GDP Report

Consumption expenditures accelerated to give us a 3.2% growth rate in real GDP for 2010I. Here's the ugly truth - certain parts of the economy don't really need the bottom 10%. Outrageous compensation increases for the upper upper income group and humongous tax cuts during Bush's reign has set up the upper middle class and higher to carry the consumer spending baton.

What does need the bottom 10% is Social Security and government spending in general. Collecting unemployment instead of paying taxes, especially payroll taxes is killing local governments along with Washington D.C. and bringing down Social Security and Medicare.

Meanwhile the higher income groups will pick up real estate on the cheap and sell it at much higher prices at the next go around to those entering the housing market. This will take a while, because it looks like homeowner wanabees will actually have to document a sufficient income this time to afford the house. Assuming of course that we haven't forgotten 2007/2008 by then.

Constructing a Diversified Portfolio or How DIYers Can Save $1,000s

In this earlier post we examined performance for various parts of the market over the past 20 years along with the performance of a diversified portfolio. This video shows how a do-it-yourselfer might use exchange traded funds (iShares used in the example) to construct a portfolio along the lines of the diversified portfolio. It shows that in the end the cost is a lot less than the cost charged by professional managers. If you are satisfied that your manager is doing a good job then by all means stick with them. On the other hand if you are thinking of managing your own assets this video will hopefully be instructive. Information on the exchange traded funds mentioned can be found at iShares . Their yields can be found at Morningstar .

BlackRock Asset Class Returns (Part I)

This is a closer look at the BlackRock Sector Returns. I believe this is one of the most useful charts for a do-it-yourself investor to look at and understand. Thus , I will have a couple of posts referring to it. Full size chart.

Levin Questioning Embarrassing

Our lawmakers don't understand capital markets. It's embarrassing. If clients want securities backed by boat loans, Goldman Sachs and other investment banks will create securities backed by boat loans even if Goldman believes that, yes, boat loans are "crap". The buyer doesn't care about Goldman's views. In the institutional market, the buyer is responsible for due diligence. Levin should have someone on staff who understands this.

Goldman is a broker-dealer. They are not a fiduciary. Their interest is Goldman and its shareholders.

I am an RIA, a fiduciary. If you ask me to invest all your money in China, I can't do that. It goes against my fiduciary role. Ask a broker/dealer to do it, and they will in the blink of an eye. They are not fiduciaries. If your grandmother begs for a deferred annuity, they'll provide it.

Bond allocation

Looking for a specific recommendation for allocating the bond portion of your portfolio? Reasoning at bond allocation.

I think this is a reasonable allocation. I would argue for 5% in TLT for some long Treasury rate exposure and a reduction in "Money Market" of 5% to a 15% exposure.

He is playing it pretty tight with the attempt to catch a bit more from the high yield sector. He sees another possible 100 basis points tightening. If it gets another 50 basis points, I would take it and run. High yield has had a spectacular run.

ALLOCATION
Vanguard Inflation-Protected Securities Fund (VIPSX): 30%

Vanguard Total Bond Market Index Fund (VBMFX) (holds government and corporate investment grade bonds): 20% *

Vanguard High-Yield Corporate ((VWEHX)): 20%

Vanguard Intermediate-Term Investment-Grade (corporate) (VFICX): 10% * Vanguard Money Market (really really short term bonds): 20%



* more sensitive to interest rates.

Investor Psychology

Where are investors in this cycle? Some think investors are moving out of the caution phase and the market has higher to go. Others think we are over the hump and in the area of indifference. For the negative view, take a look at Phillip Davis - Gives a pretty good overview of the bearish case.

A Genius at Work

Borrowed from the Biz of Life blog. It is always fun to watch a genius at work.

comic book economics

A  link  for comic book fans who happen to be econ nerds.

DIY Investor Newbie - Risk Tolerance (Cont.)

