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, November 27, 2012

Recommended Holiday Gift - Latest Jeff Yeager Book

Source: Amazon
To me, experience counts for a lot.  You can have a PhD in family matters; but, if you haven't raised teenagers, you'll have a difficult time getting me to pay attention to your child-rearing theories.  For the same reason, I have a difficulty with investment advisors still wet behind the ears--I don't care how many designations they can put behind their name. But... that's the subject of another post.

A company I worked for, once upon a time, gave periodic presentations to people on the verge of retirement.  The financial planner guy would go over financial planning issues, I would talk about managing the nest egg and creating a paycheck in retirement, and finally the President of the company would pop up and answer questions.  This was the first half.

The second half would typically present a panel of retirees who had previously worked at the company.  They would tell stories on what retirement was like and hit upon their successes and what they would do differently if they had it to do all over.

Not surprisingly, the audience sat up a little straighter and blinked a few times to get refocused as the panel spoke.  This was them a few years down the road.  They were meeting their future selves.  By listening closely to the panel, the audience could very well get answers to questions they had been mulling over.  Broad questions like "can I retire early," "how do I know if I have enough to retire," "what will I do in retirement," etc.

My question to myself at the end was why this kind of thing isn't done more often.  I even thought about the "Scared Straight" program on TV where incorrigible teenagers on the path to becoming a menace to society are given a "tour" of Rahway State Penitentiary to get an insider view of prison life from the inmates.  What could be a better deterrent?

To me, experience counts for a lot.

 The Cheapskate Way

Jeff Yeager's latest book How To Retire The Cheapskate Way is filled with stories of people who are successfully going down a debt-free road, living within their means, and achieving a goal of what he calls "selfishly employed," i.e., employed doing what they want to do.  In fact, he is one!  This book is experience writ huge!

Most people who think about retirement concentrate on the income side.  I'll admit I am guilty of this.  I hammer away at investments and creating a large "nest egg."  I emphasize relating money needed to achieve an income based on what was needed in the pre-retirement years.  But retirement is different from pre-retirement - especially for people who pay attention to where their money goes.  And the financial expert guy (or gal) with "the big binder" isn't going to be a lot of help to people who truly understand their finances.  This is one of Yeager's main points!

In between the stories and Yeager's expressions that will get you to laugh out loud (not easy for authors to do, in my case), there is a serious challenge here for the financial planning profession.  He presents evidence questioning the widely-made assumptions on retirement spending needs.  In particular, if you are buying into the notion that you need millions to happily retire, Yeager will challenge your beliefs.

The focus in this book is on spending.  The stories show that many people have learned how to get along on much less than is conventionally presented.  It tells the story of people saving and creating income in unusual ways.  It tells of people thinking outside the box - one couple got their kids a dump truck load of dirt for Christmas.  The kids were thrilled!  And, you guessed it - the dirt was dumped at the low spot in the yard!

It gives some direction in dealing with the thorny issue of medical care for the early retiree.

Part way through, I was reminded of a presentation I attended put on by the local chapter of the American Association of Individual Investors.  A broker was going through a complicated explanation of what to do if a retiree's income wasn't sufficient when, all of a sudden, a hand shot up.  The audience member said that he would figure out his Social Security, his investment income, and his small pension and then do what he did his whole life--he would "live within his means."

This threw the presenter for a loop.  He clearly had not thought of the problem from this perspective. To him, if you had a shortfall, you automatically first considered taking on more investment risk.

Yeager loads his book with references to resources enabling the reader to follow the Cheapskate path. In case there is a question, Cheapskate doesn't imply that a person isn't generous.  Cheapskate Verna Oller replaced broken shoelaces with a zipper from an old jacket but in her death revealed a generosity that will surprise you.


I highly recommend this book for anyone on your holiday list past their midlife crisis.  For one thing, it is cheap.  For another, it will be available in January after all the holiday hooplah has died down and your giftees are looking for a good read to settle down in front of the fire with.  After they read it, they will thank you and hopefully lend it to you.

Wednesday, November 21, 2012

How Are Your Investments Performing?

One of my pet peeves is that most investors have no idea how their investment portfolio is performing on an absolute basis.

