Why Is America So Pessimistic?

 Random Rant.

The S&P 500 has set new all time records.  A simple buy and hold policy has more than quadrupled investment assets over the past 20 years.  It is fairly easy to get ahead, be financially secure, and enjoy a peaceful existence in this country.  Yet polls show a huge dissatisfaction.

Stock Market Surge Bypasses Most Americans, Poll Shows (David Lynch/Bloomberg)

After reading the article, take a gander at the comments.

At the risk of stirring the hornet's nest, I would argue that it isn't that hard to get ahead in this country. Sadly, more and more of those who understand this are trying to get across our borders.  They are willing to take jobs Americans turn their noses up at.  When I started college, I worked in the laundry at NIH in Bethesda.  I gathered the gowns, etc. throughout the hospital and delivered them to the cavernous laundry in the basement.  How many young people would take that job today, given the choice of working or not?  It was a nasty job.  But, for sure, it served a purpose - it kept me motivated in my studies.

But I'm in the weeds.  Back to the "getting ahead" proposition.  Just about anyone willing to work hard with a decent high school education can enroll at the local community college and, within two years, get  a "good job" in the medical field or elsewhere making good money.  Plumbers, construction workers, and automotive technicians make good money.

This, of course, raises one hurdle (that I saw firsthand by teaching 12 years at the community college level); and that is getting a solid background in high school.  I have experience here as well - I substitute taught for a year and a half in the public high schools, an experience I highly recommend. And the high schools are a huge part of the problem.  A goodly portion of the high school population is being cool by playing games and learning little of value for a free market capitalistic system.  In today's vernacular, many graduate with skills that are barely worth the minimum wage--if that.

They enter the local community college needing remedial courses for the material they should have learned in high school.

Some people like to fall back on the "I can't afford college" argument.  Guess what?  I and many others couldn't either.  I took a year off after high school, lived at home, and saved every penny I made for college.  I worked 60 hours a week that year and then entered community college.  After that, I was drafted into the Army and used the G.I. Bill to pay for the university level as well as worked part time. Instead of going the military route, a young person today can take those 2 years to work and save.

The bottom line is this:  most young people can gain the skills necessary to make a meaningful contribution to the economy without going into debt.   News flash:  Making a meaningful/valued contribution is what is required in a free market economy.  I'm not saying the journey is easy, but most would agree it is highly rewarding.  The hardest part for young people today is probably the removing of the headphones, the giving up of surfing the internet, and the limiting of gaming. 

IMHO, the glass is half full--not half empty.

Compare 4 Bond Funds in 15 Minutes (or less)

OK...so you're facing a choice of several bond funds, and you're not sure how to proceed.  You know that duration is important and you've checked that at

Morningstar.

You know that yield is related to duration and quality of holdings - that higher quality means lower yield.

You know that price and yield are inversly related - that an increase in yield is the flip side of a decrease in bond prices.

Still - how have bond funds performed?  Reflecting on this a bit, you realize that last year saw an increase in yields; so it could be an indicator of future performance if you believe that yields will continue to rise.  To see the 12-month change in yields, you can go to

Bloomberg

and find:

Source: Bloomberg

CLICK GRAPHIC TO ENLARGE
As you can see, the benchmark 10-year Treasury Note increased in yield by 75 basis points from 2.04% to 2.79% over the past 12 months.

Again, as noted above, bond prices fall in this kind of environment.

Assume we are considering 4 bond funds:  AGG (benchmark Barclay's Aggregate Bond Index), CSJ (short duration corporate bond fund), HYS (short duration high yield bond fund), and JNK (long duration high yield fund).  In particular, we are interested in how the funds performed over the past 12 months.  Aside: if you need a list of bond ETFs, go to

Bond ETF List .

OK ...we're ready to roll.  Start the 15-minute clock.

Go to

Yahoo! Finance 

Find the quote box on the left hand side, put in your first fund's ticker symbol AGG, and click "Go." Find the graph on the right hand side and click 1 yr:

Source: Yahoo

Find the Compare link (see below) and put in the ticker symbols of the funds you want to compare.  You'll note that you get drop-down lists when you put in the symbols, and you need to carefully select the right funds!

