Can You Manage Your Own Assets?

Source: Capital Pixel

Here's an excellent article for those considering the DIYer route which I highly recommend:  "Should I Hire a Financial Advisor or Go it Alone?" by Walter Updegrave.

Thinking about becoming a DIYer is something I promote.  IMHO ( as well as Warren Buffet's and many other respected market practitioners) many people are throwing money away by paying professionals to time the market or pick stocks.

Yesterday I had coffee with a lady who explained that her portfolio consisted of three issues:  a total stock ETF, an international stock ETF, and a total bond market ETF.  Here's the thing:  there is voluminous evidence supporting the thesis that a three issue, low expense ratio, low trading cost, broadly diversified portfolio has historically outperformed most professionals over the longer-term (10 years and longer) after all fees are accounted for.

There are some things to know going in, though.  First you need to understand that controlling emotions is important.  The article points out that those who do not use an advisor actually underperform by 3%/annually on average due partially to emotions - see the study by Financial Engines cited in the article. Secondly, asset allocation is important.  Most people get some experience in this by making decisions for their 401(k).  The scary part for some is when they get assets outside their 401(k) by rolling over assets when they change jobs or retire.  Having more choices and less structure can get some to throw up their hands and pay big management fees to advisors.  They assume that investing is complicated and consumes a lot of time.  I believe, with a bit of help in the beginning along with some instruction, many can become DIYers as the article suggests.

As an aside - when it comes time to roll over assets, etc., I think just about everyone should at a minimum get some hourly professional advice.  It is trickier than most people know.  I've written before about trying to wire the dryer in my house and almost burning the house down.  You have the same kind of situation here.  There are nuances about not taking the rollover as a check to be deposited, rolling assets in kind, the type of account to roll company stock into, etc. that can have a big tax impact.

The article also lists numerous tools to help the DIYer.  I find that most major discount brokers offer these tools to analyze funds, allocate assets, track investments (and in the case of Charles Schwab, which I use, track performance relative to a well-defined benchmark) for free.  Understanding how to use these tools is the key for the DIYer.  One of the services I offer is to set up potential DIYers by doing the initial investing after the assets are rolled over, accounts combined, etc., then explain the investing process, and, when the client feels they are ready,  hand it over to them - at which point they are a true DIYer.

In fact, I would encourage those with larger portfolios to consider peeling off a part of their portfolio and give the DIY approach a shot.  They will be surprised how little time it takes to manage a portfolio of low-cost index funds.  As an added benefit, they will have a means of really assessing their high priced advisor!

Disclosure: the information here is for educational purposes only. No investment returns are implied or guaranteed.

An Interview With An Investment Guru

Seth Klarman is a legend in a league with Warren Buffett. In this interview with Charlie Rose I found on The Biz of Life site, he first talks about his non-profit organization and then gets into his investment approach.

No matter what style an investor chooses, it is always valuable, I think, to listen to those who have mastered the game. He notes that it takes a certain, rare gene to invest in line with the Benjamin Graham style. He talks about his book Margin of Safety. He lists the 3 stages of investing followed by Buffett. Interestingly, he humbly claims that he is only good at the first: "buying cigar butts at good prices."



You can follow Seth Klarman and his holdings as derived from 13f filings at guru focus.

As shown,CLICK IMAGE TO ENLARGE, he takes some big positions.

As readers of this blog know, I believe investors should index at least 80% of their retirement assets and invest at most 20% in individual stocks. I would also argue that one should be careful following the top hedge fund managers. You may find you don't have that "special gene" at exactly the wrong time ;)

Disclosure: This post is for educational purposes only. Investors should do their own research before investing. I may hold stocks mentioned in this post.

Long-Term Care Insurance

As one who concentrates on investments and portfolio management, I am very much aware that the process is carried out within the context of an overall plan. Plainly put, the investment program can be the exact fit for a client in terms of overall assets, risk tolerance, retirement goals, etc. but something else can be totally out of kilter - sort of like a well-fitted suit with a long loose thread hanging from the jacket sleeve. Such a thread for the DIY investor can be that taboo of subjects - Long-Term Care.

The issue here is very simple. It has to do with "...The best laid plans of ...." Again, everything can be in place; but then a need for long-term medical assistance can throw everything out of whack. The problem is that long-term care is expensive, as will be detailed in the following video. Think about it like this: suppose you move into the house of your dreams but you don't have homeowners insurance. Then, the house burns down. That could be the situation if you work hard to build the nest egg to the appropriate size and then need long-term care.

Long-term care is expensive. One thing some creative families have done is to have  children or other potential beneficiaries pitch in to pay the annual premium.  After all, in many cases, it is potentially an insurance on their likely inheritance.

I recommend watching the following excellent video by Christine Benz, Morningstar's Director of Personal Finance. Ms. Benz has a talent for explaining complex topics.



If you need specific info (and live in the Baltimore area) on choices available for you and their costs or even whether LTC is appropriate in your specific case, I would recommend meeting with Sharon Kreiger. sharon.kreiger@ltcfp.net  (223-275-1764). Ms. Kreiger's philosophy is to start with a meeting to basically educate a potential client on LTC.

Movie Recommendation

For those who get overdosed on cheer this holiday season, I recommend the DVD Inside Job . It will quickly bring you back to reality.  It proves what most people know - there is no upper bound for greed.  Still, to see how it has played out to bring us to where we are today is sobering.

