A New Year's Resolution That Pays

It was probably Warren Buffett, but who knows, maybe it was Yogi Berra, who said (I paraphrase), "Don't wait until it rains before fixing your roof."  In this spirit, I suggest the resolution for 2015 to read some personal finance/investment books.  This isn't as painful, for most people, as most resolutions.  It isn't like pushing away the second piece of blueberry cheesecake or trying to quit smoking.  In fact, many people would surprise themselves because it is, in effect, the same as finding money.  The important point to understand is that these books lay out the steps you need to take before "...it rains."

For example, the wrong time to worry about your disability insurance is right after the doctor has told you that you'll need hip replacement surgery.  The wrong time to question your home insurance is as you watch fire trucks pulling up to your house.  And, yes, the wrong time to seriously think about funding life in your 60s is in your 50s.

Here is a post where I listed 4 of the books I recommend most often:

recommended books.

Let me add, as well The Charles Schwab Guide to Finances After Fifty by Carrie Schwab-Pomerantz.

As an example of what you'll find in this book, consider the following table (p. 251):

LIFETIME SOCIAL SECURITY BENEFIT

Source: The Charles Schwab Guide to Finances (p. 251)

The table shows the break-even for a $1,000 monthly benefit.  The payout equalizes, as shown, at age 78 for the earliest take-out opportunity and the full retirement age of 66.  Comparing full retirement age and age 70, the break-even occurs at age 83.

Notable, of course, is the additional almost $100,000 from holding off versus earliest choice for the 95-year-old.

Admittedly, the information in the books recommended here can be garnered by paying an advisor a couple of thousand dollars, and this is a route those with more complicated situations should go if they can afford it.  Still, it can be beneficial even for those of you in this boat to have at least a cursory knowledge of the areas you will cover.

Happy 2015 to you and your family!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!


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Bond ETF Performance (Update)

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I last reported on bond ETF performance on

10/13.

Here is a year-to-date update.

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, corporate spreads widen, and international worries mount.  This was especially true since the last update, as investors piled into Treasury securities and sold high-yield and international bonds.

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.  Most observers continue to believe that rates will head higher, especially once the Fed starts its expected increasing of the Federal Funds rate in mid-2015.

Important dynamics in today's market are the rising dollar and the lower yields globally.  For example, the yield on the 10-year German Bund is 0.56%, 166 basis points below the 2.22% yield on the 10-year U.S. Treasury!  From the perspective of a European investor looking globally, an extra 1.66% in a depreciating Euro market is mighty attractive!

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. Note the -3.81% performance of the international high yield fund!  Note, also, the payoff for being in the 7 - 10 year part of the Treasury curve at 8.45% versus 2.70% for the 3 - 7 year sector!

Unfortunately, most 401(k)s do not offer a decent selection of bond funds - you are typically forced to select from a couple.  On the other hand, if you have an IRA, you  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 5.63% to date. Given that the Treasury portion of this index has increased in weighting over the past few years, it has been especially well positioned for a market where investors are piling into Treasury securities.

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

ETF	YTD RET.	DESCRIPTION
HYG	2.32	HIGH YIELD
AGG	5.63	TOTAL MARKET
SCHZ	5.80	TOTAL MARKET
MBB	6.16	MBS
CSJ	0.48	1-3 YR. CORP.
IEI	2.70	3-7 YR. TREAS.
IEF	8.45	7-10 YR. TREAS.
EMB	6.53	EMERGING MKT.
BKLN	0.17	BANK LOANS
IHY	-3.81	INT'L. HIGH YLD.
PFF	13.38	PREFERRED STK.
FLOT	0.16	FLOATING RATE
BSJF	0.48	2015 HIGH YLD.
LQD	7.84	INVEST GRADE CORP.
BAB	16.16	BUILD AMER.
BOND	6.27	PIMCO TOTAL RET.
HYS	0.44	0-5 YR. HIGH YLD.
VCIT	7.36	INTERM. CORP.

Bond Correlation Data Supports Previous Posts

Recently I wrote two posts on the

hedging property of Treasury notes and bonds,

a property very much unappreciated by many investors.  In fact, I looked through a number of well-known bond books - the types of books a novice investor would pick up at the library or bookstore if he or she was seeking to learn about bonds.  The books waded through duration and how bond prices work and the different types of bonds and the various risks in investing in bonds.  But nothing about the all-important hedging property.

