourself to an insurer.  You should discuss your specific circumstances with your insurance provider or agent.