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.

Monday, October 24, 2016

Can't Save? Think Again.

Probably the number one excuse for not saving for retirement is that people need every single penny of their paycheck. Most of us have been there and done that. This isn't just at the lower end of the economic spectrum but admittedly is most prevalent there. At least that's the most frequent response I get from people. The "I can barely make ends meet as it is, how am I supposed to make contributions to a 401(k) or an IRA " is a frequent refrain.

But the fact of the matter is people are already saving. It is forced saving. Out of every paycheck 7.65% is deducted for Social Security and Medicare. Think about this. If this was a choice I would be willing to make a sizable bet that many people would opt out and take the 7.65% each paycheck. Clearly this would exacerbate the retirement crisis that is building in this country. Sadly, many people have to be coerced into doing what is good for them.

To hammer home the idea imagine the task of trying to find people, especially as you move down the economic spectrum who don't welcome with open arms their monthly Social Security payment.

As you think about this you realize that this retirement payment is made through the years as you pay off your student debt, take on a house mortgage, have medical problems, have car payments, consider college for the kids etc. In other words, through all the usual excuses for putting thinking about retirement on the back burner.

An important corollary to all of this is that saving is more important than market returns in building a retirement nest egg, especially in the beginning. But many people use the uncertainty of the capital markets as an excuse to shy away. Know this: saving dominates. In fact, as is widely stated savers who are building a nest egg should cheer a negative stock market which gives them an opportunity to buy in at more attractive prices.

Sunday, October 16, 2016

Is This an Accumulator or a Decumulator Market?

In the simplistic world of financial planning you fall into one of three categories: an accumulator building a nest egg, a decumulator drawing down your nest egg and a live for today, borrow and spend type who will worry about retirement when it gets here. For the record there are too many in this latter category.

All three show up on the investment manager/financial planner's doorstep and the fact is only the first two can be helped unless the live for today person has had a revelation and has years to go before they want to build a nest egg or happily has been the beneficiary of an inheritance, won the lottery etc.

So what about the market for the accumulator and decumulator categories? Here are some market indices as reported by Schwab in their performance module. The returns are thru the close of business on 10/14/2016:

Market Index        3 months     YTD     1 year     5 years
S&P 500               -0.9              6.17       9.30       14.15
MSCI EAFE          1.22           -.47        -1.05        5.56
Russell 2000          1.21           8.01        8.25       12.77
Barclay's Bond     -0.50           5.08        3.84         3.10
Citi 3-mo. TB        0.07           0.20        0.21         0.08
S&P GSCI             1.60           7.72     -11.53      -13.54

Note that the 5 year number is an average annualized return. The S&P GSCI is an index of commodities produced by Goldman Sachs. The Citi 3-mo. TB (Treasury bill) return is a proxy for cash equivalent investments.

From one perspective the returns have been good for both the accumulator and the decumulator. They have been good for the accumulator because positive returns keep people in the market. On the other hand positive returns means the market is getting more pricey and sometimes gets investors to take more risk than they should. Accumulators would actually be better off if the returns were negative because then they could pick up shares at a lower price and the probability of strong returns going forward would be greater.

Decumulators should be more than satisfied with these returns as long as they stayed away from commodities, didn't park their retirement assets in cash and followed a well conceived asset allocation/drawdown strategy. Most decumulators are retirees. The behavior of markets for the first several years of retirement are critical. The 65 year old who retired 5 years ago is today 70 years old - by the "rule of 72" the annualized 14.15% return on equities has doubled money in the stock market. A retiree could hardly ask for more! Most will find that they took a nice drawdown and today have more than they started with 5 years ago and yet are 5 years closer to the grim reaper.

What more could they ask for?

Sunday, October 9, 2016

A Big Mistake

Over 20 years ago the bank I worked at was taken over by another bank. Companies are bought and sold all the time. This of course raises the stress level of employees, rumors swirl on who will be let go and who will stay. There is talk of promotions and everyone is focused on a potential reorganization and possible physical move. If you've been through this you know what I mean.

One of the outcomes typically is a short notice from Human Resources informing employees that the 401(k) will be terminated and that the employee has a number of options. They can roll over into the new company's 401(k), they can roll over to an IRA with a broker like Schwab or Vanguard, or they can can paid out a lump sum. Getting paid out a lump sum typically involves a penalty and income taxes.

The big mistake is taking the lump sum. Unfortunately, I saw most lower income employees seeing it as some type of windfall. Visions of a happy holiday season danced in their heads. They were happy to get this opportunity to take the lump sum distribution.

But look at the situation. Suppose an employee back then had $20,000 in his or her 401(k). Let's suppose the employee was 35 years old. They take it as a lump sum payment and pay a 10% early withdrawal penalty of $2,000 and income taxes of roughly 20% say so they get a check for $14,000. Wow! Happy dance time.

