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, June 30, 2010

Buying Bonds - Who Pays the Interest? Part II

In the previous post, we came up with a specific bond offering by Zions Bank.

The bond was $1,410 principal amount of a Bank of America issue maturing in April 1, 2015 with a coupon of 4.50%. We want to see how the interest paid by the buyer is calculated if this bond is bought. This interest is called accrued interest.

To figure the accrued interest, we could do the calculation of multiplying the principal amount (1,410) by the coupon rate (4.50%) by the number of days (see below) divided by 360. The easier way is to use an accrued interest calculator:


The one thing that is tricky for novices is the "days in holding period." Bonds typically pay interest every 6 months. This bond pays on 4/1 and on 10/1. The "days in holding period starts from day of last payment - in this case it would be 4/1. If we were looking at this bond on 11/17, accrued interest would start from 10/1.

The number of days can be calculated by using a calendar or by again using a days between dates calendar.

Have fun calculating accrued interest!

Buying Bonds - Who Pays the Interest? Part I

Who pays the interest when bonds are bought and sold? Good question. The answer is that the seller receives accrued interest up to the time the bond is sold. The interest is paid by the buyer. The buyer then is "reimbursed," so to speak, when the bond pays the interest.

To understand more fully, let's go through a specific example., As a caveat, let me emphasize that I do not recommend that investors buy individual bonds. I believe individuals should participate in the bond market by buying low cost exchange traded funds such as AGG, BND, LQD, etc.

That being said, let's begin by looking at a specific bond. You should begin by going to your discount broker's site and looking at their inventory. An alternative is to go to zions bank. Click "investments," "zions direct," "bond store."


Note how I filled in the boxes. You, of course, would fill them in to your specs.

Among the bonds that came up was the following: CLICK TO ENLARGE

Tuesday, June 29, 2010

Are You an Accumulator or a Decumulator?

Accumulators are adding to their nest egg. Many are dollar-cost-averaging (DCA) by investing a fixed number of dollars on a regular basis. As long as they don't plan to start drawing funds within the next 5 years, they should love a market that is dropping because they can lower the average cost of their shares. Young people pay attention! Even in a market that goes nowhere over an extended period, accumulators can come out ahead by continuing to buy as prices drop. DCA is a relatively simple process. Decide on how your investments are to be allocated, and then sit back and watch it take place pretty much automatically.

Decumulators are in an entirely different boat. One that can sink them in a declining market if they aren't careful. They are drawing a paycheck from their nest egg. They are said to be on distribution. They are in the opposite situation of DCA and, therefore, need to be careful. It's not just a matter of reversing the accumulation process and selling a given number of shares of stocks or funds across the board. Doing such would require selling more shares in a declining market to raise the required distribution. Instead, decumulators need to think about a plan whereby they set up a short term fund from which to fund their distribution. Typically this fund is started with at least payments for 9 months and longer. For example, if a retiree requires $3,000/month from his or her nest egg, they would want to put at least $27,000 in the fund. Next, you need to replenish - aggressively in a down market. This requires dividends and interest to go into the fund. If you decide to reduce stock exposure by 5%, it should go into the fund.

This process has enabled decumulators to avoid having to liquidate stocks at fire sale prices and, therefore, keeps positioning structured for the next market upturn.

In the absence of a thought-out plan, it is easy to have emotions come to the forefront and dominate the investment process.

Bottom Line
Accumulators: enjoy the market and buy on the cheap.
Decumulators: proceed in line with your plan.

Saturday, June 26, 2010

Bear market redux?

For those who wonder if the bear market is back or has even ended, this past week was rough. It's time to turn to the pilot flying in to view the remains of, Timothy Treadwell, Grizzly Man , singing "Coyote" along with the greatest cowboy singer of all time, Don Edwards.

Friday, June 25, 2010

How to buy high yield bonds

Investors today are fearful of the stock market. After the downturn in 2008 and the recent weakness, they are piling into bonds and this has worked well - up to now, despite the continued predictions of a bond market bubble.