Most of the time when I ask people, I get a puzzled look and a response that suggests they'll know when they get their quarterly report in the mail.  Of course, the quarterly report will typically be at least a week old.

Sometimes people respond by saying they are doing great - their portfolio is up by $4,320 this quarter.  This, of course, is meaningless--in that it is great if they have a portfolio valued at $140,000 but not so much if they have a $1.0 million portfolio and it depends on how the markets have performed.

Furthermore, it begs the question of performance relative to a simple benchmark.

My frustration comes after years of fighting to get performance data even in managing assets for institutions, such as pension funds, not to mention individuals.

Thus, today when performance is readily available, I find it difficult to understand that investors do not actively seek it out.  In fact, it doesn't even seem to be that important to the investment community itself. This shows up when financial publications do their surveys to report on the top brokers.  These surveys, at least the ones I read, never report on whether brokers report performance and performance relative to a benchmark.  Instead they are concerned with commissions and quality of research and various aspects that concern active traders.  Typically, not even a mention of performance reporting.

Take a look at the present market.  Europe is walking the edge of a gurgling volcano, the U.S. is wily coyote suspended in air after running off a cliff, and the U.S. employment picture is the "Little Engine That Could" chugging up the hill.  Volatility is rearing its ugly head.  How are your investments performing?

One broker that I know of - Charles Schwab - provides performance reporting on a timely basis, on-line, and compares performance to a benchmark based on the client's pre-selected asset allocation model.  I know this is a mouthful, but this is what it looks like:

Source: Schwab
CLICK IMAGE TO ENLARGE Note the information available to the client.  It includes beginning value, ending value, dividends earned, and change in value of the portfolio.  Most importantly, it includes the return on the portfolio (last two lines) for various time periods as well as a return on a benchmark.

The benchmark here is for the "Moderate" portfolio allocation model.  Schwab offers 7 different models for the client to choose from.

Here is what the benchmark is comprised of:

Moderate benchmark was composed of 5% Citigroup 3 month US T Bill (Cash Investments), 35% S&P 500 (Large Cap Equity), 35% Barclays Aggregate Bond (Fixed Income), 15% MSCI EAFE (International Equity), 10% Russell 2000 (Small Cap Equity). Source: Schwab.
Basically this is a 60% stocks/40% fixed income allocation.  Appropriate, typically, for someone who has just retired and who can take a bit of volatility.  For these clients, any performance exceeding 7% is usually pure gravy.

It is important to note that Schwab enables a client to combine accounts or look at accounts separately. Also, the periods examined can be customized--meaning that you can see performance between any two dates of your choosing.

All of this is by no means meant to argue that an investor should become obsessed with performance and check it too frequently.  It is important, though, I believe, to know it is readily available when you need it.  In fact, I believe it is critical to the whole investment process.

Disclosure:  I am not affiliated with Schwab although I do encourage my clients to use them.  Past performance is not indicative of future performance.

Sunday, November 18, 2012

2 Great Weekend Reads

Below are 2 pieces from 2 of my favorite bloggers:  Andrew Hallam and the intriguingly named Mr. Money Mustache (aka Pete). Reading these 2 bloggers will change most people's lives - to some extent.

Understand that you don't have to buy into their respective life style or investment philosophies 100% to benefit from them.

For example, Andrew Hallam is a 100% indexer and thinks hard about lifestyle.  His mission is to lay out a clear path to creating wealth.  To that end, he has written Millionaire Teacher.

I get it that indexing turns off some investors.  I understand that some people just can't buy into the idea that indexing will outperform most investors who actively seek to beat the market.  I've met a lot of people who have no doubt that they can pick high-priced mutual funds that will be in the 10% that will outperform the market over the long term after all fees.

And I know for a fact that most people have never been challenged on the frugality front.

On the investment front, many investors like matching wits with Mr. Market, like the challenge of analyzing individual stocks to try and pick winners, and bask in the adrenaline rush of timing the market.

