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.

Wednesday, October 24, 2012

An Intro to Long Term Care Insurance

Like Pac Man gobbles up dots, long-term care can gobble up a nest egg.  It is an unpleasant subject but one that is important--not just for those heading up households but also for those anticipating the role of caregiver.  Planning for long-term care is important  from the financial aspect and also because of the stress it can impose on a family.

Here, from Jim Blankenship at Getting Your Financial Ducks in a Row, is an excellent intro entitled "Long Term Care Insurance - Protecting Your Nest Egg."

Tuesday, October 23, 2012

High Fees and Low Cost ETFs

If you are a serious investor and don't know who Jason Zweig is, you should.  His book, Your Money and Your Brain, is a must read.  Very well written, it will make every investor better.

Recently he has examined a use of ETFs, When Cheap Funds Cost Too Much,  that overrides one of their  biggest benefits:  low expenses.  As Zweig points out, some advisors use ETF strategists--thereby adding a 3rd layer of fees to the investment process.  There is the advisors's fee, the strategist's fee, and the expenses of the ETF itself.  He points out this can drive costs to between 1% and 3% of portfolio assets.  Included may be a transactions cost incurred when ETF funds are traded.

A broader issue Zweig discusses is that strategists frequently provide performance results that are not real client performance results - they are back-tested results.

All of this can be avoided, and is, by numerous advisors.  I, like some other advisors, for example, index the market, avoid the "middle man" strategist, and use mostly commission-free ETFs.  Performance, in line with the objective,  is going to be close to the benchmark.  For example, here is performance for a typical client (note that it is up-to-date and can be seen by the client anytime she wishes by going online!):

As you can see, performance since inception of the account is within .20% (average cost of ETFs) of the benchmark.  Note that the benchmark is explicitly listed in the footnote.  Each client has a specific benchmark reflective of their risk tolerance.

My fee is .4% to set up the account, manage it on an ongoing basis, and rebalance as necessary - all mystery eliminated voila'. Total cost, all in, is .6%.  If she did it herself, it would be .2%.  As a matter of emphasis, the layers pointed out by Zweig results in the usual opaqueness in fees and costs that Wall Street is adept at creating.

Tuesday, October 16, 2012

An Interview With an Investment Genius

Bruce Berkowitz of Fairholme Capital is a genius.  Watch this video of an interview by Consuelo Mack on the Wealthtrack program and see if you don't agree.  Consuelo Mack is an excellent interviewer and has a knack for asking the questions, including the tough questions, that do-it-yourself investors have.

Although Berkowitz hit a rough spot over the recent past, he appears to be on the rebound in 2012 and, over the long term, has produced one of the best track records in the industry, thereby earning the prestigious title of "Manager of the Decade" from Morningstar.

As you'll see in the video, Berkowitz knows the inside and outside of the companies he invests in and sticks with his convictions over the long term.  He, like Warren Buffet and a select few others, is the epitome of a value investor.

I caught the end of the interview as I was channel flipping but then came across it on The Biz of Life site - thanks "Grouch."

In the approach to investing I use, I would limit exposure to 10% of an active fund like this.  The probability that Berkowitz will beat the market by a goodly margin over the next 10 years or so is very high, but there is that risk that he will underperform.  I would point out that, in participating heavily in the financial sector, he is facing head on an industry that has (IMHO) the best business model in the world but is overtaken on an ongoing basis by excessive greed and moral hazard, helped along by a Federal Reserve that is happy to oblige.

Expand to full screen and enjoy!

Friday, October 12, 2012

Investilosophy: Investment Lessons Wrapped in a Story

Investilosophy, by Ofir Hirsh, is an adventure story where a businessman's meeting is cancelled and he heads to Hawaii--where he meets up with a group of traders who enjoy talking about investment strategy and philosophy.  The book is well written and moves at a fast pace.  In places, you'll feel like you are, in fact, on the island.  As you are caught up in the story, you'll find yourself comparing your investment philosophy with the ideas presented by the characters in the book - a useful exercise.

Like one reviewer said, I look forward to Ofir Hirsh's sequel as the adventure continues.  I give the book 5 stars on interest level and on creativity.

