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, August 22, 2016

A Proposal - Step 2

The purpose of this proposal is to suggest an investment approach to get people on the right path for retirement. As pointed out in the last post we are now responsible for our own retirement. Unfortunately many people shy away from investing even when they have access to good 401(k)s simply because they don't know how to manage money or the basics of investing. Sadly, real world knowledge such as this isn't typically taught in school.

As pointed out in the last post, investing, if taught at all, is  presented as an exercise in analyzing individual stocks and picking stocks to trade. This plays into the hands of Wall Street but is not helpful for the long term investor looking at a 401(k) facing a multitude of mutual Funds or ETFs to invest in on an ongoing basis.

So, Step 1 was straightforward - seek the so-called "retirement date Fund" to start with. Go with a retirement date fund until your assets build to a level where it could make sense to use individual Funds. So for example, if your expected retirement date is 2040 (this isn't something to get hung up on, just pick a date where you are near your mid 60s in age) and you are employed by the government and therefore participate in the Thrift Savings Plan (TSP) select their "Lifecycle Fund" L2040. If Fidelity is your 401(k) provider choose their Freedom 2040 Freedom Fund with the ticker symbol FFFFX. If Schwab is your plan provider pick the Schwab target Fund with the ticker symbol SWERX.

If you can't find the Fund in your 401(k) corresponding to a retirement date Fund ask your human resources department where it is and how you sign up for it.

Once you have picked a Fund allocate at least 10% of your gross income to the Fund and the contribution will be made out of every paycheck and allocated in an appropriate manner. Finally, forget about it. Spend your time building your job skills, having fun with your family and doing other important stuff.

You could go with this throughout your work career. I suggest however that once your account nears 6 figures you think about investing in individual Funds. This is step 2. Typically you'll go with step 2 for at least a couple of decades and by investing in individual Funds you'll lower the cost. It may not seem like a lot but over a number of years the cost savings can be meaningful.

To begin with just focus on index funds. These funds match a particular part of the market. They are not actively traded in an effort to beat the market. Research shows that trying to beat the market is a futile effort. Upwards of 80% of managers who try to beat the market over the long term fail.

Secondly, decide on an asset allocation. There are a number of ways to do this and the critical steps are to consider your investment horizon, your goals, and your tolerance for volatility. At this point you have some experience under your belt and realize that the market can be pretty volatile over the short run but that sticking with an investment approach as you did with the target date Fund pays off.
In terms of investment horizon age is most important. If, for example, you are 40 years old then your nest egg funds won't start to be drawn down for 25 years and will be drawn down for a number of years after that. This suggests a fairly decent percentage invested in stocks with a realization again that the greater the stock exposure the greater the volatility.

So, just as an example, a forty year old could consider a 70% stock/30% bond allocation as a baseline. If a goal is to leave assets to heirs or take a shot at retiring early the percentage in stocks could be raised. On the other hand if the goal is to be absolutely sure of retirement in your early 60s you could lower the percentage in stocks.

Thinking through goals and desired lifestyles are important. Always keep in mind that the more you save today the more choices you will have down the road. The more you save the more your future self will appreciate your today self!

The next post will give a bit more detail on Step 2 and lead into the final step.

Monday, August 15, 2016

A Proposal

Here is the dilemma: we are responsible for our own retirement but no one has taught us how to build a nest egg. Thus, we are at the mercy of the financial services industry which gladly provides the service and in the process takes a huge chunk of our nest egg and produces poor performance.
Not surprisingly many people avoid the responsibility of planning for their retirement until it is too late. In many instances people even pass up the opportunity for the 401(k) company match because they just don't know what to do. In other instances they wade into the company 401(k) and see a bewildering choice of Funds and subsequently back off bewildered.

If the subject of investing is taught at all in school it is taught by those who know little of the subject. They typically will use materials provided by the financial services industry and look at investing as a stock picking exercise. They will present a basic method of valuation based on P/E ratios etc. and encouraged to research stocks and trade the stocks. Many times this presented as a game. This of course is what the industry wants. If the industry could turn of us into day traders it would be exactly what they want.

