Trail Financial Planning, LLC is a fee-only financial planning and investment management firm located in Bellingham, WA

How we manage investments


This page describes our philosophy and specific strategies we follow as we manage investments.

Our Investment Philosophy

We believe a person’s investment strategy should fit within their overall financial plan.  Thus, the first step we encourage people to do is develop a financial plan.  Part of the plannig is an analysis of entire investment portfolio and asset allocation, including things like employer-sponsored retirement plans, college savings, real estate and/or business ownership.

For all clients, whether planning or investment management only, we start by creating an “Investment Policy Statement,” or IPS.  In the IPS we detail a client’s time-horizon for investment, goals, risk tolerance, risk capacity.  We create an planned assets allocation and strategy.   Both client and advisor must agree on the IPS before we take action.  Although the IPS is individualized, there are certain features that we incorporate into all of our investment planning.  We aim to:

  • Choose low-fee investment to minimize the erosive force of fees and commissions
  • Buy high quality investments, and hold them for long periods of time
  • Produce a sufficient investment return to achieve the client’s goals
  • Reduce risk through diversification (don’t put all your eggs in one basket)
  • Be transparent in our thoughts and actions to create trust
  • Document and report on our performance to create accountability
  • Explain things to you in terms that make sense so you feel like you are processing information, not being processed

The next section will describe our specific investment strategies.  First though, I must give a general disclaimer about the risks of investing: There is no guarantee in investing.  Owning securities always includes a degree of risk of loss of your capital.  You need to be prepared to bear those losses on your own.  With increased risk however, there is generally a possibility for greater reward.  Our recommendations and advice do not guarantee, or represent the guarantee of, future results.  For more discussion about risk and rewards, please visit: John’s blog post about risk and return in the stock market or our Firm’s ADV (see footer for a link).

Our Portfolio Management Strategy

Photo from Creative Commons

We typically recommend people create an investment portfolio that follows a “core-satellite” structure. The core of your investment portfolio should be the largest portion of your investment portfolio.  We generally recommend passively managed index funds characterized by low-fees and high diversification.  For people who are currently employed, their employer-sponsored retirement plan may serve as this portion of your portfolio.

The satellite portion of a portfolio is smaller, and is not appropriate for every investor.  Typically, an investor seeks higher returns, or owning specific securities or industry exposure through a satellite portion of the portfolio.  You will work with your advisor to determine which strategy makes sense for you.

Details about core and satellite investment styles:

Core – Passive management

There is no minimum account size.

We assist you in setting up and maintaining accounts in low-fee, highly diversified index funds and/or Exchange Traded Funds (ETFs).  Emphasis is on asset allocation and lowering fees.  Clients interested in this service typically desire (a) to earn market returns, (b) to have lower risk due to higher diversification, or (c) to start building an investment portfolio.

We use a couple custodians for our core portfolios – TD Ameritrade and Betterment Institutional.  For details and full disclosures, contact our firm to view our Form ADV, part 2.

Satellite – Active management

Minimum account size:  $100,000

We build a diversified portfolio of individual stocks for specific purpose(s).  We select investments based on a fundamental analysis of the underlying businesses or security.  We are “buy-to-hold” investors, intending to hold investments for long time frames, and participate in the beauty of compound interest. Clients interested in this service typically desire (a) higher returns than a market index, (b) knowledge of how their money is invested and in what types of businesses, or (c) a higher degree of control over their risk exposures.

We use TD Ameritrade and Shareholder Services Group (SSG) as the custodian for our satellite portfolios. For details and full disclosures, contact our firm to view our Form ADV, part 2.

Our investment strategies within core and satellite models

We believe how your money is invested should depend on why your money is invested.  In general, the why will depend on your time-horizon and risk tolerance.  Thus, individual investment strategies are presented by time-horizon:

Long-term needs:  money needed more than five years from now.

We recommend investing in stocks and bonds for long-term capital growth.  Stocks, in particular, whether owned through index funds or individual equities, provide some of the best ways to participate in the power of compound interest, and to protect against inflation.

Intermediate-term needs:  money needed in the next 1-3 years, or for a specific purpose in the next 5-10 years.

Intermediate-term goals are for specific events or expenses such as college, a wedding, or an around-the-world trip.  Intermediate-term goals are particularly sensitive to individual circumstances such as risk tolerance, time horizon, etc.  We will need to address each intermediate-term goal and financial need individually.  Specific risks will depend upon the investment instrument.

