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.

Sunday, September 22, 2013

Bernanke in a Box

 One prerogative of blogging is an occasional rant.

Here's one lesson from recent Fed history:  transparency is great WHEN YOU HAVE A PLAN, not so much WHEN YOU DON'T.  In trying to reduce uncertainty and volatility, our Fed Chairman, the esteemed student of the Great Depression, has ramped it up.  Ah yes...unintended consequences!  Now markets are totally confused, and every piece of economic minutiae going forward will be analyzed to death as capital markets try to divine Bernanke's take on it.

What we see unfolding is starting to look more and more like the Greenspan exit.  Recall Greenspan went out riding on accolades from fellow governors and others praising him as the greatest (apologies to Ali who is the greatest) and a maestro only to find out in short order that he had set the stage for the worst economic downfall since the the 1930s by pandering to Wall Street.

But let's review the downfall to gain some perspective. In 2003 Greenspan and, yes, Bernanke pushed short-term interest rates to the historically low level of 1% and kept them there for a year.  This in the face of a robust housing market.  By pouring gasoline on a fire, this was the single action that caused the housing boom and consequent bust.  It wasn't greed by various groups, etc., although they played an important role in carrying it out.  To be absolutely clear, let's restate it as follows:  if short term rates had hovered around 3%  as was normal prior to the Greenspan/Bernanke manipulation, there would have been no housing crisis as we saw it.

There is a lot of pussyfooting around on this subject, so it deserves some emphasis.  Many point to Wall Street's greed as the culprit for the 2008 debacle.  Well here's some news, folks.  Wall Street has been greedy since the first gatherings under the buttonwood tree.  Wall Street's ongoing thrust has always been to make a killing anyway they can.  They will use inside information, front trade, and rip away the retirement years of the nation's workers by charging unconscionable fees.  They'll structure products filled with toxic product that even Einstein couldn't understand and sell the product to your local school district.  Whatever it takes!  The point is that Wall Street and the investment banking community, including the ratings services, didn't just get greedy in 2008.

On Bernanke's watch, he has tried unsuccessfully over the short term to reignite inflation and, in the process, pushed investors (including retirees and Pension Plans and the whole investment community) into a much riskier posture than they should be in or desire to be in.  This was undertaken by the Federal Open market Committee with eyes wide open.  Another way to view this is to understand that assets aren't being allocated by free market forces but by the a Fed micro-managing interest rates.

Again, to be clear, it is important to understand that, in controlling interest rates, the Fed is controlling prices and, in this instance, the most important price in the economy - THE PRICE OF MONEY! Think about it - you can have a mortgage payment of $2,600/month or $2,200.  You can borrow $15,000 at your bank to put on an addition or buy a car, and your monthly payment depends on the Fed setting interest rates.

I would be remiss if I outlined the problem and didn't indicate a solution.  Here it is.  Instead of a Federal Reserve that micro-manages the price of money, how about the Fed going back to Volcker's approach that broke the back of inflation by controlling the growth rate of money in the economy.  Let the millions of economic entities that daily make asset allocation decisions set the price of money.  This is called a free market economy.   Granted this requires a dramatic drop in arrogance.  It means admitting that the market knows better than the Central Bankers what interest rates should be.  For what it's worth, you can be sure it's not coming from Yellen.  She's steeped, as are present governors, in the Soviet-style price control mindset.

As you think about this, here are a couple of other points to throw into the mix.  Whenever there is a debate in DC, it seems that the higher ground is taken by debaters asserting what the founding fathers intended.  Along the same lines, what if we revisit the intentions of the creators of the Federal Reserve 100 years ago.  It is beyond dispute that then (as today) people didn't trust big banks.  Thus, they came up with a somewhat convoluted system IN ORDER TO PREVENT CONCENTRATED POWER OVER THE NATION'S MONETARY POLICY.  They specifically intended for the regional banks to  pull the levers.  Instead, today, power resides in DC to the extent that the Fed Chairmanship is said to be the second most powerful position in the world!

A second point concerns whether the FOMC has any clue on what they are doing.  Point one is their forecasts which, literally, are a joke.  Forecasting GDP out 2 to 3 years is ludicrous.  You can examine the record yourself.  Suffice it to say that it's not just the emperor; but, in fact, the whole monetary policy committee is naked.  Thirdly, and this to me is most telling, ask Bernanke if 10 years ago he could imagine (in his wildest "expert on the Great Depression" dreams) how an economy could have reported inflation under 2% with the Federal Funds target rate at essentially zero percent and the Federal Reserve monetizing the debt to an extent greater that the annual Federal deficit.

Any economist confronted with these policy facts would have made a good model for Edward Munch.

But where are we headed from here?  It is accepted with absolutely no question that interest rates jumped 1% because of the talk of reducing the tapering by $10 billion (a scary thought in its own self). But maybe the cause and effect is over emphasized.  After all, this rise in rates has been predicted for a long time.  If it continues, it will be an upheaval because there will be a massive re-shifting of portfolio assets and could take the economy South.

Part of the problem is that past policy has pushed investors into assets they don't understand.  I'm "boots on the ground," so let me give a simple example.  I see people who I ask about their holdings in bonds. They tell me that they read up on bonds and they read that, by holding individual bonds, they can't lose money!  They don't understand even that the 10-year bonds they bought 3 years ago, priced at $105.5, will drop to $100 at maturity and could go below $100 over the next 12 months with a big enough push upwards in interest rates.  Many have zero understanding of corporate bond spreads and the impact on prices if spreads widen.