But you can both index and invest actively. You can invest in line with Hallam's philosophy with 70% or 80% of your money (I always recommend at least 80%!) and try to beat the market with the rest - if that's how you want to spend your time.  By doing this, you can have the best of both worlds:  having the bulk of your assets invested with the odds on your side à la Hallam's approach and meaningful assets seeking to capture what the industry calls "alpha."  One thing Hallam will teach you, unambiguously, is how to avoid the cost of investing in high-priced funds and using high-priced advisors!

The second blogger, Mr. Money Mustache, is frugality (frugal, not cheap - he will teach you the difference) to the extreme.  In his strong language, engaging style, he provides a path for young people to be able to retire early by thinking hard about life style.  Again, you don't have to buy in 100% by, say, seeking to live close enough to your job so that you can bike to work.  I believe, however, after reading Mustache you will question why you're buying that huge flat screen TV for your small apartment when you have unpaid credit bills.

In fact, it wouldn't surprise me if most of you who read the piece below join the rapidly growing army of Mustachions!

This interview of Andrew Hallam, "How I Made My First Million," lays out the key points of his book Millionaire Teacher.  Here is a piece that lists his "Nine Laws to Financial Freedom."

Here is a piece, "Get Rich With:  Good Old-Fashioned Hard Work," by Mr. Money Mustache.  It is representative of his engaging style and includes (warning if you've got sensitive ears) strong language and a valuable lesson for young and old alike.


Thursday, November 15, 2012

Dark Pools - A Book Review

I read a lot of books on finance and investment theories, etc.  And, at the risk of sounding arrogant, mostly I don't learn a whole lot from them that's new.  After doing something for 30 years, you get to the point, I guess, where there isn't a whole lot to learn.

Well, last month I was in Anchorage, Alaska visiting my first grand- child, little Nora Emily; and my son and I visited the Anchorage library as the women went off with Nora to see the midwife for Nora's two-week checkup.

First, let me say that Anchorage has an excellent library.  They are putting that pipeline money to good use.

As always, I gravitated to the new book section and lasered in on the investment section.  There I came across Dark Pools.  I hadn't intended checking anything out; but, after sitting in one of their cushy chairs and perusing a couple of pages, I saw that this book had a lot to teach me on the important topic of high frequency trading.

The author, Scott Patterson, takes you from the beginnings of high frequency trading, day trading, and machine trading and describes the people who were instrumental in building the key constructs.  He describes how algorithms are able to hide trades until the last minute and then jump in front of the line when there are sufficient limit orders (i.e., depth in the market) to ramp up the probability of achieving a gain while limiting the possibility of a loss.  You thought that because you were the first one to put in a order to buy Intel at $20.00 that you get first dibs when a trade goes off at that price?  Think again.

The pioneers in this market did accomplish a lot of good.  They hastened the demise of the trading in eights system that blatantly ripped off small investors.  They led to a system where, today, trades are executed fast and efficiently.  They forced lower brokerage commissions.

Still, many of the principals admit they created a monster and that steps need to be taken to regain control.  In fact, at this late date, there appears to be no definitive answer to what caused the May 6, 2010 flash crash and knowledgeable people in the book argue that it easily could happen again, in even a bigger way - a pleasant thought for Joe and Daisy retiree trying to live out their days in calm comfort, not to mention for investment advisors in Glenelg, Maryland!

The last part of the book will be of special interest to some readers.  It describes Alex Fleiss's work in creating a system called Star  - an attempt to create a digital Warren Buffett.  It describes how Star, an artificial intelligence system, analyzes massive amounts of data, computes their correlations, and determines what to buy and whether to be in the market.  If a falling Euro, an increase in the price of corn, and a drop in mortgage rates correlates with rising utility sector prices, Star will find it in short order.  It is a system that learns as it goes and discards trading approaches that don't work and keeps those that do.

Star started buying up stocks including financials in a big way in early 2009 to the dismay of Fleiss who felt, along with much of the investment community, that the world was coming to an end.

As we know, of course, Star turned out to be a Star (sorry...couldn't resist that) as markets roared upwards after March 2009.

All in all, I found Dark Pools to be a fascinating read, and I feel like I learned a lot about a subject I need to understand.

