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.

Saturday, March 31, 2012

2012 Year-to-Date Performance - BlackRock Standard Diversified Portfolio

Whew!  What a quarter and start to the year!

As I have said many times here, one of the most useful research/data pieces I know of on market and sector performance  is the "Asset Class Returns: A 20-Year Snapshot" table produced by BlackRock and discussed at Cedar Financial Advisors.  It shows annual asset class returns, color-coded, ranked so that investors can easily see the best-performing and worst-performing sectors for each year over the 20-year period.  What sets it apart from similar charts is that it shows the returns of a diversified portfolio on an annual basis.  Among other important points, it clearly shows how volatility is dampened with diversification and the hedging properties of bonds.

On the volatility point, note that the diversified portfolio return was never in the top two asset categories for any given year but, by the same token, was never at the bottom of the list.  Worth studying and thinking about, I think.  On the hedging property, pay particular attention to how bonds performed in the years when stocks had negative returns.  The best example, of course, is 2008.  It is really important to understand that we are talking about bonds - not certificates of deposit or savings accounts or anything of that sort.  The key is that bond prices rise when yields drop and vice versa.  Thinking through the bond portion of one's portfolio is one of the most important parts of asset management.

Anyway, these points have been made in greater detail in previous posts - let's look at how the diversified portfolio started the year.

Source: Morningstar
CLICK TO ENLARGE  The portfolio achieved a return of 8.18% return for the quarter. This was the best quarter for stocks in 14 years! Bond prices dropped as yields rose, and the bond market eeked out a return of 0.25%.  The best performing sector was growth stocks at +14.61%.

Overall, a really good quarter for retirees who are drawing down their nest egg.  In fact, it opens up possibilities.  A performance above what was expected can be used to use a portion of the exceptional gain to lock in income by buying an immediate-pay single premium annuity.  Or a slight increase can be taken in the draw down rate.  The point is that it opens up some possibilities for those retirees who are flexible.

For the accumulators, i.e. those building their nest eggs, the news isn't so good.  I know - it feels good to see the portfolio go up; but the important thing is not where it is today but where it is when it comes time to draw it down.  Stocks are more expensive today than they were at the beginning of the quarter but, on the brighter side, bond yields are a bit higher.

Disclosure:  The data shown in the table and discussed was obtained from reliable sources but cannot be guaranteed as to accuracy.  I and some of my clients own securities mentioned in the post.  The information is solely for educational purposes. I ndividuals should do their own research or consult with a professional advisor before making investment decisions.

Wednesday, March 28, 2012

Some Asset Allocation Data

It is very easy to calculate portfolio returns from market returns.  Below are returns for the S&P 500 (Stocks) and the Barclay's Bond Index (Bonds) for the past 20 years.  These are, of course, the major benchmarks in their respective markets.  Furthermore, they are very easy to match closely in actual performance by investing in low-cost index funds.

 CLICK TO ENLARGE To get any particular return in the usual percentage form, just subtract one and multiply by 100.  For example, 1.013 is a return of 1.3% ((1.013 -1 )*100).  Similarly, 0.971 is a return of -2.9% ((.971-1)*100.

To get the average annualized return over a given period, multiply the returns in the table and take the appropriate root.  For example, the stock return over the first 3 years shown would be 1.077*1.101*1.013 = 1.2011. Raise this to the one-third power (i.e. do ^1/3 on your calculator or in Excel) and get 1.063 which is a return of 6.3% annualized.

The next step is to calculate a portfolio return.  For example, what would be the return if we had invested 50% in the S&P 500 and 50% of the portfolio in the Barclay's Aggregate Index in 1992?  The calculation is straight forward:  0.5* 1.077 + .5 * 1.074 = 1.0755.  The average annualized return would have been 7.55%.

Doing this for each year and then calculating the average annualized return as shown above gives an approximation of our return if we had chosen the simple 50/50 allocation.

This 20-year period, of course, is one path and a 50/50 split among two broad asset classes is a very simple asset allocation.  Still it is an interesting path because it is the one we actually came down ,and the allocation can be viewed as a starting point.  The period included 2 severe market downturns as well as a sharp push higher prior to the bust.  It included an act of terrorism on American soil.  There were severe corporate governance problems and  the worst economic downturn since the 1930s.

