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.
Wednesday, December 21, 2016
Saturday, December 17, 2016
Are You Freaking Out About Bonds?
Interest rates are rising and do-it-yourself investors know that pushes bond prices down. The mainstream media loves this kind of story. Scaring investors is a whole genre within the financial reporting sphere. The reporting today anticipates the shock coming when investors check out their quarterly statements.
Well, actually (here's the news for the mainstream news) most investors, if interested, can go online and see their up-to-date results. Waiting for quarterly statements is last century for many investors, especially DIY investors.
So, what about bonds? Let's take the perspective of an investor, i.e. someone who invests longer term.
The index most widely used to measure bond market performance is the
Barclay's (formerly Lehman) Aggregate Bond Index.
It is an intermediate bond index and is to the bond market what the S&P 500 is to the stock market. It tracks all investment grade bonds in the U.S. with a maturity of greater than one year (once a bond comes to within a year of maturity it is dropped from the index). Thus, the index includes U.S. Treasury Notes and Bonds, Corporate issues, and U.S. Agency issues. It is the most widely used benchmark by professional bond managers to assess and report on their performance. As a point of reference, most surveys are reporting that professional, active bond managers are under performing the Aggregate Index this year.
So how has it done? The yield on the benchmark 10 year Treasury Note has had a nasty back up from 2.22% at the beginning of the year to 2.60% as of Friday's close. So what has been the impact on performance? Shorter term the fear mongers are right. Over the past 3 months the Index has had a total return of -3.55%. But for the year-to-date the return is +1.62%! Pretty good compared to what people are getting on certificates of deposit and especially on money market fund.
In fairness, the return is not great compared to inflation. Still not something to freak out about. The yield on the index is 2.36% and this will be an important return determinant of the the longer term performance.
Most often investors capture this return by using the
AGG
exchange traded fund which has an expense ratio of .06%, i.e. 6 basis points.
Also, it is notable that, just as there are many way to play off the S&P 500 in the stock market, there are many ways to buy bond index funds that will perform differently than the Barclay's Aggregate Index. There are funds, for example that focus on different sectors and funds that have much different durations.
The above information as well as much more can be found by plugging the ticker symbol AGG into
Morningstar.
You'll note at the site that there is a "performance" link which provides up-to-date performance.
Well, actually (here's the news for the mainstream news) most investors, if interested, can go online and see their up-to-date results. Waiting for quarterly statements is last century for many investors, especially DIY investors.
So, what about bonds? Let's take the perspective of an investor, i.e. someone who invests longer term.
The index most widely used to measure bond market performance is the
Barclay's (formerly Lehman) Aggregate Bond Index.
It is an intermediate bond index and is to the bond market what the S&P 500 is to the stock market. It tracks all investment grade bonds in the U.S. with a maturity of greater than one year (once a bond comes to within a year of maturity it is dropped from the index). Thus, the index includes U.S. Treasury Notes and Bonds, Corporate issues, and U.S. Agency issues. It is the most widely used benchmark by professional bond managers to assess and report on their performance. As a point of reference, most surveys are reporting that professional, active bond managers are under performing the Aggregate Index this year.
So how has it done? The yield on the benchmark 10 year Treasury Note has had a nasty back up from 2.22% at the beginning of the year to 2.60% as of Friday's close. So what has been the impact on performance? Shorter term the fear mongers are right. Over the past 3 months the Index has had a total return of -3.55%. But for the year-to-date the return is +1.62%! Pretty good compared to what people are getting on certificates of deposit and especially on money market fund.
In fairness, the return is not great compared to inflation. Still not something to freak out about. The yield on the index is 2.36% and this will be an important return determinant of the the longer term performance.
Most often investors capture this return by using the
AGG
exchange traded fund which has an expense ratio of .06%, i.e. 6 basis points.
Also, it is notable that, just as there are many way to play off the S&P 500 in the stock market, there are many ways to buy bond index funds that will perform differently than the Barclay's Aggregate Index. There are funds, for example that focus on different sectors and funds that have much different durations.
The above information as well as much more can be found by plugging the ticker symbol AGG into
Morningstar.
You'll note at the site that there is a "performance" link which provides up-to-date performance.
Tuesday, December 6, 2016
A Great Gift
Recently I received a call from a young man seeking my advisory services. As an advisor my satisfaction comes from helping people get on a path to a successful retirement. This means steering them clear of high priced advisors who underperform, avoiding costly Funds that overcharge, and ensuring that the size of their nest egg will be sufficient to produce the income they need in retirement.
