Posts filed under ‘Financial Planning’
Philosophical Friday: Investing is Like Religion
Nothing like the subject of religion to make people feel uncomfortable, so why not dive in!
Investing Is Like Religion: Everyone believes their religion will lead them down the right path to spiritual prosperity. Adherants.com divides religions into 22 separate groupings. If you look at the loosely grouped big five (Christianity, Judaism, Islam, Hinduism, and Buddhism), these cover the vast majority of religious practitioners globally – an estimated 4 billion to 5.5 billion people.
In investing, most individuals stubbornly believe their philosophy is the right way to make money. With the hopes of creating order, the investment industry relies on tools like Morningstar’s nine style box categories, which places investors in tidy, clean groups. Unfortunately, not every strategy fits nicely into a style box, especially if you try to integrate investment vehicles like hedge funds and quantitative funds.
Can’t We All Just Get Along?: I believe religions can co-exist just like different investing philosophies can co-exist. Certainly there are less worthy religions, for example you can think of cults that prey on vulnerable individuals. The same can be said for investing – as long as greed continues to exist (a certainty), there will be unscrupulous crooks and shady businesses looking to take advantage of people for a quick buck.
Regulation: I suppose our law enforcement agencies and courts serve as regulators over a small minority of churches who break the law, but given the recent collapse of parts of our financial system it makes sense we are retooling and recalibrating our oversight and regulations. There is no doubt that negative trends like the unfettered growth of toxic mortgages (including subprime), over leveraging of investment banks (ala Bear Stearns, and Lehman), and exponential growth of complex derivative products (such as CDS and CDOs) need to be controlled with more oversight. There needs to consequences to improper actions – some religions have been known to discipline their members too.
Investing Takes Faith: We have gone through an extremely trying year and a half and iconic experts like Warren Buffett have had the wherewithal to invest successfully through uncertain economic cycles because of faith in capitalism. Even at the other side of the investing spectrum, in areas like quantitative and technical trading, the practitioner still needs to have enough faith in their systems and models with the belief they have an edge that can help them outperform. Regardless of the approach, one must have faith in their investment philosophy to be successful over the long-term.
Although there countless versions of religions all over the world, I’m confident that the Church of Money Under the Mattress (CMUM) will not lead the majority of investors to the Promise Land. Even for those risk averse savers, there are ways to heighten your expected return without assuming undue risk. Irrespective of your religious beliefs, may your spiritual journey bring you hefty profits…
Wade W. Slome, CFA, CFP® (Sidoxia Capital Management, LLC)
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management and client accounts do not have direct positions in BRKA/B at the time the article was published. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.
Studies Show Investors Ready to Look at New Advisors
Breaking Up a Relationship Doesn't Have to be Difficult
Breaking up is tough to do, especially when you’ve had a chummy relationship with your financial advisor. BusinessWeek recently ran an article urging investors to seek a second opinion, much the same way people do when they request opinions from more than one doctor.
Read BusinessWeek Article: Thinking of Switching Financial Planners?
“Just as a good doctor should respect your decision to see a second opinion, so should your financial adviser be open to review.”
Unfortunately, when it comes to money, the average investor focuses more on the emotional aspects of the client –advisor relationship rather than the objective facts. Given the volatility in the financial markets, investors continue to sift through the rubble over the last 18 months, only to find commissions, fees, taxes, and misallocated portfolios.
A Wall Street Journal article in April highlighted the survey from Prince & Associates Inc., which showed more than 75% of investors with more than $1 million to invest plan to move some money away from their investors – more than 50% intend to leave their advisors altogether. According to the Spectrem Group (July 2009 BusinessWeek article), only 36% of millionaires believe their advisors performed well through the financial crisis of 2008-2009. Another study done by the Wharton School of Business and State Street Advisors showed that only 31% of investing clients are extreme satisfied, even though their Advisors think 65% of the clients are very satisfied.
