My Favorite Investment Chart Updated

My favorite investment chart is the 2-pager put out annually by BlackRock:

Asset Class Returns A 20-Year Snapshot.

I take it with me to client calls and encourage clients to study it.  I take it with me to educational presentations.  I have written several past posts describing various nuggets investors, both newbie and seasoned, can uncover by looking at the chart.  IMHO, studying the chart and thinking about what it shows is just as good or better than reading some of the top investment books.

Here is what the first page looks like:

Source: BlackRock

CLICK GRAPHIC TO ENLARGE   The chart shows 20 years on returns on a yearly basis for seven asset classes including stock sectors, international stocks,bonds, and cash.  Each sector's annual return is shown as well as its relative ranking.

What I like about the chart is the white box.  It shows a diversified portfolio which is essentially 65% stocks and 35% fixed income and cash. The actual make-up of the diversified portfolio is shown as the last line in the footnote.  The footnote also includes disclaimers which should be read.

What does the chart show?  First off, notice that the diversified portfolio reduces volatility.  It is never in the top two slots for any given year but also is in the bottom three on only three occasions.  Secondly, notice that chasing "hot sectors" can be disastrous.  In 1998 and 1999, Large Cap Growth led the parade and subsequently fell to the bottom of the pack.  In terms of volatility, take a gander at how often the Small Cap sector return jumps above and below the diversified portfolio.  If you want volatility, this is one place to find it.  It is also where you will find one of the highest performing sectors.

Before you leave the chart, you'll want to notice the anemic return on Cash.  This 20-year period spanned in the chart was scary.  You had the East Asian Crisis, Russia Default sending Long-Term Capital Management into a death spiral, the dot.com bust, housing crisis, Europe struggling, a dysfunctional U.S. government, etc.  Many chose Cash as the place to hide.  It was costly!

Page 2 gives some numbers on the average annualized returns and charts the sectors:

Source: BlackRock

As shown, the Diversified Portfolio return 8.3%.  This is an average annualized return. Notice that its standard deviation (mathematical measure of volatility) is considerably lower that the sectors that outperformed.  The diversified portfolio investor surely slept better over the period than did those who concentrated their investments.

As you view the charts, recall that the biggest mistake that investors make is they pile in at high prices (when all the news is positive) and run for cover at the bottom (when news is horrible).  How many people do you know who gave up on investing in late 2008 when they should have had their buying hat on?

For those with a mathematical bent, returns on various allocations can be calculated from the information given. For example, some readers may want to go through and get a rough idea of how they would have fared if they started with, say, 80% stock/20% bonds and systematically reduced the stock allocation every 5 years or so.  If you need help doing that or a similar calculation, let me know.

Disclosure:  Past performance is not an indicator of future performance.  This post is intended to be educational.  Investors should do their own research or consult a professional before making investment decisions.

Organize Your Investments in 15 Minutes

Every investment advisor has seen the situation where a new client plops a shoe box or accordian folder stuffed with account statements on the desk and proclaims he or she "needs help."  Although the first inclination is to reach for a bottle of Excedrin or something stronger, it isn't necessarily a bad state of affairs.

In fact, for many DIY investors, it is the beginning that will put them on a path whereby they can breathe easy.

If you don't have statements on your accounts, then you need to take a step back, get online, and print them out.  If you haven't set up your online access, you need to do that.  Don't procrastinate - DO IT!

So, back to the beginning.  Some investors at this point have several savings accounts, a couple of IRAs (both traditional and Roth), a 401(k) or 403(b), etc.  Life is complicated in the 21st century.  Take a Zen attitude, and be happy that you are not in most parts of the world where there are no viable capital markets for securing a retirement.

