Party Question

 I attended a holiday party this past week and became involved in a game of answering broad questions. One was "what advice would you give your younger self?"

The usual answers were forthcoming : 

-pay more attention to a career

-be more honest

-appreciate my parents more 

etc.

I reflected for a moment  and said, "I would tell my younger self to sell the house, borrow as much as I could from family and friends, sell my stuff and get my hands on every last cent to invest in Amazon stock."

This got some laughs and of course it comes out after perfect hindsight. But it does contain some nuances I believe a young person today would do well to think about .

First off, looking back we now know Amazon has done extremely well as has all of the so-called "magnificent seven." Go back far enough and this wasn't clear. It was an online bookstore for crying out loud! We probably would have preferred Blockbuster or something of its ilk.

But we couldn't have foreseen how the economy would transform. We couldn't foresee packages being delivered to our door, In some cases by drones no less. We couldn't foresee people carrying around minature computers and using them as phones! So secondly,  a very important message comes through: we cannot begin to fathom what the economy will look like thirty years down the road say. Especially with the rate of innovation taking place today.

Thirdly, there is something we do know or at least are probably willing to bet on and that is that the there is a really good bet to take advantage of : that the overall economy will likely prosper to a great extent. Look at where we are today after dot.com bubble, a housing crisis and a pandemic.

So, what is my serious advice to my younger self? It isn't original. It doesn't take a PhD in Economics. It actually is proposed by many serious market thinkers including Warren Buffett no less. Buy the entire economy. Don't try to guess the nest Amazon or Apple but invest in an S&P 500 index fund.

I gave my answer, got some laughs, and proceeded downstairs to shoot pool.

Deja Vu?

 In the early 1990s the consensus view was that Japan was on the road to economically conquer the world. Then it ran smack dab into the leveraged real estate trap, the bubble exploded, and to this day still have not come back.  

Today global financial markets are fixated on China's Evergrande and its over leveraged real estate problems, with bankruptcy a real possibility. This throws a bit of a roadblock in front of the consensus view that China will be the pre-eminent economic power within a few decades.

Deja vu all over again? Yogi Berra.

Catching an eel

 

 I had to chuckle watching Fed Chairman Powell's post FOMC meeting press conference yesterday. The reporters never give up seeking to pin him down but he is much to slippery for that.

One example: He said a "good employment report" could get the taper under way. Well, what exactly is a "good employment report"? This reminds me of the committee's accepance of inflation running above target for some unspecified period of time.

By the way the Fed forecasts inflation of 2.2% for 2022. Two questions: How much over that level will they accept? Are they in la-la land? 

A Lady With Problems?

Sometimes facts aren't easy to grasp:

• Gloria C. Mackenzie formerly of Maine now of Jacksonsonville Florida
• 84 years old in mid 2013
• mid 2013 wins $278 million after taxes lottery

So, you're thinking "great" she rides off into the sunset and enjoys the latter years of her life? Not so fast. Fast forward to today.

Her son, who has a power of attorney, hired an "advisor"/radio personality who apparently put her into cash equivalents and charged her $2.0 million/year. Her son is trying to get half of her winnings saying he helped in some round about way to pay for the ticket.

By the way, she won because a couple allowed her to move ahead of them in line when the ticket was purchased.

Anyways now at the age of 90 she has brought a lawsuit against her son Scott and the advisor on the grounds they violated their fiduciary responsibility.

This case is interesting from a couple of different angles but for us it is mainly in the asset allocation and whether it is appropriate. Because it is so much and because she is so elderly she should very probably have some exposure, at least 30%, to equities simply because the investment horizon goes beyond her to someone or some entity considerably younger. In fact, I would have pushed pretty hard for at least 50% equities. 

Secondly, she should have pinned down the advisor on his fee. Obviously, $2.0 million for a portfolio of cash equivalents is egregious. 

If you are interested in following developments just Google "Gloria C. Mackenzie".

Putter Around On Your Broker Site

Choosing a discount broker is not difficult today. There are several good ones out there and there are unbiased evaluations of them that prospective customers can exploit. Here is one at

NerdWallet .

