Trinity Wealth Management
Integrity Commitment Experience
Wealth Management Principles
Robert J. Wassel, Jr. MBA, CPA/PFS
Who Are You?
Wealth means different things to different people, but most agree that being wealthy equates to financial
independence. Wealth is highly variable when measured across different time intervals or when viewed
from different perspectives. A mentor of mine frequently reminded me that even a person of modest
means in today’s world lives better than kings of 100 years ago. Our job is to help you identify your
current position as either among the truly wealthy, accumulating wealth or both.
A simple definition of wealth is that your investable assets are sufficient to support your lifestyle for the
remainder of your life while leaving some, or all, of the principal to your heirs or charity. This definition
requires a regular income stream from your portfolio based on your expenses less non-portfolio income
sources, such as pensions or Social Security. Portfolio income is comprised of interest, dividends and
realized capital gains. Thus, a typical wealth management portfolio may be weighted heavily towards
investments that pay regular interest and dividends, such as bonds and large company stock. Disregarding
outside income sources, a person with annual expenses of $50,000 requires a smaller investment income
stream than someone with $200,000 in annual expenses. Being a millionaire doesn’t necessarily mean
you are wealthy!
For those fortunate enough to be among the truly wealthy, maintaining wealth requires managing risk.
All types of risk, not just what we find in the portfolio. Focusing on portfolio risk, the key issue is
whether or not your portfolio can safely navigate the inevitable ups and downs of the world economy and
still provide the needed income. True wealth, coupled with proper wealth management, reduces risk by
limiting the downside effect on portfolio value during market downturns while allowing sufficient growth
when markets prosper. Managing wealth effectively does not entail trying to capture the peak of every
bubble or anticipate every trend. Thus, extremely wealthy individuals will pay a billion dollars for a
company with 6% after tax income and be satisfied with consistent, albeit flat, profits. They can live off
the $60 million per year! Trinity Wealth Management uses the term “Stay Rich Pocket” to describe one
method we use to manage portfolio risk and keep our clients among those deemed wealthy.
Many high income clients spend years acquiring education, job skills and paying their “dues” in the
corporate ranks, yet they never build true wealth. If they recognize this fact and commit sufficient current
resources to building financial wealth, most of these clients have enough time to accumulate the assets
required to be included among the truly wealthy. If this is your situation, you are a wealth accumulator
and the proper approach to investing is significantly different. While everyone needs a certain degree of
capital preservation, accumulators need to invest more aggressively to achieve their goal of financial
independence. Thus, accumulators view periodic market declines as a buying opportunity.
Where Are You?
When you begin working with Trinity Wealth Management, one of our first tasks is to identify your
assets, income and expenses. We then determine your goals and objectives and calculate your progress in
achieving them. The outcome of this analysis drives the strategy we recommend. If you are financially
independent, we chart a course for wealth preservation and income. If you need to accumulate additional
wealth to achieve your goals, we chart a course to make that happen. We believe no situation is without
hope. We live in a great country with a great deal of benefits that are often overlooked and undervalued.
Let’s start by reviewing the principals of wealth accumulation.
Often called dollar-cost-averaging, this is a strategy that mathematically buys more shares when prices are
down and less shares when prices are up. Don’t confuse this strategy with investing a windfall or lump
sum. This strategy is designed to maximize the value of your discretionary income invested each month.
Look at this real life example of the American Mutual Fund, a large value mutual fund, over 10 years.
There is a $12,000 difference in the amount invested between the buy-and-hold and the monthly purchase
strategies, yet almost a $30,000 difference in value after 10 years. The point is you should not wait for a rainy day
to start saving to achieve financial goals nor should you wait until you have a large sum to invest to get started.
Riding the Wave
In the accumulation phase of Wealth Management, you can and should take more risk as defined by larger swings
in value. In the example above, periodic investments increase ownership percentage at a faster rate when the value
of the asset purchased decreases. Subsequent price increases then amplify the gain. I’m reminded of the Andrea
True Connection song that went, “more, more, more! How do you like it? How do you like it?” We like it very
much, thank you.
But what about those times when we hear everything is changing and the world is coming to an end? In my
lifetime, I recall talk of the end as we know it at least a half dozen times. I can only imagine what the people of the
Great Depression, World War II, and the Cold War thought. There is a powerful message here for all of us: we
must be open to make changes, but remain focused on fundamental laws of economics. One of these fundamentals
is long term growth.
There are many ways of looking at investment results. When results are as bad as they’ve been recently,
try to keep a long-term perspective, rather than focus on short-term fluctuations. To gain some
perspective, take a look at the S&P 500 results by 10-year rolling returns shown in the table below.
In calculating “rolling returns,” analysts look at the total returns of the S&P 500 in each of the decades
that have elapsed since the inception of the index in 1926, the first being 1926–1935, the second 1927–
1936 and so on until the latest decade, 1999–2008.