But fast forward 20 years and note that over the period a conservatively allocated 65% stock/35% bond portfolio more than quadrupled. The $20,000 today would be worth more than $80,000! The employee is now 55 years old and possibly faces retirement within 10 years - meaning that the $80,000 can potentially tack on quite a bit more. By the rule of 72 the portfolio only needs a return of 7.2%/year on average to double in 10 years.

This is a mistake that comes in many guises. Whenever there is a sum of money lying around there is a temptation to take it. It like the person who is trying to quit smoking but just can't as long as there is cigarette nearby.

But time goes by and one day we'll all defacing that 65 year old birthday and then mistakes or not will be obvious.

Sunday, October 2, 2016

How's the Market Doing?

When asked about how the market is doing people tend to respond with "it's pretty much going sideways".  Really?

Mostly they focus on stocks which is understandable since stocks are the most volatile component of the markets over the short term. Still I think it is more appropriate to look at markets from a broader perspective.

For example, many investors follow an allocation of roughly 60% stocks/40% fixed income (bonds) and cash. This is a pretty conservative allocation even for those at the beginning of their retirement.

Here is Schwab's model for this particular allocation:

35% Large Cap Equity
10% Small Cap Equity
15% International
35% Bonds
5% Cash

Readers of this blog and many other investors know it is easy to get low cost index Funds to mirror this and similar allocations.

So how is this model doing? Year - to - date thru 9/30 it has  total return of 5.89% and over the 12 months ended 9/30/2016  it has a total return of 10.69%. So the market is hardly going sideways and those who have stayed on the sidelines are falling behind.

I'm just the messenger so don't kill me. And I, along with everyone else, have no idea where the market is going next. I'm just reporting where we are.

Let's consider the results thus far for retirees. For retirees 4% is an important metric. It is the amount that can be withdrawn with an inflation adjustment and have concerns about running out of money be pretty much a non event.

Inflation over the past 12 months on the basis of the Personal Consumption Expenditures (PCE) price Index (the FOMC's preferred inflation measure) is running at 1.7% (ex Food & Energy) through the end of August.

Thus, the retiree who can achieve a return of 4% + 1.7% = 5.7% is right on target. Actually he or she is ahead a bit because they hit the target and they are one year closer to the grim reaper! I hate to put it like that but it is what it is!

In essence the bottom line is that they can end the year with the the same portfolio value in real terms after extracting their income need.

Just one final point on the question " do I have enough to retire?".  As we have seen there has been a sharp rise in the stock market and bond prices from the depths reached in March 2009.

Understandably some people will look at their portfolios, consider Social Security and possibly throw in a pension or rental income, add it all up and conclude they have enough to retire. If you are in this boat I suggest you look at your "nest egg" and only count 80%. In other words take your income from this source at 4% times 80% of your egg. It just means you can withstand a decent size downturn and not be in a quandary. In 2000 and then again in early 2009 market downturns pushed some retirees out of retirement. One of the tricks in retirement is to make it past the first 5 or so years!

Sunday, September 25, 2016

A Black Swan?

Nassim Taleb popularized the idea of Black Swan events in his best selling books, "Fooled By Randomness" and "The Black Swan". These events are unpredictable and have significant effects on financial markets. Market participants are adept at constructing narratives in hind sight that make the events seem obvious. The 2008 housing crisis which produced the worst economic downturn since the Great Depression of the 1930s along with a market crash is an excellent recent example.

The key is that the event be totally unexpected. It can be either good or bad.

One candidate I believe that is out there at present is that the actions followed by Central Banks and the U.S. Federal Reserve will actually produce a well functioning global and U.S. economy. This is based on my watching the markets, reading about the markets and talking to investors. I have to say that I don't know of anyone who thinks that there aren't some serious bumps and bruises if not much worse in the near to intermediate future coming from following a zero interest rate  and negative interest rate policy. I have to add that I believe this is so even for the Fed governors in their heart of hearts. Uncharted waters are scary

But, what if the economy ratchets up its growth rate to 3%, the unemployment rate drifts a bit lower in the U.S., tax collections reduce the deficit and the Federal Reserve has the Fed Funds rate at a more  normal 3% rate say in 4 years? Wouldn't this qualify as a "Black Swan"?

And surely all those now predicting a sharp downturn immediately ahead would have no problem creating a narrative explaining how we got on the road to nirvana.

To be absolutely clear I don't expect this to happen. This is merely an academic exercise to keep us on our toes. To be sure, I'm in the camp of those who believe that manipulating the price of money or practically the price of anything is bad policy and distorts the system (i.e. creates bubbles) and eventually ends badly.

