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, October 31, 2010

Need a Laugh?

Need a laugh? Click Picture to Enlarge

Being in the wrong place is not good! This post will save some of you some money.

Saturday, October 30, 2010

How Does Your 401k Stack Up?

picture by DRW

People don't like to think about retirement. Understandable. It is thinking about getting old. It is thinking about having to save today for the future. It is about having to make decisions about what to invest in and trying to understand the jargon-laden marketing materials handed out by fund sponsors.

All of this bumps up against the awkward fact that most of us will one day wake up to our 65th birthday.

That's when the choices available to us in prior years will loom large in giving us choices in the coming years.

One of the keys is, of course, the 401k you have at work. The better it is in terms of low fees, good investment choices, company match etc., the greater the opportunity for you to achieve a successful retirement.

Until fairly recently, it hasn't been possible for you to assess your 401k. You pretty much had to settle for what was provided. Today assessing a 401k is typically fairly easy by going to There, type in your company's name and see right away if your 401k is rated.

If it is not rated, I recommend talking to your plan administrator about getting it rated. You want to see how your 401k stacks up against similar 401ks. Do you have good investment choices, are fees low etc.?

You can also enter your investment choices via a link on the page and see explicitly the fees you are being charged on the funds you are invested in. This is the type of disclosure data the Department of Labor has been seeking.

The component ratings are shown as follows:

CLICK TO ENLARGE The example shown here is for one of the biggest employers in Howard County, Maryland. With this information in hand, a participant can question a plan administrator about investment choice. Can it be improved? Why is it "average" compared to peer group plans?

With this data in hand, administrators can take steps to improve the company 401k.
I suggest spending some time looking up the 401ks for family members and seeing how they stack up. You'll be glad you made a bit of effort when the 65th birthday rolls around.

Disclosure: I subscribe to the detailed Brightscope data base and talk to 401k administrators about this data

Friday, October 29, 2010

Interesting Thoughts on Money - Olivia Mellan

Some interesting thoughts on money from the featured speaker at the upcoming Financial Planning Association of Maryland symposium coming up on 11/11/2010.

Thursday, October 28, 2010

DIY Investor Resources

DIY investors need a comprehensive list of investment and financial planning related links. This list from the American Association of Individual Investors is an excellent place to start to build a personal list. I would suggest checking the links out and eliminating those you feel aren't useful and then, over time, adding those you like.

As one who has been in the investment field for a long time, I constantly marvel at the resources available to today's investors. When I started managing assets, I had to call various brokers every day to get what is called a "bill run" and to get color on the market. That's how my day started. Today, yields on Treasury bills are available with the push of a button; and views on what is driving the market are easy to get. Analytical tools abound and are free - investors just need to know where to look.

In addition to outside resources, it is important for the DIY investor to fully understand the tools available at his or her brokerage, as I've discussed before. If you're with Schwab, TD Ameritrade, Scott Trade or whomever, putter online until you understand the analytical resources available. Don't let it be like your VCR, where you never learned all the features on how to record etc.

Picture by Matt Steenhoek

Wednesday, October 27, 2010

Is Your Investment Manager Doing a Good Job?

Many times people will tell me their investment advisor is doing a good job. I ask them what their performance has been, and they don't know. To me ,this is an indication right off the bat that the advisor may be doing a good job for him- or herself but not necessarily for the client. Other times, a person will say that they got a return of 12% and "isn't that good in a world where interest rates are practically zero?"

Well yeah...except that if you are invested in the stock and bond markets, your benchmark isn't short-term interest rates. I'll point out that the market was up 15%, so you paid an advisor 1 to 2% of your assets to produce a return 3% below the market. If you had a million dollars with the advisor for a year, it cost you between $10,000 and $20,000 for management fees and another $3,000 for poor performance.

Most advisors underperform the market over longer periods after all fees and costs are considered. There are mountains of data and books written to show this. In fact, such market stalwarts as Warren Buffett, Charles Ellis, Burton Malkiel, John Bogle and Dan Solin have stated repeatedly that trying to beat the market is futile.

They have also pointed to a better way - achieving the market return at a minimal cost. The biggest pension funds in the country understand this and invest significant portions of their assets indexed to market returns.

So how is it that individuals continue to seek superior returns when they are in fact achieving subpar performance and are paying dearly for it? The answer is up at the top. Most don't know it, and many aren't interested in making the effort to understand the basics of investments.

To the benefit of Wall Street, the phrase "ignorance is bliss" definitely holds. I guess what you don't know won't hurt you - at least until you get ready to retire.

Tuesday, October 26, 2010

An Exercise In Critical Thinking

Anyone who has come close to a community college in the last few years knows that critical thinking is the theme du jour. To produce responsible citizens, community colleges have taken on the task of getting students to think critically.

