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, December 9, 2014

Bond Correlation Data Supports Previous Posts

Recently I wrote two posts on the

hedging property of Treasury notes and bonds,

a property very much unappreciated by many investors.  In fact, I looked through a number of well-known bond books - the types of books a novice investor would pick up at the library or bookstore if he or she was seeking to learn about bonds.  The books waded through duration and how bond prices work and the different types of bonds and the various risks in investing in bonds.  But nothing about the all-important hedging property.

This is important because, when one looks at longer term performance, it is a legitimate question on why bonds should even be held in a portfolio.

And, the reasoning isn't complicated.  Treasury notes and bonds offer a very decent hedge for that very real possibility that stocks could go to hell in a hand basket! I n fact, as pointed out in the previous posts, bonds had a positive return in all of the down markets of the past 20 years.  In 2008, they produced a positive return exceeding 5% as stocks fell 37%!.

Let me put it like this:  if someone tells you they gave up on the investment markets because of what they experienced in 2008, then it is a good bet that they had minimal or zero exposure to Treasury notes and bonds.

Why are bonds a really good hedge?  This isn't rocket science:  when markets get scared, people dump stocks and jump into the safest security in the world - U.S. Treasury notes or even bonds.  In doing this, they push up the prices of notes and bonds, thereby producing a positive return when stock prices fall.

This week, Josh Brown of

"The Reformed Broker"

reported correlation statistics calculated by Richard Bernstein.  If you look at the correlation chart in the article, you find that Intermediate Treasuries and Long Term Treasuries had the highest negative correlation with the S&P 500 of all the asset classes shown over the period examined.

As regular readers know, I am not a fan so much of correlation statistics because they are basically fancy-dancy averages and, as any average can, they have the potential for throwing the unwary investor for a loop.  Everyone has heard the tired joke about the man who crossed the river that had an average depth of 3 feet.

To be clear, let me bring up the obvious deterrent of low rates.  It is important to be careful because the risk of a sharp rise in rates continues to hang out there.  For this reason, you need to be careful in how much is invested in longer duration Treasuries, or bonds of any type.  Nobody is saying this is easy!

In this case, though, the underlying logic is what is important.  In the same way that you may fantasize what you would do if you were President, portfolio managers know what they will do when markets panic.  They will pile into Treasuries!

Sunday, December 7, 2014

Robo Advisor or Full Service Advisor?

Put your info online and, for a reasonable fee, a robo advisor (see picture) will come back with a recommended asset allocation and specific funds to invest in.  Also, you'll typically get a lot of personalized reporting on your investments letting you know how much you should be saving, where you can expect to be several years from now, etc.

What's not to like?

Well, a lot, if you listen to full service advisors.  They argue that investments need to be part of the whole financial picture.  And they are more than glad to explain how the whole financial picture can be complicated.  You need advice on when to take Social Security, how to choose a 529 plan, whether to do a Roth, estate planning questions, etc. I nvestments need to fit into this bigger picture and that makes the 1 - 2% fee they charge reasonable for managing your investments, they say.

Actually, there is a third way:  forget the full service advisor and forget the robo advisor and learn how to do the whole thing yourself.  This, in fact, is doable for most people by reading a relevant book, three of which are constantly touted here:

Millionaire Teacher by Andrew Hallam,

Your Money Ratios by Charles Farrell,

The Smartest Money Book You'll Ever Read by Dan Solin.

Each of these books is easy to read - two weekends at the most - and you'll come away a lot smarter after reading them.  In fact, you'll come away knowing exactly how to invest after reading them. Furthermore, you'll know how to decide how much insurance you need, what you should seek in the way of estate planning, and even how big a mortgage you can reasonably carry.  Every family should have someone who knows and understands the information in these books.

As a motivation, you should know that understanding the information in these books will save you a huge chunk of your nest egg over your lifetime.

But it isn't just about do-it-yourself investing.  Most important of all, you'll come away with an understanding of when you need an advisor.  It may be in your 50s when you really want to hone in on whether you are saving enough to get your  nest egg where it should be by the time you reach your retirement date.  It may be that you want a formal outside opinion on your investments or even a formal analysis of the best time to take Social Security.  It may be that you have stock options you need to exercise in a tax-efficient way.

The bottom line is that there are times you need to pay up for advisory services and there are times when it isn't necessary, and knowing the difference can affect your pocket book greatly.  Again, the readings will help.  At the very least, they will help you understand what questions to ask and enable you to participate meaningfully in the advisor conversation - a conversation that some find intimidating.

Wednesday, November 26, 2014

Following the Market

Birdwatching is like market watching
I'm an indexer and dividend investor.  As such, you might think I don't follow the markets closely.  That would be wrong.  Like active stock pickers and market timers, I like to try to understand what is going on and. yes, even guess (knowing that it is a guess is, I believe, a quantum jump in investment sophistication that many ego maniacs in the markets can't make) where the market is headed.

As an economist, I like to keep the market tracking process efficient.

Over the years, I have come to understand that the market is driven by broad themes over various time periods; and understanding these themes is important.  For example, in the mid-70s and early 80s, it was all about energy because of OPEC.  Being underweighted or overweighted, energy drove relative performance.  In the late 1990s and early 2000s, of course, it was all about internet-related stocks both on the way up and the way down.  In 2008, you needed to get the impact of the housing crisis on financial services and, especially, the banking sector right.