As you view the video, notice the questions that have to do with emotions. Emotions are the enemy of the investor. Emotions cause investors to get carried away as prices rise and to capitulate at bargain basement prices. If you are too emotional, you are better off letting a professional handle your money.

Schwab YieldPlus Fund Case

Must read: Investing Guy .

Fund overinvested in mortgage-backeds to jack up the yield. The scary part, to me, is that this is exactly the type of fund that appeals to retirees (damn the younger people--they have to learn like we did! --just kidding) as they go on a desperate search for yield.

Retirees who are drawing down their "nest eggs" should set up a system where their income needs over a certain period are in investments that do not fluctuate much in value. This lowers the probability that they'll have to sell equities or longer term bonds in a depressed market.

Notice in this story that Schwab reps actively recommended switching to the yieldplus fund to pick up yield!

Community Event

On May 1 I will be walking to support NAMI, the National Alliance on Mental Illness. This organization does wonderful work educating the public about mental illness and helping individuals. I know this is short notice, but if anyone is interested in making a donation, the link is

http://www.nami.org/namiwalks10/BAL/rwasilewski

DIY Investor Newbie - Step 2 Risk Tolerance (Cont.)

Questions 6 - 10 of the questionairre:

6. How do you feel after making an investment? This is pretty important because it indicates experience. The first time many people make an investment they feel a bit queasy. But with experience they learn that, to paraphrase Annie, "The sun comes up tomorrow." It happens again when the market takes a dive.

For Those Who Like Show Tunes - The American Dream

Bet Against The American Dream from Planet Money on Vimeo.

DIY Investor Newbie - Step 2 Risk Tolerance

In the last DIY Investor Newbie post, we derived a specific asset allocation . This required a judgment on risk tolerance. Risk tolerance has to do with how well you take the up and downs of the market. Every investment advisor had clients who literally freaked out in the market downturn of 2008/early 2009. Freaking out isn't good because it usually means people sell out (capitulate) when prices are near their lows and getting ready to move higher.

MLPs increase distribution rates

Several master limited partnerships increased their distribution rates last week. The accounting for these issues can get a bit hairy, so I suggest making sure you have an idea of what you are up against record keeping-wise. The increases are discussed here .

Full disclosure: I own none of the issues discussed.

Satyajit Das on derivatives

Satyajit Das, author of "Traders Guns & Money - Knowns and Unknowns in the Dazzling World of Derivatives", p.54-

I used to be responsible for showing the trainees around the trading floor. "Look, it's quite simple," I said, breaking down the hierarchy of the trading floor. "There are salespeople - they lie to clients. Traders lie to sales and to risk managers. Risk managers? They lie to the people who run the place - correction, think they run the place.  The people who run the place lie to shareholders and regulators." I remembered our quantitative colleagues. "I forgot the quants - our fabulous rocket scientists! When last heard from, they were trying to develope a model for lying,"
"And clients?" one of the trainees asked tentatively. I thought about it for a few seconds. "Clients. They lie mainly to themselves!" To enter the world of derivatives trading is to enter a realm of beautiful lies.

BlackRock Periodic Table

DIY investors need to check out this periodic table from BlackRock. A periodic table shows visually the performance of various asset classes over a period of time. Using BlackRock's abbreviations, this periodic table shows 7 asset classes - Lg Cap Growth, Int'l, Sm Cap, Lg Cap Core, Lg Cap Value, Fixed Income, Cash - and (what makes it unique) it also includes a diversified portfolio. The table ranks the sectors and gives actual returns from top to bottom on an annual basis from 1990 - 2009.

The diversified portfolio is basically 35% bonds, 10% international stock, and 55% domestic stock. The specific breakdown is provided in a footnote.

The basic message of these types of tables (Callan also produces a useful one) is how difficult it is to pick the best performing sectors of the market. In fact, you can see how individual investors will have great difficulties as they chase the best performing sectors.

