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.

Saturday, October 25, 2014

What the Fed Doesn't Get

For some reason, the Federal Reserve still believes that tightly controlling the most important price in the economy - the price of money -  over the long term is the way to meet their long-term objectives of 2% inflation and full employment.  Their policies penalize struggling retirees living off of fixed income and favor the big banks who are subsidized with low-cost reserves.

Controlling prices goes against history and especially recent history. It will land Yellen and, yes, Bernake right in the penalty box with Greenspan.  It will be crowded in there because most Fed governors as well as Fed Bank presidents will be in there as well.  Recall Greenspan's history.  He was dubbed the "maestro" for his rate-manipulating prowess--until that very prowess set off the bubbles in the sector and then housing that resulted in the worst economic downturn since the 1930s and brought the economy to the brink of another Great Depression.

The history is not complicated.  All you need is a chart of the Fed Funds rate:
Source: Economagic

This is the rate targeted by the Federal Reserve as explicitly specified in the statement released at the conclusion of each Federal Open Market Committee (FOMC) meeting.  The rate target is anxiously awaited by the investment community at the conclusion of each meeting, and its changes are predicted and stressed over in the financial press.  If you need an immediate assessment, just check out the circus at CNBC up to and following an FOMC meeting.

Today, and for some time, as shown on the graph, the rate is essentially zero and is expected to stay there for a "considerable time."

All the various interest rates in the economy  are correlated--which means that, by controlling the Fed Funds rate, the FOMC affects your monthly car loan, how much interest retirees receive on certificates of deposit ( a pittance), and even monthly mortgage payments.  It affects the value of the dollar in global trade.  Controlling the general price of money isn't akin to controlling the price of ice cream.

It doesn't take much reflection to realize that investors love that the Fed spells out in excruciating detail its thinking of how it is going to control the rate - especially when the Fed is either lowering or holding it low for a prolonged period of time.

But history shows controlling interest rates isn't all good.  First look at 2003 on the graph above.  For a 12-month period, the rate was brought down to 1% and held there for 12 months.  Why?  An important reason was the bursting of the bubble in early 2000.  But why the bubble?  Where did it come from?  This isn't rocket science.  Most market observers get this part.  From 1987 on, Greenspan stepped in every time the financial markets faltered and lowered the Fed Funds rate, leading to the coining of the phrase "Greenspan put."  It reached a point where investors threw concerns about risk to the wind and even piled into newly issued securities of companies that had only vague business plans and no clear path to profits.

Why?  Hey why not - the Greenspan Fed was the golden goose that would rescue markets.

Econ 101 teaches that controlling prices builds pressures over time.  Historically, this has been seen whenever wages and prices were controlled.  So, here we are today with a long trailing period of time where the Fed--in its wisdom--held the price of money below where normal market forces would push it.  And the pressures have built.  Capital will flow or not flow depending on market views of when the price will change.  Look back at the graph and notice the change following 2003 whereby the rate was pushed to 5.25%!  Capital flowed into housing with mortgage rates at historical lows and then was abruptly cut off!  Jobs were easily and widely available in residential construction, mortgage banking, etc., and then they weren't.

The way off this bubble-creating, capital mis-allocating merry-go-ground is straight forward.  Just target the growth rate of the money supply.  For example, M2 growth could be targeted at 3%, say.  This would then enable the price of money, i.e. interest rates, to be set by the market, as most prices in a free market economy are set. 

Friday, October 24, 2014


I'm a fan of Barron's.  Let me say that right off the bat.  Part of my every weekend is devoted to reading it cover-to-cover.  Even though I'm an indexer, buy-and-hold guy, I like to see ideas and read what people think about the market.  I especially like articles on specific companies and analyst outlooks.

It seems that recently the publication has made a push to present "Top Advisors" and "All Star Advisors."  Every weekly publication now has a list of such advisors.

I even like these lists and reading what the advisors think.  A lot of it is total hogwash, and I have to say that I'm amazed that higher wealth families pay dearly for this advice.  I admit that high-wealth individuals and families need comprehensive services; but, from a lot of what I read, the investment services they are getting are worth nowhere near what they are paying.

