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.

Tuesday, July 29, 2014

Are You Beating the Brokers?

 Do you like stock tips?  Do you use broker stock picks?

Barron's has tracked  the performance of the focus list of 7 brokers over the first 6 months of 2014 ( RBC Is in the Lead Going Into the Turn, Vito J. Racanelli).

Here's the Table showing performance for 6 months ended 6/30/14:

RBC Capital Markets
Morgan Stanley Wealth Mgm’t.
Credit Suisse
Bank of America Merrill Lynch
Goldman Sachs
Stifel  Financial Management
Wedbush Securities
Average Broker
S&P 500 Index Total Return
S&P 500 Index Equal Weighted

Source:  Zachs Investment Research

Note that, although the average return is below the S&P 500, it is because Wedbush Securities bombed with a return of -8.68%.  In fact, 5 of the 7 outperformed the Index.

What are we to make of these results?  First, for those with the time, the resources, and the know how, buying individual stocks is obviously the least-cost solution to managing assets.  Buy stocks versus funds, and there is no annual management fee.  In many instances, this can be a huge savings.  Versus low-cost index ETFs, the savings is there; but it is small.  Secondly, the market-beating potential for individuals managing stocks picked from focus lists, if it is there, probably requires at least a bit of  a buy-and-hold approach.  Thirdly, readers should know that there is voluminous evidence showing that, over the long run, broker picks do not add value and persistence of performance is absent.

The bottom line is that, if you follow the performance of the broker's stock picks over the next ten 6-month periods, historical evidence suggests that you should find no consistent leaders among the brokers.

A big question is exactly how would you incorporate the picks in a viable portfolio strategy?  Do you focus on the winning brokers and equally weight their picks?  Do you maybe use the picks of the top 3 brokers?  Or, should you take a contrarian approach and go with Wedbush?  Or should you go to RBC or Morgan Stanley to get an advisor and have him or her manage a portfolio based on the picks?

To me, it is interesting when you get down to the implementation level.  From my side of the desk, I know there are people who will read this type of article and go out and open an account with RBC or Morgan Stanley.  A light bulb will go off in their brainm and they'll think "my investment approach heretofore hasn't been successful because I've been following the wrong stock pickers."

One consideration is that using an advisor at the brokerage will result in fees that could wipe out the performance advantage of the stock picks.

Tuesday, July 22, 2014

Are You Beating the College Endowment Funds?

The big college endowments are staffed, presumably, with the best and the brightest investment talent--graduates, in fact, of the top business schools in the nation.  They invest in esoteric sectors of the market, use sophisticated tactical allocation strategies, and have access to CEOs and top strategists in the investment world.  Surely they outperform little old you and me?  Not so fast.  Check out this table of 5-year average annualized returns for the period 7/31/2013 presented in the Morningstar article by John Rekenthaler, "Are 401(k) Funds Second-Rate?":

Notre Dame

The average return of the endowments over the period was 4.1%.  Get this:  the Vanguard Target Retirement 2030 Fund returned 5.2%.  No multi-million dollar salaries, no fancy models, no big time MBAs.  If you checked the box at your 401(k) that automatically invested in a Target Fund, you very likely did better than the largest endowment funds!

This is just another instance of so-called "lazy portfolios" tending to outperform 7 out of 10 active managers over the long term.

Saturday, July 12, 2014

Peer-to-Peer Lending

I'm not a fan of Peer-to-Peer Lending or Investing, also known as "P2P."  Let me get that clear right up front.  To me, it may turn out to be one of those areas where the Fed pushing investors into ever riskier areas ends up being regretted.

Still, I do get queries about P2P from clients and others and so thought that this report "An Advisor's Guide to Peer-to-Peer Investing" by John Caldor would be of interest (pun intended!).  The article has a lot of really good info on the subject, including websites to visit.  The best investor is an educated investor.