Here is a recent interview on high frequency trading with Dave Cummings, owner of TradeBot Systems, one of the people profiled in the book:

Wednesday, November 14, 2012

Some Market Returns

Here we go again!  This time it's the "fiscal cliff'' leading the way. Go into a decently populated bar and mention the markets, and you'll surely get a lively group discussion going about how smart people stay out of the markets - smart people buy certificates of deposit or bury their money in the back yard.

Take a look at what we've been through, the loudest voices will say!  Just over the last 10 years, we've had the tail end of the bust, the 9/11 terrorist attack that was predicted to end passenger air transportation, the housing crisis resulting from the housing market going bananas, a financial system that came within hours of going completely bust, and, to boot, Europe falling apart with the ongoing possibility of an end to the Euro.  Oh yeah...I almost forgot - throw in our  dysfunctional government and its never ending 3-ring circus of ineptitude.

Who would invest in this kind of a world?

Before we hyperventilate, maybe we should (gasp!) look at some numbers.  Here are 10-year annualized return results for the 10 -ear period ended 9/30/12 for basic asset classes:

Index                                                              Return
Barclay's U.S.  Aggregate Bond Index             +5.32%
Barclay's Global Aggregate Bond Index           +6.45%
Barclay's U.S. Corporate High Yield Index     +10.98%
JPM EMBI Global Diversified Index               +11.74%
S&P 500 Index                                               +8.01%

Source:  Morningstar

For the uninitiated, these are standard asset classes.  Each, in fact, can easily be invested in via low-cost, well-diversified exchange traded funds.  If you have a decent 401(k) or similar retirement account, you very likely have funds that track these indices available to you.

What I find interesting is that markets have done fairly well, and many don't know it.  There are a lot of people walking around thinking that markets have been a total bust over the past 10 years.  Here's some news:  at 8%/year, your money doubles in 9 years.

Here's some more news:  when markets implode, it represents an opportunity.  Most everyone in the market, including retirees, has money invested that they won't need to touch for at least 10 years.  What they care about is where the market will be 10 years from now.  This simple realization leads smart investors to look at market downturns as opportunities to pick up really good companies at attractive prices.

Tuesday, November 13, 2012

How Bonds Work - A Resource

If you're like most of my new clients, you don't know a lot about bonds and how they work.  You probably get that yields rise/bond prices drop and vice-versa idea - somewhat.  You have some idea that duration is a measure of how volatile a bond's price is and that there are various risks in buying bonds, like credit risk and interest rate risk - but you're not really clear on these concepts.

You come to understand that most bonds trade over-the-counter, which is very different from the way common stocks trade. 

I know all of this because I meet with clones of you.  I also read the financial press and ponder the ongoing national angst over flows into bond funds despite historically anemic yields.

I stress to new clients that bonds are an important part of the drive towards a successful retirement.  I stress the need to seriously think about the role of bonds in your portfolio - especially in today's world of excrutiatingly low yields.  I explain the different parts of the bond market - corporates, mortgage-backeds, Treasuries, etc.

And I see eyes glaze over, and that's when I pull back a bit.

What you don't see so much is that I am constantly on the lookout for resources that do a good job explaining how bonds work.  Every such resource makes my job easier.  Books are a good resource; but, in today's markets, they become dated pretty quickly.  This is one area where the internet has, IMHO, a distinct advantage.

A really good site I have recently come across and recommend is  This site offers basic instruction on buying bonds and covers, as far as I can see, all of the main topics that bond investors are concerned with, including issues of the day.  In addition, it also has numerous instructional videos. 

I believe that, if you visit the site and putter around a bit, you will return regularly just to keep up with the market.

Sunday, November 11, 2012

Recommended Reading For Harvard Undergrads

Greg Mankiw, Chairman of the Council of Economic Advisors under George W. Bush and author of  best-selling economics textbooks, recommended on his blog (number 1 rated economics blog) a recent interview of Eugene Fama - An Experienced View on Markets and Investing.  Mankiw recommended that the interview be required reading for undergrads studying financial markets.

As an aside, I would recommend Mankiw's blog and undergraduate text book (*buy used copy online - don't spend $235 new unless you're made of money) for anyone interested in economics or high school students aspiring to study economics. 