Short-term needs:  Money that will be needed in the next few months up to three years.

The primary goal of short-term money is capital preservation and liquidity.  Examples could include saving money for real-estate purchase, preparing to pay for an extended vacation three years down the road, or funding your lifestyle.  You need to be readily able to access your funds, and the value of those funds should not wildly oscillate.  In other words, the risk should be low.  As a corollary, growth in value is typically not a priority for this goal.  There are many alternatives for short-term money.  They can include government bonds, money market funds, or a bank accounts.

The remainder of this webpage describes some philosophies and rationales we follow in managing investments.  Read on to get a further flavor for how we manage investments.  But, we won’t judge you if you move onto a new page.  

Why invest in the stock market?

To many people the stock market seems opaque, perhaps even frightening.  But in fact, it is something real, or at least as real as a business can be.  To paint a clearer picture, imagine the stock market is like a giant open-air market in a foreign country.  Clustered together are shop owners, food vendors, artists and musicians.  Each person is industriously creating something that they think a visitors will appreciate, enjoy, and purchase.  If you want to eat good food or find a good pair of shoes, you go to the market to find them.  You trust that there will be an experienced and trustworthy person thinking and working through all the details of preparing a good pair of shoes or a delicious curry.  If the supply of leather dried up (ha, get it?), or coconut milk prices soared, the producers would be the best equipped to adjust.  We just get to eat and walk. In the stock market, different companies are like each person in the market.  Each company is working in its industry to provide something of value to the world.  As investors, we have the ability to own a little bit of their efforts.  You can own entire markets through an index fund, or a mutual fund (our core strategy).  Or, you can own individual companies (our satellite strategy).  As factors like politics or inflation change, good business managers (who often also own shares) will manage their businesses to prevail through the changes.  We aim to find investments in companies where we can trust the management to pilot the business well.  As Warren Buffet once said, his investment style is “lethargy bordering on sloth.”  We aim to follow this advice.

Some math about investing in the stock market…

Albert Einstein said, “Compound Interest is the eighth wonder of the world.”  What he meant is illustrated in the graph to the right, which shows the growth of $100,000 at a 10% annual rate.  The math is an exponential function, commonly learned and forgotten in 2nd year high school Algebra.  A much simpler, and nearly correct bit of math about investing is the “rule of 72.”

The rule states that for given annual interest rate compounded over time, the approximate time for your account balance to double will be 72 divided by the interest rate.  For example, using the historical annual growth rate of the stock market of about 10%, it would take approximately 7.2 years for your money to double.  Let’s say you had $100,000 and you are 45 years old.  If your money grew at the historical average, it would be $200,000 by age 52, $400,000 by age 59, $800,000 by age 66, and $1,600,000 by age 73.

The 30,000 ft view of my investing style for long-term money is to play into that compound growth rate.  Business owners and operators are striving for compound growth rates.  Such a growth rate is not guaranteed, but by owning stocks (whether direct or through index funds) for the long-term, and NOT PLAYING A GAMBLING GAME OF GETTING IN AND OUT OF THE MARKET, you increase your chances of riding the compound interest curve.

Why invest in individual stocks?

Owning individual stocks is not for everyone.  However, it is one that both I use within my satellite portfolios.  Here is why: I like to own things directly.  I don’t like to pay for middle levels of ownership.  Mutual funds own a diverse collection of securities, and pay a manager to choose the investments.  It is difficult to find managers who consistently beat the market.  Their compensation is typically determined by the size of the fund.  It is well known in finance that funds that “out-performed” recently get more money in.  Thus, fund managers have an incentive to strive for shorter-term performance.  Typically each year, more than 50% of mutual funds underperform the S&P market (in 2011 nearly 80% of managed funds underperformed!).  Why?  Trading costs and management fees.

On the other hand, investing directly into great, individual businesses and holding them for long periods of time can minimize trading costs and management fees.  If you enter into an advisory relationship with me you will already be paying a layer of fees for me to manage your money.  Paying an extra layer of fees (through owning mutual funds) may not be in your best interests. Ownership of individual companies allows you to own a piece of a business’s profits.  I like owning those little streams of profits.

