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.

Tuesday, August 19, 2014

Should You Rollover Your TSP?

Federal employees question whether they should rollover their Thrift Savings Plan (TSP) to an IRA at retirement.  Ask a financial advisor, and most will answer in the affirmative.  They want to get their hands on the money to manage.

The TSP is widely regarded as one of the best, if not the best, 401(k)-type vehicle in the retirement system arena.  It has a small number of very low-cost Funds that track the basic parts of the market and offer, as well, several target date funds that allocate assets for the participant.

The big question in my mind is why pension plans across the country don't model themselves after the TSP.

Anyway, here is a must-read article for any TSP participant dealing with the rollover question:

As brokers urge IRA rollovers, ex-workers ditch their low-fee federal retirement plan 

from this past Sunday's Business Section of The Washington Post.

Readers will find the comments to the piece interesting as well.

Monday, August 18, 2014

Portfolio Mechanics

Many times, when reading financial help books, I come across a recommended portfolio and wonder if readers know how to actually implement the portfolio.  There used to be (and may still be) a popular book series called "the Missing Manual" in the computer help area. To me, there seems to be a "Missing Manual" issue here.

For example, I recently read a review of the book by Spencer Sherman, The Cure for Money Madness, on The Simple Dollar site.

Here is Sherman's recommended portfolio:

25% bonds (VBMFX)
12% U.S. large cap stocks (VFINX)
12% U.S. large value stocks (VUVLX)
6% U.S. small cap stocks (NAESX)
6% U.S. small value stocks (VISVX)
7% international large value stocks (VTRIX)
3.5% international small cap stocks (VINEX)
3.5% international value stocks (VWIGX)
2% emerging markets large cap stocks (VEIEX)
2% emerging markets small cap stocks (VEIEX)
2% emerging markets value stocks (VEIEX)
11.5% U.S. real estate (VGSIX)
3% international real estate (VHGEX)
4.5% commodities (VAW)

  • this portfolio is, IMHO, way too complex - a lot of the Funds could easily be combined using broad market Funds
  • no single asset allocation is right for all investors 
  • some readers will be able to execute the portfolio as listed; BUT many others, I believe, would be stumped on what would be the next move.
I haven't read the book, so some of this may be explained by Spencer Sherman.  I do know that in similar books the next steps, i.e. the mechanics of setting up a portfolio, are not discussed.

Understand that (this is sort of outside the box) money management is not like buying a car.  In buying a car, you go in and tell them you are interested in a sedan or SUV, color, 4WD or not, etc.  In money management, you take the investment style of the advisor you use.  In other words, it is not possible to go in and say, "I like the philosophy presented in The Cure for Money Madness, set me up a portfolio matching it."

Your best chance to get money management help for this approach is to first establish that a particular advisor uses a low-cost, well-diversified market indexing approach.

But back to doing it yourself.  You are in one of two situations.  You are taking over a portfolio of investments, or you have cash to invest.  For example, after reading a book like the above, you realize that your present advisor is charging way too much to manage your assets.  Or, you may be rolling over a 401(k).  In these instances. you may need to sell existing Funds, have tax questions, etc.  These can be tricky situations, and you may want to get some hourly consulting just to make sure you are not making some basic mistakes.

The second case would be where you inherit cash or want to get a maturing CD invested in stocks. This is much simpler; you need just focus on the buy side.

In some instances, where an individual has never transacted in the stock market, I recommend starting with a target date fund or life strategy fund.  These funds already do all of the allocation for you - you have one Fund to buy.  You just need to figure out the number of shares to buy and how to buy them.

Here, as an example, is the Vanguard "Moderate Growth Fund" allocation:

Underlying funds as of 07/31/2014
Rank Fund name Percentage
1 Vanguard Total Stock Market Index Fund Investor Shares 41.6%
2 Vanguard Total Bond Market II Index Fund Investor Shares** 32.4%
3 Vanguard Total International Stock Index Fund Investor Shares 17.9%
4 Vanguard Total International Bond Index Fund 8.1%
Total 100.0%
**Information on this fund can be found on Vanguard's Institutional Investors site.

As you can see, this is basically a 60% stocks/40% bonds allocation.

Suppose you have $100,000 and you are ready to take the leap and buy shares.  First off, you need the ticker symbol.  This Fund has a ticker symbol of VSMGX.  This ticker symbol can be input into the quote box on any financial site and the price ascertained.  As this is written, the price is $24.11.  Divide $100,000 by 24.11, and you find the number of shares to buy at approximately 4,000.