Still there is a great need for yield, and one place investors are looking is high yield bonds. High yield bonds are bonds that are rated below investment grade. Here is a list of high yield bonds from the Wall Street journal- CLICK TO ENLARGE.

Notice there are a couple of bonds on the list that yield more than 10%. The reason they have such "attractive" yields is because they are very risky - they may not pay off. This is called default risk. If you buy individual high yield bonds, you need to be well diversified because you will experience some defaults.

The better way to go is with exchange traded funds (ETFs) that are diversified and managed by professionals who have the resources to do the necessary research. There are two popular high yield ETFs: JNK ( note: high yield bonds are also called junk bonds!) and HYG. Put "JNK" or "HYG" into Google, and you'll come up with a number of sources to do further research on these ETFs.

I recommend that, in total, no more than 10% of investable assets be invested in this particular sector. It makes a good diversification for the bond portion of your assets.

The yield on JNK is 12%.

Disclosure: Investors should consult a professional or do their own research prior to investing. The information here is intended for educational purposes only.

Thursday, June 24, 2010

Timing the market

There is an interesting discussion on Bargaineering about market timing. The author of the blog, Jim Wang, had a nice response to a commenter I think is worth talking about. He said, "... if market timing doesn’t work for me, I don’t really care if it works at all."

I like this response because it reminded me of a luncheon I attended a number of years ago at the National Press Club in Washington, D.C. The speaker was a well-known stock manager who had produced exceptional returns by buying out-of-favor stocks. As he described his approach, I noticed that people were nodding and could tell by many people's expressions that they felt they could do it themselves. In fact, it was almost as if they couldn't wait to leave the luncheon and start making some money. And then he mentioned that he had just taken a big position in General Public Utilities after its plunge in price due to its Three Mile Island accident. It was almost as if air had been let out of a gigantic balloon, as people realized that they couldn't manage money like this manager.

Today some people say it is easy to avoid periods where valuations are excessive (for example, when P/Es skyrocketed in the late '90s). Well, one manager did it successfully and took heat for it - Warren Buffett. If you were invested in this period and didn't get caught up, like Buffett, in the bubble, then you may be able to come out way ahead by recognizing these periods. Otherwise paraphrasing Jim Wang may be appropriate.

I'd throw in the fact that professionals have, for some time, been harping about a bond market bubble. If you followed their advice, it has severely impacted your investment performance. Just some food for thought.

Why Active Management is Eating Up Your Nest Egg

People hand over their nest egg to active managers who claim they can pick stocks, time the market, and make tactical asset allocations. Many times the managers do OK for a period, and historical results seem to indicate superior performance. But careful analysis of long-term results show that very few active managers outperform the market after all fees are taken into account. Furthermore, it has been shown that outstanding performance doesn't persist; and it is not possible to pick the managers who will outperform the market.

Why is this? After all, these are the brightest of the brightest. They consume considerable resources in their endeavors. One important reason is as follows. Investing is a zero sum game. When a stock transaction takes place, there will be a winner and a loser. In the aggregate, professionals make up about 90% of the market. In other words, they are the market. The key to understanding long-term under performance is to understand fees. Here is a table taken from "The Intelligent Asset Allocator" by William Bernstein, page 92. Click to enlarge. Understanding this table can save your retirement dreams.

Look at Large Cap. If you get buy an actively managed fund that seeks to outperform the S&P 500 there is an expense ratio,on average, right off the top, of 1.30%. Also,these funds typically have high turnover - in other words they trade a lot. This takes another 0.3%. This is a fee you don't see. There is a bid-ask spread that takes another 0.3%. Note this is considerably larger for less liquid parts of the market like small cap etc.

The bottom line is that professional managers on average make close to market returns but fees subtract so much that the bottom line is greatly impacted.

