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  Investment Advice to Help You Reach Your Lifetime Goals

   
Investment Philosophy
Why Index Funds?
 
   
   
 
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Our Investment Philosophy (Index Funds)
 

Based on a thorough understanding of the client's financial objectives, risk tolerance and investment time horizon; we help them build a diversified portfolio centered around the use of low cost and tax efficient stock index mutual funds.

Our investment philosophy is based on extensive academic research, which has shown that trying to beat the stock market is a "loser's game". Numerous studies have shown that attempting to select successful (consistent market beating) active investment managers and mutual funds is virtually impossible and prohibitively expensive. It is our belief that a well-diversified portfolio containing index funds offers the investor the highest probability of reaching their financial goals.

By using the passive investing (index funds) approach, a portfolio that is periodically rebalanced, can be effectively maintained without incurring the additional cost of ongoing professional portfolio management.

With this philosophy, Lifetime Financial Planning can review your portfolio on an "as-needed basis for an hourly fee". In most cases this fee will be considerably less than the annual fee charged by an investment manager, which is typically 1 to 2 percent of assets under management.
Why Index Funds Over Actively Managed Funds?
 
1. Many studies have shown that over extended periods of time, most equity investment managers under perform relevant indexes by about as much as they charge in fees and incur in trading costs.

2. The number of mutual funds and investment managers that outperform indexes over extended periods of time is no greater than that which would occur from random chance.

3. The random pattern of mutual fund returns indicates that there is no consistent means of selecting mutual funds, which will outperform in the future.
 
Articles on Investing
 

Turn on a Paradigm?

Fundamentally weighted indexing vs. capitalization weighted indexing.

By John C. Bogle and Burton G. Malkiel

As index funds gain an increasing share of the portfolios of mutual funds, institutional equity and bond funds, academics and practitioners are hotly debating how these portfolios should be composed. Capitalization-weighted indexing, until now the dominant approach, has come under fire for overweighting portfolios with (temporarily) overvalued stocks and underweighting them with undervalued ones.

Eugene Fama and Kenneth French have suggested that higher returns can be generated by indexed portfolios of stocks with small capitalizations and low price-to-book-value ratios. Robert Arnott has argued that a better method for indexing is to eight the stocks in the index not by their total capitalization, but rather by certain "fundamental" factors such as sales, earnings or book values. Jeremy Siegel has proposed that the "fundamental factor" should be the dividends that companies pay. These analysts have all argued that fundamentally weighted indexes represent the "new paradigm" for index-fund investing.

Are they correct? We think not. There is no doubt that fundamentally weighted indexes have outperformed capitalization-weighted indexes during the past six years, which witnessed the collapse of the "new economy" bubble and partial recovery. But we need to be cautious before accepting any "new paradigm" that implicitly suggests that the "old paradigm" -- reflected in more than $3 trillion of capitalization-weighted index investment funds -- is in error. During the three-plus decades that such passively managed funds have been available, they have provided for their investors returns substantially superior to the returns achieved by actively managed equity funds. We need to understand why capitalization-weighted indexes make sense -- even if market prices are "noisy" and can fluctuate above or below the values they would have in a perfectly efficient market. Read the entire article

 

The Difficulty of Selecting Superior Mutual Fund Performance

Journal of Financial Planning - February 2006 Issue

By Thomas P. McGuigan, CFP®

Much has been written about the management of mutual funds and active versus passive management. This study attempts to quantify the relative performance of actively managed large- and mid-cap domestic stock mutual funds with a passive strategy during a 20-year period beginning December 1, 1983, and ending November 30, 2003.

...The study shows that there is remarkable consistency in the relative performance of active versus passive strategies during ten-year periods, that the number and percentage of individual actively managed funds that have outperformed the passive approach is low, and that based on data available to planners, it is difficult to predict in advance which actively managed funds will outperform during the next ten-year period. Read the entire article

 

10 Questions with...Burton Malkiel on A Random Walk Down Wall Street

Journal of Financial Planning's Interview with Dr. Burton G. Malkiel

He's been called the intellectual midwife of the indexing phenomenon. The book has been called a classic. Both are rightly so. When Dr. Burton Malkiel wrote A Random Walk Down Wall Street in 1973, now in its eighth edition, he offered up the premise that a blindfolded chimpanzee throwing darts at the Wall Street Journal could select a portfolio that performs as well as those managed by the experts. It was, says Malkiel, a clever metaphor; but the better one is, "Just throw a towel over the stock pages and go buy as broad-based an index fund as you can find."

...Malkiel has consistently tested his premise and says that the evidence suggest that, long term, few professional money managers outperform a passive index - and those who do so in one period regularly fail to repeat it in another period. He says he recognizes that telling investors there's no way to outperform the market is like telling a kid there's no Santa Claus: "It takes the zip out."

...most individuals get "sold" financial products. Brokers and advisors don't make any money if they put you in a Vanguard index fund, but they do get paid for selling you a hot, actively managed fund. Read the entire interview.

