8th Wonder of the World & 2007 Third Quarter Review
Insight NewsletterIssue #20
Blocking and Tackling
It is amazing how much good a financial adviser can do by simply coaxing clients to streamline their financial affairs and diligently contribute to their investment accounts every month and year. That’s the stuff that makes million dollar accounts by retirement age.
At Barnes Capital we believe that financial planning is an integrated set of tasks that are a part of the Investment Management process. In this newsletter we often talk more about the asset allocation and our market outlook than we do details of financial planning. That is because we passionately work to understand the fascinating currents of the economy. In so doing, we believe we are better able to build client wealth through solid returns.
However, we know that the big picture is always about the fundamentals. For most families, getting ahead and building their net worth is a function of time and contributions, analogous to football’s blocking and tackling. Successful blocking in investments is making regular investment contributions. Without regular contributions, the accounts just won’t grow as they must.
Successful tackling in investments is time. With enough time, all investors would be millionaires due to the magic of compound interest. But time is finite for all of us. The sooner you make that contribution the better: PERIOD.
That said, at Barnes Capital, we don’t neglect the basics, and the basics are about diligently setting up and funding accounts. If our clients don’t sock away money into their investment accounts on a regular matter, for most of them great returns won’t matter, they will have lost the power and the magic of the 8th wonder of the world, the magic of compounding interest.
The 8th Wonder of the World
Perhaps it’s instructive to think back to your 20s. Some of you certainly made some decent amounts of money, but fewer of you invested it. It’s fair to say that most of you did not. A year or so ago, we discussed an amazing chart, showing the story of two twins: John and Jane.
Jane invests $5,000 a year for 10 years into her IRA from age 22 to 31. Then she becomes a homemaker and never invests in her IRA again. Her twin brother John travels the world, goes to graduate school, and takes a job in an expensive city. He doesn’t start investing in his IRA until age 32. He invests for 34 years, a total of $170,000.
At age 65, Jane’s $50,000 in investment contributions compounding at 8% annually grow to $1,071,000, an increase of 21x. Her brother John’s $170,000 investment contribution compounding at the same 8% rate increases less than 5x to $856,000.
Investment net performance after all fees and expenses clearly matters in the long term.
If Jane’s account compounds at 10% annually, instead of 8%, then the account value at age 65 will rise to $2.239 Million. An account invested in CD’s or bonds yielding just 5% would only grow to $346 Thousand.
Summary
As Investment Advisors, our job to help client execute on their blocking and tackling as early as possible. Ultimately, this diligence and execution on the investing fundamentals is more important than anything else, including any ability to deliver market beating returns. However, market beating returns can definitely help, as the above table clearly shows that there is a whale of a difference between an account which compounds at 8% ($1.07 million) versus an account compounding at 10% ($2.24 million), an improvement of 110%.
2007 Third Quarter Review
Wow, what a quarter it was. July got off to a blistering start for the first 3 weeks as the markets 5% and our client accounts gained nearly 10%. Then the Credit Crunch Crisis settled in, and the markets traded violently for 5 weeks, with a crescendo on August 16th. From that point the markets recovered steadily, and closed this the quarter 1% from their highs on the year.
The current market is becoming an increasingly narrow market. It is very reminiscent of 1996/1997. Small and mid-cap stocks are lagging, and the great international brands are doing best, together with Oil, Agriculture and Minerals stocks.
Looking forward we expect large capitalization equities to continue to do well. We are focused on good dividend payers and we continue to believe that diversified portfolios should include commodity and precious metals exposure.
We continue to believe that fixed income securities are priced for overly modest returns. We do however like the medium maturity municipal bonds for high net worth client portfolios focused on capital preservation due to their relatively high after-tax returns.
Blessings,
Daniel A. Barnes, CFA