When you go shopping for a house, TV, clothes, or car, you understand that you need to shop around.
Shopping allows you to better understand the nature of the product you might buy. What are the options? What is the price range? How is the product sold? How is it supported after purchase?
If you don't do a good job of shopping around, you are very likely to pick an inferior product or pay too high a price. So, it pays to shop around.
The same can be said when it comes to looking for investing or financial advice: you need to do some comparison shopping. (In fact, I think that the expense and impact of good or bad financial advice far out-weighs the cost and benefit of a house, TV, clothes or car. But, then again, this is what I do for a living.)
But, many consumers don't comparison shop for investing advice. They pick the person they already know who does it, or a golfing buddy. Some people ask for referrals from friends, family or coworkers, but then don't find out who else is out there or what they have to offer. How do you know what you're getting is any good if you don't know what else is being sold and at what price? The worst way to pick such advice is to wait for someone to come to you--you know, the shark with his fin showing.
What types of things do you need to find out from a potential adviser? Start with their track record: how are they doing with their own money?
Would you want to work with a plumber who can't fix her own pipes, or a doctor that can't successfully diagnose patients? Then, why would you want to work with an financial adviser who hasn't succeeded financially themselves (or are on a clear path to doing so)?
It is shocking how few advisers follow their own advice. Most mutual fund managers don't put but a small amount of their own cash into the fund they manage. Many sellers of insurance and annuities buy the minimum required so they can say they buy the product they sell. A good adviser puts most of their money into the product or service they sell. If they say it is good for you, why wouldn't they be fully invested themselves?
Another thing to find out from an adviser is how they are paid. If they are paid a commission to sell a product, don't expect much support after the sale. If they pass you off to someone else after the sale, you just bought a service from a rainmaker--good luck with that. The best situation is when their pay is aligned with your interests in some way. If you don't understand how they are getting paid or they are evasive in answering your questions, be wary.
Another question to ask is how much a potential adviser charges? Be careful, because you may be comparing apples and oranges. A Porsche doesn't sell at the same price as a Yugo, so don't expect a good adviser to be lowest cost. Make sure you understand how much you would be paying relative to similar services. If the rate is above or below average, then assess whether it makes sense to pay more or less. Higher touch service is higher cost, so is higher performance service. Price is not a figure in a vacuum, it belongs in the context of the value you are getting.
Finding good financial advice is hard. There just aren't that many people out there who are good with their money. Also, the investing advice business is structured to sell products and services, not specifically to help clients, so investors are understandably wary.
To get good advice, you need to shop around. Find out what services are available at what price. Talk to many people in the field to get to the point you understand what you are buying and the quality of the person you are buying from.
As they say, if you don't know jewelry, know the jeweler. To get good investing advice, you don't need to know investing, but you do need to know your investing adviser.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, July 25, 2014
Friday, July 18, 2014
Show me your numbers
Most investors don't really know how they are doing.
One reason is that many investment advisers don't report their performance. Jason Zweig pointed this out in a Wall Street Journal article this past weekend.
Another reason is that most investors don't know what the numbers mean. Are the numbers reported before fees or after fees? Do the numbers include contributions and withdrawals, or are they time-weighted to remove that impact (investment advisers shouldn't get credit for your deposits)? Is performance compared against a relevant benchmark? Many advisers would prefer to keep their clients in the dark, otherwise such clients would know how poorly they are doing.
Even more investors don't really want to know how they are doing. It's kind of like deciding to step on the scale--or not--after the holidays. Do you really want to know how much weight you've put on?
But, not reporting, not understanding, and not looking won't change the underlying reality. Reaching your financial goals is too important to play ostrich.
Make sure your investment adviser reports their performance accurately. Such results should comply with industry standards, include fees, adjust for deposits/withdrawals, and be compared to a relevant benchmark.
If you don't understand the numbers, ask questions. Evasive answers should raise red flags in you mind. Clear descriptions should give you comfort.
If you want peace of mind, you need to know where you are going and whether you are getting there. With investing, accurate reporting is not a nice-to-have, but a necessity.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
One reason is that many investment advisers don't report their performance. Jason Zweig pointed this out in a Wall Street Journal article this past weekend.
Another reason is that most investors don't know what the numbers mean. Are the numbers reported before fees or after fees? Do the numbers include contributions and withdrawals, or are they time-weighted to remove that impact (investment advisers shouldn't get credit for your deposits)? Is performance compared against a relevant benchmark? Many advisers would prefer to keep their clients in the dark, otherwise such clients would know how poorly they are doing.
Even more investors don't really want to know how they are doing. It's kind of like deciding to step on the scale--or not--after the holidays. Do you really want to know how much weight you've put on?
