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.

Thursday, March 31, 2011

The Proteus Effect and Saving

Your Money and Your Brain: How the New Science of Neuroeconomics Can Help Make You RichIf you are interested in behavioral economics or the psychology of investor behavior, read Jason Zweig.  His book Your Money & Your Brain is the classic in this field.

In a thought-provoking article, "Want to Retire Wealthier? Start by Scanning Your Photo,"  in Tuesday's Wall Street Journal, he described the research being done using, of all things, avatars.  He reports that research being done at Stanford University enables people to see themselves at retirement age via their avatar. This, in turn, gets them to save more. The use of avatars has worked in the area of increasing confidence by giving people an attractive avatar in virtual reality space. The research suggests it can help people save.

Now DIY Investor is admittedly low tech. He doesn't deal with avatars and such. He doesn't even have, as far as he knows, an avatar. In his low-tech style, he merely reminds clients that one day they will wake up and it will be their 65th birthday and whether they have choices depends on their saving behavior today. It's hard to tell how effective this is.

Who knows? Maybe avatars are the key to getting people to focus on the long term. As the article points out, research by the Center for Retirement Research at Boston College finds that over 50% of Americans are not in a position to maintain their lifestyle in retirement.

Interestingly, some people already have the talent to think longer term without putting on the headset and going into virtual reality space.  Warren Buffett, for example, thinks about the value of spending on a haircut today compared to investing the money for 30 years. Most advisors dwell on the spending that takes place at life's big events and wonder whether people give them sufficient weight. DIY Investor tends to think, as well, that not understanding the basic concept of compound interest plays an important role in people spending significant amounts on weddings, funerals, and the first two years of college.

Mr. Zweig points out that one difficulty is that people don't know what they will want 30 or 40 years from now, and this is a hindrance to saving. DIY Investor suggests that perhaps a better way to think about it is in terms of what you don't want. This is a good place for a little Zen. DIY Investor doesn't want to work part-time for Walmart.

One of the psychologists, Dan Goldstein,  working at Stanford suggests putting employee's "age-morphed" photo on benefits section of company website. Great! Now we'll be even more depressed in down markets with statements showing how we'll look at 65. Admittedly, this isn't as big a deal for DIY Investor as it might be for some of his readers.

Wednesday, March 30, 2011

Google's 401k-the BrightScope rating.

A few days ago, DIY Investor posted the YouTube talk (found at Biz of Life's site) given by the irrepressible Suze Orman to Google employees. DIY Investor found Ms. Orman's talk filled with  essential information, especially for young people in the business world. Now Michael Zhuang at Investment Fiduciary has posted the talk which will get it out to more people. Thanks Michael. Michael has actually worked with Google employees and points out how good the Google 401k plan is, as did Ms. Orman in her talk.

This popped the question into DIY Investor's head as to how good the Google Plan actually is and sent him scampering to the site that rates plans relative to their peers:  BrightScope.

As you can see, BrightScope gives a top peer group rating to the Google Plan:

CLICK TO ENLARGE Suffice it to say that receiving the highest rating in the peer group is not easy.

The component ratings provide greater insight into the Google Plan:

The dark green scores are in the best 15% of their peer group. Thus, Google's 401k fees are in the lowest 15% compared to fees, participation rate is in the top 15%, etc. The two components below the absolute top are account balances ( I see Ms. Orman's eyebrows going up) which maybe is not surprising. There is a hint in the talk that Google employees may be a bit challenged in terms of taking on a bit much debt and may not be contributing as much as they should to their retirement. Also, employees may be a bit younger compared to their peer group companies.

The one component that stands out is the "investment menu quality" rating at "below average."  Since Vanguard is their provider, this isn't likely a matter of investment choices--although possibly some fund choices may have underperformed in recent periods. It may reflect the choices made by employees. As of 12/31/2009, the top holding was the Vanguard Wellesley Income fund at 25% of total holdings. With hindsight, we know that wasn't a good choice. Are the employees really that conservative?

In the comment section on the BrightScope page, a commenter recognizes the generosity of Google's 50% match for both the traditional and the Roth plans.

Tuesday, March 29, 2011

Bloomberg Economic Calendar

An essential tool for DIY investors who follow the market closely is an economic calendar showing the release dates and times of economic data. The most widely-known calendar is produced by Econoday and is available at the Bloomberg site. Go to and click the drop-down list button. The next to the last item is "Economic Calendar."

CLICK TO ENLARGE  In addition to economic data, the calendar shows weekly Treasury auctions for bills, notes, and bonds. DIY investors involved in the bond market need to know the timing of these auctions because interest rates can sometimes get volatile when the auctions go better than or worse than expected. You'll notice that the auction results for notes and bonds are reported at 1 pm. For example, today the 5-year Treasury auction results will be reported at 1 pm. If you are a novice in this area and are interested in following Treasury auctions, you may want to tune in to CNBC at 1 pm. At that time, Rick Santelli gives an assessment of the auction results - very useful information if you happen to be buying or selling bonds or bond funds.

You'll also notice that there is a report issued on Wednesday at 10:30 am called the "EIA Petroleum Status Report."  This report is on oil inventories and is a market mover in the energy markets. Again, if you are in the market buying or selling energy stocks or funds, you need to be aware of when this report is issued. At the bottom of the calendar page is an important legend that tells you which reports are deemed important and which reports have market expectations available. As DIY investors know, it is "news,"  i.e., the difference between expectations and actual results that move stock and bond prices.

Source: Econoday/Bloomberg
For example, today at 10 am the Consumer Confidence report will be released by the Conference Board. Clicking on "consensus," the DIY investor will find that the number is expected at 64.0 and estimates range between 55.0 and 70.0. The DIY investor will also notice that most major releases are reported at 8:30 am . The biggie this week is Friday's report of the employment situation. The DIY investor can easily find that the consensus for that report is that 200,000 jobs were added in the month of March.

Monday, March 28, 2011

Doing It Yourself

Many years ago I had a friend whose name escapes me, but whose situation stayed with me through the years. He had wanted desperately to get into a course but for some reason had been shut out. I don't remember if it was financial or what the reason was. As I commiserated with him, he ended up saying, "There's always the library."   In my mind, that translated into the idea that, if you want something badly enough, there's always a way to get it; and that especially holds true when it comes to learning.

This, of course, has never been truer than today with the internet. Want to learn cooking, how to get from point A to point B, or even how to play the guitar? There is loads of information available at your fingertips online. The information is free and, in my opinion, much better than just a short while ago. For example, there are sites available now that catalogue the best online college course from top universities. Many  are taught by dynamic teachers featuring interactive modules that allow the student to get involved.

I believe that this is subtly revolutionizing the education industry. It won't be long before you can get a degree online by picking a package of online courses from the best instructors at MIT, University of Maryland, University of Chicago, and the Wharton School. If you're like me, you're thinking, "right, nothing will replace face-to-face in the classroom." Before you pooh-pooh this, you may want to check out some of the top online courses and see how they use the technology, and compare them to some of the lectures you sat through when you were in college.

Source: New York Times
Anyways, this is surely the case with investing and personal finance, in general. The challenge actually is to catalogue the sources of information for those who want to learn so that they can easily find the best sources. Along these lines, I would like to present the "Managing Your Money Through the Ages" feature at the New York Times. CLICK TO ENLARGE

One of the challenges of financial planning is that everybody is at a different stage in life and on a different path. The New York Times feature handles this well. Hone in on your particular stage in life and drill down.  Most likely, you will find financial planning articles highly pertinent to you. There are even checklists that show you some issues you  should be aware of at different stages.