What you end up with, in the Yahoo! graph, is the percentage change in the price of the funds - not the total returns.  To get total returns you can go to the Morningstar site and find performance data.

Source:Yahoo

As expected, AGG with its lower yields and relatively higher duration had the biggest negative price change at slightly more than -2%.  The best performer was the short duration, high yield fund HYS.

One point to note is that the price of CSJ was fairly stable over the year.  It has a yield of 1.14% (pretty hefty compared to today's money market rates).  It is the type of fund that yield seekers who can withstand some price volatility find attractive.

So, my challenge to you:  pick 4 funds (can even be stock funds!) and see if you can get a quick picture in under 15 minutes.  If so, then you are on your way to becoming  the Rachel Ray of the investing world ;)

Disclosure:  Past performance is not necessarily indicative of future performance.  This post is for educational purposes and investors should do their own research or consult a professional before making investment decisions.  Some of the funds mentioned are held by me and my clients.

Make Your 401(k) Administrator Read This Article

Along with many others, I have been pounding away at the importance of fees for nest egg accumulators.  Happily, these efforts are paying off; and more and more is being written on the impact of fees.  Sadly, however, many of the decision-makers (read plan administrators) still don't know what they are doing and select highly priced funds for company 401(k)s.  So, to make this real easy, copy the article at this link

Give Fees an Inch, and They'll Take a Mile

by Jeff Sommer in the New York Times, 3/2/2014.  Note, also, that the article has the following important link to a Securities Exchange Commission bulletin

How Fees and Expenses Affect Your Investment Portfolio

In the SEC bulletin article, you'll find the following table:

Source: Securities Exchange Commission

CLICK TO ENLARGE.  The chart shows that, on $100,000 over 20 years, a seemingly small 1% fee will take $28,000 from the nest egg. Assume 4% growth in the foregone funds, and it costs another $12,000.

Plan administrators need to understand these numbers and at least offer inexpensive funds to plan participants.

Many individuals have a broader problem, of course.  You may have rolled over IRAs and taxable accounts.  Understanding how fees affect the overall structure of these accounts over the long-term and minimizing these fees are one of the best ways to use your time in preparing for retirement.  If you are a bit shaky in this area, find a fee-only financial advisor and get hourly consultation on your overall fees.  Again, it could be one of the best investments you ever make.

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.

Organize Your Investments in 15 Minutes

Every investment advisor has seen the situation where a new client plops a shoe box or accordian folder stuffed with account statements on the desk and proclaims he or she "needs help."  Although the first inclination is to reach for a bottle of Excedrin or something stronger, it isn't necessarily a bad state of affairs.

In fact, for many DIY investors, it is the beginning that will put them on a path whereby they can breathe easy.

If you don't have statements on your accounts, then you need to take a step back, get online, and print them out.  If you haven't set up your online access, you need to do that.  Don't procrastinate - DO IT!

So, back to the beginning.  Some investors at this point have several savings accounts, a couple of IRAs (both traditional and Roth), a 401(k) or 403(b), etc.  Life is complicated in the 21st century.  Take a Zen attitude, and be happy that you are not in most parts of the world where there are no viable capital markets for securing a retirement.

Step 1 is to order the accounts.  The first group includes savings accounts and regular brokerage accounts.  These are taxable accounts.  Simply, if you earn $1 of interest on the assets in these accounts, you pay taxes on the earnings this year.  The second group includes the IRAs and 401(k) accounts. Here you mostly have accounts built up from pre-tax monies.  Taxes on earnings and capital gains in these accounts will be paid when withdrawals occur.  There are all kinds of rules on these accounts involving when withdrawals can occur without penalty, RMDs, etc. that should be learned as time goes by.  The final set of accounts is comprised of Roths, if any.  For these accounts, taxes have already been paid.

Step 2 is to seek opportunities to combine accounts.  The fewer account statements you have to handle, typically, the more control you have over your finances.  I run into many people who have so many accounts even Einstein wouldn't be able to keep up.  In fact, let me take a potshot:  it seems to me that doctors take a little bit of every financial product that walks through their doors, and a lot walks through their doors!  I've wondered about this and concluded that, because doctors are smart and financial product sales people are clever, there is a natural match-up.  News flash for doctors:  you don't need 6 different annuities (in fact, most annuities are horrible investments; but that's a whole different subject!).