But, not reporting, not understanding, and not looking won't change the underlying reality. Reaching your financial goals is too important to play ostrich.
Make sure your investment adviser reports their performance accurately. Such results should comply with industry standards, include fees, adjust for deposits/withdrawals, and be compared to a relevant benchmark.
If you don't understand the numbers, ask questions. Evasive answers should raise red flags in you mind. Clear descriptions should give you comfort.
If you want peace of mind, you need to know where you are going and whether you are getting there. With investing, accurate reporting is not a nice-to-have, but a necessity.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, July 11, 2014
Past performance is not an indicator of future results
Every money manager must say that past performance is not an indicator of future results, but most investors ignore this warning.
In fact, most investors--individual and professionals alike--use past performance to choose money managers.
That's a big mistake.
S&P Dow Jones recently reported on why: investment performance is rarely persistent. Put differently, past performance really doesn't tell you much about future returns.
How bad are the numbers? Out of the 687 mutual funds that were in the top one-quarter in March 2012, only 3.8% were there again two years later (purely random results would have indicated 6.25% would have remained).
Out of the 1,372 mutual funds that were in the top one-half in March 2012 , only 18.7% were there two years later (purely random results would have indicated 25% would have remained).
Just because a money manager beats the market in one period does not mean they will in the following period. In fact, it is much more likely they won't.
Over 5 years, the numbers are even more stark. Out of 715 mutual funds in the top one-quarter in March 2010, only 0.3% were there again four years later (purely random: 0.4%).
Out of 1,431 mutual funds in the top-half of in March 2010, only 4.5% were there again four years later (purely random: 6.25%).
Does that mean that no one can beat the market? No. Does it mean it is very hard for someone to do so? Yes. It is even harder to tell the difference between those who can do it persistently and those who can't.
Investors who use past performance to chose money managers are taking a huge risk.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
In fact, most investors--individual and professionals alike--use past performance to choose money managers.
That's a big mistake.
S&P Dow Jones recently reported on why: investment performance is rarely persistent. Put differently, past performance really doesn't tell you much about future returns.
How bad are the numbers? Out of the 687 mutual funds that were in the top one-quarter in March 2012, only 3.8% were there again two years later (purely random results would have indicated 6.25% would have remained).
Out of the 1,372 mutual funds that were in the top one-half in March 2012 , only 18.7% were there two years later (purely random results would have indicated 25% would have remained).
Just because a money manager beats the market in one period does not mean they will in the following period. In fact, it is much more likely they won't.
Over 5 years, the numbers are even more stark. Out of 715 mutual funds in the top one-quarter in March 2010, only 0.3% were there again four years later (purely random: 0.4%).
Out of 1,431 mutual funds in the top-half of in March 2010, only 4.5% were there again four years later (purely random: 6.25%).
Does that mean that no one can beat the market? No. Does it mean it is very hard for someone to do so? Yes. It is even harder to tell the difference between those who can do it persistently and those who can't.
Investors who use past performance to chose money managers are taking a huge risk.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, June 20, 2014
The stock market could jump up or tank this summer, be prepared
Will the market drop this summer? Does it matter? Yes, and no.
The hardest thing about investing is dealing with emotional swings. People really want the market to go up and never go down, but wishing won't make it so.
These emotional swings lead people to make big mistakes. Many sold in 2008-2009 and haven't gotten re-invested. The opportunity cost of that is HUGE.
It's better just to start with the premise that the market can go up 100% and down 50% (as Benjamin Graham suggested decades ago). Just accept that now because it has throughout recorded history.
If you are rattled by that prospect, then you don't belong in the game (and you'll have to save roughly three times more money per year to reach the same goal as someone who is investing in stocks).
If you invest, you must be prepared for such swings, even though that is tough to do.
Could the market tank this summer? Yes. Will it? No one knows. If it does, you need to be emotionally prepared to handle a drop.
Could the market continue marching up and double over the next 7 years? Sure. Will it? No one knows, so just be prepared.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
The hardest thing about investing is dealing with emotional swings. People really want the market to go up and never go down, but wishing won't make it so.
These emotional swings lead people to make big mistakes. Many sold in 2008-2009 and haven't gotten re-invested. The opportunity cost of that is HUGE.
It's better just to start with the premise that the market can go up 100% and down 50% (as Benjamin Graham suggested decades ago). Just accept that now because it has throughout recorded history.
If you are rattled by that prospect, then you don't belong in the game (and you'll have to save roughly three times more money per year to reach the same goal as someone who is investing in stocks).
If you invest, you must be prepared for such swings, even though that is tough to do.
Could the market tank this summer? Yes. Will it? No one knows. If it does, you need to be emotionally prepared to handle a drop.
Could the market continue marching up and double over the next 7 years? Sure. Will it? No one knows, so just be prepared.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Wednesday, June 04, 2014
What if inflation isn't low?