The good news is that today (this hasn't always been true-it's a fairly recent developement) it is easy to achieve close to market returns after all fees by buying low-cost, indexed, ETFs. For example, the SPY, which tracks the S&P 500, has an expense ratio of .09%. By buying this the individual investor saves 2.1% of assets right off the top EVERY SINGLE YEAR.

Disclosure: This material is for educational purposes and is not intended as specific investment recommendation. Individual should consuly an advisor and do their own research before investing. The writer holds SPY.

Wednesday, June 23, 2010

Kill the ump

Just for the record, I want to put out front that I'm an old guy; so I can say what needs to be said. Get rid of all the old referees and umpires. They're blind, and it's ruining games. Once they get to be 35 years old, put them out to pasture.

This morning I watched again as a referee in the U.S. match made a phantom call that took away a goal from the U.S. If the U.S. had not scored in stoppage time, we would have been eliminated from the tournament.

Officials make stupid calls all the time. Anyone who has seen an NBA game knows that. The problem with soccer is that half the time you can't tell what the foul is. Throw in a candidate for assisted living to wander around as a referee, and the players no longer determine the game. No wonder they flop on the ground like fish anytime someone comes near them.

But my fun hadn't ended with soccer. This afternoon I settled in to watch pitching phenom Strasburgh pitch for the Nationals. Great game, except the Nats lost on a blatantly bad call at the plate. The runner slid across the plate and was tagged high on his back knee. The umpire was 2 feet from the play and in perfect position. The only reasonable explanation is that he is legally blind. I just want to say that, if that umpire drove home from the game, you don't want to be on the road. Seriously, you'd have to see it; and you would agree with me.

Monday, June 21, 2010

Target Date Funds-Should You Do It Yourself?

Is it worth constructing target date fund yourself?

Target date funds attract many investors. Pick a desired retirement date and the fund does the rest. It diversifies assets and rebalances to a more conservative position as the retirement date approaches. Some use low cost ETFs. What's not to like?

For one thing it may be worth checking the returns and the fees. If the fund charges fees and then fees are charged on the ETFs you are subject to a double layering of fees - the fund of funds effect. Thus. even though low cost ETFs are used the fees mount up.

Secondly, the performance needs to be monitored. Maybe a simpler approach gives comparable or better returns.


Some target date funds (CLICK to ENLARGE)

I decided to take a closer look at the 2020 target dated fund and looked at constructing a fund with the same allocation based on the Blackrock diversified portfolio. The allocation is 69% equity/31% bonds. Suppose we construct a portfolio similar to the 2020 target fund based on the Blackrock diversified portfolio. How has it performed over the past 12 months?


ETF Ticker

Weight (%)

1 year Return (%)

Yield (%)

Total Bond Market










Russell 2000





Russell 1000 Growth





Russell 1000 Value





The portfolio return here for the year was 19.83%. The return on the 2020 fund was 17.92%.

This, of course, is a bit of "apples vs. oranges" because the allocations are a bit different but still the magnitude is sufficiently large to investigate further. Part of the discrepency may be due the higher fees incurred by the target dated fund.

Data is from Bloomberg site. Although believed to be accurate it cannot be guaranteed. Analysis is for educational purposes. Readers should do their own research or consult with advisor before investing. Writer holds these ETFs.

Sunday, June 20, 2010

Can you time the market as well as Tony Hayward?

It may appear that those in favor of low cost index funds with minimal turnover for DIY investors only write about the folly of market timing. To prove that isn't the case and that we are more open minded, I offer a market timing move extraordinnaire by none other than Tony Hayward, BP's CEO. He might be clueless about deep sea drilling but apparently has a market sense.

Good move Tony!

Saturday, June 19, 2010

Eva Cassidy - Fields of Gold

For all the gold bugs celebrating the peak in gold price and those jumping on the band of my favorites

Important Money Ratios

Free Money Finance has interesting posts and comments based on the book "Your Money Ratios: 8 Simple Tools for Financial Security" by Charles Farrell.
These ratios are important for the DIY investor not so much for their specific recommendations but more for people to see where they stand with their finances and to think concretely about the important questions.

