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".

I Apologize

I apologize to all those people over the past three years to whom I talked and tried to the best of my ability to get into the stock market. I wish I was more persuasive. We sat together at the table (or Skyped) and looked at the huge amount you had in Certificates of Deposit at .75% or  in  money markets at 0.1% and I pleaded for you to open an account at Schwab (or the discount broker of your choice) and choose a low  fee S&P 500 Index Fund for 60% of the assets.

I argued that the U.S. economy is the most innovative in the world, that products will be forthcoming that neither of us could foresee that would be in demand. We couldn't foresee Fitbits, or driverless trucks, or drones delivering packages. We couldn't foresee virtual reality. But all of it came and is coming big time.

You worried over government shutdowns, a slowing economy, the European Union breaking up and more recently Brexit and Trump. In your thinking you kept going back to the downturn in 2008 despite the fact that you had many years to recover if the market experienced a meltdown in the short run. To no avail I tried to emphasize that such a meltdown is a gift to the long term investor who is accumulating a nest egg for retirement.

The saving grace for me are the many who did invest for the first time and who gained the confidence and knowledge that  put them on the path they need to be on. They  held to a well defined asset allocation and have seen their assets appreciate significantly to return well above the rate of inflation. They learned to manage their own assets and avoid the egregious fees charged by the industry.

They are excellent examples of how straight forward it is to become do-it-yourself investors and participate fully in the free market capitalistic system.

100% in Stocks?

In an interesting MarketWatch opinion piece worth reading, "Why 100% of your investment portfolio should be in stocks," Jeff Reeves argues for investors all-in in the stock market.  The body of the piece, though, seems to argue, understandably, for that positioning for those in their 40s and below which still can be a stretch for many.

He cites the fact that, over the longer term, stocks have always moved higher.  Going back to 1926 and looking at 20-year rolling periods shows that the lowest 20-year return was a positive return of almost 11%.  It is important to note that rolling 20-year returns are obviously not independent.  By using rolling returns, analysts can cull many more data points as compared with periods that are wholly independent.

He also emphasizes the buy and hold aspect.  Jumping in and out can negate the potential positive outcome of an aggressive allocation strategy.  Furthermore, it is not easy to determine if you have the fortitude to stay the course in a really serious downturn until you've experienced one.  Whether you have the fortitude depends on personality and expectations on the use of the funds.  As I often tell people, I have seen individuals who literally have a good day when the market is up that day and are miserable when the market is down on the day.  For these people, no matter what their age, all-in is not a good idea. Actually, if you look at your account more than every couple of weeks, you should probably have some bonds for cushioning purposes.

To get a good feel for your risk tolerance, go back to the market in early 2009.  As most market observers recall, stocks were down approximately 35% in 2008.  What they may have forgotten is that the S&P 500 dropped another 25% over the first part of 2009 through the first week in March!  If you can put yourself back in this time frame, you can get a good assessment of your risk tolerance.  If you were calmly able to stay the course during this period, then your risk tolerance is high--you can readily withstand short-term down turns and focus on the longer run.

A final point to keep in mind as you read the article is that because-something-has-always-happened isn't a logical argument for it having a high probability to continue happening.  Ask the turkey, who is dutifully fed each day by the farmer, about this the day after Thanksgiving, as Nassim Taleb is fond of pointing out.

To me, the reason for aggressively allocating to stocks over the long run is the nature of our economic system.  It rewards innovation, creativity, and hard work.  The best and brightest among us are working 24/7 to bring us what we want in entertainment, the medical field, transportation, apparel, etc., etc.  This is what creates companies worth investing in over the longer term!

Nonsense Reporting

Read this article by Harold Gold of Marketwatch and see what's wrong with it:  "Opinion:  Baby boomers have no idea what they're doing with retirement planning."

I'll help.  The subtitle (referring to baby boomers) says "...over 80% of them have all of their money in equities." Eye popping, right?  Especially for me because I deal with baby boomers all the time; and I can tell you that, if Fidelity found that, then their study was wrong.  Period.

But, of course, headlines and sub-headlines are many times  misleading.  Later in the article, it says that Fidelity found that approximately one in ten 401(k) participants have 100% in stocks.

What is interesting to me is that it wasn't until the 6th commenter that this was pointed out.  When I first read the article and looked at the comments, I wondered if the commenters had actually read the article! I also wonder if the author proofed his own article, misread the statistics, or what?