Just as  you are not going to be the next Food Network star by learning to cook online, there is still a need for face-to-face individualized financial planning in complicated cases. Still, for most people, the information they need is available online, for free.

As a special bonus for those who have read this far, check out this online book.

Sunday, March 27, 2011

Suze Orman Talk to Google Employees

The Google Author series is, IMHO, one of the best on the web. I found this Suze Orman talk to Google employees at The Biz of Life blog.

The information Suze Orman so eloquently presents (and with flair to boot) in this talk is extremely valuable. I recommend that it be passed along to young people getting started in the work world. Learning about FICO scores and Roth IRAs, etc., early on can make a big difference.

Saturday, March 26, 2011

Buffett on Gold

Mich, at Beating the Index, presents some comments made by Warren Buffet on the difference between investing and speculating, specifically in reference to gold. Buffett relates the value of gold to real productive resources - the resources from which value is created. This puts the value in "real terms." Understanding economics requires looking at magnitudes in real terms. For example, forget inflation and the value of the dollar for a minute. How long does the average worker today have to work for an automobile or, say, 100 gallons of gasoline, or, for that matter, an ounce of gold?

Think back to '73/'74 and OPEC quadrupling the price of oil overnight. In effect, they were saying a U.S. auto was worth so many barrels of oil and then turning around and saying the U.S. needed to pay 4 times as many autos to get the same number of barrels of oil. Obviously the U.S. couldn't do that, especially in the short-run, and had a choice between paying them funny money, i.e. deflating the currency or going into a severe recession. We chose a combination of the two. Take a look at the inflation rate in the early '80s.

The same sort of analysis was done in the late '80s with respect to Japanese real estate. A square meter of land in parts of Japan was going for approximately $100,000! The sport du jour was comparing Japanese land prices to land prices in prime locations around the world. The end result wasn't pretty.

In his analysis, Buffett figures that all the gold in the world would amount to a cube 27 feet/side. It would be valued at approximately $7 trillion. Compare that to the value of farmland in the U.S., at roughly $2.5 trillion, and 7 ExxonMobiles along with $1 trillion left over. Buffett points out that you are comparing something pretty to look at with something that is productive. Gold is bought not because it is used to produce something valuable but because the buyer hopes someone else will come along and be willing to buy at a higher price.

In the end, Buffett chooses the farmland, etc., and Mich agrees. I agree also. What about you?

Friday, March 25, 2011

Bond Prices and Present Value

DIY Investor previously discussed the concept of present value. Present value puts a monetary value on income to be received in the future. As a simple example, $200 to be received 5 years from now would have a present value of $149.45, if the discount rate (i.e. yield) is 6%. This is calculated as follows:

                                                               $149.45 = 200/(1.06)^5. 

Flipping this around reveals that, if you invest $149.45 today at 6% compounded annually, you will  have $200 five years from now.

This is the key to bond prices, since bonds are merely a stream of payments to be received in the future. The general price for a bond is calculated by adding up the present value of the payments to be received and can be expressed with the following scary-looking formula:

P = C/(1 + yld.) + C/(1+yld.)^2 +...+C/(1+yld.)^n + PRIN/(1+yld.)^n

C is the coupon payment, yld. is the all important yield-to-maturity, and PRIN is the principal amount.

Understanding this formula is key to understanding how bonds work. To put it into specific terms, consider the price of a 3-year maturity with a coupon of 6% with market yields for similar bonds at 6%. Assume a principal amount of $100. The price can be written as :

P = 6/(1.06) + 6/(1.06)^2 + 6/(1.06)^3 + 100/(1.06)^3

P = 5.66 + 5.34 + 5.04 + 83.96 = 100

This just shows that when market rates are equal to the yield on the bond, the price is $100, or par.

But suppose yields rise. Suppose the yield on similar bonds in the market are 7%. Redo the calculations:

P = 6/(1.07) + 6/1.07)^2 + 6(1.07)^3 + 100(1.07)^3

P = 5.61 + 5.24 + 4.90 + 81.63 = 97.38

Notice how the present value of each term is now lower. Playing with the present value formula by changing yields and maturities etc. will enable you to understand everything you need to know about bonds. The simple demonstration here shows the inverse relationship between bond prices and yields that confuses so many investors. Studying the formula further reveals why longer maturity bonds are more volatile in price than shorter maturity bonds. If you don't believe DIY Investor, do the same exercise above for a 5-year maturity. Think about the impact of more terms. Think about what happens to the present value of $100 to be received 5 years from now compared to the 3-year period above.

You can even go further and think about the percentage drop in bond price calculated above for the assumed 100 basis point increase in market yields. This gets you even more sophisticated in that it takes you to the concept of duration, which is merely an extension of maturity. Now, when you go on Morningstar or similar sites and see the duration of various bond funds, you hopefully understand how the underlying implied volatility is figured.

Bottom Line

All investors, including the most aggressive, should have a portion of their assets in fixed income or bonds. The key to understanding how this portion of their assets works is understanding the basic principle of present value. DIY Investor believes that this requires, for most people, rolling up the sleeves, getting out the calculator, and playing around with the numbers.

Thursday, March 24, 2011

Meeting With RW Investment Strategies

The focus of my practice, RW Investment Strategies, is to offer financial advice and investment management services for individuals and families to get their investments on track. It turns out that, over the past few decades, the American people have been put in charge of their investments and their retirements without an owner's manual. Many are unsure of how to proceed and whether they are on the right track. They are at the mercy of fast-talking, high-priced financial service providers. They should, at the very least, explore the alternatives that are available to them.

I understand that for many people, as I previously said in a similar post, meeting with an investment advisor is on par with going to the dentist. Hopefully, I can change that perception (no disrespect intended towards dentists) by describing the process.

I get all kinds of requests. Some are just to look at the bond portion of assets. Some are to get a second opinion. Some are to look over 401k allocations. The following is a description of my approach..

The Initial Meeting

Typically, it is a matter of two meetings. At the first meeting, usually one hour,  I gather information and we get to know each other. I'm interested in the big picture. We fill out a questionnaire together. I'm interested in your goals and where you are on your path to retirement. Ages, types of assets owned, number of years to desired retirement, etc., are all very important. I am interested in whether you seek to finance college educations, your insurance situation, whether your job is secure, etc. I am interested in your saving and borrowing habits.

In the first meeting, in addition to the basic questionnaire, I ask potential clients to complete a simple risk-tolerance type of questionnaire. I ask questions about past investment experience. Many times, by understanding reactions to the 2008 debacle, I can get valuable insights into risk tolerance. Here's the deal: sometime over the next 10 years the stock market is going to drop more than 25%. This could be over a short period or prolonged. I need to try to understand how a client will act in choppy markets. I'm interested in whether s/he will want to capitulate and sell everything or stay the course and possibly look at a drop as a buying opportunity.

If you aren't sure if you are interested in my services, I usually cover my philosophy in the first 15 minutes. I'll listen to what you are looking for. This is low key, and there is absolutely no obligation. If there is no interest in the low-cost, low turnover, indexed approach or you are interviewing other advisors, then we'll shake hands.  I'll wish you luck, and we'll part ways, hopefully to meet up again in the near future.