This is important because, when one looks at longer term performance, it is a legitimate question on why bonds should even be held in a portfolio.

And, the reasoning isn't complicated.  Treasury notes and bonds offer a very decent hedge for that very real possibility that stocks could go to hell in a hand basket! I n fact, as pointed out in the previous posts, bonds had a positive return in all of the down markets of the past 20 years.  In 2008, they produced a positive return exceeding 5% as stocks fell 37%!.

Let me put it like this:  if someone tells you they gave up on the investment markets because of what they experienced in 2008, then it is a good bet that they had minimal or zero exposure to Treasury notes and bonds.

Why are bonds a really good hedge?  This isn't rocket science:  when markets get scared, people dump stocks and jump into the safest security in the world - U.S. Treasury notes or even bonds.  In doing this, they push up the prices of notes and bonds, thereby producing a positive return when stock prices fall.

This week, Josh Brown of

"The Reformed Broker"

reported correlation statistics calculated by Richard Bernstein.  If you look at the correlation chart in the article, you find that Intermediate Treasuries and Long Term Treasuries had the highest negative correlation with the S&P 500 of all the asset classes shown over the period examined.

As regular readers know, I am not a fan so much of correlation statistics because they are basically fancy-dancy averages and, as any average can, they have the potential for throwing the unwary investor for a loop.  Everyone has heard the tired joke about the man who crossed the river that had an average depth of 3 feet.

To be clear, let me bring up the obvious deterrent of low rates.  It is important to be careful because the risk of a sharp rise in rates continues to hang out there.  For this reason, you need to be careful in how much is invested in longer duration Treasuries, or bonds of any type.  Nobody is saying this is easy!

In this case, though, the underlying logic is what is important.  In the same way that you may fantasize what you would do if you were President, portfolio managers know what they will do when markets panic.  They will pile into Treasuries!

Robo Advisor or Full Service Advisor?

Put your info online and, for a reasonable fee, a robo advisor (see picture) will come back with a recommended asset allocation and specific funds to invest in.  Also, you'll typically get a lot of personalized reporting on your investments letting you know how much you should be saving, where you can expect to be several years from now, etc.

What's not to like?

Well, a lot, if you listen to full service advisors.  They argue that investments need to be part of the whole financial picture.  And they are more than glad to explain how the whole financial picture can be complicated.  You need advice on when to take Social Security, how to choose a 529 plan, whether to do a Roth, estate planning questions, etc. I nvestments need to fit into this bigger picture and that makes the 1 - 2% fee they charge reasonable for managing your investments, they say.

Actually, there is a third way:  forget the full service advisor and forget the robo advisor and learn how to do the whole thing yourself.  This, in fact, is doable for most people by reading a relevant book, three of which are constantly touted here:

Millionaire Teacher by Andrew Hallam,

Your Money Ratios by Charles Farrell,

The Smartest Money Book You'll Ever Read by Dan Solin.

Each of these books is easy to read - two weekends at the most - and you'll come away a lot smarter after reading them.  In fact, you'll come away knowing exactly how to invest after reading them. Furthermore, you'll know how to decide how much insurance you need, what you should seek in the way of estate planning, and even how big a mortgage you can reasonably carry.  Every family should have someone who knows and understands the information in these books.

As a motivation, you should know that understanding the information in these books will save you a huge chunk of your nest egg over your lifetime.

But it isn't just about do-it-yourself investing.  Most important of all, you'll come away with an understanding of when you need an advisor.  It may be in your 50s when you really want to hone in on whether you are saving enough to get your  nest egg where it should be by the time you reach your retirement date.  It may be that you want a formal outside opinion on your investments or even a formal analysis of the best time to take Social Security.  It may be that you have stock options you need to exercise in a tax-efficient way.

The bottom line is that there are times you need to pay up for advisory services and there are times when it isn't necessary, and knowing the difference can affect your pocket book greatly.  Again, the readings will help.  At the very least, they will help you understand what questions to ask and enable you to participate meaningfully in the advisor conversation - a conversation that some find intimidating.