Along these lines, my class last night watched this YouTube video of an interpretation of Austan Goolsbee's (head of the Council of Economic Advisors to the president) presentation of the administration's economic record thus far:

For some in the older generation, this will bring to mind the book "How to Lie With Statistics" by Huff. The video shows both sides presenting the same data with opposing interpretations. And commentators wonder why the American people are confused by the economy!

Question: Which view do you agree with?

Monday, October 25, 2010

What's Wrong With This Picture?

You've seen it. It's a full page ad in the local paper. Smiling couple with a Green Box emphasizing their smiling faces and the biggest type on the page asking "Who Says You Can't Get A Competitive Yield In Today's Economy?"

Your eye goes does the page and in the middle you see 9.41% as the total return and 4.88% as the "Distribution Yield/" That sure beats the yield you and I are getting on our CDs, Treasuries, bond finds etc.

But it's not a yield comparable to a yield on Treasuries or CDs etc,! It's a distribution yield based on a total return. Here's my rough guesstimate-probably less than 20% of the people reading this ad could explain the difference between total return and yield. But everyone of them feels that the yield on their investments as they now stand is pathetic. The fact is that the return reflects a sharp drop in interest rates and a consequent rise in bond prices. Experts today are warning about a bond bubble. If interest rates rise and stock prices fall, what will happen to the "competitive yield" on this fund?

We know the managers will do ok - they're charging 1.75% right off the top. It's not clear what the funds they invest in charge.

Read the fine print. If you are over 55 years old, you'll probably need a magnifying glass. In the fine print the breakdown of the portfolio is given, and it states that 64% is invested in equity funds!

Looking for yield? Need income to live on? Invest in equities!

When the housing bubble burst, people acted like they were shocked about how low prime loans were marketed and made requiring no documentation, no down payment, ridiculous teaser rates etc. that would be reset and result in payments the buyer obviously couldn't make.

How many times do we need to be shocked before we start requiring the financial sector to do the right thing.

To me, emphasizing yield on a total return fund (especially when so many are desperately seeking investments that provide a good yield)is misleading and unconscionable at worst.

What's your take?

Sunday, October 24, 2010

What? I'm Going to Find Out How Much They Are Charging Me?

In 2012, the Department of Labor will take a step towards exiting the cave by requiring 401k fund providers to disclose fees. The yachts on Wall Street continue to shrink.

Participants will see the impact of management fees, sales charges, 12 b(1) fees, trading costs etc. Some of these will disappear in the light of the day. Undoubtedly, fees will drop in the face of increased competition.

If you can't wait, you may want to visit and put in the name of your company.

CLICK TO ENLARGE By scrolling down, you come to the component ratings. The first one is "Total Plan Cost." If it is high, you may want to ask the plan administrator why.

If your plan is not rated, again, it may be worthwhile asking the plan administrator why. It is not difficult for a company to provide data to Brightscope to see how its plan compares to the plans of peers.

Saturday, October 23, 2010

From Death Bed to the Top

I love apples and anything to do with apples - applesauce, apple pie, apple cider and especially apples themselves. So this is a good time of the year for me. To top it off, I have come across some articles on Apple Computer this week. Sad to say, I didn't stay with my Apple stock long enough; although I'm not complaining (I'm looking skyward as I type this!).

Anyways, the Bloomberg BusinessWeek magazine this week offers an interesting interview with John Scully on "Being Steve's Boss." It especially caught my eye after reading Andrew Hallam's post and comments this week on the relative investment merits of Proctor and Gamble and Apple.

Steve Jobs, of course, is credited with lifting Apple off its death bed and getting it to soar to the front of the technology pack. So it is not surprising that Jobs is a fascinating study and that his ex-,boss would provide some insights - especially for me since I don't know a lot about Jobs.

Jobs is a designer. This is what drives Apple. Scully contrasted Apple with Microsoft, where Gates will put out a product and fix the bugs later ("...they get it right the third time.") and Jobs seeks perfection the first time.

Jobs is a minimalist. Scully says that Job's house has very little furniture - just a picture of Einstein, a lamp, a chair, and a bed. As a minimalist, Jobs feels the most important decisions are not what you decide to do but what you decide not to do! This is looking through the lens of designing.

Interestingly, Jobs is a big fan of Sony and especially the way Sony factories were set up by Akio Morita (another interesting study). Morita is said to have gotten the inspiration for the Sony Walkman when teenagers interrupted his attempt to read at the beach by playing their music too loud. Scully points out, however, that Sony adapted poorly to digital. He says Sony should have had the iPod.

Job's hero is Edwin Land, the inventor of the Polaroid camera. Both Land and Jobs don't feel like they invented products. They feel like they were always there and they discovered them!

Genius is interesting!

Friday, October 22, 2010

The Inmates Are Running the Asylum

Walmart sold $5 billion of debt this week:

$750 million 3-year maturity 0.75% (+22 bps to 3-year Treasury)
$1.25 billion 5-year maturity 1.50% (+35 bps to 5-year Treasury)
$1.75 billion 10-year maturity 3.25% (+69 bps to 10-year Treasury)
$1.25 BILLION 30-year maturity 5%. (+106 bps to 30-year Treasury).

