Investors Need to Do Homework

This week's Barron's (page L6) has an Oppenheimer ad featuring revenue weighted etfs. The ad implies that cap weighted etfs are out of date and weighting holdings by other measures are more sophisticated. They present revenue weighted efts. They say that weighting by revenue is "the smarter way to weight the index".

One example they give has the ticker symbol RWL.

They provide a website to provide info:

Oppenheimer Revenue Weighted ETFs

Click on this page and scroll down to come to "LargeCapRevenueETF" and click on it to get performance on RWL:

What do you think when you see this little table? You may think that the ETF, RWL, matches the market but this isn't the case. These are returns based on net asset values and market prices of the ETF, which over the longer term will be close as they are in the Table.

What is really of interest is how performance has been versus the old stodgy market cap weighted S&P 500. To get that you have to click the "Performance History..." link below the Table.

This tells an interesting story as shown below:

Note the 3 year average annualized return of 9.61% on the cap weighted S&P versus the 8.31% on the touted  "sophisticated" RWL.

The longer term 5 year superior results of 15.04% versus 14.63% on the S&P 500 indicate that RWL got off to a great start. Many times investors chase the hottest concept and then run into a brick wall. For those who jumped in 3 years ago this was the case.

Actually though many investors don't do their homework and are happy with their performance in an up market. In this case they be satisfied with 8.32% and not even realize they would have gotten 9.60% with a basic cap weighted index.

Choosing between these ETFs is challenging to say the least. I tend to stick with cap weighted as a personal choice. I just think the "disrupter" type of environment we are in at the present favors the larger companies. But frankly this could be changing as the rise in interest rates may be leading to a significant rotation.

The bottom line is that investors should dig in and do a bit of research to really understand their investment portfolio.

Portis ripped off

I know this is kind of gross and probably gets me in trouble with the SPCA but it is what happens to copperheads who come too close to my cabin.

Sadly, Clinton Portis the great Redskin running back, considered doing the same to his financial advisors who ripped him off to the tune of $11 million!

Clinton Contemplated Murder (USA Today)

This too often sad tale of professional athletes is difficult to get our head around. The clowns who ripped off Portis, who is one of my all time favorite athletes, were actually registered with the NFL Players Assoc. Financial Advisor program! Doesn't anyone know what's going on? These advisors are dangerous. They are absolutely top of the line at self promotion but have a reptilian part of their brain that focuses like a laser beam on separating people from their hard earned dollars.

Look I can help. I suggest modestly to put aside $2 million and invest it in low cost Funds. Such an approach would have grown to over $8 million over the last 20 years with an allocation of 65% stocks/35% bonds.  I would charge $6,000/year (0.3%) to manage the portfolio. $2 million generates $80,000/year for life. Most people can live comfortably on $80,000/year in retirement.
I'm glad that Portis's friends talked him out of killing the advisors but wish that advisors of this ilk would serve serious time in the slammer.

Don't think these kinds of advisors can't find the average investor . They can. As Woody Guthrie said,  Some will rob you with a six-gun, And Some with a fountain Pen.

Types of Orders

I frequently point out to new DIY investors that buying an index fund is typically simpler than buying something off of Amazon. Generally it is a matter of clicking a "trade button", putting in a ticker symbol and figuring out the number of shares. This merely requires dividing the dollar amount to invest by the share price.

The process is made straightforward and simple for a good reason. The brokers want you to trade.

But a part of the process that may seem a little tricky at first is the type of order. Most orders are put in "at the market". This means that whatever the price is at the time of the trade that is what the buyer or seller will get.

It is good practice though when getting set to do a trade to eyeball the bid and ask prices for whatever you're buying, whether it is a stock or an exchange traded fund. For example, as this is written the exchange traded fund SCHX, a Schwab large cap index fund has a bid-ask spread of $57.03 - $57.05. This spread is usually given as part of the info from the quote box.