Sometimes I counsel people who are looking for a broker and I suggest Schwab but point out that there are others that are also good such as Fidelity, TD Ameritrade, Vanguard etc.

I also suggest that if they are really on the fence they can open an account with the minimum and then do a couple of transactions to see if it is a good fit.

But beyond this it is also useful for just about every investor to putter around on their brokerage account. So many times I hear "I didn't know they had this". Many times investors are paying for information in other places that is available for free on their brokerage site.

With this in mind I thought it would be useful to go over some of the things I look at on Schwab and elsewhere when I consider a stock. To be clear I am basically an index fund guy but I do invest in individual stocks from time-to-time and I also have a dividend portfolio where I research individual companies.

So, suppose I'm interested in Home Depot (HD). I go to the Schwab page and put HD in the quote box:

Under "Symbol" click on "HD", This opens a lot of information.

I started formally in the investment business in 1980. The challenge then was to get information. I started with a dial up phone each morning calling several brokers (Lehman Brothers, Goldman Sachs, Merrill Lynch etc.) to get T-bill rates. T-bill rates for crying out loud!

Today the challenge for the investor is to figure out what information they want to look at. Behavioral finance teaches us that there can actually be too much information causing investors to throw their hands up and just walk away. Winnowing it down is a challenge.

So as I look at this page I look at eps earnings date first because i don't want to get surprised by a volatile movement because of the announcement:

Next I scroll down and look at the right hand side where you find opinions of various researchers and Schwab's rating:

This of course is just a smattering of the data on the page. Again, it is a challenge to pick and choose what to look at. For example, I'm not a huge fan of ratings but if Schwab's rating is "D" or "F" I'll do a bit more digging to find out why.

I'll admit also that I am a fan of Ned Davis so I'll typically take a look at their report ,for which you see there is a link.

I next go to Yahoo Finance put HD in the quote box and scroll down the right hand side:

This gives a nice view of the all important earnings versus earnings estimates going back a year. In other words, does the company tend to perform better than expected.

All of this takes longer to explain than to do and is easily carried out to compare two stocks. For example, you may want to compare HD with LOW.

So the bottom line is to putter around on your site to see what is available.

Full disclosure: I am not affiliated with Schwab and I own HD.

Warren Buffet's Advice

In the last post I presented Warren Buffet's often repeated advice to the average investor to invest in low cost index funds. He simplifies and recommends an index fund tracking the S&P 500.

This got me to recalling a recent post on LinkedIn about an Uber Driver who got advice from his passengers. He asks his passengers for the one message in life that they would suggest and then he asks them to write it down for him. He then says he plans to publish the "life suggestions" in a book.

Well, as you might imagine this got a terrific response with many people stating they couldn't wait to read the book! Many responders thought this a novel idea.

To be clear I am all for sharing life living advice especially from those with the experience  of decades manuevering  the pitfalls of the free market capitalistic  hyper-charged consumer driven U.S. economy.

Circling back it is interesting to recall Buffet's advice. After all, this is the advice from the premier investor of our age and has embedded in it the key to a successful retirement for the last 25 to 35 years of our life! You would think that every high school in the country would present this as worthy of consideration for young people. Good luck finding it in a single economics curriculum.

But, given Buffet's investment prowess, why wouldn't better advice be to invest in his company? Well, let's take a look at his record:

                                   YTD     1-yr     5-yr     10-yr     15-yr     20yr
Berkshire Hathaway   4.1%    7.9%   10.8%  13.7%    8.5%    7.7%
S&P500                     17.5%   13.1%  11.7%  15.3%    8.7%    5.9%
(reported in Barron's  from Bloomberg, 4/29/2019, p.16)

As shown he has underperformed from 15 years on in,  weighed down by the tremendous size of Berkshire Hathaway and the significant cash position he holds.

So, to me the bottom line is this: few know as well as Buffett how difficult it is for the average investor to beat the market. His advice to stick with a low cost index fund is worth heeding. That's what I would tell the Uber driver.

Retirement Planning

Just finished the short book,

  How to Retire With Enough Money by Teresa Ghilarducci.

Ms. Ghilarducci is a heavyweight in the world of retirement planning and the overall concern with the looming retirement crisis in the U.S.

