The book shown on the left is by Robert J. Klosterman. Click on the cover to order.

This interview was conducted by Douglas R. Cobb on July 16, 2015.

Today, I have the great pleasure of interviewing an expert in investment strategies, Robert J. Klosterman, CFP. He is the CEO and chief investment officer of White Oaks Investment Management Inc., and the
founder of White Oaks Wealth Advisors, and he has four decades of experience in financial planning and wealth advisory services. Mr. Klosterman has written a very useful guide about the hindrances and pitfalls that can get in the way of investors seeing a good return on their money, titled The Four Horsemen of the Investor's Apocalypse. The book is subtitled "The Four Evils That Will Crush Your Portfolio, and How to Fight Them."

Douglas R. Cobb: Thank you, Robert, for agreeing to do this interview with me. Your insights in the book The Four Horsemen of the Investor's Apocalypse are an invaluable guide and resource for investors and you offer helpful advice in it for readers to avoid the deadly consequences to their portfolios that the "Four Horsemen" you mention can pose.

Just to give our readers a bit of background about the subject of your book, Robert, would you please say what the "Four Horsemen," are, and is there any particular one of them that strikes you as being the worst of the four, or are they all potentially equally as bad?

Robert Klosterman: As I began to write the book, it occurred to me that the biggest challenges facing those individuals fighting to build and preserve the resources intended for their financial security came down to four things - Inflation, Volatility, Group Think, which I sometimes refer to the sea of sameness, and Global Disruptions and Dislocations. I see them as equally challenging and evil. While all are equally dangerous, they are often not all present at the same time. At one point inflation seems to be a non-issue and volatility is rampant. Other times one of the other horsemen is leading the charge. This means intelligent portfolio design is needed to meet all regardless of which horseman is leading the charge.

Douglas R. Cobb: You state fairly early on in your book, Robert, that it is not one that people who are interested in "get rich quick" schemes should consult. What is the intended audience you would like to reach and assist with your fine book, The Four Horsemen of the Investor's Apocalypse?

Robert Klosterman: When I reflect back on my 40 years of advising clients the biggest horror stories have been ones where the individual pursued a get rich quick scheme. There is an abundance of books that promise a quick, easy way to get rich because the public eats them up and they sell. The Four Horsemen of the Investors Apocalypse is for those who recognize that sound principles that are designed to have a high probability of success will be the soundest path for them.

Douglas R. Cobb: Robert, in your book, you mention that "independent research is the best weapon in fighting off the third horseman, Group Think. Would you please get into that idea a bit further, and explain in maybe a few sentences why independent research can be so important to investors?

Robert Klosterman: The third horseman is particularly prevalent in today’s world of “benchmark hugging” and intense marketing by financial services firms. One piece of evidence for this is that many large brokerage firms and investment banks offer investment research. Of course, there is a potential conflict of interest in that they benefit by the transactions that may be generated and by keeping clients feeling generally pretty good. This “positivity” bias may lead to outcomes that are less than desired. By purchasing research from firms whose prime business is providing research can provide important perspectives that will likely provide a more balanced viewpoint. One must examine multiple views and provide additional credibility when the source represents an independent perspective. If there were one person or firm with all the answers they would be famous beyond belief. While intuitively attractive to find that one source - the reality is non-existent.

Douglas R. Cobb: In the second chapter of The Four Horsemen of the Investor's Apocalypse, you write a statement that probably will be somewhat controversial to many people, that "market timing doesn't work." Why would you argue that it does not work, and what is a good alternative strategy to trying to "time the market?"

Robert Klosterman: It is controversial because everyone wants to believe it can be accomplished with precision and consistency. Who wouldn’t want to buy low and sell high each and every time? I would… if it would work. Over my 40 years I have tried multiple times with seemingly rock solid strategies and all have been found wanting. Relative value is the best indicator of future returns. There are many famous investors who used value as a key indicator. There are no famous market timers. That is compelling enough for me.

Douglas R. Cobb: Robert, one of the other "Horsemen" that you write about is "Volatility." How does the sound advice of "not putting all of your eggs in one basket" help to combat this particular "Horseman?"

Robert Klosterman: Without a doubt volatility of returns can be the biggest evil for those seeking to live off of their portfolio and need withdrawals from their portfolio. For example, a 25% decline in the portfolio needs a 33% increase in the portfolio to break even. A 50% decline needs a 100% return to breakeven. So for a “point to point” investor not taking withdrawals that is significant. Now assume you need a withdrawal from the portfolio and the problem becomes even more challenging. That amount of withdrawal will not be able to contribute to getting the portfolio back to even. Volatility matters a lot to those real people with real money with real day-to-day needs!