Now is the time to check under the hood to review advisor fees and performance
Over our lives, we have switched CPAs, attorneys, hair-stylists and auto-mechanics, so why the difficulty in considering advisor change? The emotional aspects and uncertainty of the financial markets can cloud the decision making process. That’s why now, better than ever, it is an ideal time to ask tough questions and shop around for the top advice you deserve. In addition to bad advice, commissions and fees could be eating away at your investment returns, forcing a later than anticipated retirement or a lower quality of life. I myself prefer filet mignon over macaroni & cheese.
Given the unabated free-fall of last fall appears to have abated and the economy appears to be finding firmer footing, do yourself a favor and get a second opinion – there’s not a lot of downside.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
You and Your 401K are Not Alone
You have choices when it comes to managing your 401k.
A large majority of individual investors watched their 401k retirement accounts crater throughout 2008 and the beginning of 2009. For some, prudently managing these accounts, while attempting to decipher historic, unimaginable events, proved to be a difficult challenge. Fortunately for investors there are alternatives beyond managing a narrow 401k menu of options by yourself.
One option to consider is the establishment of a Self Directed 401k account, sometimes called a Self Directed Brokerage Account (SDBA). This is an option offered by a minority of plan sponsors (employers) to their employees, so make sure to ask your human resources department if you are interested in exploring this selection. By opening a separate Self Directed 401k account at a third party brokerage firm the investor should have access to a broader set of investment options relative to traditional 401k offerings. The retirement plan documents may however limit investment choices to certain investment products, in part due to litigation concerns created by potentially poor plan participant decisions. Increased trading and administrative charges are other potential costs to mull over.
Opening up one of these self directed accounts also avails a 401k investor to work with an outside advisor who can assist with managing the external brokerage account. Of course, nothing in life comes for free, so the individual will be paying the advisor for these services rather than managing the account solo.
Instead of creating a whole new external Self Directed account, 401k investors can also hire companies for personal 401k management advice in their existing accounts. One such firm, Financial Engines, made famous by its academic all-star founder Bill Sharpe, provides advice to investing participants for a fee, based on the dollar value of the account.
Financial Engines claims to work with more than 750 large employers (including 112 of the FORTUNE 500 and 8 of the FORTUNE 20) and 8 of the largest retirement plan providers serving the retirement market. The problem with services like these (including Guided Choice, also a brainchild of a finance guru – Harry Markowitz) is that no matter how great the advice may be, the investor is stuck with the limited investment options provided by the employer on the 401k company menu.
Other players in the financial industry are swirling around to advise participants on a piece of this $3 trillion 401k U.S. retirement asset market (ICI 2007 estimate), including some brokerage and mutual fund companies, and even independent financial planners. Also, don’t forget if you ever leave an employer, you have the ability to roll over your 401k account into a personal IRA (Individual Retirement Account) – an account you fully control with a buffet of options.
Regardless of the money you may have lost or the amount of confusion you feel, realize that you are not alone (if you choose not to be). Make sure to contact the appropriate human resource professional in charge of retirement benefits, and discover your 401k options.
The Dirty Little Secret Shrinking Your Portfolio
There’s a dirty little secret in the investment industry and it’s called “fees”. I constantly interact with investors from all walks of life and inevitably the topic turns to fees. Although they may know the daily price of the Starbucks coffee they buy down to the penny, when I ask them about the hundreds or thousands of dollars they are paying in fees and expenses, I get the proverbial deer in the headlights glare. Who can blame them when they are effectively forced to hire a lawyer to decipher the layers of costs buried in thick legal client documents? These fees and expenses include, but are not limited to, load fees, management fees, 12b-1 fees, trading commissions, soft dollars, surrender charges, administrative charges, bid-ask spread, impact costs along with other kitchen sink charges (enough to make your head spin).
Are the fees worth the price? The short answer is NO. On average 75% of professional managers underperform the benchmarking strategy, which I call the “do-nothing” or passive indexing approach. Standard & Poor’s SPIVA division (S&P Indices Versus Active Funds) discovered the following over the five year market cycle from 2004 to 2008:
- S&P 500 outperformed 71.9% of actively managed large cap funds;
- S&P MidCap 400 outperformed 79.1% of mid cap funds;
- S&P SmallCap 600 outperformed 85.5% of small cap funds.