How did simple asset allocations fare during this 20-year period?  The following table shows the results:

CLICK TO ENLARGE As shown, this was a period where additional risk, i.e. a greater exposure to stocks, didn't result in a significant pick-up in return.  But it did make a huge difference in the volatility as shown by the high and low returns.  For example, the 80% stock portfolio had a low return of -28. 56% in 2008 compared to the low return of -15.90% on the 50% stock portfolio.

These kinds of exercises are useful, I believe, in deciding on an asset allocation.  As mentioned above, it is very easy to bring in additional asset classes.  For example, if you're wondering how the portfolio would have done if 10% was invested in small cap value stocks, just get the annual returns for that sector and carry out the calculations as described above.

In my opinion, capturing a good long-term return with your funds allocated for retirement depends on having an asset allocation you can stay with.  Bailing out and letting emotions take over the investment process is what ruins many retirement plans.

Sunday, March 25, 2012

It Made Me Cringe

Not my newest client or me!
My newest client said to me in passing that his accountant had told him that " doesn't matter what your investment manager charges as long as he is making you money."  I cringed.   I didn't press the issue but, undoubtedly, it was in response to my contention that minimizing costs is a key to long-term superior performance in investing.

Let's think about what the accountant said.  What does it mean that your investment manager is making money?  Is he really doing such a great job that he should be paid more than average, say?  Suppose your $1.0 million dollar portfolio gains $100,000 higher next year.  Would it be OK if your investment manager took a fee of $20,000, i.e. 2%?  If you believe so, a lot of investment managers would like to talk to you.  The fact is that the $100,000 represents a 10% return, and the market may have been up considerably more, 14% say.  You've rewarded the manager approximately twice the average rate for significant underperformance.

But this, of course, is looking at the super naive situation.  If the accountant was pressed, he would probably say this is not what he meant.

So what about those who have a good track record - those who can demonstrate that, over the past 10 years, say, they have outperformed the market after all fees and costs?  Would we be willing to pay them more than the going rate?  This is trickier and, in my mind, a good example of the teaching goal  du jour of "critical thinking." After all, the evidence suggests that probably 10 % - 15% of investment managers out there have outperformed the market over several years.  This would be expected.  To see why, read my post on "Flipping Pennies."

So, to reframe the question, suppose an investment manager demonstrates that he outperformed the market by 4%/year over the past 10 years.  Should we follow the accountant's advice and be willing to pay the manager 2%/year, say?  The evidence suggests not.  The evidence from many studies over numerous time periods clearly shows there is no consistency in superior performance.  Take the 20 out of 100 managers who outperformed the past 10 years, and you'll find that only 4 of those will outperform over the next 10 years.  Maybe...just maybe...the two that outperform over the entire 20 years are the superior managers, but there is no way to identify him or her ahead of time.

There is a plethora of managers who have performed well over time and who ended up flat on their faces.  But most departed financially secure to make a serious understatement.  Part of the reason is that people do not think critically but accept the view of the accountant when it comes to investing.  Sadly, it is costing people their retirement and continually lining the pockets of Wall Street.

Saturday, March 24, 2012



Steve Jobs:  “That’s been one of my mantras — focus and simplicity. Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.” [BusinessWeek, May 25, 1998]
I recently sent in my iPod to Apple because they notified me the model I had might have battery problems.  This iPod was the size of a playing card, had to be strapped into this holder that went around my bicep so that I could listen to music when I ran. There were days I spent more time trying to strap it on than I did running.  Apple returned an iPod the size of a postage stamp. It clicks on my t-shirt, has photos, and all kinds of neat fitness-related stuff built in--the end result of hard thinking by passionate people.

Jobs' observation is just as true in the investment world as it is in technology and other parts of life. Thinking hard about the investment process, studying the data, and clearly setting out the objectives will get you to the point where you realize the optimal approach is simple and elegant.