This spread means you can buy SCHX at $57.05/share or sell it at $57.03/share. If you are buying a few hundred shares you'll likely pay $57.05share but if you have a few hundred shares to sell you'll get $57.03/share.

If you're thinking this is like a used car dealer you've got the idea. The used car dealer gives you $4,000 for your car and then wants to sell it to me for $6,000. Thankfully the bid- ask spread in financial markets are not this big!

Sometimes you'll want to buy for less than the ask price. For example, maybe you would like to buy at $57.00. Here you would put in a"limit order" at $57.00. You could leave it as an open order or make it good for the day. I always just do a day order. I don't want to be on vacation 6 months from now, long after I've forgotten about the particular Fund or stock and see the order get executed.

The big deal in putting in a limit order for the day or as an open order is that you may not get it done. This is worth thinking about because typically a few ticks are not a big deal. If you're a long term investor and you pay $57.05 versus $57.00 isn't really significant. In fact, you may not get the trade done and 2 days later you give in when the Fund is trading at $57.50.

Been there, done that!

A First Pass Investment Test

We are responsible  for our own retirement. Defined benefit plans are going the way of the dinosaur. Now we manage our own IRAs, 401(k)s and taxable accounts to create a nest egg from which we will drawdown at some point in the future, hopefully when we are retired or semi-retired.

What is not well known, despite considerable publicity, is that billions are going into the coffers of advisors at the expense of the people who need sizable nest eggs to finance retirement. Literally, people are giving up a sizable chunk of their nest egg for a service that doesn't produce results. This has been emphasized by John Bogle (founder of Vanguard), Burton Malkiel (author of Random Walk Down Wall Street), and also Warren Buffett (arguably the top investor of our era).

So what is a fast test to whether we may be in the large group of investor novices being taken advantage of?

Actually, it is quite easy. Take a recent statement and see what you are invested in. You should see ticker symbols for each of your investments. But, even if the investment does not not have a ticker symbol just Google the Fund's description and you should find a ticker symbol.

For example, you may find your IRA holds the Davis NY Venture A Fund. Google "Davis NY Venture A Fund" and you'll find the ticker symbol is NYVTX.

Next, go to www.morningstar.com and type the ticker symbol into the quote box. The summary page you'll come up with shows that the Fund has a load of 4.75% and annual expenses of .89%.

This is an interesting Fund in that it has performed well over the short-term with an out performance of +3.98% over the past year which you can see by scrolling down on the summary page. It is the type of Fund that a "friend" would suggest because he has had good recent performance.

But, alas, your investment horizon extends over decades. And over the long term the performance has not been good versus the S&P 500 Index. Over 5 years, for example, it has underperformed the index by -1.26%/year.

An important factor in this sub par performance is a .89%/year expense charge in addition to the load referred to above. In contrast, the SPY,  S&P 500 Index ETF Fund charges .10%/year.

So, which will perform better over the long term? Obviously, we can't tell unless we have the proverbial crystal ball but my interpretation of considerable research is that the probability of NYVTX outperforming over the longer term is approximately 10%. In other words its like trying to pull a white ball when there are 90 red balls and 10 white balls in the urn.

Interestingly the odds are better than 50% when you ignore costs. These managers are smart and are skilled at picking stocks. The problem is the high fees.

Thus, if you want to get a quick feel on whether you are investing efficiently do this simple ticker test and see first hand the fees you are paying for the Funds you are invested in.

This. of course, hasn't even looked at the other aspect - that of what you pay your advisor.

If you follow the financial news you know that all of these fees - what Funds charge and what advisors charge are coming down because investors are proactively moving to the lower cost Funds.

The suggestion here is that it is easy to see where you stand and to avoid being the last one on the bus.

Graduation Gift

Ok, so you're going to a graduation party and you need a gift. One thing you can count on is that the graduate is financially illiterate. Schools don't teach financial literacy. You may be financially illiterate as well. Or, in fact, you may have a slew of suggestions for the graduate on the financial literacy front. Forget about them and instead consider giving a book that explains systematically, in detail, what they need to know.

