How Are Your Investments Performing?

You know the mpg for each of your cars. You know how much you pay in property taxes. You know your cholesterol level and you even know your kids' SAT scores. Do you know your investment performance?

If you tell me your kids are going to an IVY league school, I'm going to ask how they did on their SATs. If you tell me you're eating right and exercising, I'm going to ask about your cholesterol level. If you tell me your investment advisor is doing a good job, I'm going to ask about your performance.

And, if you are typical, I'm going to get a blank look. Often this is followed by some mumbling about accounts at different brokers and the assurance that the numbers are somewhere on the website. In the end. there is a sheepish admittance that, for many of you, you just don't know.

Let me be blunt here. You need to know. Investment performance is a determining factor for many in whether they will meet their retirement goals. Furthermore, it is not difficult to get at and to actually understand. Brokers should make it available. but many don't. There's a reason why, but DIY Investor doesn't want to get into that here. It will be more instructive to show how easily it can be obtained - at least at Schwab.

Full disclosure:  I am not affiliated with Schwab. I have clients that use different brokers. If asked for a recommendation, I will recommend Schwab; and one reason is the feature described here.

One of the nice features of the Schwab performance module is that it enables clients to combine accounts and easily get up-to-date performance. This performance is compared to a benchmark, derived from the model chosen by the client. For example, out of seven models, one of my clients (who has recently retired) and I selected Schwab's "Moderate Conservative" model shown here. CLICK TO ENLARGE

Source: Charles Schwab

Note the "Asset Class" and allocation percentages. This determines the all-important benchmark. To assess how investments are performing, you need a benchmark to compare against. In looking at the allocation percentages, note that cash and fixed income add up to 60%. This makes it a viable model for the recently retired. Note, also, that the worst year for this allocation over the period 1970 - 2009 was -12.5%. The retiree choosing this model has to be able to withstand a downturn of this magnitude.

The performance module is available online and is accessible by pushing a couple of buttons. It is kept up-to-date so that the client can always find performance as of the previous day relative to the model benchmark. Here is the performance of a client using the "Moderate Conservative" model:

Source: Charles Schwab

CLICK TO ENLARGE The performance shown combines the three accounts at Schwab:  a brokerage account, a traditional IRA, and a Roth IRA. The lower right-hand corner shows returns since inception. As you can see, the portfolio has returned 9.14% and the benchmark 8.74%.

For this client, it is important that performance be 7% and higher - this is what is assumed in his/her financial plan. Also, the fact that the portfolio is outperforming the benchmark is unusual; and it is because the portfolio is slightly overweighted in higher dividend stocks and has a greater concentration in shorter-term bonds (because yields are so low) than the benchmark. In fact, over the longer term, it should be about .20 under the benchmark, reflecting the cost of the exchange traded funds.

The information here is presented for educational purposes. It should not be considered a recommendation. Individuals should consult with an advisor or do their own research prior to investing. Past investment results are not indicative of future results.

2011 First Quarter Performance - BlackRock Diversified Portfolio Update

One of the most useful tools for individuals in analyzing and understanding long-term investment returns is the so-called periodic table of investment performance. The version produced by BlackRock includes a diversified portfolio comprised of growth stock and value stock ETFs as well as international stocks and fixed income.

The diversified portfolio result reveals the value of diversifying among sectors and indexed investing. The portfolio is easy to set up, can be easily adapted to fit different risk tolerances (by increasing the percent allocated to fixed income to reduce portfolio volatility), and can readily bring in different asset classes if desired.

DIY Investor updates the diversified portfolio at the end of each quarter. The last update was for the 12-month period ended 12/31/2010; this one is for the quarter ended 3/31/2011.

The quarterly results are shown in the table: CLICK TO ENLARGE. For the quarter, the Russell 2000 (IWM) performed the best, value stocks (IWD) came next, followed by growth stocks (IWD). International stocks (EFA) lagged domestic stocks, and the U.S. bond (AGG) was the poorest-performing sector.

The overall portfolio, weighted similar to that used by BlackRock, achieved a return of 4.02%. The alert reader will notice the low expense ratios for the ETFs.

