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.

Tuesday, February 28, 2012

High-IQ Investors

I have to say that, in my experience, some of the smartest people I have ever met have been the lousiest investors.  In fact, the only thing that has saved them has been their high incomes.  They anaylze individual stocks and find it hard to believe that what they have learned the market already knows and is reflected in the price of the stocks, are absolutely adamant about the direction of the market, and tend to chase the hottest performing sectors, and get caught up in bubbles because bubbles tend to reinforce their belief in their own genius.  But my data set isn't that large, so I'll defer to a fascinating study by Mark Grinblatt of the University of California, Los Angeles, Matti Keloharju of Aalto University in Helsinki and Juhani Linnainmaa of  the University of Chicago, What High-IQ Investors Do Differently, described by Robert Shiller.

The study is based on data from Finland where young men are required to serve in the military and, thereby, are given IQ tests.  Finland also has a wealth tax which requires investment portfolios to be  reported.  According to Shiller, the researchers find that the propensity to follow accepted portfolio techniques--diversify, invest in low cap stocks, etc.--is greater for higher IQ men (it seems that females may have been skipped in this study!).  Interestingly, nothing is reported, as far as I can tell, on performance, which of course would be the bottom line!

Shiller goes on to say that the bigger issue might not be intelligence per se but a lack of trust.  The ability to learn who to trust though, according to Shiller, is dependent on intelligence.  He cites a second study that found those with a "high level of trust" were more likely to invest in the stock market.  To me, this is a sort of "duh!" finding.

I am a huge fan of Shiller and have admired his books and especially the research he has done on the p/e ratio.  I believe it is useful for determining entry points for long-term investing.  Still, I have some difficulty with statements he makes. For example, he says
 Successful investing requires that we judge other people, and it relies on an ability to develop a good model of others’ minds.
Frankly,  I'm not even sure what the last part of the sentence means.  My main beef, though, is that just investing in the market with a well-diversified portfolio comprised of low-cost funds has been very successful over the long run.  In fact, voluminous evidence supports the finding that it outperforms 70% to 80% of all professionals after all costs are accounted for!  There is no need to "...judge other people."  More than anything, it requires a belief that the economic system will continue to produce remarkable products.  In a world where the information available to geniuses with a laptop is proliferating at an amazing rate, I believe it is a belief that is easy to accept.

I  would like to see a study on how much wealth has been lost because people went to Mr. High IQ for investment advice!

Friday, February 24, 2012

Steve Jobs by Walter Isaacson

From time to time I've picked up advice books on managing in the business world.  Some by consultants.  Some by successful ex-CEOs.

Now I'm a bit more than halfway through what is clearly the best I've ever read. And it's not an advice book per se.  It's a biography.  But it is loaded with advice.  It's the best-selling biography of Steve Jobs by Isaacson.

If a young person was to ask me for a reference book on how to  manage a company in a major industry, I would give him or her this book with the advice to study it.  Jobs clearly had character flaws.  He clearly made mistakes - which he readily admitted.  But, on the bottom line, his understanding of how to bridge technology and creativity, how to build and manage a team of some of the brightest and most creative people in the world, and how to harness passion for products was unsurpassed.

What really intrigues me about this book is Isaacson's capturing of Job's passion for Apple and the products it produced.  The attention to detail, the ongoing brutal task of building an "A" team, and the dealing with clueless board members are fascinating to anyone who has been part of this type of environment.

There is a lot to be learned in this book by anyone in the business world or anyone thinking about entering the business world.  The book isn't, for sure, going to make someone into a Steve Jobs - after all his was a very rare, charismatic personality combined with a particular genius ability to present a vision of which he could convince people to do what they felt was impossible.  But this book can teach the value of passion, team building, and understanding the importance of seeing products from the customer's point of view.

Here are a few YouTubes worth watching if you enjoy the book:

And ...if you have tissue nearby:

Thursday, February 23, 2012

Is Your Portfolio Down Over the Past 5 Years?

Potential clients are coming to me more often complaining that their portfolio is down over the past 5 years or so.  They wring their hands and express wonderment that they are essentially feeding a trough that is shrinking in size.  Some point out that they would have done better just putting their funds under a mattress.