For those who might not know, Fama is generally referred to as the "father of modern finance."  His research forms the basis on which many portfolio theorists base their investment philosophies.

Interestingly, the bulk of the audience of Harvard undergrads for whom Mankiw recommends the interview will eventually end up in the higher end of the income spectrum.

Others who need to know this point of view are in high school playing the stock market game where they are trying to pick stocks that "beat the market."  They are playing games and hearing about investment approaches that enrich Wall Street.  They are indoctrinated into games that, at the end of their retirement years, will likely result in "nest eggs" significantly lower than they could otherwise have.  Most never hear about the evidence on building a portfolio using low-cost, well-diversified index funds.

Here are a couple of quotes from Fama in the interview:

After costs, only the top 3% of managers
produce a return that indicates they have sufficient
skill to just cover their costs, which means
that going forward, and despite extraordinary past
returns, even the top performers are expected to
be only about as good as a low-cost passive index
fund. The other 97% can be expected to do worse.

Asked what the conclusions are, he replies:

That an investor doesn’t have a prayer of
picking a manager that can deliver true alpha. Even
over a 20-year period, the past performance of an
actively managed fund has a ton of random noise
that makes it difficult, if not impossible, to distinguish
luck from skill.
Isn't it time that the low-cost, dividend approach to investing for retirement be explicitly incorporated into high school curriculums so that students understand an approach towards preparing for retirement?

*Even if you are made of money, buy the text used and send the difference to Children's Hospital.

Friday, November 9, 2012

Increase Savings Rate By 1%

Jim Blankenship at Getting Your Financial Ducks In A Row has asked financial bloggers to encourage Americans to increase their savings rate by 1%.  This is important because the nation faces a looming retirement crisis.  Simply, Americans in the red zone of retirement, 10 - 15 years away, have inadequate savings to support themselves when they exit the work force.

There are numerous "tricks" one can use to increase savings that even the frugally challenged can easily adopt, and some of these are detailed by Jim and his contributors.  The one I offer may be a bit challenging; but, if you try it for a while, it will very likely become a habit, and your mid-60ish self one day will surely appreciate your meeting the challenge.

My Ideal Client

Recently I had lunch with an ideal client at the *Eichenkranz restaurant in Baltimore.  Ed insisted on paying.  But this isn't why he is an ideal client.  The reason is that when the check came, he pulled out a small, spiral notebook along with his glasses from his shirt pocket and carefully scanned the bill.  He then picked up a pen and carefully entered the amount in his notebook.

Surely I have to go no further to convince you that Ed has a really good handle on where his money goes.  This goes a long way towards making him an ideal client.  When we sit down and talk about spending and saving, Ed has the figures at hand and I know they are reliable.

I know all of this is old school, and most people today can more easily do all this with tablets and smart phones and whatnot.  Whatever works is fine.  Knowing where your money goes is the crucial first step in managing finances.

The Challenge

But how can this help increase saving and where is the challenge?  Simply, do the following for 30 days:  when you eat out, note the cost of soft drinks and record it in a notebook, like Ed, but order water.  In other words, record how much you are saving each time you eat out by not ordering a Coke or a Pepsi.

I know - this is a huge challenge for most people.  If, like many Americans, you eat out often and with your family, you'll find you save a decent amount; and you'll be surprised at how much you spend on soft drinks - and your dentist will commend you!

You might consider giving the kids the choice between a soft drink and receiving $1 in spending money.

All is for naught, of course, unless you bank the amount saved each month!  It isn't money for spending elsewhere!

Admittedly this isn't easy.  And, 30 days is obviously arbitrary.  To me, it is long enough to make it a challenge and get most people to turn the behavior into a habit.


*If you are in Baltimore and interested in the ethnic experience along with really good, reasonably priced food, visit the Eichenkranz .  The drive there will take you through an area that will give you a strong flavor of industrial America.

Thursday, November 8, 2012

Need Help Allocating 401(k) Investments?

One of the good things about the financial services industry is that there are people who constantly seek opportunities to provide what the market needs.

