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.

Friday, February 5, 2016

My Favorite Investment Chart


BlackRock Asset Class Returns - A 20-Year Snapshot

chart has just been released for the period through 2015. This is a 2 page chart many advisors would not want you to see. It illustrates that investing in low cost Funds over an extended period, using a buy and hold strategy has produced excellent returns with relatively low volatility.

Understanding what this chart shows can make a huge difference for those trying to build a nest egg for retirement. Understanding this chart reveals how many investors could have invested their 401(k)s as well as their other monies to achieve better performance. It is useful for comparing their performance as well as their advisor's performance.

The first page shows year by year the returns of 7 different asset classes with each color coded so that it is easy to see for any given year the top performing sectors as well as the lower performing sectors. They also show a diversified portfolio as the white box.  The diversified portfolio is comprised of all the sectors. The actual composition of the diversified portfolio is provided in the last footnote on the first page of the charts.

The first thing that jumps out is that the diversified portfolio is never among the top 2 performers but also is never in the bottom 2. This is a visual depiction of the fact that diversifying reduces volatility.

A second point is that chasing the hottest sectors can be hazardous to your investment health. Notice that in 1998 and 1999 the top performing sector was Large Cap Growth. For the ensuing 3 years this sector was at or near the bottom.

A third point to note is that the Fixed Income sector (i.e. bonds) produced a negative return in only 2 out of the 20 years. This is worth some consideration because investors tend to be leery of bond Funds because bond prices go up and down and managers therefore may sell at losses and buy at higher prices. The overall market though, as shown, is much better behaved in terms of loss aversion. The index shown is for the entire U.S. investment grade bond market and holds bonds until they reach 1 year left to maturity.

The second page of the chart shows line graphs of the sectors as well as the cumulative and average annualized returns and standard deviations. Keep in mind, as you look at this chart, all the events that occurred that kept nervous investors out of the market including terrorist attacks, the "Great Recession", Greece threatening the viability of the European Union with its debt issues, and even shutting down the government. Despite these the patient investing of $100,000 at the beginning of the period ended up at $417,329! The average annualized return was 7.4% and the standard deviation as shown in the table was a relatively low 10%.

It goes without saying that many financial advisors who charge big fees would love to have results close to these to report to their clients.

It is a sad commentary however that many investors have no idea what they could achieve. Over the period shown many investors would feel their advisor (or they themselves for that matter) had done a good job if they had turned $100,000 into $315,000 say.

Some may question at this point what happened to the extra $100,000. For an answer read "Where Are the Customers' Yachts ?" by Fred Schwed.

Disclosure: this post is for educational purposes. Investors should do their own research or consult with professionals before making investment decisions.

Monday, January 11, 2016

Target Date Funds Comparison

Here is a nice article on Target-Date Funds by John Presto at MarketWatchOpinion:  Target-date retirement funds may miss the mark for investors.

This is the type of article that is mostly not read by investors who need to read it because, by definition, most target date Fund investors are in these types of Funds because they don't want to make their own decisions on which Funds to buy and how to allocate their overall assets.

The article emphasizes the important points to consider.  First, you want to ascertain that index funds, as opposed to actively managed funds, are used.  Secondly, you want to understand the asset allocation, i..e., the percentage in stocks and bonds.  Is 87.1% or 89.5% the right percentage to be invested in stocks?  Only Dr. Who knows; and he is in a cave at an undetermined location--so forget trying to figure that out.  And thirdly, you want an idea of the "glide path," that is, how the Fund becomes more conservative over time.
You do however, want the Fund to have a decent "glide path."  Moving through the years from being 30 years from retirement to retirement should result in a substantive increase in bonds and a consequent reduction in equities.  The table in the article showing only a slight equity exposure reduction for the Fidelity Fund was puzzling.

Another consideration is the risk tolerance of young people.  In an ideal world, young people should be aggressively invested, contribute on a regular basis at least 12% of gross income, and ignore the market value of their Funds as well as financial news.  Financial news, like news in general, is biased to be negative and will cause some younger people to stress out over the ups and downs of their portfolio as well as the potential for such based on pundits' assessments of financial events.  Young investors can easily dampen the volatility by utilizing a money fund in conjunction with the target-date Fund or choosing a Fund 10 years prior to their retirement date.

The bottom line on target-date funds is that they are better than investing in money funds, as the article points out.  Also, they have in this regard been a positive, in that they are the right vehicle to opt employees into the company 401(k). There also can be some exploitation of investors by adding Funds that a Fund provider is trying to build up in terms of assets under management, and they are a bit more expensive compared to constructing the same basic allocation with the lowest cost index Funds.