Naturally this got me to go back and look at market performance for the past 5 years.  To do this, I used one of my favorite data sources--the BlackRock Sector Returns chart.  I first looked at the BlackRock diversified portfolio - one of my favorites because of its low volatility and nice fit for a wide range of risk tolerances and ages.  It is comprised of 35% Barclay's Aggregate Bond Index + 10% MSCI EAFE Index + 10% Russell 2000 Index + 22.5% Russell 1000 Growth Index + 22.5% Russell 1000 Value Index.  These indices are all well known and represent broad parts of the relevant markets investors should be invested in.  Furthermore it can be replicated with low-cost index funds.

So how did this portfolio do over the past 5 years?

2007 +6.0%
2008 -22.8%
2009 +20.8%
2010 +13%
2011 +1.8%

The portfolio increased by 13.7% over the period, for an average annualized return of +2.6%.  Admittedly not a great return, but at least it keeps up with inflation and is well ahead of the paltry rates on short-term Treasuries and money funds.  Importantly, it was not negative - like the returns experienced by the potential clients (many of whom added contributions over the 5 years!) who appear on my doorstep.

So how do they end up with negative returns? After all, someone, somewhere steered them towards high performing funds!  Actually, funds that were purportedly the "best of the best" at one point in time.

The answer is obvious to regular readers of this blog.  The impact of high-fee advisors putting clients in high-expense funds that trade aggressively has been explored on numerous occasions.  Research clearly shows there is no consistency to superior performance.  In fact, the odds are that the best-performing funds of the past 5 years will underperform over the next 5 years! It  reminds me of a young boy I saw at an Easter Egg hunt one time. T he kids would call out "there are eggs over here!" and he would run over.  By the time he got there, the eggs were gone.  Sad to say, at the end of the hunt, he had few eggs to show!

The interesting observation here is not the eggs - it is the impact on portfolios during periods where market returns are not robust.

My job is to get clients invested in low-cost well-diversified funds.  For most clients, it is fairly easy to learn how to manage a portfolio structured along the lines of the diversified portfolio mentioned above. As far as I know, no one else offers to show the novice investor how to structure and manage a low-cost indexed portfolio.  This approach avoids high management fees, expense ratios, trading costs, etc.  It gives the best possible chance of matching the returns shown.  Alternatively, some clients have me manage the assets on an ongoing basis.  This costs 0.4% and would be subtracted from the annual returns. 

The bottom line is that investors who are scratching their heads and wondering about negative performance over the past 5 years should reconsider their investment approach.  They are like the boy wondering why he ended up with so few eggs.  Sadly, many are throwing up their hands in frustration and exiting the market completely - a mistake ,in my opinion!

Disclosure: T his piece is solely for educational purposes.  Individuals should do their own research or consult with a professional before making investment decisions.

Tuesday, February 21, 2012

Looking for a Deal? Here it is!

After you think you've seen it all....

 CLICK IMAGE TO GET A LAUGH   Groupon has some great deals, but this has to be the record!  95% discount?  I would think it would get most people to pause.  But wait --- you save $601!

More than 260 people jumped at it!

Sort of scary to me.  It proves a long-held theory of mine - in America, I don't care what you're selling, you can get someone to buy it. 

My take:  if a 95% discount on a product that purports to teach you to trade doesn't get  you to run in the opposite direction, then maybe, just maybe, you are the last person who should even be thinking about trading.

Thursday, February 16, 2012

Best-Selling Author Commends RW Investment Strategies' Approach

Andrew Hallam, author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School, says "If the average American Fund salesperson saw what Wasilewski charges, they would hide their pink heads under the covers of shame."  Nobody can ever say that Hallam doesn't have a way with words!

My conviction has long been that the financial services industry overcharges by charging sales fees, marketing fees, outrageous management fees, and  numerous additional hidden costs to individuals who are led to believe that market timing and stock picking are superior approaches.

I, of course, am not the only one practicing along the low-cost index approach.  Hallam mentions Assetbuilder as well, and there are others.  In fact, my sense is that the movement is growing - helped along by the works of Hallam et al. .

Although I work with all age groups, I am especially interested in getting the message across to young people.  Too many procrastinate with their investment program because they won't take a bit of time to learn how it works.  They convince themselves they are right whenever they see markets drop, when, in fact, they should see declining markets as a great opportunity.

Wednesday, February 15, 2012

What is an Economic Moat?

Students of medieval history know that castles had moats surrounding them to protect against invaders.  The moat was just a big ditch filled with water.  With the moat, all the castle's lord needed was a good drawbridge that would hold his horses, a sober lookout, and a couple of working catapults.  At the cry of "invaders me lord," the drawbridge would come up, the catapults loaded, and a real life game of "Dragons and Dungeons" would be on.

