Posts filed under 'Investing'

How Worried Should You Be?

By J. David Lewis

There is little doubt virtually everyone who gets this email is well aware of recent turbulent markets.  At the end of June 2011 the S&P 500 Index returns were 30.69% for twelve months, 2.94% for five years and 2.72% for ten years.  Stock market values dropped sharply around the beginning of August and have been volatile since.  When I started drafting this text, markets had been sharply down for several days.  As I draft and edit, they have rallied.  The bulls and bears are still in their struggle.  These alternating good and bad days have been the nature of things for about sixty days.  For September 30, S&P returns were 1.14% for twelve months, -1.18% for five years and 2.82% for ten years.  It is not surprising a lot of people feel something must be done on the worst days of the down periods.  There is more to money than money®.  And, there is more to this situation than just making a few trades.   

During the recent quarter I had a conversation with another investment advisor, in which my friend asked about our portfolio adjustments in light of the markets.  This is not an unusual question.  I see several broadcasted emails a week from reporters wanting the same kind of commentary.  When I told my friend we believe in building portfolios we are satisfied to hold through tough times, he concurred that our philosophy is correct in terms of investment management. The disturbing part of the conversation was his explanation for their recent portfolio changes.   

My friend was concerned about calls from distressed clients.  He felt compelled to show them account activity to maintain their relationships.  In effect he said, “I don’t know whether what I am doing will improve investment returns or not – probably not.”  I felt he was noticeably uneasy that he was making changes solely to soothe clients.  When I described the conversation in our office, we all felt gratitude for our client relationships.  We do not feel the pressures that seem to prompt many advisors’ departure from their belief that well diversified portfolios should not be disturbed based on recent market events.  Unfortunately, I think many advisors do a lot of things to appease clients’ moods instead of well informed investment reasoning.    

We think it is important to help clients consider their securities portfolio in the context of all their resources.  It is not unusual to see someone very concerned about stock market events when all the stocks they own are a relatively small portion of their total assets.  For some fortunate people, pension and social security income cover a large percentage of their day-to-day cash needs.  Therefore, the cost of their lifestyle does not require much from their portfolio, and probably never will.  Yet, they feel considerable emotional stress from market volatility, without considering whether the portfolio is already prudent for their situation.  Possibly you can feel at least some relief by just putting your exposure to stocks into perspective relative to the rest of your resources.  Try to understand the true significance of market volatility to your personal situation.  

With this line of thinking as our context, we consider ways to create portfolios we are comfortable holding during tough market conditions.  Periods of volatile markets are virtually a certainty in the future.  They are also generally some of the worst times to change investment allocations.  Facing the fact that there will be tough markets helps develop better portfolios.   

Regularly, we merge all a client’s accounts into one portfolio listing, where mutual fund names and categories are together in a logical order. This yields a rough impression of the client’s exposure to stocks in general and various types of mutual funds.  At this level of review, we consider diversification and portfolio behavior characteristics we can reasonably expect.  Other times we create more sophisticated reports to understand allocations from different perspectives.  Because mutual funds that appear to hold U.S. stocks almost always have bonds and non-U.S. stocks, it is important to see allocations to specific types of instruments without regard to the mutual funds that hold them.  Often this deeper research reveals different allocations among instruments than the mutual fund names imply.   

With this array of tools, we can analyze how a portfolio would have behaved through the ups and downs of the past ten years, which has an unusually rich assortment of ups and downs.  This sense of portfolio resilience can go a long way toward revealing how damaging market events might really be.  We know there will be tough markets that will affect our clients’ securities portfolios.  The issue is to develop a sense for how much they will be affected.  We believe strongly that the perspective and judgment these rigors bring is far more significant than the latest news stories. In our view, changing portfolios to imply we are reacting to recent events and news seems deceptive.   

I hope this summary of our philosophy helps you understand how significant this, or any, turbulent market is for your total resources – not just your 401(k) and other investments.  It is likely you are personally less vulnerable than you may feel.  Of course, we will welcome the opportunity to give our professional opinion of your specific financial strength.   

Contact J. David Lewis directly with dlewis@resourceadv.com or share your thoughts on this topic below. He founded Resource Advisory Services in 1985.  National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986.  He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family.  55585

2 comments October 6th, 2011

The Intelligent Investor: Are ETFs a Menace? – WSJ.com

Our Comment by J. David Lewis – This is another interesting column by Jason Zweig.  For a very long time, I think I have understood many of the virtues of EFTs. Yes, their expense ratios are extremely low and they seem bound to hold exactly what they say they will hold.  So far I have not been very interested in using them for client portfolios.  Zweig calls our attention to an issue that may or may not influence our future usage.  

