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, February 24, 2015

FeeX - Understand Account Fees and How to Lower Them

I've hammered home again and again the importance of investment fees and how to lower them.  Now there is a free service, FeeX, that will analyze your accounts, identify the fees, and advise on how to lower them.

An overview of the service is provided by investorjunkie:  FeeX Review - An Investment Fee Reducer.

As explained in the overview, the service is still free, requires you linking them with your accounts, and examines the following fees:
  • Mutual fund expense ratios, which are present even on no-load funds
  • Exchange traded funds (ETF’s) expense ratios (even though they’re typically lower than what mutual funds charge)
  • Advisory fees (can be between 1.0% to 1.5% of an entire account balance)
  • Wrap fees
  • Sales loads
  • Redemption fees
  • Transaction fees
  • Account maintenance fees 
It also grades your fee structure versus similar investors.  The final step is to suggest ways to lower your fees.

A lot of this, of course, can be done yourself.  You can research the all-important yearly expense ratios, sales loads, and advisory fees.  As the article points out, paying 2% of assets per year reduces a retirement nest egg significantly.

Thursday, February 19, 2015

Getting to a Low-Cost Index Fund Strategy

Did you ever hear the old joke about the Maine farmer who was standing in his field when a car pulled up and asked if he knew how to get to a certain town.  He squinted, furrowed his brow, pursed his lip,s and then came out in his Maine accent with, "You know, I don't think you can get there from here."

That's how I feel sometimes when I meet with new clients.  We go over the principles underlying low-cost well-diversified index investing.  We cover the thinking behind different asset allocation models and the importance of sticking with an asset allocation strategy through the ups and downs of the market.

Then we look at their investments.  More times than not they include several bank accounts, multiple 401(k)s, IRAs and taxable accounts.  The taxable accounts include inherited stock, and they look at me quizzically when I ask about cost basis.

The Funds they hold include front load, back load, and everything in between.  Some hold private collective funds on which it is difficult to understand the management fees.

The bottom line is we need to go from a smorgasbord of investment vehicles to a well-structured basic asset allocation comprised of low-cost index funds.  Sometimes I feel like the Maine farmer.

But usually it is best to proceed slowly.  Take one account at a time.  Know exactly where you are headed and take baby steps if necessary.  Understand each investment.  If it's a taxable account, look at capital gains - are they long term or short term?  Look at the Funds - are they load Funds?  Does it make sense to hold for a while to lessen the deferred charge?

If moving accounts to a new broker, can the Funds be moved "in kind"?  If not, how will your overall asset allocation look over the transition period?

Sometimes it pays to have an advisor take over during this set-up period.  An advisor knows how to get from where you are to where you want to go on a tax-efficient basis.  In many instances, once the account is finally set up so that the asset allocation is clearly understood and assets are invested in low-cost index funds, the advisor can bow out and the client take over.

Saturday, February 14, 2015

An Important Read

The best book I've read so far this year is Being Mortal by Atul Gawande.  The book is an easy read but isn't an easy read.  How so? Well, it is very well written and filled with anecdotes and real world cases.  Thus, most readers will breeze through in a fairly short period of time.  Where it is not an easy read is that it deals with a subject matter most people find unpleasant, to put it mildly.

Being Mortal is about the shortcomings of the medical profession in dealing with end-of-life situations.  Many times, terminally ill patients aren't given all the choices and trade-offs.  Sometimes people may prefer to forego chemo, multiple medicines, and other drastic measures to prolong life if they can get a much higher quality of life for a shorter period of time. Understanding the trade-offs is important.  Doctors are trained to prolong life as long as possible and, thus, don't always consider the wishes of the patient in terms of quality of life, goals, etc.

As I say, this isn't a pleasant topic; but, for many, it is valuable information which will change their perspective when dealing with this subject.  It is important for individuals as they themselves age but also in the all-important and difficult role of caregiver.  By the end of the book, you will have some important guidance on how to converse with a person who has been given the terrible news that they are terminally ill.

I understand that this goes a bit afield from the overall investment program; but, from a life-planning viewpoint, it is very valuable information for at least someone in every family to have.

Friday, February 13, 2015

Are Men or Women Better Investors?

Here's a cute piece on data from SigFig which aggregated and anonymized (whatever that means!) 2.5 MILLION PORTFOLIOS  "Is your Valentine a better stock picker than you?" by Eric Cheni.
Total assets amounted to $350 billion, and the bottom line was women had a return of 4.7% and men had a return of 4.1%. The finding that women tend to perform better as investors is fairly consistent because they trade less and generally are more patient. Plus they don't have an exaggerated opinion of their investment prowess!