Step 3:  total up the accounts each quarter.  You'll want to look at money market accounts and cash equivalents and ask if the total is what you want for emergencies - think weddings, funerals, roof leaks, erratic employment income, etc.  Looking way down the road, you'll note that withdrawals in retirement will pretty much follow the ordering--with the first withdrawals coming from the taxable pot, then the IRAs, etc., and finally the Roths.  As you look at your contributions, you also want to to put a fisheye over on your credit situation and ask whether the marginal dollar is best applied to paying down debt or going into your 401(k).

So, the bottom line is that spending a little time getting your investment accounts organized is a necessary first step to managing your assets and asking the right questions.

Past Performance Feeds Financial Media

OK... stocks fooled everybody in 2013 and spurted ahead over 30%. So what do we get in the media ?

•  3 Reasons to Be 100 Percent Invested in Stocks by Dana Anspach
• Some "prudent" strategies downright reckless, says Cramer by the irrepressible Jim Cramer

And so it goes, as rear view mirrorers give advice to wimpish Wallys and his ilk to get them further into the deep end.  This punditry theme extends to media interviews you see on the financial networks, popular investment books that climb the charts, and the newsletter industry.

But where were these articles in early 2009 as investors stared bug-eyed at stock portfolios down 50%?  2009 was a time when these types of articles could have done a lot of good.  Mostly they would have been ignored; but, for those who heeded them, the advice would have paid off.  Back then, though, the articles were about investor portfolios being to risky!  The media was inundated with articles on how investors should reduce risk.

Let me be clear.  I have no idea where the market is headed.  Pin me down and make me make a guess and I would say it's at the pricier end of the spectrum.  Who knows, though?  Next year this time it could be 20% higher, and  readers will think "I should have listened to Anspach and Cramer."  What I do know is that the evidence shows that thinking hard about asset allocation and sticking with it thru the ups and downs has outperformed strategies that chase up markets and panic in down markets. 

DIY investors should know that one of the first propositions that is demonstrated early on in an investment course is that past prices don't contain information on where prices will go in the future.  One place to find the voluminous studies supporting this proposition is Malkiel's book A Random Walk Down Wall Street, now in its 8th edition.

So, bottom line:  IMHO, have a well thought-out asset allocation and stick with it.

Is "Buy-and-Hold Dead"?

Is "Buy-and-Hold" in Here?

I quite often hear the phrase "buy-and-hold is dead."  In fact, two years ago a money manager stood in front of the American Association of Individual Investors in Baltimore and proclaimed the demise of buy and hold.  He was promoting tactical allocation, of which he is a practitioner and would be glad to tactically allocate your assets for 1.50% of your assets annually.  Perhaps not as remembered by some in the group, there was a member who pressed the speaker on his current allocation.  He responded that his tactical allocation indicators had him heavily into cash.

Given how adamant he was about his style and the hindsight we now have for the past 2 years, I often wondered how he did.

It is hard to get performance data on specific managers, for good reason:  managing for individuals presents unique cases in every instance.  For example, some clients come in with load funds and stocks that have large capital gains, etc., requiring careful management from a tax efficiency perspective.  As a result, it is not easy to tell if a given money manager is doing a good job.  Furthermore, you can't ask clients because many clients don't know.  I've had people tell me their investment manager did great last year because he made them $18,000.  Think about that for a moment.  It actually tells you nothing.

I follow up by asking what their return was.  Typically, they have no idea.  At that point, it is useless to go the next step and ask about risk.

So it is difficult to assess how investment managers perform.

But what do we know?  We know that a well-diversified, low-cost indexed portfolio achieved a return of approximately 8%/year over the past 20 years - a rate that doubles your money every 9 years and, therefore, more than quadruples assets over two decades.  We know it achieved this performance over a period that was extremely difficult at times.

We also know that Warren Buffett, the most successful investor of our era,  is a proponent of buy-and-hold.

Here are some further thoughts on buy-and-hold:

THOUGHTS ON BUY-AND-HOLD



The bottom line is each investor has to decide on their own whether active trading, tactical allocation, market timing or buy-and-hold is the way to go .