Step 1 is to order the accounts.  The first group includes savings accounts and regular brokerage accounts.  These are taxable accounts.  Simply, if you earn $1 of interest on the assets in these accounts, you pay taxes on the earnings this year.  The second group includes the IRAs and 401(k) accounts. Here you mostly have accounts built up from pre-tax monies.  Taxes on earnings and capital gains in these accounts will be paid when withdrawals occur.  There are all kinds of rules on these accounts involving when withdrawals can occur without penalty, RMDs, etc. that should be learned as time goes by.  The final set of accounts is comprised of Roths, if any.  For these accounts, taxes have already been paid.

Step 2 is to seek opportunities to combine accounts.  The fewer account statements you have to handle, typically, the more control you have over your finances.  I run into many people who have so many accounts even Einstein wouldn't be able to keep up.  In fact, let me take a potshot:  it seems to me that doctors take a little bit of every financial product that walks through their doors, and a lot walks through their doors!  I've wondered about this and concluded that, because doctors are smart and financial product sales people are clever, there is a natural match-up.  News flash for doctors:  you don't need 6 different annuities (in fact, most annuities are horrible investments; but that's a whole different subject!).

Step 3:  total up the accounts each quarter.  You'll want to look at money market accounts and cash equivalents and ask if the total is what you want for emergencies - think weddings, funerals, roof leaks, erratic employment income, etc.  Looking way down the road, you'll note that withdrawals in retirement will pretty much follow the ordering--with the first withdrawals coming from the taxable pot, then the IRAs, etc., and finally the Roths.  As you look at your contributions, you also want to to put a fisheye over on your credit situation and ask whether the marginal dollar is best applied to paying down debt or going into your 401(k).

So, the bottom line is that spending a little time getting your investment accounts organized is a necessary first step to managing your assets and asking the right questions.

Past Performance Feeds Financial Media

OK... stocks fooled everybody in 2013 and spurted ahead over 30%. So what do we get in the media ?

•  3 Reasons to Be 100 Percent Invested in Stocks by Dana Anspach
• Some "prudent" strategies downright reckless, says Cramer by the irrepressible Jim Cramer

And so it goes, as rear view mirrorers give advice to wimpish Wallys and his ilk to get them further into the deep end.  This punditry theme extends to media interviews you see on the financial networks, popular investment books that climb the charts, and the newsletter industry.

But where were these articles in early 2009 as investors stared bug-eyed at stock portfolios down 50%?  2009 was a time when these types of articles could have done a lot of good.  Mostly they would have been ignored; but, for those who heeded them, the advice would have paid off.  Back then, though, the articles were about investor portfolios being to risky!  The media was inundated with articles on how investors should reduce risk.

Let me be clear.  I have no idea where the market is headed.  Pin me down and make me make a guess and I would say it's at the pricier end of the spectrum.  Who knows, though?  Next year this time it could be 20% higher, and  readers will think "I should have listened to Anspach and Cramer."  What I do know is that the evidence shows that thinking hard about asset allocation and sticking with it thru the ups and downs has outperformed strategies that chase up markets and panic in down markets. 

DIY investors should know that one of the first propositions that is demonstrated early on in an investment course is that past prices don't contain information on where prices will go in the future.  One place to find the voluminous studies supporting this proposition is Malkiel's book A Random Walk Down Wall Street, now in its 8th edition.

So, bottom line:  IMHO, have a well thought-out asset allocation and stick with it.

Is "Buy-and-Hold Dead"?

Is "Buy-and-Hold" in Here?

I quite often hear the phrase "buy-and-hold is dead."  In fact, two years ago a money manager stood in front of the American Association of Individual Investors in Baltimore and proclaimed the demise of buy and hold.  He was promoting tactical allocation, of which he is a practitioner and would be glad to tactically allocate your assets for 1.50% of your assets annually.  Perhaps not as remembered by some in the group, there was a member who pressed the speaker on his current allocation.  He responded that his tactical allocation indicators had him heavily into cash.

Given how adamant he was about his style and the hindsight we now have for the past 2 years, I often wondered how he did.