So I was surprised to come away disappointed. The book is mainly directed towards promoting her plan which is basically a hybrid of Social Security - take money out of paychecks and have required employer contributions  all invested by professional money managers.

She admits she is no fan of 401(k)s and IRAs. This in spite of some examples in her book whereby they have done well for investors.

My beef is that like so many other instances a government solution is offered in lieu of people taking personal responsibility. Here's the nitty gritty: we expect to reach our mid 60s some day and we know (unless we've been living under a proverbial rock) that Social Security alone will not provide a sufficient income for a comfortable retirement.

So, we can go over some arithmetic in the crazy exercise of trying to pin down how much needs to be saved to reach a so-called magic number.

Forget that. Know that you need to save and the more you save the happier your 65 year old self will be with you. So, look at your 401(k). If it has low cost index funds and especially low cost retirement date funds you're done. Have 10% deducted from your paycheck into these funds.

If you don't have a 401(k) you're not toast like so many commentators suggest. You can open up an IRA and contribute up to $6,000/year. Where? I like Schwab but there are many other places as well such as Vanguard, Fidelity etc. All offer low cost funds that you can invest in yourself or they may offer low cost products whereby they handle all the investing. You just set it up so that a deduction is made from your paycheck on a regular basis.

But don't just take it from me. Here's what Warren Buffett recently said "All you have to do is just buy a cross-section of America and then never listen to people like me or read the papers or do anything subsequently".

So again, this isn't rocket science. And, admittedly, there are some nuances. For example, legally there are some differences between IRAs and 401(k) regarding creditor rights. If you aren't paying alimony payments, are a reckless driver or get in fist fights with your next door neighbor you might want to avoid the IRA.  Ms. Ghilarducci emphasizes this in her book.

I know that a lot of what I have covered glosses over some points that most people may not know, For example, if you open up an IRA with a broker you need to know what a ticker symbol is, how to calculate how many shares you can buy etc. All of this is trivial. I offer one hour sessions at $160 that covers all the basics but you can cover other advisors as well that will do this with you,

Try to Avoid "Tilt"

Poker players know about "tilt". Taken from pinball terminology it refers to losing good poker technique following a "bad beat". Every poker player has been bluffed by a pair of tens when they held a pair of kings. This can play havoc with one's emotions and can lead to stupid (this is the appropriate word) bets. The cure is to get up, walk around, take some deep breaths and know that emotionally your brain wants to fight back.

Well, the same thing happens in the investment world. To be clear I'm not a fan of most investors buying individual stocks but if you want to do it that's ok. I suggest that individuals mostly use low cost index funds and with 10% at most invest in individual stocks.

Still, if you invest in individual stocks so be it.

So, suppose you bought Boeing on 2/22/19 at $424.05. By  2/28 it is at $439.95 and you are high fiving yourself and (big mistake) bragging to your friends. After all you've got a layup with a reasonable p/e, a wide moat (worldwide duopoly with Airbus), and a nice dividend. Your brain is congratulating you on being a genius.

Then the 737 mess. By 3/12 the stock is at $375.41.  Your brain now has all kinds of scenarios including you living under a bridge. You might look at your other stocks and imagine worst case scenarios. This is TILT !!!!!!!!!!!!!!!!!

Knowing that this happens is in itself valuable and can help you calm down. Think back to 2008 and know that many investors blew out their entire portfolios and never got back in. You've read the horror stories.

The other thing that I suggest is to limit yourself to 5% of total assets in any particular stock and 10% to any industry. This is where the value of diversification really comes into play.

Equity Indexed Annuities (EIA))

Here is an excellent,

short piece on Equity Indexed Annuities 

 written by Robert Huebscher and presented  on Advisor Perspectives.

Equity Indexed Annuities seem to offer the best of all worlds: equity returns with no down side risk.

In the article Huebscher shows how these vehicles are misrepresented by insurance salesman. Alas, once again there is no such thing as a free lunch!

Impact of Expense Ratios

Jane Bryant Quinn in AARP Bulletin, April 2019, p. 33 states the following:

Assuming that a $10,000 investment you made in a zero-fee fund grew an average of 6 percent annually, you'd end up with roughly $32,070 after 20 years. The same fund with a 1.1 percent annual fee (also called an expense ratio) would net you only about $25,710, or $6,360 less.