We have paid a heavy price for assuming that those in charge know what they are doing and that they are operating in the nation's best interest.

Many want the bad actors in the film put in jail--which is easily understandable. The problem is that a lot of bad things can be done without it being criminal.  It is easy to not do one's job in the pursuit of greater riches, which will be seen over and over in the film.  This isn't a crime under the criminal code.  Most viewers will get that.

What is unfathomable is that the leading institutions of the country continue to employ many of these people at the highest level.  The Federal Reserve, Columbia Business School, the various think tanks should be ashamed.

I, for one, am deeply ashamed for the economics profession.  Watch the film and see why.

How to Find Release Dates of Earnings Reports

Source: Capital Pixel

The most important firm specific date is usually when earnings are released.  If you invest in individual stocks, you are interested in when the report is coming out and the expectations of the market.  A disappointing report or a surprisingly good report typically will move the price significantly.  Those who follow Apple stock closely know exactly what I mean.  When Apple reports, its stock moves sharply in after-hours trading.

So suppose we are interested in finding, for example, Pepsi's release date and analyst expectations.

For this, we turn to the "Earnings Calendar" available at most major financial sites.  We'll use the Yahoo! site.  At the site, just type in the ticker, PEP, to find the release date of February 6, as shown:

Source: Thompson Financial Network

 CLICK IMAGE TO ENLARGE  Note the other useful items available, especially the conference call link.  At this link, you can listen to the last conference call.  If you stay on until the end, you usually can hear questions from analysts and the company's response.  To me, this is one of the best ways to identify issues with a company.  For example, analysts will want to know why sales in South America are down slightly or, if it's the Apple conference call, why phone sales were below expectations.  Questions will come up about the all-important revenue projections, etc.

Scrolling down the list for earnings releases for February 6 brings you to:

Source: Thompson Financial Network

 CLICK IMAGE TO ENLARGE  As you can see, analysts expect Pepsi to earn $1.14/share for the quarter.  Also note that you can add the event to a Yahoo! calendar, so it is easy to track a portfolio of stocks.  Clicking on the PEP link and then on "analyst estimates" (on the left-hand side after scrolling down) will give you even more info on earnings history and expectations--including the all-important number of analyst who are providing estimates.

Disclosure:  I agree with Warren Buffett et al. that most investors will be better off by buying well-diversified low-cost index funds tailored to an asset allocation model.  This information is for those who find buying a few stocks an enjoyable and challenging undertaking.
 

Average Joe's Retirement Fund

• Assume: Joe has worked for 20 years at a company that matched  the company 401(k) by 50% up to 6% of salary. 
• Joe contributed 6% of salary and being risk averse allocated his contribution and the company match to 50% bonds (aggregate exchange traded fund, AGG) and 50% stocks (S&P 500,SPY).

He was 45 years old when he started and today he is 65 years old. How much was his portfolio  worth at year end 2010?

Data sources: Average Joe made the average wage during his career. This data was obtained at http://www.ssa.gov/oact/cola/awiseries.html . The market return data was taken from the "20 Year Periodic Table of Returns" produced by BlackRock. Here's the data and results:

CLICK TABLE TO ENLARGE The table shows that an average person, continually making the average wage over his peak earning years, at a company that offered  basic retirement benefits, accumulated $113,000 using an extremely conservative investment approach. This despite waiting until he was 45 years old before he saved a dime.

It is not easy to understand sometimes why people constantly complain.  Suffice it to say that the human race has not always had it so easy and that billions would trade places today with Joe in the blink of an eye. And they wouldn't be stuck at an average wage for 20 years.

A Good Source of Investment Information

Source: Capital Pixel

One of the challenges today for DIY investors, who actively manage their own assets, is handling the vast amount of information at their finger tips.  A key is to find good sources.  One worth checking out is "Market Currents" at Seeking Alpha.

Scanning recent lists you'll find many reports on the troubled Europe region.  This, of course, is where investors are presently focused.

Other reports will grab your attention as well.  For example, from yesterday's items, we find this tidbit worth thinking about if you are contemplating buying or selling banks' stocks.

6:50 PM Fitch has it wrong, U.S. banks could actually wind up benefiting from Europe's debt crisis, says Rochdale's Dick Bove.  He cites two reasons:   first, U.S. banks have a relatively low level of exposure to European banks.  Second, the problems facing European banks could actually drive business to seek healthier institutions in the U.S.  His top picks: PNC Financial (PNC) and Fifth Third Bancorp (FITB).  Both get hit when Europe erupts, but neither are heavily exposed to European banks.  [Quick Ideas, Global & FX, Financials]

The reports, as you can see, have numerous links making it easy to further research the information presented, if necessary. 

You'll also notice the search box in the upper right of the page.  Here is where you can type in a ticker symbol and get recent stock specific reports.  Do this today for Intel (INTC) and you'll find reports ranging from Buffett's 13F filing showing he bought chip companies (which is news because he previously has famously avoided tech altogether) to industry projections on the inventory and profit outlook.

If you buy individual stocks or make general market bets, this kind of information can be invaluable.  Not that long ago it would have taken days to garner the information now available at the click of a button.

Full Disclosure:  I recommend that at least 80% of retirement assets be invested in index funds aligned with a carefully selected asset allocation model reflective of risk tolerance.