The data was obtained from Morningstar. The information presented is solely for educational purposes. Individuals should do their own research or consult a professional advisor before making investments.

The Proteus Effect and Saving

If you are interested in behavioral economics or the psychology of investor behavior, read Jason Zweig.  His book Your Money & Your Brain is the classic in this field.

In a thought-provoking article, "Want to Retire Wealthier? Start by Scanning Your Photo,"  in Tuesday's Wall Street Journal, he described the research being done using, of all things, avatars.  He reports that research being done at Stanford University enables people to see themselves at retirement age via their avatar. This, in turn, gets them to save more. The use of avatars has worked in the area of increasing confidence by giving people an attractive avatar in virtual reality space. The research suggests it can help people save.

Now DIY Investor is admittedly low tech. He doesn't deal with avatars and such. He doesn't even have, as far as he knows, an avatar. In his low-tech style, he merely reminds clients that one day they will wake up and it will be their 65th birthday and whether they have choices depends on their saving behavior today. It's hard to tell how effective this is.

Who knows? Maybe avatars are the key to getting people to focus on the long term. As the article points out, research by the Center for Retirement Research at Boston College finds that over 50% of Americans are not in a position to maintain their lifestyle in retirement.

Interestingly, some people already have the talent to think longer term without putting on the headset and going into virtual reality space.  Warren Buffett, for example, thinks about the value of spending on a haircut today compared to investing the money for 30 years. Most advisors dwell on the spending that takes place at life's big events and wonder whether people give them sufficient weight. DIY Investor tends to think, as well, that not understanding the basic concept of compound interest plays an important role in people spending significant amounts on weddings, funerals, and the first two years of college.

Mr. Zweig points out that one difficulty is that people don't know what they will want 30 or 40 years from now, and this is a hindrance to saving. DIY Investor suggests that perhaps a better way to think about it is in terms of what you don't want. This is a good place for a little Zen. DIY Investor doesn't want to work part-time for Walmart.

One of the psychologists, Dan Goldstein,  working at Stanford suggests putting employee's "age-morphed" photo on benefits section of company website. Great! Now we'll be even more depressed in down markets with statements showing how we'll look at 65. Admittedly, this isn't as big a deal for DIY Investor as it might be for some of his readers.

Google's 401k-the BrightScope rating.

A few days ago, DIY Investor posted the YouTube talk (found at Biz of Life's site) given by the irrepressible Suze Orman to Google employees. DIY Investor found Ms. Orman's talk filled with  essential information, especially for young people in the business world. Now Michael Zhuang at Investment Fiduciary has posted the talk which will get it out to more people. Thanks Michael. Michael has actually worked with Google employees and points out how good the Google 401k plan is, as did Ms. Orman in her talk.

This popped the question into DIY Investor's head as to how good the Google Plan actually is and sent him scampering to the site that rates plans relative to their peers:  BrightScope.

As you can see, BrightScope gives a top peer group rating to the Google Plan:

Source: www.brightscope.com

CLICK TO ENLARGE Suffice it to say that receiving the highest rating in the peer group is not easy.


The component ratings provide greater insight into the Google Plan:
 CLICK TO ENLARGE

Source: www.brightscope.com

The dark green scores are in the best 15% of their peer group. Thus, Google's 401k fees are in the lowest 15% compared to fees, participation rate is in the top 15%, etc. The two components below the absolute top are account balances ( I see Ms. Orman's eyebrows going up) which maybe is not surprising. There is a hint in the talk that Google employees may be a bit challenged in terms of taking on a bit much debt and may not be contributing as much as they should to their retirement. Also, employees may be a bit younger compared to their peer group companies.

The one component that stands out is the "investment menu quality" rating at "below average."  Since Vanguard is their provider, this isn't likely a matter of investment choices--although possibly some fund choices may have underperformed in recent periods. It may reflect the choices made by employees. As of 12/31/2009, the top holding was the Vanguard Wellesley Income fund at 25% of total holdings. With hindsight, we know that wasn't a good choice. Are the employees really that conservative?

In the comment section on the BrightScope page, a commenter recognizes the generosity of Google's 50% match for both the traditional and the Roth plans.

