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, April 28, 2015

Your Investment Horizon Should Probably be Longer Than You Think and What it Means

The biggest obstacle to people investing in stocks is, understandably, the fear of losing money.  But the possibility is reduced the longer the investment horizon.

In my conversations with new clients, I find that most people think of their investment horizon as the time to when they plan on retiring.  Thus, a 50-year-old is thinking in terms of needing a nest egg in 15 years.  Which is, of course, the case; BUT he or she will need the nest egg to last not 15 years but another 30 years, potentially, past that.  Thus, most investors need growth for much longer than they typically think.

This is just considering the "I want to die broke" crowd.  Others have an explicit goal of leaving assets to their heirs.  Their horizon automatically extends a bit to account for younger heirs.

The good news along these lines is that risk, defined as the potential for a portfolio loss, is reduced the longer the investment horizon.  This is typically presented via a chart like this:

Source: Dana Anspach/ Money Over 55

Simply stated, the chart shows that holding stocks, which are most volatile as a sector over the short term, is actually quite safe the longer the investment horizon. The chart shows that, over the period examined, rolling returns for both the 15-year and 20-year periods were always positive as shown by the positive performance of their worst periods!

The significance of this is that the investment horizon is a key input in figuring out the percentage to invest in stocks. 

Behavioral finance tells us that our brains aren't really adept at thinking longer term; but, in this instance, we should remind ourselves of the data when setting up our investment strategy.  The ability to withstand short-term ups and downs of a roller coaster market pays off for those thinking in terms of a longer horizon.

Friday, April 10, 2015

How to Boost a Target Date Return

Paul Merriman of MarketWatch has written an interesting article,

How to double your target-date retirement fund's return in a single move

that is worth reading and considering by target fund investors, especially younger investors, many of whom have been opted into target date type funds.

The gist of the article is straightforward:  put the bulk of your automatic 401(k) contribution into a target date fund, but also put a percentage in a small-cap fund. 

Why small-cap funds?  Although small-cap funds are volatile (will remind you of Jack Nicholson going beserk at various times!), they make up for it with exceptional long-term performance.

A couple of important points:  you need to be able to handle the volatility.  The article doesn't really spell out the asset allocation over time for Jessica, the fictional investor; but it would have been interesting to see where she stood on 1/1/2008 with a "free falling Tom Petty," off-the-cliff experience immediately ahead.  In 2008, stocks fell 37% and then in early 2009 dropped another 50%!

Sadly, the best laid plans many times are trashed in the real world of investing.  It is hard for most people to see something they have built up over a number of years crumble in front of their eyes.

Also, keep in mind the long term covered by the study.  A quick glance at the 

BlackRock sector returns 

(see page 2) for the past 20 years shows that Large Cap Core achieved an average annualized return of 10.5% versus 9.6% for Small Cap.  Standard deviation was 15% for the former compared to 19.6% for the latter!  Thus, you would have slept better and been ahead using Large Cap.

By the way, if you can only stand to read one person in the investment arena,  

Paul Merriman 

would be an excellent choice.  He stands out even among all the other excellent "Retirement" writers at MarketWatch.

Wednesday, April 1, 2015

Update: 1st Quarter Performance of BlackRock Diversified Portfolio

Regular readers know my favorite investment chart is the BlackRock 20-year sector performance.  It details the relative performance ranking of asset classes on an annual basis as well as the performance of an easily replicated low-cost diversified portfolio comprised basically of 65% stocks, 35% bonds.  The diversified portfolio returned 8.7% on an average annualized basis over the 20-years ended 12/31/20114.

The diversified portfolio allocation is an appropriate benchmark for many individuals in their 40s and even early 50s, depending on their specific risk tolerance.  The chart 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 using the data in the table--as it should be as an 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 3 months ended 3/31/2015.  Overall, the portfolio returned approximately 2.17%.

For the quarter, sector performance was mixed with the international (EFA) doing best and large and mid-sized value (IWD) lagging. The bond market (AGG) achieved a positive return as yields dropped over the 3 months.

Weight (%)
Return (%) 3 months ended 3/31/2015
AGG (Barclay’s Aggregate Bond Index)
EFA (EAFE Index)
IWM (Russell 2000)
IWF (Russell 1000 Growth)
IWD (Russell 1000 Value)

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.