One final point:  boomers have more than their 401(k) in retirement assets.  They have IRAs which they rolled over and taxable accounts.  Fidelity's study probably accomplished its objective of getting people to throw up their hands and say "OMG, do we need to sell, we have too much in stocks!"

The bottom line is that studies coming out of the financial services industry always need to be read with an eye to an underlying motive.

Some Market Perspective (Part 2)

Yesterday's post focused on the performance of a particular asset allocation that fits many retirees, i.e. those who are drawing down their nest egg.

To get further perspective here are the returns on the underlying market indices for various periods:

                         last 3 mos.       y-t-d        1 year       3 years     5 years
S&P500           -8.90%          -5.75%     -2.49%      13.18%     14.50%
MSCI EAFE    -9.98%          -2.63%     -9.68%        7.65%       5.93%
Russell 2000     -9.43%          -5.59%     -2.68%       13.09%     14.05%
Barclay's Bond     .02%            0.54%      1.65%         1.56%       3.06%
3 mo. t-bill           .00%              .01%         .02%          .04%         .06%
S&P GSCI     -17.60%         -17,80%    -44.12%     -19.68%     -8.29%

The MSCI EAFE is an international stock index and the GSCI is the Goldman Sachs commodity index. Note that the bond index was positive in each of the periods. Note that it returned a positive 1.65% over the past year as the S&P 500 had a -2.49% return. This is what the bond portion of a portfolio is intended to do! It acts as a sort of hedge to the volatile stock portion. To be clear, understand that the low yielding cash portion doesn't typically do this well. Over the past 12 months it returned .02%.

People like to ask about the purpose of holding cash in a portfolio. After all, the other asset classes tend to outperform over the long term. For the retiree drawing down a nest egg cash (i.e. money market fund) holdings are a buffer for meeting drawdowns and not having to liquidate stock or bond holdings in a down market. Selling stocks and bonds in a down market would be a type of reverse dollar cost averaging!  For the younger person, holding cash would be dry powder to put to work in a market like we are having today.

For the record I don't recommend holding commodities separately for the simple reason that commodities are a part of the overall market. For example, the S&P 500 has a goodly representation from the oil sector. So holding a commodity fund would be like double counting. If you have a strong view on commodities you can hold a commodities Fund but understand that you are making an over-weighted bet.

The bottom line here is that investing is a long term prospect. Focusing on short term results and thereby letting your emotions skyrocket in up markets and dive in down markets is typically counter productive.                                                   

Some Market Perspective

The market has been hit hard. A whiff of panic is in the air. China is slowing down big time and  pundits are parading to the financial news networks to offer their disparate views. This is not new. Every correction feels the same. Every correction feels like the end of the world.

So how bad has it been to this point? Well, it depends. It depends on how you are positioned. Back in 2008 when markets were experiencing a much worse environment retirees talked of losing their life savings. This of course got investors who understand asset allocation principles to scratch their heads and wonder how this could be. After all retirees should have a decent representation of bonds in their portfolio and bonds had a positive return of greater than 5%!

I split the investor world simplistically into accumulators and decumulators. Accumulators welcome the current markets because they are building their nest eggs and thereby welcome the opportunity to buy shares at lower prices. The decumulators are primarily retirees drawing down their nest eggs or are close to drawing down their nest eggs. For them market downturns can be traumatic, especially if they don't understand asset allocation.

So, suppose you are a retiree and are decumulating or close to decumulating. Then one asset allocation you could reasonably consider would be basically 40% stocks/60% fixed income and cash. Here is a proposed allocation by Charles Schwab:

Large Cap Stocks          25%
Small Cap Stocks            5%
International Stocks       10%
Fixed Income (Bonds)   50%
Cash                             10%

A quick point on the percentages. Cash at 10% gives the retiree two and one-half years to weather a downturn assuming the usual 4% drawdown rate before even looking to dividend and interest payments.

So how has this allocation fared to date? Here are the numbers through the close of yesterday 9/1/15:

3 months              -3.68%
year-to-date        -1.71%
12 months           -0.90%
3 years               +5.77%
5 years                +7.02%     

The returns for 3 years and 5 years are average annualized returns. These returns on the overall asset allocation can be pretty closely matched using low cost well diversified index funds and avoiding high cost investment advisor services.

