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I am writing with a brief update on Unconventional Investor (UI) and a critically important reminder on the process of building wealth.  UI has grown from a scrappy start-up conceived the year before the 2008 financial crisis, to a legitimate money management firm presently managing $37 million for hard-working clients (and several retirees) across the country.  Despite the market turmoil since 2008, the UI approach to building investment wealth remains fundamentally unchanged.  The three pillars are (1) an evidence-based investment strategy centered on equity index funds for long-term performance, (2) obsessive expense minimization, starting with very low fees, and (3) an unusually transparent adviser relationship combined with personal service.

Building Wealth Is a Process
Wealth can be built, and is the result of disciplined savings and investing over many years.  Three vital components -- savings, investment performance and time, combine to produce wealth and determine how comfortable your golden years will be.  Yet few investors fully appreciate the profound impact of seemingly small improvements in investment return. Consider this so-obvious-it's-overlooked fact about investment return. Expressed as a formula, investment return is the net result of two things: 
                     Gross Portfolio Return                       
minus  All Expenses and Taxes
                      equals  Net Investment Return
This offers two distinct paths to improving investment returns - maximizing returns and also aggressively minimizing expenses and taxes.  Before some thoughts on UI's approach to each element, first, a brief arithmetic lesson. Consider five hypothetical investors (see table, below) each of whom (a) starts with $250,000 and (b) invests $50,000 annually for 25 years.  The only variable among these investors is their annual investment return, which differs by increments of 0.5%, and since it is hypothetical, is the same each year for each investor.  The gap between these investors, due solely to varying returns, grows very large over time, highlighting the importance of small amounts of return, particularly when compounded over many years
In this light, seemingly small increments of return suddenly are quite compelling.  First consider the expense side, where UI enjoys a considerable advantage and where improving returns is often easiest.  UI charges 0.25% on the first $750,000 and 0.15% on amounts over $750,000.  If you currently have an adviser, compare that to your rates. The second important element of expense minimization relates to the expenses and tax efficiency of the actual securities used.  UI uses Vanguard index funds, widely known for their ultra low costs and tax efficiency.  Whereas most investors have a total cost profile of 1.0% to 2.0%, UI clients can reduce total fees to 0.5% (and as low as 0.3% on accounts over $2 million).  This provides a powerful tailwind when compared to the expense burden borne by most other investors.   


The lever of maximizing investment return depends on the quality of the investment strategy employed.  Multiple, peer-reviewed studies have shown equity index funds offer investors a dominant advantage over active management.  This advantage is derived from the elimination of stock picking mistakes and a lower overall cost structure for index funds.  Another element to this durable advantage is that equity index funds self-adjust, adding and removing companies as they come and go.  


Research on market timing shows that investors, professionals as well as amateurs, make more mistakes than wise choices, with predictably negative impact on investment performance.  With no unique ability to predict the market, UI instead stays fully invested and focuses on the long term, not today's manic market swings.  The elimination of market timing mistakes and the use of equity index funds helps UI clients extract maximum return from the market.  And the extraction of maximum return, as opposed to the fallacious notion of 'beating the market', is the proper framework for evaluating an investment strategy.   


Given the importance of minimizing expenses, and the effectiveness of index funds for extracting maximum returns, the reasonable next questions are, which index funds, in which proportions, and why?  Also, what is the best way to optimize for taxes? That's where UI can help.  In constructing client portfolios, UI uses a select few equity index funds, each targeting a specific broad asset class, such as the entire US equity (stock) market.  While the asset classes (and funds) used are essentially the same for all clients, the proportions vary for each client, to suit their unique situation and risk tolerance. 


UI is a non-custodial adviser, instead using a third party custodian, preferably Vanguard, to hold client securities and perform all tax and reporting tasks.  This minimizes custodial and reporting expenses, and also provides important security to clients.  UI manages client portfolios via limited trading access, assigned by the client and Vanguard, which allows trading but not the movement of funds out of client accounts. UI's inability to deduct fees provides another measure of transparency; UI invoices clients who then mail a check. 

As 2014 begins, market volatility is ever present.  I encourage you consider Unconventional Investor as a sensible alternative to the stress of managing your own funds, or the prospect of using one of the more traditional financial firms offering services to consumers.  The combination of an effective long term strategy, low costs and transparency really shouldn't be so unconventional, but in reality - it is.  


Contact UI at paul@unconventionalinvestor.com or call 415.235.3729 to learn more. 


Paul O'Leary
Unconventional Investor, LLC