"Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve." So it is written in the Talmud, a record of debates among rabbis about Jewish law dating as early as 1200 B.C. And so it is written on Page 1 of Asset Allocation: Balancing Financial Risk by Roger Gibson, first published in 1989.
Gibson is not Jewish; he found the saying from the Talmud in a book of quotes and liked it. But he has a penchant for history - he lives in a pre-Civil War farmhouse north of Pittsburgh - which has taught him one important lesson: Slow and steady wins the race. Since his book appeared the week he founded his practice, the firm has taken on six to seven new clients a year, hitting $1 billion in assets under advisement at the end of 2010.
"We are not obsessed with growth. We measure our success by the happiness of our clients," he says. His attitude - as well as regard for his book - have produced a clientele of 115 investors and families from 24 states, with median assets of nearly $3 million.
His firm, Gibson Capital in Wexford, Pa., operates with a staff of 10, led by his wife, Brenda, the CEO. Three advisors, each with an M.B.A., handle client relationships. Two are CFPs, and another is a CFA. Gibson, the firm's chief investment officer, has some prominent admirers, including Charles Ellis and John Templeton, who contributed forewords to the fourth edition of his book, released in 2008.
FOLLOWING ANCIENT LAW
In his modern update on Talmudic investing philosophy, Gibson defines "land" as real estate investments, mainly REITs (he doesn't consider a home an investment asset); "business" as U.S. stocks; and "reserve" as U.S. bonds. Holding the basic trio, without periodic rebalancing, returned 5% during the bear market from March 24, 2000, to Oct. 9, 2002. During the same time frame, a traditional balanced portfolio of one-third U.S. bonds and two-thirds U.S. stocks lost 22%.
Gibson adds that the Talmudic approach also worked well during the Great Recession of 2008, mainly because of bonds. "Despite the enormity of losses all equity asset classes endured, Treasury bonds did well in 2008."
Although its simplicity is attractive, Gibson does complicate the Talmud strategy a bit. He places client money into seven broad asset classes that he divides into two major buckets: interest-generating (short-term debt, U.S. and non-U.S. bonds) and equity investments (U.S. and non-U.S. stocks, real estate investments and commodity-linked securities.
Gibson is an engaging advisor who takes client education seriously. Each new client must attend at least four meetings with an advisor that run two to four hours - a minimum of eight hours - before any investment action is taken.
The first meeting focuses on the pros and cons of fixed income vs. equity investments. The second session covers other asset classes. Clients and advisors hammer out an investment policy statement during the third meeting, and discuss the best way to implement the strategy in the fourth.
When the firm discusses market volatility with clients, it stresses patience, the planner says. According to Gibson, from 1926 to 2005, the relative range of returns for large-company stocks defined by one standard deviation was 40.4 percentage points. Historically, the reward for bearing this gut-wrenching spread has been a modest annualized return of 6% percent (the equity risk premium) above the return of stable Treasury bills.
Of course, we all know the equity risk premium makes an enormous difference over time. "If stock market volatility is the disease," Gibson says, "time is the cure."
Even a couple turning 60 must make a meaningful equity investment in their portfolio, assuming a 30-year time horizon, until both pass away. While Gibson concedes the equity risk premium may diminish, he still sees stocks as the best long-term bet.
When necessary, Gibson's staff will teach clients the ins and outs of emotions and money, but they prefer to save those lessons for moments when clients' emotions about investment choices are running high. That was the case when Gibson's newest advisor on staff, Chris Sidoni, took on a couple in their early 60s a few years ago with about $10 million to invest.
Both spouses had inherited wealth. The husband, a businessman who was much less risk-averse than his wife, planned to retire in a few years. They shared two clear goals: annual income of $230,000 (net of taxes and adjusted for inflation) and a defined bequest for each of their three children.
The couple came to Gibson Capital with two portfolios, one in each name, but each divided between 55% interest-generating investments and 45% equities, overwhelmingly domestic. The husband had too much cash and the wife had too many individual stocks.
Sidoni developed a target allocation for the risk-averse wife of 75% interest-generating holdings and 25% equity investments divided among U.S. and non-U.S. equities, real estate investments and commodity-linked securities. The husband's holdings were targeted for a 50/50 allocation with a similar mix. The combined portfolio grew a bit more conservative at about 60% interest-generating investments and 40% equities.
As the allocation strategy was being phased in, the economic crisis took hold and the couple balked. Sidoni and Gibson, who are used to clients getting cold feet during the implementation phase, went into coaching mode. They managed to talk the couple out of walking away, educating them that the best time to buy is precisely when the market news is gloomy and adding to a portfolio seems counterintuitive. Part of this education included some behavioral finance lessons on emotions and investment decisions.
Gibson describes the relationship between advisor and client as a process that requires the advisor to engage in two strategies. The outer strategy is the science of diversification and asset allocation. The inner strategy is just as crucial, but it is the art of behavioral finance, which can persuade clients to stick to their asset allocations. As Gibson puts it: "Follow your strategy and ignore the evening news."
WORKING AS A COUPLE
Gibson hired his wife years ago as a business consultant after she had been the executive director of a complex charity serving the homeless in Pittsburgh, with staff of more than 130 employees. "She has incredible business and organizational skills," he says. "She is invaluable."
After Gibson Capital moved to larger quarters, he and Brenda continued to share an office as they had before. People ask Gibson often if their arrangement doesn't qualify as too much togetherness.
He always responds, "Yes, and that's the way we like it." When it comes to asset allocation, business organization and marriage, Gibson has a knack for the right mix.
Jim Grote, a CFP in Louisville, Ky., writes regularly for Financial Planning.