But what about the most patient, non-stock-picking approach of all?  Pull out again the BlackRock chart and find that, in 2014, the Diversified Portfolio achieved a return of 8.1%!  This portfolio is 35% Barclay's Aggregate Bond Index, 10% MSCI EAFE Index, 10% Russel 2000 Index, 22.5% Russell 1000 Growth Index, and 22.5% Russell 1000 Value Index.  This portfolio is easily replicated.  In fact, it could have been set up on 1/1/2014 and you could have enjoyed the rest of year leaving the stock picking and market timing to those with the big egos!

Saturday, February 7, 2015

Updated BlackRock "Asset Class Returns"

Source: Capital Pixel
updated "BlackRock Asset Class Returns"

two-page chart is out.  This is my favorite investment chart.  It shows 20 years of investment returns for 7 different, color-coded, asset classes including fixed income, international stocks, cash, and various stock sectors.  Most importantly, it shows a diversified portfolio comprised essentially of 65% stock and 36% fixed income and cash.  The actual composition is given in the very last footnote of page 1.

It cuts through all the nonsense and shows vividly that diversification reduces volatility.  It also shows that chasing the hottest sector can be damaging.  Consider, for example, 1998 and 1999 where Large Cap Growth was at the top of the column.  If you would have run into someone claiming that they were hitting the ball in the upper deck with their Large Cap Growth Fund, you would probably have been sorely disappointed in 2000, 2001, 2002 as this sector was near, or at, the very bottom.

Page 2 shows line graphs of each sector over the 20 years.  As you look at this roller coaster experience, recall 9/11, the bust, and last (but not least) the 2008 housing crisis.  While you are at it, you can recall the ongoing geopolitical problems as well as the periods where it looked like even the U.S. government was on the verge of breaking down.  As you recall all the reasons for grabbing your wallet and seeking a fast exit, grab your smart phone, your laptop, and even your iPad.  You didn't have these 20 years ago.  For that matter, you couldn't get a genome sequencing.

The bottom line is that the constant preaching of stalwarts like Warren Buffett, John Bogle, and Burton Malkiel to ignore the noise and get an asset allocation paid off.  As shown on page 2, the diversified portfolio turned $100,000 into $531,326.  The average investor over this period did considerably worse - especially those trying to pick stocks and/or time the market.  This includes the parade of pontificators on CNBC, mutual fund managers and even the largest college endowments in the country.

I like to track the BlackRock diversified portfolio and

estimated the 2014 return

on New Year's Day at 7.96%.  As shown on the chart, it was 8.1%--so I was off by only.14%.

Wednesday, January 28, 2015

Does Your Investment Approach/Withdrawal Strategy Pass the "Sinatra Test" ?

As Ol' Blue Eyes crooned about moving to "New York, New York," the chorus belted out "If I can make it there, I can make it anywhere."

Today the so-called "Sinatra Test" is a credential measure.  If you've got the security contract for Fort Knox, you can handle the security anywhere.  If you cater a White House function, you can cater anywhere - no more questions asked!  I came across this concept in an interesting little book,

"Made to Stick

 by Chip Heath & Dan Heath.

Well, what about your investment philosophy/withdrawal strategy?  I would argue that a good Sinatra Test would be looking at retirement in 2000.  Stocks dropped the first 3 years and later hit a huge air pocket in 2008 and early 2009, known today as the "Great Recession."  This was a  period where many investors left the market, never to return.  Some label the first 10 years as the "lost decade."

Many retirees effectively blew their retirement by trying to jump on the internet bandwagon and then getting aggressive as the market reached new highs in 2007.

A heart stopper for the year 2000 retiree was 3 consecutive down years right at the start--one of the worst fears of the newly retired.  The 2008 housing crisis debacle piled on angst for stock pickers, tactical asset allocators, and market timers as the financial system was brought to its knees, requiring unprecedented monetary policy stimulus in conjunction with super aggressive fiscal policy.

Thus, the period from 2000 to present represents a "Sinatra Test."  Investment philosophies and withdrawal strategies that made it through this period could make it through just about any period.

To explore the most widely used withdrawal rate rule-of-thumb and basic low-cost index strategy, I turned to my favorite chart -

BlackRock Asset Class Returns:  A 20-Year Snapshot

which lists annual returns for 7 asset classes, color-coded, along with a diversified portfolio which is essentially 65% stocks/35% bonds.  The actual makeup of the diversified portfolio is given on the chart as the very last footnote:  "35% of Barclays US Aggregate Bond Index, 10% of the MSCI EAFE Index, 10% of the Russell 2000 Index, 22.5% of the Russell 1000 Growth Index and 22.5% of the Russell 1000 Value Index."

I assumed a

4% withdrawal rate,

adjusted annually for inflation as measured by the Consumer Price Index year-over-year change.  The portfolio used was the diversified portfolio presented in the BlackRock chart.  Indexers know that the portfolio can easily be replicated using low-cost index exchange traded funds.  It should be noted that, with a little creativity using the BlackRock data, it is easy to change the asset allocation.