But this young man was a different case than I usually handle. He had just gotten out of prison on drug related charges and while in prison had read "Millionaire Teacher", which he found in the prison library, by Andrew Hallam. By reading the book he had come to understand how people build wealth by saving and investing intelligently. The book inspired him to do the same and he enlisted my services to get going. Full disclosure: I, along with a couple of other advisors, are mentioned in the book.
He related to me how his parents and entire family are poor but he had attained a job and was primed to start investing on a regular basis. To say the least this was one of my most satisfying consultations.
But the bottom line here is receiving the methodology. Admittedly, there are a number of books that describe how to invest in low cost Funds, allocate assets, and rebalance as needed. "Millionaire Teacher" is one and it is a good one. It is well written and can be read in a couple of weekends.
In my opinion it is a great life changing gift, especially for the young couple ( many of whom are financially illiterate) starting out in the professional work world. But many in mid-career find it useful as well.
So, I suggest instead of showing up with the soon to be consumed bottle of wine at the holiday party or putting a DVD of "Deadpool" under the tree consider "Millionaire Teacher". It is an excellent choice for the budding DIY investor. As this blog and many others have harped on for a long time DIY investing done intelligently can save huge amounts and increase the size of the nest egg over longer periods of time.
For additional background check out Andrew Hallam's website.
But this young man was a different case than I usually handle. He had just gotten out of prison on drug related charges and while in prison had read "Millionaire Teacher", which he found in the prison library, by Andrew Hallam. By reading the book he had come to understand how people build wealth by saving and investing intelligently. The book inspired him to do the same and he enlisted my services to get going. Full disclosure: I, along with a couple of other advisors, are mentioned in the book.
He related to me how his parents and entire family are poor but he had attained a job and was primed to start investing on a regular basis. To say the least this was one of my most satisfying consultations.
But the bottom line here is receiving the methodology. Admittedly, there are a number of books that describe how to invest in low cost Funds, allocate assets, and rebalance as needed. "Millionaire Teacher" is one and it is a good one. It is well written and can be read in a couple of weekends.
In my opinion it is a great life changing gift, especially for the young couple ( many of whom are financially illiterate) starting out in the professional work world. But many in mid-career find it useful as well.
So, I suggest instead of showing up with the soon to be consumed bottle of wine at the holiday party or putting a DVD of "Deadpool" under the tree consider "Millionaire Teacher". It is an excellent choice for the budding DIY investor. As this blog and many others have harped on for a long time DIY investing done intelligently can save huge amounts and increase the size of the nest egg over longer periods of time.
For additional background check out Andrew Hallam's website.
Wednesday, November 16, 2016
Can You Retire Early?
Here's a neat little chart from businessinsider "How close am I to early retirement"? Just find your income level and then the difference between your spending and saving. The answer as shown in the chart is how long it takes to build a next egg you can retire on by taking the magical 4%/year. Do this and you won't run out of money.
Simple? Yes, but useful as a general guide.
The problem is tricky as I've written several times on this blog. You've got inflation, market performance, how long you will live, medical costs and all sorts of unknowns. Some people take more comfort in getting complex analyses which produce Monte Carlo scenarios etc. To me simple is better. But it is very important to revisit the issue every couple of years at a minimum to see where you stand.
Some people target a number. For example they might have $1 million as the value of their nest egg at which they can retire. A problem here is that the number will be hit when the market is at a high point. I had a distraught individual who came to me after he had retired in 2000 and then went through the dot.com bust and had to go back to work. He then retired after the market hit a record high in 2007 and then experienced the 2008 down 37% market. Needless to say he was at wit's end!
One way to approach this is to consider 4% of 80% of your portfolio. Can you have a nice retirement off of this? It may not be ideal but would it be ok? For example, if your nest egg is $1 million then 4% of 80% (.04 * $800,000) would be $32,000. If this would be ok (combined, of course, with Social Security etc.) then you could withstand a downturn in the market.
But back at the chart, what I really like is the out front emphasis on income and sending. The gap is what is key and it is important to not get lost in the weeds with all the other moving parts!
Simple? Yes, but useful as a general guide.
The problem is tricky as I've written several times on this blog. You've got inflation, market performance, how long you will live, medical costs and all sorts of unknowns. Some people take more comfort in getting complex analyses which produce Monte Carlo scenarios etc. To me simple is better. But it is very important to revisit the issue every couple of years at a minimum to see where you stand.