But notice that the diversified portfolio is constantly near the middle. Page 2 of the PDF provides actual returns over the period along with standard deviations. Notice the solid 8.1% return of the diversified portfolio and its relatively low standard deviation.

Recall that this 20-year period was extremely wild with at least two "100 year events" during the 20 years. To me, this speaks volumes in favor of low cost index funds and avoiding market timing for the individual investor. The diversified portfolio provided solid returns with minimal risk exactly what the individual investor is seeking.

DIY Newbie - Step 1 (cont.) - asset allocation

To finish up with the asset allocation tool, let's take a specific example. We'll use these results in later posts. You may want to do this for your specific situation. The end result will help us set up an actual portfolio.

The assumptions we use for our specific example are as follows:
Age: 35
Current Assets: $100,000
Savings/year: $10,000
Marginal tax rate: 25%
Income required: 0%
Risk tolerance: middle
Economic outlook: middle

With these assumptions, we get 28% large cap, 19% mid cap, 14% small cap, 15% foreign stk. This represents the stock allocation. In total it is 76% stock.

On the fixed income side, we get 10% bonds, 0% municipals, 14% cash. In total then, the tool suggests 24% in fixed income.

A couple of comments are in order. As Grouch noted in an earlier post, there are "rules-of thumb" that are often used. He specifically mentioned Bogle's view that bond percent should equal age. Another more aggressive one is 120 - age equals stock position. One I recently came across is that stocks should be twice the loss that would make you uncomfortable. For example, if a 25% drop in your portfolio would get you to move aggressively to a defensive posture, you should have no more than 50% in stocks.

The bottom line is that asset allocation isn't as scientific as it can be made to appear. Go to 3 different financial advisors and you'll come away with 3 different allocations. The point is know yourself and constantly monitor your allocation. As many observers have noted, we all learned a lot about our risk tolerance in 2008.

In the next post, we'll take a look at a risk tolerance questionnaire just to get a flavor for the type of questions typically asked and to pick out the important ones.

Maddow's "Tiny Town"

Rachel Maddow's take on SEC accusations against Goldman Sachs:

Goldman Sachs...naughty! naughty!

Abacus 2007-AC 1...OMG!!!! What is it?

Let me say first off that I'm no fan of the big investment banks (those still with us and those that expired in past few years). I did business with all of them over the years, and from day one had my hand on my wallet. And every time ( which is often) another Goldman employee is appointed to a high position in the government, my blood pressure rises a few basis points.

Still, at this early juncture, I have to say the SEC charges look like the beginning of a witch hunt; and for that reason it is scary. The SEC has an incentive to clear up some of its lack of oversight and can do that by deflecting attention to the investment banks.

Let me give a similar situation. From the 1980s on, the investment bankers created collateralized mortgage obligations. They did this by selecting mortgage-backed securities. Which did they pick? They picked the ones that they expected to pay down fast or slow, depending on their particular view of rates. Investors understood this and did their due diligence accordingly. Sometimes the investment banks won; sometimes they didn't.

As I understand it, Paulson, in helping Goldman pick the underlying sub-prime portion of the CDO, did not know for certain that the debt would fail. In fact, as we learned this week from Washington Mutual's testimony, a lot depended on government actions. They said they believe they would have survived if some of the rescue efforts steps would have been taken sooner.

Maybe Abacus 2007 - AC 1 would have turned out differently if the Federal Reserve hadn't jerked interest rates all around.

A lot of people want to get a piece of Goldman, including AIG. It could get nasty.

DIY Newbie - Step 1 (cont.) - asset allocation

So now that you have some experience playing around with the asset allocation tool and you know that an important objective is to determine a basic percent to invest in stocks and bonds, let's take a look at some of the questions the calculator asks.

