Better known in English as Leo Tolstoy, the author of War and Peace is widely considered to have been one of the world’s greatest writers but his potential aptitude for financial planning may be somewhat less well known. Were it not for the publication of Isaiah Berlin’s The Hedgehog and the Fox: An Essay on Tolstoy’s View of History in 1953, those abilities might never have come to light.

Berlin’s essay draws upon the ancient Greek proverb: “The fox knows many things but the hedgehog knows one big thing.” In it, he divides writers and philosophers into those two categories: the hedgehogs who contributed a single significant idea during their lifetimes and the foxes whose world could not be so narrowly confined. According to Berlin, Tolstoy was in a category of his own, combining the approach of a fox with the determination of a hedgehog.

I recently wrote an article about people’s tendency to seek out news sources that generally agree with their own basic assumptions. One disadvantage of the hedgehog theory of news is that, without moderating influences, the pundit often pursues a single line of reasoning further and further, eventually leading to a strongly held conclusion which stands entirely on its own, divorced from all other influences. By denying the possibility of other outcomes and stating opinions briefly and clearly, the author takes on an air of certainty as if actually possessing the ability to see into the future.

Foxes, on the other hand, approach things more obliquely, questing in multiple directions for information as they search for an answer. Although the fox’s approach is generally at least as rigorous as the hedgehog’s, it often results in a range of possible outcomes instead of just one. This seeming lack of conviction can make foxes seem less believable so their predictions are sometimes discounted, especially by those who prefer positivity.

As has been true throughout history, today’s world is full of things to worry about, things which demand investors’ attention: the Super Storm Sandy, the “fiscal cliff” and a do-nothing Congress, a drought in the Midwest, financial problems in Greece, Spain and the rest of Europe, terrorism and much more. It’s easy to imagine that any one of these issues could cause significant economic problems but, despite all of these (and other) apparently negative indicators, stock markets have made steady progress in 2012. That suggests that there’s more to forecasting investment outcomes than one narrow issue, even one as important as the name of the next president.

Why do I say Tolstoy would have made a good financial planner? A thorough planner must review a very wide range of information - different in every situation - then synthesize it and offer specific guidance to the client. Mr. Berlin would consider the review of such a range of possible outcomes to be fox-like. A planner who was able to accomplish that, then focus on an individual plan and act decisively to execute it might even be considered Tolstoy-like.

I’ve always taken the fox’s approach to both investing and financial planning on behalf of my clients. I try to keep an open mind and am always searching for another bit of information with which to flavor my opinion. Although I’ve been quoted several times over the years in local and national publications, I’ve never given a live TV interview. I may not be photogenic enough to merit such attention but I’ll guarantee that I’m not a good source for a quick sound bite delivering an absolute prediction.

15th Century English lawyer and philosopher, Sir Francis Bacon once said: “If a man will begin with certainties, he shall end in doubts: but if he will be content to begin with doubts, he shall end in certainties.” Hopefully, my approach to advising my clients about their lives and finances will result in enough certainty to ease their doubts while their lives, and their plan, progress.

There aren’t many quiz shows left on TV but among history’s most famous was The $64,000 Question. It was broadcast on CBS from 1955 to 1958, based on an earlier radio version with a top prize of just $64. It was a huge ratings success until the scandal involving the competing quiz show Twenty-One and its winner Charles Van Doren made the news. In order to keep ratings high, the sponsors of both shows influenced producers to select appealing winners in advance, then supply them with answers in various ways. When this story broke, Twenty-One was cancelled immediately and The $64,000 Question followed soon thereafter.

Even allowing for inflation, increasing a question’s value from $64,000 to $16,000,000,000,000 takes considerable effort, or perhaps, a concerted lack of effort. As I write this article, the 2012 elections are just weeks away and Congress is functionally in recess with members having returned home to run for reelection. In their absence, of course, nothing is being done about either developing a balanced budget or dealing with those sections of the tax code which are due to expire at year-end.

In the meantime, the government must continue to function and it’s the job of the Department of the Treasury to keep money flowing. Their efforts allow our elected officials to continue receiving paychecks and other agencies to pay their bills too. Everyone knows that our economy is just coming out of recession, so it’s no surprise that people and companies aren’t earning as much as they once did. Of course, reduced levels of income mean the IRS isn’t collecting as much in the way of tax dollars. When there’s not enough income to cover expenses, anyone might borrow a little money to fill the gap. In this case, the Treasury has borrowed about $16.1 trillion.