Sunday, January 3, 2016

Estimated 2015 Performance of BlackRock Diversified Portfolio

Regular readers know my favorite investment chart is the BlackRock 20-year sector performance.  It details the relative performance ranking of asset classes on an annual basis as well as the performance of an easily replicated low-cost diversified portfolio comprised basically of 65% stocks, 35% bonds.  As can be seen by referencing the above link, the diversified portfolio returned 8.7% on an average annualized basis over the 20-years ended 12/31/2014.

The diversified portfolio allocation is an appropriate benchmark for many individuals in their 40s and even early 50s, depending on their specific risk tolerance.  The chart contains sufficient data, however, to construct a benchmark and analyze performance for any specific allocation; and, in fact, the allocation can be changed over time using the data in the table--as it should be as an individual ages.

Voluminous data from unbiased academic studies have been presented over the years showing that a diversified portfolio of low-cost funds outperforms upwards of 70% of active managers over the longer term, after all costs are taken into account.  These studies cover various time periods, countries, asset classes, and investment methodologies.  In line with this data, the low-cost diversified approach warrants consideration as a benchmark for investors.  It shouldn't go unnoticed that the approach economizes on the investor's time.

Below is an update showing the estimated performance of the diversified portfolio's sectors for the 12 months ended 12/31/2015.  Overall, the portfolio returned approximately -.03%. This was a year pundits labeled "violently flat."  Although there were big up and down moves, well-diversified portfolios tended to be unchanged.

For the 12-month period, sector performance was mixed with small growth stocks doing best, followed by the investment grade bond market which eked out a small gain.  Small cap value stocks did especially poorly.  Commodities, including oil, had an especially horrendous year and were responsible for weighing down the broad averages.

Weight (%)
Return (%) 12 months ended 12/31/2015
AGG (Barclay’s Aggregate Bond Index)
EFA (EAFE Index)
IWM (Russell 2000)
IWF (Russell 1000 Growth)
IWD (Russell 1000 Value)

Disclosure:  This post is intended for educational purposes only.  Past performance is not indicative of future performance.  Individuals should consult a professional or do their own research before making investment decisions.

Sunday, December 6, 2015

Take Your Required Minimum Distribution (RMD)

If you were 70½ in 2015 or are older, then you need to take a required minimum distribution (RMD) from your qualified accounts (i.e., IRA type accounts).  If you turned 70½ this year, then the distribution must be taken by April 1 of 2016.  Otherwise, the deadline is 12/31/2015.

If you are a lot younger, skip to the last paragraph!

The custodian of your qualified accounts is required to notify you that an RMD is required on the balances you held with them on 12/31/2014.  If an account was rolled over during the year, you need to find out if the distribution was taken and, if not, the amount that needs to be taken.

Failure to take the required distribution results in a 50% excise tax penalty.  If you find yourself in this boat, you can get a waiver by first paying the penalty and then contacting the IRS and doing a triple somersault back flip through a hoop for them.  Recommendation:  take the distribution as required, on time.

If you have an IRA at Schwab, click "Balances":

Source: Charles Schwab


Near the top left, you'll see a dark blue box which contains your accounts.  Make sure you select your IRA(s) and then scroll down.  On the right hand side, you'll see this:

Source: Charles Schwab
As shown by the arrow, you want the "Remaining RMD To Be Taken" to be zeroed out.

To take the distribution ($13,298.36 in this example), you need to have the required amount in cash in your IRA.

Where do you put the distribution?
 This, of course, is up to you.  You can have it sent to you, or you can put it in your taxable brokerage account.

But what if you had an IRA transferred to Schwab in March, say, of this year?  Then, obviously, they won't know what your balance was at the end of 2014; and the previous custodian probably did not take the distribution.  But this is not a problem.  Schwab, as well as many others, provide easy-to-use calculators online to figure the distribution amount.  Here is Schwab's:  Schwab RMD Calculator.

IMPORTANT:  ALL OF THIS MAY NOT APPLY TO YOU BUT TO SOMEONE YOU KNOW.  You may want, for example, to casually mention to seniors (as a great conversation starter) that you just learned about the high fee the IRS charges if people miss their RMD.

Tuesday, December 1, 2015

A Couple of Good Reads

This is the time of year where financial writers like to recommend mutual funds for the coming year. Do you follow their recommendations?  If so, do yourself a favor and read The Best Mutual Funds to Buy Right Now! by Andrew Hallam.