If held in a taxable account, the interest payments on these bonds is taxed up to 35%.

In comparison, Walmart's stock is at $54. It's basically unchanged over the past 10 years, despite a huge move in earnings and dividends. Today the dividend yield is 2.3%, and it is a qualified dividend so gets taxed at 15%, at the most. Furthermore, the dividend has been increased annually.

Yet investors are piling into the bonds!

All of this is detailed in "When Will the Madness Stop?" In the article, Brett Arends attributes the seemingly irrational behavior to investors first deciding on asset allocation, i.e. what percentage of stocks and bonds to hold, and then investing according to the allocation. This is an important point. With yields so out of kilter between bonds and stocks, it is time to look at dividend-paying stocks as a substitute for bonds in the asset allocation process.

At least that's my take.

Yield Curve - Part 2

In "Yield Curve - Part 1," we looked at the Treasury yield curve - which shows the yields of "on-the-run" Treasuries. On the run Treasuries are the most recently issued Treasuries. Bond investors study the curve to determine if the pick-up in yield for extending maturity (i.e. buying bonds with a longer maturity) is worth the incremental risk. For example, the yield on the 10-year today is 2.55% and the yield on the 2-year is a pathetic 0.35%. Is it worth taking on the additional risk of the 10-year bond (its price will drop sharply if interest rates rise) to pick up an additional 2.10% (i.e. 210 basis points) in yield? There is no way to get around this fundamental trade-off between risk and return.

Analysts study the curve to assess the likely course of the economy. A steep curve (i.e. the yield on longer-term bonds is considerably above shorter-term bonds) typically indicates a pick-up in economic activity. A steep curve is generally the result of an aggressive Fed pushing short-term rates lower. Today's curve is steep.

A flat or inverted curve typically presages a slowing economy. It generally follows an aggressive Fed-tightening move whereby short-term rates are driven higher. If we experience an inflationary episode in the coming years, this is probably what we'll see.

As a point of useful information, it is generally agreed that the Fed controls short-term rates by targeting the federal funds rate at its FOMC meeting; and longer-term rates reflect inflationary expectations.

In today's environment, the Fed seems to be trying (and succeeding somewhat) to influence longer-term rates by its so-called policy of "quantitative easing." This policy involves buying longer-term securities which pushes their prices higher and yields lower.

Although the Treasury yield curve is the most closely followed, there are others worth knowing about. One such is the TIPS curve which shows the yield on various maturity Treasury Inflation Protected bonds. This curve can be found at the Bloomberg site :

CLICK TO ENLARGE Analysts like to take the difference between the 10-year Treasury and the 10-year TIPS as a measure of inflationary expectations. Today that difference is 2.12% (2.54 - .42). If you buy the 10-year TIPS and inflation averages greater than 2.12%, you are better off versus the non-inflation adjusted Treasury because the principal amount on the TIPS is adjusted upwards by the rate of inflation. The 2.12% is viewed as the break-even rate.

Wednesday, October 20, 2010

Is There a Financial Equivalent of the Darwin Awards?

Death is a mostly a serious matter; but one can't help laughing at the Darwin Awards for people who have killed themselves doing crazy things and, in the process, lifted up the whole process of evolution. One of my favorites was the guy who went up on the roof and, for support, tied one end of a rope around his waist and the other end around his wife's car bumper. Mankind no longer has to worry about him having offspring.

These thoughts crossed my mind as I read the "Etc." column, titled "Why Ballers Go Bust," in the Bloomberg/BusinessWeek magazine for the week of October 17. The column reported that Scottie Pippen lost $120 million in bad investments, Antoine Walker filed for bankruptcy after making $120 million in his career, Mark Brunell lost millions in Florida real estate, Evander Holyfield blew more than $200 million, and the list goes on.

Here's my advice to multimillionaire athletes: take a measly $50 million and invest it in 30-year Treasury bonds at 3.89%, and get $1.9 million each year for the next 30 years. Next, sign up for my class in which I will teach how to live on $1.9 million/year. Then go out and piss away the balance by succumbing to greed and hair-brained schemes of your "friends" and advisors.

Actually, I shouldn't be so sarcastic since they are, in effect, taking over part of the function of what the government likes to do--which is redistribute income.

Yield Curve-Part 1

OK, so you've come up with an asset allocation. You've determined the percentage of assets to put in bonds and the percentage to go into stocks. You've looked at bonds and seen there is a mind-boggling number of choices. There are maturities to think about; and there are types of bonds including Treasury bonds, corporate bonds and agency bonds.

A good first step in thinking about structuring the fixed income portion of the portfolio is to understand the concept of the yield curve. The yield curve is simply a snapshot, at a point in time, of the yields at different maturities on the same class of bonds. The yield curve you will see and work with most often is the Treasury yield curve.