Age-Generally speaking, the older a person is, the more they should have in bonds.  The reason is very simple.  Stocks go up and they go down.  Over longer periods of time, historically, they have risen.  In fact, they have been the best performing asset class.  Thus, as long as time is on your side (that is, as long as you can bear with the down periods), you should have a sizable exposure to stocks.  But the older you are, the less time you have to wait for a snapback.  In fact, in your 60s, you are to likely to be "drawing a paycheck" off your nest egg.  You don't want to be in a position to have to sell stock in a down market to raise that money.  In fact, a really good rule-of-thumb is to not put money in the stock market if you will need it within the next 5 years.  This may seem like a no-brainer, but I've seen distraught people who put money for their child's education in the stock market with the child in 10th grade and ....well you know the rest.

Marginal tax rate - The marginal tax rate is the rate you pay on the next dollar you earn.  When it gets high enough, it makes sense to allocate assets to municipals because they are tax free - some both federal and state.

Income Required - Generally the greater percentage of your nest egg that you are drawing down, the greater percentage you should have in bonds.  A widely used rule-of-thumb says that, if you draw approximately 4% of your portfolio, the odds are you won't run out of money.

Risk Tolerance - This is a biggie and will be discussed further in a separate post.  Investors have different tolerances for risk and, I believe, it changes over time.  When volatility increases in the stock market, some people sleep like a baby and others toss and turn all night.  In fact there are stories of people waking in the middle of the night and putting sell orders in to sell all their stock because the pain is so bad.  This is typically a sign of capitulation and usually a great time to buy.  Outside reading assignment:  p. 105 and 106 in The Elements of Investing, Malkiel and Ellis.  Malkiel and Ellis wrote some of the classic books on investing.  This little volume contains a number of valuable lessons for the newbie.  These pages give you the valuable proposition:  "Know thyself and match your investing to who you are and where you are in life."

The important part of this lesson is to get an appreciation of the type of questions that you need to answer to arrive at the all important asset allocation - the percent invested in stocks and bonds.

Economic Outlook - I suggest you keep this in the middle of the range.  I know that some of you will argue that the economy is going to "hell in a handbasket" and want to reflect that.  All I can say is that, depending on your personality, it can always look bad.  Think 1932, WWII, Savings & Loan Crisis, 9/11, Housing Crisis etc.  These have all been great times to invest.

"Greenfest" on Saturday

I will have a table at  "GreenfFest" to be held at Howard Community College in Columbia, Maryland on Saturday.  I will be available to talk to people about investing in "green" companies (actually the more prevalent term in the investment world seems to be "Cleantech").

In line with my overall philosophy, I would limit direct exposure to this sector to 20% of total assets. I would recommend, as well, that investment in a single ETF be limited to 5% of assets and for a single company it be 2.5%. This is a volatile sector where you could hit a homerun or easily strike out.

Today there are a lot of forces converging to make this a significant growth area. But it also is an area of intense competition and is affected by the price of fossil fuels.

Solar seems to be the first area of promise with wind power a distant second and biofuels a sort of wild card. Geothermal and wave power are on the fringe.  All of these face an uphill battle to become competitive with a massive infrastructure that is already in place.  From a different perspective, there is a lot being done to become more efficient (energy efficient homes and office building construction etc.) and to clean up fossil fuel energy production.

I look at this a bit like bio-tech.  Bio-tech companies have enormous potential, but the specific companies are very difficult to analyze unless you are a scientist and want to specialize in the area.  The drugs are complicated, there are trials, companies burn through cash and many have never made a profit, patents expire etc.  In the end, I think it is best to select a good ETF or fund that is well diversified.  To me, it is exactly the same with "green " companies.

Thus, if you want to do good and do well at the same time, I would recommend ETFs.  FAN will get you windpower and TAN will get you solar. Check these out on Yahoo Finance and, in particular, their specific holdings.  There are, of course, many other ETFs - these are just examples with cool (pun!) tickers.

As usual this is intended to be educational. .  eaders should do their own research and consult with an advisor before making an investment.