If one chooses to build a well diversified portfolio from ETFs, they can, with sufficient knowledge, create relatively precise allocations.  In my experience, most consumer-level investors do not seem to really understand the intricacies of managing portfolio allocations.  If the fund implies it is an ETF, they might buy it without understanding the role it could or should play in their portfolio, other that being inexpensive.  The missing piece is a clearly defined portfolio philosophy.  Having and keeping a clearly defined portfolio philosophy is the first and most important issue.   

So, with a portfolio philosophy defined, we believe we can effectively and prudently build the allocations for that philosophy with actively managed mutual funds.  For 25 years, we have built an evolving list of actively mutual funds that demonstrate their ability to perform better than their peers in unique categories.  Then, we build asset allocations with mutual funds that represent the better performers of the categories, generally based on at least five years of impressive results.  It is the active managers who make the indexes work as a reasonable representation of the markets they represent. The indexes values depend on a robust community of analysts searching for situations where the markets have not recognized value.  

I think I agree with Zweig’s conclusion that the Kauffman Foundation report may not be relevant to the individual EFT investor. Yet, I am not sure what this means for the markets in general.  The report is probably worth reading, no matter where one investor stands on using EFTs.  We should avoid closing their mind to information that challenges their beliefs.  I will put this on my reading list and see if I get to it.  Thanks again Jason.     

 Are ETFs a Menace—or Just Misunderstood?  By Jason Zweig

“Could exchange-traded funds blow up and take the markets down with them?

A report released this week argues that ETFs are “radically changing the markets,” raising the prospect of a “panic-driven market meltdown.” ETFs are funds that hold all the securities in an index and themselves trade like a stock.”  http://online.wsj.com/article/SB10001424052748704865704575610833659564558.html

Contact J. David Lewis directly with david.lewis@resourceadv.com or share your thoughts on this topic below. He founded Resource Advisory Services in 1985.  National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986.  He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 50508

Add comment November 14th, 2010

Managed-Payout Funds Help Boomers Deal With Retirement – NYTimes.com

 Our Comment by J. David Lewis – I found this article very interesting and timely.  As the excerpt below highlights, much of traditional investment discussion has focused on accumulating assets and selecting an array of instruments.  Now, at least some mutual funds are developing their marketing around the idea that they are particularly well suited to reliable streams of cash flow for the investors’ lifestyle spending.  For us the really interesting issue here is that we have been using and discussing prudent withdrawal rates from investment portfolios since the mid 1990s.  Our methodology has characteristics that are very similar to those attributed to this “new bread” of mutual funds.  While the concepts make a great deal of sense to us, we believe it is not as simple as buying a mutual fund to solve the withdrawal rate problem for any client.

 By Robert D. Hershey Jr., Published: October 9, 2010

“Although consumers have been slow to embrace managed-payout funds, the group’s rationale, at least, seems solid. The funds are aimed at investors at the stage of life when the top priority is a flow of income available for spending rather than the accumulation of assets.

Payout funds offer various approaches. Some are set up to provide a specified monthly payout, while others pay variable amounts based on what the portfolio produces. Some plan to deplete principal by a certain year; others can leave assets for heirs. Unlike annuities, payout funds have no guarantees. And they differ from target-date funds in that they are intended to get an investor “through” retirement, not “to” it.

“It’s a very attractive idea,” said Dan Culloton, Morningstar associate director of fund analysis, albeit with the caveat that its execution “is still a work in progress.”

Read the rationale via Managed-Payout Funds Help Boomers Deal With Retirement – NYTimes.com.

Contact J. David Lewis directly with david.lewis@resourceadv.com or share your thoughts on this topic below. He founded Resource Advisory Services in 1985.  National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986.  He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 

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Add comment October 24th, 2010

Dow Jones – A Fiduciary Duty For IRA Rollovers

 Our Comment by J. David Lewis – This piece represents yet one more example of the many reasons people of our country should demand higher standards from the financial services professions.  We hope new regulations next year will require the fiduciary standard for every individual who may appear to be an advisor in their approach to investors.  Whether the government does or not, everyone should educate themselves in ways to find advisors who will put the clients’ interest first in all dealings.  There is more to money than money.®

By SUZANNE BARLYN 

“Many older retirees have fewer protections than younger investors who stash their money in government-regulated workplace savings plans, says a Harvard University economics professor.

That needs to change, according to David Laibson, who studies the relationship between aging and the ability to make financial decisions.

He’s concerned because older investors suffer the highest rates of dementia and other cognitive problems. That means they’re at greater risk of financial mismanagement and fraud, Laibson said during a recent conference in Baltimore for the nations state securities regulators. The inability to solve certain problems becomes profound by the time many adults reach age 65, he said. About half of retirees between ages 80 and 89 suffer from full-blown dementia or a lesser cognitive problem, he said.

