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.

Wednesday, April 23, 2014

Understand Your Investments

One of the first steps in understanding your path to retirement is to get a handle on what investments you own. Do you have high priced funds? Are you stuck because you signed an insurance company contract  that specifies egregious fees if you change your mind?

Recently I consulted with 2 school teachers. They don't make high salaries and their respective "nest eggs" are a bit meager. One has approximately $30,000 in IRAs rolled over from previous teaching positions, invested in Franklin Templeton shares  like FKINX, an income fund with a 4.25% load  and an expense ratio of 0.62%. FKINX is a class A fund. If you don't know the various classes of mutual funds , read

 The ABCs of  Mutual Fund Classes .

The particular advisor at Franklin Templeton Investments had this teacher, who is in her mid 30s, 70% invested in bonds. According to the client, the advisor chose the funds and told her he had her invested in the same way he invests his wife's investments!

I don't know the advisor but I would be willing to bet that he is making a good six figure income off of the commissions he is getting from putting school teachers and other lower income people in these expensive funds. I just wonder how he looks in the mirror each day.

To make the story short, I recommended she rollover the funds to Vanguard and invest in their 2045 Life Strategy Fund. Bottom line: low expenses, appropriate asset allocation, minimal effort. The good news is she saw she was headed in a bad direction early on and now has 30 years on a better path!

TO UNDERSTAND YOUR FUNDS, FIND OUT THE TICKER SYMBOLS AND THEN LOOK THEM UP AT WWW.MORNINGSTAR.COM. If you don't know how to do this email me and I'll talk you through it!

The second teacher works for a school system that has several insurance companies as providers to their 403 (b). This teacher is 10 years from retirement and has several Equity-Indexed Annuities.The annuities had returns of between 3% and 6% last year. Over the same period a conservative portfolio of 60% stocks/40% bonds achieved a return of approximately 15%. Just as a reminder, if she wanted to change her mind, liquidate her funds and try a different approach she would pay a hefty charge.

Her best alternative at this point is to hold the annuities until the charge runs down and then to make a switch. Her school district also offers TIAA/CREF and Fidelity as providers - both of which offer lower cost, well diversified funds. She will use these providers going forward over the next 10 years.

What are you and your family members invested in? Are you building your nest egg or some broker's/insurance sales guy's nest egg?

Sunday, April 20, 2014

HFT (Take 2)

HFT a Black Swan?
My "Take 1" post on high-frequency trading (HFT) referred to a Carl Richards piece in the New York Times which concluded that HFT doesn't have a discernible impact on most investors.  When I had written that post, I hadn't read Lewis's book.  I now have.

From one perspective, HFT is Office Space writ huge with nerds coding various trading strategies (i.e., algorithms) to skim off nickles and dimes on trades.  For the buy-and-hold investor who is re-balancing once or twice a year and is making relatively minor contributions to his or her 401(k), the impact as Richards pointed out is minimal.

When you take into account, though, the enormous trading volume in the capital markets, the sums accruing to the successful HFT firms are huge.  How huge?  Well, some traders fly in their private jets. Routing that reduces signalling by microseconds is worth hundreds of millions.

But to conclude that the small amounts taken from individual trades means that the small investor isn't much affected by the practice may miss a bigger issue that is a theme running throughout Flash Boys. That theme is that very few people understand how the capital markets work - especially since exotic trading has emerged with computers putting on trades, taking off trades, jumping in front of the line to get a probabilistic edge, not to mention so-called "dark pools."

Lewis's readers learn that the regulators were not very helpful in all of this.  In fact, regulators frequently moved to the HFT firms to earn the big bucks - illustrating the phenomena known as "regulatory capture."

So, in my opinion, the fact that the smaller investor isn't much affected and that maybe the whole practice of HFT has some beneficial arbitrage factored in misses a bigger concern.  That is that the whole process isn't understood; and when something isn't understood, the chance of a catastrophe (a "black swan," if you prefer) increases significantly.  For example, (an observation swept under the rug !), the Federal Open Market Committee was totally in the dark about the relationship between the banking system, the housing market, and Wall Street leading up to and into the 2008 crash.

There already have been numerous technological "glitches," as Lewis catalogues, headlined by the infamous 2010 "Flash Crash."  One of the traps that people fall into in today's complex world is that they assume the person flying the plane knows what he or she is doing.  This isn't always the case.

Saturday, April 12, 2014

What is a Robo-Advisor?

A robo-advisor is an online service that manages your assets directly or indirectly at a lower fee than is available from typical advisors.  They are the market place's response to high fees, available technology, and the fact that today we are responsible for our own retirement.