Provocative article in CFA Institute Magazine questioning if inflation isn't really low. What if inflation stats are misreporting actual inflation? What if central banks are keeping rates low and that is causing the income inequality that so many commentators are braying about?
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Tuesday, June 03, 2014
Market timing and market valuation
Excellent article from Morningstar on market timing and valuation.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, May 30, 2014
Retirement prep
Planning for retirement stresses most people out. Most people don't know how much to save fore retirement. Added to this, they have misconceptions about retirement itself.
With these two ideas in mind, I have two Wall Street Journal articles to recommend.
The first highlights online calculators that help you figure out how much to save for retirement. Let me ruin the plot: there are no magical calculators that tell you everything you need to know. Retirement calculators are all based on assumptions about a future that no one can know with precision. But, the process is worthwhile. Remember Eisenhower's quote: "Plans are nothing; planning is everything." Don't expect the calculators to give you quick and easy answers, but do expect the process to enlighten your understanding and inform your future actions.
The second highlights myths that most hold about retirement. Here, I'll quote Mark Twain, "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." Most retire early because they have health problems or get fired--before they are ready to retire. Getting rehired isn't that easy. Buying a second home doesn't work out that well. You will have medical costs that Medicare doesn't cover. You'll probably spend more than you expect in retirement.
Everyone can prepare for retirement and succeed, but few do. Focus on planning instead of a plan, and make sure you aren't deluding yourself about the nature of retirement.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
With these two ideas in mind, I have two Wall Street Journal articles to recommend.
The first highlights online calculators that help you figure out how much to save for retirement. Let me ruin the plot: there are no magical calculators that tell you everything you need to know. Retirement calculators are all based on assumptions about a future that no one can know with precision. But, the process is worthwhile. Remember Eisenhower's quote: "Plans are nothing; planning is everything." Don't expect the calculators to give you quick and easy answers, but do expect the process to enlighten your understanding and inform your future actions.
The second highlights myths that most hold about retirement. Here, I'll quote Mark Twain, "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." Most retire early because they have health problems or get fired--before they are ready to retire. Getting rehired isn't that easy. Buying a second home doesn't work out that well. You will have medical costs that Medicare doesn't cover. You'll probably spend more than you expect in retirement.
Everyone can prepare for retirement and succeed, but few do. Focus on planning instead of a plan, and make sure you aren't deluding yourself about the nature of retirement.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, May 16, 2014
Don't invest with your gut
Most investors use their gut to guide their investing choices. Perhaps that's why so few are prepared for retirement.
MarketWatch had a good article on this subject this past week.
Many investors have unrealistic expectations for future returns. They think they need 10% returns above inflation to reach their goals. But, after inflation, returns over the last 50 years have been 5-6%--half of what investors think they need.
Also, more than half of investors want to generate returns with minimal risk. But, is it possible to generate above average returns with little risk?
Almost 80% of investors say they follow their gut instinct to invest while only 25% say their investment knowledge is strong. If you are using your gut and know it's unknowledgeable, you're in trouble.
Your gut is great for telling you that you are hungry, or ill, or infatuated, but it's not a robust tool for investment decision making.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
MarketWatch had a good article on this subject this past week.
Many investors have unrealistic expectations for future returns. They think they need 10% returns above inflation to reach their goals. But, after inflation, returns over the last 50 years have been 5-6%--half of what investors think they need.
Also, more than half of investors want to generate returns with minimal risk. But, is it possible to generate above average returns with little risk?
Almost 80% of investors say they follow their gut instinct to invest while only 25% say their investment knowledge is strong. If you are using your gut and know it's unknowledgeable, you're in trouble.
Your gut is great for telling you that you are hungry, or ill, or infatuated, but it's not a robust tool for investment decision making.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, April 25, 2014
Save more!
The most important key to reaching your financial goals: saving.
You can't get good returns on money you don't save and invest.
You may not be able to control inflation, tax rates, bond or stock returns, but you have complete control over your savings.
This point was nicely made in a recent Wall Street Journal article, "If You're Not Saving, You're Losing Out."
The last 15 years have felt like a wasteland for portfolio growth if you just look at market appreciation. The Dow Jones Industrial Average, S&P 500 and NASDAQ indexes are up are 4-5% annualized over the last 15 years. That doesn't look or feel like huge portfolio growth.
But, if you have been saving over the last 15 years, then your portfolio's growth probably doesn't look bad. In fact, your saving has probably caused more portfolio growth than investment appreciation or dividends. That's not a bad thing, unless of course you haven't been saving.
The easiest route to financial independence is through consistent saving. Getting great returns helps enhance the outcome, but the savings comes first, and contributes the most.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
You can't get good returns on money you don't save and invest.