What always strikes me about these blogs and financial seminars is that most of the people reading them and attending already have an interest in the subject and know much of the information. Where this is really valuable is for those who haven't thought about insurance, investments etc. These particular posts at Free Money Finance are very useful, especially for these kinds of people.

Friday, June 18, 2010

A Quiz Worth Taking

Here's an investor knowledge quiz from FINRA. A DIY investor should get at least 16 correct.

Thursday, June 17, 2010

Evidence For Low Cost/Indexed Investing

What's the evidence for low cost/indexed investing? Good question. There is lots and it is varied. We'll eventually look at most of it in one form or another in this blog. But one type I'd like to look at here is less academic and more real world. It looks at what institutions do. It mirrors my experience as an advisor for the multi-billion dollar multi-employer United Mine Workers Health & Retirement Funds in Washington D.C. during the 1980s. There we did a lot of work to try to identify the "best of the best". Consultants brought us the best managers in terms of outperforming the S&P 500. We chose the best 3. Guess what? After 5 years, their return was below or close to the S&P 500 when looked at in the aggregate. This got us to move into low cost indexing.

When you look into institutions, you realize they have large staffs of analysts to advise the Trustees. You see that they spend most of their time focused on how they can enhance investment returns. They utilize the top consultants in the investment arena. Clearly, their actions speak loudly.

So what do institutions do? Dan Solin, on page 100 of "The Smartest Investment Book You'll Ever Read", lists the following as having "over $50 billion invested to achieve market returns:

-California Public Employees Retirement System
-New York State Common
-New York State Teachers
-Florida State Board
-City of San Diego
-State of Maryland
-State of Utah
-Los Angeles City Employees Retirement Association

The list continues with educational institutions and other organization types, but you get the message.

Wednesday, June 16, 2010

"How to Think Smarter About Risk"

Moshe A. Milevsky's thought-provoking article "How to Think Smarter About Risk" is must reading for the investment community. His thesis is that human capital is an asset that should be included on the personal balance sheet and incorporated into the asset allocation process. As he puts it, some people are bonds--their incomes hold up even in the face of a 20% market drop--and others are stocks--their incomes go up and down with big changes in the market.

His most controversial premise, it seems to me, is that young people should go lightly on equities because of their erratic income, and vice versa for older people who have converted considerable human capital into financial capital and thereby can take on additional risk. This, of course, is exactly opposite of accepted views on asset allocation. It seems to me that there is a trade-off involved in the point made by Milevsky and the long term returns of risky asset classes.

On another note, his analysis leads me to think that people should think a bit harder about the role of their home in their long-term financial plan. Is it viewed as an asset that will be used to help fund retirement? Then the possibility of a drop in price(or rise in price) should be factored in, whether from the possibility of a reverse mortgage or downsizing.

In any event, Milevsky's analysis raises important points in the critical area of risk management.

Tuesday, June 15, 2010

Do Economists Know What's Going On?

More great news out of Europe reported by Bloomberg. An index of investor and analyst expectations over the next 6 months plunged.The median forecast of 35 estimates dropped to 28.7 from 45.8, and economists predicted 42.

Apparently economists are drifting along in the fog in analyzing the fallout from the ongoing sovereign debt crisis. The need for debt-ridden countries to take fiscally responsible steps in a high unemployment environment bothers investors more than economists.

Sunday, June 13, 2010

Investment Musings

My basic recommendation is that investors invest at least 80% of their retirement funds in broad-based, low fee, low turnover exchange traded funds as determined by a systematic asset allocation approach that takes into account risk tolerance. This strategy overcomes the damaging impact of emotions driving the investment process in periods of extreme volatility. Defeating emotions defeats the primary long-term factor causing underperformance. Stated bluntly - it defeats getting whipsawed, i.e. buying high and selling low.

But what about those who want to "play" the market with the other 20%. I'm in this group as well as a couple you wouldn't expect - Charles Ellis (author of the classic "Winning at the Loser's Game") and Burton Malkiel (author of "A Random Walk Down Wall Street" and cataloger of evidence related to the Efficient Markets Hypothesis).