The"Daily Treasury Yield Curve Rates" provides a good source of historical data in tabular form as shown:

CLICK TO ENLARGE As shown, this particular curve shows yields on maturities ranging from 3 months out to 30 years. Typically the yields on shorter maturities are less than on longer maturities. This is because the prices of longer maturity bonds are more volatile than shorter bonds, i.e. more risky and, as we know, investors have to be compensated for taking on additional risk. There are, however, occasions when shorter maturity bond yields are above the longer maturities. This occurs when the Federal Reserve is aggressively fighting inflation by slowing down the economy.

On the other hand, when short maturity rates are considerably below the yields on longer maturities, as it is today, the curve is said to be steep. A good way to track the steepness of the curve is to watch the spread between the 2-year Treasury note and the 10-year Treasury note. As shown in the table, it stands at 213 basis points today ( 2.50 - .37). A good exercise is to track the 2s to 10s spread for the other dates in the table. You may want to click on the "Historical Data" link, go back in time, and see how this spread has been in the more distant past. You'll find today's spread is historically steep. This partially reflects investors' fear that rates will rise. The spread is the compensation that investors get for taking on price risk for buying longer maturities. Bond investors constantly assess whether the additional yield, i.e. spread, compensates for the incremental risk.

Tuesday, October 19, 2010

How to Get a Quote on a Single Premium Immediate Pay Annuity

Suppose you have a parent with a sum of money, or even yourself, at retirement who is fearful of running out of money. You aren't sure how much to draw down, you're fearful of markets, and you understand that inflation eats away at purchasing power over time. What to do?

A Single Premium Immediate Pay Annuity (SPIA) is a way to lessen the fear of running out of money in old age. Basically. the annuitant (you) pay an insurance company a sum of money, and the insurance company will pay you a given amount for as long as you live. There are a couple of negatives: (1) you lose control of the money, (2) there is nothing typically left for heirs, (3) you take on the credit risk that the insurance co. goes bust.

To get a quote is easy and takes about 5 minutes. Call Vanguard at 800-357-4720 and speak to an annuity rep. I did this yesterday and said I wanted a quote for a man and a woman aged 62 and 58 respectively on a SPIA for $530,000 that had a beneficiary payout as well. The $530,000 is the amount I would pay the insurance company. They came back and said they had one quote from American General at $1,490/month that had a death benefit. I asked for a quote with no death benefit that adjusted for inflation. They said 3 companies provided quotes, listed the companies and the amounts which ranged from a low of $1,445/month to $1,559/month, from American General again.

Quotes depend on age and interest rates. Two factors holding down the amount quoted here are the relative young ages of the annuitants and the low level of interest rates. I, for one, would prefer and recommend at this time to invest conservatively and watch interest rates. If, as I expect, interest rates are higher two or three years from now and my clients are older (this is a given!) then revisit the annuity possibility.

This illustrates that quotes are easy to get and that they range fairly widely; and, therefore, it is important to shop around. The Vanguard site has some useful educational materials on annuities that cover the positive and negative features and describe the bells and whistles that can be added on. As a general point of information, bells and whistles cost, i.e. lower the payout.

Just as a matter of arithmetic $1,559 * 12 = $18,708 and 18,708/530,000 = 3.53%.

Monday, October 18, 2010

Rose Gorelick Blumkin

There is a lively discussion going on at "Bargaineering" on money tips for young professionals. Along these lines, I would highly recommend a short reading of Chapter 44 of "The Snowball Warren Buffett and the Business of Life" by Alice Schroeder. Snowball is the biography of Warren Buffett, and Chapter 44 is the story of Rose Gorelick Blumkin, a remarkable lady/character whom Buffett respected enormously.

It is a story that illustrates how far a person can go in this country if they are willing to work hard, are smart, and have a lot of energy.

Ms. Blumkin travelled more than 9,000 miles across Asia and had to finesse her way past Russian guards to get to America. She had to struggle to learn English. She had to "bootleg" furniture in for her furniture outlet because competitors wouldn't deal with her.

Buffett bought her business for $55 million without even conducting an audit.

Warren Buffett once said, "Put her up against the top graduates of the top business schools or chief executives of the Fortune 500 and, assuming an even start with the same resources, she'd run rings around them."

Friday, October 15, 2010

The Circus is in Town

Recently I went over how to follow Treasury auctions by going to the Bloomberg site's calendar. Yesterday the Treasury auctioned the 30-year Treasury, and it didn't go well. Bloomberg reported:

"Coverage of 2.49 was soft for today's $13 billion reopening of the August 3.875 percent 30-year bond. The auction shows a larger than usual two-basis-point tail, stopping out at 3.852 percent vs. a 1:00 p.m. ET bid of 3.834. Buyside interest was soft with dealers taking down an outsized 59 percent of the auction, more than 10 points above average. Demand for Treasuries is slipping following the results which wind up a heavy week of uneven auctions. "

Some commentators are saying that the Chinese protested and didn't participate because of a report that may declare them a "currency manipulator" was delayed.