Once we decide to proceed, we sign some agreements that specify my services, as required by state regulators. I next gather your most recent statements and the list of assets available for investing.

Next, I sit down with this information and order accounts starting with the taxable accounts, then the qualified accounts (401ks, 403bs, IRAs, government TSP, etc.), then the Roths. The next step is to assess your overall asset allocation. Simply, this is the percent in stocks versus percent in bonds. Is it appropriate, given everything I've learned about you up to this point?  I like to frame it in terms of the seven models offered by Schwab, ranging from most aggressive to least aggressive. Picking an appropriate model at the beginning is a vital first step in a successful investment program.

Next, I will see if it makes sense to reorder investments from a tax perspective. Some clients have interest-paying assets predominantly in their taxable accounts. A simple reordering of investments to exploit low-dividend/cap gains tax rates can save big bucks.

I next look at specific investments from the perspective of how they fit the model.

I explain that this is a long-term process, that, again, we are moving into choppy waters; the idea is to get comfortable with a plan and stick with it. For those contributing to their 401ks, etc., I explain that it is beneficial for markets to drop because then assets are cheaper.

Once I've drilled down to the asset level, I am looking for index funds with low-management fees rather than high turnover, actively managed funds with high expense ratios. I am interested in broad market participation in domestic markets as well as international markets. In the bond area, in today's markets, I am recommending shorter-term funds, some high-yield exposure as well as international bond funds. With rates so low, it is risky just to buy the broad bond market.

The Second Meeting

The second meeting goes over the recommendations in detail. I am looking to see whether you can carry out the investment plan. If I feel you can't, or don't want to, I'll offer to manage your investments at a rate of 0.4% of market value. As part of the meeting, we talk about monitoring the portfolio and rebalancing. I typically rebalance if a sector is 5% out of balance. We talk about the resources you have available at your broker/401k provider. For example, Schwab has portfolio analytics available to clients that makes the process very simple. In fact, they are currently testing a portfolio performance system that will soon be available.

RW Investment Strategies works with some clients who feel they may want to manage their own investments, in the future, using the low-cost, indexed fund approach. RW Investment Strategies gets the portfolio up and running, manages the assets for 6 months to a year, until the client is comfortable, and then hands the reins over. During the interim, RW Investment Strategies will sit with you at the computer to ensure you know how to do transactions on line, rebalance, etc. It is obvious that doing it yourself saves a big chunk of the nest egg over the years.

In the second meeting, I also make recommendations in other areas for your financial planning. For example, you may need umbrella insurance, a will, or tax work. As a fee-only registered investment advisor, I am compensated solely by my clients--I receive no referral fees from custodians or insurance companies I may recommend . If I receive referrals from someone I refer you to, I disclose it.

If you are several years away from retiring, it is very useful to begin thinking about where your retirement income will be coming from and how much you will need in retirement. If in retirement, it is critical to think through when to take Social Security and how you will manage your assets to ensure you don't run out of money.

I'll leave you with recommended readings and blogs to follow. From time-to-time, I'll check up on you.

Generally, it's a pretty pain-free process. Not at all like going to the dentist!

Wednesday, March 23, 2011

Academy of Finance Spring Conference

Yesterday DIY Investor attended the Academy of Finance Spring Conference at the beautiful Kossiakoff Center at the Applied Physics Lab in Laurel, Maryland. The campus is a feel-good place because you just feel smarter being among so many brilliant scientists. For those who might not know, scientists from all over the world trek to the APL in Laurel to discuss path-breaking scientific research. If anyone in the world has a question about Jupiter, for example, they very likely could find the world's expert at the APL.

The Academy of Finance is a Howard County Public Schools program open to students of all Howard County public schools who are in interested in getting a jump on a career in economics, finance, or business. Yesterday's program was attended by approximately 75 students (rough eyeball count) and focused on "Entrepreneurship:  Business in the Future."

The program was bracketed by the keynote speakers. Fran Kirley, CEO of Nexion Health, was the opening keynote speaker; and he described how he started his nursing and rehabilitative services company at the age of 50 after spending a career as a hospital administrator. He vividly described all the functions his company is responsible for, including meal preparation. He stressed the importance of his employees and having them feel that their work is important.  Mr. Kirley took the students through a step-by-step process of starting a business, including methods of financing when starting up; and the one point above all that stood out was the importance of having a passion for the service you provide.

After a short introduction to the breakout sessions by Academy of Finance instructor Dr. Maddy Halbach, students either went to presentations or practiced interviewing skills with volunteers from the community. DIY Investor interviewed several students and was very impressed. Students made excellent eye contact and gave specific examples in answer to difficult questions. They smiled and appeared at ease. They were clear in describing their short-term as well as long-term plans. As DIY Investor commented on their sheets, these students performed better in their practice interviews than did many that DIY Investor has seen in the real work world.

DIY Investor also attended a breakout session led by Cary Millstein of the Welming Group, a company that sells nuts in China. A number of students in the room had been to Asia and related well to the stories he told. He talked about the currency, tariffs, and the importance of the World Trade Organization. He talked about duty trade zones. He even said that he had thought about doing the same business in India but most likely won't. He pointed it out as an opportunity for an aspiring entrepreneur.

In all, there were 12 breakout sessions the students could choose from, ranging from "Careers in Insurance and Public Service" by Joy Hatchette and  Sandra Castagna to "Electronic Marketing" by (former "Apprentice" participant) Aaron Altscher.

The second keynote speaker was Kwame Kuadey, CEO & Founder of Gift Card Rescue. He described how his company will pay you for that Macy's gift card you don't want and then resell it at a markup to someone who likes to shop at Macy's. This problem of getting gift cards from people who don't want them (sorry Aunt Sally) to people who do in today's economy is the problem his company was set up to solve, and he said this is a key for an entrepreneur - find a problem to solve for people. A student asked an excellent question about how he got clients to trust him since he does business online. Mr. Kuadey responded that this was an obstacle and that he solved it by using video testimonies on his website and becoming an expert on the subject of gift cards. As a recognized expert, he is quoted in the Wall Street Journal, New York Times, etc., which bolsters confidence in potential clients doing business online.

At the end of the day, Ed Evans, principal of ARL, complimented the students on their professional behavior, attention, and questions they asked of the speakers.

DIY Investor has to say that students in Howard County are lucky to have a diverse group of accomplished business people in Howard County willing to share their experiences with students as well the opportunity to participate in a program like the Academy of Finance.

Tuesday, March 22, 2011

Building, Preserving and Keeping Enough Wealth for a Comfortable Retirement

Guest post from Charles Tran at

We hear the dire predicaments from politicians and financial advisors alike: we simply cannot rely on Social Security to get us through retirement. We all know we must begin saving in order to guarantee a solid financial future after retirement, but not many of us know how to get there.

Today is the day to begin saving for your future. Thankfully, building, preserving and saving our wealth can be accomplished by following a number of strategies:

Don’t save tomorrow what you can today – In the best case scenario, you start to save for retirement the moment you land your first job out of college. However, not many 20-somethings are thinking of retirement. The reality is that the sooner you begin saving, the better off you’ll be, even if you are able to only save small amounts. Remember: the key to building wealth is time. The more time you have, the more you can put the power of compound interest to work for you. There is a reason Albert Einstein said, “The most powerful force in the universe is compound interest.”