Thursday, October 11, 2012

Buy what you know

Peter Lynch, one of the most successful fund managers of all time, was an advocate for investing in what you know.  If you work in a shoe store and see a certain shoe selling, do a bit of research and you may uncover an investment opportunity.

This was brought to mind recently under slightly different circumstances.  I was prepping for my 10-year colonoscopy, drinking the horrendous concoction whose purpose was to clean me out appropriately.  If you're not sure what I'm talking about, don't worry--it's not crucial to my point.  As I spent time on the throne, so to speak, I was reading Barron's and came across A Better Test for Colon Cancer? by Andrew Bary.  The article discusses a company named Exact Sciences and the test they have developed that is in the clinical trial stage.

In line with Peter Lynch's theory, this stock could be a perfect candidate for doctors working at the clinic where I was getting my procedure done.  They very likely may know more about the potential of such a test than even Wall Street analysts.  Furthermore, the whole back story is beyond the understanding of the average investor.

Although I am not an advocate for buying individual stocks, this might be the type of situation where it could make sense.  It is the type of situation where an investor could gain an edge.

To be clear, my overall philosophy is that individuals should not invest more than 20% of their assets in individual names and no more than 5% in any single name.

Where is your expertise?

Monday, October 8, 2012


Here is a free program, Riskalyze, that creates a portfolio for you which first analyzes your risk tolerance and then creates a portfolio for you. You start by selecting one of the following choices:

Source: Riskalyze
You begin by specifying a "desperation amount."  This is an amount that, if you fall below it, will have a negative impact on your lifestyle - sort of like being in Vegas and keeping in mind that you need a certain amount to make it back home.  Seriously, though, this is an important number to consciously think about as you enter the investment arena.

As you see, I put in a portfolio value of $200,000 and a "desperation value" of $150,000:

Source: Riskalyze
Note the pictures and risk scores.  The old guy has a low risk score of 28, the professional woman a risk score of 45, etc.

Next you get a series of questions comparing alternatives, comprised of taking a sure gain or preferring an uncertain situation of a much higher gain (hit the ball in the upper deck) or dropping back to your "desperation value."

Here is the first alternative:

Source: Riskalyze

As you choose among these alternatives, the bar will eventually fill up and you'll receive a risk score.  I have to admit that I have never liked answering these types of hypotheticals as a means of uncovering risk tolerance.  I would rather look at past behavior and study historical returns.  I will say, though, that Riskalyze's approach may work well for some people and, admittedly, it is based on academic research.

The next set of choices will seek to present you with a case where you start out with your portfolio dropping.  Would you, in that instance, seek to take a chance to regain your position?  It proceeds through these kinds of questions to get at a risk score.

Source: Riskalyze
As you can see, once you get a score it gives you a range of potential returns for a typical portfolio.  The process is based on modern portfolio theory.  Thus, it is saying that the average portfolio for this risk score will fall within the indicated range based on 2 standard deviations from the average.

So, quantifying in this way can be useful for some people.

At this point, Riskalyze asks if you have a prediction for the market or if you would like to use historical returns.  After you pick, it will then construct a portfolio based on your choice in the first graphic above.  What I really like is that - as seen in the first graphic above- it allows for a simple portfolio.  This is the route I would definitely choose unless you want to make managing your portfolio a full time job.

Overall, this is an interesting program and one I think most DIYers will find useful to play around with. Try and see how different it is compared to what you are doing.

Thursday, October 4, 2012

3 Great Reads

If you are up for edgy commentary on financial matters, you'll enjoy this blog (warning:  sensitive ears should stay away!!!!!)  Very talented writer:

Mr. Money Mustache

Forget the excuses and watch: (from the Grouch )

Adam Carolla  on Luck

Instructive for the kids to watch, too!

Last but not least, check out the MoneyCone, back from an extended absence, with his inimitable research showing the impact of expenses on fund returns:

The Fund That Beat The Market 9 Times Since 1999

The best posts are those that have you looking at the world a bit differently.  These three do that.  Enjoy!

