Investment Help

If you are seeking investment help, look at the video here on my services. If you are seeking a different approach to managing your assets, you have landed at the right spot. I am a fee-only advisor registered in the State of Maryland, charge less than half the going rate for investment management, and seek to teach individuals how to manage their own assets using low-cost indexed exchange traded funds. Please call or email me if interested in further details. My website is at If you are new to investing, take a look at the "DIY Investor Newbie" posts here by typing "newbie" in the search box above to the left. These take you through the basics of what you need to know in getting started on doing your own investing.

Monday, May 25, 2015

Cheap Trick

No, this isn't about the 70's rock band (still apparently going strong). It is about a financial services industry cheap trick.

The lady was from Texas and called with a bit of concern in her voice. She was selling land that had been in the family for a long time and was getting approximately $13 million. In hand she had a proposal to manage the $13 million and was seeking a second opinion.

The proposal wasn't from an asset manager but actually from an advisor who finds asset managers. In other words, an asset gatherer. He was from a large network of advisors who gather assets. He is a middleman. In other words if you were selling or buying a house you can go directly to a realtor or you can go to an advisor who would recommend a realtor. If people fall for it the industry would put on as many layers as they could get away with!

The cheap trick, in my opinion (you can make up your own mind), comes in the fee proposal:

As you look at this fee proposal recall one of the well known tricks discovered by behavioral finance researchers. It goes like this: if you want someone to donate $1 first ask for $2. Then, after a pause,  when you say you have a lower level of participation ($1) you are likely to get it.

Here when the client is shown the big discount it looks like they are getting a good deal with the much lower proposed fee. What needs to be asked is how many clients this advisor has paying the "Standard Fee". I would be willing to bet he has nobody paying 2.90% and 2.70% etc.

At 0.98% of $13 million the fee for 12 months would amount to $127,000 FOR THE FIRST YEAR!
The next question to put to the advisor would be who gets what? My guess would be that the investment managers would get approximately 0.60% and the advisor/asset gatherer would get a cool 0.38%.

The rest of the proposal is just as laughable (or sad depending on how you are looking at it). The asset allocation is based on an 8 question allocation questionnaire. The end result is 2 asset categories specified to 2 decimal places. To the uninitiated it looks very scientific.

But none of the questions asks about her goal for the funds. In a short conversation with me she indicated intended a chunk of the funds was earmarked to go to heirs. Did the advisor explain to her that her heirs have a considerably longer investment horizon and therefore assets intended for them should be invested in other than municipal bonds (especially given the 0.98% investment fee)!

Friday, May 22, 2015

Look Who's Indexing - Scott Adams

Scott Adams, the creator of "Dilbert," has made a career out of exposing incompetence.  His laugh-out-loud cartoon series makes fun of the business world in a way that is highly recognizable by anyone who has spent any time in an office environment.

Similarly he has strong words to say about active investment management and touts the passive management approach.

Here is his response (from the Wall Street Journal) to whom he would recommend active investment management:  Scott Adams:  It's a Perfect Strategy for My Enemies.

Monday, May 11, 2015

Look Who's Indexing - Greg Mankiw

Greg Mankiw teaching
I've decided to start a list of well-known people who index.  The obvious impetus is to show readers they are far from alone in choosing to index their nest egg investments.

Who is Greg Mankiw (pronounced "man q")?  He is head of the economics department at Harvard University, former head of the Council of Economic Advisors to president George W. Bush, and author of the best-selling economics text books used in introductory economics classes in the U.S.  He is also author of the popular Greg Mankiw's Blog.

Incidently, those interested in an introductory economics text would enjoy Mankiw's texts; BUT, unless you are made of money, I would recommend buying an older edition.  The latest edition which is required at many colleges is pricey and the texts typically don't change a whole lot in moving to the latest edition.  There are a number of inexpensive listings on eBay--just be sure to get a "Principles" text.  Mankiw also writes some advanced texts for use in graduate courses.