We all know that history sometimes repeats itself. Please take a moment to think back to August of 2011 and you may recall a similar situation. At the time, our debt limit of $14.5 trillion was rapidly being approached. One response to the looming crisis would have been Congressional action resulting in a balanced (or at least a more balanced) budget but that was not to be. Instead, the borrowing limit was raised to the current $16.4 trillion level through the Budget Control Act of 2011. That allowed everyone to breathe a sigh of relief, certain that the issue would be dealt with in plenty of time to avoid another crisis. Unfortunately, Congress has done nothing more than point fingers across the aisle and we are currently facing yet another crisis, this one described as the “fiscal cliff”.

With borrowings of $16.1 trillion and a limit of $16.4 trillion, something needs to be done. The Treasury has several tools it can employ to stay below the limit but they are short term in nature and are very obvious when put into use. There’s no hiding the fact that our government will once again be facing some difficult decisions. Last year’s crisis brought significantly increased market volatility and a reduction of the country’s credit rating. That rating downgrade was generally unanticipated but this year all three major agencies have our government’s debt on watch for a further downgrade. The agencies have said they’re likely to take such action unless:

• Congress produces “specific policies” that will stabilize the negative debt-to-GDP trend (which is forcing increased borrowing);
• Their efforts succeed without leading to a significant fiscal shock which would limit the ability of the economy to rebound;
• The process for another debt increase is orderly, avoiding additional market volatility, and most importantly;
• An agreement about increasing the debt ceiling is reached before the Treasury is forced to put those short-term tools to work.

I would not expect another round of downgrades to produce disastrous results: they didn’t last time and the possibility of additional ones has been loudly telegraphed by the rating agencies. As cynical as I am about politics, I believe our economy is inherently strong and that it can weather this storm if reasonable accommodations take place within a reasonable time. Unfortunately, at least to the best of my knowledge, no producer is standing in the wings ready to feed answers to the contestants. Congress will have to come up with them on its own and - just like on live TV - everyone’s watching.

I don’t watch very much TV but I happened upon CNN’s mid-day market coverage one day last week. This will not be news to regular viewers but I was nearly overwhelmed by the amount of information being offered. In addition to a series of stories in the main window, there were four sets of market quotations crawling across the screen, two at the top and two at the bottom. On the right side, there was more detailed information about specific companies, brief stories from other reporters and a calendar of future market-related events. Below that was a repeating cycle of promotional messages for upcoming CNN programs, usually including video. Finally, the reporting in the main window was periodically replaced with a suggested stock trade. From my perspective, the only good news was that the sound was off in the restaurant so I didn’t have to try to listen at the same time.

As I watched, I tried to understand the appeal of what was being presented. How could a viewer possibly expect to assimilate and filter this barrage of information, let alone do so quickly enough to make a timely financial decision? Even if an investor could accomplish both tasks, how could the information be used to get ahead of the crowd, which seems like the most obvious reason for wanting it? Of course it’s illegal to trade on true “inside” information but I can see that would probably be an effective strategy if such data were available. My question for CNN watchers: If you are one of hundreds of thousands of viewers, how unique is this information likely to be? I.e., if everyone else gets the same news at the same time, how can you hope to profit from it?

Most people I speak with understand the intrinsic value of seeking their own path instead of following the crowd but I’d like to share a story from investment advisor Don Hays. He was addressing a group of investors and asked those who considered themselves contrarians to raise their hands - almost everyone did. Of course, by definition the majority can’t be contrarian. When it comes time to make investment decisions, most individuals act more or less in concert with the rest of the group. Their best intentions aside, people apparently find comfort in being part of the crowd.

Beyond looking to information sources such as CNN, some of those making their own investment decisions belong to the American Association of Individual Investors. This is a national organization which provides a template for forming and operating investment clubs. These clubs allow individuals to gather with friends in a safe and structured setting to learn more about investing. The AAII polls its 150,000 members weekly regarding their level of optimism about the stock market and compiles their responses into a Bullish/Bearish sentiment report which is updated every Friday. This report is one of the primary data points I consider when making strategic investment decisions for my clients. I pay attention because the sentiment of this group has been a nearly perfect contra-indicator of upcoming market actions. For whatever reason, it seems that investors operating in groups tend to make poor decisions.

