Investment Help

If you are seeking investment help, look at the video here on my services. If you are seeking a different approach to managing your assets, you have landed at the right spot. I am a fee-only advisor registered in the State of Maryland, charge less than half the going rate for investment management, and seek to teach individuals how to manage their own assets using low-cost indexed exchange traded funds. Please call or email me if interested in further details. My website is at If you are new to investing, take a look at the "DIY Investor Newbie" posts here by typing "newbie" in the search box above to the left. These take you through the basics of what you need to know in getting started on doing your own investing.

Sunday, September 25, 2016

A Black Swan?

Nassim Taleb popularized the idea of Black Swan events in his best selling books, "Fooled By Randomness" and "The Black Swan". These events are unpredictable and have significant effects on financial markets. Market participants are adept at constructing narratives in hind sight that make the events seem obvious. The 2008 housing crisis which produced the worst economic downturn since the Great Depression of the 1930s along with a market crash is an excellent recent example.

The key is that the event be totally unexpected. It can be either good or bad.

One candidate I believe that is out there at present is that the actions followed by Central Banks and the U.S. Federal Reserve will actually produce a well functioning global and U.S. economy. This is based on my watching the markets, reading about the markets and talking to investors. I have to say that I don't know of anyone who thinks that there aren't some serious bumps and bruises if not much worse in the near to intermediate future coming from following a zero interest rate  and negative interest rate policy. I have to add that I believe this is so even for the Fed governors in their heart of hearts. Uncharted waters are scary

But, what if the economy ratchets up its growth rate to 3%, the unemployment rate drifts a bit lower in the U.S., tax collections reduce the deficit and the Federal Reserve has the Fed Funds rate at a more  normal 3% rate say in 4 years? Wouldn't this qualify as a "Black Swan"?

And surely all those now predicting a sharp downturn immediately ahead would have no problem creating a narrative explaining how we got on the road to nirvana.

To be absolutely clear I don't expect this to happen. This is merely an academic exercise to keep us on our toes. To be sure, I'm in the camp of those who believe that manipulating the price of money or practically the price of anything is bad policy and distorts the system (i.e. creates bubbles) and eventually ends badly.

Sunday, September 18, 2016

Recent Data on Passive Versus Active

One of the most important decisions an investor can make is whether to go passive or active. Passive accepts the market return, active seeks to beat the market return.

I am in the camp that says most investors investing for retirement should go passive (see previous post of "Proposal"). This rests on the belief that capital markets are mostly efficient. This means that stock and bond prices rapidly reflect publicly available information.

Believing in efficient markets practically comes with the territory of being an economist. Economists are drilled in the idea that when you have low barriers to entry, abnormal (i.e. greater than market ) profits won't persist. Take this idea to the capital markets where billions of dollars are on the line and it is pretty straightforward.

But this isn't an intuitive notion for most people. They hear their friend made a killing selling beanie babies and they run out and garner an inventory only to watch them gather dust later in their basement.

So what does recent data on passive versus active show? One of the most anticipated reports of the year  produced by Standard & Poor's is called the SPIVA report. This year, through 6/30/2016, 84.6% of large cap active managers underperformed the S&P 500 Index.

This means that if you bought SPY, the low cost index ETF, you outperformed 85 out of 100 managers for the year. For what it's worth, yearly performance is pretty much useless. Anything can happen in a year.

What is important is longer term performance because that is where costs that arise from active trading, management fees etc. come into play. The data shows that over the 5 years ended 6/30/2016 only 8% of active large cap managers performed better than the index. To break this down consider that if you had given 100 active large cap managers $1 million 5 years ago only 8 would have come back with better than index returns.

These results, along with the results of other market sectors, including "fixed income" are reported by Ryan Vlastelica in "How passive funds extended their dominance over actively managed rivals" /MarketWatch 9/15/2016.

There are various ways to try to beat the market. Some try to time the market, i.e. jump in when they think it is going up, jump out when then think it's going down. I call this the "hokey - pokey" approach to investing. And actually it amuses me. For example I was recently entertained by the mass exit called for after the Brexit vote. As we saw the market didn't fall off a cliff, instead it reached new records.

