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Stocks Shine for Long-Term, Chicago Business


Wealth Management

Equities have certainly had their ups and downs lately, but they continue to attract capital from individuals and wealth managers alike.


Business owner Jacob Eisen puts about 40% of his capital into equities. The remainder is earmarked to expand his company, Capital Insight Partners Inc., an investor relations firm. He figures his company will double its revenue in 2012, producing better returns than he could earn elsewhere. But, he adds, "I'm not putting all my money in my business," says Mr. Eisen. "I still believe in diversification."


Mr. Eisen isn't keen on illiquid assets like real estate, though he recognizes the sector could be due for an upturn. Since he's still in his 30s and has time for his wealth to grow, Mr. Eisen likes stocks. He prefers bank stocks because it's an industry he understands. "Equities over a long period have outperformed other asset classes," he says. Equities are the top investment choice in 2012 for ultra high net worth individuals, according to a recent study by the Spectrem Group, a Lake Forest based consulting firm. About 63% of individuals with a net worth of between $5 million and $25 million plan to invest in equities this year. About 73% of senior corporate executives with a net worth $5 million to $25 million plan to buy stocks. The next most popular investment categories are, in order, cash, bonds, international funds, precious metals, real estate and alternatives, such as hedge funds. (See chart on page 3.)


The study also shows that senior corporate executives with a high net worth have the most tolerance for risky investments (24%), compared to other wealthy individuals. But, lately, attitudes have shifted a bit, according to George Walper, president at Spectrum which tracks investor sentiment, and runs the website "Wealthy folks are becoming less willing to take an investment risk."


The S&P Stock 500 Index is up about 40% since 2009. But investors are nervous about weak U.S. economic growth and European debt troubles. The goal for wealth managers is to achieve decent stock returns of 7% to 9%, while keeping volatility in check.




Equity exposure today should total about 45%-55% in a balanced portfolio. "We're not really aggressive and not really pessimistic," says Lee Gordon, senior managing director, Mesirow Financial Investment Advisory, Chicago. Many money managers are overweighting U.S. stocks since American companies have improved their balance sheets over the last few years.


Mr. Gordon likes investing globally, with most of the stock allocation earmarked for U.S. companies. Stocks in the BRIC countries (Brazil, Russia, India and China) have had a big run up and aren't as attractive as they once were. "They're also volatile," he notes. Mr. Gordon doesn't avoid Europe altogether, but instead picks individual stocks of wellrun companies offered at a reasonable price.


Dividend paying stocks offer some downside protection, advisors say. One local couple planned to build their dream vacation house at the same time they

Wealth Management

wanted to retire. During the downturn they kept 55% of their assets in equities, with an emphasis on high-quality dividend paying stocks. Their portfolio recovered and now they're moving ahead with plans to build their vacation house. "You don't need top performance to do well in the long run," says Sharon Oberlander, financial advisor, managing director-investment, Merrill Lynch Wealth Management, Chicago. "The tortoise beats the hare." New Strategies That doesn't stop investors from chasing higher yields in more unconventional stock plays. Bret Maxwell owns MK Capital, a Northbrook-based venture capital firm. "We're in a world with very low returns. Money is just wasting away," he laments. Aiming to increase yields, Mr. Maxwell invests some of his personal wealth with Relative Value Partners LLC, Northbrook, which offers an absolute return strategy. The firm combs about 650 closed-end funds and ETFs listed on the NYSE. Funds are bought that are discounted 10%-15%, but are likely to lose the discount--which could eventually result in a gain. At the same time, the S&P 500 Index is sold short to act as a hedge against volatility. "We are generally insulated from market moves," says Maury Fertig, chief investment officer at Relative Value Partners. "Our goal is to replicate 100% of the upside of the S&P 500 Stock Index and 50% of the downside."


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Mr. Maxwell has earned an annual return of 8% to 9% over the last five years. "It's much better than buying money market funds that pay 10 basis points," he says. But he still believes in diversification, adding, "I don't have all my money plowed into one thing."


That advice applies to executives who own restricted stock or options in the companies they run. A growing number of executive compensation packages include some form of ownership in the company.


Many executives take a passive approach with their company stock, even though it may represent their biggest holding outside of their personal residence. "You can get crushed if you are not diversified," says Brian Wodar, senior vice president at Bernstein Global Wealth Management, Chicago.


With the passive approach, executives typically sell enough shares when they vest to cover the taxes on the entire position. The remainder of the shares are held. But Mr. Wodar recommends a different strategy. Executives still building their wealth should sell all of their shares when they vest. The sale does not create an additional tax burden, and the proceeds can be invested elsewhere. Executives often continue to accumulate new shares in the company as part of their compensation anyway, Mr. Wodar says. "It's better to take an active management approach to achieve long-term financial goals."


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