Remain realistic when setting retirement goals – Regardless of what a financial advisor may tell you, only you know what you can comfortably afford to give to your retirement account each month. For example, you do not want to sacrifice your credit card payments to store away retirement funds, as the financial cost would not be wise. Setting unrealistic goals that you simply can’t keep is the quickest way to ensure your retirement plan will go down in flames.

Absolutely take full advantage of your employer’s match – If you only employ one retirement strategy, then it should be to always match your employer’s maximum retirement contributions. The amount of money your employer will contribute to your retirement plan is essentially free money. If you neglect to contribute  the maximum employer contribution, you are really burning free money for your golden years.

Think 401K or IRA for your retirement plans – Both 401K plans  (usually through your employer) and IRAs (individual retirement accounts) offer huge tax breaks. Put your money where it can grow without being overtaxed so you can reap the rewards of saving for retirement.

Concentrate on stocks and go easy on the bonds – Generally speaking, stocks  are usually a smarter option for younger savers who have a higher risk tolerance. In fact, stocks achieve better over long periods than nearly any other type of investment. Bonds  are a challenge, though an option, especially for those near retirement. Those who are on fixed-income and vested in bonds will be sensitive to inflation.

Dip into your taxable accounts once you hit retirement – The best way to make sure your retirement money will last is to draw from your taxable accounts and leave your tax-advantaged accounts alone so they can continue to earn you compound interest until the last possible minute.

Consider the advantages of working part-time in retirement – If you are quickly nearing retirement age without a substantial nest egg, consider taking a part-time job. Making just a small amount of money can mean your retirement accounts will go that much farther. Do something you love or find something that interests you and earn some part-time cash to put toward your living expenses.

The prosperity of your golden years starts today. The sooner you begin to store away money for retirement, the larger your nest egg will grow.

Monday, March 21, 2011

Paid For College on His Own

The April issue of Kiplinger's Personal Finance on page 65 features an interview with David Leetsma, a junior at Ferris State University in Michigan. David has paid his way through college. I did as well; and, as I read David's story, I thought for a minute I was reading about myself. I thought the questions were well done and decided to answer them myself.

You took a year off between high school and college. How come?
My father suggested that I do so. He said it would give me work experience, give me a better appreciation of what I was trying to achieve with a college education, and, of course, give me money to pay for school. I had some nasty jobs. One was in a laundry of a major hospital. Many older people at these jobs encouraged me to go for an education. I felt the opportunity was a privilege many people would have liked to have had. Finally, I was fortunate in that I landed a job working 60 hours/week and getting paid time and a half for overtime. The job wore me out, and I was able to save a pile of money. It isn't easy to spend money when you are working 60 hours/week.

Why did you start at a community college rather than a four-year college?
Actually a couple of reasons. First, my start was a false start. I thought the purpose of college was to extend one's sports career. I went to play basketball and baseball. Classes were secondary. I did learn, however, that I wasn't interested in engineering. Secondly, I was the first one in my family to go to college. In my eyes, community college was the same as a 4-year school. We didn't live in the type of neighborhood where everybody compared the colleges their kids were accepted at.

On my second attempt, where I took the education part seriously, community college enabled me, like David, to live at home.

Let me put in a plug. The really great thing about the University is all of the super smart people. Still, when I look back, I feel that the very best teacher I had in Economics was my first Econ teacher, Mr. Biggs, in community college.  One of the big secrets, I feel, is the quality of teaching at community colleges.

You had siblings. Were your parents able to help with the college costs?
No. But again, like David, I did live at home for a while.

What were some of the ways in which you paid for college?
There were three. I took the year off, as mentioned above. After my false start, I then took 2 years off-- courtesy of being drafted into the U.S. Army. This gave me the GI Bill, of which I used every penny all the way to graduate school. And finally, I always had a job - in graduate school it was mostly teaching-assistant positions.

What was the biggest challenge?
Jobs. After the Army, I needed a job to help pay for school. That summer, I worked in a tire warehouse and made good money. At the end of the day, however, I fell into bed exhausted. Two weeks into the Fall semester, I saw this wouldn't work. I then took a job as a bank teller, at a cut in pay; but the bank teller job offered me a chance to study in between customers, and it was related to the business/economics curriculum I was studying.

This has come up since, because today I am an adjunct economics instructor at the local community college. I once had a student fail the mid-term, and he told me he didn't have time to study because he had to spend time learning the menu at Outback where he was a waiter. Priorities are important.

Do you have advice for students?
Think about why you want to get a college education. Think about the career you want to pursue. After I got discharged from the Army, I knew I wanted to do something with investments. I took my first economics course, having no idea what it was going to be about, and immediately saw that it was the key to understanding investments. Every economics course after that was vitally important to me.

My youngest daughter went to the University of Maryland and to the Culinary Institute of America. The first thing she said was the students are different. At the Culinary Institute, all they want to do is cook. All weekend long, out of class, they are experimenting with food. If a student can study something s/he is passionate about, it is a huge advantage. Even more important, IMHO, than smarts!

Any regrets?
None. I'm glad I paid for it myself, and it has been great fun and a great challenge. I admit it's harder today; but, as David shows, it can still be done.

Sunday, March 20, 2011

Generating a Paycheck From Your Nest Egg

You are no longer an accumulator; you are now a decumulator. This is a completely new phase. It needs to be thought through carefully. Too often people retire in a rising market with no thought given to how they are to fund their retirement. Then the market drops and the problems start.

Think it through ahead of time. You are no longer building up your nest egg by making your 401k contribution out of your paycheck every two weeks. Now you are looking to the nest egg to provide a paycheck.

There are a number of ways to proceed. DIY Investor believes that the decumulator should first put 9 months of payments into a short-term fund. This is where the paycheck will come from. This is the primary defense against a market downturn. It enables you to weather a market drop.

It is important to have this plan in place to minimize the chances of selling stocks or bonds after they have dropped significantly in value. If you think about it, just systematically selling in a down market is the opposite of dollar cost averaging - the process that was so instrumental in building the portfolio up. Avoiding this "negative dollar cost averaging" is important in managing the nest egg in retirement.

Part 2 of the plan is to seek to structure the portfolio so that at least 60% of income needs is met by dividends and interest payments of the portfolio.

Here is a simple Excel table for one of my retired clients:
 CLICK TO ENLARGE  Note that this client only invests in ETFs. As an aside, for those seeking solid dividend paying stocks, there are blogs that do a lot of really good analysis on dividend stocks. For example, The Dividend Pig offers a list of stocks with an accompanying analysis along with a list of other bloggers who analyze dividend stocks.

In the table, notice the bottom line is in the right hand corner, $10,405. Divide this by .60 and get $17,341. This is the amount that the portfolio can easily provide and weather a market downturn. Also notice the portfolio yield, 2.42% which is key.

If $17,341 isn't sufficient, then more assets have to be directed to dividend paying stocks. That can be done, but always keep an eye on risk. Notice that in the portfolio above, DIY Investor could easily sell the small stock ETF and add a dividend ETF and at the same time reduce one type of risk. It, of course, reduces the expected return on the portfolio.