Some people target a number. For example they might have $1 million as the value of their nest egg at which they can retire. A problem here is that the number will be hit when the market is at a high point. I had a distraught individual who came to me after he had retired in 2000 and then went through the dot.com bust and had to go back to work. He then retired after the market hit a record high in 2007 and then experienced the 2008 down 37% market. Needless to say he was at wit's end!
One way to approach this is to consider 4% of 80% of your portfolio. Can you have a nice retirement off of this? It may not be ideal but would it be ok? For example, if your nest egg is $1 million then 4% of 80% (.04 * $800,000) would be $32,000. If this would be ok (combined, of course, with Social Security etc.) then you could withstand a downturn in the market.
But back at the chart, what I really like is the out front emphasis on income and sending. The gap is what is key and it is important to not get lost in the weeds with all the other moving parts!
Saturday, November 12, 2016
What's Next?
Ok, so you've listened to Bogle and Buffett, you've read Bernstein and Malkiel. Now you want to get started investing in low cost index Funds. You've got numerous accounts: 401(k)s, IRAs, taxable accounts etc. You've got capital gains to think about and a host of questions on how to get going.
My suggestion is to find a Registered Investment Advisor (RIA) you can work with. This is code for "who is an adherent of the low cost index Fund approach". If you (1) have made trades and know what ticker symbols are etc., (2) can withstand volatility in your portfolio and (3) are willing to spend some time continuing to be educated on the investment process as it relates to creating a retirement
"nest egg", then you are likely a good candidate for hourly consultation or having the RIA invest for a short-term period to set the account up and then doing your own investing. From the start you save advisory fees of 1% to 2% as well as avoid high cost Funds that tend to underperform the market.
In my practice I do a session for $160. During the session we typically Skype and look at the investments, talk about goals, talk about how big the nest egg should be saved at various ages, how much should be saved, risk tolerance and Funds to be invested in. Sometimes we go over the process of rolling over 401(k)s, withdrawal strategies etc.
Many times this is enough to get the do-it-yourself investor headed in the right direction. Other times I manage assets for a short term period at a low rate of 0.4% per year. If for instance the account is $600,000, I charge $600 for the first 3 months. If at that point the client is ready to take over then that's it - no further charge. Typically, the client will schedule a session for $160 approximately 12 months later.
Some clients of course have me manage their assets on an ongoing basis. They have other things in their daily work life or even in retirement they would rather do than to be managing their assets.
Why an RIA? Good question. Because RIAs are fiduciaries and as such are required to tell you if they have conflicts of interest in regards to compensation. That is, do they get commissions from referring you to people or selling products? Many are like me and the only compensation they receive is what their clients pay them. This is the primary factor in determining that RIAs do what is in the clients' best interests!
My suggestion is to find a Registered Investment Advisor (RIA) you can work with. This is code for "who is an adherent of the low cost index Fund approach". If you (1) have made trades and know what ticker symbols are etc., (2) can withstand volatility in your portfolio and (3) are willing to spend some time continuing to be educated on the investment process as it relates to creating a retirement
"nest egg", then you are likely a good candidate for hourly consultation or having the RIA invest for a short-term period to set the account up and then doing your own investing. From the start you save advisory fees of 1% to 2% as well as avoid high cost Funds that tend to underperform the market.
In my practice I do a session for $160. During the session we typically Skype and look at the investments, talk about goals, talk about how big the nest egg should be saved at various ages, how much should be saved, risk tolerance and Funds to be invested in. Sometimes we go over the process of rolling over 401(k)s, withdrawal strategies etc.
Many times this is enough to get the do-it-yourself investor headed in the right direction. Other times I manage assets for a short term period at a low rate of 0.4% per year. If for instance the account is $600,000, I charge $600 for the first 3 months. If at that point the client is ready to take over then that's it - no further charge. Typically, the client will schedule a session for $160 approximately 12 months later.
Some clients of course have me manage their assets on an ongoing basis. They have other things in their daily work life or even in retirement they would rather do than to be managing their assets.
Why an RIA? Good question. Because RIAs are fiduciaries and as such are required to tell you if they have conflicts of interest in regards to compensation. That is, do they get commissions from referring you to people or selling products? Many are like me and the only compensation they receive is what their clients pay them. This is the primary factor in determining that RIAs do what is in the clients' best interests!
Thursday, November 10, 2016
Market Reaction to Trump
This from Yahoo Finance, "How Wall Street is trying to make sense of the stunning stock market rally"
Stock prices crashed as it became clear that Donald Trump would be elected the next President of the United States. And then they did a complete reversal to actually rally during the first trading day after the votes were counted.Just when you thought the stock market was starting to make sense, it goes ahead and does the exact opposite.The markets were supposed to get crushedAhead of Election Day, Wall Street’s stock market experts were in broad agreement that a surprise victory by Republican candidate Donald Trump would be met by a sharp sell-off, ranging somewhere between -3% to -15%. Yahoo Finance reported on this multiple times.