Another was to beat the market is to try and pick the best stocks. In this category I find especially interesting the so-called long/short Funds. If you think you can pick stocks then surely this proposition would interest you: study the stocks in the S&P 500 and short the 50 you dislike the most and with the proceeds buy equally weighted positions in the 50 you like the best.

Clearly, if you have any stock picking ability you would provide a superior return. Not only that but you should do well in any kind of market. This was, in fact, the pitch Funds following this approach presented. I know because I spent the first 20 years of my career investing for pension funds, endowments and other institutional investors. I heard the pitches.

How have they done you ask? William Baldwin, "Scary Results At Long-Short Equity Funds", 8/23/2016 Forbes provides some data. He says that Morningstar puts 133 publicly offered Funds in this category and that they returned 2%, average annualized return for 3 years ended 6/30/2016. The average stock index Fund returned 11.7%/year.

Is it really any wonder active funds are seeing huge outflows and index funds are seeing huge inflows. You don't need to be an economist to grasp that money flows from poorly performing high cost products to better performing low cost products.

Monday, September 12, 2016

A Proposal - Summary

This proposal's purpose is to give everyone at least a framework of how to go about building a nest egg for retirement, as presented in the previous 4 posts. Like many areas we have gone 90% of the way to handling a problem but then stop just short of wrapping it up.

The 401(k) and similar qualified plans are excellent for getting people to a successful retirement. The problem is many don't know how to use it. The purpose of the proposal is to fix that. As mentioned in previous posts if you know how to invest or have a different approach then go for it. Again, a caveat, if you are hell bent on beating the market by picking stocks or active Funds or timing the market all I can say is "good luck". The odds are against you.

Begin by emphasizing the importance of starting early and putting away at least 10% of every paycheck.

So, the proposal: start with an appropriate target date/life cycle/retirement date Fund . How to do this will be presented in a 15 minute video when you take your job. Secondly, once you reach $60,000 or so in your 401(k) switch to low cost index Funds with an appropriate asset allocation. Typically this would be somewhere around 70% stocks/30% bonds. Finally, when you reach the point where you are thinking of generating an income off of your portfolio consider creating a dividend stream by using bonds Funds and Dividend Funds and even individual dividend stocks.

The first two steps require very little time. The third is a bit more time consuming.

As explained in the previous 4 posts there is no need to switch at various points. If you have no interest and just want to stick with the life cycle approach you can do that. Or you can stay with the low cost, index Funds. The only reason to switch at various times is to lower the costs a bit. It is worth noting that directly investing in the dividend stocks can potentially be the most rewarding because you have opportunities for tax loss harvesting, judicially increasing yields oner time etc.

The bottom line is that this proposal provides a way to emphasize to workers that by following some very basic steps they can end up enjoying a nice retirement.

Monday, September 5, 2016

A Proposal - Step 4 to rehash what we have so far to get most people on track for a nice retirement: for your first job, assuming the company has a decent 401(k) just elect to put at least 10% away out of each paycheck and pick the Fund corresponding to the retirement date or life cycle or target date Fund. Forget about it, go to work and when it reaches $60,000 or so say switch to a well defined asset allocation using low cost index Funds.

How to do this can be presented by Human Resources on the first day of employment by using a short online video. Why can't Fund providers do this? Well, they can but they won't  because they get far greater fees by getting Plan participants to use higher cost actively traded Funds that they switch around frequently.

The beauty of going target date Fund and then low cost Funds is that it gets over some formidable hurdles. First, many would be participants back off because there are so many choices. Economic theory has found that too many choices is actually not a good thing in many instances. Secondly, many would be participants just don't understand the process and that they are responsible for building their own nest egg. They think it takes time and expertise to do this. In fact, it runs itself once it is set up.

Now we come to the third and final phase. This is when you have reached the point where you need   to generate an income off your nest egg. Note that at this point your goal has changed significantly from growing your nest egg to generating an income off of your nest egg.

There are some choices here. Today for example you can get approximately 5.5% off your nest egg by buying a single premium immediate pay annuity. This is an insurance product that pays a monthly income (or at whatever interval you pretty much request) and has the clear advantages of ensuring you never run out of money and not being subject to a possible sharp drop in the market. The big disadvantage is that you lose control of the money both for emergency needs and for leaving assets to heirs.

