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, May 30, 2010

Eddie Vedder advice on the market?

For David, Kristy, Kodi, and the infamous Dusty (who likes to run the Alaska rivers with Iditarod sled dogs) in Seattle this weekend, pulling a boat with a wounded 4Runner filled with stuff from the cabin in Virgina, enroute to their cabin in Glennallen (I spelled it right this time Kristy!)Alaska. If you see Mr. Vedder say hi! This is also for all the investors out there trying to hold in with a market whipsawing all over the place.

Saturday, May 29, 2010

Are you getting a fair price for your bond?

Click Image to Expand
Individuals are piling into bonds, and some are buying individual bonds rather than ETFs or bond funds. I don't condone this because it is time consuming, difficult to diversify, and almost impossible to determine if bid or offer is fair . But if you have the time, the resources, and the knowledge and insist on buying individual bonds, it is worthwhile following the price of active bonds in the Wall Street Journal. This is a free resource.
Active bonds
Go to "Markets" "Market Data" "Bonds. Rates, & Credit Markets"...scroll down and find on the right-hand-side "Corporate Bonds: Most Active" and click...scroll down and find the list of actively traded bonds.

You hopefully have noticed that we have navigated through a lot of useful bond market information.

Thursday, May 27, 2010

Search for meaning

Inspiration from one of the greats: Victor Frankl, a survivor of the Nazi death camps and author of "Man's Search For Meaning".

Tuesday, May 25, 2010

Jodi Beggs gives advice on how to become a behavioral economics nerd

Here's the link.

Behavioral economics is important to pay attention to for all investors. It has to do with how we make decisions and especially concentrates on situations where people are irrational.

Thursday, May 20, 2010

Benchmarks revisited

I had earlier produced a post on the importance of benchmarks. This is important in the kind of markets we are experiencing now. I have just finished watching a video where the owner of the firm bragged that since the 2007 peak the clients' performance has been down but it has beat the performance of the S&P 500. Guess what? Most of the clients are in models that are 70% stocks and 30% bonds. The question is not whether they beat the S&P 500. The question is did they beat a passive portfolio of 70% stocks and 30% bonds. The clients should ask: why are you showing me results against an all stock index? Secondly, the index isn't very well diversified. It doesn't hold small cap for example.

Hopefully this helps clients ask the right questions.

I saw another video of a manager who invests in multiple asset classes. This manager argued that, because of their investment style, they shouldn't be compared to a benchmark.

Is it no wonder that so many just throw up their hands and do-it-themselves?

Wednesday, May 19, 2010

DIY Investor - Completion Index

Problem: You are looking at your portfolio holistically, as you should, and you seek to invest a determined percentage in a total stock market, lost cost, etf or fund. Your choices available in your 401(k), however, are limited to a S&P 500 Index fund. What to do? Assuming you have other investable assets, the workaround is achieved by using what is called a "completion index" etf.
Two examples are:
VEXMX from Vanguard, expense fee .3%
WXSP from Claymore, expense fee .18%, note that WXSP is relatively new
The completion index tracks the 4500 stocks in the Wilshire 5000 except for the S&P 500. Thus, if you want 40% of your assets invested to track the total stock market as represented by the Wilshire 5000, invest 20% in the S&P 500 in your 401(k) and 20% in a completion etf outside of your 401(k).
The completion index etfs are useful tools for the DIY investor.

Sunday, May 16, 2010

Think you or your advisor can beat the market?

Mike Travaglini is the executive director of the Massachusetts employee retirement system-one of the largest pension funds in the country. Pension funds of this size have huge staffs of very smart analysts searching the world for the most talented investment managers. They had hired Bill Miller of Legg Mason, manager of the Value Trust Fund which had beat the S&P 500 for 15 consecutive years. They fired him in 2006 after his luck ran out and "...decided to get out of actively managed U.S. stock funds and stick with passively managed funds..." Mike Travaglini went on to say "The extra cost to hire a money manager didn't seem worth it." "If Bill Miller can't do it on a consistent basis, then nobody can".
If you think you or your investment advisor are smarter than Bill Miller and have as much information as Bill Miller and can actively manage assets to beat the market, then go for it. It goes without saying that Bill Miller at one time could pick up the phone and talk to the CEO of any major company in the U.S. Do you or your advisor have that kind of access?
The end result is that, according to an article on the front page of the Baltimore Sun today, Legg Mason is making major cuts in its work force.
This is just another piece of evidence supporting the thesis that individual investors should go with low cost index funds and stop paying self proclaimed "gurus" excessive fees to try to beat the market.

