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AAII

One of the best resources around, in my opinion, for do-it-yourself investors is the American Association of Individual Investors. For a low annual fee you get access to all sorts of educational materials on investing,  financial planning, and retirement issues. Included are such things as discussion boards and stock screens. Check out  their website .
Perhaps the biggest benefit is joining the local chapter and meeting with investors to discuss topics of the day. Monthly meetings typically involve discussions and presentations by investment professionals. The Baltimore chapter, of which I am a member, usually meets on the first Saturday of each month. The Baltimore AAII website describes this Saturday's meeting.

Center for Retirement Research Study

The Center for Retirement Research at Boston College has published a new study arguing that younger investors were hurt more by recent market downturns than older investors. They point out that even despite the dot.com and housing crisis downturns, older investors earned in excess of 8.5% on a conservative portfolio - well in excess of the returns achieved by younger investors since they entered the market. The reason is that the younger investors didn't get the huge push higher from 1982 - 2000.
I haven't read the study so I might be wrong but I suspect that the returns are market returns not actual investor returns. This is important because Dalbar presents data every year that shows individual investors significantly underperform markets because their emotions have them chasing the hottest sectors and capitulating at the worst possible time.
In any event the article did bring to mind a meeting with a potential client a bit over a year ago.  She was upset because her portfolio was at $350,000 and it had been at $325,000. I commiserated with her and said it must be difficult when you've invested $350,000 and experience $25,000 in unrealized losses. All of sudden she straigtened up and said. "I didn't put in $350,000, I had put in $265,000 of my own money". The problem of course is that people compare their portfolios to the peak value. This happens a lot with homes. People wring their hands and bemoan the fact that their house which was valued at $450,000 in 2007 is now valued at $385,000. They forget that they paid $250,000 for it.

What happened in 2008????????????

Still not sure about the causes of the crisis of 2008?  Spend 6 minutes with this excellent presentation by Paddy Hirsch. If you've seen a better explanation of what he is talking about (I'm purposely not saying what it is because most of you would run for the hills!) please let me know. By the way every video of his that I've seen is excellent.

Shoutout to juxtaexposed

Thanks to my oldest, beautiful daughter Lori and her beau Matt  (merger in May!!! Yea!!!) for introducing me on their blog juxtaexposed to their fans in D.C.

"1st Quarter Returns 2010" addendum

The Biz of Life has posted "1st Quarter Returns 2010" which shows that a very well diversified portfolio of ETFs achieved a return of 4.26% for the quarter based on Morningstar data. This is worth spending some time looking at and, I believe, is very valuable information. Again, the portfolio is very well diversified. It uses funds indexed to the REIT market, to small cap international, international fixed income and munis, along with more basic ETFs. In all, 15 different indexed funds with their respective weightings are shown.

There are 2 small typos in the data : the VTI fund returned 6.04% rather than 6.4% and VSS returned 4.5% not 4.55%. Also, the ticker symbol for the Wisdom Tree fund is DLS not WLS. These results do not affect the conclusion:  the fund achieved a return of 4.25% for the quarter.

Here's my first question:  What was your return for the first quarter? If you are typical, you'll throw up your hands and say it will take you at least a week, if not longer, to get a number. In fact, you may not be able to come up with a number at all.

Here's my second question:  If you have your money professionally managed, how much did it cost?  I'll help you here. The lowest cost fee-only registered investment advisor will charge you 1% of the market value of your assets. So if your portfolio was $1.0 million, you would pay ($1.0 * .01) / 4 = $2,500. And most people would be glad to pay that because it looks very complicated to set up this kind of portfolio. For the record, I would charge a lot less and seek to show you how to manage it yourself; but that's detailed in other parts of this blog.

The fee you pay your advisor is only part of the story. If s/he is using mutual funds or, even worse, funds of funds, at least 1.4% is coming out before the results are even reported to you. If you are in actively traded funds, there are trading costs piled on. The cost of the index funds examined in the post, on a weighted basis, was .27%!  Not 1.4%.  So, if your advisor's returns are less than 4.25%, it is not necessarily that they are poor performers but could be because of the fees that are taken out all along the line.

Here's the news:  for the first time in the history of markets, small investors can easily get well diversified in many areas of the domestic and global markets at a low fee without a lot of trading restrictions thrown in and worries about capital gains taxes because of active trading.

If you are satisfied that your advisor is a great stock picker or market timer, then by all means stick with him or her. At least, now you have a benchmark to compare them to.

For the record, I want to emphasize that the data here is from sources judged to be reliable but, obviously, cannot be guaranteed and any errors  here are solely my own.

Some ETF Returns

Year-to-date returns, selected ETFs, and markets they track, thru 3/31/2010 taken from Bloomberg

BND +1.39% Total Bond Market
SPY + 5.42% S&P 500
AGG +1.61% Total Bond Market
LQD +1.27% Investment Grade Corporate Bond Market
JNK +4.33% Junk Bond Market