I'm not trying to sugar coat the market correction  but clearly anyone who has been in over the long term should see that the situation isn't as bleak as the fear mongers make it out to be. Surely it is worth recognizing that a one million portfolio has seen a $36,800 decrease in value over a short period and that is enough to cause people to lose a little sleep. Another point is that if someone bailed in 2009 and got back in in the last couple of years they must feel snake bitten. But the evidence shows that jumping in and out generally leads to significant under performance.

Cheap Trick

No, this isn't about the 70's rock band (still apparently going strong).  It is about a financial services industry cheap trick.

The lady was from Texas and called with a bit of concern in her voice.  She was selling land that had been in the family for a long time and was getting approximately $13 million.  In hand, she had a proposal to manage the $13 million and was seeking a second opinion.

The proposal wasn't from an asset manager but actually from an advisor who finds asset managers.  In other words, an asset gatherer.  He was from a large network of advisors who gather assets.  He is a middleman.  In other words, if you were selling or buying a house, you can go directly to a realtor or you can go to an advisor who would recommend a realtor.  If people fall for it, the industry would put on as many layers as they could get away with!

The cheap trick, in my opinion (you can make up your own mind), comes in the fee proposal:

As you look at this fee proposal, recall one of the well-known tricks discovered by behavioral finance researchers.  It goes like this:  if you want someone to donate $1, first ask for $2.  Then, after a pause, when you say you have a lower level of participation ($1), you are likely to get it.

Here, when the client is shown the big discount, it looks like they are getting a good deal with the much lower proposed fee.  What needs to be asked is how many clients this advisor has paying the "Standard Fee."  I would be willing to bet he has nobody paying 2.90% and 2.70%, etc.

At 0.98% of $13 million, the fee for 12 months would amount to $127,000 FOR THE FIRST YEAR!
The next question to put to the advisor would be who gets what?  My guess would be that the investment managers would get approximately 0.60% and the advisor/asset gatherer would get a cool 0.38%.

The rest of the proposal is just as laughable (or sad, depending on how you are looking at it).  The asset allocation is based on an 8-question allocation questionnaire.  The end result is 2 asset categories specified to 2 decimal places.  To the uninitiated, it looks very scientific.

But none of the questions asks about her goal for the funds.  In a short conversation with me, she indicated she intended a chunk of the funds was earmarked to go to heirs.  Did the advisor explain to her that her heirs have a considerably longer investment horizon and, therefore, assets intended for them should be invested in other than municipal bonds (especially given the 0.98% investment fee)!

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.

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.

What is Your Investment Horizon?

 If you're like most people, thinking about time is not easy.  In the US, things are old if they are 2 or 3 hundred years old.  Go to Europe and tourists marvel at sites thousands of years old.  The 30-year-old finds it hard to imagine his or her 65th birthday.  It is a challenge thinking about retirement. "That's far off, I have plenty of time to get started later."  This, of course, gets investment people to wring their hands and gnash their teeth.

We realize that time is the investor's big ally.  Even a small difference in return over a long period can make a huge difference.  An 8% return on $10,000 compounded over 40 years gives you $217,245.  Increase the return by 1% and the ending value is $314,094.  Our mantra is "get invested early and correctly."  Warren Buffett is the shining example of this.  Fifty years ago, he was investing in well-run companies and holding on to them.

The time frame is referred to as investment horizon.  Understanding and thinking about your  investment horizon is an important piece to determining an appropriate asset allocation.  Other things being equal, the longer your investment horizon the greater the tolerance for volatility and, therefore, the greater the capacity to take on stocks.  In layman's terms, the longer your investment horizon the more time you have to recover from a market downturn.

Most people have a longer investment horizon than they think when it comes to retirement planning. For example, many people think right-off-the-bat that the investment horizon is the expected retirement date.  And it is, if you think you might drop dead on that date!  Otherwise, you probably want to continue to have your assets earning a decent return.  In fact, you may need them to continue earning a decent return for 30 or more years.

Another consideration is that you may have as a goal to leave an inheritance.  Now the horizon shifts from how long you are going to live to the life expectancy of your heirs.

The bottom line is that your investment horizon is probably longer than you think!  As a caveat, keep in mind the rule of thumb of investing very cautiously for monies you will need within 5 years.  For example, if you are saving for a down payment on a house, your horizon is probably less than 5 years. Keep these funds in very short-term bond funds or money market equivalents.