You may not be able to control inflation, tax rates, bond or stock returns, but you have complete control over your savings.
This point was nicely made in a recent Wall Street Journal article, "If You're Not Saving, You're Losing Out."
The last 15 years have felt like a wasteland for portfolio growth if you just look at market appreciation. The Dow Jones Industrial Average, S&P 500 and NASDAQ indexes are up are 4-5% annualized over the last 15 years. That doesn't look or feel like huge portfolio growth.
But, if you have been saving over the last 15 years, then your portfolio's growth probably doesn't look bad. In fact, your saving has probably caused more portfolio growth than investment appreciation or dividends. That's not a bad thing, unless of course you haven't been saving.
The easiest route to financial independence is through consistent saving. Getting great returns helps enhance the outcome, but the savings comes first, and contributes the most.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, April 18, 2014
Athena Capital 1Q14 Client Letter
Athena Capital's 1st quarter client letter is available.
In it, I cover our investment results, my view of the market and economy, and how to set retirement milestones.
Let me know if you have any questions or comments on it!
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
In it, I cover our investment results, my view of the market and economy, and how to set retirement milestones.
Let me know if you have any questions or comments on it!
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, April 11, 2014
Succeeding unconventionally
John Keynes once said, "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."
What he meant is that people would do better if they were focused less on their reputation and more on what works, but they don't.
In investing, you cannot do better than average by doing what everyone else is doing. This seems plain and simple, until investors become uncomfortable doing or being asked to do something the crowd isn't.
Howard Marks, the chairman of Oaktree Capital, illustrates these points brilliantly in his latest letter to investors, Dare to Be Great II.
For those of you who don't want to read the 9 page letter, I'll summarize with quotes:
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
What he meant is that people would do better if they were focused less on their reputation and more on what works, but they don't.
In investing, you cannot do better than average by doing what everyone else is doing. This seems plain and simple, until investors become uncomfortable doing or being asked to do something the crowd isn't.
Howard Marks, the chairman of Oaktree Capital, illustrates these points brilliantly in his latest letter to investors, Dare to Be Great II.
For those of you who don't want to read the 9 page letter, I'll summarize with quotes:
- The real question is whether you dare to do the things that are necessary in order to be great. Are you willing to be different, and are you willing to be wrong? In order to have a chance at great results, you have to be open to being both.
- ...you can't take the same actions as everyone else and expect to outperform.
- By definition, non-consensus ideas that are popular, widely held or intuitively obvious are an oxymoron.
- Most great investments begin in discomfort.
- To succeed at any activity involving the pursuit of gain, we have to be able to withstand the possibility of loss.
- But it's crippling to have to avoid all failures, and insisting on doing so can't be a winning strategy. It may guarantee you against losses, but it's likely to guarantee you against gains as well.
- I'm convinced that everything that's important in investing is counterintuitive, and everything that is obvious is wrong.
- Unconventional behavior is the only road to superior investment results, but it isn't for everyone. In addition to superior skill, successful investing requires the ability to look wrong for a while and to survive some mistakes.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, April 04, 2014
Investment advice isn't only about maximizing returns
Generating above average returns isn't the only way investment advisers help clients.
As Vanguard has recently pointed out, investors on their own tend to make bad mistakes that destroy returns over time.
Investment advisers can help their clients make better decisions in key areas that dramatically impact long run returns:
I agree with Vanguard's findings and believe it highlights what many investors may be missing: investment advisers help clients reach their goals not just through investment selection, but by providing prudent and effective advice that can significantly impact returns over time.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
As Vanguard has recently pointed out, investors on their own tend to make bad mistakes that destroy returns over time.
Investment advisers can help their clients make better decisions in key areas that dramatically impact long run returns:
- keeping clients on an even keel emotionally by guiding them to be fearful when others are greedy and greedy when others are fearful
- guiding clients toward tax-efficient investing without making tax planning an all-consuming goal
- keeping client investment costs low
- guiding clients to rebalance their portfolios: selling what has gone up and buying what has gone down
I agree with Vanguard's findings and believe it highlights what many investors may be missing: investment advisers help clients reach their goals not just through investment selection, but by providing prudent and effective advice that can significantly impact returns over time.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, March 14, 2014
Returns through the windshield, not the rear-view mirror
What kind of returns are you expecting over the next 5 to 10 years?
Most people look at history as a guide to answer such a question, but is that really the right approach?
The Wall Street Journal published a good article last week on just this issue.
Most investors expect 5-10% returns because that's what they've seen in the past. Those same investors thought 15-20% returns were possible in 2000. Not so much. They also thought housing prices would go up much faster than inflation back in 2006. Wrong, there, too.