It is hard to get performance data on specific managers, for good reason:  managing for individuals presents unique cases in every instance.  For example, some clients come in with load funds and stocks that have large capital gains, etc., requiring careful management from a tax efficiency perspective.  As a result, it is not easy to tell if a given money manager is doing a good job.  Furthermore, you can't ask clients because many clients don't know.  I've had people tell me their investment manager did great last year because he made them $18,000.  Think about that for a moment.  It actually tells you nothing.

I follow up by asking what their return was.  Typically, they have no idea.  At that point, it is useless to go the next step and ask about risk.

So it is difficult to assess how investment managers perform.

But what do we know?  We know that a well-diversified, low-cost indexed portfolio achieved a return of approximately 8%/year over the past 20 years - a rate that doubles your money every 9 years and, therefore, more than quadruples assets over two decades.  We know it achieved this performance over a period that was extremely difficult at times.

We also know that Warren Buffett, the most successful investor of our era,  is a proponent of buy-and-hold.

Here are some further thoughts on buy-and-hold:

THOUGHTS ON BUY-AND-HOLD



The bottom line is each investor has to decide on their own whether active trading, tactical allocation, market timing or buy-and-hold is the way to go .

Fired Again!

Yep, fired again.  Actually, this way of putting it came up as a result of an interview of me by Millionaire Teacher author Andrew Hallam.  As Andrew and I  discussed, a major part of my practice is to get clients to the point where they can take over their investment management.  It's not for everybody.  It's like taxes.  Some people prefer to do their own taxes, some not.  With investments, some people will let their emotions run their investments and, in the end, do more harm than good, get stressed out, and let volatile markets make them miserable.  Others just don't want to be bothered and value the comfort of a professional doing the nitty gritty work.  I respect that and welcome those clients as well.

But for some, we go in with the objective of the client taking over the reins one day.  I am proud of this service for two reasons.  First, I don't know of anyone else who really does it on a 1-to-1 basis. Secondly, taking over the reins can really make a huge difference in the size of the nest egg as people approach retirement and go through retirement.

This recent firing involved a 9-month collaboration.  The client is a widowed middle school teacher.  As is typical, I moved her from commissioned brokers who put her into expensive load funds to low cost well-diversified funds at Charles Schwab.  Thus, she moved from being charged somewhere between 1.5% and 2.5% of assets under management to funds that charge between .08% and .30%.  My fee added .4% *.75 or .3% over the 9-month period.

Her account, consisting of 3 funds, totaled approximately $400,000.  Paying brokers between 1.5% and 2.5% amounted to approximately $6,000 - $10,000/year.  Throw in sloppy tax efficiency management and poor performance, which she was experiencing, and all I can say is ouch!!!

Today, she understands the well-defined asset allocation model that fits her risk tolerance, as shown here:

Source: Charles Schwab

CLICK TABLE TO ENLARGE
She has learned to use this table every several months.  She now knows the funds for each asset class and how to figure out how many shares to buy or sell to rebalance.  She knows how to place the trades online; she knows the difference between bid-ask and how to put a limit trade in.

As time goes by, she knows how to monitor performance as shown in the following table:

Source: Charles Schwab

 CLICK TABLE TO ENLARGE
Disclosure:  Her out performance is not indicative of typical performance.  Moving from mutual funds to ETFs in a rising market and putting her cash holdings to work in the rising market produced the abnormal returns.  She understands that, over the long term, the objective is to perform close to the benchmark model return.

Many times potential clients come to me puzzled, wanting to know why their accounts are not higher given that the market has moved higher over the last several years.  Well, the answer is simple.  What has moved higher is their advisor's account at the expense of theirs.

The real payoff for this client will be in a few years when she retires and rolls over her 403(b).  At that point, she will be able to manage all her assets efficiently in line with a well-defined asset allocation model.

Although she fired me, she knows that I am an email or phone call away for any questions she has going forward. 

Disclosure:  This post is for educational purposes.  Individuals should do their own research before making investment decisions.  The Schwab charts come with disclosure statements that should be read before utilizing.  They are used here for illustrative purposes.  Other brokers provide similar investment tools.