This is another example of the futility of trying to time the market. There also is some "recency bias" apparently going on. This is where investors give weight to what has happened in similar situations in the recent past. On this front not long ago investors saw the head fake from the Brexit situation whereby stocks dropped and then reversed sharply.
Market time at your own risk.
Sunday, November 6, 2016
Can you find a growth fund that will return 12% over the long term?
Debt elimination guru Dave Ramsey argues that people should eliminate all debt and then invest in a growth fund that returns 12%/year. By the rule of 72 money doubles every 72/12 = 6 years. Sweet!
I, with just about everyone who is familiar with Ramsey, admires his work on the debt side. He has helped thousands get out of and stay out of debt.
But his investment advice is misleading and potentially harmful. Finding a Fund that averages 12% over the long term is like trying to find the next triple crown winner. Good luck! And as he further recommends taking 8%/year out of your nest egg can lead to the outcome that is most feared by retirees - running out of money.
Actually, people don't tend to run out of money - they tend to run out of lifestyle. Draw down at too great a rate and one morning you wake up and realize you can't visit the kids as often, you can't eat out as often, and (drat it!) you have to ask your boss at Wal Mart if you can get more hours!
But the good thing about living in the internet age is that it is fairly easy in most instances to research claims or for that matter just about anything you are interested in. People do this in many areas but not so much in finance.
For example, Google "Large Company Stock Returns" and you'll come up with a link that shows the following table:
This table is reported by Kiplinger and the data comes from Morningstar. These Funds are the top performers out of tens of thousands of Funds.
Looking under the 10 year and 20 year columns you see no 12% s. As you do your research you'll find that Ramsey uses the non sensical arithmetic average whereas the appropriate average is a compound annual number.
But the idea here extends beyond Dave Ramsey and his investment advice. Suppose you want to know what Warren Buffet suggests as an investment approach for the average investor. Or, you have an annuity and, like most people including those who sell them, you can't make heads nor tails of it. Just go on a good search engine and look them up.
Doing the research ahead of meeting with professionals is especially useful because once the jargon starts flying the will weakens and when it comes to financial products people just give in. To hammer this home think of going in to meet with an attorney to discuss setting up a donor advised fund. If you are like most people you may be a bit intimidated in meeting with an attorney. Do a little research and this stress will be reduced and you'll be able to follow the pros and cons as presented and in the end be able to make a better decision. It is all a benefit of living in the information age.
I, with just about everyone who is familiar with Ramsey, admires his work on the debt side. He has helped thousands get out of and stay out of debt.
But his investment advice is misleading and potentially harmful. Finding a Fund that averages 12% over the long term is like trying to find the next triple crown winner. Good luck! And as he further recommends taking 8%/year out of your nest egg can lead to the outcome that is most feared by retirees - running out of money.
Actually, people don't tend to run out of money - they tend to run out of lifestyle. Draw down at too great a rate and one morning you wake up and realize you can't visit the kids as often, you can't eat out as often, and (drat it!) you have to ask your boss at Wal Mart if you can get more hours!
But the good thing about living in the internet age is that it is fairly easy in most instances to research claims or for that matter just about anything you are interested in. People do this in many areas but not so much in finance.
For example, Google "Large Company Stock Returns" and you'll come up with a link that shows the following table:
This table is reported by Kiplinger and the data comes from Morningstar. These Funds are the top performers out of tens of thousands of Funds.
Looking under the 10 year and 20 year columns you see no 12% s. As you do your research you'll find that Ramsey uses the non sensical arithmetic average whereas the appropriate average is a compound annual number.
But the idea here extends beyond Dave Ramsey and his investment advice. Suppose you want to know what Warren Buffet suggests as an investment approach for the average investor. Or, you have an annuity and, like most people including those who sell them, you can't make heads nor tails of it. Just go on a good search engine and look them up.
Doing the research ahead of meeting with professionals is especially useful because once the jargon starts flying the will weakens and when it comes to financial products people just give in. To hammer this home think of going in to meet with an attorney to discuss setting up a donor advised fund. If you are like most people you may be a bit intimidated in meeting with an attorney. Do a little research and this stress will be reduced and you'll be able to follow the pros and cons as presented and in the end be able to make a better decision. It is all a benefit of living in the information age.
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