Another good read is at MarketWatch by Robert Powell:  You may need less retirement income than you think.  The article illustrates to me that the whole subject of retirement planning is treated simplistically by researchers, and individuals should be aware of this.  Even going beyond the excellent points made in the study cited by Powell is the fact that individuals vary in the amount they spend during their retirement years.  Many spend heavily at first, doing the traveling or other expensive endeaors they have dreamed of, get it out of their system, and then settle in.  A decade then follows where spending may be somewhat less and even less than the 80% cited by Powell.  Closer to the end, or as Ed Slott is fond of saying "when the life insurance matures," medical costs ramp up.  The point is that spending in retirement is generally more complex than generally made out to be, and it is less cumbersome for researchers to just use simple percentage rate drawdowns.

Sunday, November 22, 2015

Wanna Be a Market Pundit?

If you want to be a market pundit, you need to explain why markets are doing what they are doing.  To the average person, this would seem to be complicated.  But it's not once you get the hang of it!

The last 2 weeks offer an excellent example.  Two weeks ago, the employment report for October was released; and it was much stronger across the board than expected.  Stocks were expected to rise but instead dropped sharply and continued to drop the following week.  Explanation?  CNBC pundits made it perfectly clear (after the fact):  the surprisingly robust employment data pushed the odds of the Federal Reserve increasing rates sharply higher, thereby increasing economic uncertainty.  And uncertainty is the one thing that markets are fearful of! 

The horrible week ended with the 11/13 Paris terrorist attack, and markets expected the sell-off to continue unabated.  What happened?  Last week stocks had one of the best weeks of the year?  Could it be explained?  Ask CNBC if they had any problems finding people to whom it was perfectly clear (after the fact). Their explanation:  the Fed was going to increase rates and finally uncertainty would be reduced.

The sad part of this is that the pundits believe that they are actually imparting valuable information.  Unfortunately, their audience may come to the same costly conclusion. 

As Nassim Taleb stressed in The Black Swan, pundits in the financial world are adept at creating a plausible narrative for events after they happen--making them seem obvious after the fact but notoriously poor at forseeing big changes in markets.

Thursday, November 12, 2015

100% in Stocks?

In an interesting MarketWatch opinion piece worth reading, "Why 100% of your investment portfolio should be in stocks," Jeff Reeves argues for investors all-in in the stock market.  The body of the piece, though, seems to argue, understandably, for that positioning for those in their 40s and below which still can be a stretch for many.

He cites the fact that, over the longer term, stocks have always moved higher.  Going back to 1926 and looking at 20-year rolling periods shows that the lowest 20-year return was a positive return of almost 11%.  It is important to note that rolling 20-year returns are obviously not independent.  By using rolling returns, analysts can cull many more data points as compared with periods that are wholly independent.

He also emphasizes the buy and hold aspect.  Jumping in and out can negate the potential positive outcome of an aggressive allocation strategy.  Furthermore, it is not easy to determine if you have the fortitude to stay the course in a really serious downturn until you've experienced one.  Whether you have the fortitude depends on personality and expectations on the use of the funds.  As I often tell people, I have seen individuals who literally have a good day when the market is up that day and are miserable when the market is down on the day.  For these people, no matter what their age, all-in is not a good idea. Actually, if you look at your account more than every couple of weeks, you should probably have some bonds for cushioning purposes.

To get a good feel for your risk tolerance, go back to the market in early 2009.  As most market observers recall, stocks were down approximately 35% in 2008.  What they may have forgotten is that the S&P 500 dropped another 25% over the first part of 2009 through the first week in March!  If you can put yourself back in this time frame, you can get a good assessment of your risk tolerance.  If you were calmly able to stay the course during this period, then your risk tolerance is high--you can readily withstand short-term down turns and focus on the longer run.

A final point to keep in mind as you read the article is that because-something-has-always-happened isn't a logical argument for it having a high probability to continue happening.  Ask the turkey, who is dutifully fed each day by the farmer, about this the day after Thanksgiving, as Nassim Taleb is fond of pointing out.

To me, the reason for aggressively allocating to stocks over the long run is the nature of our economic system.  It rewards innovation, creativity, and hard work.  The best and brightest among us are working 24/7 to bring us what we want in entertainment, the medical field, transportation, apparel, etc., etc.  This is what creates companies worth investing in over the longer term!