These are the kinds of events that change market sentiment and are worth following. Of course, in the background, the nev---ending circus in the nation's mortgage market goes on--this time with possible serious property rights violations.

This reminds me of e.e. cummings and "everything damned but the circus" which always gets me to smile in crazy situations.

Thursday, October 14, 2010

Do As I Say - Not As I Do

Warren Buffett recommends that individual investors diversify and use low-cost index funds. But that is not what he does. It's not even close. He takes big positions. Early in his career, a few positions comprised his entire invested assets for himself and his partnerships.

What gives? Actually, it's pretty simple, I believe. Few people understand the management of risk better than Warren Buffett. What he understands, and what most people don't get, is what is glibly referred to as "firm specific risk" in the investment texts. Think of it like this: when you buy a stock, you can do a lot of research by cranking the numbers, reading the reports, analyzing the competition, and even taking into account the macroeconomic environment. But, no matter how much research you do, if you are on the outside of the company, there is still a lot you don't know.

As you get ready to click "buy," the CEO and CFO could be having lunch and talking about the phone calls they got yesterday from their two biggest customers and how they were thinking of moving to a competitor. They may be discussing that internal research report that found customers were reporting a surprising increase in company product related injuries. They may be discussing the surprising announcement that the top salesman is considering a competing offer. They may be fleshing out an idea that involves selling barges to Merrill Lynch and then buying them back after the quarter ends, to get the revenue numbers Wall Street is expecting.

This is partly what "firm specific" risk is about. And, again, if you are on the outside, it can blindside you and you have no Michael Oher to protect you.

Unless, you are on the inside and at the top levels on the inside. Even the employees of Enron didn't know what was going on.

But Warren Buffett and Charlie Munger get on the inside. They get appointed to the board. They bring their own people in, if necessary, and make it their job to minimize firm specific risk. They get to know the key people in the companies in which they invest.

Thus, his admonition to diversify is appropriate, despite his approach, because he realizes the firm specific risk the typical investor faces in buying individual companies. If you must buy individual companies, limit your buy in a single name to 5% of total assets. That's my recommendation.

Wednesday, October 13, 2010

Picking Stocks

Sometimes I feel like the judge in the flowing robe overlooking the courtroom. I have weighed the evidence to the best of my ability and have arrived at my considered judgment. Two conclusions: (1) Index at least 80% of your retirement money, and (2) to beat the market over the long run, your best chance is to pick stocks yourself and avoid the management fees.

Of course, there are many approaches to picking stocks. I attended a presentation on one approach worth considering, this past week, at the monthly meeting of the American Association of Independent Investors (AAII) /Baltimore . The presentation was by Timothy J. Reazor of Investor's Business Daily. The program was developed by William J. O'Neill and is referred to as CAN SLIM, an acronym for the data the approach looks at to identify stocks to consider. It breaks down as follows:

C: Current Earnings
A: Annual Earnings
N: New Products
S: Supply and Demand
L: Leadership
I: Institutional Buying
M: Market Direction

These seven criteria are measured or graded and, in some cases, subject to a high hurdle to gain listing as a stock worth considering. One of the values of the presentation was that Mr. Reazor took the group through a routine, with the IBD newspaper that takes maybe 30 minutes a day, that will find stocks worth considering. The routine encompasses voluminous stock specific and industry specific information with the bottom line objective of identifying stocks on the move.

For the serious investor, there is a top-of-the-line online service whereby a stock symbol can be entered and a rating obtained along with the top-rated in the industry.

For those who might be interested, there are meetup groups around the U.S. where presentations are made and you can talk to users of the program.

Disclosure: This isn't intended as an endorsement of IBD or the CAN SLIM approach. I am not affiliated with IBD and receive no compensation from them. This post is solely informational.

Tuesday, October 12, 2010

Need to Know

The foremost expert in the country on IRAs and qualified plans is Ed Slott. Ed has written several books on retirement planning and IRAs and is this month's guest in the "10 Questions With Noteworthy People" column in the Journal of Financial Planning. You may also have seen Ed on PBS, during their fund-raising season, presenting "Stay Rich For Life."

In the column, he is asked about what mistakes advisors make in their own financial planning and answers with a revealing story about an advisor who inherited a $300,000 IRA and took it to the bank. He gave the lady the new titling, but she didn't know that it had to be retitled or how to retitle the account. So . . . two people who supposedly know what they are doing! Instead she gave him a check and said " can make it out the way you want . . . ." The big mistake was taking the check. As he took the check, it was taxable income. A non-spouse beneficiary cannot do a rollover. Instead, they need to keep the name on the account and retitle it. Then they can invest it the way they want and have important options, including withdrawing the funds over a long period (thereby paying much less in taxes).