Why can history be a poor guide? Think about throwing a ball into the air. If you project the first part of its upward flight into the future, you'd think it would keep going up. But, that doesn't factor in good ole gravity.
The same is true with investing. You can look at the past, but you have to factor in where things started, where they ended, and what forces may cause projected trends to change.
By looking at such underlying factors, I think you can expect 1% to 7% returns over the next 5 years, 4% to 8% returns over the next 10 years, and 6% to 8.5% returns over the next 20 years.
Keep in mind, those numbers include inflation, so you have to subtract around 2.5% from each figure to get the real return (what your dollars can actually buy in the future). And, yes, that means we could experience negative real returns over the next 5 years.
Those numbers aren't terrible, but they aren't what most people are expecting (especially after a year when the S&P 500 was up over 32%!).
If you need to drive from Colorado Springs to Denver and need to arrive at 4 pm, you can't get there by leaving at 3:30 pm and driving 120 miles per hour. Assuming the wrong rate prevents you from reaching your destination on time.
The same is true with investing. Assuming the wrong rate of investment growth will cause you to save too little, and not have enough to retire when you want.
To plan a safe retirement journey, plan accordingly.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Most people look at history as a guide to answer such a question, but is that really the right approach?
The Wall Street Journal published a good article last week on just this issue.
Most investors expect 5-10% returns because that's what they've seen in the past. Those same investors thought 15-20% returns were possible in 2000. Not so much. They also thought housing prices would go up much faster than inflation back in 2006. Wrong, there, too.
Why can history be a poor guide? Think about throwing a ball into the air. If you project the first part of its upward flight into the future, you'd think it would keep going up. But, that doesn't factor in good ole gravity.
The same is true with investing. You can look at the past, but you have to factor in where things started, where they ended, and what forces may cause projected trends to change.
By looking at such underlying factors, I think you can expect 1% to 7% returns over the next 5 years, 4% to 8% returns over the next 10 years, and 6% to 8.5% returns over the next 20 years.
Keep in mind, those numbers include inflation, so you have to subtract around 2.5% from each figure to get the real return (what your dollars can actually buy in the future). And, yes, that means we could experience negative real returns over the next 5 years.
Those numbers aren't terrible, but they aren't what most people are expecting (especially after a year when the S&P 500 was up over 32%!).
If you need to drive from Colorado Springs to Denver and need to arrive at 4 pm, you can't get there by leaving at 3:30 pm and driving 120 miles per hour. Assuming the wrong rate prevents you from reaching your destination on time.
The same is true with investing. Assuming the wrong rate of investment growth will cause you to save too little, and not have enough to retire when you want.
To plan a safe retirement journey, plan accordingly.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Tuesday, March 11, 2014
America needs to rethink retirement
Very thought-provoking article on rethinking retirement.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, March 07, 2014
Try to time the market: get lousy returns
More evidence pours out each year that investors get worse returns than the mutual funds they invest in. The reason isn't high fees, but the actions of investors themselves.
Basically, investors try to time their purchases of mutual funds.
They buy mutual funds that have "been working" and sell the one's that "haven't been working."
They "go to the sidelines" when markets look scary, like they did in 2008-2009, and only put their money back to into stocks after "the coast is clear."
They try to buy into "alternative" investments, or speculate in commodities, or decide to jump into and out of foreign markets.
All of this action causes them to buy and sell at the wrong times, thus dramatically reducing the returns they receive relative to the underlying performance of the mutual funds they choose.
The solution is to stop trying to buy and sell at all. Instead, investors should do enough homework to pick the best investment choice, and then stick with it.
Will their net worth go up and down with crazy market swings? Yes. Would such investors get better returns? Also, yes.
Sometimes the hardest decision is the decision of what not to do.
Investors should decide not to buy and sell in an effort to time the market. They would end up much better off if they did.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Basically, investors try to time their purchases of mutual funds.
They buy mutual funds that have "been working" and sell the one's that "haven't been working."
They "go to the sidelines" when markets look scary, like they did in 2008-2009, and only put their money back to into stocks after "the coast is clear."
They try to buy into "alternative" investments, or speculate in commodities, or decide to jump into and out of foreign markets.
All of this action causes them to buy and sell at the wrong times, thus dramatically reducing the returns they receive relative to the underlying performance of the mutual funds they choose.
The solution is to stop trying to buy and sell at all. Instead, investors should do enough homework to pick the best investment choice, and then stick with it.
Will their net worth go up and down with crazy market swings? Yes. Would such investors get better returns? Also, yes.
Sometimes the hardest decision is the decision of what not to do.
Investors should decide not to buy and sell in an effort to time the market. They would end up much better off if they did.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, February 28, 2014
Buffett's advice
Part of Warren Buffett's annual letter to shareholders appeared in Fortune magazine this week (click here to read the article). It's short and worth reading.