Thinking about it, I guess some good torture devices in a good dungeon would also be necessary to chain the captured invaders who stupidly fell into the moat.  If you could get Billy Crystal to do the torturing, all the better.  But I'm in the weeds - the basic idea of the castle moat is pretty straightforward.

This concept was adapted by Warren Buffett to describe companies that have some built-in protection mechanism that ward off the essence of what makes the economy go - competition.  He called it an "economic moat."  Anyone with a sense of economics understands that, if we get an idea, implement it, and start making the big bucks, competitors will swiftly arrive and compete our profits away.  Ask the Beanie Baby crowd.

Investors want to avoid companies whose profits can be competed away.  Instead, the investor is a lookout (similar to that in the medieval castle) seeking profitable companies with significant barriers to entry - i.e. an economic moat.  The example that comes immediately to mind are the patents enjoyed, for example, by drug companies.  Another example would be Apple's products and brand - unless, of course, you're in China.  Then you can copy the product, copy the logo, and try to cross the moat.

The desire to explain Buffett's valuable concept came to me yesterday as I read Dividend Monk's blog on "12 Dividend Companies with Large Patent Shields."  This article is actually the 3rd in a series that examines different ways companies gain the advantage of an economic moat.  The series makes great reading for the DIY investor.

Tuesday, February 14, 2012

Bonds versus Stocks: Buffett versus Gross

The media is playing up the differing views of Buffett and Gross on stocks and bonds.  Buffett recently previewed his much-anticipated shareholder letter and called bonds "dangerous investments."  At the other end of the spectrum, Bill Gross, manager of the world's largest bond fund, at PIMCO, has recently increased exposure to Treasury issues.

Five years from now, we will look back and see that one of these icons of the investment world will be right and the other probably very wrong.  With the yield on the 10-year Treasury below 2%, the Fed and other world central banks on an inflation mission, and the yield on the S&P 500, for the first time in decades, yielding more than the 10-year Treasury, I have to side with Buffett - up to a point.

Some, in fact, like Laurence Fink, CEO of BlackRock Inc. (the world's largest investor), are pounding the table and arguing that investors should be 100% in equities.

I have to say that I believe Buffett is right but wouldn't go 100% into stocks.  I could sketch out a scenario where 10 years from now the S&P 500 is 10% lower than today (think Medicare, U.S. dysfunctional  government, Southern Europe, nutcase in Iran, etc., etc.) and the 10-year Treasury note is at 1.50%, say, where, in fact, Buffett followers would not have done well.  It is why my clients are diversified.

One comment that Fink made got a chuckle out of me.  He said he was sitting with Buffett one time and the market was falling off a cliff.  He said Buffett got up 3 times and bought stock.  This impressed him. It doesn't me.  Buffett is a multi-billionaire.  He has, for all practical purposes, unlimited capacity to take risk.  If the market fell 50% tomorrow, it would not make one bit of difference to Buffett's economic well-being.

I would suggest that  Fink sit with a couple who are 3 years into retirement, have a "nest egg" of $600,000, and are trying to generate an income from the nest egg and social security that will last.  See how often they are jumping up and down to buy stocks in a market that's falling sharply!

To me, the disagreement on the most important investment decision of all--asset allocation--by these extremely bright, successful long-term investors is the strongest argument for diversification.  Although I agree that long-term Treasuries should be avoided today, bonds in general should not.

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

Friday, February 10, 2012

Diversify and Start Young

If it hasn't been written yet, I'm sure someday someone will write the book on the fundamental principles of life.  Granted, we have a lot to argue about and to debate, but there are principles that I believe most people would agree are beyond dispute.  The investment section of the book would undoubtedly include the principles of diversification and the value of time in the investment process.

To illustrate, I once again go to the BlackRock "Asset Returns Table" - this time to page 2.   Here is shown the 20-year results of investing $100,000 in various asset classes and in a diversified portfolio.  Before looking at the results, reflect on the thought that most workers will spend 40 years in the work force.

Diversification and Time

Source: BlackRock

CLICK IMAGE TO ENLARGE   The diversified portfolio is "composed of 35% of the Barclays Capital US Aggregate Bond Index, 10% of the MSCI EAFE Index, 10% of the Russell 2000 Index, 22.5% of the Russell 1000 Growth Index and 22.5% of the Russell 1000 Value Index."  This  portfolio is easily replicated with low-cost, index funds.  The results are straightforward.  At the realized return of 7.7%, money quadruples in 20 years (rule of 72).  Over 40 years, it increases by 16 times!  You can run all kinds of savings scenarios; but the bottom line is that workers who have a regular contribution to their 401k, starting at least by their mid-20s, will have a good-sized nest egg when they reach their 60s, by investing in a diversified portfolio.