What have I learned from experience that I can offer for this 20%?

First, keep the investment in any single name to 5% and less of total assets unless there are extraordinary circumstances. If your cousin reveals that his penny stock company is announcing the cure tomorrow for all types of cancer, disregard this point and even the first paragraph--otherwise, diversify.

Second, remember that you don't have to be "all or none." For a long time I had been, and then I had a stock that I had held for over a year that had been under water from day 1. It was a biotech stock; and although I agreed with most analysts that the sector was promising, I never felt I completely understood the company. I would read about the drugs in the pipeline etc, but really didn't feel like I could explain exactly what they were involved with. In other words, they weren't exactly Krispy Kreme.

Anyways, in the library one night, in a state of boredom, I punched the stock up online to see where it had closed; and all of a sudden, trumpets started to blare and clouds parted. It was up 8 points, giving me a real nice profit at a time I could use a winner. I excitedly consulted a friend and told him I was mixed between blowing it out and holding it to see where it went. Moreover,there was really nothing in the news that explained the pop. My friend (take a bow, Andy) told me there was a third choice. You guessed it - he asked me to consider selling half. He said, "Why not play with the house's money." This was a Duh!! moment for me. This advice has served me well over the years both for stocks making surprise jumps or drops. It comes into play especially when there is a move and you are not sure why.

A final point that has helped me is to determine my actions ahead of time and then to follow through. In the tuition that is typically paid to learn investing, there is the so-called round trip where you buy a stock, it moves to a nice profit and then starts the slow descent to the runway with you kicking yourself all the way as it slowly drops back to cost and inevitably (this is what Mr. Market does!) below. Today, if I buy 300 shares of XYZ at $20, I make a mental note that, if it hits $25 or so, I'll let go 100 shares, say. And then I follow through. Where this really pays off is when you can follow through and buy a stock after it has dropped.

Saturday, June 12, 2010

Matt Andersen covers "The Boss"

Talking about Thursday's market

Friday, June 11, 2010

BP Coffee Spill

We have to laugh from time to time to keep from crying. Thanks to Anne Shugars for sending me this.

Thank You Andrew Hallam

It's always nice to get a favorable mention regarding my investment process but especially when it comes from a very knowledgeable investor. A casual perusal of Andrew Hallam's site shows you his considerable investment expertise.

My approach for the DIY Investor is based on the ideas of such investors as Bogle, Buffett, Ellis, and Malkiel as well as many others who have studied investment markets. It focuses on low cost, low turnover, indexed funds. My contribution is to work with you so that you can take over your own investing and avoid high (excessive, in my view) investment advisor fees. I do this by explaining the investment process, rebalancing etc., as I manage your funds for approximately 1 year at less than half the usual fee. Over the years, this will make a substantive contribution to the "nest egg" you will rely on in retirement.

Thursday, June 10, 2010

AAII/Baltimore Monthly Meeting

The American Association of Independent Investors will meet Saturday from 10 am until noon. The presenter will be Joseph J. Dankowski, and the topic, timely for DIY Investors in retirement or close to retirement, will be "Retirement Income Strategies".

Wednesday, June 9, 2010

Leveraged ETFs - An Accident Waiting to Happen?

There are stocks and there are bonds. All other financial instruments were created to get around some regulation. Frank Partnoy made this point in "Infectious Greed", published in 2003 to discuss the history of derivatives up to that time.

What about a 5-year average life collateralized mortgage obligation (CMO) This is an instrument created by carving up the cash flows of 30-year mortgages and placing them in a specific tranche so that a treasurer can get around the investment policy statement requiring investments to have a maturity of 5 years or less. What about an inverse floater CMO? This is a highly leveraged instrument created to make a significant bet on interest rates moving lower by those who are not allowed to legally borrow money to become leveraged. How about a structured note whose payment depends on the return of whatever has been the hottest stock market in the world over the past 3 years? It would be for the treasurer who is not allowed to invest globally. What about the municipality that wants to play the yield curve? There are structured interest rate swaps to do this.