In it, Buffett spells out the investment advice that he and his mentor, Benjamin Graham, have spelled out for years.
"Investing is most intelligent when it is most businesslike."
Buffett describes two real estate investment he made that have done well: one a farm in Omaha and the other a New York City retail property. In both cases, the properties were purchased when no one wanted to own them, so he bought at very reasonable prices (10% yields with the potential for asset growth over time).
He was investing in real assets, not pieces of paper on an exchange. He evaluated the cash flow potential relative to the price to be paid, and recognized a good deal with limited downside. He didn't care if others liked or didn't like the price. He didn't care if they generated excellent returns right away. He was thinking long term, and he was thinking about the specific properties and his ability to evaluate them.
"You don't need to be an expert in order to achieve satisfactory investment returns."
"Focus on the future productivity of the asset you are considering."
"If you instead focus on the prospective price change of a contemplated purchase, you are speculating."
"Forming macro opinions or listening to macro or market predictions of others is a waste of time."
"Stocks provide you a minute-to-minute [quoted prices] for your holdings, whereas I have yet to see quotation for either my farm or the New York real estate."
"Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well."
"When...I buy stocks -- which [I] think of as small portions of businesses -- [my] analysis is very similar to that which [I] use in buying entire businesses."
"Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power."
"The goal of the nonprofessional should not be to pick winners -- neither he nor his "helpers" can do that -- but should rather be to own a cross section of businesses that in aggregate are bound too do well." By "helpers," Buffett means financial planners or investment advisers who don't understand how to value businesses, or choose not to make the effort.
If you or your helpers don't know how to value businesses, then a low cost index fund is the way to go.
Don't try to time the market by getting in when it is "hot," and out when things look "scary." You will do worse if you try.
"Price is what you pay, value is what you get."
After Buffett dies, his advice to the trustee who will manage his wife's money is to invest 10% in short term government bonds, and 90% in a very low cost S&P 500 index fund. He's putting his money where his mouth is.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
In it, Buffett spells out the investment advice that he and his mentor, Benjamin Graham, have spelled out for years.
"Investing is most intelligent when it is most businesslike."
Buffett describes two real estate investment he made that have done well: one a farm in Omaha and the other a New York City retail property. In both cases, the properties were purchased when no one wanted to own them, so he bought at very reasonable prices (10% yields with the potential for asset growth over time).
He was investing in real assets, not pieces of paper on an exchange. He evaluated the cash flow potential relative to the price to be paid, and recognized a good deal with limited downside. He didn't care if others liked or didn't like the price. He didn't care if they generated excellent returns right away. He was thinking long term, and he was thinking about the specific properties and his ability to evaluate them.
"You don't need to be an expert in order to achieve satisfactory investment returns."
"Focus on the future productivity of the asset you are considering."
"If you instead focus on the prospective price change of a contemplated purchase, you are speculating."
"Forming macro opinions or listening to macro or market predictions of others is a waste of time."
"Stocks provide you a minute-to-minute [quoted prices] for your holdings, whereas I have yet to see quotation for either my farm or the New York real estate."
"Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally as well."
"When...I buy stocks -- which [I] think of as small portions of businesses -- [my] analysis is very similar to that which [I] use in buying entire businesses."
"Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power."
"The goal of the nonprofessional should not be to pick winners -- neither he nor his "helpers" can do that -- but should rather be to own a cross section of businesses that in aggregate are bound too do well." By "helpers," Buffett means financial planners or investment advisers who don't understand how to value businesses, or choose not to make the effort.
If you or your helpers don't know how to value businesses, then a low cost index fund is the way to go.
Don't try to time the market by getting in when it is "hot," and out when things look "scary." You will do worse if you try.
"Price is what you pay, value is what you get."
After Buffett dies, his advice to the trustee who will manage his wife's money is to invest 10% in short term government bonds, and 90% in a very low cost S&P 500 index fund. He's putting his money where his mouth is.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, February 21, 2014
Investing: simple but not easy
As Warren Buffett said, investing is simple, but not easy.
The concepts are simple to understand, but executing those simple concepts isn't easy.
People shoot themselves in the foot by paying too-high fees, trying to time their entry and exit from the market, and by picking lousy advisers. Our psychology makes us our own worst enemy.
Instead of doing the homework necessary to get and stay on the right track, most want short-cuts. Those short-cuts lead to a ditch.
When picking an adviser, the most important thing to know is their character. Not their credentials, not their schooling, not even their knowledge. Smart people with bad character are just better at ripping you off.
How do you know a person's character? It's not easy, but it is simple. Look at how they are compensated. Find out if they follow their own advice. Talk to their current and former clients. Are they willing to admit their own mistakes? Are they forthright, or evasive? Does such homework take some extra work? Yes. Is it worth it? Yes.