DIY Newbie - Step1 (cont.) - asset allocation

Ok...we're back at the asset allocation tool you played around with yesterday.  Let's first have a look at some of the categories:
1. Stocks:  large cap, mid cap, small cap, foreign stock.  Large cap are  large companies, mid cap middle size companies etc.  Another tool: when confronted with a term you are not sure about (for example "mid cap") or for which you want more info, use investopedia .  Adding the percentages for these categories, using the assumptions I have put in the allocation tool, gives me 68%.  This is the recommended stock allocation.

Stocks represent the more volatile part of a portfolio.  As we'll see, this is where historically the best performance has come from over long periods of time.  Generally, the younger you are, the greater you want your exposure to stocks to be.  For a  90-year-old, the allocation tool (and  hopefully his financial advisor) will recommend a fairly small percentage investment in stocks.

2. Income:  bonds, municipals, and cash.  This category is generally referred to as bonds, fixed income or just income, as we have labeled it here.  When I add these categories, I get 32%.  The income portion of the portfolio is less volatile than the stock portion.  As you age, you will increase your exposure in bonds.  With the allocator tool, run the age up to 90 and watch the purple slice grow!

Asset allocation is, as I mentioned yesterday, a very important determinant of long term performance.  There is an ongoing academic debate about how important it is, but nevertheless everyone agrees it is very important!

The bottom line is that it is very easy to use an online calculator to get at an asset allocation.  We'll look at the calculator in more detail in the next post.

DIY Newbie - Step 1 - asset allocation

By request from a follower, this is the first "newbie" post.  The intention is to give an actionable, bare-bones, approach to investing.  This is not to say that a more in-depth approach isn't more preferred - it is.  It is always worthwhile understanding what you are doing.  ,Along the way I'll mention how to get a more in-depth understanding without having to take a graduate course in investments.  Fortunately, we've had some really smart people break down this process in readable prose.

Step 1 - Decide on the percentage of assets to invest in stocks and bonds.  A popular asset allocation is 70% stocks/30% bonds.  Asset allocation goes a long way towards explaining investment performance.

Here is a link to a simplistic asset allocation tool:  asset allocation tool.  Play around with it.  Slide the little triangles and watch the pie pieces change in size.

Look at the questions it asks.  Tomorrow I will shed more light on what is going on and what the questions mean.

DIY Investor perspective: The Economy - Shiller and Siegel

Interesting interview on contrasting views of the economy.  Robert Shiller argues that there is a possible double dip, Professor Siegel says, "...no chance of double dip". Both are brilliant. Both have well reasoned arguments. Here's the kicker: a year from now one of them will appear to be a genius and the other not. If you are a market timer, pick your guru. Most likely you'll pick the one whose views conform to those you already hold.

 Supose there is a "double dip" in the economy in the second half of the year, that is unemployment rises above 10%, GDP growth turns negative etc. Then Shiller would be the financial media star du jour and great hoopla would be made over the brilliant outlook he had in early April and we would likely get another book from Shiller. This happened with the housing crisis - Shiller saw it, others didn't. Siegel would be asked about his forecast and undoubtedly would construct a well thought out narrative ( as described by Taleb in "The Black Swan") to explain how the "...no chance...."  event occured.

I would argue - I don't have any concrete evidence - that most investors would side with Siegel today for the simple reasons that stock prices have been rising and momentum is on his side. I would also argue, based on the evidence of macroeconomic forecasters, including those at the Fed, that the eventual outcome is a coin toss.

MLPs - worth considering for DIYers?

At Saturday's AAII meeting Master Limited Partnerships were the subject of some discussion. Not surprising given today's low yields. Here is a WSJ article that will be of interest to those seeking an understanding of how these issues behave in a rising interest rate environment. Here is a good introduction to these issues.
The essential points are:
1. They offer attractive yields in today's low interest rate market,
2. Their price is volatile and will drop when yields rise - they are stocks,
3. The investor will have additional accounting (headaches) with these issues - companies issue K-1s typically late is the season, there are deferred taxes etc.
4. They should be considered only by longer-term investors.