So here is a proposed approach to teaching investing for retirement. I suggest it be presented by human resources departments when young people start their career or whenever they have the opportunity to participate in a 401(k) type vehicle. The approach  isn't set in concrete for every single investor. If you think you're the next Warren Buffett and believe you are a great stock picker then go for it. If you want to trade your 401(k) aggressively to try to hit a homerun go for it. If you want to snub your nose at diversification principles go for it. Just understand that instead of hitting the ball in the upper deck you are more likely to strike out.

If instead you take Aesop's advice and go the route of the tortoise as presented here and are patient  the odds are high that you will achieve the retirement dreams you seek.

Again this is a simple approach for most nest egg builders.

Begin by looking at your company 401(k) for  so-called "retirement date funds" or "life cycle funds".  They typically have a year attached to their name - this is the year of expected retirement. For example, a retirement date Fund might be named "Fund 2035". This would be for employees expected to retire in approximately 20 years. This would be you for example if you are in your mid 40s.

In fact, many 401(k)s automatically opt in new employees and the Fund they go into is the appropriate retirement date fund.

Check the retirement date fund's expense ratio. This expense is charged every year. It shouldn't be more than .3%. So, find the Fund that is closest to when you expect to retire and put 100% of your 401(k) contributions into it. You should save at least 10% of your gross income into your 401(k). More would be better. The more you save now the more choices you have down the road.

So with that simple step you're on the right path. By selecting a retirement date/life cycle type fund your asset allocation is handled for you. This basically is the percentage invested in stocks,bonds, international stocks etc. Your job now is to go to work on your career, get promoted build your human capital and even enjoy your family. Your investments are on auto pilot and doing their thing.

FAQ 1: What if the market drops and my account goes down?
    First off you shouldn't be watching it that closely because you are working on getting promoted, enjoying your family etc. But still know this: a falling market is good because it enables you to buy more shares of the target date fund out of each paycheck. Always remember this: what you care about is where the market is years from now when you retire.

FAQ 2: What if I can't save at least 10%.
     Make adjustments. Take another job, hold back on vacation expenses, buy a lesser car etc.Do what you have to do. The 10% is for your future self! Think about this: if you can't do at least 10% then it is likely you will be a burden to your kids when they are in their prime years of trying to build a family.

The next post will go step 2 on the transition to the next step once your 401(k) gets sizable.

Tuesday, August 9, 2016

Comparing Apples to Oranges

A well known dismissal of an argument is the claim that one is comparing "apples to oranges". I came across this a couple of weeks ago in an article that claimed comparing dividend paying stocks to bonds is an "apples to oranges" comparison. Unfortunately I didn't write down the article so can't quote it directly.
As a past long time Economics instructor I am always amused when I see this "apples to oranges" phrase invoked. As it happens most Economics instructors compare apples to oranges in their microeconomics class when teaching the concept of substitute goods.

Simply, one can imagine the housewife or househusband pushing the grocery cart and noticing that the price of apples has risen and the price of oranges has fallen. What will they do? How will this affect demand and hence price?

The implication for dividend stocks and bonds is straightforward. At the margin, investors view the 10 year Treasury and dividend stocks as substitute goods in the world of needing to generate an income stream. Drive up the yield on dividend stocks and drive down the yield on the 10 year Treasury note and what do you think investors will throw into their shopping cart? What do you think will happen to prices.

It interests me considerably that so many market gurus have totally missed this market. As cited in Barron's this past weekend, Gundlach, head of DoubleLine Capital and the new "bond king" said "sell everything", Druckenmiller, Soros, and even Carl Icahn have been seriously negative on stocks. After the brexit vote the market was supposed to fall off a cliff. And yet it didn't, instead it set new record highs.

Now I'm not claiming I know where the market is headed but the fact is that to this point these great investors have missed a sharp upturn and one has to question what they are missing.