Sunday, September 18, 2016

Recent Data on Passive Versus Active

One of the most important decisions an investor can make is whether to go passive or active. Passive accepts the market return, active seeks to beat the market return.

I am in the camp that says most investors investing for retirement should go passive (see previous post of "Proposal"). This rests on the belief that capital markets are mostly efficient. This means that stock and bond prices rapidly reflect publicly available information.

Believing in efficient markets practically comes with the territory of being an economist. Economists are drilled in the idea that when you have low barriers to entry, abnormal (i.e. greater than market ) profits won't persist. Take this idea to the capital markets where billions of dollars are on the line and it is pretty straightforward.

But this isn't an intuitive notion for most people. They hear their friend made a killing selling beanie babies and they run out and garner an inventory only to watch them gather dust later in their basement.

So what does recent data on passive versus active show? One of the most anticipated reports of the year  produced by Standard & Poor's is called the SPIVA report. This year, through 6/30/2016, 84.6% of large cap active managers underperformed the S&P 500 Index.

This means that if you bought SPY, the low cost index ETF, you outperformed 85 out of 100 managers for the year. For what it's worth, yearly performance is pretty much useless. Anything can happen in a year.

What is important is longer term performance because that is where costs that arise from active trading, management fees etc. come into play. The data shows that over the 5 years ended 6/30/2016 only 8% of active large cap managers performed better than the index. To break this down consider that if you had given 100 active large cap managers $1 million 5 years ago only 8 would have come back with better than index returns.

These results, along with the results of other market sectors, including "fixed income" are reported by Ryan Vlastelica in "How passive funds extended their dominance over actively managed rivals" /MarketWatch 9/15/2016.

There are various ways to try to beat the market. Some try to time the market, i.e. jump in when they think it is going up, jump out when then think it's going down. I call this the "hokey - pokey" approach to investing. And actually it amuses me. For example I was recently entertained by the mass exit called for after the Brexit vote. As we saw the market didn't fall off a cliff, instead it reached new records.

Another was to beat the market is to try and pick the best stocks. In this category I find especially interesting the so-called long/short Funds. If you think you can pick stocks then surely this proposition would interest you: study the stocks in the S&P 500 and short the 50 you dislike the most and with the proceeds buy equally weighted positions in the 50 you like the best.

Clearly, if you have any stock picking ability you would provide a superior return. Not only that but you should do well in any kind of market. This was, in fact, the pitch Funds following this approach presented. I know because I spent the first 20 years of my career investing for pension funds, endowments and other institutional investors. I heard the pitches.

How have they done you ask? William Baldwin, "Scary Results At Long-Short Equity Funds", 8/23/2016 Forbes provides some data. He says that Morningstar puts 133 publicly offered Funds in this category and that they returned 2%, average annualized return for 3 years ended 6/30/2016. The average stock index Fund returned 11.7%/year.

Is it really any wonder active funds are seeing huge outflows and index funds are seeing huge inflows. You don't need to be an economist to grasp that money flows from poorly performing high cost products to better performing low cost products.

Monday, September 12, 2016

A Proposal - Summary

This proposal's purpose is to give everyone at least a framework of how to go about building a nest egg for retirement, as presented in the previous 4 posts. Like many areas we have gone 90% of the way to handling a problem but then stop just short of wrapping it up.

The 401(k) and similar qualified plans are excellent for getting people to a successful retirement. The problem is many don't know how to use it. The purpose of the proposal is to fix that. As mentioned in previous posts if you know how to invest or have a different approach then go for it. Again, a caveat, if you are hell bent on beating the market by picking stocks or active Funds or timing the market all I can say is "good luck". The odds are against you.

Begin by emphasizing the importance of starting early and putting away at least 10% of every paycheck.

So, the proposal: start with an appropriate target date/life cycle/retirement date Fund . How to do this will be presented in a 15 minute video when you take your job. Secondly, once you reach $60,000 or so in your 401(k) switch to low cost index Funds with an appropriate asset allocation. Typically this would be somewhere around 70% stocks/30% bonds. Finally, when you reach the point where you are thinking of generating an income off of your portfolio consider creating a dividend stream by using bonds Funds and Dividend Funds and even individual dividend stocks.

The first two steps require very little time. The third is a bit more time consuming.

As explained in the previous 4 posts there is no need to switch at various points. If you have no interest and just want to stick with the life cycle approach you can do that. Or you can stay with the low cost, index Funds. The only reason to switch at various times is to lower the costs a bit. It is worth noting that directly investing in the dividend stocks can potentially be the most rewarding because you have opportunities for tax loss harvesting, judicially increasing yields oner time etc.

The bottom line is that this proposal provides a way to emphasize to workers that by following some very basic steps they can end up enjoying a nice retirement.