My Favorite Investment Chart Updated

My favorite investment chart is the 2-pager put out annually by BlackRock:

Asset Class Returns A 20-Year Snapshot.

I take it with me to client calls and encourage clients to study it.  I take it with me to educational presentations.  I have written several past posts describing various nuggets investors, both newbie and seasoned, can uncover by looking at the chart.  IMHO, studying the chart and thinking about what it shows is just as good or better than reading some of the top investment books.

Here is what the first page looks like:

Source: BlackRock

CLICK GRAPHIC TO ENLARGE   The chart shows 20 years on returns on a yearly basis for seven asset classes including stock sectors, international stocks,bonds, and cash.  Each sector's annual return is shown as well as its relative ranking.

What I like about the chart is the white box.  It shows a diversified portfolio which is essentially 65% stocks and 35% fixed income and cash. The actual make-up of the diversified portfolio is shown as the last line in the footnote.  The footnote also includes disclaimers which should be read.

What does the chart show?  First off, notice that the diversified portfolio reduces volatility.  It is never in the top two slots for any given year but also is in the bottom three on only three occasions.  Secondly, notice that chasing "hot sectors" can be disastrous.  In 1998 and 1999, Large Cap Growth led the parade and subsequently fell to the bottom of the pack.  In terms of volatility, take a gander at how often the Small Cap sector return jumps above and below the diversified portfolio.  If you want volatility, this is one place to find it.  It is also where you will find one of the highest performing sectors.

Before you leave the chart, you'll want to notice the anemic return on Cash.  This 20-year period spanned in the chart was scary.  You had the East Asian Crisis, Russia Default sending Long-Term Capital Management into a death spiral, the dot.com bust, housing crisis, Europe struggling, a dysfunctional U.S. government, etc.  Many chose Cash as the place to hide.  It was costly!

Page 2 gives some numbers on the average annualized returns and charts the sectors:

Source: BlackRock

As shown, the Diversified Portfolio return 8.3%.  This is an average annualized return. Notice that its standard deviation (mathematical measure of volatility) is considerably lower that the sectors that outperformed.  The diversified portfolio investor surely slept better over the period than did those who concentrated their investments.

As you view the charts, recall that the biggest mistake that investors make is they pile in at high prices (when all the news is positive) and run for cover at the bottom (when news is horrible).  How many people do you know who gave up on investing in late 2008 when they should have had their buying hat on?

For those with a mathematical bent, returns on various allocations can be calculated from the information given. For example, some readers may want to go through and get a rough idea of how they would have fared if they started with, say, 80% stock/20% bonds and systematically reduced the stock allocation every 5 years or so.  If you need help doing that or a similar calculation, let me know.

Disclosure:  Past performance is not an indicator of future performance.  This post is intended to be educational.  Investors should do their own research or consult a professional before making investment decisions.

Monster Game Babeeeeee!!!!!!!!!!

This ain't me!

Monster game this past Sunday.  Not Michael Jordan monster, but personal monster.  3-for-3 from the 3-point arc and 5-for-6 from the field - 19 in total - blew them out of the gym.  Start the bus up, the team is on a roll.

So what did I do?  Did I do an NFL endzone dance?  Did I make the motion to move the chains as footballers do when they eek out a first down?

Nah.  I passed on all of these and not just because my dance would be horrible.  The fact of the matter is that the game was not the goal.  The goal is to win the championship, and this was one small step.

You're probably wondering what all of this has to do with investing.  Well, fact-of-the-matter is I'm being run over by more and more people doing a victory lap after last year's monster year in the stock market.  Some are the same people who, of course, were walking the ledge in 2008 looking for a good spot to jump head first.

You know what's coming.  YOU HAVEN'T MADE ANYTHING OR LOST ANYTHING UNTIL YOU SELL OR START DRAWING DOWN THE NEST EGG!  In fact, one day I'm going to write a post titled "I didn't lose anything in 2008 even though I was 70% in stocks."  Maybe this will fool some people into thinking I'm the world's greatest stock picker ;)

As it turned out, I stuck with my asset allocation and accumulated funds at bargain basement prices, as many people did, and today we are way, way ahead of the low point in 3/2009.

If you're getting the message here, you are understanding that victory laps here can very well be premature. I n fact, if you feel the need to do something, this is a good time to review your asset allocation and make sure it is where you want to be.  It is a good time to review your bond positioning to make sure it is where you want to be.  Save the high-fiving for down the road.

