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.

Thursday, October 27, 2016

Grant Cardone Shuns 401 (k)

Grant Cardone gave an interview on CNBC trashing the 401 (k) as a savings vehicle, "Self-made millionaire: Don't put money in your 401(k)".

If you're like me you're wondering "who is Grant Cardone"? Google his name and you find that he is a motivational speaker, specializing apparently in teaching people how to sell. In other words, he is a self promoter. If the thought is crossing your mind that we have too much self promoting already we are on the same page.

Mr. Cardone claims he made his first million at the age of 30. He was 30 years old in 1988. For the record, if he had $1 million in a 401(k) back then, invested in the S&P 500, today it would be worth approximately $8 million ( (1.07864 ^ 28) * $1.0 million).

I'm sure he is worth considerably more and could probably easily find out by buying the book he is promoting. I'm sure in his mind he can take people off the street and turn them into millionaires using his sales techniques.

All of this of course is quibbling about hypotheticals in my view. What I do have a problem with is the message to stay away from the 401(k) and try to become a millionaire. The planet is littered with people who have tried and failed and have no back up.

Look at like this. Kids spend the summer lifting weights, throwing a football through a tire and running wind sprints. Then the fall comes and the tryouts for quarterback are upon them and only one gets to be the starting quarterback. Similarly, kids take dance lessons, singing lessons etc. and then the tryout for the lead in the school play is held. One person gets it.

There is only one Tom Brady. Telling people to forget the 401(k) and seek a fortune by starting a business is like counseling a high school quarterback to try and become a low draft pick and be the next Tom Brady. I suggest having a back-up plan just in case.

Mr. Cardone states, "Why would I go to work, have my employer give me another $6,000 a year, and then take that money and send it off to Wall Street, where I can't even touch it for 30 years? 

The answer is pretty straight forward: because by doing so you are investing in the greatest wealth creating economy the world has ever known in the beginnings of the information age betting on entrepreneurs creating products we cannot even begin to imagine. To most people this makes sense when they realize that the day is coming when they will be 65 years old.

Monday, October 24, 2016

Can't Save? Think Again.

Probably the number one excuse for not saving for retirement is that people need every single penny of their paycheck. Most of us have been there and done that. This isn't just at the lower end of the economic spectrum but admittedly is most prevalent there. At least that's the most frequent response I get from people. The "I can barely make ends meet as it is, how am I supposed to make contributions to a 401(k) or an IRA " is a frequent refrain.

But the fact of the matter is people are already saving. It is forced saving. Out of every paycheck 7.65% is deducted for Social Security and Medicare. Think about this. If this was a choice I would be willing to make a sizable bet that many people would opt out and take the 7.65% each paycheck. Clearly this would exacerbate the retirement crisis that is building in this country. Sadly, many people have to be coerced into doing what is good for them.

To hammer home the idea imagine the task of trying to find people, especially as you move down the economic spectrum who don't welcome with open arms their monthly Social Security payment.

As you think about this you realize that this retirement payment is made through the years as you pay off your student debt, take on a house mortgage, have medical problems, have car payments, consider college for the kids etc. In other words, through all the usual excuses for putting thinking about retirement on the back burner.

An important corollary to all of this is that saving is more important than market returns in building a retirement nest egg, especially in the beginning. But many people use the uncertainty of the capital markets as an excuse to shy away. Know this: saving dominates. In fact, as is widely stated savers who are building a nest egg should cheer a negative stock market which gives them an opportunity to buy in at more attractive prices.

Sunday, October 16, 2016

Is This an Accumulator or a Decumulator Market?

In the simplistic world of financial planning you fall into one of three categories: an accumulator building a nest egg, a decumulator drawing down your nest egg and a live for today, borrow and spend type who will worry about retirement when it gets here. For the record there are too many in this latter category.

All three show up on the investment manager/financial planner's doorstep and the fact is only the first two can be helped unless the live for today person has had a revelation and has years to go before they want to build a nest egg or happily has been the beneficiary of an inheritance, won the lottery etc.

So what about the market for the accumulator and decumulator categories? Here are some market indices as reported by Schwab in their performance module. The returns are thru the close of business on 10/14/2016:

Market Index        3 months     YTD     1 year     5 years
S&P 500               -0.9              6.17       9.30       14.15
MSCI EAFE          1.22           -.47        -1.05        5.56
Russell 2000          1.21           8.01        8.25       12.77
Barclay's Bond     -0.50           5.08        3.84         3.10
Citi 3-mo. TB        0.07           0.20        0.21         0.08
S&P GSCI             1.60           7.72     -11.53      -13.54

Note that the 5 year number is an average annualized return. The S&P GSCI is an index of commodities produced by Goldman Sachs. The Citi 3-mo. TB (Treasury bill) return is a proxy for cash equivalent investments.