I know...they are graduating and the last last thing they think they need is something to read. Emphasize, when you get to talk to them on the side, that this is important reading...perhaps significantly more important than the stuf they crammed in to take their final exams.

The books can be read in one or two weekends, they are very well written and they will make a huge difference in avoiding lining brokers' pockets and getting on the path to a nice retirement. In fact, the books show that it is not that difficult to lead one's last third of life in really nice style.

Here are the books:

• Millionaire Teacher by Andrew Hallam. Now in its 2nd edition this book illustrates clearly how to successfully invest over the longer term. It details Hallam's journey and how he on a relatively modest salary achieved millionaire status at a young age, and now travels the world leading a very envious life style. To be clear the journey he describes can easily be duplicated by following the basic principles he outlines. Full disclosure: I am mentioned very brirfly in the book.
• I Will Teach You to be Rich by Ramit Seth. This book details the steps young people need to take to set up their finances and navigate the work world. 

Both Hallam and Sethi have excellent blogs:

https://andrewhallam.com

http://www.iwillteachyoutoberich.com/blog/

Spending a couple of weekends reading these books could easily make a six figure difference in the size of one's nest egg at retirement.

Trump and the "Fiduciary Rule"

Here's a nice opinion piece on the situation with the "Fiduciary Rule" and its potential blockage as it is on the verge of going into effect written by Mitch Tuchman of Rebalance IRA, "Trump's last-second swipe at an Obama retirement rule" (MarketWatch, 3/22/17).

The rule requires investment advisors, in particular  insurance companies and brokers, to act in the best interests of their clients when offering investment products and making investment decisions.

That they significantly affect investor performance in a negative way is supported by mountains of research. How? By charging 1% and higher to manage assets, putting clients' funds into the highest commission products that charge excessive annual fees and tacking on fees that are cleverly hidden.

And, all of this comes out in the wash. Most people don't read the academic studies on performance that track how active managers perform - just insomniacs and academics. Instead investors look at their accounts, read about markets hitting record levels and get a sinking feeling realizing that they are performing way below where they should be. Bluntly speaking, the fast talking fancy suited expensive brief case toters have sold  retirement dreams down the river - and people eventually get it.

And there is an ongoing push back. Investors are flocking to low cost, index funds and managing or considering managing their own assets. Many are moving to robo advisors and in the process disrupting the financial services industry. They are choosing to bet longer term on the entire economy whether it is U.S. or global rather that the touted ability of stock pickers and market timers.

This of course is what DIY Investor has been about for the last seven years and has referenced Buffett, Malkiel, Bogle, Ellis, Solin and others in the process.

For what it is worth, the whole set up of the movement of  retirement investing away from the defined benefit approach to the defined contribution, i.e. 401(k) played a major role in this enabling of the financial services to take advantage of those trying to plan for retirement. It enabled the complicating of the whole process which many saw as an opportunity to obfuscate the fee structure and take advantage of workers. In short, the average person was put in charge of their retirement but not given instruction on how to go about it!

In my opinion the same thing may be unfolding in the health care industry. It is important to understand a basic finding of behavioral economics: choice isn't always a good thing! This is worth keeping in mind when politicians puff themselves up and proclaim that the consumer will have more choices. Sleazy characters hear this and start to plan on complicating schemes that rip consumers off.

Retirees Don't Run Out of Money

Polls consistently show that the number 1 fear of retirees is running out of money. But rarely do retirees literally run out of money. It doesn't happen that Joe goes to Mildred and says "darling we've only got $100 in our account. What are we going to do?"

Instead, what people tend to do is run out of lifestyle. More typically Joe will go to Mildred and say, "honey, it looks like we can only afford to visit the kids twice this year instead of three times." And Mildred responds, "but Joe we are only 71, in good health, and my number 1 thing in life is seeing my grand children".