Another choice is to invest in Treasury Notes. At the present time the 10 year Treasury Note yields 1.6%, about in line with the rate of inflation. A big disadvantage in addition to the low yield is that the interest payment stays constant over the life of the Note. This means that the interest payment you receive over the next 10 years would stay the same. Assuming inflation rises this means you would be losing ground.

The third alternative is to create, in effect, your own annuity by using dividend stocks. For the retiree willing to spend some time at it there are numerous solid stocks that offer yields of 3% and higher. Furthermore, they have a history of increasing their yields. To get an idea of the stocks in this category just Google "dividend stocks" and you'll come up with all kinds of listings. Finance magazines such as Barron's, Kiplingers. Money etc. constantly provide lists of attractive dividend payers as well.

But what about the possibility of the market dropping? After all, at this point we are in retirement and as commenters like to say "retirees don't have much time for the market to recover after a downturn". This actually isn't too great an issue in my view if you frame the process appropriately.

Think about the first two alternatives: an annuity and a Treasury Note. In each instance we did the investment and then whatever happened to the market didn't matter. Think also about your Social Security. Does a market downturn have any impact on Social Security?

The point here is that once you have invested the main concern is with your income stream not with the market value of the portfolio. Odds are that with some basic principles your income stream should increase as your stocks increase their dividends. If over time your portfolio rises in value it's basically gravy. If it drops it is no big deal, again as long as your income stream holds up.

What are the basic principles? First, limit the size of specific company holdings to 5% of total assets. This limits the impact of a negative event. Secondly, be careful about industry diversification. For example, choose Verizon or AT&T but not both. They are in the same industry. Choose one or two energy companies, utility companies, banks etc. If you extend to riskier companies invest 2.5% of total assets. You'll find business development companies that offer, for example, double digit yields. Always remember that extra yield means extra risk.

A negative for this approach is that it takes time. The first two approaches ran themselves. Not the dividend portfolio. But some retirees find that creating a dividend portfolio and managing it is a great "hobby" in retirement. As you get into it you find numerous opportunities, on an ongoing basis, to increase yield and improve the portfolio. The bottom line is that it can pay off nicely for the retiree willing to put in the effort.

Monday, August 29, 2016

A Proposal - Step 3 here's the deal. We started our career and recognize that we are responsible for our own retirement. But we've had no training or education on how to achieve that retirement. So, we start by saving at least 10% of our gross income and doing that by putting it into our company 401(k).The specific investment we select is the retirement date Fund corresponding to when we are in our mid 60s.

And then we go to work, live our life and get promoted and maybe get bonuses. Some people of course will find it difficult to save at least 10%. It is very easy to have your lifestyle adjust to whatever income you have. Interestingly there are professional athletes raking in millions who for the life of them cannot apparently save a cent.

I have found that if you fortunately are in a position to get raises and promotions as time goes by and don't automatically increase your lifestyle each time then you should be able easily to meet the 10% and higher saving goal.

Anyways...get it done. Sit down and have a face-to-face with your 65 year old self and let him or her know that you are doing it for them. While you're at it motivate yourself by recognizing you are doing it for the kids. The last thing they want is a broke mom and pop when they are trying to get their family going.

So, we're saving, time goes by, as it always has, and we reach a point where the 401(k) is starting to reach a decent size. For the sake of argument we can take this to be $80,000 or so. The next phase comes into play. At this point you may want to consider investing in individual Funds within your 401(k). This should save you .50% or so annually. This may not seem like a lot but when you consider the savings over 25 to 30 years it becomes meaningful. And the beauty of it is that it isn't difficult.

As an aside you don't have to do it. If you deem your efforts better used in other areas then stick with the target date Fund approach.

So, how do you use individual Funds? Take a look at your 401(k) Fund offerings. They hopefully include low cost index Funds. For the sake of argument assume that Fidelity is your 401(k) Fund advisor. Assume as well you have been investing in the Fidelity Freedom 2050 Fund, ticker symbol FFFHX. If you go to and put the ticker symbol in the quote box you find that FFFHX has an annual expense of .77%.