With the advent of the 401(k) and the consequent demise of pension funds, individuals have had to take on the task of managing their assets. As a result, an industry arose that charges upwards of 1% to put you into mutual funds charging in excess of 1% and even garnering commissions in many cases on top of that.  They will do this in your 401(k)s and then in your IRA rolled over from your 401(k).  Sadly, the bottom line has been, not surprisingly, poor.  After fees, research has long shown that 8 out of 10 professional managers underperform the market over longer periods.  This is part of the reason that a retirement crisis looms.

Robo-advisors, on the other hand, advise for a low fee so that picking funds, rebalancing, and withdrawing appropriately are broken down in easy-to-follow steps.  IMHO, this still isn't the best approach.  That would be to teach these fundamental principles of low-cost, well-diversified asset allocation based investing in public schools.  Today, instead, if school systems teach anything about investing it is via stock market games which, in turn, is a step in the wrong direction.  Still, for many people today, a robo-advisor could be a good approach.

Don't get me wrong - if you think you are Warren Buffett and want to take the risk of investing in individual stocks for higher performance ,be my guest:  in fact, I actively promote it for some clients with up to 10% of their assets.  FOR MOST PEOPLE, THOUGH, JUST INVESTING AUTOMATICALLY (VIA A 401(K) OR SIMILAR VEHICLE) WILL PUT THEM ON AN INVESTMENT PATH THAT WILL LEAD TO A SECURE RETIREMENT.

I have to say that I am always a bit leery of people who come to the party late.  In that vein, I am looking with a jaundiced eye at the movement in the Financial Planning industry to lower investment management fees in response to the robo-advisor trend.  It is reminiscent of brokers lowering the fees on mutual funds in response to the low fees of exchange traded funds.

In any event, here is the best article I have seen on robo-advisors and the services they offer:

"Financial Advice for People Who Aren't Rich" by Ron Lieber, New York Times

Towards the end of the article, you'll find a useful table comparing the various services. 

Tuesday, April 8, 2014

High Frequency Trading

Here's an informative piece by Carl Richards from the New York Times on Michael Lewis's Flash Boys: A Wall Street Revolt:

"What Michael Lewis's Book Has to Do With Your Money."

I haven't read the book but am  in the process of getting it on my pile of things to read - I'm number 8 out of 24 at my local library.  I'm a big fan of Lewis.  He is one of those writers who make you smarter about complex developments and you enjoy it.

Carl Richards makes the important point, with his napkin diagram (showing some investors are making a mountain out of a molehill) as well as with his writing, that high-frequency trading will not affect most investors, especially for the investor in low-cost, well-diversified index funds.  Actually, I would be remiss if I didn't quote Michael Lewis (a man who knows a lot about investment markets) on how he approaches investing:
When asked to describe how he invests, Mr. Lewis told CNBC, “I’ve always been a boring and conservative investor. I own index funds, and I don’t time the market ... I put it away and I don’t look at it very much. It doesn’t follow from the story in the book that you should flee the market.”
For those interested, the subject of high-frequency trading has been covered before in a well-written, entertaining book by Scott Patterson that I reviewed in November of 2012:

Dark Pools - A Book Review

If you are far back in the library waiting line, you may want to check the stacks for Patterson's book.

Tuesday, April 1, 2014

1st Quarter Performance - BlackRock Diversified Portfolio

Source: Capital Pixel
Regular readers know my favorite investment chart is the BlackRock 20-year sector performance.  It details the relative ranking of asset classes on an annual basis as well as the performance of an easily replicated low-cost diversified portfolio comprised of 65% stocks, 35% bonds.  The diversified portfolio returned 8.3% on an average annualized basis over the 20-,years ended 12/31/2013.

The diversified portfolio allocation is an appropriate benchmark for individuals in their 40s and even early 50s, depending on risk tolerance.  The table 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--as it should be as the 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 approximate performance of the diversified portfolio's sectors  for the 1st quarter of 2014.  Overall, the portfolio returned approximately 1.74%.

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.

Return (%) 3 months ended 3/31/2014
Expense Ratio
AGG  (Barclay’s Aggregate Bond Index)
EFA (EAFE Index)
IWM (Russell 2000)
IWF (Russell 1000 Growth)
IWD (Russell 3000)

Sunday, March 30, 2014

Dividend Aristocrats

real aristocrats
Dividend aristocrats have increased their dividends each year for the past 25 years.  There are presently 51 aristocrats in the S&P 500.  Here are the first 10 dividend aristocrats shown with ticker symbol, dividend yield, and P/E ratio.  The P/E ratio is based on the trailing twelve-month earnings:

MMM     2.60%     19.95
AFL        2.30%      9.31
ABT        2.30%     23.66
APD        2.50%     25.56
ADM       2.32%    21.00
 T            5.40%     10.24
ADP        2.50%    26.26
BCR        0.60%    17.27
BDX        1.90%    24.15
BMS        2.80%    18.65

A complete list can be found at

S&P 500 Dividend Aristocrats .