Hopefully it goes without saying that they need to ask about company matches and take a look at the choices available in the company 401k plan.  ALL 401K PLANS ARE NOT CREATED EQUAL!

Understanding these basic principles and applying them will result in a person typically being fairly wealthy by the time they reach their 60s.  These are fundamental principles.

But what will keep emotions in check?  Look closely at the chart, and you can easily identify the 2008 period where portfolios fell off a cliff.  Look closely at the black line which traces the diversified portfolio and observe the important fact that it is a lot less volatile than the asset classes it is compared against.  This, of course, is the second half of the investment equation:  risk.  By being less volatile, the diversified portfolio is one where most investors can sleep at night.

Those of a mathematical bent will note that the table shows standard deviation, the basic risk measure for investments.  The take-away is that the diversified portfolio return is reasonably close to the annualized return on the best-performing asset classes over the period at a significantly lower standard deviation - i.e. volatility.

So the fundamental principles are as straightforward as they possibly could be: s ave young, save often, and diversify.  You don't need to pick stocks; you don't need to do a lot of analysis; you don't even need to take a course in investments.

Sunday, February 5, 2012

Withdrawal Rate (Part 2)

 In the last post, we took a look at some withdrawal rates using actual data over the recent past by examining returns on a diversified portfolio.  The latest update to that data source is the  BlackRock table of asset returns.  As I've said a hundred times, this is an extremely useful resource from which all kinds of questions can be addressed.  Admittedly, it is one path we have come down; but it has been especially rocky at times and gives a bit of insight into how asset classes have performed and how various strategies would have fared.

Along these lines I, thought it would be interesting to go back and look at a retiree who retired in 2000 and decided on a 5% withdrawal rate.  Where would he stand today?  I would also like to introduce another resource that is often used in this research - the Shiller Price/Earnings (P/E) ratio.  This ratio is sometimes used to set the initial withdrawal rate.  Simply, if the ratio is high (stocks potentially overvalued on an historical basis) then, other things being equal, the retiree should start with a lower withdrawal rate (for example 4%).  If the P/E ratio is lower, then a higher initial withdrawal rate should be considered.

Here is a graph of the Shiller P/E ratio:
Source: Online Data - Robert Shiller

CLICK TO ENLARGE  The graph shows that the market P/E in 2000 suggests it was not an especially good time for the retiree to have a high withdrawal rate.  Instead of 5% or higher, the Shiller P/E suggests 4% as a more appropriate rate.  Given this caveat, let us see where the retiree who, in fact, instead chose 5% would stand today if he achieved the BlackRock diversified portfolio returns.  Again, we assume a $1.0 million portfolio starting value and a 2% inflation adjusted income taken on 1/1 of each year.

2000 1000000 50000 950000 0.989 939550
2001 939550 51000 888550 0.952 845900
2002 845900 52020 793880 0.902 716080
2003 716080 53060 663020 1.235 818829
2004 818829 54122 764707 1.105 845002
2005 845002 55204 789797 1.054 832447
2006 832447 56308 776139 1.13 877037
2007 877037 57434 819603 1.06 868779
2008 868779 58583 810196 0.772 625471
2009 625471 59755 565716 1.208 683385
2010 683385 60950 622435 1.13 703352
2011 703352 62169 641183 1.018 652725
The table shows that the 77-year-old retiree would now have 65.2% of his nest egg left to draw on.  The similar exercise using a 4% withdrawal rate would have 83.6% of the nest egg still available at the end of 2011.

Again, recognizing this is one path, it still yields some valuable insights into varying withdrawal experiences, the potential value of taking into account initial conditions (i.e. the  p/e ratio), and the dynamic nature of the experience of drawing down the nest egg.

Looking back at the Shiller P/E suggests that today's retiree can consider a slightly higher withdrawal rate.  For those interested in doing further research, you may want to consider redoing the results and starting with the 5% rate but not taking an inflation adjustment when markets are down, as suggested by Jon Guyton.

Also, those interested in this research may want to review the Shiller P/E.  It is not, to say the least, your typical trailing 12 months p/e ratio.

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