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.

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.

Wednesday, November 5, 2014

The Most Important Thing About Bonds That Most Investors Don't Know

Not a bad hedge!
I've recently read a couple of books about bonds along with an article about how to protect a portfolio from a stock market correction.  The article was one of those Yahoo! type articles touting something like 10 ways to protect your portfolio.  It listed a number of esoteric ideas including puts, stop loss orders, etc. Nothing about bonds.  Maybe bonds wouldn't be your first thought either.

Maybe they should be.

Let's cut to the chase and take a look at the four times out of the past 20 years that the large cap core index, essentially the S&P 500, has produced a negative annual return along with the return on the Barclay's Aggregate Bond Index:

Large Cap Core Stock Index
Barclay’s Aggregate Bond Index

 Source:  BlackRock Asset Class Returns

Hopefully something jumps out at you.  The fact is that bonds, as the table clearly shows, offer a pretty decent hedge, i.e. insurance, to dampen the impact of stock market downturns.

People many times want to get wrapped up in the mathematics and look at correlations which, essentially, are fancy averages; but there is more to it than this.  I say this because most correlations disappointed investors in 2008.  Asset classes that were supposed to provide a cushion in the event of a downturn didn't.

Bonds, on the other hand, especially Treasury notes and bonds which comprise most of the Barclay's Bond Index, are the go-to asset when investors get scared!  This is called "flight-to-quality."

Understanding a bit of history can lead to a pretty good idea of how bonds will act in various scenarios. Is it possible for both bonds and stocks to have a negative return?  Surely, especially when inflation picks up.  Most likely, in this situation, if stocks drop (which is not a given), it won't be by much.  On the other hand, if there is a major downturn, 15% or more say, it is probably because  the market is scared and bonds could be expected to do well.

One point worth emphasizing is that fixed income encompasses money markets, certificates-of-deposit, and savings accounts.  Sometimes people treat these as bond like instruments.  They are not.  Their price won't rise in a "flight-to-quality" instance.

What About Levels?

Most of the bond market has fixated over the past few years on the historically low rates and the need to position portfolios for a rise in rates.  After all, the thinking has been there is nowhere to go but up. Well, time has proven that this isn't exactly the case.  But beyond that, where should bond investors be today?

Well, if they load up on short duration bonds and corporate bonds offering higher yields, they could be severely disappointed in a crisis.  For example, if the market became convinced that we were locked into a serious Japanese-type deflation episode, the meager 2.35% 10-year Treasury yield could look robust.

The bottom line is that investors need to recognize that hedging like, insurance like, properties of bonds when managing their portfolios.  When is more the question rather than if when expecting a stock market correction?  When it comes, investors will appreciate their bonds (pun intended).

Saturday, October 25, 2014

What the Fed Doesn't Get

For some reason, the Federal Reserve still believes that tightly controlling the most important price in the economy - the price of money -  over the long term is the way to meet their long-term objectives of 2% inflation and full employment.  Their policies penalize struggling retirees living off of fixed income and favor the big banks who are subsidized with low-cost reserves.

Controlling prices goes against history and especially recent history. It will land Yellen and, yes, Bernake right in the penalty box with Greenspan.  It will be crowded in there because most Fed governors as well as Fed Bank presidents will be in there as well.  Recall Greenspan's history.  He was dubbed the "maestro" for his rate-manipulating prowess--until that very prowess set off the bubbles in the sector and then housing that resulted in the worst economic downturn since the 1930s and brought the economy to the brink of another Great Depression.

The history is not complicated.  All you need is a chart of the Fed Funds rate:
Source: Economagic

This is the rate targeted by the Federal Reserve as explicitly specified in the statement released at the conclusion of each Federal Open Market Committee (FOMC) meeting.  The rate target is anxiously awaited by the investment community at the conclusion of each meeting, and its changes are predicted and stressed over in the financial press.  If you need an immediate assessment, just check out the circus at CNBC up to and following an FOMC meeting.

Today, and for some time, as shown on the graph, the rate is essentially zero and is expected to stay there for a "considerable time."

All the various interest rates in the economy  are correlated--which means that, by controlling the Fed Funds rate, the FOMC affects your monthly car loan, how much interest retirees receive on certificates of deposit ( a pittance), and even monthly mortgage payments.  It affects the value of the dollar in global trade.  Controlling the general price of money isn't akin to controlling the price of ice cream.

It doesn't take much reflection to realize that investors love that the Fed spells out in excruciating detail its thinking of how it is going to control the rate - especially when the Fed is either lowering or holding it low for a prolonged period of time.