Douglas R. Cobb: What are some ways investors can "diversify" without putting all of their eggs into, say, just the stock market?

Robert Klosterman: Great question and it ties into the previous one. The stock market has been an effective way to invest, especially for those who don’t take withdrawals and to whom volatility doesn’t matter. Looking back many have believed that by simply buying 20-40 stocks was adequate but this ignored that many of those same stocks looked much the same. If those stocks were large cap US Equities the diversification impact may be, in fact, minimal. Yet for those “real people” with “real portfolios” who want to fight off the first horseman, Inflation, and at the same defend against the 2nd horseman, Volatility, then looking beyond the US equity market is critical to achieve the desired result.

It was also believed for many years that investing in international equities would provide diversification value. Not so true in 2015. In chapter five “Asset Allocation Decisions” this is explored as to the various types of asset classes that should be considered and why. Today’s investors need to look beyond traditional teachings to meet the needs of our current times.

Douglas R. Cobb: One of the many other statements that you make and argue that some people might find a bit controversial is that "using average returns is instructive but does not offer any real investing value." What do you mean by that, Robert, and why is developing an estimate of asset class returns one of the better choices for investors to consider?

Robert Klosterman: One of the advantages of many years of experience is that you get to see many different perspectives and how attitudes and in this case statistics change. In the mid 70’s the long-term average for US Stocks was around 8%. In 1999 when one viewed the average the long-term average was around 12%. The difference was the type of market we were in at the time. In the mid 70s it was after a significant pull back in the US equity markets. In 1999 it was after a huge run up in the US equity markets. Averages may look different at different times. That being said, averages have never been a short-term indicator. The markets seldom have an “average” year. As mentioned in the book valuations provide much more help, especially with a long-term view.

Douglas R. Cobb: Great answers so far, Robert! It is easy to see why so many investors consult you and your company, White Oaks Investment Management Inc., for advice with their investment needs. I just have a few more questions for you.

What can be a big danger of using software to manage investment data and in asset allocation?

Robert Klosterman: Used appropriately software can be a great tool to help make decisions but as with most technology the “garbage in, garbage out (GIGO)” problem needs to be avoided. An investor needs to be familiar with the assumptions used and their impact on the results. Return assumptions need to be validated with the investor’s own views. Correlations and other statistical data need to be understood to a level that the investor believes they are reasonable and useful for the analysis. Most people don’t fully understand the impact even minor changes can have on the output. It is critical to have realistic, credible assumptions consistent with an investing outlook that the investor believes. Without that… GIGO.

Douglas R. Cobb: What is the difference between a "fee-based" and a "fee-only" advisor, and why are "fee-only" ones often a better alternative for investors?

Robert Klosterman: You question drills down to a critical issue when it comes to vetting financial advisors. The real critical issue is what the advisor or firm is saying with each. Fee-based means we have a service where we will charge a fee for the service. The advisor may also receive compensation from commissions, finders fees or other sources of income when they describe themselves as “fee based”. Fee-only advisors on the other hand only receive fees based on an arrangement with the client. In other words the client is the “only” source of compensation and the highly likely outcome is that the client’s interests is the only focus for that type of advisor. Many want the objectivity, independent focus of the “fee-only” method but it is easily confused when the term “fee-based” is used. It not hard to see why some advisors use “fee-based”. Fee-only is the relationship many would prefer, however.

Douglas R. Cobb: Finally, Robert, what is "asymmetrical risk," and why do you write that "focusing on asymmetrical risk is a valuable and profitable endeavor?"

Robert Klosterman: The concept of “asymmetrical risk” is to seek investment opportunities that exhibit the likelihood of more positive returns than negative returns over a period of time. As we explored in your earlier question, downside events in a portfolio are especially damaging to investors portfolios. If an investor can minimize the impact of downside events in a portfolio the long-term results can be accentuated to a much better result. When understood this may broaden an investor’s perspective beyond just the stock market as we know it.

Douglas R. Cobb: Thanks, Robert, for doing this interview with me! We have barely really scratched the surface of the great insights and advice you give to investors who are interested in thwarting the "Four Horsemen" that you write about in your book about these hindrances to accumulating wealth, but hopefully it is enough of a glimpse at some of the concepts you cover that people will want to read more. Your book should belong in the libraries of everyone who is concerned about building their wealth and investing wisely.

Read Our Review of The Four Horsemen of the Investor’s Apocalypse: The Four Evils That Will Crush Your Portfolio and How to Fight Them by Robert J. Klosterman, CFP

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