This is a super critical lesson. People get an inheritance and ask their next door neighbor or the "expert" at work how to proceed. These people will tell them to take the proceeds, and they have a while before they need to roll it over into a new IRA. They, of course, are thinking of the time they changed jobs and rolled over their 401k. But this is completely different! This is a costly mistake.

Whenever there is big money involved, get the advice of a professional. Don't assume.

Monday, October 11, 2010

Be Careful Out There!

Brokers are not fiduciaries. They are not required by law to act in your best interest. This fact has been covered up, and only a small percentage of the investing public has any inkling of the damage brokers can do. In fact, even a prominent personal finance columnist this weekend urged her listeners to take advantage of brokers offering "free" asset allocation services. Doesn't she know that this is like asking the fox to buy the lock for the hen house? She should be ashamed--nobody does anything for free in the world of finance. Anyways, I'm off into the weeds. In this post, I want to bring the story of Lisa Detanna to your attention.

Ms. Detanna was the broker for Larry Hagman of "Dallas" fame. At one time, the entire country was engrossed in the "Dallas" TV series and especially the cold, calculating, manipulative business dealings portrayed by Mr. Hagman. Thus, there is a bit of irony here; although it's important to keep in mind one is fictional and one is real.

In thinking about investing and financial planning, the first step is to think about goals.

"The Hagmans told Detanna in 2005 that they needed income producing investments that would protect their principal, according to the claim. By June 2008, their accounts were about 69 percent invested in equities."

For brokers of a certain ilk, there is a problem here. The compensation they receive is just not compelling if they put you into "...income producing investments. . . ." Think about this. For a fee-only, registered investment advisor (RIA), the compensation is the same whether they put you into stocks or bonds; they don't get compensated by what they sell to you. Furthermore, an RIA has a fiduciary relationship with the client. They have to do what is in the interest of the client.

As the story details, Ms. Detanna had numerous complaints against her. Surely a potential client would see this in her ADV filing that she has to make available to potential clients. But wait--brokers don't have to file an ADV. There is no way to get a broker's background, just as there is no requirement for brokers to reveal conflicts of interest.

Instead, individuals see Ms. Detanna listed on Barron's list of top women Financial Advisors and assume she is an advisor worth working with.

My advice for a beautiful Monday morning: if you are using a broker for advice, then carefully read the story detailed in the link. Consider yourself warned.

Saturday, October 9, 2010

Active vs. Passive - It Ain't Going Away

Most people in the active versus passive debate know the importance of framing. Just saying "passive" along with a disgusting look can go a long way for the naysayers on indexing. For that reason, I like to refer to indexed investing as "evidence-based investing" because the evidence is clear that very few average fee active managers and individual investors have outperformed their respective indices. Looking at the Dalbar report or numerous academic studies, all point to the same conclusion.

Framing indexing as "evidence based" gets people's attention.

For a really good presentation on books for DIY Investors that present the aforementioned evidence, check out the guest blog at Get Rich Slowly. But don't just stop at the post--check out the comments where you will find a good give and take on active management versus indexing.

Friday, October 8, 2010

Hit The Road?

Regular readers of this blog know I am a huge fan of indexing. The evidence is overwhelmingly in favor of low-cost, low-turnover, "capture market returns" approach recommended by Buffett, Bogle, Bernstein, Ellis, Malkiel and many others--especially for those investing retirement assets.

In fact, I only work with clients who subscribe to this approach. Still, like those mentioned above, I believe that there is some room for individual stock picking for those willing to do the research. I allow up to 20% of investable assets for myself and my clients to be invested in this way. Some like to do research and find undervalued stocks. I like to think in terms of themes and the solutions to problems on a big scale. This was brought to mind by the post at "Invest It Wisely" where Kevin reviewed a new site .

The problem I am interested in is considerably broader than the "how do I build a website" etc. you'll find at that site. I am interested in how the retirement problem in this country will be resolved. Recent estimates are that more than half of baby boomers will not be able to retire to a lifestyle they are used to. Many will be hard up.

Figuring out the path that will be taken, I believe, will result in an investment opportunity. Admittedly, I went down one dead end (so far) and came close to going off a cliff. I had convinced myself a few years back, when housing prices were moving steadily higher, that reverse mortgages would be the key (I know: reverse mortgages are laden with fees and an area where abuses can occur). Still, it seemed to me that they were, in some cases, the only thing standing between some seniors going hungry etc. and living normally. The unlocking of home equity seemed to be a key. At the time, I read a lot about CountryWide Financial and how they were coming up with some clever innovations in this area and thought they would be a great investment. Looking back, I clearly dodged a bullet.

Still, the same problem is out there. I should say, up front, that I believe I have an advantage in thinking this through in that I have always considered myself everyman from the perspective of if I like something or am thinking along certain lines, then many people are doing likewise.