Bloomberg Economic Calendar

An essential tool for DIY investors who follow the market closely is an economic calendar showing the release dates and times of economic data. The most widely-known calendar is produced by Econoday and is available at the Bloomberg site. Go to www.bloomberg.com and click the drop-down list button. The next to the last item is "Economic Calendar."

Source:Econoday?Bloomberg

CLICK TO ENLARGE  In addition to economic data, the calendar shows weekly Treasury auctions for bills, notes, and bonds. DIY investors involved in the bond market need to know the timing of these auctions because interest rates can sometimes get volatile when the auctions go better than or worse than expected. You'll notice that the auction results for notes and bonds are reported at 1 pm. For example, today the 5-year Treasury auction results will be reported at 1 pm. If you are a novice in this area and are interested in following Treasury auctions, you may want to tune in to CNBC at 1 pm. At that time, Rick Santelli gives an assessment of the auction results - very useful information if you happen to be buying or selling bonds or bond funds.

You'll also notice that there is a report issued on Wednesday at 10:30 am called the "EIA Petroleum Status Report."  This report is on oil inventories and is a market mover in the energy markets. Again, if you are in the market buying or selling energy stocks or funds, you need to be aware of when this report is issued. At the bottom of the calendar page is an important legend that tells you which reports are deemed important and which reports have market expectations available. As DIY investors know, it is "news,"  i.e., the difference between expectations and actual results that move stock and bond prices.

Source: Econoday/Bloomberg

For example, today at 10 am the Consumer Confidence report will be released by the Conference Board. Clicking on "consensus," the DIY investor will find that the number is expected at 64.0 and estimates range between 55.0 and 70.0. The DIY investor will also notice that most major releases are reported at 8:30 am . The biggie this week is Friday's report of the employment situation. The DIY investor can easily find that the consensus for that report is that 200,000 jobs were added in the month of March.

Doing It Yourself

Many years ago I had a friend whose name escapes me, but whose situation stayed with me through the years. He had wanted desperately to get into a course but for some reason had been shut out. I don't remember if it was financial or what the reason was. As I commiserated with him, he ended up saying, "There's always the library."   In my mind, that translated into the idea that, if you want something badly enough, there's always a way to get it; and that especially holds true when it comes to learning.

This, of course, has never been truer than today with the internet. Want to learn cooking, how to get from point A to point B, or even how to play the guitar? There is loads of information available at your fingertips online. The information is free and, in my opinion, much better than just a short while ago. For example, there are sites available now that catalogue the best online college course from top universities. Many  are taught by dynamic teachers featuring interactive modules that allow the student to get involved.

I believe that this is subtly revolutionizing the education industry. It won't be long before you can get a degree online by picking a package of online courses from the best instructors at MIT, University of Maryland, University of Chicago, and the Wharton School. If you're like me, you're thinking, "right, nothing will replace face-to-face in the classroom." Before you pooh-pooh this, you may want to check out some of the top online courses and see how they use the technology, and compare them to some of the lectures you sat through when you were in college.

Source: New York Times

Anyways, this is surely the case with investing and personal finance, in general. The challenge actually is to catalogue the sources of information for those who want to learn so that they can easily find the best sources. Along these lines, I would like to present the "Managing Your Money Through the Ages" feature at the New York Times. CLICK TO ENLARGE

One of the challenges of financial planning is that everybody is at a different stage in life and on a different path. The New York Times feature handles this well. Hone in on your particular stage in life and drill down.  Most likely, you will find financial planning articles highly pertinent to you. There are even checklists that show you some issues you  should be aware of at different stages.

Just as  you are not going to be the next Food Network star by learning to cook online, there is still a need for face-to-face individualized financial planning in complicated cases. Still, for most people, the information they need is available online, for free.

As a special bonus for those who have read this far, check out this online book.

Suze Orman Talk to Google Employees

The Google Author series is, IMHO, one of the best on the web. I found this Suze Orman talk to Google employees at The Biz of Life blog.




The information Suze Orman so eloquently presents (and with flair to boot) in this talk is extremely valuable. I recommend that it be passed along to young people getting started in the work world. Learning about FICO scores and Roth IRAs, etc., early on can make a big difference.