Fortunately, many hard thinkers have done the required thinking to understand why investors--both individuals and professionals--underperform so badly over long periods and how to construct portfolios. Below is a short post detailing the performance of a 3-fund portfolio  (as basic as you could possibly get, short of the more expensive life cycle funds) that has had performance over the last 5.5 years that has outperformed, I would guess, at least 75% of both professional and individual investors.  Note that this period spans the sharp downturn in 2008/early 2009 as well as the European problems of the last couple of years.

Setting up the portfolio would take about the same amount of time it takes to read the article - approximately 5 minutes.  Rebalancing the portfolio to reset the risk level also takes about 5 minutes. This is the end result of hard thinking.

Line up all the investors over the past 5.5 years who have spent chunks of their lives listening to CNBC, Jim Cramer, et al., and tried to time the market and pick stocks.  There will be some who beat the portfolio shown here, but there will be many many more who didn't.

My suggestion:  the next time a friend or co-worker or anyone, for that matter, starts whining about their investment performance, whip out a copy of Andrew Hallam's post, Don't Forget That You're Getting Older, and recommend to them that they read it.  Better yet--suggest they think hard about what it says. You could be a retirement saver!

Wednesday, March 21, 2012

Buffett Ahead of the Hedge Funds

When I set about convincing non-investment people on the efficacy of low-cost indexed investing, I usually face a challenge.  Many of them have had a bad experience with their investments.  That's why they are talking to me.

I am up against the suits and the resources of well-heeled firms that have honed their sales pitches to the nth degree.  I'm against the hard thought-out processes of cleverly hiding fees and poor performance.  I'm against the presenters of carefully selected funds that have outperformed in the past.

It is easy for me to empathize with the 3rd runner up in some of today's presidential primaries.

But I bring heavy hitters to the plate.  These include Burton Malkiel, Dan Solin, John Bogel, Andrew Hallam, Jack Meyer, and many others.  The most powerful, though, is Warren Buffett who states that professionals even should follow the low-cost index approach.

Warren Buffett says:

Most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees.  Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals.
All of this, of course, is more than an academic exercise.  Many of the above mentioned people spent lifetimes studying and analyzing data on market performance before they arrived at their conclusion. Warren Buffett went a step further.

The Bet

On Jan. 1, 2008, Warren Buffett bet Protégé Partners LLC, a New York fund of hedge funds co-founded by Ted Seides and Jeffrey Tarrant, $1.0 million they couldn't pick an index of five funds that would outperform  the Standard & Poor’s 500 Index over the 10-year period ending Dec. 31, 2017.  These funds are funds of funds.

The fund of funds hedge fund pitch is interesting.  Hedge funds are for the wealthy.  To get in them, you have to put up a lot.  Everybody knows, however, that diversification is important.  Thus, you want your investment dollars to spread among several hedge funds.  Not easy unless you are ultra rich.  Enter the "fund of funds."  Now you are diversified and getting management from the best of the best - at least, that's the pitch.  All of this and you are investing like the ultra rich!  You are ready to head to the neighbor's barbecue and brag that you are invested in hedge funds.

I once listened to a pitch to a group of do-it-yourself investors that presented impressive graphs as part of a power point that showed the exceptional performance of hedge funds over the past 20 years.  I asked if Long Term Capital Management was included in the results.  The presenter didn't know - at least, that's what he said.  Long Term Capital Management was the largest hedge fund in the world - before it went broke.

As of the most recent calculation on the bet, Buffett has a return of 2.2% (using Vanguard's Admiral funds) and the hedge funds are down 4.5%.

Brad Alford, head of Alpha Capital Management LLC in Atlanta, says "hedge funds of funds have underperformed because of high fees and mediocre manager selection."  Interesting.  It seems that with $1.0 million on the line and, even more importantly, pride, that the hedge fund manager made his best picks.

The fees part of it we definitely get.

The details of the bet can be seen at .

Thursday, March 15, 2012

Need Help Saving?

Need help saving?  Give it to me, I'll save it for you.  Just joking!