Personally they are on my radar screen for when short-term interest rates go higher. I am not interested with the Fed holding short-term rates near zero.

The Rule of 72 - A Great Tool for the DIYer

The "Rule of 72" is used to easily estimate the time it takes for a magnitude to double at a given growth rate. It should be in the tool box of every "Do-It-Yourself" investor.
This is  how it works. Suppose you get 8%/year on $2,000? How long will it take to grow to $4,000? The answer is 72/8 = 9 years.
You can check this by solving for x:

$4,000 =  $2,000 * (1.08)^x

 divide both sides by 2,000 and take logs of both sides:

log 2  = x log1.08 or x = log2/log1.08 = .301/.0334 = 9.01 years

Another problem:

Suppose the return is 9%/year. How many years to double? Answer: 8 years.

Suppose GDP grows at 4%/year. How many years will it take for the nation's output to double? Do this in your head. We know it takes 9 years at 8% so at 4% it will take twice as long, i.e. 18 years.

If you are interested in pursuing this further you may be interested in the following video. Professor Barlett uses 70 as the numerator which is a bit rougher of an approximation. The video is also worthwhile because it stresses "critical thinking", a topic du jour on college campuses.

What did we learn from the 2008 meltdown?

I'm a fan of William Bernstein as many in the investment community are and believe some of his books are the best available in terms of investment advice. Biz of Life has this great post of Bernstein talking about the lessons presented in "The Investor's Manifesto".

AAII Presentation -Gross Mendelsohn

David Goldner, principal at Gross Mendelsohn gave an interesting presentation to the Baltimore Chapter of AAII this morning. He began with the oft heard but always appreciated joke about God creating economists so that weather men would feel good about themselves.

He believes stocks have gotten a bit ahead of themselves and is somewhat cautious. Interest rates he believes will remain basically the same over the near term  and inflation will "...stay low for a long time...". On the tax front he feels the phased out estate tax may surprise people and "...come back with more of a vengeance...".

He briefly covered the pros and cons of doing a Roth conversion. Bottom line: despite the hype, the conversion is not a great idea in most cases. Members appreciated the thought that the government once promised that Social Security wouldn't be taxed and wondered how the government could be trusted on the non-taxing of Roth withdrawals.

On the investment front, the firm's suggested asset allocation, in line with their cautious economic outlook,  is 30% high quality corporate bonds, 10% mortgage REITs, 30% stocks, and 30% alternative investments.

In  the fixed portion of assets the firm feels that yield spreads are unattractive at present levels and therefore are investing in 3 year duration high quality corporate bond funds. They note that spreads are tight even though the economy has a ways to go to get on firmer ground. They like munis because they offer yields that are almost equal to Treasury yields and still offer a tax break. They do caution investors to be careful because there are some states to avoid.

They like mortgage REITs but stress the importance of being nimble. Holders have to be ready to exit when short-term rates begin to rise.

On the equity front they prefer the growth sector, both large and small cap, to the value sectors based on their analysis of historical P/E ratios. In both the value sectors their analysis shows that P/Es exceed historical averages.

The firm likes healthcare closed funds and also offered a couple of business developement names, with attractive yields, that they like.

Alternatives comprise 30% of their model portfolio allocation. Mr. Goldner stressed that they have the attractive feature of being non-correlated with equities. This of course is something market participants have been interested in  recently because so many asset classes are now, in fact, correlated as evidenced in the 2008 downturn. In the alternatives portion of the portfolio the firm likes, for example,  options strategy, merger, and market neutral funds.

The information presented was of an educational nature and is not to be construed as specific recommendations.