What bothers me, though, is that there may be individuals who read this stuff and actually act on it.  Let me give an example.  Top advisor presented on page S19 of last Saturday's issue:  Joseph W. Montgomery of Wells Fargo Advisors.  The write-up says "Old school diversification, with stocks, bonds, and cash, served to pare portfolio risk for many years.  But it failed in the 2008 crash..." It goes on to tout commodities, etc., for diversification.

Really? I sn't there a point where we need to look at the data.  Check out Asset Class Returns A 20-Year Snapshot. by BlackRock.

In 2008, stocks were down -37% (Large Cap Core) and bonds (which "failed"?) were up +5.2%, as evidenced by the Barclay's Aggregate Bond Index, and cash returned + 2.1%.  Reflecting on these numbers and the much ballyhooed pounding of retirees in 2008, one has to seriously question diversification.  UNLESS THERE ARE EXTENUATING CIRCUMSTANCES, RETIREES SHOULD HAVE AT LEAST 40% IN BONDS AND CASH.  Following this fundamental rule enabled many retirees to weather the worst stock environment since the 1930s and come out fine in the ensuing sharp rally.  But, of course, this isn't a "man bites dog story" and, therefore, is not as sexy as the scary "crash destroys retirees nest eggs" write-up.

Just for the record, you may want to check out the returns in 2008 of commodities.  Still interested in diversifying into commodities?

Hopefully, you aren't reading this the wrong way.  I'm not anti-commodities as a diversifying asset class.  The point is to be careful.  If you sell bonds and buy commodities thinking you are reducing volatility, you may be in for a shock.

In the world of investing, math sometimes makes us lazy.  Give me a bunch of asset correlations, based on past data, and I'll construct an optimal portfolio.  Easy...I just feed the correlations into the program and it spits out weightings.  Twelve months down the road, we find that the world has acted a lot different than it has historically.  The price has been paid for lazy thinking.

Here is what investors, even "Top Advisors," need to know and think through.  Bonds are the "flight-to-quality" asset - especially U.S. Treasuries.  Long periods go by and investors forget about this feature of bonds--especially periods like the end of the 1990s and 2007.  Behavioral finance people find that investors ramp up their risk tolerances during these periods and shun bonds and increase stock exposure.  If stocks go up and commodities go up more, a light bulb goes off and the diversifying quality of the asset class is widely emphasized.

The bottom line is:  as always, check claims.  We live in a world where this is very easy.  If you don't, you could fall prey to pure gobbledygook; and it could cost you.

Thursday, October 23, 2014

$300/hour for reading!

There are a lot of whiners walking around today, wringing their hands, complaining about the lack of good jobs.  There are many arguing for a large increase in the minimum wage.  Concern about the expanding wealth gap and income gap between the middle class and the top 1% has turned into a national pastime.
Well, I'm here to tell you that many of these people could put big bucks on the table by just spending a few hours reading some of the books I've mentioned here on an ongoing basis.  The books spell out the basics of how to avoid getting ripped off in retirement accounts, how to ensure you are on the right path to retirement, when and how you need to budget, and how to ensure you've taken the right steps to protect yourself and your family against catastrophe.

As I mentioned in a previous post, I'm getting geared up to present a seminar on indexed investing and dividend investing on November 13 at 7 pm at the Miller Library in Howard County, Maryland.  As I've mentioned before, although  attendees get a lot out of the seminars as indicated by feedback comments, it is those non-attendees wandering throughout the library who would likely get the biggest "bang per buck" for attending.  But personal financial literacy is just something most don't want to be bothered with.

You can read Millionaire Teacher by Andrew Hallam or Your Money Ratios by Charles Farrell or I'll Make You Rich by Ramit Sethi in a few hours.  Any one of these books will put thousands of dollars on the table for most people for just a few hours' commitment.  All it takes is for the light bulb to go off and that little voice saying "Aha, I get it."