Once you log on to Vanguard or whatever broker you are using, you need to find the "Trade" button or, in Vanguard's case, the "Buy & Sell" button.  Next, on Vanguard, click "Buy Vanguard Funds" and it is straightforward from there.

In carrying out a transaction like this, I would likely do the buy in a few transactions - maybe 500 shares at a time.  If you are doing this for the first time, you may even want to start with 50 shares just to make sure the computer doesn't blow up when you hit the "buy" button ;)

I would also look at the bid-ask spread.  If it is wide, I would maybe put in a limit order.

When you first start, it is good practice to go slow.  I use Schwab primarily and have a routine I go through.  I run my eyeballs to the top and see available funds to invest.  I look to the left to make sure I am on the right account.  On the review page, I read the footnotes, etc.  I then go to "order status" to see that the trade was executed.  This is important because it is easy not to push the "buy" button on the review page and, therefore, not actually put in the trade.

An interesting point is that this simple process has historically outperformed 70% and more higher priced actively trading professional managers who seek to beat the market!

Once you are confident with the process, you can easily graduate to buying the individual Funds.  To replicate VSMGX requires only 4 Funds, the ticker symbols of which can easily be found on the Vanguard site.

Or you may prefer to jazz it up a bit with some of the Funds listed by Sherman Spencer.  Which will do better?  Only those with a crystal ball can tell!

Disclosure:  This post is for educational purposes.  Individuals should do their own research and/or consult a professional before making financial decisions.  My clients and I own some of the Funds mentioned.

Monday, August 11, 2014

Mean Reversion

Mean reversion is one of those terms that gets bandied around a lot in financial circles.  The concept is basically that there is some underlying average that a given magnitude will move towards over time.  Thus, if P/Es get to high or too low, they will drop/rise as the case may be.  A cousin of mean reversion is the "what goes up must come down" phrase that is also popular.

Another example is yield spreads on bonds.  Bond traders look at historical yields, calculate the average, and then identify profitable trade situations where  the spread is different from the average.

But "mean reversion" shouldn't just be put in an investor's toolbox as a substitute for deeper thinking. For example, another cousin of mean reversion is "doubling down."  But fortunes have been lost by "doubling down."  After all, if you liked a stock at $30/share, you've got to love it at $15/share.  Talk to some of those who tried this during the dot-com bust of 2001!

In thinking about mean reversion, you should think through the underlying process.  Essentially, we're back in high school studying concepts like stable functions, limits in Calculus, etc.  Take a step further and we are on the fringe of Chaos Theory.  These concepts teach us that some functions effectively blow up whereas others reach a limit.  In the world of economics, some events bring forth actions that move us back towards equilibrium whereas others blow up.  Further complicating the process is the possibility that the mean may change.

An example of a blowup is the 2008/early 2009 period in the U.S. stock market.  At one point, there was a run on money market funds reminiscent of the bank runs on the 1930s that threatened to take the financial markets down, i.e ,to literally blow up the system.  As expected, forces came into play to rein the process in - Bernanke and Paulson guaranteed money market funds.

A better example is Japan of the 1990s which morphed from the fastest growing major economy in the world to what can best be described as a basket case.  To this day, it hasn't pulled out of its malaise. Maybe the mean it has reverted to is permanent weak performance and the exceptional performance of the earlier period was an aberation.  This, of course, is little help to investors who pounced on Japan's stock market seeing exceptional value after it moved sharply lower.

The bottom line is that thinking along the lines of mean reversion leads to conceptually coming up with an idea of where the world should be.  In effect, it is a type of linear thinking in a world that mostly isn't linear.  Although useful in many places in framing investment strategy, it has to be handled with care.

One final example worth contemplating along these lines is the so-called problem with asset correlation. By diversifing among widely varying asset types, negative correlations supposedly would lessen risk in a downfall.  Worked great in a non-globalized capital markets setting.  But, as money moved more easily around the world, the historical correlations fell apart.  Think through the underlying process!

Saturday, August 9, 2014

Luck and Skill in Investing

You look at a Fund and see that it is outperforming its index.  Is this luck or skill?  Here is an excellent interview, found on the The Reformed Broker site by Barry Ritholz, of Michael Mauboussin:

"Masters of Business Interview"

that will help you answer this question.  Both participants are serious thinkers about the investment process and are well-versed in behavioral finance.