But history shows controlling interest rates isn't all good.  First look at 2003 on the graph above.  For a 12-month period, the rate was brought down to 1% and held there for 12 months.  Why?  An important reason was the bursting of the bubble in early 2000.  But why the bubble?  Where did it come from?  This isn't rocket science.  Most market observers get this part.  From 1987 on, Greenspan stepped in every time the financial markets faltered and lowered the Fed Funds rate, leading to the coining of the phrase "Greenspan put."  It reached a point where investors threw concerns about risk to the wind and even piled into newly issued securities of companies that had only vague business plans and no clear path to profits.

Why?  Hey why not - the Greenspan Fed was the golden goose that would rescue markets.

Econ 101 teaches that controlling prices builds pressures over time.  Historically, this has been seen whenever wages and prices were controlled.  So, here we are today with a long trailing period of time where the Fed--in its wisdom--held the price of money below where normal market forces would push it.  And the pressures have built.  Capital will flow or not flow depending on market views of when the price will change.  Look back at the graph and notice the change following 2003 whereby the rate was pushed to 5.25%!  Capital flowed into housing with mortgage rates at historical lows and then was abruptly cut off!  Jobs were easily and widely available in residential construction, mortgage banking, etc., and then they weren't.

The way off this bubble-creating, capital mis-allocating merry-go-ground is straight forward.  Just target the growth rate of the money supply.  For example, M2 growth could be targeted at 3%, say.  This would then enable the price of money, i.e. interest rates, to be set by the market, as most prices in a free market economy are set. 

Friday, October 24, 2014


I'm a fan of Barron's.  Let me say that right off the bat.  Part of my every weekend is devoted to reading it cover-to-cover.  Even though I'm an indexer, buy-and-hold guy, I like to see ideas and read what people think about the market.  I especially like articles on specific companies and analyst outlooks.

It seems that recently the publication has made a push to present "Top Advisors" and "All Star Advisors."  Every weekly publication now has a list of such advisors.

I even like these lists and reading what the advisors think.  A lot of it is total hogwash, and I have to say that I'm amazed that higher wealth families pay dearly for this advice.  I admit that high-wealth individuals and families need comprehensive services; but, from a lot of what I read, the investment services they are getting are worth nowhere near what they are paying.

What bothers me, though, is that there may be individuals who read this stuff and actually act on it.  Let me give an example.  Top advisor presented on page S19 of last Saturday's issue:  Joseph W. Montgomery of Wells Fargo Advisors.  The write-up says "Old school diversification, with stocks, bonds, and cash, served to pare portfolio risk for many years.  But it failed in the 2008 crash..." It goes on to tout commodities, etc., for diversification.

Really? I sn't there a point where we need to look at the data.  Check out Asset Class Returns A 20-Year Snapshot. by BlackRock.

In 2008, stocks were down -37% (Large Cap Core) and bonds (which "failed"?) were up +5.2%, as evidenced by the Barclay's Aggregate Bond Index, and cash returned + 2.1%.  Reflecting on these numbers and the much ballyhooed pounding of retirees in 2008, one has to seriously question diversification.  UNLESS THERE ARE EXTENUATING CIRCUMSTANCES, RETIREES SHOULD HAVE AT LEAST 40% IN BONDS AND CASH.  Following this fundamental rule enabled many retirees to weather the worst stock environment since the 1930s and come out fine in the ensuing sharp rally.  But, of course, this isn't a "man bites dog story" and, therefore, is not as sexy as the scary "crash destroys retirees nest eggs" write-up.

Just for the record, you may want to check out the returns in 2008 of commodities.  Still interested in diversifying into commodities?

Hopefully, you aren't reading this the wrong way.  I'm not anti-commodities as a diversifying asset class.  The point is to be careful.  If you sell bonds and buy commodities thinking you are reducing volatility, you may be in for a shock.

In the world of investing, math sometimes makes us lazy.  Give me a bunch of asset correlations, based on past data, and I'll construct an optimal portfolio.  Easy...I just feed the correlations into the program and it spits out weightings.  Twelve months down the road, we find that the world has acted a lot different than it has historically.  The price has been paid for lazy thinking.

Here is what investors, even "Top Advisors," need to know and think through.  Bonds are the "flight-to-quality" asset - especially U.S. Treasuries.  Long periods go by and investors forget about this feature of bonds--especially periods like the end of the 1990s and 2007.  Behavioral finance people find that investors ramp up their risk tolerances during these periods and shun bonds and increase stock exposure.  If stocks go up and commodities go up more, a light bulb goes off and the diversifying quality of the asset class is widely emphasized.

The bottom line is:  as always, check claims.  We live in a world where this is very easy.  If you don't, you could fall prey to pure gobbledygook; and it could cost you.