The new approach of using individual Funds would include FUSEX, an S&P 500 Fund (.09%), FSGUX, a global ex U.S. Fund  (.18%), FBIDX an Index bond Fund (.15%), and FSSPX, a small cap index Fund (.19%). The respective annual fees for the Funds are shown in parentheses.

You can use these 4 Funds to set up your asset allocation. For example, if you are 40 years old you may decide to allocate 70% to stocks and 30% to bonds if you are fairly comfortable with some portfolio volatility. If not, reduce the stock allocation to 60%.

For your stock position you may want to have 15% in the global Fund, FSGUX, and 5% in the small cap Fund, FSSPX. The global Fund gives diversification and exposure at the present time in a part of the market that hasn't done well. The small cap Fund increases volatility a bit in a sector that has provided higher returns.

You'll undoubtedly notice that this simplifies your investment setup. The 2050 Fund is comprised of many more Funds. Which is better? Wouldn't the greater complexity and more Funds in the 2050 Fund mean better performance? Actually, we don't know unless we have the proverbial "crystal ball".
The simpler structure does however mean that it is easier to understand and analyze and the fact that it saves approximately .5%/year means that over the long term it has the odds highly in its favor to meaningfully outperform.

To recap: on day 1 of starting your career you elect to have at least 10% of each paycheck go into the target date Fund offered by your 401(k).  After a few years go by and it has reached a sizable amount consider investing in individual Funds in order to reduce the annual expenses. This will take you to your mid 60s at which point your goal shifts meaningfully from getting growth of your portfolio to generating an income from your portfolio. That will be the subject of the next post.

Let me reemphasize that you don't obviously have to follow this approach. You may feel you are a great stock picker. You may believe you can time the market. If so, go for it with my blessing. Just understand that the odds are extremely high that you are wrong and that it could be very costly learning that fact.

Monday, August 22, 2016

A Proposal - Step 2

The purpose of this proposal is to suggest an investment approach to get people on the right path for retirement. As pointed out in the last post we are now responsible for our own retirement. Unfortunately many people shy away from investing even when they have access to good 401(k)s simply because they don't know how to manage money or the basics of investing. Sadly, real world knowledge such as this isn't typically taught in school.

As pointed out in the last post, investing, if taught at all, is  presented as an exercise in analyzing individual stocks and picking stocks to trade. This plays into the hands of Wall Street but is not helpful for the long term investor looking at a 401(k) facing a multitude of mutual Funds or ETFs to invest in on an ongoing basis.

So, Step 1 was straightforward - seek the so-called "retirement date Fund" to start with. Go with a retirement date fund until your assets build to a level where it could make sense to use individual Funds. So for example, if your expected retirement date is 2040 (this isn't something to get hung up on, just pick a date where you are near your mid 60s in age) and you are employed by the government and therefore participate in the Thrift Savings Plan (TSP) select their "Lifecycle Fund" L2040. If Fidelity is your 401(k) provider choose their Freedom 2040 Freedom Fund with the ticker symbol FFFFX. If Schwab is your plan provider pick the Schwab target Fund with the ticker symbol SWERX.

If you can't find the Fund in your 401(k) corresponding to a retirement date Fund ask your human resources department where it is and how you sign up for it.

Once you have picked a Fund allocate at least 10% of your gross income to the Fund and the contribution will be made out of every paycheck and allocated in an appropriate manner. Finally, forget about it. Spend your time building your job skills, having fun with your family and doing other important stuff.

You could go with this throughout your work career. I suggest however that once your account nears 6 figures you think about investing in individual Funds. This is step 2. Typically you'll go with step 2 for at least a couple of decades and by investing in individual Funds you'll lower the cost. It may not seem like a lot but over a number of years the cost savings can be meaningful.

To begin with just focus on index funds. These funds match a particular part of the market. They are not actively traded in an effort to beat the market. Research shows that trying to beat the market is a futile effort. Upwards of 80% of managers who try to beat the market over the long term fail.