The average stock mutual fund in 2017 charged 1.1%.  $25,710 versus $32,070 is a 20% hit. As a matter of perspective retirees target 4% as a drawdown rate in retirement.

Alphabeticity Bias

In a

recent research paper 

it was reported that the alphabetical listing of Fund choices affects the selections 401 (k) participants choose.

An example was provided in 401K Specialist magazine ( issue 2, page 7) listing 13 Funds alphabetically. They stated that renaming the 11th Fund listed from "Royce Pennsylvania Mutual" to "American Royce Pennsylvania Mutual" and thereby moving it 10 slots higher on the list would generate approximately 20% greater participation all else equal.

An annuity worth looking at (part 2)

In the last post we looked at the basics of the longevity annuity. Simply, give an insurance company money today and at a specified time in the future it pays you until you die. It is like Social Security - a simple product that avoids the number 1 fear of retirees - running out of money.

The longevity annuity can be held in an IRA up to $130,000 and reduce required minimum distributions at age 70 and a half.

So, although I am against insurance products that are used as investment products (which includes most annuities) this is one that can be a good fit for many investors.

The last time we looked at 

an annuity calculator .

Here is another 

annuity calculator at Schwab 

As you can see I put in data for a 55 year old purchasing a $130,000 longevity annuity to begin paying in 20 years at age 75. 

The result would be a monthly payment of $2,353/month beginning in 20 years. This equals $28,236/year.

Here's where a little bit of math starts to come in. If we apply the Bengen 4% rule whereby retirees can withdraw 4%/year and have a low probability of running out of money we can divide $28,236 by .04 to get $705,900. Thus, a portfolio of $705,900 would be required to satisfy the Bengen rule and provide an income of $28,236/year.

Now divide $705,900 by $130,000 and get 5.43. Finally, take the .05 root (1/20) of 5.43 to get 1.088.

So, to get a portfolio that generates $28,236/year would mean the $130,000 would have to achieve an annual annualized return of 8.88%/year. 

To be clear the investor would prefer to have a portfolio that grows at  8.88%/year to reach $705,900 20 years from now versus a contract that pays $28,236/year simply because the portfolio is available for heirs, provides more choices etc. 

Still the annuity is a good fit for some. One important consideration is that it can free up assets to take more risk and thereby generate a higher return over the longer term.

An annuity worth looking at (part 1)

Let me say at the outset that I am not a fan of annuities. I've seen too many that are impossible to understand even by those who sell them, involve egregious commissions and do not deliver what customers expect.

That said, there is one that I present to clients that is worth looking at. It can enable an investor to take more risk by increasing the allocation to stocks and at the same time reduce required minimum distributions at the age of 70 and a half. It is the "longevity annuity".

The longevity annuity is basically insurance against living a long time. Living a long time  is something we all want but it increases the probability that we run out of money. The annuity works like this: give an insurance company money today and the insurance company pays you an agreed upon sum in the future. Now go ahead and live to 110!

Here is a simple calculator provided online by immediate annuities that gives a simple example. You see I assumed 52 years of age, payout to start in 10 years, and a payment amount today of $130,000.

Hit the "Get My Quote" button and you find that the payout is, on average, $979/month.

You may be wondering why I chose $130,000. Simply this is the amount you can hold in an IRA and use to reduce required minimum distributions at age 70 and one half. Clearly those who are very risk averse and afraid of stocks can invest much more in this type of annuity.

So basically, this is very similar to social security and as such it enables you to take more risk, i.e. allocate more to stocks ( the third bucket for those using a bucket approach).

The usual caveats occur: check out the credit quality of the insurance company, look into insurance against bankruptcy provided by the state etc. As usual diversification may be in order depending on the commitment.

The next post will look at another example and look at a bit of basic math.

Thank You Kimberly Clark Corporation!

Back in 2013 I sold a house, got a nice check at settlement and had to consider how to invest it. It was part of downsizing and the important objective was to generate income.

I looked at 3 possibilities: an annuity, the 10 year Treasury note, and dividend stocks.