If they have credentials, are those credentials legitimate? Seeing that someone has some letters after their name is not due diligence. Some programs are a sham done over a weekend. Others take years and are excruciatingly difficult to get through. If you don't know the difference, how do you know how your money will be handled?
What is an adviser's investment process? Can they explain it, or do they talk patronizingly to you as if you were a 5-year-old? Does it make sense to you, or does it sound shady? If you don't know how they do what they do, then you'll panic at the first difficulty--and there will always be difficulties.
Respecting and admiring your investment adviser is important; thinking that you'd like to spend your free time with them isn't. You aren't looking for a buddy, you're looking for sound financial advice. If you want a loyal friend, get a dog. Nothing is more likely to prevent you from reaching your goals as not wanting to hurt a friend's feelings.
Be objective in this process. Pick character first, check up on an adviser's background, know and agree with their process at some level, and pick someone you respect over someone that seems oh-so-nice.
Reaching your financial goals is too important to take short-cuts. Do the work, reap the benefits. It's not easy, but it is simple.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
The concepts are simple to understand, but executing those simple concepts isn't easy.
People shoot themselves in the foot by paying too-high fees, trying to time their entry and exit from the market, and by picking lousy advisers. Our psychology makes us our own worst enemy.
Instead of doing the homework necessary to get and stay on the right track, most want short-cuts. Those short-cuts lead to a ditch.
When picking an adviser, the most important thing to know is their character. Not their credentials, not their schooling, not even their knowledge. Smart people with bad character are just better at ripping you off.
How do you know a person's character? It's not easy, but it is simple. Look at how they are compensated. Find out if they follow their own advice. Talk to their current and former clients. Are they willing to admit their own mistakes? Are they forthright, or evasive? Does such homework take some extra work? Yes. Is it worth it? Yes.
If they have credentials, are those credentials legitimate? Seeing that someone has some letters after their name is not due diligence. Some programs are a sham done over a weekend. Others take years and are excruciatingly difficult to get through. If you don't know the difference, how do you know how your money will be handled?
What is an adviser's investment process? Can they explain it, or do they talk patronizingly to you as if you were a 5-year-old? Does it make sense to you, or does it sound shady? If you don't know how they do what they do, then you'll panic at the first difficulty--and there will always be difficulties.
Respecting and admiring your investment adviser is important; thinking that you'd like to spend your free time with them isn't. You aren't looking for a buddy, you're looking for sound financial advice. If you want a loyal friend, get a dog. Nothing is more likely to prevent you from reaching your goals as not wanting to hurt a friend's feelings.
Be objective in this process. Pick character first, check up on an adviser's background, know and agree with their process at some level, and pick someone you respect over someone that seems oh-so-nice.
Reaching your financial goals is too important to take short-cuts. Do the work, reap the benefits. It's not easy, but it is simple.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, February 07, 2014
I wrote a couple weeks ago about the right stock/bond mix before and during retirement.
Another good article appeared in the WSJ this past week that is also worth reading on the same subject.
The concept of reducing your stock exposure slowly as you age is being questioned. Perhaps it's better to have a lot less stock just before and early into retirement, but then increase the stock portion as retirement goes on.
I think this is a much more intelligent way to think about retirement planning and should be reiterated.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Another good article appeared in the WSJ this past week that is also worth reading on the same subject.
The concept of reducing your stock exposure slowly as you age is being questioned. Perhaps it's better to have a lot less stock just before and early into retirement, but then increase the stock portion as retirement goes on.
I think this is a much more intelligent way to think about retirement planning and should be reiterated.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, January 31, 2014
So much for the safety of bonds
Bonds had a lousy 2013. Most investors think bonds are always safer than stocks, but it depends on what you are buying and the price you pay.
Last year, the 1-3 year Treasury Bond ETF (SHY) generated a 0.23% return. That's one-tenth of inflation.
The 3-7 year Treasury Bond ETF (IEI) returned -1.95%.
The 7-10 year Treasury Bond ETF (IEF) returned -6.12%
The Treasury Inflation Protection Bond ETF (TIP) generated -8.65% return.
The 10-20 year Treasury Bond ETF (TLH) returned -8.48%.
The 20+ year Treasury Bond ETF (TLT) returned -13.91%.
Oh, by the way, the S&P 500 ETF (IVV) returned +32.31%.
What happened? As has been long predicted, interest rates went up. That's it. When interest rates go up, bond prices go down.
When you buy bonds at high prices and low yield, you get return-less risk instead of risk-less return.
Bond yields are higher, but not high relative to history. The bond bull market that began in the early 1980's saw yields in the teens. Today long government bonds are yielding 2.6% to 3.6%. I don't know which way they will go, but yields still have more room to go up than down.