One service desperately needed is objective advice on allocating 401(k) assets.  In fact, this is an important part of what I do.  Very basically, I look at the total asset picture of clients and manage their assets or recommend asset allocations for them.  I use an approach that stresses tracking markets using low-cost well-diversified ETFs and mutual funds.  My reading of the evidence is that this approach will outperform active managers over the long term after all fees are accounted for.

Many prefer an active approach.  From my perspective, that's ok. There is more than one way to skin a cat, and time will tell if an active approach will add value.

With this being said, there is a free, fund-specific service, Kivalia, that helps investors with asset allocation in their 401(k)s (and 403(b)s and 457s, etc.).  If a fund isn't presently in the more than 225 funds listed, it can easily be listed.

Once in the database, the service produces 3 recommended fund-specific asset allocations illustrating 3 risk tolerances as shown:

CLICK IMAGE TO ENLARGE  On the same page, clicking an icon will enable you to compare the asset allocation of your own portfolio.  Are you more aggressive or more conservative than you think?  Also shown is the performance of the portfolios along with relevant target date funds.

For those who like pie charts, the asset allocation is also shown as follows:
CLICK IMAGE TO ENLARGE Once on the page, you'll also see useful risk and diversification metrics.

To get the full utility of kivalia (the website has the genesis of the word, which you'll find interesting), you have to putter around on the site.  You'll find the ability to be notified of alerts when changes are recommended and that there is a lot of guidance and useful information for those puzzling over the asset allocation decision.  I would suggest that plan administrators take the lead and advertise this service to employees.  They should be pro-active in getting their plans listed and promoting objective advice on investments.

The principals of Kivalia have strong credentials to provide the advice offered.  I would, however, like to see an explanation of how various factors are weighted in arriving at the recommendations.  For example, as readers know, I and many others emphasize costs of funds as an important long-term performance factor.

Disclosure:  I am not affiliated with Kivalia.  This post is for educational purposes only.  Individuals should do their own research or consult with an investment professional before making investment decisions.

Tuesday, November 6, 2012

Do You Care Where Your Money Is Invested?

If you care about social issues and such as it relates to investing, there are two basic schools of thought.  One is to do the best you can investing and then donate to the causes that are meaningful to you, and the other is to invest in socially responsible companies.  The first approach is obviously easier but may cause you to toss and turn as you see visions of companies producing cigarettes, military hardware, and engage in practices you view as destroying the planet and even unethical.

The second approach is a bit more challenging.  The easy way out is to use a socially responsible fund. By googling "social responsible funds," you can get a wealth of information on funds meeting various criteria.  They have periods where they outperform the market but, in general, have underperformed a bit.  One reason is that they tend to be high-priced in terms of expense ratios - understandable in that they require quite a bit of research and fairly intensive screening.

There are other ways to approach the problem, for those willing to do their own research, and they are laid out neatly in the book Low Fee Socially Responsible Investing by Tom Nowak.  The book recommends different approaches for various size accounts as well a screening approach.  Useful, also, are a databases for screening criteria.  The book can read in a weekend.

Here is a podcast of an interview of the author Tom Nowak by Jim Ludwick of MainStreet Financial Planning, Inc.

Monday, November 5, 2012

A Simple Asset Allocation Spreadsheet

At the bottom of this investment article from Rutgers University, directed to farmers, is a simple Excel spreadsheet one of my clients found for tracking asset allocation.  The spreadsheet is useful for bringing accounts together and determining when re-balancing needs to take place.  As has been discussed here frequently, asset allocation is the most important determinant of overall investment return.

The approach I, and many others, recommend is to identify an appropriate asset allocation and stick to it through market ups and downs.  In this way, the key emotional factors that investors struggle with are defeated.

Cash investments include money market accounts, certificates of deposit, savings accounts, etc.  Fixed income investments include bonds, bond mutual funds, and bond ETFs, etc.

Once you get the hang of it, you should break out equities into domestic and foreign.  Somewhere down the line, you may want to also break out large cap and small cap stocks.