Along this vein, I have been thinking of motor homes. I have talked with the wife about selling our home (on which there is no mortgage) and buying a motor home. This will result in a nice chunk of money for retirement that actually, unlike the IRA, can be drawn down tax-free. With the motor home, we can spend 4 months visiting my son and daughter-in-law in Alaska, then spend some time down South and make our way to Assateague camp grounds in spring to be near my oldest daughter and son-in-law in D.C. This solution frees up investment funds and enables the newly retired a way to visit children who might be scattered around the country and live fairly cheaply. Is this a solution?

To get specific, should I take a position in Winnebago, or is there some other way to play this? Winnebago now looks pretty ugly and is losing money. What do you think? Is this a solution for many to a looming retirement crisis? Remember, we are not a generation that adapts well to hardship.

Thursday, October 7, 2010

How Can the Unemployment Rate Drop When People Give Up Looking For a Job?

A drop in the unemployment rate is a good thing, right? Actually, not necessarily.

The rate of unemployment is perhaps the most important indicator of the health of the economy and is widely anticipated. It is released each month by the Bureau of Labor Statistics at 8:30 am on the first Friday of the month, unless the first Friday is the 1st day of the month.

Analysts and the media focus on two data items: the unemployment rate and the number of jobs gained or lost. These come from separate surveys of households and business establishments. The numbers are predicted by economists, and the predictions are widely publicized and discussed. Numbers different from the expectations move markets.

The report for September will come out on Friday morning. As shown on the Bloomberg calendar, the September unemployment rate is expected at 9.7% and the number of jobs lost is -8,000. Again, numbers different from these expectations will move markets. If the unemployment rate moves closer to 10%, it could be the trigger for QE2, the easing program for the Federal Reserve whereby they purchase fixed income securities in an effort to lower longer-term interest rates, including mortgage rates.

A good explanation of how the unemployment rate is calculated is provided by Khan's Academy, which was looked at in a previous post. This particular post provides an excellent explanation of how the unemployment rate can drop (hint: if you haven't looked for a job in the past 4 weeks, you are out of the labor force) if those seeking a job give up looking for work--something that investors need to keep their eye on in the current weak economic environment.

Wednesday, October 6, 2010

"Bogle's Folly"

In the mid-70s, John Bogle, founder of Vanguard, started the first index fund which was derisively called "Bogle's Folly" by Wall Street. People questioned why anyone would want to capture the average performance of the market. The answer turned out actually to be pretty simple. Wall Street charges so much for active fund management that only 2 out 10 active funds, at most, beat their benchmarks over the long term.
Furthermore, individual investors do much worse because they are severely whipsawed by their emotions and end up up consistently buying high and selling low.

"Bogle's Folly," which grew to be the largest fund in the world, has now been copied by every major fund provider in the industry. Today, individuals as well as the largest pension funds in the country put money into index funds. The participation of pension funds along with other institutional investors is telling, for the simple reason that they have staffs of well-paid analysts that should be able to pick the best and the brightest of the market timers, stock pickers and technicians.

What does this history tell you about Wall Street?

Tuesday, October 5, 2010

Protection Against the Bond Bubble

Small investors are piling into bonds despite highly vocal, widespread warnings of a bond bubble. It's time to leave, the water's coming over the dike, and the buses to the Superdome are filling up. If you don't leave now ,you'll soon be on your roof.

I agree with this, except for the timing, and timing is everything when it comes to money. It could be a while before the bubble bursts. The deflation scare could intensify. QE2 could temporarily push longer-term rates even lower.

What's an investor to do? I recommend looking at CSJ, a shorter-term bond market exchange traded fund, or, if you're looking at your 401k, considering a short-term corporate bond fund. CSJ is well diversified, participates in the short-term, corporate bond market and, best of all, has a shorter duration than the overall market. This means these bonds won't decline as much in price. I t is presently yielding slightly more than 3%.

Make no mistake-this bubble will burst within the next 5-7 years, and it will be ugly., For one thing, the younger generation of investors wil,l for the first time, see what inflation is really about.

Disclosure: My clients and I hold CSJ.

Monday, October 4, 2010

A Creative Artist

CLICK TO ENLARGE Many times the best way to get a message across is with humor. Here is the most popular cartoon by perhaps the greatest ever political/business cartoonist Kevin Kallaugher, aka KAL.

This cartoon, first shown on the cover of "The Economist," is his most popular. It generated an inordinate number of comments, many from traders who said it reflects the mood on the floor of the exchanges. DOES THIS SCARE ANYBODY ELSE?

If you've ever been caught up in emotions in your investing, or if you have ever acted on an investment tip, you can relate. If you go into the company lunch room and overhear a fellow worker say that their fund XYZ is really doing well, and then you go out and buy it, then you can relate to this cartoon. I know - I'm stretching here - none of you have ever done anything of the sort.

Here's an interesting background video on KAL

Saturday, October 2, 2010

Still Paying 1st Class For Coach?