Most individuals would be better served by purchasing a diversified basket of low-cost, tax efficient index funds or ETFs (Exchange Traded Funds). Unfortunately, the deafening noise and chest thumping from the ever-changing top 25% of investment managers muddies the waters for rational investment decision makers. Proprietary algorithms, can’t-lose strategies (ala Bernie Madoff), pretty pie charts, and a rosy story explaining a path of future outperformance are typically used as smoke and mirrors to confuse unsuspecting investors into unwanted decisions. For the day-trading addicts, financial intermediaries peddle their unique software in commercials with flashing light and hip music, touting the newest bells and whistles that will catapult the masses into riches.
What’s the solution? Well, if you have the time, discipline, and emotional make-up then you should call the manufacturers of low-cost index funds and ETFs (Exchange Traded Funds) like Vanguard Group, PowerShares or iShares and construct a diversified equity and fixed income portfolio. I recommend rebalancing client portfolios periodically subject to your objectives, constraints, risk tolerance and changing circumstances.
If you don’t have the time, discipline, or emotional make-up necessary to manage your investments, then interview a group of “fee-only” advisors who have no conflicts of interest and subscribe to a diversified, low-cost, tax efficient strategy (for disclosure purposes, Sidoxia Capital Management is a fee-only advisor).
Regardless of portfolio management choices, do yourself a favor and ask your broker/advisor or investment company what you are paying in fees/expenses. It’s your money and you deserve answers, despite the dirty little secret that pervades the industry.
Building Your Financial Future – Mistakes Made in Investment Planning
Building Your Dream Future Requires a Plan
Building your retirement and financial future can be likened with the challenge of designing and building your dream home. The tools and strategies selected will determine the ultimate cost and outcome of the project.
I constantly get asked by investors, “Wade, is this the bottom – is now the right time to get in the markets?” First of all, if I precisely knew the answer, I would buy my own island and drink coconut-umbrella drinks all day. And secondarily, despite the desire for a simple, get-rich quick answer, the true solution often is more complex (surprise!). If building your financial future is like designing your dream home, then serious questions need to be explored before your wealth building journey begins:
1) Do I have enough money, and if not, how much money do I need to develop my financial future?
2) Can I build it myself, or do I need the help of professionals?
3) Do I have contingency plans in place, should my circumstances change?
4) What tools and supplies do I need to effectively bring my plans to life?
Most investors I run into have no investment plan in place, do not know the costs (fees) of the tools and strategies they are using, and if they are using an advisor (broker) they typically are in the dark with respect to the strategy implemented.
For the “Do-It-Yourselfers”, the largest problem I am witnessing right now is excessive conservatism. Certainly, for those who have already built their financial future, it does not make sense to take on unnecessary risk. However, for most, this is a losing strategy in a world laden with inflation and ever-growing entitlements like Medicare and Social Security. There’s clearly a difference between stuffing money under the mattress (short-term Treasuries, CDs, Money Market, etc.) and prudent conservatism. This is a credo I preach to my clients.
In many cases this conservative stance merely compounds a previous misstep. Many investors undertook excessive risk prior to the current financial crisis – for example piling 100% of investment portfolios into five emerging market commodity stocks.
What these examples prove is that the average investor is too emotional (buys too much near peaks, and capitulates near bottoms), while paying too much in fees. If you don’t believe me, then my conclusions are perfectly encapsulated in John Bogle’s (Vanguard) 1984-2002 study. The analysis shows the average investor dramatically underperforming both the professionally managed mutual fund (approximately by 7% annually) and the passive (“Do Nothing”) strategy by a whopping 10% per year.
Building your financial future, like building your dream home, requires objective and intensive planning. With the proper tools, strategies and advice, you can succeed in building your dream future, which may even include a coconut-umbrella drink.