Maybe the apples to oranges comparison above has something to do with it, especially when on a daily basis we have thousands of baby boomers turning 65 and struggling to produce an income stream, as noted above.

Other thoughts have also crossed my mind as I listen to some prominent strategists. leading the biggest investment banks in the country present the bearish argument on CNBC. Their wailing and gnashing of teeth over China slowing, anemic corporate profits, and even the economy failing to respond to an aggressive Federal Reserve are well known.

But what if we step back a few years and I presented you with the proverbial crystal ball which showed a scenario with oil prices below $50.barrel, a 0.5% federal funds rate, a 10 year Treasury note yield of  1.5%, an unemployment rate below 5%, and inflation below the Fed's target? What if the crystal ball also showed that the U.S. economy was the best in the world and that the investment climate in most of the rest of the world was scary.

Some people foreseeing this in the crystal ball would have said sell everything that isn't tied down and put it into the market. Yet this has been the scenario we have seen unfold and again the best minds in the market have totally missed it to this point.

To me Bogle's observation that he has never known anyone or known anyone who has known anyone who can predict the market is apt here.

Tuesday, June 21, 2016

Some Great Free Sources for Market Information

This morning I had work to do on a piece I was writing plus I  wanted to follow Draghi's 9 am (EST) speech to the European Parliament on Brexit - Britain's decision to go or stay with respect to the European Union. Brexit of course is the most important event currently impacting global markets and has the potential, according to experts, to significantly roil markets, depending on the outcome of the vote.

So, how to follow events and work on the computer at the same time?  The resource I use most often  is Bloomberg TV available at I like the fact that there is no sign up and it can be brought up fast.  And it is free!

Try it - I think you will like it. If you want to follow markets at the same time as you listen to Bloomberg TV you might want to reduce Bloomberg so you can still listen  (I'm listening to Draghi as I type this) and bring up the futures page on MarketWatch For those interested this can reveal market impacts of events in real time.

I will bring these resources up again later today as I follow Yellen's Congressional testimony. I hope you find these resources as useful as I do.

Tuesday, May 3, 2016

Research on 60/40 Portfolio

Two points:  we are wired to think short term, and investment research is typically too abstract and/or complicated to make basic points to the average investor.

Here is a nice succinct piece that shows results for a portofolio going back to 1926 comprised of 60% stocks/40% bonds (as represented by the 10-year Treasury):

 What Can a 60/40 Portfolio Deliver?
 by The Investment Scientist Michael Zhuang.

The results show the hugely important bottom line that the worst 10-year period was +1.8%/year.  Think about this:  if you are 75 years old or less, you probably have an investment horizon that is at least 10 years long.  Most people, of course, have a considerably longer horizon and absolutely need portfolio growth!

Thursday, April 14, 2016

My 2 Cents on Active versus Passive and Tony Robbin's "Money"

I'm working my way through Money, Master The Game by self-help guru and motivator supreme Tony Robbins.

One claim he continually makes is that passive management, using low-cost indexes, beats active managers who try to time the market and/or pick stocks, 96% of the time.

I think most people would agree that Tony Robbins is an exaggerator of the highest degree; and this, in my opinion, is an example of it.

Interestingly, there is no definitive percentage of active management underperformance.  When people throw out a number, they are basically referring to an average of numerous studies using various approaches.  Whether active managers can beat the market has been studied by academics, i.e. non-partisan researchers, for various time periods, various asset classes, and even for different countries.

My belief, from studying the results, is that passive wins 70% to 80% of the time over longer periods after all costs are taken into account.  If this is closer to the truth, then there are a fairly large number of managers and individuals beating the market by actively investing.  For every 1,000 investors in this category, 200 to 300 fall in this special group.

But, still the odds obviously favor the passive approach for most investors who are saving for their retirement.