 

Mutual Fund Scandals Will Make Fund Industry Better in the Long Run

By Dean Knepper, CPA, CFP®

Last year, it seemed that every morning the newspaper reported some scandalous behavior associated with corporate accounting. Remember Enron and the other related headlines? This year, the bad news allegations have been about a handful of mutual fund families.

As an independent, professional financial advisor, I’d like to add my voice to what will obviously be an ongoing conversation in the weeks and months ahead. Hopefully, this commentary will provide some insights and help you give you a better perspective regarding what the press is calling “the Mutual Fund Scandal.” Read the entire article
 

FAMILY FINANCE: Saving for College

How families can plan for their children’s higher education.

Loudoun Family Magazine's Interview with Dean Knepper, CPA, CFP®

By Kevin Self, Editor

Sending children to college can be one of the most financially challenging times for a family. Parents want the best for their children, but the cost of living—let alone higher education—is not getting cheaper. For a child born today, a four-year, Virginia state college education is estimated to cost over $40,000 per year. Loudoun Family Magazine spoke with Dean Knepper, a local financial expert and the founding principal of Lifetime Financial Planning, based in Leesburg. Knepper, a CERTIFIED PUBLIC ACCOUNTANT and CERTIFIED FINANCIAL PLANNER™ professional, answers questions concerning the best ways for families to save money for college and gives practical advice on how to get started now on your children’s college fund. Read the entire interview

 

Sucker's Bet

By William Bernstein, PH.D., M.D. - Author of The Four Pillars of Investing and The Intelligent Asset Allocator

Overwhelming empirical evidence shows that attempting to select successful active [investment] managers is virtually impossible, so why try?

...At first thought, it does seem reasonable that there is such a thing as money management skill. It should be a straightforward matter to identify and employ for our clients those managers whose prior results promise future excess returns. Unfortunately, the overwhelming empirical evidence shows that attempting to select successful active managers is virtually impossible and, alas, prohibitively expensive if implemented. Read the entire article

 

Serious Money - Straight Talk about Investing for Retirement

By Richard A. Ferri, CFA - Author of All About Index Funds and Protecting Your Wealth

Almost every financial plan will undoubtedly lead to some investment in the stock market. What is the best way to achieve a fair return in stocks? The answer is to develop a diversified portfolio of low cost, market-matching index funds. Indexing the stock markets make a lot of sense for four reasons. First, index funds are low cost; second, they perform better than almost all active strategies; third, they reduce the desire to chase the hot dot since you already own the stocks that are performing well; and fourth, they are tax efficient.

Nearly every academic study concludes that index funds offer better performance overall than active (beat the market) strategies. Few active managers are able to achieve the returns of indexes, let alone beat them - and it is impossible to tell which managers will be successful in the future. The markets make people wealthy, not speculative strategies designed to beat the markets. Read the entire book online

 

Dollar-Cost Averaging: Emotional Panacea or Logical Fallacy?

By Moshe Milevsky, Ph.D. - Author of Wealth Logic, Insurance Logic, Money Logic, and Probability of Fortune

DCA is an inferior strategy. Alternate strategies result in greater expected wealth for the same level of risk or identical wealth for lower risk.

Replacing one major investment decision with many smaller ones does not make the final outcome any safer. Therefore, if you have the money now and you have the choice, it is best to pick an asset allocation that you are comfortable with—and live with it. If you don’t have the money now, invest it as soon as it is available without using an averaging strategy.

If you use DCA as a savings strategy, then you are essentially investing when you have the money, and forcing yourself to save, which is a good thing. The conscious decision to split your investments over time is the problem.

Saving money on a regular basis is a wonderful idea, unfortunately investing it isn’t. Read the entire chapter from Dr. Milevsky's book: Wealth Logic - Wisdom for Improving Your Personal Finances.
 

It's the Execution, Stupid

By William Bernstein, PH.D., M.D. - Author of The Four Pillars of Investing and The Intelligent Asset Allocator

...How do I really feel about ETFs? I don’t buy them. Not for myself, my family and, in particular, not for the clients of our advisory firm. The reason? Because, in most cases, you can do better. To show you why, I’ve put together a table from the Morningstar database

...In all seven cases where a direct head-to-head comparison can be made, the Vanguard funds outperform the iShares. Read the entire article

 

CPA Checklist to Protect Against Investment Fraud

By The Virginia Society of Certified Public Accountants

"No risks. Fast profits. Upfront money." If an investment opportunity is described to you in these terms, don't part with your money, advises the Virginia Society of CPAs. Americans are losing billions of dollars a year to fraudulent investments, and these bogus opportunities come in many guises. Read the entire article
 
 

Learn More About Investing in Index Funds at Fool.com
 
 

Lifetime Financial Planning, Inc.

Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional

13800 Coppermine Road, 3rd Floor, Herndon, Virginia, 20171

208 South King Street, Suite 201, Leesburg, Virginia, 20175

Phone: (703) 779-0515 - Fax: (703) 779-7815 - E-mail: info@lifetimefp.net
 

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