The annuity paid about 4.5% but you lost control of the assets. For me, that was a non-starter. To be given serious consideration the yield would have had to been considerably higher.

The 10 year Treasury Note yielded 1.83%. It would pay a constant interest payment every 6 months for 10 years. The yield was considerably below the Fed's target rate of inflation of 2% and yields were widely expected to increase. An increase in yield would drive the price down, which did in fact happen - today it yields 2.84%. If that 10 year Treasury Note had been bought and needed to be sold today it would realize a capital loss.

The 3rd possibility was much more intriguing given the goal of generating income. At the time there were many really good stocks with yields of greater than 3%. By "good" I mean stocks that had a long history of increasing their dividend, had a low payout ratio (at least less than 60% of earnings), and a reasonable P/E ratio relative to the rest of the market.

Kimberly Clark was one that fit these criteria. At the time it was priced at $94.24/share and paid a dividend of $3.24/share to yield 3.43%. So, 5% of the portfolio was invested in Kimberly Clark. Today the stock is priced at $105.30 (+16.2%) and pays an annual dividend of $4.00/share. The dividend yield at cost is now at 4.24%! Thank you Kimberly Clark Corporation!

My thinking 5 years ago was to generate a nice income and I wasn't really concerned with the price. I considered it like Social Security or even the annuity - nobody worries about the principle value fluctuating because of the market for these 2. What is of concern is the cash flow or income generated. The risk is that the dividend is reduced or eliminated.

Thus, a big concern was to properly diversify. For example, look at Pfizer and Merck but only choose one.

Lest readers think I cherry picked, I chose Kimberly Clark just because it was the most recent dividend payer I hold. In fact, I have a couple of holdings that have more than doubled. But, again, the price increase is gravy, the dividend is the objective.

And, if I get hit by a truck (actually did in 2017 via bladder cancer but that's a whole different post!) my wife and kids will be glad I didn't hand the money over to an insurance company to buy an annuity.

Be Careful With Statistics

Mark Hulbert recently published a post,

"This is what the stock-market indicator with the best track record is telling us.",

 on MarketWatch.com, based on Ned Davis research arguing against those who believe that high "sideline cash" could lead to a strong upsurge in equities.

Let me say right off that I don't know where the market is going.  I believe that over the next 10 years stocks will do better than bonds and bonds will do better than cash equivalents. I believe that stocks could do a lot better given that the information age puts all kinds of information at the fingertips of very smart, creative, energetic people around the world. But...I could be wrong. Furthermore. I will be the first to stand up and admit that Hulbert is a lot smarter than me and I enjoy reading his posts.

Still, I think one needs to be careful with time series data on stock investing and this post by Hulbert is a prime example.

I wasn't investing in 1951 but I was investing in the 1960s. In the 1960s the investing world was dominated by defined benefit plans and the defined benefit plans were the responsibility of Trustees. Recency bias dominated the the investment process. Trustees looked over their shoulders and saw the markets of the 1930s. As a result allocations to stocks were low.

As an individual my investment choices were actively managed mutual funds that charged a lot expense wise or individual stocks at a high commission. If I wanted to buy or sell I had to talk to a broker who inevitably tried to up sell me by pressuring me into high commission product. To see how my stocks did the previous day I went to the mailbox and got the newspaper.

Today of course I can buy ETFs with the push of a button that track markets around the world. Today we live in a defined contribution world. Today, according to the Census Bureau, 79% of Americans have access to a 401 (k) at work. Today the small investor can easily and economically  invest in the overall market, a choice that has been shown to outperform most active managers over the longer term.

The point here is that using time series data from the 1950s on up even to the 1990s compared to today is comparing apples and oranges. In effect, arguing for the "reversion to the mean" maybe misleading as  the mean could be changing significantly over the period examined.

So maybe you say "no harm no foul", the data just needs to be taken with a grain of salt. Unfortunately I think the harm is greater in the following sense. Many investors can be persuaded by slick talking advisors using this kind of information to alter their investment approach. Using terms like "mean reversion", R-squared, and performance by "quintiles" gives the report seemingly expert opinion.

Just saying!

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.