Some points that interested me in my cursory overview:
  • idea of diversifying to the point that, even if historical default rates occur, the P2P investor still achieves a much higher yield than they would elsewhere at comparable risk.  This is an interesting point on a couple of fronts.  One is that this was the genesis, in fact, of the high yield or junk bond market.  Mike Milken found that this to be the case when doing research for a doctoral thesis.  In P2P lending, if you lend $1,000 by lending $25 to 40 different lenders at rates between 12 and 15%, say, you can still experience defaults at the highest historical rate and come out ahead.  A point of caution, though - historical default rates can be exceeded by a lot.  This was one of the key problems in the 2008 debacle with derivatives!
  • a second point on diversifying.  The article mentions 5 to 8% of total assets be confined to P2P.  I agree.  Remember that diversifying goes beyond number of issuers.  It also has to do with amount in sectors.  If you lend to 1,000 borrowers using 25% of your assets and the whole sector gets hit (think of banks in 2008), you're dead meat (see picture above)!  With flies circling!
  • a third point is the types of borrowers.  I winced when I saw the mention of debt consolidation and moving from 20% credit card balances to lower P2P lender rates.  Ooch!  The borrowers may have issues that lower rates won't solve.
Anyway, for those of you exploring this area, enjoy the article.  Keep in mind I am conservative in the investment arena. Your own research could very well determine P2P is an area you should participate in.

Thursday, July 10, 2014

Can You Handle Investment Risk?

Sometimes it isn't easy to take what's good for us. In the world of investments, volatility, especially on the downside, can be very beneficial if individuals can avoid jumping ship at the bottom and, in fact, keep investing on the downside.

Consider 2 graphs:



The first graph brings to mind the 2008 debacle followed by the subsequent rise to record stock prices. Graph 2 starts at the same spot and ends as well at record stock prices. Which produces the best performance for the long term buy and hold investor automatically buying into his 401(k)? Think about the buying in 2008,2009,2010 at low prices!

The point to think about is that the time path of  markets in Graph 1 that chases many investors away and into cash is in fact what the astute investor building a nest egg wants.

The whole argument gets stood on its head of course for the retiree. Having to liquidate in 2008 was a standard of living changing event for retirees.

Saturday, July 5, 2014

A Tipping Point in Your Savings

 An important milestone in saving for your retirement is when your "nest egg" reaches 2X your salary.  This is nicely presented in Your Money Ratios by Charles Farrell, one of my favorite books mentioned in yesterday's post "The Four Investment Books I Recommend Most Often."

The milestone works like this.  Assume you make $80,000/year and are saving 15% per year.  This equals $12,000/year you are socking away.  Assume, also, that you have a nest egg of $160,000 built up, equal to 2X your salary.  Then, if you earn 4.5% above the rate of inflation and assume that inflation is 3%, you are earning 7.5% for the year.  On $160,000, a 7.5% return amounts to $12,000.

Thus, at this milestone of having a nest egg built up of twice your salary, you are adding the same amount to your nest egg through investment performance as you are from paycheck contributions.

As a point of reference, a well-diversified portfolio comprised of 65% stocks/35% bonds achieved an average annualized return of 8.3% over the 20 years ended 12/31/13.

Friday, July 4, 2014

The Four Investment Books I Recommend Most Often

Today you and I need help to achieve a successful retirement.  Instead of a pension that pays us a certain percentage of our pay when we retire, we are responsible for creating a "nest egg" from which we will draw a paycheck in retirement.  But nobody gave us an instruction booklet.  It's like somebody gave us keys to a car and said "go figure out how to drive it."  Good luck at that!

But that's OK because there are really good books that explain how to invest our money appropriately and to put us on the right path for a successful retirement.

Understand that the retirement process is complicated.  We don't know how long we'll live; we don't know what market returns will be; we don't know what the inflation bite will be.  We are told that Social Security won't pay what it has promised, and even the government will likely change tax policies that will affect us.

It is not surprising that many people throw their hands up and choose to live for today.  They choose to let the the last third of their life take care of itself.  Good luck at that!

Another approach is to let advisors talk you into a $3,000 financial plan and charge upwards of 1% to manage your assets.  For most people, I believe this isn't the optimal way to go and, in fact, can be detrimental to the bottom line goal of achieving a successful retirement.  Leave the stock planning analyses of stock options, fancy trusts, and Monte Carlo simulations to those with nest eggs of $5 million or more.

