Investment Performance

This is part 3 of the process used to start a new account.  On Friday, we looked at how the process starts with picking an asset allocation model and why using low-cost indexed funds to match asset classes makes sense.  On Saturday, we looked at how to choose the investments and how they are tracked relative to the chosen model.  For this purpose, I used Schwab, which I use for my clients (mainly because of what I will present today); but many other brokers could be used as well.  Most offer tools for investors to manage their portfolios and more are offering commission free ETFs.  I am not affiliated with Schwab in any way.

The goal is for the investor to reach the point where he or she is comfortable managing his or her own investments after a reasonable time.  The savings are significant.  The particular case considered here involves an account that, by early August, will be approximately $575,000.  The typical advisor would charge 1% to 2% to manage this account.  At 1%, this would amount to $5,750/year.  I charge 0.4% which would be $2,300/year (charged quarterly, i.e. $575/3 months).  The goal is, as stated above, for the client to take over management after a reasonable time - certainly less than a year - in which case the entire management fee will be saved - i.e., stay in the "nest egg" and grow over time.

The setting up of the account and making initial buys and sells to get the account aligned with the model takes some time and trading activity.  That is done by me, with an ongoing explanation of the process to the client along with the reasoning behind the trades.  Sometimes particular assets will be held because they are load funds or they are in taxable accounts and would generate a tax gain, etc.  Once, however, the account is set up, the account needs to be monitored on an ongoing basis to ensure that it is aligned with the model - this is a process that takes a few minutes a week.  For this purpose, I show the client how to use the Schwab table looked at yesterday:

Source:Schwab

CLICK TO ENLARGE The "Difference" column reveals exactly where investments need to be made and is key to rebalancing.  At a minimum, rebalance whenever the asset class gets more than 5% away from target.  Yesterday we saw where to get investments.   I prefer to primarily use Schwab commission-free funds, but there are some others I  introduce when Schwab doesn't offer a comparable fund.

As an aside, it is important to note that the whole process works with individual stocks as well.  So, for example, if the client has 100 shares of Apple Computer, it will be classified appropriately.

Once the account is set up, it requires very little activity.  In fact, as mentioned above, just checking it once a week for a few minutes is usually sufficient.  This is a huge plus because, when markets get volatile, investors get emotional.  The emotions can take over, especially for investors who are not aware of how their portfolio is structured.  Thus, to back up for a minute, a real key to successful investing is to carefully pick an asset allocation that you are comfortable with and understand how your portfolio is aligned with the allocation model.

For those interested in further background on this investment approach, the following are well worth reading :

















Tracking Investment Performance

The next step, monitoring investment performance, is essential.  Schwab makes this easy, and it is the primary reason I use them for my clients.  The account we are looking at here that was opened a few days ago has the following performance:

Source:Schwab

CLICK TO ENLARGE As can be seen, the table shows performance for a number of time periods.  As time goes by, the client will be able to see how s/he is performing on an overall basis as well as versus the benchmark.  Notice that the assets comprising the benchmark ( the "moderately conservative" model) are shown in the footnote.

To summarize:  once the account is set up, there is not a whole lot of activity.  The positions are easily monitored relative to the desired allocation.  When interested, the performance can readily be examined by looking at the above table.  The days of waiting anxiously for  quarterly results and not knowing how assets are performing at any particular time are becoming a thing of the past.  The bottom line is that technology has given the average investor the tools to make the entire investment process much more transparent.

Additional Wrap-Up Points

There are some bells and whistles I typically add to  accounts.  For example, I put a few percent of the assets in PFF.  This is a trust preferred ETF that yields 7%.  It is somewhat volatile in that a number of issues are bank issuers.  I monitor the spread between high-yielding bonds and higher rated bonds and, at times, will add HYG - a high yield ETF. 

Also, there are other advisory services that cater to the do-it-yourselfer, low-cost index fund investor.  They advise on an ongoing basis and offer reasonable fees and minimize the time requirement on the part of the investor.  One I recommend that is worth checking out is MarketRiders.  Their mission is the same as mine:  to enable investors to keep more of their nest egg for retirement.

Disclosure:  I own some of the funds mentioned and invest in them for clients.  This information is for educational purposes only.  Investors should do their own research and/or consult with an investment professional.  I am not affiliated with Schwab or MarketRiders.