According to news headlines, investors have poured nearly a trillion dollars into bond mutual funds since the beginning of 2008 while withdrawing about $400 billion from stock funds. Presumably this has happened because people who were not prepared for the market correction wanted to move to the seemingly safer haven of bonds. Of course, this rush of new money pushed bond prices up so early investors profited from the shift. When the tide turns, those who have most recently invested will have the most to lose and, if history is any guide, will be among the last to sell. These crowd-followers are all but guaranteed a loss when interest rates rise again.

This scenario has been replayed time and time again. Those timid souls who remain out of the market until confidence is high and there appears to be no remaining risk are the very ones who always seem to pay the price when the market turns, as it inevitably does. We live in a risky world but most risks can be managed in one way or another. Unfortunately, following the crowd has rarely proved to be an effective way to do so, especially related to investment strategy.

As Groucho, the Marx in today’s title, famously said: ” I don’t care to belong to any club that will have me as a member”. Investors may want to consider his stance regarding the value of following the crowd and think about taking independent action instead.

Having recently qualified for Medicare, it occurs to me that I’ve been doing business with one bank or another for over sixty years. This began when my parents opened a savings account in my name to hold gifts I received for various occasions. Later, I deposited the earnings from my paper route and other part-time jobs into it. Savings accounts were obviously safe - you couldn’t miss the thickness of the vault doors - and also paid interest, a fascinating concept to an unsophisticated youngster.

As we are reminded every year while watching It’s a Wonderful Life, banks never have as much in the vault as their customers have on deposit since it’s loaned out to individuals and businesses. Banks do, of course, have some money on hand, as is required by their own operating principles and various regulators. But, as the market crash of 2008 proved, it’s quite possible for banks to lend too aggressively and find themselves short at just the wrong time. Various government agencies stepped in and supported some banks, forced others to merge with stronger institutions and allowed some to simply fail. Since we’ve now learned that the thickness of the vault door isn’t really a reliable indicator of a bank’s strength, where can we turn for the answer?

One place is Moody’s Corporation, a company which has been in the business of providing ratings for the bonds of a wide range of corporations, municipalities and national governments since 1909. It was founded by John Moody and was owned by Dun & Bradstreet for about forty years before being spun off to the public in 2000. It and two competitors, Standard & Poors and Fitch Group, cover just about every significant borrower in the world.

All utilize an enviable business model - most of their customers pay to get their ratings. Of course, all three assert that these payments are not a source of influence and that the ratings would be the same regardless of how the companies were compensated. Yet one has to wonder how this model affected the Aaa rating provided for what’s now known as “toxic debt”, those bonds which imploded to bring about the ’08 market crash. Warren Buffett’s Berkshire Hathaway owns more than ten percent of Moody’s. Perhaps not surprisingly, he defends their position that such ratings are simply opinions and in no way guarantee appropriateness in any specific situation.

These companies have long provided ratings for governments, including ours. Perhaps in partial penance for so seriously understating the risk associated with 2008′s Collateralized Debt Obligations, all three have been more aggressive recently regarding sovereign debt. Last August, Moody’s lowered the US government’s rating from Aaa (the highest of their twenty-one levels) to Aa (the next highest). Moody’s cited Congress’ inability to work out a budget compromise as the reason for the downgrade. Although you might think that such a public reduction in confidence would lead investors to sell, just the opposite happened. Investors were not frightened off by the change and there has been no shortage of buyers for US bonds.

As everyone knows, having more buyers than sellers pushes prices up and, as we’ve discussed, that pushes rates down. As I write this note, the return on a ten-year US Treasury bond is 1.40% and projected inflation is about twice that. Someone investing today will be losing money after allowing for inflation. As low as current rates are, they’ve been even lower a couple of times, briefly dropping below zero during the Great Depression and a few times during our current crisis. To be clear, that means that investors sometimes pay the government to keep their money instead of earning interest on it. Why would someone do that, in fact, why would billions of dollars be invested in the bonds of a country whose creditworthiness has been downgraded? The answer is that for all our apparent faults, global investors consider our dollar one of the safest currencies and our government one of the safest bond issuers in the world.

Recent headlines about European economies have made investors nervous and a two tier bond market has developed. Europe’s most solid economy, Germany, pays even less to borrow money for ten years than the US - just 1.26%, while troubled Spain now has to pay 7.44%. Why is this so? Well, individuals who own Spanish bonds are selling and few new buyers are stepping forward in spite of the seemingly attractive yields being offered.