The yields and P/E ratios were obtained at

Yahoo! Finance  (just put ticker symbol into quote box )

The reader will  note that the issues are a bit pricey.  For comparison purposes, the weighted P/E on the overall S&P 500 is 19.63.  The fact that  many aristocrats have a higher P/E reflects their solid performance.

To see this go to the useful site at

S&P Dow Jones Indices

Source: S&P
 Here you can see that the aristocrats achieved a 5-year annualized return of 23.23% versus 20.43% on the overall S&P 500.

If you do the same exercise for the 1-year period ended 3/28, you'll find the aristocrats underperformed, 17.65% versus 20.89%.

These results point up an important point regarding investment approaches:  there is no single "no brainer" approach to investing.  This is important to keep in mind today because you'll see articles that tout dividend investing as an approach that always outperforms.

Investment Approaches

As an advisor, I talk to a lot of people about how to go about investing.  I understand that many people have difficulty relating to the typical approach that sets up a benchmark and then constructs a portfolio that seeks to outperform a benchmark they are not familiar with.  Many times there is the unasked background question concerning the performance of the benchmark:  what if it gets hammered?

Then there is the investment approach du jour:  manage to meet goals.  With this approach, portfolios are constructed differently for those seeking to finance a college education, leave an inheritance, or meet basic retirement needs.  To me, this approach is a bit wishy-washy and enables investment managers considerable leeway to produce poor performance.

Another way is suggested with the dividend approach and is welcomed by not only those in or near retirement but also the young.  The dividend investing approach has the goal of creating  passive income, and passive income is what you need in retiring - either early or normally.

I find that those who have dabbled in real estate relate to this way of viewing investing.

From the perspective of dividend aristocrats, the passive income approach is especially attractive in that dividends are consistently increased.  Consider this:  the yield on the 10-year Treasury note is 2.70%; and, if bought today, is locked in for the next 10 years.  Look back at the list above, and you'll find issues with yields above 2.70%.  If bought today and dividends are increased, yield at cost can rise significantly!

Think about the dividend approach like this:  suppose you had a basic annuity with an insurance company whereby you pay them a certain amount and they pay you a specified amount for as long as you live.  This is known as a single premium immediate pay annuity (the income stream is similar to Social Security).  Once you make the payment, there is no underlying value to worry about.  Similarly, in  investing in a portfolio  of dividend stocks, you can ignore the underlying value of the portfolio.  If it goes up, it can be considered gravy; but what you really care about is the income stream.


Like all investors, the dividend investor should diversify.  Buy Pfizer or Merck - don't buy both.  Buy AT&T or Verizon - don't buy both.  In 2008, the non-diversifier could have easily gotten hammered by the finance sector--caveat emptor.  The big risk in dividend investing is that dividends will be decreased!

Dividend stocks are in competition with the bond market.  They are substitutes for the marginal investor.  A sharp rise in interest rates would likely cause a greater discrepancy in performance between dividend stocks and non-dividend stocks than noted in the 1-year performance results reported above.

Creating a strong portfolio of dividend paying stocks requires some research and understanding that higher yields means greater risk.

Disclosure:  I hold stocks mentioned above for myself and for clients.  This post is for educational purposes.  Investors should do their own research or consult a professional before making investment decisions.

Tuesday, March 25, 2014

A Bond-Buying Pitfall

The pitch is practiced.  The reasoning is flawless.  The graphics are impressive.  You are elderly, wealthy, and seeking to protect a substantive nest egg.

Actually, on second thought, you may not be so wealthy.  You may merely have a six-figure taxable account as part of your nest egg.

Either way, you are walking around with a huge target on your back when you interact with the brokerage and advisor community.  Many in this community see you as an easy mark from which they can extract a significant portion of the nest egg you have built up over many years or inherited.

One way is to invest you in individual municipal bonds.  What, you say?  Aren't these the most conservative, low-risk instruments I can invest in?  If you believe this, go back and try to figure out the return you have actually achieved over the past 5 years on your muni bonds.

Even better, do as New York Times columnist Carl Richards suggests in

"Determining the Markup on Municipal Bonds"

and ask your broker what exactly is the cost of investing in your municipal bonds.  After he or she gives you a gibberish answer, ask "what is the mark-up?"  Another way to get at this is to ask for a bid price on your most recent purchase.

Then compare the mark-up percentage to the yields you are getting on your bonds.

As you read Richard's article, you may want to underline "...instead of seeing which bond would be best for the client, I was supposed to figure out which one had the highest markup...."  Since you've got your pen out, you may want to also underline, "...that most prospective clients didn’t know the markup existed. They said 'their guy' didn’t charge them anything...."

The points Richards brings up don't just apply to the muni bond world but also to corporate bonds. They are the reasons I prefer bond funds over individual bonds.

As an aside, Carl Richards is among my favorite personal finance writers.  I will be reviewing his book

The Behavior Gap

in the near future.