Bonds are safe when they are priced to provide good returns, not at any price--just like stocks provide good returns when priced accordingly.
No financial instrument is inherently safe. It depends on what you buy, and the price you pay.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Last year, the 1-3 year Treasury Bond ETF (SHY) generated a 0.23% return. That's one-tenth of inflation.
The 3-7 year Treasury Bond ETF (IEI) returned -1.95%.
The 7-10 year Treasury Bond ETF (IEF) returned -6.12%
The Treasury Inflation Protection Bond ETF (TIP) generated -8.65% return.
The 10-20 year Treasury Bond ETF (TLH) returned -8.48%.
The 20+ year Treasury Bond ETF (TLT) returned -13.91%.
Oh, by the way, the S&P 500 ETF (IVV) returned +32.31%.
What happened? As has been long predicted, interest rates went up. That's it. When interest rates go up, bond prices go down.
When you buy bonds at high prices and low yield, you get return-less risk instead of risk-less return.
Bond yields are higher, but not high relative to history. The bond bull market that began in the early 1980's saw yields in the teens. Today long government bonds are yielding 2.6% to 3.6%. I don't know which way they will go, but yields still have more room to go up than down.
Bonds are safe when they are priced to provide good returns, not at any price--just like stocks provide good returns when priced accordingly.
No financial instrument is inherently safe. It depends on what you buy, and the price you pay.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, January 24, 2014
In retirement: how much bonds and stocks?
Most people cling to the idea that people should invest in stocks when young and bonds when old.
Specifically, many believe that young people can stand the risk of stocks and retirees can't, so you should start 100% stocks when young and gradually increase your bond percentage until you have 100% bonds late in retirement. Sound familiar?
This advice tends to sound like:
Some provocative research indicates this may be the wrong way to think about asset allocation.
The riskiest period for retirees is right before and early in retirement. If they own a bunch of bonds or stocks that tank in that critical time period, it is hard for them to recover.
Added to this, as a retiree ages, their greatest risk is running out of money because their assets don't appreciate enough relative to inflation or how long they live.
Instead, the new approach indicates a U-shaped path, with lots of stocks early and late, and more bonds in the middle. The idea is that you get lots of growth early, less right before and early in retirement, and then ratchet up the stocks to make sure you outrun your age and inflation.
Although I think that is better advice than just increasing bond holdings linearly over time, I think it may miss the risk of stocks and bonds at certain times.
Bonds had a lousy year last year, and stocks did wonderfully. The extremely low rates on bonds should have been a warning, but many people think bonds are inherently safe and don't understand that bonds decline in price when interest rates rise.
Same with stocks. Stocks are better investments when they are cheap than when they are expensive. Knowing when to own one versus the other may mean the difference between collecting cans or enjoying retirement.
Having the right mix of assets before and during retirement is vital to successfully navigating retirement. The task shouldn't be taken lightly or with imprecise rules of thumb that don't always work.
Fortune favor the prepared mind.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Specifically, many believe that young people can stand the risk of stocks and retirees can't, so you should start 100% stocks when young and gradually increase your bond percentage until you have 100% bonds late in retirement. Sound familiar?
This advice tends to sound like:
- own 100% stocks when you are 25
- 80% stocks and 20% bonds when you are 35
- 70%/30% at 45
- 60%/40% at 55
- 50%/50% at 65
- 40%/60% at 75
- 20%/80% at 85
- 100% bonds in your 90's
Some provocative research indicates this may be the wrong way to think about asset allocation.
The riskiest period for retirees is right before and early in retirement. If they own a bunch of bonds or stocks that tank in that critical time period, it is hard for them to recover.
Added to this, as a retiree ages, their greatest risk is running out of money because their assets don't appreciate enough relative to inflation or how long they live.
Instead, the new approach indicates a U-shaped path, with lots of stocks early and late, and more bonds in the middle. The idea is that you get lots of growth early, less right before and early in retirement, and then ratchet up the stocks to make sure you outrun your age and inflation.
Although I think that is better advice than just increasing bond holdings linearly over time, I think it may miss the risk of stocks and bonds at certain times.
Bonds had a lousy year last year, and stocks did wonderfully. The extremely low rates on bonds should have been a warning, but many people think bonds are inherently safe and don't understand that bonds decline in price when interest rates rise.
Same with stocks. Stocks are better investments when they are cheap than when they are expensive. Knowing when to own one versus the other may mean the difference between collecting cans or enjoying retirement.
Having the right mix of assets before and during retirement is vital to successfully navigating retirement. The task shouldn't be taken lightly or with imprecise rules of thumb that don't always work.
Fortune favor the prepared mind.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
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