Risks associated with owning individual stocks

However, there are many risks.  The primary one is that the companies profits, or prospect for profits, decline and so will the value of your investment.  A worse situation could be if your owned company goes bankrupt.  In that case, you have very little legal rights to recover anything.  Legally, bondholders have a higher right to any leftover business assets when a company goes bankrupt than a holder of common stock.  Regardless of those risks, I like to own shares of individual companies.  I think the ability of individual like me to invest on the coat tails of smart business owners/managers is a privilege allowed by the public markets.

How does John choose individual stocks?

For the satellite portion of a portfolio, I invest in individual stocks.  This is true for for my personal accounts, as well as some of my clients’.  In fact, I tend to own shares in the same companies I recommend for satellite portfolios.

Businesses can serve a quality purpose in this world, and earn quality profits.  To select such businesses, I start by analyzing their financial statements.  I analyze the fundamental financial condition of a company including its balance sheet and likelihood of future income.  I read about ideas and research from other analysts, such as the Motley Fool (to whom I am a paying member).  I make a determination of a fair value for the security.  I try to take advantage of price volatility to obtain a good price for purchase (or sale) of a stock. What I do not do is try to time the market;  trading in and out of securities.  Such a tactic incurs excess trading fees, and is counter to the philosophy of investing in businesses.  Warren Buffet agrees, or more appropriately, I agree with Warren Buffet:

“Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, ‘I can calculate the movement of the stars, but not the madness of men.’ If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases.” — Warren Buffet (from

I spend many of the open hours of the market teaching students (I am a high school teacher).  I don’t live near Wall Street.  I rarely check on the daily movements of stock prices.  All of these actions are intentional.  They help me stay away from knee-jerk actions.  I tend to think a lot, and act a little.  However, when I act, I do so decisively.  My definition of a compelling opportunities is one that looks promising over the next few years of decades, not over the next few months. My goal with selecting a diverse portfolio of investments is generally to pick the highest quality companies, hold them for a long time, yawn at the volatility, then five or ten years down the road recognize that we have beaten the market.

Some people say that investing in the stock market is a form of “gambling.” I agree because of the role of odds within each bet.  But, in the case of the stock market, the odds are actually stacked in the investors favor, whereas the odds in Vegas are the opposite.   In Vegas the odds are literally stacked against you.  You may do well, but given enough plays and enough time, your return will migrate to the odds and Steve Wynn will be able to buy himself a new helicopter at your expense.

By investing in the stock market, especially quality individual companies, you are buying into a story where the odds are in your favor.  Sure, you may lose some, just as you may win a few in Vegas.  However, by putting time and diverse “bets” into your portfolio, your return should move towards the odds.  And over the last seventy or so years, the odds were for approximately 10% compounded annual returns.  In ten years I want to be on the compound interest curve, in the part curving UP!

Diversification can help to reduce company-specific risk, however it cannot remove risk altogether.  I design portfolios first with a thought of quality businesses, second with diversification as a key element.  I do not follow a prescribed strategy of x% in financials or y% in energy.  I look for compelling opportunities to own stocks for long periods of time.  I strive to establish positions so they are not overweighted initially, although when a stock is doing well as a result of strong business growth, I tend to let it run.

Risks involved with owning securitized stocks and bonds

The ownership of common stock and bonds carries significant risks, which could cause you to lose money. There are macroeconomic risks and company-specific risks.  If you agree to invest in individual securities, you need to be prepared to bear the permanent loss of your investing capital. There are also risks with not investing your long-term money.  If you park it in a very safe, but low-yielding investment, you risk the loss of your purchasing power due to inflation.  I’d bet that ten years down the road gas is going to cost more than it does today.  You want your money to still have the power to buy gas.  Businesses (their stocks) have historically been one of the better investments to outpace inflation.  If you think about it, businesses are really the entities that make inflation happen (ever noticed what has happened to the price of a candy bar over time)?

Risks involved with investing in short-term instruments

In general, although appropriate short-term investments bear less risk of capital loss, they do carry the risk of purchasing power.  That is, inflation can cause the investments to lose their ability to purchase.  For example, ten years ago a savings account of $1,000 could have bought 500 gallons of gas (at $2 per gallon).  However, now that same $1,000 might only buy 250 gallons (at $4 per gallon).  If that $1,000 were put into a very safe, but low yielding investment such that the $1,000 did not lose face value over the ten years, the purchasing power of the asset would have declined, though the face value did not.  However, given

Fees.  Our fees are described on the “Fees page.”