How A Second Grader Beats Wall Street by Allan S. Roth

Don't let the title put you off. "How A Second Grader Beats Wall Street" is worth reading and adding to your library, especially for those not happy with their investment performance, those tired of paying excessive fees to investment advisors, and DIY Investor Newbies. Complex topics are simplified. The chapter on locating investments to minimize taxes by paying taxes at the lowest rate and avoiding taxes until they have to be paid will save many readers a lot of money.
Full disclosure: the book is centered on the investment philosophy I believe most investors should follow - focus on asset allocation, invest with low cost indexed exchange traded funds or mutual funds, and participate in broad markets.
It presents an approach that has handily outperformed professional managers over the long-term.
A portfolio constructed by applying the ideas in the book can be found at Paul Farrel's lazy portfolio site.

Friday, May 14, 2010

Can't you read the signs?

Global debt overload. People having a hard time reading the signs. And, it comes at the darndest time - just when we were pulling out of a nasty recession! Reflect on the music

Special thanks to juxtaexposed

Wednesday, May 12, 2010

Frequent Traveler Must Read

If you travel a lot, you'll like this and you'll learn some economics which is always a good thing.
Charles Wheelan is the author of "Naked Economics," an interesting read which will make you smarter.

Tuesday, May 11, 2010

On "The Welfare State's Death Spiral"

Samuelson's piece Has the internet abuzz. Some say the media is waking up to the issue of the welfare state. In fact, Samuelson has written about this issue for some time. Maybe the blogosphere has just started to read him.
Anyway, the thesis is simple: governments have lived way beyond their means by making promises and, with an aging population, the problem is reaching a head. Samuelson's contribution in this piece, I believe, is to show that there is no easy way out of the mess - austerity programs at this point will only exacerbate the problem.

It is interesting from the perspective that the U.S. just went through a similar situation with a massive bailout; and although it got off to a rocky start,it eventually, in the view of financial markets, succeeded. A similar outcome was the hope yesterday as communicated by the strong market rebound. Today the market is having second thoughts. It is coming to understand what some observers were saying - the bailout is only postponing the problem. It is not a solution.

The problem is tied up with the incentives in the political arena and the type of goods that government provides. Politicians get elected by spending other people's money, and there are a lot of non-rich people who want what the wealthy have. They want nice retirements, community centers with elaborate physical fitness centers, libraries stocked with the latest DVDs, bus systems and world-class transportation systems, and, yes, medical care. Politicians willingly provide all of this, and much more, but are afraid to ask the people to pay for it. The easy thing to do is to borrow because the general population has no idea how this works.

Economists have shown that people who use credit cards cannot recite the prices of what they bought as well as those who pay cash. The same thing is going on here. People have no idea what the welfare state costs.

For the DIY investor, it is worth doing a check on comfort level. If volatility is troublesome, think about reducing it by raising some cash with the understanding that upside may be sacrificed.

Sunday, May 9, 2010

Matt Andersen - Ain't No Sunshine

Is he singing about the bull market? Eurozone 1st quarter GDP on Weds., China data all through the week. Lite data week for U.S.

Saturday, May 8, 2010

AAII Presentation-The Case for Roth IRA Conversions

Matt Carbone, Regional VP Ameriprise, gave an excellent, thought-provoking presentation on this timely, complicated subject.

Three points that I found interesting were:
1. A Roth Conversion triggers a lot of side effects on, for example, AMT, Social Security taxes and Medicare premiums. A quick way to assess these impacts is to put the contemplated conversion amount on the 2009 tax returns and work through the implications.
2. In terms of one of the biggest benefits- the recharacterization feature - you generally can't "cherry pick" stocks etc. or parts of the portfolio that have dropped. One thing you can do is set up separate IRAs for your bonds, emerging market ETFs, Growth stocks etc. Then do the conversion, and if emerging markets drop, for example, 20%, you can recharacterize that part of the conversion.
3. If a child earns income, have them put a portion into a Roth IRA and partially match their contribution. With the contribution, have them buy a fund or an ETF. It is a great way to enhance their financial literacy.
4. An inherited IRA or Roth IRA is a windfall, and research shows that windfalls tend to be spent within 12 to 18 months of receipt. Ameriprise and some others have a feature where the inheritor receives the RMD up to a specified age and then receives the balance. This produces the value of the inheritance of getting long term, tax free, growth.