Most individuals who use advisors pay outrageous fees for investment management- and yet the historical evidence clearly shows that at least 8 out of 10 under-perform the market. Individuals are paying 1st class rates and sitting in coach. Some don't even know their performance. I know because I ask them. Just as important, they have no idea what Wall Street, and its many layers, are siphoning off from their asset performance --much of it deftly hidden. Fees are taken before results are reported,, and then many advisors automatically deduct their charges.

Take for example, an advisor who invests your assets in mutual funds. What kind of costs are involved? Consider the following chart from Bernstein, "The Investor's Manifesto:"

CLICK TO ENLARGE As shown, even the most basic large cap active fund has fees that average 2.2%. This is before your advisor takes his cut of 1 to 2%! Don't be surprised 20 years from now if you've severely underperformed. But then, hey, who knows? Maybe you'll get lucky and have the 1 out of 10 or 2 out 10 managers who outperform. But there is a way to get into 1st class; and it's straightforward, it doesn't take a lot of time, and, best of all, it helps you get a fix on exactly what is happening with your investable assets. On the basis of historical performance data, it puts you into 1st class. It uses a low cost, low turnover, indexed portfolio, well-diversified portfolio.

Yesterday's post reported on the version reported by BlackRock that provides long-term performance data. The year-to-date performance of the low cost, low turn-over, well-diversified portfolio was 5.47%. Again, do you know what your performance was? The cost of the portfolio is 0.22% and uses sectors of the market that Bernstein's table shows charges over 4%!

Furthermore, this week's posts showed that it is not that difficult to get solid, lost-cost performance with your investable assets. Something worth thinking about: this is an area where you can go 1st class and pay coach pricing.

Friday, October 1, 2010

YTD Performance - BlackRock Diversified Portfolio

In previous posts, we have looked at returns over the last 20 years for parts of the capital markets including international, growth, value, fixed income etc., as provided by BlackRock.

The value of the BlackRock data is it provides long term results, shows volatility explicitly, and illustrates the value of diversification.

The following table extends these results by showing year-to-date returns for 2010 through 9/30 on the sectors of the diversified portfolio: Click to Enlarge.

The table shows the volatility of various sectors and the dampening influence on returns that results from diversification.

For the year-to-date period, the small cap stocks (IWM) stood out, with large cap growth (IWF) and large cap value (IWD) producing similar returns. The bond market (AGG) performed nicely, continuing to defy the bond market bubble worries. International is still lagging but bounced back sharply from being down double digits at mid-year.

Overall, the portfolio is up +5.47 % year-to-date calculated as follows:

.3*7.71 + .11*1.06 +.11*9.04 + .24*4.21 + .24*4.33 = 5.47

The returns are based on net asset value, as reported by Morningstar.

To me, a benefit of simplifying and using exchange traded funds is the ability to easily track performance on an ongoing basis. Also, by playing with the numbers, it is easy to see the impact of altering the allocation by, say, moving 5% from international to bonds.

Disclaimer: The information here is intended solely for instructional purposes. Investors should consult an advisor or do their own research before investing. I hold some of the exchange traded funds mentioned.

DIY Newbie - Portfolio Analytics - Part 4

Yesterday we had a look at the portfolio holdings and the percentage in each sector of the selected model versus the targeted percentage. This is a live portfolio. Today we want to see what trades need to be done to bring the portfolio back into line with the model.
Again, here is a listing of assets, all low cost, low turnover, exchange traded funds (ETFs):

CLICK TO ENLARGE The bond ETF is CSJ. The account is basically riding out the "bond bubble" by using a short-term (1 to 3 year maturity) corporate bond ETF. Although it gives up a bit in yield and price appreciation if rates drop, it provides protection in the event that rates move higher--which is the greater fear now. The "Big Cap" holding is SPY which tracks the S&P 500. Both CSJ and SPY have transactions costs; the others are commission free.

CLICK TO ENLARGE Next, let's revisit the table showing sector allocations relative to model targets, this time in dollar terms. We see that we need to sell approximately $500 from "Large Cap Equity" and increase "Fixed Income." In the first table above, we see that SPY is at $114.13/share, so we can sell 5 shares; and because CSJ is at $105.05/share, we would buy 5 shares. This would take "Large Cap" to approximate target weighting and overweight "Fixed Income." There are other minor moves that could be made, for example, to reduce cash and increase international slightly.

Notice that reducing stocks fits with the contrarian philosophy because stocks had a spectacular month! Also notice that there is some room, within this disciplined approach, for decision-making, if that's what you want. A 5% leeway, up and down, versus the target percent gives decent wiggle room.

This 4-part series has only touched the surface of the free analytics that are typically available to account holders. The only way to see and understand what is available to you is to get online and explore. You may want to do this with someone who is knowledgeable about investments to get a fuller understanding of the various tools. This is one technology where it pays to learn the full capability.