Got a few million dollars to invest?
Neither do I.
Still, on the theory that the rich generally get richer, I thought it would be a good idea to talk with two local advisers who invest money for those with lots of it.
Maybe, Dorsey Farr and Mike Wolf would have a few ideas for us average types. They’re two of the three owners of French Wolf & Farr, which invests $225 million of their clients’ money.
The firm’s minimum for an individual account is currently $3 million — a sum I’m hoping to accumulate in my next life. When it comes to investing, you can never start too early.
Also, when it comes to investing, it’s critical to try to avoid major mistakes. A big one, according to Farr and Wolf, is to pay too much for an asset.
A few years back, they noticed that important investments — stocks, bonds and real estate — were becoming very pricey. So they adopted a more defensive posture, sheltering a larger proportion of money in U.S. Treasuries, money markets and other cash equivalents. Cash, after all, is not trash.
Another key mistake can be thinking you’ve diversified your investments when you haven’t. Some 401(k) programs, for example, have many domestic stock choices. It’s common for employees to split their money among them.
Farr calls that method — “spread it around and hope.”
That’s generally not a wise game plan. It can leave investors with virtually all of their money in domestic stocks and little in other options, such as bonds, international stocks, money-market accounts and the like.
“When you throw a little at everything, you’re not truly diversified,” Farr said.
A third mistake, Wolf said, can be a reluctance to take a loss, sometimes because you’ve become emotionally attached to an investment.
For their well-heeled clients, a loss can be valuable because it can reduce taxes considerably by offsetting the gains. And for both average and wealthy investors, taking a loss can make sense if the remaining money is then deployed in investments with better prospects.
Where are those investments these days?
With very low interest rates right now and a surging federal deficit, Farr and Wolf believe interest rates are headed north. And they’re not overly impressed with U.S. stocks, because of the relatively meager dividend yields and high price-to-earnings ratio.
So, they suggest U.S. Treasuries that have inflation-protection, called TIPS.
They also like international stocks, particularly from Western Europe and Japan, because they believe those equities are undervalued when compared to U.S. stocks.
And they’re putting money into floating rate notes — bank loans that can be a hedge against inflation because their interest rates fluctuate with market conditions.
While these investments may work in the current climate, Farr said, there’s one other principle to remember — do your homework.
“It’s hard not to mention Bernie Madoff and the number of folks who were fooled,” he said. “There was not enough due diligence.”
If there’s a substitute for that, I don’t know it.
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