Saturday, November 3, 2012

A Bucket Approach to Portfolio Allocation for Retirees

One of my important functions is to advise retirees on allocating assets--a perspective that shifts at retirement from nest egg accumulation to decumulation.  The retiree goes from hoping that markets fall so that he or she can buy assets cheaply to praying for rising markets to push their nest egg higher, from which they will generate a paycheck for the next 25 years or so.

The need to generate the paycheck and the increased sensitivity to declining markets raises the potential for emotional factors to derail the whole process for the retiree.  This was seen in 2008.  With a drop in stocks of 37%, it was easy to understand the fears of those living off their nest egg.

One approach to this problem is the so-called "bucket approach" to asset allocation.  This approach provides a structure for riding out market downturns.  Although it seems unique, it actually is not so different from a standard approach--as I'll explain later.  The bucket approach is very nicely described by Christine Benz, Morningstar's Director of Research in A Bucketed ETF Portfolio for Moderate Retirees.

This article lays out a specific allocation in terms of 3 buckets with recommended ETFs for each bucket.  This creates a nice visual effect for the retiree to understand the purpose of each part of the portfolio.  The first bucket is intended to meet expenditures over the first few years and is comprised of low-risk cash equivalent types of ETFs.  The second bucket is primarily fixed income and is positioned to meet the middle years, and the 3rd bucket is riskier stocks, high-yield bonds and commodity ETFs intended to produce growth.

The advantages of the bucket approach is that, as mentioned above, it should enable the retiree to weather market downturns and visually see how the portfolio replenishes its needs.  Furthermore, it is efficient and doesn't require retirees to spend their retirement managing their portfolios.  Ms. Benz argues that her recommended portfolio should enable a retiree to withdraw 5% of assets, inflation adjusted, over a 20-year time frame.

I believe that her article is useful reading for anyone in retirement or nearing retirement.

As mentioned above, though, the bucket approach is not much different from the standard asset allocation approach.  For example, for some of the retirees I manage assets for and advise, I use the 40% stocks/60% fixed and cash allocation model.  Ten percent of this allocation is cash; so, right off the bat, the usual approach will have the 2 years' cash needs met as in the bucket approach.  Also, the 10% allocation will be replenished on an ongoing basis via portfolio re-balancing.  The 40% stocks is, as above, intended for growth; but, if stocks do very well, they could be used to replenish the other parts of the portfolio and, in fact, could be used to meet cash needs.

One stipulation I put in for retirees drawing down their nest egg is that the yield on the overall portfolio be at least 60% of  cash needs.  Thus, if the retiree is drawing down 4%, the portfolio needs to yield at least 2.4%.  This may mean some jockeying into dividend ETFs, etc.  Thinking about this a bit, you'll realize that more than 2 years' protection is built in !

Furthermore, if the market is down, all cash flows go to cash.  We live in a world where markets have always recovered (at least in the U.S.) and, thus, people believe they always will.  Those in retirement need to be careful, I believe, in making this assumption.

Thursday, November 1, 2012

Stress - Can You Handle It?

Barron's reports this week that investment managers have turned bearish and performance numbers show that they are behind their benchmarks year-to-date.  All of this as we see the market starting November with a strong performance.  What do they do now - hold their nose and jump in at the risk of getting whipsawed?  Or do they stay on the sidelines and potentially miss a good move?  Stress is undoubtedly high.

There are a lot of uncertainties - corporate earnings, the election, Europe, the fiscal cliff.  Still, the market holds in.

And this isn't an unusual situation.  It is the nature of the market that many times you can make a list of negatives longer than your arm and yet the market moves sharply higher.  The opposite case is obviously true as well.

One of the benefits of the investment approach I, and many others, choose is that it limits this market  stress.  Instead of the stock picking/market timing stress-inducing approach promoted by the Wall Street community, we prefer to focus on asset allocation and then satisfy this allocation using low-cost, market-tracking exchange traded funds.  We get that the market is going to be up big and down big.  We believe, however, that over the long run the economy and the market will produce good performance as innovation and global growth take successful companies higher.

I realize that some of you may not have bought into this approach just yet and are on the sidelines pulling your hair out.  To you, I offer a piece First Understand, Then Destroy Stress by one of my favorite bloggers - none other than Mr. Money Mustache .