Of course, the academic literature needs to simplify and where possible interject the math. So they frame the problem in terms of how much can be withdrawn over a given period without running the balance to zero. The magic number of course, which is debated, is 4%. With a nest egg, the rule of thumb is that 4% adjusted for inflation can safely be drawn down.

Thinking about lifestyle rather than some percentage can be enlightening however. It gets pre-retirees to focus on what is important in their retirement years. How many times do you want to visit the children? How much does it cost to play golf constantly to realize your dream of reaching the pro tour? How big a house do you need to live in and how much does it cost?

In fact, many people will only have a satisfying retirement if they can continue in the same house they lived in when they had 3 or 4 kids at home. It is important, of course, to know this going in.

Then we also have the world travelers working off a so-called 'bucket list". Some people view their dream retirement as one whereby they will be able to take at least 3 major trips/year.

All of this leads to a type of bottom up approach. It suggests the idea that in approaching retirement a list should be made listing the important things that you want in retirement and their estimated cost.
This then can be used to see if the anticipated income stream satisfies the needs. A tricky part , of course, is to keep  medical needs in mind. A  couple's lifestyle can be upended by medical surprises.

On the Difference in Saving Rates

Ben Carlson at MarketWatch has produced interesting data on savings rates in

Opinion: How a slight edge in investing adds up to big money over time.

In his article he starts with a short story from Atul Gawande on how small changes have a big impact in the medical field where people look for big, miraculous changes. As an aside Dr. Gawande is one of my favorite authors and I highly recommend his

The Checklist Manifesto.

So, what is the impact of a small change in the saving rate? Carlson first looks at an example of a household income of $100,000 saving 10%/year and achieving an investment return of 8%. After 10 years this will produce a portfolio value of $132,822. Increasing the saving rate to 11% results in a portfolio of $146,104. He shows portfolio values for 1% incremental returns up to 15% where the portfolio value approaches $200,000.

It is important to note that the period is relatively short in terms of the saving horizon most retirement savers experience. In fact, most savers should be saving over a 30 year plus period!

Carlson also provides an interesting chart showing the impact of marginally increasing your saving rate. He starts, again, with 10% and then increases by 2% to 10.2%.

The big take away is that incremental changes have big impacts over longer periods of time (both in a person's health as well as their retirement program)  but it is difficult to appreciate them because they are barely noticed in the beginning.

A Good Year For Retirees

2016 was a good year for DIY investor retirees in the investment markets. For a basic asset allocation using low cost ETFs the results were approximately as follows:

Large Cap 35% = +11.80% SPY
Small Cap 10% = +19.89% SCHA
International 15% = +4.66% IXUS
Bonds 35% = +2.56% AGG
cash 5% = +0.1%

The total portfolio return approximated +7.77%.

The important point is that it exceeded 4% (the benchmark 4% drawdown rate for retirement) plus the rate of inflation (approximately 2%).

The bottom line is that the DIY investor retiree took his or her drawdown and had more than they started the year with and they are one year closer to the grim reaper. What more could one ask for?

There are some assumptions in here of course. If you invested with an investment advisor who charged 1 percent or more and who invested you in active Funds that follow the
"hokey-poket style" of jumping in and jumping out you likely did considerably less than the above results.

In fact, the above portfolio could have easily been set up on 1/1 and the DIY investor retiree set about enjoying his or her retirement to the fullest. Let the hair pulling over the UK leaving the EU and the Trump election with the barrage of analysis over the stream of tweets to others.

And, oh yes, the grim reaper part is no big deal either. Everyone is one year closer, retiree or not. It is just that many retirees know it and appreciate their time a bit more because of the fact.

Have a great and prosperous New Year and enjoy the ongoing 3 ring circus. As long as they don't get us into a nuclear war it should be pretty entertaining!