A tidbit for the older crowd as you do this:  New York Life is advertising a 6.3% payout rate on single premium annuities for 66-year-old males.  For $100,000, you get $525/month as long as you live and, if you kick the bucket soon, your beneficiaries get back what you paid in.  As always, you should limit the amount of assets you put into annuities because you lose control of the money!  Just as important - know what you want going in.  Insurance sales people are some of the best on the planet at selling you what you don't need!

Disclosure:  This post is solely for educational purposes.  Investors should do their own research before making investment decisions.

Is This Your Biggest Investment Boo Boo?

As I was cruising the internet recently, I came across a call for readers to submit their biggest investment mistake.  I chuckled and moved on, easily imagining possible submissions.  There will be those who piled into Apple Computer at the top, those who got out of the market in 2008 but never got back in, and those who (like Enron employees) lost their life savings because their 401(k)s was mostly invested in the company where they worked which went belly up. One mistake that pops up frequently is where people got caught in the dot.com bubble of the late '90s and watched their portfolio implode.

This isn't even touching on the business ventures people have gotten into with their bother-in-laws. 

These mistakes all involve what economists call explicit costs.  For example, it is straightforward and easy to calculate the impact of a portfolio dropping from $180,000 to $100,000 because the dot.com market fell off the cliff or $30,000 put into a business that went belly up.

A more subtle mistake that affects more people, in my experience, involves implicit or what economists call opportunity costs.  To economists, these are very real costs; and in the investment world, a big source is poor asset allocation.  I know some readers are thinking this isn't a problem they may have because they think they don't have an asset allocation.  Well, here's the news - everybody with assets has an asset allocation.  This is akin to the oft-made observation that not making a decision is, in fact, making a decision.

When it comes to  asset allocation, people will say "I haven't decided on an asset allocation so I've kept a big chunk of my money in cash."  OK then.  As I look at their accounts, I still see an asset allocation of, say, 60% cash, etc.  What is the cost?  What about the past 12 months?

As it turns out, a portfolio of 60% stocks/40% bonds + cash is up 8.21% year-to-date.  $100,000 parked in cash since the beginning of the year has had an opportunity cost of more than $8,000.  Consider this over a multi-year period, as happens with some people, and you see why I consider mis-allocation of assets the biggest investment mistake of many.

Admittedly, we don't know where the market is headed in the short run; and, in fact, the cost could be reduced sharply from here or it could go higher.  Over the longer term, though, carefully thinking about asset allocation and potential opportunity costs is critical for retirement success for many individuals and is a potential mistake worth seeking to avoid.

Should I Rebalance?

New DIY investors are really interested in the process of rebalancing.  How often should I rebalance?  How often do I need to check the allocation?  Is there a rule I can follow?

Actually there are no set rules.  It is up to the individual and, in fact, in most cases there is very little activity once the allocation is set up for the index investor.  For those who have a need to be in and out of the market, I suggest a small trading account on the side.

Let's take a look at an actual allocation to see what we're talking about:

Source: Schwab

As you can see, this allocation is based on one of Schwab's models.  There are many others out there as well.  The basic idea is simple:  target a given percentage for the various asset classes.  More conservative investors should target a greater percentage in "Fixed Income" and "Cash Investments."

Most people would want to follow their asset allocation for all of their assets combined, including brokerage accounts, IRAs, 401(k)s, etc.  You can do this the old school way, using an Excel spread sheet, or with online services like Personal Capital that collect account information from various sources.

In looking at the Schwab allocation above, you want to eyeball the "Difference" column.  This tells you when to rebalance.  Note that "Fixed Income, in this example, is under allocated by 2%.  If this is your rule (i.e., to rebalance at 2% difference), then the sector needs to be bolstered by 2%.  As it turns out in this case, this increase can be met by reducing "Cash Investments" which happen to be over invested by 1.8%.

You probably have noticed the "View Table in $" link at the top of the table.  If you click, you'll see the dollar amount to be invested.  Divide by the fund to be purchased and you have the number of shares to buy.  It's that simple.  Inside of 5 minutes, you are done.

Keep in mind that, if you are using commission-free funds (most major providers today - Fidelity, Schwab, Vanguard etc.- offer them ), the number of shares to be bought or sold doesn't matter.  If the commission is approximately $10/trade, then you want to buy sufficient size so that commissions are not having a material impact.

Is This a Good Time to Invest in Stocks?