What are the dynamics? Simply, if the return on the overall portfolio is less than 7% (7% is a target return - it was the assumption used in figuring out if she had enough to retire on), feed the dividend and interest income into the short-term fund from which the paycheck is generated. Otherwise, if the return is higher, reinvest the proceeds. The IRAs, of course, present a challenge because their withdrawals will be taxed and they have to start to be withdrawn at 70 and 1/2.  But at this time, also, the yield on the portfolio will likely be higher because the allocation to bonds will be greater and probably yields will be higher. Still, it is worth thinking about.

The table shown above doesn't take long to do. If you are not familiar with Excel, find someone who is - possible a high school student.  Especially, if you are within 5 years of retirement, this will begin to give you a handle on meeting your income needs whether you use the strategy described here or one of your own.

Saturday, March 19, 2011

Sniffing Out Bubbles

DIY Investor is often asked about bubbles. It's almost as if the country has bubbles on the brain. Today, after every big market collapse, people knowingly wag their fingers and proclaim that it was a bubble waiting to burst. We've had the internet bubble and the housing bubble. Now the sport du jour is identifying future bubbles.

One likely participant who has publicly bowed out was former Federal Reserve Chairman Alan Greenspan. Unfortunately, he was the one person who could have saved the country considerable pain by simply raising margin requirements a bit as the stock market went on a moonshot over the 1995-1999 period or even just stepping in with a cautionary word on derivatives as housing prices were gaping higher in 2005. But the "maestro" said he couldn't identify bubbles and that it was better to clean up after they burst rather than nip them in the bud.

Today any investment or, for that matter, economy that takes off brings out the bubble seekers. Two prominent examples are gold and China. Gold, of course, has gone on a moon shot and China's economy has grown at a high rate that is clearly unsustainable. In fact, high rise unoccupied buildings, typically a harbinger of bubbles, are going up in China .

Boombustology: Spotting Financial Bubbles Before They Burst
A recent book by Yale professor Vikram Mansharamani brings together a number of disciples to bear on the problem of identifying bubbles. DIY Investor has not yet read the book but notes from the reviews that it looks promising and will produce a review in the near future.

For those who can't wait, you may want to check out the interview at Yahoo Finance.

Friday, March 18, 2011

Market Timing

Got an email from a client. She let me know she had put $20,000 in stocks 2 weeks ago, and she said she had lost $800.

She had asked me if it was a good time to invest. This is the type of question I hear all the time that gets me, and I'm sure other advisors, to cringe inside. It's almost a lose-lose situation. If the market shoots up, you were not aggressive enough; and if the market drops, you gave the wrong call. When asked the question, I always think of price/earnings ratios and, unless they are at extremes, suggest that the client go with the plan we agreed upon.

What I didn't tell you is that the client who "lost" $800 is in her early 40s.

You can probably guess my response. I said that, if she had sold, then indeed she had lost $800. I then gave her the speech I've given many times. I explained that how the investment is doing now doesn't matter. What does matter is where it is 20 to 30 years from now, when she is drawing a paycheck off of her nest egg.

For what it's worth, I've come to believe that there are people who can't understand this. Actually I went on to explain that the best thing that could happen over the next several years for her and her husband would be a sustained market downturn because they are systematically contributing to their 401ks. Again, this is one of those things that some people hear but don't hear, if you know what I mean.

On the flip side, there were many people bragging in early 2000 about how much they had made in the stock market. We all know how that turned out.

I know where she was coming from. I told her it would have been great if we had a crystal ball and we saw the earthquake and subsequent tsunami coming in Japan and waited until late Wednesday to invest. But we didn't.  Benjamin Graham chimes in on this one:
If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what's going to happen to the stock market.
Graham, of course, was Buffet's mentor and co-authored Security Analysis.

Do you think my client will email me (do you think email will even be around) 20 years from now and say that the $20,000 is now $80,000 and it turned out to be a great investment move?

Thursday, March 17, 2011

MIT World - a resource

DIY Investor came across this  video, produced by MIT World, at Calculating Investor's site. It is a speech by Robert C. Merton, Nobel laureate, on "The Future of Finance" given at MIT on 1/28/2011.

First off, DIY Investor has to say a word about the technology. To be able sit at the laptop in the morning and browse and come across an excellent quality video of a speech by one of the top finance economists of the age is a real marvel. DIY Investor appreciates all the brilliant people who have and are making this possible at a low cost.

Dr. Merton's quest is to solve the "retirement problem."  I'm not sure he does that, and he definitely doesn't do it to my taste. On this I agree with Chad, the author of the Calculating Investor blog. But more on that later. What I really like is the explanation towards the beginning of the problem. He lays out, rather succinctly, that we have been put in charge of our own assets. Financial planners do a plan and come up with a probability of success in terms of not running out of money. He casts the probability in terms of a grade - suppose its 60, meaning that there is a 60% chance of not running out of money. He notes this wouldn't be acceptable to many people and that  they then have 3 choices: save more, work more years, or take more risk.

People push back against saving more, and they don't want to "move the slider" in the direction of working longer, so that leaves more risk, i.e. greater stock market exposure. In the end, it results in greater volatility and, hence, uncertainty for the possibility of realizing retirement goals. This, of course, is what is taking place in today's investment markets, especially for those nearing retirement.

He then turns to an annuitized unit approach that eliminates volatility. I don't like this approach partly because it is so unfamiliar but mainly because it, as I understand it, takes away from individual freedom. I hold to the view that education, combined with a well-thought plan including appropriate low-cost investment choices, is the way to go.

If it was up to me, I would like to see a plan available to everyone patterned after after the Thrift Savings Plan (TSP) available to government workers. This plan has the lowest cost in the nation and has only a few choices, including lifestyle funds. Considerable educational resources are available to educate participants on how to set up a secure retirement using the plan. This, of course, retains the basic desired features of potentially leaving an inheritance etc.

For those who are wondering, Dr. Merton was on the board of directors of Long Term Capital Management--the hedge fund that imploded in 1998 and was bailed out by the Federal Reserve. This moral hazard episode is part of the path that led to the housing crisis of 2008 for which American taxpayers and unemployed workers are still paying dearly. Thus, though I respect Dr. Merton's brilliance, I am not a fan.

Tuesday, March 15, 2011

Callan Periodic Table revisited

Source: Callan Associates
DIY Investor recently took another look at Callan's Periodic Table of Investment Returns (CLICK TO ENLARGE) which ranks investment performance on a yearly basis, going back 20 years, for 9 different asset classes.

This data offers many insights for investors on longer term relationships, the interaction between asset classes, the value of diversification and so forth.

To begin with, DIY Investor wondered how a 70% S&P 500/30% Barclay's Aggregate Bond Index (BC AGG) portfolio performed over the period. Putting the data points in Excel and doing the appropriate weightings produced an average annualized return of 8.46%. This is an interesting result, but few people would have this weighting over a 20-year period, although given the Dalbar results for individual investors maybe they should have.