Reading the following four books will put most people on the right path for a successful retirement. These are the books I recommend most often.  They teach the basic principles of investing, whether you can do it yourself, how to pick an advisor if you need one, etc.  In other words, they explain basic principles that a growing number of people, including myself, feel should be presented in high school.

  • Millionaire Teacher by Andrew Hallam.  This book is filled with laugh-out-loud stories that take you on a journey whereby Andrew Hallam, a teacher, became a millionaire at a young age. Read this book in 2 weekends, and you will know how to construct a portfolio using low-cost, well-diversified funds that track broad sectors of the market.  This book will give you the knowledge to pick appropriate funds from the 401(k) choices you are faced with.  It is a great resource for the whole family.
  • The Smartest Investment Book You'll Ever Read by Dan Solin.   Solin's book can also be read in a couple of weekends.  He emphasizes that most people don't finish most investment books because the books get bogged down in esoteric jargon.  His book explicitly avoids this.  Like Hallam, Solin provides explicit portfolios of low-cost well-diversified funds.  As a highly experienced securities arbitration lawyer, he is especially well positioned to help you avoid the traps set up for the novice investor by the financial services community.
  • Your Money Ratios by Charles Farrell.  Charles Farrell will help you answer the nagging questions like how big should your nest egg be, how much you should be saving at your age, what income you should be targeting for retirement, do you have the right insurance?  He provides a worksheet that you'll return to over the years as you approach retirement.  Advisors will charge you up to $3,000 to answer the questions he gives guidance on. 
  • Your Money and Your Brain by Jason Zweig.  Jason Zweig's highly readable book will ramp up big time your sophistication in understanding the pitfalls in picking stocks and timing the market.  It will solidify your philosophical foundation in arriving at the all-important investment philosophy presented by the authors above.  If you like books that make you smarter, you'll love this well-written book that takes you to the frontier of investment research.
These books were chosen especially for the investment novice.  They are well written, hold the jargon to a minimum, and do not require an inordinate amount of time.  They make great gifts for those struggling with their investments.

There are other really good books as well:  for example, any investment book written by William J. Bernstein (example: The Intelligent Asset Allocator) or Burton G. Malkiel (example: A Random Walk Down Wall Street - a must-read if you're going to advise others on investing!) or John Bogle (example: Common Sense on Mutual Funds).  These books get more into teaching how the car works, whereas the above four books focus on how to drive the car.  For most investors, how to drive the car is more than sufficient.

If you have favorite investment books, I'd love to hear them.

Tuesday, July 1, 2014

6-Month Year-to-Date Performance - BlackRock Diversified Portfolio

Regular readers know my favorite investment chart is the BlackRock 20-year sector performance.  It details the relative ranking of asset classes on an annual basis as well as the performance of an easily replicated low-cost diversified portfolio comprised of 65% stocks, 35% bonds.  The diversified portfolio returned 8.3% on an average annualized basis over the 20-years ended 12/31/2013.

The diversified portfolio allocation is an appropriate benchmark for individuals in their 40s and even early 50s, depending on risk tolerance.  The table contains sufficient data, however, to construct a benchmark and analyze performance for any specific allocation; and, in fact, the allocation can be changed over time--as it should be as the individual ages.

Voluminous data from unbiased academic studies have been presented over the years showing that a diversified portfolio of low-cost funds outperforms upwards of 70% of active managers over the longer term, after all costs are taken into account.  These studies cover various time periods, countries, asset classes, and investment methodologies.  In line with this data, the low-cost diversified approach warrants consideration as a benchmark for investors.  It shouldn't go unnoticed that the approach economizes on the investor's time.

Below is an update showing the approximate performance of the diversified portfolio's sectors for the 6 months ended 6/30/2014.  Overall, the portfolio returned approximately 4.25%.

Disclosure:  This post is intended for educational purposes only.  Past performance is not indicative of future performance.  Individuals should consult a professional or do their own research before making investment decisions.

Return (%) 6 months ended 6/30/2014
Expense Ratio
AGG  (Barclay’s Aggregate Bond Index)
EFA (EAFE Index)
IWM (Russell 2000)
IWF (Russell 1000 Growth)
IWD (Russell 3000)