Today, I look at relative yields, the dollar, oil prices, and the price of gold.  In particular, I go to


and record the difference between the U.S. 10-year and the German 10-year.  Here you see that difference at 2.24 - .70 =  +1.54%  (154 basis points).  Eyeballing the other rates shows the advantage of the U.S. 10-year Note as well.
Source: Marketwatch

But for foreign investors, the currency conversion is also important.  Click the FX link, and you find a broad FX index, WSJ$IDX, and the Euro.  I record each of these first thing each morning.  To the extent that foreign investors invest in the U.S.10-year and yields drop and the dollar strengthens, it is a very good investment compared to investing in their home country.

This hasn't gone unnoticed by market observers as an important  influence that has kept U.S. interest rates low despite an aggressive Fed policy and an expanding U.S. economy.

As an aside, I once knew a man who explicitly  sat down and waded through numerous investment publications whenever he felt he didn't understand the markets.  This is the process that many needed to go through earlier this year as their confident predictions of a sharp rise in interest rates didn't just materialize but actually moved in the other direction.  This would have led to an understanding of relative yields and the influence of global yields on U.S. yields.

I also click on "Futures" and get the price of oil and the price of gold.  Each has had, and will have in the future, a major role in moving markets.

The whole process of collecting this data takes just a few minutes and is, I believe, useful in understanding broader markets.  For example, dividend-paying stocks should continue to at least hang in and provide decent performance as long as their yields stay above the yield on the 10-year UST and global yields remain low.

Saturday, November 15, 2014

Help For Expat Investors From Andrew Hallam

If you or someone you know is working outside of their home country, you need to get

The Global Expatriate's Guide to Investing

by Andrew Hallam.  The subtitle From Millionaire Teacher to Millionaire Expat refers to his immensely popular book Millionaire Teacher.

Hallam's gift is the ability to explain, using stories and humor, some of the most intricate parts of the investment markets facing everyday workers seeking to attain a secure and satisfying retirement.  These are the parts of the market where a huge part of the financial services industry have, sadly, taken great advantage of investors in the U.S. and, even to a greater extent, globally.

If U.S. citizen investors think they face a complex task investing in the U.S., they should consider the task from the perspective of the out-of-country expat investor.  All countries have their own rules; but, in general, the expat has no type of social security, has to be careful choosing a broker because of how difficult it is to compare fees and different offerings, be aware of laws that could affect tax exclusion, be aware of possible estate taxes from investing too great an amount in certain counties, factor in the cost to convert currencies--and the list just goes on and on.

All of this has not gone unnoticed by the unscrupulous who have invaded expats, especially teachers teaching abroad, with retirement schemes that lock in participants for decades into high cost, commissioned products.  These outrageously priced products have the potential to wipe out almost the entire contributions as well as earnings, if participants decide they want to change course.

In the book, Hallam gives explicit advice for successful investing for all investors--using the low-cost index approach recommended in the first book as well as by such market stalwarts as Buffett, Bogle, and Malkiel--but also introduces the permanent portfolio which has an incredible record.  The second half of the book covers expats in specific countries.  Again, actionable steps are presented so that expats in those countries know exactly what to do.

Part of the problem is that human resource departments are not generally investment savvy.  This book is a must read for them!  This book should be given to every new hire.

Simply stated, the information in this book is available nowhere else.  Everyone would profit by reading it--but especially expats.

Wednesday, November 12, 2014

Financial Literacy Quiz For High Schoolers and College

Here is a neat little financial literacy quiz put out by AARP appropriate for high schoolers and/or college students:  QUIZ .

If you can be at their elbow, the quiz should generate some discussion.  They may need to ask what a Roth is or what is term insurance.  They may ask why is the annual interest rate on a credit card so important and why a shorter payment term reduces finance charges.

Better to learn these financial literacy concepts on a quiz rather than after paying excessive finance charges or shying away from a 401(k) because they just don't what it is!

Sunday, November 9, 2014

What is "Flight-to-Quality" ?

Source: Capital Pixel
Last week I wrote a post on the important role of bonds in a portfolio when the market gets scared--as in a 15% or greater sell-off.  The post showed that the four times the S&P 500 had negative returns over the past 20 years the Barclay's Bond Index produced positive returns.  When the S&P 500 returned -37% in 2008, the bond index returned greater than 5%.

Thus, bonds are a hedge or a type of insurance in the event of a significant sell-off in stocks.  This shift of assets into bonds is "flight-to-quality" and typically is concentrated in Treasury notes and bonds.  Again, it takes place when the market is scared.

A good way to put on this hedge is simply to use AGG or a similar Barclay's Aggregate Index exchange traded fund for the fixed income portion of assets.  Note three metrics:  .08% expense ratio, 5.3 duration, and 31.29% Treasury issues.  The duration of 5.3 tells you that, if yields rise 1% from 2.3% to 3.3% over the next 12 months, then AGG will fall in price by approximately 5.3%.  Add in 1.8% approximately from interest payments and total return would approximate -3.5%.  There's no free lunch here!

Those looking for a really good "flight-to-quality" hedge might consider TLO - the long Treasury etf. Note that it has a duration of 16.6 years so is a lot more volatile than AGG.  Also note that it was up over 23% in 2008!

Disclaimer:  This post is for educational purposes.  Investors need to do their own research or consult a professional before making investment decisions.  Exchange traded funds mentioned are held by me and by my clients.

Friday, November 7, 2014

Best Spending Tracking Tool Poll

Rob Berger at Dough Roller has recently written up results of a poll for "what software or tool do you use to track your spending?".

As you can see Mint, Quicken, YNAB and Excel are the top four.  I use Excel just because I'm old fashioned and prefer to limit the spread of bank account/broker account information.

Just recently, a client requested I send Schwab account numbers to FutureAdvisor to see a recommended asset allocation.  I told him he could do it, but I didn't feel comfortable doing it.

By the way, Dough Roller is a nice article aggregation site for those interested in DIY investing.  I recommend checking it out each week.