The exercise is shown in the following table:

Age Year Amount(t) w/d Invest Port. Return Amount (t+1) CPI
65 2000 1,000,000 40000 960,000 0.989 949,440 3.4
66 2001 949,440 41360 908,080 0.951 863,584 1.6
67 2002 863,584 42022 821,562 0.901 740,228 2.4
68 2003 740,228 43030 697,197 1.235 861,039 1.9
69 2004 861,039 43848 817,191 1.105 902,996 3.3
70 2005 902,996 45295 857,701 1.054 904,017 3.4
71 2006 904,017 46835 857,182 1.13 968,616 2.5
72 2007 968,616 48006 920,610 1.06 975,847 4.1
73 2008 975,847 49974 925,873 0.774 716,625 0.1
74 2009 716,625 50024 666,602 1.209 805,921 2.7
75 2010 805,921 51375 754,547 1.13 852,638 1.5
76 2011 852,638 52145 800,492 1.019 815,702 3
77 2012 815,702 53710 761,992 1.122 854,955 1.7
78 2013 854,955 54623 800,333 1.203 962,800 1.5
79 2014 962,800 55442 907,358 1.079 979,040 0.8

As you can see, for fun, I assumed the retiree was 65 years old in 2000.  He or she started with an assumed $1 million and the withdrawal ("w/d") started at $40,000 (the 4% rule).  The first withdrawal was taken on 1/1/2000, so the portfolio stood at $960,000 at the beginning.  The first yearly return for the diversified portfolio was -1.1%, which gives the .989 (1-.011).  So the end-of-year 1 (12/31/2000) portfolio value was 960,000*.989 = $949,440.  This, of course, is the starting value for the next year. The CPI numbers shown came from the Bureau of Labor Statistics site.

The bottom line is that the investment approach worked well.  As shown, at the end of the period, the 79-year-old retiree has a portfolio value almost equal to where it started.  The largest percentage amount draw down was in 2009, where almost 7% of the portfolio was withdrawn (50,024/716,625).  It is worth noting that one suggestion commonly made is to forego the inflation in down years for the market.  Another point of interest is that, if the retiree kept the assets in cash, the value of his or her holdings would have been $282,383 at the end of the period.

Sunday, January 25, 2015

Update on Morning Routine

Source: Capital Pixel
I'm primarily an indexer and passive dividend stock investor.  Thus, I don't hunger after economic data during the course of the market day or breathlessly wait for the next pundit coming up on CNBC.  But I do like to feel like I know what is going on in the market and  like I understand the major influences.  To that end, I begin my day gathering data.

I go to MarketWatch and begin at the data source shown:

Source: MarketWatch
I first record the yield on the 10-year Treasury Note (1.79) and the German 10-year Bund yield (.32) and then calculate the difference.  That difference, as shown, is now 1.47%.  So, even though the U.S. rate is anemic, it is considerably higher than the German rate as well as most of the other yields shown in the table.  Other things equal, U.S. rates are enticing to many in the global markets.

Next I click "FX" and record  "WSJ $ Idx, a basket of currencies, as well as the euro.  Both of these have moved higher.  On January 14, for example, the WSJ Idx and the euro stood at 84.02 and 1.18, respectively.  Today they are at 85.40 and 1.12, respectively.  The bottom line is U.S. Notes and Bonds look very attractive to global investors both on a yield level basis and dollar appreciation basis.  This was the major factor confounding prognosticators in their prediction that rates would rise in 2014!

I next click "Futures" and record both the price of oil and gold.  In reading Barron's "Roundtable," I have gotten chuckles, as I'm sure some of you have, over the hand-wringing by participants of the failure to foresee the collapse in oil prices.  Some of the participants seem to question the whole pundit/prediction exercise!

One final data point I started picking up recently was the yield on the S&P 500 which, itself, has gone above the yield on the 10-year Treasury.  I get it by going to Yahoo! Finance and looking at the yield on SPY, the ETF tracking the S&P 500:

Source: Yahoo

As shown, the yield is 1.87%.

All of this takes less than 10 minutes in the morning and gives me a good feel for how markets are behaving.

A couple of years from now, I will surely be tracking different indicators.  That's the nature of markets - what is important at various times changes.  There was a time when the P/E ratio on internet stocks was a driving factor.  At another time, it was the rate on adjustable rate mortgages.  Today it happens to be the spread between U.S. interest rates and global rates along with the value of the dollar.

Since some of you may go to the MarketWatch site, it is a good time to tout the "RetireMentors" which can be found by clicking the "retirement" link at the top of the homepage.  IMHO, this is the best ongoing collection of articles online for people interested in retirement.