The headlines blare "Market at 5 Year High."  Graphics on CNBC and Bloomberg Television track points required to get Dow Jones to an all-time high.  Giddiness abounds.  All of this in the face of D.C. craziness, European nuttiness, and economic weakness domestically and globally that could reasonably be expected to slam markets to the mat and get a 3 count.

Individuals as well as professionals built up cash balances, missed the push higher, and returns suffered.  And we know what cash is earning these days.

So, not surprisingly, advisors get the question more frequently these days of whether now is a good time to get into the market.

The people asking the question remind me of people at a swimming pool.  There, you find some people dive right in and others will gingerly walk down the steps at the low end, proclaim "ooh, it's cold," back off, go back in, etc., and take 30 minutes to get in up to their waist.  Each has to be treated differently.

Joe and Suzy Wannabinvested

Take Joe and Suzy Wannabinvested--a couple in their mid-40s.  The first thing I emphasize, and I try to pause dramatically in doing so, is that what they care about is where the market is 25 - 30 years from now--NOT WHERE IT IS GOING OVER THE SHORTER TERM!

Some Joe and Suzy Wannabinvesteds seem to think I am a psychic.  They want me to pull out a crystal ball and say "ooh, look at this, the market will be a lot lower 6 months from now. That's when you should get in."

Sorry, can't do that!

So what can I do to get people started?  First of all, we talk about asset allocation.  Joe and Suzy need a model that specifies percentage to be invested in stocks (big cap, small cap, international, etc.) and bonds and cash.  That's the goal. 

Secondly, we need to find a way to comfortably get to that model.  I suggest all in* (especially if they are making regular contributions via a 401(k) and they are not close to drawing on the funds); but if Joe and Suzy are more comfortable going piecemeal, that is better than doing nothing.  I have in mind a man from several months ago who desperately wanted to get into stocks but couldn't pull the trigger.  I pleaded with him to start by just putting one third of his targeted allocation in - to just stick his big toe into the water.

Alas, the news was just so bad; and he was absolutely sure that a better entry point was down the road. As far as I know, he never got in.  I do know that a better entry point never materialized.

In the course of our discussion, he made an interesting comment.  He said, "I couldn't stand it if my portfolio was down $6,000 over the next month."  This elicits a couple of important points:  (1) You haven't made anything or lost anything until you draw funds from your account or realize gains or losses, (2) possibly this man shouldn't invest in stocks at all.  Point (1) is true on the upside as well as the downside.  Take the case of Apple, as an example.  Think of all the braggarts proclaiming how much they made when the stock was at $700.  Point (2) recognizes that investing can be an uncomfortable undertaking as, for example, flying can be.  There are some people who should do neither.

*There is a difference between setting a record price and a record valuation metric.  In particular, if the headline one day becomes "S&P 500 P/E ratio at all-time high," I will definitely trim back and be more cautious.

How Are Your Investments Performing?

One of my pet peeves is that most investors have no idea how their investment portfolio is performing on an absolute basis.

Most of the time when I ask people, I get a puzzled look and a response that suggests they'll know when they get their quarterly report in the mail.  Of course, the quarterly report will typically be at least a week old.

Sometimes people respond by saying they are doing great - their portfolio is up by $4,320 this quarter.  This, of course, is meaningless--in that it is great if they have a portfolio valued at $140,000 but not so much if they have a $1.0 million portfolio and it depends on how the markets have performed.

Furthermore, it begs the question of performance relative to a simple benchmark.

My frustration comes after years of fighting to get performance data even in managing assets for institutions, such as pension funds, not to mention individuals.

Thus, today when performance is readily available, I find it difficult to understand that investors do not actively seek it out.  In fact, it doesn't even seem to be that important to the investment community itself. This shows up when financial publications do their surveys to report on the top brokers.  These surveys, at least the ones I read, never report on whether brokers report performance and performance relative to a benchmark.  Instead they are concerned with commissions and quality of research and various aspects that concern active traders.  Typically, not even a mention of performance reporting.

Take a look at the present market.  Europe is walking the edge of a gurgling volcano, the U.S. is wily coyote suspended in air after running off a cliff, and the U.S. employment picture is the "Little Engine That Could" chugging up the hill.  Volatility is rearing its ugly head.  How are your investments performing?