They recommended getting tax advice in determining whether a conversion is appropriate for you.

I am in no way connected with Ameriprise.

Repricing of Global Assets

Some hedge funds find it worthwhile stepping back and looking at where money is flowing around the globe. I believe this is a useful exercise for all investors. In doing this today, you can appreciate the massive repricng that markets have undertaken and may be in the midst of. For example, the U.S. $ has shot up versus the Euro, as fears of contagion from Greece's debt problems have spread and riots have indicated that a neat solution might be difficult to pull off. This, of course, makes Europe's goods a lot cheaper on world markets. It is also getting stock managers to move out of multinational companies. At the same time, the Yen has risen against the U.S. $.

Commodities have cheapened significantly, led by oil which is $75.11/barrel versus $86.15/barrel last week. Japan is benefited greatly by a drop in oil, and Russia, for one, suffers. For those with a long-term view and looking to pick up something like FSLR (First Solar) on the cheap, this is worth following.

Gold shot through $1200/ounce. If you need an indicator of whether the fear is real in the market, this is it. It now takes 16.12 barrels of oil to buy an ounce of gold - last week it took 13.81 barrels.

Yields in the U.S. dropped sharply as "flight-to-quality" money obviously sought a refuge. It is worth noting that some pros are probably getting picked off because the layup trade of 2010 was supposed to be a rise in rates. It is not unusual for a big player in the market to be caught swimming naked (as Buffett would put it) because of these types of moves.

Reflecting a changing view of the world, inflation expectations dropped sharply to 2.17% from 2.40% ( difference between 10 year Treasury yield and 10 year Treasury TIP).

Thursday, May 6, 2010

The "Fat Finger" got us

I know all about the "fat finger". It's why I've never been able to feel comfortable texting. But I never dreamed it would be the culprit for the biggest intraday trade off ever in stocks. This reminded me a lot of the recent Goldman Congressional testimony that morphed into a circus type atmosphere.

There's going to come a point where, to use the popular vernacular, we need to get "real." There are economic laws; and, if we violate these laws, there is a price to pay. In physics, if we throw a brick in the air and stand under it, there will be a consequence. In economics, we've borrowed too much and played too many games with leverage. When the problems manifested themselves in the U.S., we were able to contain them at least for the short-term. Fed Chairman Bernanke, astute student of the 1930s, understood the dike can be plugged temporarily by the federal government guaranteeing everything in sight and printing money like crazy. He is applauded today along with his cohort at Treasury Tim Geithner.

But now the chain of events has extended. The laws are immutable. Now the ability to solve the problem is out of our hands - unless the U.S. is willing to guarantee Greece's debt or take an equity position in its government and other governments in Europe. At this juncture I have to admit nothing would surprise me - but I've said that a lot over the past few years.

The point is that the root of the problem is governments being too free with tax payers' money and making outrageous promises.

At one time I would have argued that the consequences (as John Maynard Keynes labeled it) of the peace settlement after WWI taught a lesson the world would never forget. But time goes by and lessons are forgot. Now, once again, we face a Europe that is imploding. Once again we have been whooping it up in the U.S. as the economic numbers surprise us on the upside. Once again contagion arises.
It is time to get "real".

Wednesday, May 5, 2010

Yesterday's ETF returns

This is an interesting chart on yesterday's ETF returns. Notice the bars on the right. These are what zigged while the S&P 500 zagged. This shows the value of bonds.

Tuesday, May 4, 2010

DIYer Advantage

Markets are scary. There is a humongous tug-of-war taking place between exceptionally strong economic numbers and the possible contagion arising from Greece's problems along with the oil spill and the Goldman Sachs issue. The VIX has shot up. This is implied volatility as calculated from premiums on put options.
A popular way of viewing the market is in terms of Greed and Fear. Today Fear had the upper hand. This is the message from the VIX.