Anyways, DIY Investor considered a 40-year-old investor in 1991 with an allocation of 80% S&P 500 and 20% Barclay's Bond Index. DIY Investor further assumed that every 5 years the allocation was changed such that the equity portion was reduced by 5% and the bond portion was raised by 5%. Thus, in 1996, for example, the portfolio was weighted 75% stocks/25% bonds. By the time 2011 was reached, the 40-year-old was 60 years old and the allocation was a reasonable 60% stocks/40% bonds. The calculation under this assumption achieved a return of 9.25%, somewhat greater than the return reported above for the constant 70%/30% allocation.
 Next, DIY Investor became interested in how this very basic sector diversification stacked up relative to the 9 asset classes shown in Callan's Table. The table on the left shows the results on a yearly basis over the 20-year period.
 It provided some diversification but still was highly volatile. On one occasion (when both the S&P 500 and the bond index were at the bottom of the performance list), the portfolio (which actually was 70% stocks and 30% bonds) ranked 9th overall out of 10 asset classes. It is also notable that the portfolio ranked 2nd in 2008 - actually a good year to rank 2nd as most investors would agree!

For the most part, the simple diversification did its job in keeping the portfolio away from the extremes and dampening overall volatility.

It did leave DIY Investor wondering how a further simplified diversification might affect the results. For example, how would adding international stocks to the mix via MSCI EAFE.

If DIY Investor had a bit more energy, he would do an analysis showing a formal rebalancing each year and maybe attempt an analysis whereby the 40-year-old starts with $200,000, say, and adds $15,000/year. As we know, sequence of returns plays an important role.

Scary Times for Investors

Source: Globe and Mail
Waking up and hearing all kinds of horrendous reports on the nuclear plant developments in Japan is obviously scary. The bad news continues to cascade. Two parts of the brain are firing on all cylinders: one is the concern with the plight of the Japanese as pictures and horrific videos circulate online, and the second is the  impact on the global economy and investment markets as markets around the world fall.

The videos get us to wonder how in the world  we would cope if similar events happened here. Seeing videos of people scouring  lists to see if their loved ones have been located  brings back memories of 9/11. Walls of water washing away homes and automobiles as if they were toys leaves one gasping.

On the investment front, emotions are running high. It is easy to feel like that squirrel in the road darting back and forth as the automobile approaches. Just as the squirrel isn't sure which way to go, investors, on one hand, see opportunity to buy in cheaper - the downturn everyone was waiting for - and on the other hand are wondering whether a bigger downturn is ahead and, thus, whether getting out is the right move.
Like the nervous squirrel, make a wrong move and it is easy to get squashed in a market like this.

As indicated in a previous pos,t it is a time to get our bearing. It is times like this when people learn their real risk tolerance. Risk tolerance quizzes get crumpled up and pitched into the trash can in light of real world events.

Let's start with our asset allocation. It was structured on a number of important factors:  risk tolerance (as best it could be measured), when you will start drawing on assets, ability to take risk, age, and  past experience in the market.

Whether you are an accumulator or decumulator is important. Accumulators are building the nest egg. If you are more than 5 years away from drawing on your nest egg, the economic downturn can be seen as an opportunity as long as you can stand the volatility. If you can increase contributions, reallocate to stocks as markets drop, and lessen your exposure to bonds.   As bond prices rise, this is the time to consider these moves. You are looking ahead to where markets will be 15 to 20 years from now.

The decumulator faces a different situation. He or she is drawing on the nest egg. In times like this, the decumulator needs to have a plan. Just drawing the monthly paycheck by selling a fixed amount across funds can result in reverse dollar-cost averaging which, in turn, can do severe damage to a portfolio. Before the market downturn started, at least nine months' worth of payments should have been in a short-term fund and the portfolio structured so that at least 60% of income needs were being generated by dividends and interest. These income flows should be used, as they are received, to replenish the short-term fund at this point.

Typically, a 65-year-old will have 60% or more of assets in fixed income. These assets are providing a valuable cushion in this environment. Bond prices, for example, are up sharply this morning. From an overall perspective, decumulators, as a first step, may want to raise their bond allocation by 5% - DIY Investor uses a 5% band in structuring asset allocation. Decumulators also need to keep in mind that a portion of their assets are for the longer term. In other words, a portion of their assets have a 15 - 25 (or longer) year investment horizon.

As always, the ability to sleep at night is paramount. If you are tossing and turning and wondering whether this market downturn will wreck your retirement, you may need to reconsider your allocation.

The important point to remember is that panicking gets investors in trouble and is one of the biggest sources of under performance.

Disclosure: This post is intended for educational purposes only. Investors should do their own research and consult an investment professional before making investment decisions.

Monday, March 14, 2011

Bill Gate's Advice to High Schoolers

Here is a post from The Investment Fiduciary worth passing on to high school students, especially at graduation. I  like #10 and #11.

Investors Need Long-Term Perspective

Below is a brief overview of the market since the end of WWII by David Booth, founder of Dimensional Fund Advisors. The overview gives a longer-term perspective and stresses the value of staying with a strategy. The times that seem to be the worst for investing oftentimes turn out to be the best and vice versa. In the early 1980s, equities were avoided by many just as they were poised to make an historical run. BusinessWeek, in fact, published their infamous "Death of Equities" cover during this period.

On the other hand, early 2000 looked to investors like a great time to invest. Investors predicted a stock market return of more than 30% for 2000. The subsequent 10 years, which we have recently completed, are now referred to as a "lost decade." As David Booth points out, equities were down 20% on an inflation adjusted basis.

Source: Arianna Capital

Sunday, March 13, 2011

How to Get Master Limited Partnership K-1s Online and into TurboTax

Are you willing to go through a little extra effort to get more yield and defer taxes in today's low yield environment? The Master Limited Partnerships (MLPs) may be the investment you are looking for - especially in taxable accounts because of the tax deferral feature of MLPs. A major issue for many investors has been the late reporting of the K-1 forms received from the company in the mail - usually received in late February or early March, at which point the taxable income had to be entered by hand to do taxes.

MoneyCone has produced an excellent write-up and slide show, "HOWTO View Your Schedule K-1s Online and Import Them Into TurboTax," showing both how to get the K-1 online and how to import it into TurboTax. This very well could be what is needed to expand the participation in this sector of the market to more do-it-yourself investors.

For those interested in a good introduction to the tax implications of MLPs, see "Discover Master Limited Partnerships" by Nathaniel Riley. It is worth noting that there are now also ETFs available to participate in the MLP market.

Disclosure:  This information is for educational purposes only. Individuals should do their own research and consult a tax advisor and investment advisor before making investment decisions.

Saturday, March 12, 2011


Reverse Mortgage Foreclosures

Not that long ago (it seems like yesterday), I looked at reverse mortgages as a potential solution to the baby boomers' need for retirement savings issue. That was before CountryWide imploded and the housing market went into a meltdown downward spiral. Instead of being a solution, reverse mortgages have put some widows and widowers in a precarious situation.

It turns out that some reverse mortgage seniors are being foreclosed on at the death of the one spouse who signed the document, if they can't pay off the loan.  Ron Lieber, of the New York Times, reports on this unfortunate state of affairs in "A Red Flag on Reverse Mortgages."  In the article, Ron provides an excellent overview of how reverse mortgages work and what they are intended for. It seems that in the effort of many people, including HUD, to caution seniors ( you have to be at least 62 years old to get a reverse mortgage ) to pay attention to costs and the sleazy activity of annuity salesmen, the impact of one spouse signing and then dying wasn't fully appreciated. It's reached the point where AARP is suing HUD.

In the immortal words of Gilda Radner : "It's always something."

Addendum: If you can only read one financial columnist, Ron Lieber  is an excellent choice. I'm a fan.