One broker that I know of - Charles Schwab - provides performance reporting on a timely basis, on-line, and compares performance to a benchmark based on the client's pre-selected asset allocation model.  I know this is a mouthful, but this is what it looks like:

Source: Schwab

CLICK IMAGE TO ENLARGE Note the information available to the client.  It includes beginning value, ending value, dividends earned, and change in value of the portfolio.  Most importantly, it includes the return on the portfolio (last two lines) for various time periods as well as a return on a benchmark.

The benchmark here is for the "Moderate" portfolio allocation model.  Schwab offers 7 different models for the client to choose from.

Here is what the benchmark is comprised of:

Moderate benchmark was composed of 5% Citigroup 3 month US T Bill (Cash Investments), 35% S&P 500 (Large Cap Equity), 35% Barclays Aggregate Bond (Fixed Income), 15% MSCI EAFE (International Equity), 10% Russell 2000 (Small Cap Equity). Source: Schwab.

Basically this is a 60% stocks/40% fixed income allocation.  Appropriate, typically, for someone who has just retired and who can take a bit of volatility.  For these clients, any performance exceeding 7% is usually pure gravy.

It is important to note that Schwab enables a client to combine accounts or look at accounts separately. Also, the periods examined can be customized--meaning that you can see performance between any two dates of your choosing.

All of this is by no means meant to argue that an investor should become obsessed with performance and check it too frequently.  It is important, though, I believe, to know it is readily available when you need it.  In fact, I believe it is critical to the whole investment process.

Disclosure:  I am not affiliated with Schwab although I do encourage my clients to use them.  Past performance is not indicative of future performance.

Need Help Allocating 401(k) Investments?

source: www.capitalpixel.com

One of the good things about the financial services industry is that there are people who constantly seek opportunities to provide what the market needs.

One service desperately needed is objective advice on allocating 401(k) assets.  In fact, this is an important part of what I do.  Very basically, I look at the total asset picture of clients and manage their assets or recommend asset allocations for them.  I use an approach that stresses tracking markets using low-cost well-diversified ETFs and mutual funds.  My reading of the evidence is that this approach will outperform active managers over the long term after all fees are accounted for.

Many prefer an active approach.  From my perspective, that's ok. There is more than one way to skin a cat, and time will tell if an active approach will add value.

With this being said, there is a free, fund-specific service, Kivalia, that helps investors with asset allocation in their 401(k)s (and 403(b)s and 457s, etc.).  If a fund isn't presently in the more than 225 funds listed, it can easily be listed.

Once in the database, the service produces 3 recommended fund-specific asset allocations illustrating 3 risk tolerances as shown:

Source: www.kivalia.com

CLICK IMAGE TO ENLARGE  On the same page, clicking an icon will enable you to compare the asset allocation of your own portfolio.  Are you more aggressive or more conservative than you think?  Also shown is the performance of the portfolios along with relevant target date funds.

For those who like pie charts, the asset allocation is also shown as follows:

www.kivalia.com

CLICK IMAGE TO ENLARGE Once on the page, you'll also see useful risk and diversification metrics.

To get the full utility of kivalia (the website has the genesis of the word, which you'll find interesting), you have to putter around on the site.  You'll find the ability to be notified of alerts when changes are recommended and that there is a lot of guidance and useful information for those puzzling over the asset allocation decision.  I would suggest that plan administrators take the lead and advertise this service to employees.  They should be pro-active in getting their plans listed and promoting objective advice on investments.

The principals of Kivalia have strong credentials to provide the advice offered.  I would, however, like to see an explanation of how various factors are weighted in arriving at the recommendations.  For example, as readers know, I and many others emphasize costs of funds as an important long-term performance factor.

Disclosure:  I am not affiliated with Kivalia.  This post is for educational purposes only.  Individuals should do their own research or consult with an investment professional before making investment decisions.

A Simple Asset Allocation Spreadsheet

At the bottom of this investment article from Rutgers University, directed to farmers, is a simple Excel spreadsheet one of my clients found for tracking asset allocation.  The spreadsheet is useful for bringing accounts together and determining when re-balancing needs to take place.  As has been discussed here frequently, asset allocation is the most important determinant of overall investment return.

The approach I, and many others, recommend is to identify an appropriate asset allocation and stick to it through market ups and downs.  In this way, the key emotional factors that investors struggle with are defeated.

Cash investments include money market accounts, certificates of deposit, savings accounts, etc.  Fixed income investments include bonds, bond mutual funds, and bond ETFs, etc.