Sometimes I think the FOMC understands these underlying market dynamics about as well as they understood credit default swaps in 2007.

Going forward, if this all leads to a nasty collapse, Bernanke and his committee will thankfully have those they can point the finger at and blame.  Front runners here are Congress, emerging markets, and the Far East.  Part of the job requirement of central banking today is being able to cast blame elsewhere.

Saturday, September 21, 2013

Target Date Fund Flaws

Here is an excellent, eye-opening article by Robert Powell at MarketWatch on Target Date Funds.  For many, target date funds are excellent investment choices.  They take care of the asset allocation question by investing in low-cost index funds without the plan participant needing to know anything about investing or needing to adjust allocations over time.  But, as you might suspect, target date funds aren't always a good choice.  Some providers just can't resist exploiting the lack of knowledge on the part of participants by throwing in high-cost funds.

Powell cites "...Legg MasonTarget Retirement Series (1.47%); Franklin Templeton Retirement Series (1.36%); State Farm Lifepath Series (1.27%); and Invesco Balanced-Risk Retirement Series (1.19%)..." for having higher-than-average costs.

The article recommends that, if your 401(k) plan has higher-than-average cost target date funds, you bring it to the attention of the plan administrator.  The plan administrator is usually a fiduciary and, thereby, by law required to act in the best interest of the Plan participants.

All of this is of even greater significance in that target date funds are the typical destination for those who don't opt out of the company 401(k).

Wednesday, September 18, 2013

Online Book Discussion - Millionaire Teacher

The second online book discussion of Andrew Hallam's Millionaire Teacher will kick off with a meeting at the Miller Branch of the Howard County Library System on Tuesday, 9/24/2013 at 7 p.m.  You don't have to come to the meeting to participate.  All you have to do is read one chapter per week and check into the blog.

Unlike decades past, today we are responsible for managing our own retirement.  But, we haven't been given the basics on how to proceed.  We wonder if we're saving enough, do we need an advisor, which funds should we invest in, should we take the investment advice of our stock broker brother-in-law, and countless other issues.

Andrew, and many others, argue that these basics of financial literacy should be taught in school.

Please pass this on to anyone you think might be interested.  As you can see from the syllabus on the blog, we'll cover many essential topics--such as how to avoid excessive fees in building a retirement portfolio, how to get time on your side in the investment process, how to avoid the negative impact of emotions on your investment strategy, and even how to construct a portfolio conducive to your risk tolerance.  The next time you sit in a human resources meeting confronted with making a choice among numerous funds, you'll know exactly how to proceed.

Monday, September 16, 2013

Are My Retirement Savings on Track?

How much should you have today in retirement assets to generate $1 in income at retirement?  This very basic, most important question can now be answered for those between the ages of 55 and 64, with a neat new tool from BlackRock called the CoRi Index.

This is the easiest calculator ever!  All you have to do is put your age in the calculator.

The calculator takes into account interest rates, inflation, risk, life expectancy, and starting point in deriving the number.  These inputs change on an ongoing basis; so, as time goes by, you want to be sure to recheck the number.  The calculator also can be used to flip the question around and estimate the amount you should have today to generate a given inflation adjusted income at retirement.

For example, if you put in 56 as your age, it derives $12.93.  This tells you that each $12.93 you have in retirement savings today can generate $1 in inflation adjusted income in retirement at age 65.  Thus, for example, if you have $193,618 in retirement assets, it can produce 193,618 /12.93 = $14,974 annually in retirement.

If, instead, you flipped it around and input $14,973 as the desired income in the first year of retirement, you'll find you need $193,616 today.  This use of the calculator will give you a really good idea if you are on track to meet your retirement goals.

If you play around a bit more with the calculator ,you'll see that you can easily calculate daily index values as shown in the table:

Source: BlackRock

These values were for 9/13/2013. Notice that the levels increase a bit more than 4.5% each year.  This is the amount your portfolio needs to grow once you are on track.  As a result, your portfolio needs to grow at least 20% in the last 5 years.  This  points to the observation that adverse markets can easily throw a plan off kilter and it, therefore, is probably not a good idea to get too smug as you approach retirement unless you are well over your targeted amount.

This post is for educational purposes only.  Readers should pay special attention to BlackRock's disclaimers.

Thursday, September 5, 2013

Are You Saving Enough?

Here is a neat 13-minute video from Andrew Hallam, author of  Millionaire Teacher, taking you through the thinking required to find out if you are putting enough away for your retirement.  All of us one day will hone in on whether we have enough to retire comfortably. Some will let this process control them, and others will map it out. Just how you go about thinking it through is explained here.

The video is presented to international teachers but obviously applicable to everyone.  The international teachers have a bigger task because they don't receive Social Security, etc. 

Some of you will see that you have a big job in front of you.  It is better to see this early on rather than later.

Tuesday, September 3, 2013

An Investment Checklist

Here is a creative approach for presenting investment principles, "The Awesome Portfolio Checklist," found on The Coffeehouse Investor blog, an excellent source of articles for the DIY investor.  While I'm at it, I should mention that Schultheis' book, The New Coffee House Investor, is an excellent read for those who have better things to do with their free time than manage their investments yet still seek top-of-the-line performance.