I'm an economist.  I've taught Intro to Microeconomics for more years than I want to admit.  One of my complaints about how the price theory portion of the course is taught is that it emphasizes immediate payment.  In fact, in many areas of life, the payment for an act is well into the future and may even not be in dollar terms.  When you sat on the porch and learned from your grandfather how to whittle a flute out of a simple branch, the payoff wasn't just immediate - part of it came years down the road when you passed the knowledge on.

Reading these books will produce a much greater payoff than the $300/hour  headline above, and it will happen over many years.

Saturday, October 18, 2014

Investment Seminar Announcement

I will be giving a seminar/ workshop at the Miller Library in Columbia, Maryland on Thursday, November 13 starting at 7 pm. The presentation will go over two approaches to investing :  (1) low-cost index investing as touted by John Bogle, Warren Buffett, and Burton Malkiel ( author of A Random Walk Down Wall Street) as well as many other knowledgeable investors, and (2) dividend stock investing for investors seeking to develop an income stream in a low interest rate environment.  Also, we will go over a worksheet to determine how to pinpoint whether we are on the right track for retirement.

So bring a friend, bring a neighbor, or suggest it to a co-worker who has expressed confusion on the whole topic of whether they are doing the right approach with their investments.  We live in a world where we are responsible for our own retirement.  This is something many people are getting wrong-- possibly including your neighbors, your co-workers, and your friends.  Get it right and your 65-year-old self will thank you.

I hope to see you there!

Here is a link for the registration : Seminar/Workshop .

Monday, October 13, 2014

Bond ETF Fund Performance (Update)

A Different Kind of Bonding
I last reported on bond ETF performance on 5/23.  Here is a year-to-date update on the performance of funds I follow based on Morningstar net asset value performance data.

Allocating the fixed income portion of invested assets has been a challenge for investors over the past few years and continues as rates refuse to rise in tandem with experts' expectations.

 Not long ago, investors could put the bulk of fixed income assets in an index fund tracking the Barclay's Aggregate Index and then go to thinking about the stock portion of assets.  Not true in 2013, and still not true as we approach the end of 2014.

An important dynamic in today's market is the rising dollar and the lower yields globally.  For example, the yield on the 10-year German Bund is 0.85%, 143 basis points below the 2.28% yield on the 10-year U.S. Treasury!

As you can see, the returns vary widely among the different funds.  Since the last update, long duration Treasury notes and bonds have outperformed high yield instruments; and the yield curve has flattened. International bonds have not fared as well in recent markets.

Unfortunately, most 401(k)s do not offer a decent selection of bond funds - you are forced to select from a couple.  On the other hand, if you have an IRA, you typically have the selection available below as well as many others - another reason in favor of rolling over 401(k)s.

In general, you want to limit, to the extent it makes sense, the bond exposure of your investable assets  in your taxable accounts--where they will get hit with your marginal tax rate as ordinary income--and invest your bond allocation in qualified accounts like 401(k)s, 403(b)s and Roths.

The bogey in the bond market is AGG, the Barclay's Aggregate Bond Index - it is to the bond market what the S&P 500 is to stocks.  Thus, the overall market has achieved a return of 4.10% to date.

Disclosure:  this post is for educational purposes.  Individuals should do their own research or consult a professional before making financial transactions.

MBB 4.27 MBS
CSJ 0.69 1-3 YR. CORP. 
IEI 1.81 3-7 YR. TREAS.
IEF 5.64 7-10 YR. TREAS.
BSJF 1.51 2015 HIGH YLD.
HYS 0.93 0-5 YR. HIGH YLD.

Wednesday, October 1, 2014

9-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 9 months ended 9/30/2014.  Overall, the portfolio returned approximately 4.38%.

For the quarter, sector performance was mixed.  Small cap stocks and international had negative returns.  U.S.bonds and mid cap and large cap U.S. stocks achieved gains. 

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 (%) 9 months ended 9/30/2014
Expense Ratio
AGG  (Barclay’s Aggregate Bond Index)
EFA (EAFE Index)
IWM (Russell 2000)
IWF (Russell 1000 Growth)  
IWD (Russell 3000)