Secondly, decide on an asset allocation. There are a number of ways to do this and the critical steps are to consider your investment horizon, your goals, and your tolerance for volatility. At this point you have some experience under your belt and realize that the market can be pretty volatile over the short run but that sticking with an investment approach as you did with the target date Fund pays off.
In terms of investment horizon age is most important. If, for example, you are 40 years old then your nest egg funds won't start to be drawn down for 25 years and will be drawn down for a number of years after that. This suggests a fairly decent percentage invested in stocks with a realization again that the greater the stock exposure the greater the volatility.

So, just as an example, a forty year old could consider a 70% stock/30% bond allocation as a baseline. If a goal is to leave assets to heirs or take a shot at retiring early the percentage in stocks could be raised. On the other hand if the goal is to be absolutely sure of retirement in your early 60s you could lower the percentage in stocks.

Thinking through goals and desired lifestyles are important. Always keep in mind that the more you save today the more choices you will have down the road. The more you save the more your future self will appreciate your today self!

The next post will give a bit more detail on Step 2 and lead into the final step.

Monday, August 15, 2016

A Proposal

Here is the dilemma: we are responsible for our own retirement but no one has taught us how to build a nest egg. Thus, we are at the mercy of the financial services industry which gladly provides the service and in the process takes a huge chunk of our nest egg and produces poor performance.
Not surprisingly many people avoid the responsibility of planning for their retirement until it is too late. In many instances people even pass up the opportunity for the 401(k) company match because they just don't know what to do. In other instances they wade into the company 401(k) and see a bewildering choice of Funds and subsequently back off bewildered.

If the subject of investing is taught at all in school it is taught by those who know little of the subject. They typically will use materials provided by the financial services industry and look at investing as a stock picking exercise. They will present a basic method of valuation based on P/E ratios etc. and encouraged to research stocks and trade the stocks. Many times this presented as a game. This of course is what the industry wants. If the industry could turn of us into day traders it would be exactly what they want.

So here is a proposed approach to teaching investing for retirement. I suggest it be presented by human resources departments when young people start their career or whenever they have the opportunity to participate in a 401(k) type vehicle. The approach  isn't set in concrete for every single investor. If you think you're the next Warren Buffett and believe you are a great stock picker then go for it. If you want to trade your 401(k) aggressively to try to hit a homerun go for it. If you want to snub your nose at diversification principles go for it. Just understand that instead of hitting the ball in the upper deck you are more likely to strike out.

If instead you take Aesop's advice and go the route of the tortoise as presented here and are patient  the odds are high that you will achieve the retirement dreams you seek.

Again this is a simple approach for most nest egg builders.

Begin by looking at your company 401(k) for  so-called "retirement date funds" or "life cycle funds".  They typically have a year attached to their name - this is the year of expected retirement. For example, a retirement date Fund might be named "Fund 2035". This would be for employees expected to retire in approximately 20 years. This would be you for example if you are in your mid 40s.

In fact, many 401(k)s automatically opt in new employees and the Fund they go into is the appropriate retirement date fund.

Check the retirement date fund's expense ratio. This expense is charged every year. It shouldn't be more than .3%. So, find the Fund that is closest to when you expect to retire and put 100% of your 401(k) contributions into it. You should save at least 10% of your gross income into your 401(k). More would be better. The more you save now the more choices you have down the road.

So with that simple step you're on the right path. By selecting a retirement date/life cycle type fund your asset allocation is handled for you. This basically is the percentage invested in stocks,bonds, international stocks etc. Your job now is to go to work on your career, get promoted build your human capital and even enjoy your family. Your investments are on auto pilot and doing their thing.

FAQ 1: What if the market drops and my account goes down?
    First off you shouldn't be watching it that closely because you are working on getting promoted, enjoying your family etc. But still know this: a falling market is good because it enables you to buy more shares of the target date fund out of each paycheck. Always remember this: what you care about is where the market is years from now when you retire.

FAQ 2: What if I can't save at least 10%.
     Make adjustments. Take another job, hold back on vacation expenses, buy a lesser car etc.Do what you have to do. The 10% is for your future self! Think about this: if you can't do at least 10% then it is likely you will be a burden to your kids when they are in their prime years of trying to build a family.

The next post will go step 2 on the transition to the next step once your 401(k) gets sizable.