I break it down to simple terms when I explain this to people trying to get to a successful retirement.  I say the active versus passive decision is like trying to draw a blue ball out of an urn that contains 200 to 300 blue balls and 700 to 800 red balls. Is this what most investors want to attempt when it comes to their nest egg?

Another point to understand, that Tony Robbins I think misses, is that many people who have underperformed just don't know it and actually believe they are doing well.  Consider that a simple 65% stocks/35% bonds portfolio more than quadrupled over the past 20 years.  For someone whose manager has tripled their assets over this period, he/she will likely feel they have done well.  In other words, they are clueless how much their manager has taken in fees and/or underperformed!  Probably they will go around touting their manager as a superior investment manager!

Keep in mind that there are always people who break the rules and win big.  In one of my favorite books, Rocket Boys, the memoir by Homer Hickam, the mother put every last cent in Johnson & Johnson stock because she saw all the kids in the neighborhood constantly needing bandaids etc. for their recurring scrapes.  She undoubtedly would look befuddled at the mention of diversification.  But her one stock approach bought her a nice place in Myrtle Beach!
A final point made in this ongoing debate is on the failure of superior performance to persist.  This means that picking the 200 to 300 market beaters over the last 10 years is futile.  What is generally missed, however, is that some percentage of the underperformers from the first 10 years will outperform by such an extent over the next 10 years that they will be superior performers over the 20 years!  Like zombies they come back!

Other than the irksome (to me) percentage, Tony Robbin's book is interesting albeit way too long and too much of a pump-it-up infomercial for my tastes.

Monday, March 21, 2016

How Active Managers Sucker Naive Investors In

Here is another article at MarketWatch that naive investors should throw in the trash:

 Why buy-and-hold is a bad idea for retirees by Ken Moraif.

Two points first:  MarketWatch is one of my favorite sites because most articles are informative, timely, and well-written.  Secondly, this straw-man type of bashing of "buy and hold" is quite popular and used to charge egregious fees in my opinion.

Why should the article be trashed?  I suggest you read the article first and see if you can figure it out.  If you can't, then you need help in the investment world because you are set up for the manager who wants 1% to 2% of your assets annually and is likely to underperform.  You need to do some research or get some guidance on the hit your nest egg takes over a longer period of time as you contribute to the average underperforming active manager's coffers (see:  article on recent SPIVA scorecard.)

Now to the article.  The author presents an example which shows the retiree who put all of his or her money in stocks in 2000:

So in 2000, your first year of retirement, you took out $40,000, but, oops, the market went down 10%, and you lost $100,000. You were left with $860,000. Then the market dropped 13% in 2001, gobbling almost $112,000 of your investments, plus you took out $41,200* to live on. Your investments fell to $700,000.

After 3 years he claims:

You lost half your nest egg in three years.

Now let's take a deep breath and step back a minute and ask the very basic question of who would put their nest egg 100% in stocks.  Maybe the author's firm recommends retirees put 100% in stocks, but I know of no others that do.

To be clear on the difference, let's take a look at his returns versus more reasonable numbers.  He says the market was down -10%, -13% and -23% in 2000, 2001, and 2002.  What was the performance of a buy-and-hold investor for these years using a 65% stocks/35% bonds basic, reasonable buy-and-hold allocation? Using the BlackRock Asset Class Returns chart, you can see they were -1.1%, -4.8%, and -9.8% for 2000, 2001, and 2002 respectively.  A huge difference!

The discerning reader may have also noticed that the author assumes 3% inflation for the withdrawal schedule.  He could have an interesting conversation with Fed Chairperson Janet Yellen who has been trying to reach the Fed's goal of 2%.

The bottom line is that the author has used wholly unrealistic assumptions to reach his conclusions--which could negatively impact the undiscerning reader. 

What if I was to flip this around and seek to create a straw-man type of argument in the other direction and ask how active investors fared who put their entire nest egg in Pershing Square (the firm managed by former active hedge fund manager Bill Ackman).  That story by Brett Arends is here:  Bill Ackman's stock drops.