Sunday, May 10, 2015

Average Joe on the Path to Retirement

According to Census Bureau data, the real median income of a household 10 years ago was $65,000.  This is where we 'll start our average Joe. Today, Joe's household income, adjusted for inflation, again from median Census Bureau data, is approximately $67,141.

The following simple exercise shows how Joe has done on the path to retirement if he followed some basic guidelines.

Tables from the book Your Money Ratios by Charles Farrell show that a 40-year-old on track to achieve an 80% income replacement at age 65 should have a nest egg of 2.4 times his income.  In average Joe's case, this amounted to 2.4 * $65,000 = $156,000.  This is what his nest egg should have been 10 years ago.

Farrell's tables also show that Joe should have been saving roughly 12% of income or $7,800/year (.12 * $65,000).  In case you're interested, Farrell also says that Joe's mortgage should have been 1.8 * $65,000  = $117,000 and his household education debt should have been zero.  Given these stipulations, at 40 years old, Joe would have been on a path for a successful retirement.

But how is Joe doing today at 50 years old given market performance over the past 10 years?  Most studies show that the average investor underperforms the market by a significant amount.  This is because the average investor jumps in aggressively when prices are high and panics when prices are low.  For our purpose, we'll assume that average Joe isn't like the average investor.  Instead we'll assume Joe invests in low-cost, well-diversified index funds.

For our performance data, we will use the chart produced by BlackRock.  The chart shows annual performance for a diversified portfolio comprised basically of 65% stocks and 35% bonds.  This is the portfolio whose performance we update each quarter.

For the purpose of the analysis, I used $7,800 as the amount Joe saved each year.  This amount would ratchet up according to plan because Joe's salary increased but also because Farrell suggests the saving rate be ramped up to 15% at age 45. I  kept it simplistic at $7,800/year.

Joe's goal, as given by Farrell's tables, is to have 5.2 * $67,141 = $349,133 to be on plan at age 50.  The following table shows the year-by-year results:

Start of Year
Amount  in Nest  Egg
Diversified Portfolio Performance
Annual Saving
-23.0% *
+20% *

The results in the table were obtained using a bankrate calculator.  I used the calculator to calculate year-by-year returns assuming Joe contributed $300/week to a qualified, 401(k) type plan.  The calculator doesn't handle negative investment performance or returns exceeding 20%.  For those years, I used rough estimates to calculate by hand.  The performance numbers came from the aforementioned BlackRock chart obtainable from the link above.

The diversified portfolio is weighted as follows:  35% Barclay's Aggregate bond index, 10% MSCI EAFE index, 10% Russell 2000 index, 22.5% Russell 1000 growth index, 22.5% Russell 1000 value index.

The bottom line is that Joe is not doing badly, with a portfolio above target by approximately $73,000. In fact, Joe would have probably done better because most 40-year-olds would be more aggressively invested than with a 65% stocks/35% bonds portfolio.

Disclaimer:  info here is for educational purposes only.  Individuals should consult a professional and do their own research before making financial decisions.

Tuesday, April 28, 2015

Your Investment Horizon Should Probably be Longer Than You Think and What it Means

The biggest obstacle to people investing in stocks is, understandably, the fear of losing money.  But the possibility is reduced the longer the investment horizon.

In my conversations with new clients, I find that most people think of their investment horizon as the time to when they plan on retiring.  Thus, a 50-year-old is thinking in terms of needing a nest egg in 15 years.  Which is, of course, the case; BUT he or she will need the nest egg to last not 15 years but another 30 years, potentially, past that.  Thus, most investors need growth for much longer than they typically think.

This is just considering the "I want to die broke" crowd.  Others have an explicit goal of leaving assets to their heirs.  Their horizon automatically extends a bit to account for younger heirs.

The good news along these lines is that risk, defined as the potential for a portfolio loss, is reduced the longer the investment horizon.  This is typically presented via a chart like this:

Source: Dana Anspach/ Money Over 55

Simply stated, the chart shows that holding stocks, which are most volatile as a sector over the short term, is actually quite safe the longer the investment horizon. The chart shows that, over the period examined, rolling returns for both the 15-year and 20-year periods were always positive as shown by the positive performance of their worst periods!