If you are a DIYer and markets are making you nervous guess what? You can easily raise an additional 5% in cash. You don't have to toss and turn tonight wondering why your advisor didn't return your call, or hope that he or she knows what they are doing or why their explanation today sounded like babble. You can take action.
One of the problems in 2008, in my opinion, is that advisors became frozen and didn't take action.

Never's your money and you have to feel comfortable. Raising a little cash early on can allow you to more easily ride out a major downturn. This is much easier to do if you have a firm understanding of your investment philosophy, a plan, and can take actions yourself.

BlackRock Diversified Portfolio - 3 Year Rolling Returns

In a previous post we looked at the Barclay's sector return/ periodic table of 20 year returns. We showed how to construct a portfolio corresponding to the diversified portfolio by using low cost ETFs.

Now let's take it a step further and take a look from the perspective of a new retiree. Let's assume that he or she has just reached the so-called "number." Assume that assets are invested in line with the diversified portfolio. The question is: what can be expected over the subsequent 3 years? Think about this. Everyone likes to think long-term, but the fact of the matter is that we live in a short-term world. Stocks take a big hit over the next 30 days, and it is only natural to begin to worry. So again, what can the retiree or any investor expect? Here is part of an Excel spread sheet I constructed using the BlackRock data to derive overlapping 3 year returns. The spread sheet shows the return on the portfolio for each of the 18 3 year periods.

The exercise showed that there were 3 years where the retiree's portfolio would have declined over the 3 years following retirement. The worst year was 1999. Retiring on 1/1/1999 would have given him or her 85 cents on the dollar by the end of 2001. I can send my spread sheet as an attachment to anyone interested.

When I get the energy, I plan to do the calculations throwing in a 4% inflation adjusted withdrawal rate and an inflation adjustment on the overall portfolio assets.

Monday, May 3, 2010

Bond Market Review

I was checking on Schwab's beginning of the year bond market outlook to see how they were doing. They said (my interpretation):
1. TIPs better value than Treasuries (TIP = 2.88%)
2. MBS = limited upside (MBB = 2.21%)
3. Investment Grade Corporates add value (LQD = 3.59%)
4. Muni bonds are still attractive (MUB = 2.50%)
5. Junk has run its course (JNK = 6.16%)
6. Weak dollar driving International bonds (FAX = 6.37%).

For reference purposes AGG (basically total bond market = 2.69%).

In parentheses are corresponding ETF returns through month-end April from Morningstar (exception is FAX, a closed end fund). I sort of check this kind of thing for fun. Short-term results are almost meaningless in the investment markets. It does, however, point out some misses. If you got out of high yield, you are not a happy camper.

Also, looking at other funds, the payout for taking on the risk of investing out at the longer part of the curve has been marginal year-to-date.

I may or may not own these funds. This is for informational purposes only.

DIY Investor Newbie - Constructing the Portfolio

This is another step towards managing our own investments. We go back to the asset allocation post and use that allocation to talk about implementing it with an actual portfolio. Recall that the allocation was arrived at after making specific assumptions. As always this is intended solely for educational purposes.

AAII Baltimore meeting

This month's American Association of Independent Investors/Baltimore Chapter meeting will be on "The Case for Roth Conversion". The speaker will be Matt Carbone, regional VP of Retirement Wealth Strategies.

DIY Investor - Worth Reading

High Yield ETFs vs, High Yield Mutual Funds Bottom line: All portfolios should have some exxposure to high yield in the fixed income portion of their portfolio. High yield etfs vs. mutual funds has all the usual arguments in favor of etfs. There is one unusual element: performance. This has been shown to be an area where active management adds value.

"Secret Sauce" An approach that has significantly outperformed the S&P 500 return over the past 35 years. Can you explain it?

Sunday, May 2, 2010

DIY Investor Newbie-Risk Tolerance Quiz

These are all the questions together on the risk tolerance quiz. I tried to make them a bit more readable per a viewer request. I strongly urge you to try it out to see if it gives you some insight into your risk tolerance. Next, we will look at building a portfolio.

Saturday, May 1, 2010

Mind Over Money | NOVA | PBS Video

Worth watching to further your understanding of markets.
Mind Over Money | NOVA | PBS Video

DIY Investor Newbie - Risk Tolerance

These are the final questions on the risk tolerance questionnaire. I strongly urge you to try it out to see if it gives you some insight into your risk tolerance. Next, we will look at building a portfolio.