The process is usually the same. The suits from Wall Street show up, find out what you want to invest in or explain what you need to invest in, and then go out and create it - the investment policy statement (IPS) be damned. They will create an instrument that lawyers can defend and that circumvents the intent of the IPS. This is a big bucks operation that ends up hurting a lot of people and sometimes soaks the American taxpayer.

The most recent manifestation was the toxic securities created from subprime mortgages sold around the world. These were sold to entities that were not allowed to invest in low-quality instruments. This is where the rating agencies showed up, carved up the cash flows (a process they have had plenty of experience at) and, again, produced securities designed to get around the safeguards - a triple A rating is (or at least has been) a powerful gate opener in the investment world.

Today people seem to agree that leverage is a problem. For example, it looks like bank capital requirements will be raised and bigger banks (read: "too big to fail") may be required to hold a greater proportion of assets as capital.

In hindsight, there are those who argue that the Federal Reserve should have reduced leverage by increasing margin requirements early on in the stock market run up in 2006/2007. This, they argue, would have mitigated the 2008 downturn.

All of this, of course, is similar to the community that puts up a traffic light after a horrific automobile accident has occurred. It's on the order of tightening up oil drilling after oil is washing up on America's beaches.

Still, despite the general agreement that leverage needs to be controlled, there is a proliferation of leveraged products in the form of ultra exchange traded funds. These can be used, by the average investor, to make leveraged bets on the direction, up or down, of stocks and interest rates and can get 2 to 3 times the move in the index.

Is this an instance where we, once again, turn in the other direction and then express surprise and consternation when the train wreck occurs?

Tuesday, June 8, 2010

A Resource for the Mutual Fund/ETF DIY Investor

CLICK IMAGE TO ENLARGE This is a useful resource for the mutual fund/ETF investor. It allows you to get approximate, up-to-date, performance based on net asset value. I'll first describe how to get to the site and how to use it and then a simple fun application.

Go to
and click the "MARKET DATA" tab. Next, scroll down to find the image shown above. In the "Enter Symbol" box, put in a mutual fund ticker symbol - for example put in IWV (the iShares Russell 3000 Index ETF). Next, in the drop down box for "Rank Funds by Sector," scroll to and click "All Funds." You'll see there are 27,623 funds in the data base! Divide by 4 to determine there are 6,905 funds in each quartile. In the little "skip to #" box, put in 6,905 and you'll see the approximate performance, on a net asset value basis, of the top 25% of the funds in the data base. Similarly, if you put in 13,811, you'll find the median return.

An Application

Now go back and find the YTD return for IWV and AGG (total bond ETF), and weight those by 70% and 30%, respectively. The result will give you a very simple return approximation for a very popular asset allocation.

Today's calculation (takes longer to explain than to do!) showed the weighted allocation at -1.73% YTD, the 1st quartile cutoff at 1.244% and the median return at -3.662%

Caveat: there may be an inclination to use this site to pursue top-performing funds. Resist; it could be hazardous to your wealth. Instead, stick with a well thought-out investment strategy based on an appropriate asset allocation.

The usual disclaimers apply. The information here is intended for educational purposes. Information at the Bloomberg site is judged to be reliable but cannot be guaranteed as to accuracy.

Monday, June 7, 2010

New Bond ETF product

Investors searching for yield (and there are a lot of you) here-to-fore have had the following choices:
-buy individual bonds
-buy bond ETFs matched to market indices
-buy CDs etc.

Individual bonds are unwieldy, illiquid, and generally difficult to diversify with. They have the advantage, in the minds of investors at least, that they can be held to maturity, in which case the investor gets his principle back, as long as they don't default.

ETFs matched to an index have no fixed maturity date and the price goes up and down so that at the end of 5 years, say, the ETF may have a price lower that what you paid for it.