Laibson called for a fiduciary duty to apply to the management of funds rolled over into IRAs…”  Read the article via Dow Jones – A Fiduciary Duty For IRA Rollovers.

Contact J. David Lewis directly with david.lewis@resourceadv.com or share your thoughts on this topic below. He founded Resource Advisory Services in 1985.  National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986.  He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 

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Add comment October 5th, 2010

Are You Paying Too Much for Financial Planning and Advice? – CBS MoneyWatch.com

Our Comment by J. David Lewis - Jane Bryant Quinn has been a well known personal finance authority for many years.  Her columns, books and personal appearances are a continual source of reliable advice.  This  item is particularly useful because it speaks directly to a very important aspect of using professionals for financial advice – the cost you will pay.  Sometimes it is incredibly difficult to coax an advisor into revealing a clear, dollars and cents, statement for their services’ costs.  Only the most basic cost information is generally available.  Even that is very difficult to discern from lengthy documents and complex language.  Too often, the sales representative, who may appear to be an advisor, doesn’t understand the layers of costs involved in selling their company’s products.  Ms Quinn gives good guidance on learning how much you are paying for help with financial decisions. 

“How much are you paying for the financial-planning advice you get? Some investors don’t know. Others think they know but don’t. “Fee-only” planners and registered investment advisors state their fees up front. “Fee-based” advisors appear to do the same but might be charging you in other ways. Brokerage house advisory accounts charge the most and can entangle you in costs you didn’t expect.

In short, a stated fee isn’t always what it seems. For that matter, neither is an advisor. I recommend”  …… via Are You Paying Too Much for Financial Planning and Advice? – CBS MoneyWatch.com.

Contact J. David Lewis directly with david.lewis@resourceadv.com or share your thoughts on this topic below. He founded Resource Advisory Services in 1985.  National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986.  He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family. 

Add comment September 26th, 2010

Downside Protection Has Downsides – WSJ.com

 Our Comment by J. David Lewis – I really like this “Intelligent Investor” column by Jason Zweig.  He discusses the public’s reactions to recent market volatility.  Many are seeking safety in a type of annuity product.  Then he tells us pretty much what a fiduciary would tell someone asking for advice on these annuities.  I posted my comment on WSJ.com soon after I read the column, because we have seen the troubling aftermath from these annuity sales. Other WSJ.com comments are almost as interesting as the column itself.  A few attempt to justify annuity expenses and risks that are very difficult for typical consumers to understand.  Others support Mr. Zweig’s exposure of the expenses and other issues.  Potentially, the Securities and Exchange Commission will issue regulations that move all financial advisors toward a fiduciary standard that places clients’ interest first. If the regulations are strong, consumers will be better served.

 Mr. Zweig says, “Money has hemorrhaged out of “U.S. stock funds for 18 weeks in a row, with an estimated $15 billion flowing out in August alone. Much of that is being soaked up by a form of insurance sold as a safer alternative to stocks.

Fixed-indexed insurance products, commonly called “equity-indexed annuities,” offer the promise of protection on the downside combined with a guaranteed minimum upside. They racked up a record $8.2 billion in new sales in the second quarter and hit an all-time high of $168 billion in total assets as of June 30, according to Limra and Beacon Research.”

Read Mr. Zweig’s column via Downside Protection Has Downsides – WSJ.com.

Our Comment on WSJ.COM - Welcome back Jason.  I have missed your weekend stream of wisdom.  This column is particularly well timed.  Until April of this year, I was getting concerned that people were loosing some of the cautious mentality brought on by the bear market.  It seems the volatility since May 31 has injected a healthy dose of memory.  Of course, with that comes the tendency for people to fall pray to a sense of certainty, even if there are downsides they do not recognize.  There are always risks in everything.  The trick is to see them clearly and make good decisions with them in sight. 

In my experience, it is not the risks we can see that give us trouble.  We deal with those.  The risks we don’t see are the ones that get us.  And, the salesman, who is not held to a fiduciary standard of putting the client’s interest first, has great temptation to avoid giving his or her customer a clear explanation of all the risks that the customer is not able to see on their own.  In deed, being paid by commissions can motivate the sales people themselves to believe there is no risk in these annuities they are selling.  It is amazing what some people will believe if you pay them enough to believe a line. 

J. David Lewis founded Resource Advisory Services in 1985.  National Association of Personal Financial Advisors (NAPFA) was formed only a few years before. Lewis became a NAPFA-Registered Financial Advisor in 1986.  He is a passionate advocate for fiduciary, fee-only financial planning and has been associated with financial services since childhood in a banking family.  Contact him using david.lewis@resourceadv.com.

Add comment September 5th, 2010

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