From one perspective the returns have been good for both the accumulator and the decumulator. They have been good for the accumulator because positive returns keep people in the market. On the other hand positive returns means the market is getting more pricey and sometimes gets investors to take more risk than they should. Accumulators would actually be better off if the returns were negative because then they could pick up shares at a lower price and the probability of strong returns going forward would be greater.

Decumulators should be more than satisfied with these returns as long as they stayed away from commodities, didn't park their retirement assets in cash and followed a well conceived asset allocation/drawdown strategy. Most decumulators are retirees. The behavior of markets for the first several years of retirement are critical. The 65 year old who retired 5 years ago is today 70 years old - by the "rule of 72" the annualized 14.15% return on equities has doubled money in the stock market. A retiree could hardly ask for more! Most will find that they took a nice drawdown and today have more than they started with 5 years ago and yet are 5 years closer to the grim reaper.

What more could they ask for?

Sunday, October 9, 2016

A Big Mistake

Over 20 years ago the bank I worked at was taken over by another bank. Companies are bought and sold all the time. This of course raises the stress level of employees, rumors swirl on who will be let go and who will stay. There is talk of promotions and everyone is focused on a potential reorganization and possible physical move. If you've been through this you know what I mean.

One of the outcomes typically is a short notice from Human Resources informing employees that the 401(k) will be terminated and that the employee has a number of options. They can roll over into the new company's 401(k), they can roll over to an IRA with a broker like Schwab or Vanguard, or they can can paid out a lump sum. Getting paid out a lump sum typically involves a penalty and income taxes.

The big mistake is taking the lump sum. Unfortunately, I saw most lower income employees seeing it as some type of windfall. Visions of a happy holiday season danced in their heads. They were happy to get this opportunity to take the lump sum distribution.

But look at the situation. Suppose an employee back then had $20,000 in his or her 401(k). Let's suppose the employee was 35 years old. They take it as a lump sum payment and pay a 10% early withdrawal penalty of $2,000 and income taxes of roughly 20% say so they get a check for $14,000. Wow! Happy dance time.

But fast forward 20 years and note that over the period a conservatively allocated 65% stock/35% bond portfolio more than quadrupled. The $20,000 today would be worth more than $80,000! The employee is now 55 years old and possibly faces retirement within 10 years - meaning that the $80,000 can potentially tack on quite a bit more. By the rule of 72 the portfolio only needs a return of 7.2%/year on average to double in 10 years.

This is a mistake that comes in many guises. Whenever there is a sum of money lying around there is a temptation to take it. It is like the person who is trying to quit smoking but just can't as long as there is cigarette nearby.

But time goes by and one day we'll all be facing that 65 year old birthday and then mistakes or not will be obvious.

Sunday, October 2, 2016

How's the Market Doing?

When asked about how the market is doing people tend to respond with "it's pretty much going sideways".  Really?

Mostly they focus on stocks which is understandable since stocks are the most volatile component of the markets over the short term. Still I think it is more appropriate to look at markets from a broader perspective.

For example, many investors follow an allocation of roughly 60% stocks/40% fixed income (bonds) and cash. This is a pretty conservative allocation even for those at the beginning of their retirement.

Here is Schwab's model for this particular allocation:

35% Large Cap Equity
10% Small Cap Equity
15% International
35% Bonds
5% Cash

Readers of this blog and many other investors know it is easy to get low cost index Funds to mirror this and similar allocations.

So how is this model doing? Year - to - date thru 9/30 it has  total return of 5.89% and over the 12 months ended 9/30/2016  it has a total return of 10.69%. So the market is hardly going sideways and those who have stayed on the sidelines are falling behind.

I'm just the messenger so don't kill me. And I, along with everyone else, have no idea where the market is going next. I'm just reporting where we are.

Let's consider the results thus far for retirees. For retirees 4% is an important metric. It is the amount that can be withdrawn with an inflation adjustment and have concerns about running out of money be pretty much a non event.

Inflation over the past 12 months on the basis of the Personal Consumption Expenditures (PCE) price Index (the FOMC's preferred inflation measure) is running at 1.7% (ex Food & Energy) through the end of August.

Thus, the retiree who can achieve a return of 4% + 1.7% = 5.7% is right on target. Actually he or she is ahead a bit because they hit the target and they are one year closer to the grim reaper! I hate to put it like that but it is what it is!

In essence the bottom line is that they can end the year with the the same portfolio value in real terms after extracting their income need.

Just one final point on the question " do I have enough to retire?".  As we have seen there has been a sharp rise in the stock market and bond prices from the depths reached in March 2009.

Understandably some people will look at their portfolios, consider Social Security and possibly throw in a pension or rental income, add it all up and conclude they have enough to retire. If you are in this boat I suggest you look at your "nest egg" and only count 80%. In other words take your income from this source at 4% times 80% of your egg. It just means you can withstand a decent size downturn and not be in a quandary. In 2000 and then again in early 2009 market downturns pushed some retirees out of retirement. One of the tricks in retirement is to make it past the first 5 or so years!