Seriously, though, a problem people have saving is that they view their older selves as strangers.  After all, they have never met their older selves!  This is the interesting research finding produced by Hal Ersner-Hershfield et al. detailed in Social Cognitive and Affective Neural Science.  I learned about it at the Investment Fiduciary site.  It is reasonable that, if we see our older self as a stranger, it makes it more difficult to save - especially for retirement.

Today there is a way to overcome this hurdle because there is (you guessed it!) an app that will take a current picture and age it digitally so you can meet your future stranger self!  The app is a $0.99 iPhone app called AgingBooth.

You can see my aging picture on the main page to this blog :)

I hope they come up with an app soon that makes us all younger so we can save more at an earlier age!

Tuesday, March 13, 2012

Don't Blame the Stock Market!

Not surprisingly, financial market reporters have hammered home the idea that the 2008 stock market played a big role in destroying the retirement goals of many.  No doubt it did for some; but these were, for the most part, those who don't know how to invest.

In After the Storm. the Little Nest Eggs That Couldn't, Steven Greenhouse quotes Jonnie Worth who says “Like everyone else, I watched my retirement savings plummet” .  “I lost a big percentage of my investments.” She worked at JP Morgan Chase - a place where one would think that good investment advice was available.  Anyways...let's think about Ms. Worth's situation.  In the latter half of 2007, the stock market reached its all-time high - worth noting.

In 2008, of course, stocks plummeted.  A well-diversified portfolio invested basically 65% stocks/35% bonds was down 22.6% for the year.  By the way, this allocation is more aggressive than most near- retirees would choose.

Granted, those who sold out during this period locked in a loss.  If it was panic selling, they probably didn't get back in.  Ms. Worth is likely in this boat, with others.  Again, this isn't investing - it is market timing, etc.  It's watching the dice roll and trying to decide when to place a bet.  This is fodder for behavioral finance experts.

Investors, on the other hand, continued to contribute to their 401(k) and other investment accounts.  Some increased their allocation to stocks on the grounds that it was the sale of a lifetime.

How did an investor do who stayed the course?  By the end of 2011, the diversified portfolio mentioned earlier was up 7.2%!  This doesn't account for contributions during the period - it is just the value of the portfolio assets from the beginning of 2008! I t also doesn't take into account the push higher we've seen in 2012.

The bottom line is simple.  Most retirement assets should be invested in line with a well thought-out asset allocation model that can weather not just calm seas but stormy ones as well.  If you can't emotionally do this, hire an advisor to do it for you.  If you have an overwhelming desire to gamble, limit it to 20% or less of assets.  You or that advisor with the great track record might be the next Warren Buffett, but (I hate to be the one to break the news!) probably aren't.

Friday, March 9, 2012

What Happened in 1988?

On 9/26/1988 the word "internet" first appeared in the Washington Post.  But we were busy looking elsewhere.  We were looking for Elvis, following the Bush/Dukakis debates, and wondering why the mighty Soviet Union had to ingloriously back out of Afghanistan.  We were blindsided.  Our world was set to change.

The Dow Jones Industrial Average ended the year up about 9% in price to a level of 2,168.57.  Two years later, in 1990, Tim Berners-Lee showed a group of physicists that he could get data from his computer by typing in code on computers in Alabama.  The physicists were reportedly unimpressed.  They failed to see a trillion dollar idea - the worldwide web.

Today, of course, our world is completely different - because of these events as we looked elsewhere. People of an older generation lamented the fact that their parents didn't get in on the ground floor of IBM.  Guess what - there have been a lot of IBM-type situations since!

At the time, information was not easy to get.  It was preceded by hobbyists meeting in garages to talk about the computer kits they were trying to assemble.  Graduate students remember going to the library to find journal articles they needed to Xerox for class - the articles were dated.  Today, of course, the worldwide web enables anyone with smarts and a laptop to easily find the top research papers in practically any field.  Worth thinking about.

When I think about the availability of information and the idea that the cost of obtaining information is down dramatically, I can't help but think that, 20 years from today, we'll look back at the present and marvel at what a great investment opportunity it presented.  My guess is that the world will change more in the next 20 years than it has in the past.  Cars will be different, houses will be different, education will be totally transformed (sorry chiropractors), and wondrous advances in bio-tech will be forthcoming.