Wednesday, October 3, 2012

DALBAR Results Questioned

Ever wonder how the individual investor does versus the market?  Everyone knows someone who made a killing investing.  More often these days, we hear of some maniac up the street who is day trading like crazy.  Ever wonder about your chances?  You ever think of going to the library, checking out 12 books on investing, burning the midnight oil reading them, and then going on CNBC to explain what a genius you are?

Apparently, a lot of people have and it has been going on for a long time.  How do I know?  I know because book stores have been supplied as long as I've frequented them with books that sell well and proclaim to have the secret for beating the market.

This question of whether Joe Blow is beating the market or not is actually a serious question in the investment community.  And it isn't that easy to answer.

One source that has been widely quoted and accepted is an annual study by DALBAR.  They find consistently that individuals underperform by 4% to 5% per year.  Get market returns, a calculator, and a bottle of wine, and spend some time seeing what this under-performance would do to a 20-year investment program; and it will hit you like a sledge hammer that under-performance of this magnitude is devastating!  In fact, you'll likely need another bottle of wine before you're done!

One key point to bring up is that the DALBAR study is expensive, and it is used by money managers to say "if you try to manage your own money, you'll probably screw up; so let us do it for you." (writer's note to self:  I'm not sure that last sentence reads correctly!)  More bluntly, there is an incentive on the part of DALBAR to come up with the kind of findings they report.

Sad to say, I'm in an industry where you have to keep your hand on your wallet and look into incentives at every turn.

A second key point is that it is difficult to decipher exactly DALBAR's methodology.  On seeing their results, any serious analysts would say "wow, I wonder how they got these results."  Good luck in figuring it out.

The relevance of all of this is neatly explained in a guest blog post at the Nerd's Eye View site by Harry Sit of The Finance Group.  The post, Does The DALBAR Study Grossly Overstate The Behavior Gap? examines the impact of the sequence of returns on investment performance and shows how it can produce highly misleading results.

I recommend the post highly - it is readable and you'll come away with a better understanding of investment returns.

Full disclosure:  I have referenced the DALBAR results myself when arguing that investors will do better by sticking to an asset allocation strategy to overcome the negative influence of emotions on the difficult task of successful investing.

Tuesday, October 2, 2012

Thoughts on Bonds

A video worth watching, 3 Ways to Maximize Bond Returns is an interview by Jeff Macke of Larry Swedroe, author of Wise Investing Made Simple and numerous other investment books.  Swedroe is a successful investor who does an excellent job of explaining complex investment topics.

Monday, October 1, 2012

Year-To-Date Performance

Source: Capital Pixel
Markets overcame fears of Europe imploding, weakness in Asia, softening U.S. earnings and mixed economic data and put in a strong quarterly performance over the first 9 months of 2012. Investors who were well-diversified and who stayed with their asset allocations were again well rewarded as they were over the first 6 months.  This performance builds on the 20-year performance ended 2011 of the diversified portfolio as reported by BlackRock.  BlackRock's report covers several asset classes as well as a diversified portfolio comprised of 35% fixed income and 65% stocks.  Over the 20-year period ended 2011, the portfolio achieved an average annualized return of 7.7%.  At that rate, money doubles in approximately 9 years.  Thus, over the period, a sum of money invested in line with the diversified portfolio would have quadrupled.

The performance of the asset classes comprising the diversified portfolio over the 1st 9 months of 2012 along with component weights and expense ratios are shown in the following table constructed with data from Morningstar :

The overall portfolio has achieved a return of   11.02% year-to-date.

As noted above, there has been plenty of news and reasons for investors to stay on the sidelines in this market. E urope, Asia, weakening corporate profits, "fiscal cliff" - you name it.  And, in fact, judging by the returns, many big players have stayed on the sidelines and haven't participated.  These include active mutual funds, hedge funds, huge state pension funds, and college endowment funds.

This portfolio would be appropriate for someone in their 30s or 40s with a slight conservative bent.  As such, it is a useful benchmark for your own management or to put in front of your advisor.  If you haven't achieved a  return year-to-date close to 11%, you should at least learn why.  It could be because you have a more conservative allocation or you or your manager guessed wrong in picking stocks/timing the market or even because you are in high cost funds.

If your return is higher than 11%, pat yourself on the back!

Disclosure:  This post is for educational purposes only.  I own for myself and my clients some of the funds mentioned above.