Michael Moubousin is head of Global Financial Strategies at Credit Suisse.  Barry Ritholz is CIO of Ritholz Wealth Management and a widely-published author.

The wide-ranging interview discusses luck and skill in investing, the roles of process versus outcome, seeking an edge, understanding the role of time, the paradox of skill, how to manage your luck, and other topics with a number of interesting examples bearing on the process of investing.

Taking the time to listen to this interview will make you a smarter investor.

Friday, August 8, 2014

Investment Book Giveaway

Mid-summer clean-up.  If one of the following books interests you, let me know.  All I ask is shipping cost.  Some of the books do have notes and/or underlining in them.   Email:

  • Dear Mr. Buffett by Janet Tavakoli
  • The Little Book of Common Sense Investing by John Bogle
  • The Elements of Investing by Burton Malkiel and Charles Ellis
  • The New Coffee House Investor by Bill Schultheis
  • How to Retire the Cheapskate Way by Jeff Yeager
  • The Intelligent Investor by Benjamin Graham

Tuesday, July 29, 2014

Are You Beating the Brokers?

 Do you like stock tips?  Do you use broker stock picks?

Barron's has tracked  the performance of the focus list of 7 brokers over the first 6 months of 2014 ( RBC Is in the Lead Going Into the Turn, Vito J. Racanelli).

Here's the Table showing performance for 6 months ended 6/30/14:

RBC Capital Markets
Morgan Stanley Wealth Mgm’t.
Credit Suisse
Bank of America Merrill Lynch
Goldman Sachs
Stifel  Financial Management
Wedbush Securities
Average Broker
S&P 500 Index Total Return
S&P 500 Index Equal Weighted

Source:  Zachs Investment Research

Note that, although the average return is below the S&P 500, it is because Wedbush Securities bombed with a return of -8.68%.  In fact, 5 of the 7 outperformed the Index.

What are we to make of these results?  First, for those with the time, the resources, and the know how, buying individual stocks is obviously the least-cost solution to managing assets.  Buy stocks versus funds, and there is no annual management fee.  In many instances, this can be a huge savings.  Versus low-cost index ETFs, the savings is there; but it is small.  Secondly, the market-beating potential for individuals managing stocks picked from focus lists, if it is there, probably requires at least a bit of  a buy-and-hold approach.  Thirdly, readers should know that there is voluminous evidence showing that, over the long run, broker picks do not add value and persistence of performance is absent.

The bottom line is that, if you follow the performance of the broker's stock picks over the next ten 6-month periods, historical evidence suggests that you should find no consistent leaders among the brokers.

A big question is exactly how would you incorporate the picks in a viable portfolio strategy?  Do you focus on the winning brokers and equally weight their picks?  Do you maybe use the picks of the top 3 brokers?  Or, should you take a contrarian approach and go with Wedbush?  Or should you go to RBC or Morgan Stanley to get an advisor and have him or her manage a portfolio based on the picks?

To me, it is interesting when you get down to the implementation level.  From my side of the desk, I know there are people who will read this type of article and go out and open an account with RBC or Morgan Stanley.  A light bulb will go off in their brainm and they'll think "my investment approach heretofore hasn't been successful because I've been following the wrong stock pickers."

One consideration is that using an advisor at the brokerage will result in fees that could wipe out the performance advantage of the stock picks.

Tuesday, July 22, 2014

Are You Beating the College Endowment Funds?

The big college endowments are staffed, presumably, with the best and the brightest investment talent--graduates, in fact, of the top business schools in the nation.  They invest in esoteric sectors of the market, use sophisticated tactical allocation strategies, and have access to CEOs and top strategists in the investment world.  Surely they outperform little old you and me?  Not so fast.  Check out this table of 5-year average annualized returns for the period 7/31/2013 presented in the Morningstar article by John Rekenthaler, "Are 401(k) Funds Second-Rate?":

Notre Dame

The average return of the endowments over the period was 4.1%.  Get this:  the Vanguard Target Retirement 2030 Fund returned 5.2%.  No multi-million dollar salaries, no fancy models, no big time MBAs.  If you checked the box at your 401(k) that automatically invested in a Target Fund, you very likely did better than the largest endowment funds!

This is just another instance of so-called "lazy portfolios" tending to outperform 7 out of 10 active managers over the long term.