To understand why, reflect on the plight of someone who has a savings account at a Spanish bank. That person has to consider the possibility that Spain might separate from the European Union, meaning later withdrawals might come in Pesetas instead of Euros. Should that happen, the depositor would certainly lose money, likely 25% or more. Compared to that, earning any interest seems like a good deal so withdrawals have been significant. This flight of capital has weakened Spanish banks to the point that intervention may be required. However, the stress this would put on the Spanish government has raised doubts as to whether bond owners could expect to receive full value for their investment. Many investors have simply chosen to sell rather than wait to find out; obviously they prefer German and US bonds.

Since German banks are huge holders of Spanish government bonds, I suspect that, political rhetoric notwithstanding, some sort of Euro-denominated, European Union-issued bonds will eventually be required to restore investor confidence. However stability is achieved, investors will eventually begin searching for yield again and we’ll see a reversal in bond prices. I’ve written before that an unprecedented amount of money has been flowing into bond funds as falling rates have provided unusually high returns. All that money has continued to drive rates down and here’s a chart showing the yield of the thirty-year Treasury since 1919:

When investor confidence does return, it’s pretty easy to see which way rates will go and prices will do the opposite. Although I’d prefer not to expose my clients to today’s stock market volatility, I’m much more concerned about exposing them to nearly certain losses when rates do move.

If you happen to be gazing at a magnificent cathedral just as a mason walks by, you might be tempted to ask how one goes about building something so overwhelming. The answer is likely to be the title of today’s article. Experience shows that even a task which is almost too large to be comprehended can be completed if it’s broken down into smaller steps which can be dealt with one at a time.

There are actually a couple of ways this insight applies to Warren Ward Associates’ work in helping people plan for the rest of their lives. A classic financial plan covers five basic areas: investments, taxes, insurance, retirement planning and estate planning. However, we sometimes do much more, including helping purchase homes and cars, recommend physicians and tax preparers and even stand with clients when a loved one dies. Although it might be beneficial to meet a financial planner at an early age, most of the time people call us when a significant life change is about to occur (or already has).

Of course, the better we know someone, the better our advice is likely to be, meaning we prefer to review copies of quite a few different documents. For years, we didn’t begin the planning process until we had everything we thought we’d eventually need. We’ve now learned that we can gather the necessary information step by step nearly as efficiently. We begin with the issue which calls for the most immediate attention, then expand the scope of our work until we have provided guidance in all the areas which the planning process has identified as being important.

I’ve reviewed many different financial plans in my twenty-plus years as an advisor but, as far as I’m aware, ours is unique. Over that period, computing power has allowed us to transition from a legal pad and adding machine tape through spreadsheets to dedicated web-based planning software. The data we gather from our clients is entered into various fields in the software. Then, based on the client’s tolerance for risk and our assumptions regarding inflation, rates of return for various investment classes and lifespan, charts and graphs are produced. These illustrate various scenarios and allow us to show people what they might expect in an easy to understand format.

Although these reports are quite detailed, our approach is not unusual. In fact, something similar is available at little or no cost from discount brokerage companies and even on advertising supported websites. It’s the second part of our plan that seems to be unique. While most others consist of page-after-page of boilerplate language (also seen in those Revocable Living Trusts offered by out of town attorneys), our printout is accompanied by a letter to the client. It generally runs several pages in length and covers the various topics we’ve reviewed, pointing out any potential problems I foresee and suggesting actions that clients can take to improve their outcome.

Just as I have learned that people aren’t always able to pull together all the documents we’d prefer initially, I’ve also learned that people don’t necessarily get all the way through my list. Knowing they may not have time to accomplish more than one or two tasks, I’m careful to organize them in order of importance. If I have done a good job of triage, people often resolve the first couple, then find themselves comfortable enough to not act on the others. This approach has worked well for over ten years now. However, I was surprised a few weeks ago when a newly retired couple approached me with some thoughtful questions about their living trust which had been put in place several years earlier. As I thought about my response, I realized that it was the last item on my list. I believe this was the first time in my professional life that a client had methodically gone through all of my recommendations and dealt with each of them. Time will tell if this improves their lives in retirement but it does prove it can be done.

A good friend gave me a CD by Joe Crookston, a musician who performs in Columbus from time to time. One of the songs on it describes how dealing with life’s problems one at a time usually works better than worrying about all of them at once. Its title? Stone by Stone. I was tempted to buy a copy for that couple but I think it’s safe to say they already understand the concept.