Financial Literacy Event

Here is the link to Fed Governor Duke's speech yesterday to the JumpStart Coalition conference to promote finacial literacy. If you are interested in promoting financial literacy here is the game that the Coalition has released in a number of countries.
In its most recent 31 question survey the JumpStart Coalition found that high school students scored 48.3% and college students 62.2%. Thus, college students, by the time they graduate are close to being finacially literate. As the Coalition points out, however, only 25% of U.S. children are graduating from college and therefore 75% of young Americans struggle making financial decisions.

Bond ETF Ideas

Good informational article on new bond etfs if you are trying to figure out how to allocate the bond portion of your portfolio.  I believe #2 and #5 are worth looking at. #2 if you are convinced rates are headed higher but still struggling to pick up yield, #5 if you believe active management can beat the overall bond market.

FYI: I am not a fan of buying individual bonds because of their illiquidity and believe ETFs are definitely the way to go in bond land. Still I will put out a piece down the road explaining how to find the most recent price specific bonds have traded at for those interested in buying individual bonds.

Financial Literacy Event

Fed Governor Elizabeth A. Duke speaks today at the JumpStart Coalition event in Washington D.C. on "The Importance of Financial Education".

Hopefully this moves us further along the path of getting states to require financial and economic education instruction in their high schools.

I'll put up the link to her speech tomorrow.

10 Year Treasury Note auction follow-up

Bloomberg's assessment:

"Buyers have returned in force to Treasury coupon auctions. The April 10-year note auction, a reopening of the February 3.625 percent coupon, posted a bid-to-cover ratio of 3.72 for the highest rate in the last nine years of data.

The $21 billion auction stopped out at 3.900 percent, 3-1/2 basis points below the 1:00 bid. Retail demand was very strong with direct and indirect bidders taking down 59 percent of the auction vs. an average of 51 percent.
New troubles for Greece have increased the value of the dollar and are giving a boost to U.S. Treasuries. Treasury prices are extending gains in reaction to the results. Tomorrow the Treasury auctions $13 billion of 30-year bonds. "

Partcipants making money from falling yields and rising dollar!

10 year Treasury auction today

Given the recent push up in rates, the attention on today's 10 year Treasury note auction will be greater than usual. Yesterday's auction of 3 year Treasury notes went fairly well as evidenced by the results:

Source: Bloomberg/Econoday

Note in the table the respectable bid-to-cover ratio of 3.10. Buyers are definitely not on strike at the shorter maturity range of the yield curve.

To get today's results go to http://www.bloomberg.com/ after 1 pm, and click on "Economic Calendar" on drop list for "Market Data".
There is a serious tug-of-war going on with U.S,. interest rates as record deficit financing issuance is putting upward pressure on rates and Europe's difficulties are causing a reallocation out of the Euro into the dollar and thereby into U.S. Treasuries creating downward rate pressures.
In the background is the ongoing question of when the Fed will begin to remove the punchbowl as the economic recovery picks up.

laugh

AAII

One of the best resources around, in my opinion, for do-it-yourself investors is the American Association of Individual Investors. For a low annual fee you get access to all sorts of educational materials on investing,  financial planning, and retirement issues. Included are such things as discussion boards and stock screens. Check out  their website .
Perhaps the biggest benefit is joining the local chapter and meeting with investors to discuss topics of the day. Monthly meetings typically involve discussions and presentations by investment professionals. The Baltimore chapter, of which I am a member, usually meets on the first Saturday of each month. The Baltimore AAII website describes this Saturday's meeting.