To participate, we have to look in the right places.

Tuesday, March 6, 2012

What You Don't Know Won't Hurt You!

What you don't know won't hurt you.

That's the idiom we used to bandy about a lot as kids.  But it comes into play a lot for adults as well, I guess.

I met with a young lady about asset management.a couple of weeks ago and noticed she held shares of Fidelity Magellan (FMAGX).  This is a huge, widely-held, large cap fund.  Management expenses on FMAGX are relatively low at 0.60% (the average actively managed fund charges in the neighborhood of 1.20%!), turnover is relatively low at 42%, and over the past 3 years, as of 3/5/2012,  has achieved an annualized average return of 25%!

Morningstar data shows that $10,000 invested in FMAGX would have grown to $19,500 over the period!  My guess is that most holders of FMAGX are pretty happy.  What's not to like?

Actually, there's a lot!  Over the same period, the SPY exchange traded fund which is indexed to the S&P 500 achieved a return of 28.3% annualized.  $10,000 invested in SPY would have grown to $21,119.  The difference is approximately $1,600.  Part of this difference is in management expenses. The SPY fund charges .09% considerably below the .59% of the Magellan Fund - it adds up.

A point to consider is what the $1,600 is likely to grow to over the next 15 or so years, taking into account the compounding of returns!

The March issue of Money magazine put out by the Financial Planning Association reports that last year "79% of large-cap fund managers trailed the Standard & Poor's 500...".  They go on to say "These poor results are no anomaly...".  In other words, looking at FMAGX isn't just (as we also used to say when we were kids) "cherry picking."

When I talk to people about asset management fees, I know they balk about the explicit fee, especially if the assets are in a 401(k).  Some feel like they are getting the management essentially for free.  Here's the news:  Wall Street does nothing for free.  Wall Street is making money, believe me.

I charge 0.4% of the market value of assets and invest in low-cost, well-diversified index funds, like SPY mentioned above.  On $1.0 million of assets, this amounts to a fee of $1,000 for 3 months.  After that ,some of my clients manage the assets on their own - possibly with some guidance from me.  I know that $1,000 paid out explicitely seems like a lot; but, in many cases, it is a lot less than what brokers are taking before investors even see the bottom line.  And this includes funds in 401(k)s.

Disclosure:  This post is for educational purposes only.

Sunday, March 4, 2012

Flipping Pennies

If you are reading some list of the "top 5 funds" of the decade or listening to some investment manager on CNBC boast about how his fund outperformed the market over the last decade, remember the "flipping pennies" metaphor.

If we take 100 people and have them flip a penny, approximately 50 will have heads.  Let those 50 flip again and approximately 25 will have heads.  Repeat for the 25 still standing and we have approximately 12.  Repeat once more and we have 6 standing.  These are the "best" penny flippers. 

This simple metaphor shows that pure luck will statistically produce winners from a group that attempts a difficult task.  Here the task is to get 5 heads in a row.  The odds are very slim that you will get it; but, if we do it with 100 people, the odds are good that a few will get it.  Worth thinking about.  Think about how many actively managed mutual funds are out there charging high fees.

The task in the investment world is to get outstanding performance over the long run when you are subtracting fees on an annual basis ranging between 1.5 and 2.5% and, in some egregious cases, even higher. 

But the best part of the pennies metaphor is the follow up question:  if we want to pick people out of the 100 who are superior coin flippers in the future, would we pick the winners from the initial experiment?  This is what people do when they sit in a human resources meeting and pick funds with the best track record for their 401(k).  For sure, they may pick someone with such awesome talent that they outperform their fees.  The evidence from numerous studies, however, shows this is unlikely.  Out of the top 10 funds from the past 10 years, only 2 or at most 3 will outperform the market over the next 10 years.  That's what the evidence shows.

Unfortunately the simple pennies flipping metaphor is not well known, and people invest their retirement funds with the "market beaters" of the past.  And it is costing them!

Fred Schwed Jr. - Where are the Customers' Yachts? or A Good Hard Look at Wall Street