Friday, March 11, 2011

Earthquakes, European Debt Issues, Middle East Craziness...

Spooky Forest
 Earthquakes, European debt issues, Middle East craziness, State & Local government deficits ...

What is your asset allocation? How is your portfolio doing in the market downturn? How will further market deterioration affect you? As I've detailed in previous posts, if you are with Schwab, you can hit a button right now and get an up-to-date performance. You know exactly what your allocation is and how each asset class is performing. This is always valuable information but especially in markets like these. Forget waiting for the quarterly statement--the information is at your fingertips.

If you don't know the answers to these kinds of questions, today's markets  can make you feel like you are in a horror movie, walking in the spooky forest. You'll jump at every unusual sound as the rain falls and the wind howls.

Furthermore, you may not realize it, but you are even more on edge than usual after the horrific experience of 2008 and early 2009. The behavioral scientists tell us that recent experience carries a great weight in our minds. No wonder people are hyper-ventilating.

How to proceed? First off, if you can answer the questions above, you are ahead of the game--especially compared to those whose assets are scattered, who buy and sell on an ad-hoc basis, and who jumped in late after the market had made most of its move. Many of these people are berating themselves with the old "I knew this was a trap" mind speech and are totally confused today on what to do next.

Secondly, remind yourself of your situation. You are either accumulating assets or are in the decumulation stage. The accumulator welcomes these markets because he or she can buy more stock for a given amount as stock prices drop. This is called dollar cost averaging. They buy today at lower prices and care about where the market is 10 or 15 years from now or whenever it is when they plan to draw down their nest egg.

A little knowledge of market history goes a long way in these types of environments. Many examples of previous sharp downturns exist - all with the same message:  panicking is a bad strategy.

The decumulators, those drawing down their nest eggs, are in a different boat. They should have a plan in place to handle market downturns. The plan typically has set aside months of payments so that they don't have to liquidate stocks at unfavorable prices. Forced liquidation in this market results in what is known as reverse dollar cost averaging, which is harmful to the portfolio. It means that more shares have to be sold to raise a given amount of money. An appropriate decumulator plan will typically have a goodly percentage of fixed income assets - the typical 60-year-old will have approximately 60% of assets in fixed income. Note:  on the big down days in stocks recently, bond prices have risen. This is the cushioning role they play in the portfolio.

So what is the bottom line? Remember it is your money, and it is important to maintain a certain degree of stability. Whatever your plan is, if you are waking in the middle of the night with dreams of oil wells on fire and Europe defaulting, your plan isn't working. Adjustments need to be made.

This, at least, is DIY Investor's view. As Thomas Paine said "These are the times that try men's souls."

Thursday, March 10, 2011

Callan Periodic Table of Investment Returns - a Resource

Source: Callan Associates
The graphic on the left shows two columns of  "The Callan Periodic Table of Investment Returns."  Click to enlarge and, better yet, use the link to study the whole table. The table shows 20 years of performance for 9 different market sectors. These are:

Domestic Equity: S&P 500, S&P/Citi 500 Value, S&P/Citi 500 Growth, Russell 2000, Russell 2000 Value, Russell 2000 Growth

International: MSCI EAFE, MSCI Emerging Markets

Bonds: Barclay's Capital Aggregate Bond Index

In the table, investment returns for each year are ranked with the best performing sector at the top and the worst performing sector at the bottom. Each sector is color-coded with its return shown in a box. As shown, for example, in the column on the left, the best performing sector in 2010 was "Russell 2000/Growth at + 29.09%. The worst performing sector was "BC AGG," the bond market index, with a return of +6.54%.

It is difficult to over emphasize the usefulness of the table. For example, when DIY Investor is interested in seeing how the bond market performed, on a relative basis, over the past 20 years, he can pull up the chart and, by scanning horizontally, follow the gray boxes. DIY Investor quickly notes that bonds were the top performing sector in 2 years (2002 and 2008) out of the last 20 years. These, of course, were two big down years for stocks, and bonds provided much needed negative correlation.

One of the points shown in the table is the importance of sector diversification. This is reflected in the quilt-like pattern of the colors. Performance by sector jumps around . A second important point is that chasing hot sectors, which many investors apparently cannot refrain from, can be hazardous to your financial health. Frequently,  top-performing sectors fall towards the bottom in subsequent years.

In addition to these usual points, one that is often overlooked should be considered and thought about. That is that the actual returns themselves are useful in thinking about risk tolerance. Focus on the return over the past 20 years of the S&P 500. Notice from 1995 - 1996 that the lowest annual return was 22.96%. Over the next 20 years, we very well could get a similar return. Investors will drive prices sky high, earnings will consistently come in higher than expected, the investment world will convince itself that "the world has changed" and value  metrics no longer matter. The important point is how will you react?  Will you abandon plan and pile in to the "hot sector"?

Notice in the table that the S&P 500 was down more than 20% on two occasions. Again, this very likely will occur going forward. Don't be surprised. Think through strategy and likely responses when seas are calm - that's all DIY Investor is saying. All of this emphasizes, of course, the value of having a well-thought out plan. It goes without saying, as well,  that there likely will be a period during the next 20 years that is unlike anything we've seen before. But this is what makes it fun.

You should also read page 2 of the Callan report and some of the interesting points it makes about the table.

Wednesday, March 9, 2011

When is enough enough?

A recurring theme that DIY Investor emphasizes is that by using low-cost, well-diversified indexed funds, individuals can learn to manage their own assets without having to make a major time commitment. DIY Investor pushes back against those who believe that successful investing requires picking individual stocks and poring over financial statements and even trying to pick the hot fund managers.We all know those who spend 40 hours a week working on their investments, track prices on a daily basis, subscribe to 5 different newsletters, and stay glued to CNBC. Hey - more power to them if this is what they want to do. Most people have lives away from investments.

There is a balance to be sought here. Admittedly, investing can be fun; and most fans of low-cost indexing allow for a certain percentage invested in individual stocks or chasing commodities, etc. The point is that many investors would do well to look up from time to time and ask if they are over-committing the precious resource of time to investment activity.

So DIY Investor emphasizes that it is possible to get excellent performance with a minimal time commitment. In fact, historically the index approach outperforms over the long term, after fees, 80% of professional money managers. And, if an individual doesn't want to make the minimal time commitment, he or she should be able to get money management services using the low-cost indexed approach at a reasonable cost, well below what the typical advisor charges.

The New Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get on with Your LifeThis  philosophy of seeking excellent performance without having to give up the things people enjoy in life is expressed well by Bill Schultheis in The New Coffee House Investor. Bill asks, "When is enough, enough?" On page 115, Bill offers the first verse of a poem, "The Spell of the Yukon" by Robert Service:

I wanted the gold, and I sought it;
I scrabbled and mucked like a slave.
Was it famine or scurvy, I fought it;
I hurled my youth into a grave.
I wanted the gold, and I got it-
Came out with a fortune last fall,-
Yet somehow life's not what I thought it,
and somehow the gold isn't all.

Bill is a former Smith Barney broker turned advisor who has many passions in life other than the world of investing.

The process by which many people can learn to successfully manage their own investments starts with reading a book that the layman can understand that covers the basics. Bill Schultheis' book fits the bill. In fact, the book's subtitle says it all: How to Build Wealth, Ignore Wall Street, and Get On With Your Life.