Center for Retirement Research Study

The Center for Retirement Research at Boston College has published a new study arguing that younger investors were hurt more by recent market downturns than older investors. They point out that even despite the dot.com and housing crisis downturns, older investors earned in excess of 8.5% on a conservative portfolio - well in excess of the returns achieved by younger investors since they entered the market. The reason is that the younger investors didn't get the huge push higher from 1982 - 2000.
I haven't read the study so I might be wrong but I suspect that the returns are market returns not actual investor returns. This is important because Dalbar presents data every year that shows individual investors significantly underperform markets because their emotions have them chasing the hottest sectors and capitulating at the worst possible time.
In any event the article did bring to mind a meeting with a potential client a bit over a year ago.  She was upset because her portfolio was at $350,000 and it had been at $325,000. I commiserated with her and said it must be difficult when you've invested $350,000 and experience $25,000 in unrealized losses. All of sudden she straigtened up and said. "I didn't put in $350,000, I had put in $265,000 of my own money". The problem of course is that people compare their portfolios to the peak value. This happens a lot with homes. People wring their hands and bemoan the fact that their house which was valued at $450,000 in 2007 is now valued at $385,000. They forget that they paid $250,000 for it.

What happened in 2008????????????

Still not sure about the causes of the crisis of 2008?  Spend 6 minutes with this excellent presentation by Paddy Hirsch. If you've seen a better explanation of what he is talking about (I'm purposely not saying what it is because most of you would run for the hills!) please let me know. By the way every video of his that I've seen is excellent.

Shoutout to juxtaexposed

Thanks to my oldest, beautiful daughter Lori and her beau Matt  (merger in May!!! Yea!!!) for introducing me on their blog juxtaexposed to their fans in D.C.

"1st Quarter Returns 2010" addendum

The Biz of Life has posted "1st Quarter Returns 2010" which shows that a very well diversified portfolio of ETFs achieved a return of 4.26% for the quarter based on Morningstar data. This is worth spending some time looking at and, I believe, is very valuable information. Again, the portfolio is very well diversified. It uses funds indexed to the REIT market, to small cap international, international fixed income and munis, along with more basic ETFs. In all, 15 different indexed funds with their respective weightings are shown.

There are 2 small typos in the data : the VTI fund returned 6.04% rather than 6.4% and VSS returned 4.5% not 4.55%. Also, the ticker symbol for the Wisdom Tree fund is DLS not WLS. These results do not affect the conclusion:  the fund achieved a return of 4.25% for the quarter.

Here's my first question:  What was your return for the first quarter? If you are typical, you'll throw up your hands and say it will take you at least a week, if not longer, to get a number. In fact, you may not be able to come up with a number at all.

Here's my second question:  If you have your money professionally managed, how much did it cost?  I'll help you here. The lowest cost fee-only registered investment advisor will charge you 1% of the market value of your assets. So if your portfolio was $1.0 million, you would pay ($1.0 * .01) / 4 = $2,500. And most people would be glad to pay that because it looks very complicated to set up this kind of portfolio. For the record, I would charge a lot less and seek to show you how to manage it yourself; but that's detailed in other parts of this blog.

The fee you pay your advisor is only part of the story. If s/he is using mutual funds or, even worse, funds of funds, at least 1.4% is coming out before the results are even reported to you. If you are in actively traded funds, there are trading costs piled on. The cost of the index funds examined in the post, on a weighted basis, was .27%!  Not 1.4%.  So, if your advisor's returns are less than 4.25%, it is not necessarily that they are poor performers but could be because of the fees that are taken out all along the line.

Here's the news:  for the first time in the history of markets, small investors can easily get well diversified in many areas of the domestic and global markets at a low fee without a lot of trading restrictions thrown in and worries about capital gains taxes because of active trading.

If you are satisfied that your advisor is a great stock picker or market timer, then by all means stick with him or her. At least, now you have a benchmark to compare them to.

For the record, I want to emphasize that the data here is from sources judged to be reliable but, obviously, cannot be guaranteed and any errors  here are solely my own.

Some ETF Returns

Year-to-date returns, selected ETFs, and markets they track, thru 3/31/2010 taken from Bloomberg

BND +1.39% Total Bond Market
SPY + 5.42% S&P 500
AGG +1.61% Total Bond Market
LQD +1.27% Investment Grade Corporate Bond Market
JNK +4.33% Junk Bond Market