Of these 74 periods, just four decades had negative returns: 1928–1937, 1929–1938, 1930–1939 and
1999–2008. It’s important to keep in mind that past results are not predictive of future results.
The S&P 500: 10-year rolling returns, 1926-2008
Number of rolling decades with positive returns 70
Number of rolling decades with negative returns 4
Results are based on the unmanaged S&P 500 calculated with dividends reinvested for the period December 31, 1925, through December 31,
2008. Note that two of the four decades (1928–1937 and 1930–1939) had negative annualized results of just –0.00% and –0.08%
The Fine Print
One caveat: the S&P 500 is actively managed insofar as the index components are periodically reviewed
by a committee and, just as an active manager buys and sells stocks for his or her portfolio, the
components of the index may be changed. This fact creates a survivor bias and the S&P 500 would look
very different, and probably not as good, if it still held Enron, Worldcom, General Motors, Washington
Mutual, and Chrysler, just to name a few recent examples!
Don’t Kill the Goose
Lastly, wealth accumulation requires an almost sacrosanct treatment of your long-term savings. In an
emergency all bets are off. But the annual Mercedes Benz Holiday event is not an emergency. This is
really a mental approach to wealth. These assets are for a particular purpose, typically retirement funding,
and for that purpose alone. In many cases, even in bankruptcy, retirement account assets are protected. If
the government is going to treat it that way, you should too.
Wealth Preservation Principles
Two Pockets Approach
One of the hedge fund managers we like is fond of saying the approach to wealth management is simple:
you need to have two pockets, your stay rich pocket and your get rich pocket. The idea being you take
more risks in the hope of getting rich but take limited risks with the funds identified as your wealth. The
ratio is not important since it is dependent on your situation. One of the benefits of working with Trinity
Wealth Management is we take a client centered approach. Your needs and situation dictate the strategy
instead of the other way around.
Matching Income with Expenses
While this may not sound like the appropriate heading, it is exactly what you are doing when you manage
risk in a portfolio. Stocks have returned about 10% per year over the past 80 years. I’ve been in meetings
where the advisor discussed stock returns going back 200 years, but we believe those are inappropriate
comparisons for several reasons; let’s focus on just two. First, when you have a mortgage, does the
mortgage company say, ‘we want you to pay an average of 6% plus principal over the next 30 years’? Or,
do they tell you the exact amount down to the penny they expect each month? The latter is obviously the
case as your mortgage is an example of a fixed, or locked-in, expense. We believe that fixed expenses
should be matched with a fixed income source. Otherwise, in a bear market, you may find it hard to pay
these expenses. We consider this an unacceptable and avoidable risk.
Another scenario is when retirement is still 20 or more years away. You can and should accept more
fluctuation given the historical returns of stocks and bonds. It is almost guaranteed that short term fixed
income investments will not keep up with inflation nor will they grow in principal value. Keep your
investments in instruments that will move with the uncertainties of time like inflation, technology
advances, and taxes.
Finally, realize that your retirement time horizon is actually a relatively short period of time and your
point of entry is vital to your success. For example, if you retire at age 60 and start drawing from your
portfolio at the beginning of a 15-year secular bear market, you will withdraw a constantly increasing
percentage of your portfolio. The result is you need constantly rising rates of return just to keep even!
“That Large Sucking Sound”
Who can forget Ross Perot’s comment made during the 1992 Presidential campaign? We use it here to
illustrate another significant difference between wealth accumulation and wealth management. Down
markets are devastating to a portfolio when there are withdrawals and the portfolio is not positioned
appropriately. Since withdrawals are made during market lows, the portfolio likely never recovers. Let’s
review two scenarios illustrating the effects of point-of-entry on the portfolio.
Assume $100,000 is invested in the S&P 500 and $5,000 per year is withdrawn over a 20-year period.
Assuming return matches the S&P 500 return over the last 30 years, the portfolio value grows slightly.
There were some very good years during this 30-year period with negative returns occurring later in the
period. However, if we reverse the returns so that the worst years occur first, the portfolio runs out of
money prior to the end of the 20-year retirement period. Same returns, same average, but different timing
of returns. Volatility is the enemy when you are taking withdrawals.
Know When Enough is Enough
Kurt Vonnegut (Slaughterhouse 5) and his neighbor, Joseph Heller (Catch 22) were at a party being held
at the estate of a wealthy Wall Street tycoon on Long Island. Vonnegut purportedly looked around and
asked Heller, ‘wouldn’t you like to have all this guy has?’ to which Heller replied, “I got one thing this
guy doesn’t have. I know when enough is enough!” The reason we mention this point is not to present
some moral lesson on wealth, but to help you realize that once your goals are achieved you should shift to
wealth preservation. You no longer need to, nor should you accept, the higher risk associated with wealth
accumulation. If you still wish to accept higher risk, then we need to discuss modifying your goals.
Otherwise, we don’t want you taking unnecessary risks once reaching your objective.