Now we have target-maturity-date ETFs issued by Claymore Securities (actually a similar product has been previously launched by iShares in the muni sector). These track an index of investment grade corporate bonds that mature in a given year. For example, the 2014 fund (BSCE) is comprised of bonds that mature in 2014. Using a sampling technique, they track an index of these bonds. The expense ratio is .24%.

Using target-maturity-date ETFs, an investor can set up a laddered portfolio to capture corporate bond yields and be ensured, as long as there are no defaults, of receiving principle at maturity. For bonds that mature during the year, the proceeds are invested in Treasury bills until the end of the year.

I will continue to prefer the market indexed based ETFs such as AGG, LQD, and JNK; but understand that the target-maturity-date ETFs will appeal to certain investors, especially retirees.

For additional information, read index universe:

Sunday, June 6, 2010

A Must Have Link

Here's an indispensable link:

Type in "Howard County" and you'll get the pertinent demographic and economic information. Notice that at the bottom you have the sources.

Type in your birth date and you'll find out exactly how long you've been alive and the temperature in the nearest big city the day you were born.

You can type in formulas and all sorts of things. You need to play around with it to appreciate its full scope. I got on and immediately found out how big Hungary is relative to Maryland. Hungary is in the news now because of debt problems.

For investment people they may be interested in the fact that it quickly calculates an optimal portfolio for a given set of stocks. Just put in the ticker symbols and scroll to the bottom. You'll see correlations and ultimately arrive at the portfolio with weightings that produces the highest return with the minimum volatility. Although you may be like me and not really subscribe to this "efficient frontier portfolio optimization" approach it is interesting.

Type in duration and it produces a simple calculator to quickly calculate duration. Durations for bonds are not easy to find online!

This link was brought to my attention by Gene Mulligan - thanks Gene. This is I believe an indispensable tool for just about everyone, but especially for the DIY Investor.

Saturday, June 5, 2010

Is it time to capitulate?

I don't know if anyone's tried to rank the words investors least like to hear, but contagion and capitulation have to be, I would think, somewhere near the top of the list. Both were bandied about on Friday. Capitulation because of the big down draft in stock prices and contagion because of Hungary's debt woes.

I spent a good part of the day Friday glued to the TV set watching the hysteria build on CNBC. By the time Maria Bartiromo came on, it was at a fever pitch. She ramped it up a notch as she's wont to do by screeching that it's the President's fault because he had promised the market a good employment report at his press conference earlier in the week. Huh? She said the President had said he would keep his boot to the throat of BP. Huh? I watched that press conference; and as I recall, a reporter had asked the question in those terms and the President had said he wouldn't phrase it like that. Apparently, hysteria on CNBC knows no bounds. Look up Rick Santelli in the dictionary if you're not convinced.

According to Ms. Bartiromo, the President had gotten investor's expectations up and apparently was responsible for the disappointment experienced when the numbers were released. All I've got to say is that investors moving in and out of the market on the basis of one economic report deserve what they get - good or bad. It isn't investing, it's speculating. Unfortunately, most viewers probably don't know the difference between the two and are getting whipsawed by Ms. Bartiromo, Mr. Santelli and their ilk.

All of this provides a teaching moment. In calm times, it is not as easy to get people's attention. Investors, as opposed to speculators, do a lot of work on their asset allocation and arrive at an allocation appropriate to their goals, risk tolerance, capacity to take risk etc. Investors recognize that there will be periods like now. Investors understand that a key is to not let emotions rule their investment decisions.

Investors recognize that the current market environment means different things to different people. Younger investors should have their buying hat on. This is why they hold bonds. At this point they should be thinking of incrementally reducing bonds and adding to stocks. Older investors, who have more assets than they need and plan on leaving a sizeable inheritance, should be of a similar mindset. For those tossing and turning at night and generally afraid to look at their account, you may want to think about putting 5 or 10% into bonds (actually bonds have done great in this market).