The significance of this is that the investment horizon is a key input in figuring out the percentage to invest in stocks. 

Behavioral finance tells us that our brains aren't really adept at thinking longer term; but, in this instance, we should remind ourselves of the data when setting up our investment strategy.  The ability to withstand short-term ups and downs of a roller coaster market pays off for those thinking in terms of a longer horizon.

Friday, April 10, 2015

How to Boost a Target Date Return

Paul Merriman of MarketWatch has written an interesting article,

How to double your target-date retirement fund's return in a single move

that is worth reading and considering by target fund investors, especially younger investors, many of whom have been opted into target date type funds.

The gist of the article is straightforward:  put the bulk of your automatic 401(k) contribution into a target date fund, but also put a percentage in a small-cap fund. 

Why small-cap funds?  Although small-cap funds are volatile (will remind you of Jack Nicholson going beserk at various times!), they make up for it with exceptional long-term performance.

A couple of important points:  you need to be able to handle the volatility.  The article doesn't really spell out the asset allocation over time for Jessica, the fictional investor; but it would have been interesting to see where she stood on 1/1/2008 with a "free falling Tom Petty," off-the-cliff experience immediately ahead.  In 2008, stocks fell 37% and then in early 2009 dropped another 50%!

Sadly, the best laid plans many times are trashed in the real world of investing.  It is hard for most people to see something they have built up over a number of years crumble in front of their eyes.

Also, keep in mind the long term covered by the study.  A quick glance at the 

BlackRock sector returns 

(see page 2) for the past 20 years shows that Large Cap Core achieved an average annualized return of 10.5% versus 9.6% for Small Cap.  Standard deviation was 15% for the former compared to 19.6% for the latter!  Thus, you would have slept better and been ahead using Large Cap.

By the way, if you can only stand to read one person in the investment arena,  

Paul Merriman 

would be an excellent choice.  He stands out even among all the other excellent "Retirement" writers at MarketWatch.

Wednesday, April 1, 2015

Update: 1st Quarter Performance of BlackRock Diversified Portfolio

Regular readers know my favorite investment chart is the BlackRock 20-year sector performance.  It details the relative performance ranking of asset classes on an annual basis as well as the performance of an easily replicated low-cost diversified portfolio comprised basically of 65% stocks, 35% bonds.  The diversified portfolio returned 8.7% on an average annualized basis over the 20-years ended 12/31/20114.

The diversified portfolio allocation is an appropriate benchmark for many individuals in their 40s and even early 50s, depending on their specific risk tolerance.  The chart contains sufficient data, however, to construct a benchmark and analyze performance for any specific allocation; and, in fact, the allocation can be changed over time using the data in the table--as it should be as an individual ages.

Voluminous data from unbiased academic studies have been presented over the years showing that a diversified portfolio of low-cost funds outperforms upwards of 70% of active managers over the longer term, after all costs are taken into account.  These studies cover various time periods, countries, asset classes, and investment methodologies.  In line with this data, the low-cost diversified approach warrants consideration as a benchmark for investors.  It shouldn't go unnoticed that the approach economizes on the investor's time.

Below is an update showing the approximate performance of the diversified portfolio's sectors for the 3 months ended 3/31/2015.  Overall, the portfolio returned approximately 2.17%.

For the quarter, sector performance was mixed with the international (EFA) doing best and large and mid-sized value (IWD) lagging. The bond market (AGG) achieved a positive return as yields dropped over the 3 months.

Weight (%)
Return (%) 3 months ended 3/31/2015
AGG (Barclay’s Aggregate Bond Index)
EFA (EAFE Index)
IWM (Russell 2000)
IWF (Russell 1000 Growth)
IWD (Russell 1000 Value)

Disclosure:  This post is intended for educational purposes only.  Past performance is not indicative of future performance.  Individuals should consult a professional or do their own research before making investment decisions.