Disclosure: If you click though the book's image and order from Amazon, I receive a small compensation.

Tuesday, March 8, 2011

Where is Silver Headed?

DIY investor is a low-cost ETF investor who believes that people should invest at least 80% of their investable assets in well-diversified, broad market, low-cost funds. Many investors, however, are understandably caught up in precious metals fever, given that gold has skyrocketed and silver has moved considerably higher. DIY Investor looks at precious metals as a speculation but does, however,  buy  SLV, the silver ETF, and GLD, the gold ETF, for clients at their direction, on occasion.

Why are people excited by Silver? What is the bullish case? Here is Eric Sprott,  well-known bull on precious metals, giving a recent talk that DIY Investor came across on the Biz of Life site:


Disclosure: This post is for educational purposes only and is not a recommendation. Individuals should do their own research and/or consult professionals before investing.

Monday, March 7, 2011

Can You Forecast the Economy?

Everybody's got a view on the economy. But how accurate is it? It is great sport to make fun of economists and their  forecasts ( the old joke is God invented weather forecasters to make economists look good - DIY Investor knows - not very funny), but how would you do? Here's your chance to find out. Bloomberg columnist John Dorfman is now running his annual "Derby of Economic Forecasting" (DEFT) contest. 

There are six magnitudes to predict for year end:
1.Economic growth.
3.Interest rates.
4.Oil prices.
5.Retail sales.
The contest has a March 15 deadline. Go for the trophy - Good Luck!

Sunday, March 6, 2011

Figure the Impact of Saving Your Payroll Tax Cut

Financial planners recommend upping the contribution to your qualified accounts (IRA, Roth IRA, or company 401k etc.) by the amount of this year's payroll tax cut. Admittedly, this isn't easy, now that food prices are rising and gasoline prices have spiked. Still, if possible, a 2% pickup in your personal saving rate can make a huge difference for many people. This is especially true for younger people, in light of the state of Social Security and its likely changes.

To quantify some of this, the New York Times "Savings Calculator" is a useful resource. You can see the inputs DIY Investor put into the calculator. DIY Investor assumed a $40,000/year income, 10% savings rate, 8% investment return, and a 20-year time horizon. This produced an end-of-period savings balance in inflation adjusted dollars of 
Source: New York Times
$333,549, as shown by the bottom line in the calculator's accompanying graph.


Next DIY Investor assumed the savings rate was increased by 2%, by putting the payroll tax cut into savings. Keeping everything else the same produced an end-of -period savings balance of $393,735--an increase of approximately $60,000.

All of this translates into choices 20 years down the road. In real terms, it may make the difference between having to work another year and a half or having the flexibility to retire.

This is a useful tool, DIY Investor believes, for motivating young people to save for the future. The next few years will reveal how poorly this has been done by the "boomer" generation.

Saturday, March 5, 2011

Mutual Fund Track Records

In the ongoing debate between the "market beaters" and the "evidence based investors"   ( i.e. the indexers - yes, those whom detractors call passive investors), one issue that continually comes up is whether picking market beating mutual funds can be done.

The first place most people turn for superior performance is the track record. This, however, according to the evidence, is futile. Simply, the best performers of the recent past turn out to be not the best performers going forward. In other words, there is a lack of consistency among those with the best past records.

DIY Investor's Theory

But why wouldn't the best performing funds of the recent past continue to produce exceptional performance going forward? After all, aren't they the smartest, hardest-working, generally most skilled investors among their peers? As DIY Investor has pondered this, he has recalled personal experience which he has described previously. In the early 1980s, DIY Investor managed a small Treasury bond fund ($15 million) for an insurance company which, by a series of trades in a volatile market, produced a spectacular return relative to its index. In fact, the fund was #3 across the U.S., in its category, as listed in Pensions & Investment Age for the quarter. Its performance got DIY Investor interviewed in the article that listed performance of institutional managers and attracted attention.

To understand DIY Investor's thinking at that point, it is useful to appreciate that the goal of the institutional manager is to produce an outstanding longer-term record. A 3-year record in the bond market, for example, that is .8% above the index ( for example, if the index return is 5.0% annualized and the manager's return is 5.8% annualized) attracts institutional  money to the funds. How did this affect his thinking after the exceptional 3-month performance? DIY Investor figured that all he had to do was  match the market return over the next couple of years and it would produce an exceptional long-term track record . His  incentive for taking risk relative to the benchmark had been reduced.

Think about that top-performing mutual fund you were looking at yesterday that has beat the S&P 500 by x% over the last 5 years. Why should it take risk to outperform the market going forward?

There are other reasons, of course, for why the market beaters won't persist in spectacular performance; but this subtle impact of basically mismatched information is one that gets overlooked, in DIY Investor's opinion. Again, the fund manager has a different incentive than the fund buyer. The fund manager, after a period of exceptional performance,  is content to match the index ( and charge active management fees); and the fund buyer thinks he or she is buying an investment approach and expertise that produced  exceptional performance.

Recent Evidence

The underlying reasons are interesting; but, in the end, the evidence on track record performance is what matters. A neat and sophisticated analysis along these lines has been done by the calculating investor in examining subsequent performance of the top 5 Forbes Honor Roll funds in 2005. He examined the next 5 years and found " investor who invested an equal amount in each of these Top 5 Honor Roll funds would have underperformed the VTI index by more than 4% over the 5-year period." But he went further and did a risk-adjusted return analysis based on the Fama-French 3 Factor Model and found that only one fund outperformed ( had a positive alpha) on a risk-adjusted basis.


DIY Investor continues to question  why people would put their retirement savings in the hands of those who charge excessive fees, and seek to "beat the market" when the evidence clearly shows that most people lose in this endeavor. Using track records to identify "market beaters" is clearly without merit.

Friday, March 4, 2011

What Does an Executor Do?

Many times DIY Investor meets young families with children and substantial assets, and yet there is no will or other plan for the disposal of assets in the event of death. I ask the parents who will raise the children if something happens to them, and I get that look that tells me that anytime the question has crossed their minds they have quickly dismissed it. Estate planning work is, of course, the venue of estate attorneys; but every financial advisor needs to question prospective clients in the initial meeting on the subject of wills, trusts, and so forth.

This is one of those areas where many things can be done right; but, if the foundation isn't there, it is all for naught.

Referring clients to get estate planning work done by competent attorneys and pushing them to do it is, I feel, one of my primary functions. I know they don't want to do it. Thinking of guardians and executors of an estate is not fun. But it is important.

Along these lines, the New York Times provides an excellent overview of the difficult task of picking an executor in  "Choosing the Right Executor for Your Estate" by Deborah L. Jacobs. DIY Investor was especially interested in the qualities deemed necessary.  According to Howard M. Zaritsky, a Rapidan Virginia lawyer, "...the ideal executor should not only be honest and diplomatic, but also well organized, good with paperwork and vigilant about meeting deadlines.  His litmus test: Is this someone who always files income tax returns on time?"

The article goes on to mention that naming children as co-executor, which is frequently done, is not usually a good idea.

To me, this article is one that families should read, copy, and keep. It provides excellent background information before meeting with attorneys. Facing one's mortality and planning for the ongoing well-being of one's family is one of the most important functions parents can carry out.

From a completely different angle, the article is worth consulting in the event you are tapped on the shoulder and asked to be an executor.