The point is to concentrate on making rational, non-emotional decisions. Waking up at 3 am and going on line to sell everything you own typically backfires.

On the contagion issue, it is possible to hyperventilate imagining the whole world defaulting. Recall that this first became an issue in 1997 with the East Asia crisis. Contagion in that episode eventually spread to South America. The important point is that it was contained and followed by strong markets.

Disclosure: This is not investment advice to any specific individual but is the opinion of the writer and is intended only for instructional purposes. Investors (and speculators) should do their own research and consult with an investment advisor before making investment decisions.

Friday, June 4, 2010

The Wreck of the Edmund Fitzgerald

Gordon Lightfoot tells a tale that investors can relate to this weekend.

Cool and informative

This is worth checking out if you are interested in creative presentations and learning about motivation. It comes from a posting on the The Biz of Life site.

Thursday, June 3, 2010

Taxes,DIY Investor, Milevsky

Homework time!

All DIY Investors need to read chapter 5 of "Your Money Milestones" by Moshe A. Milevsky. Actually, the whole book is worth reading because it's well written and presents a unique look at financial planning. He believes in smoothing lifetime consumption. He tells of an exercise where he asks his students to do a mocked-up personal balance sheet. These, of course, are pathetic and done wrong because, according to Dr. Milevsky, they don't include human capital. Dr. Milevsky explains to the students that they are like an oil well with a stream of earnings forthcoming over the next 40 years years or so. This stream of earnings based on their human capital needs to be taken into account on their balance sheet.

In the tax chapter he presents a typical approach of thinking of Uncle Sam as a business partner and the need to ensure that Uncle Sam doesn't take too big a cut of earnings. He talks about an anomaly that drives economists up a wall - the preference of low income individuals to give Uncle Sam an interest free loan and receive a big tax refund in April.

The part DIY Investors need to understand has to do with mutual fund returns reported for taxable accounts. Assume we see a 10% return for the year. I quote:

  • "The entire 10 percent might be due to interest or dividends received, or both, even if the underlying securities themselves didn't increase in value.

  • Alternatively, the stocks and bonds in the fund might have increased in value without being sold, and in addition, they earned some dividends and interest.

  • Finally, the return might result from the investments themselves being sold for a profit.

  • In each of these instances the bottom line amount for the DIY Investor is going to be different. Thus, returns of actively managed funds are not always what they seem.

    All of this is just further reason to prefer low turnover, low fee indexed funds.

    Essential Info For Every Investor

    This is a must read for every investor on the fiduciary standard, written by Stephen Young, CFP. He suggests asking, "Do you have a legal obligation to act in my best interests?"

    Tuesday, June 1, 2010

    A fundamental rule of diversification

    The very first investment principle a DIY Investor should learn - one that is learned by some at great cost (monetarily and psychologically)- is don't put all your eggs in one basket.

    Many of the employees at Enron didn't understand it, but I bet you today they get it.

    Every advisor who has been in the business long enough flinches whenever they see a major stock run into difficulty because they know someone who holds the stock who wouldn't reduce their exposure. For example, I pleaded with an elderly lady in 2006 to reduce her 28% holding of a major bank stock she had inherited from her mother. She liked the dividend she said, but I knew the real issue was emotional attachment because I showed her a number of stocks in different industries that paid close to the same dividend. Needless to say, I didn't get that account because she didn't want to hear the advice I gave.

    Today I think back to a lady who had inherited BP stock and couldn't part with it. The shares had been given to her by her dad to finance her retirement. I can only imagine the sleepless nights she must be experiencing now.

    Here's the rule: limit exposure to 5% of total investable assets in any one name (stocks and bonds combined). When the price rises to put exposure at more than 5%, reduce the position. If there are tax consequences, then manage these.

    This comes from someone who has been stunned by developements in recent years by the companies that have run into difficulties: Bear Stearns, Lehman, Citi, Bank of America, AIG etc.

    Remember: Fortune magazine was praising Enron right up until it imploded despite having no clue on how it achieved its earnings.