Once you get the hang of it, you should break out equities into domestic and foreign.  Somewhere down the line, you may want to also break out large cap and small cap stocks.

A Bucket Approach to Portfolio Allocation for Retirees

One of my important functions is to advise retirees on allocating assets--a perspective that shifts at retirement from nest egg accumulation to decumulation.  The retiree goes from hoping that markets fall so that he or she can buy assets cheaply to praying for rising markets to push their nest egg higher, from which they will generate a paycheck for the next 25 years or so.

The need to generate the paycheck and the increased sensitivity to declining markets raises the potential for emotional factors to derail the whole process for the retiree.  This was seen in 2008.  With a drop in stocks of 37%, it was easy to understand the fears of those living off their nest egg.

One approach to this problem is the so-called "bucket approach" to asset allocation.  This approach provides a structure for riding out market downturns.  Although it seems unique, it actually is not so different from a standard approach--as I'll explain later.  The bucket approach is very nicely described by Christine Benz, Morningstar's Director of Research in A Bucketed ETF Portfolio for Moderate Retirees.

This article lays out a specific allocation in terms of 3 buckets with recommended ETFs for each bucket.  This creates a nice visual effect for the retiree to understand the purpose of each part of the portfolio.  The first bucket is intended to meet expenditures over the first few years and is comprised of low-risk cash equivalent types of ETFs.  The second bucket is primarily fixed income and is positioned to meet the middle years, and the 3rd bucket is riskier stocks, high-yield bonds and commodity ETFs intended to produce growth.

The advantages of the bucket approach is that, as mentioned above, it should enable the retiree to weather market downturns and visually see how the portfolio replenishes its needs.  Furthermore, it is efficient and doesn't require retirees to spend their retirement managing their portfolios.  Ms. Benz argues that her recommended portfolio should enable a retiree to withdraw 5% of assets, inflation adjusted, over a 20-year time frame.

I believe that her article is useful reading for anyone in retirement or nearing retirement.

As mentioned above, though, the bucket approach is not much different from the standard asset allocation approach.  For example, for some of the retirees I manage assets for and advise, I use the 40% stocks/60% fixed and cash allocation model.  Ten percent of this allocation is cash; so, right off the bat, the usual approach will have the 2 years' cash needs met as in the bucket approach.  Also, the 10% allocation will be replenished on an ongoing basis via portfolio re-balancing.  The 40% stocks is, as above, intended for growth; but, if stocks do very well, they could be used to replenish the other parts of the portfolio and, in fact, could be used to meet cash needs.

One stipulation I put in for retirees drawing down their nest egg is that the yield on the overall portfolio be at least 60% of  cash needs.  Thus, if the retiree is drawing down 4%, the portfolio needs to yield at least 2.4%.  This may mean some jockeying into dividend ETFs, etc.  Thinking about this a bit, you'll realize that more than 2 years' protection is built in !

Furthermore, if the market is down, all cash flows go to cash.  We live in a world where markets have always recovered (at least in the U.S.) and, thus, people believe they always will.  Those in retirement need to be careful, I believe, in making this assumption.

Stress - Can You Handle It?

Barron's reports this week that investment managers have turned bearish and performance numbers show that they are behind their benchmarks year-to-date.  All of this as we see the market starting November with a strong performance.  What do they do now - hold their nose and jump in at the risk of getting whipsawed?  Or do they stay on the sidelines and potentially miss a good move?  Stress is undoubtedly high.

There are a lot of uncertainties - corporate earnings, the election, Europe, the fiscal cliff.  Still, the market holds in.

And this isn't an unusual situation.  It is the nature of the market that many times you can make a list of negatives longer than your arm and yet the market moves sharply higher.  The opposite case is obviously true as well.

One of the benefits of the investment approach I, and many others, choose is that it limits this market  stress.  Instead of the stock picking/market timing stress-inducing approach promoted by the Wall Street community, we prefer to focus on asset allocation and then satisfy this allocation using low-cost, market-tracking exchange traded funds.  We get that the market is going to be up big and down big.  We believe, however, that over the long run the economy and the market will produce good performance as innovation and global growth take successful companies higher.

I realize that some of you may not have bought into this approach just yet and are on the sidelines pulling your hair out.  To you, I offer a piece First Understand, Then Destroy Stress by one of my favorite bloggers - none other than Mr. Money Mustache .