Recent Musings

1. When building a portfolio, you basically have two choices.

With the availability of index funds, it’s not difficult to build a portfolio. The question is, what kind of portfolio do you want to build? Or, to put it another way, what are you trying to accomplish?

Do you want to trail the market when it’s going up or when it’s going down?

You can structure your portfolio to be more aggressive than the overall stock market. That will help you when the market is going up but hurt you in down markets. Alternatively, you can structure things to be more conservative than the market, in which case you’ll trail in up markets but lose less when the market is going down. The takeaway being you can’t have it both ways.

Investment returns (in the realm of normal) are within our control. Many people worry about the stock market. It doesn’t need to be that way. If you don’t want to lose sleep worrying about the market, you don’t have to. It’s all about the asset allocation choices you make.

2. When it comes to investments, there’s no such thing as perfect.

No investment is going to be perfect, and we shouldn’t expect it to be. In traditional finance textbooks, investment decisions are presented as a tradeoff between risk and return. If you want more return, you must take more risk. But if you want less risk, you must be content with lower returns.

That is a bit over-simplistic so when evaluating investments, investors should think things through much more carefully. In addition to risk and return, consider an investment’s fees, complexity, liquidity, tax treatment and the overall level of economic certainty or uncertainty.

3. When warranted, be willing to pay more.

It’s worth paying more if you’re getting extra value. Most investors are sensitive to fees and taxes—and they should be—but this comment is a good reminder not to take this too far.

Similarly, if you own an overpriced, underperforming fund, should you hang on forever just because you would have to pay some taxes if you sold?  Of course not. Do the math and don’t be afraid of costs if you think it will pay off in the long run.

4. Don’t fall in love with an investment.

Just as there’s no perfect investment, there is no investment that you should expect to remain perfect for all time. I see this as particularly applicable to thinking about index funds—an investment that appears awfully close to perfect right now.

I believe that low-cost index and factor funds are the best way to invest—and there’s plenty of supporting data. But we should never be too comfortable. Currently, indexing works exceptionally well. But it may not work forever. Markets are dynamic. Indexing might begin to work less well or other forms of investing might begin to work better. Anything can happen, so be careful. When it comes to your investments, you don’t want to be blindsided.

CBlakely, CFP®, CTFA

Keep Taxes Low to Maximize Returns - Here's How

Portfolio research has examined the long-term impact of expenses and taxes on investment returns and concluded that, while asset allocation remains the most important factor affecting variability of returns, keeping costs and taxes low is an important factor for investors who are trying to maximize return.

Because mutual funds may distribute capital gains throughout the year, mutual fund investors are often concerned about losing investment returns to taxes. But individual stock and bond investors are vulnerable to taxes as well, depending on how they manage their investments.

Return lost to taxes sucks, but the good news is you can exercise a good deal of control here. Think about this: diversification and asset allocation are great tools for helping to reduce portfolio volatility and variability, but we're still going to be subjected to the short-term moves of the market, no matter how diligent we might be in setting up our portfolio and selecting our investments. Where we have the greatest degree of control is the area of expenses and tax-efficient implementation. Doesn't it make sense that where we can exercise the most control, we should?

Below is a table that displays where investors who want to minimize taxes may want to place their investments.

Taxable accounts	Tax-deferred accounts such as traditional IRAs, 401(k)s and deferred annuities
Here, you'd ideally place...	Here, you'd ideally place...
Individual stocks you plan to hold more than one year	Individual stocks you plan to hold one year or less
Tax-managed stock funds, index funds, exchange-traded funds (ETFs), low-turnover stock funds	Actively managed funds that may generate significant short-term capital gains
Stocks or mutual funds that pay qualified dividends	Taxable bond funds, zero-coupon bonds, inflation-protected bonds or high-yield bond funds
Municipal bonds, I Bonds (savings bonds)	Real estate investment trusts (REITs) Private equity, partnerships (IRA only)

Also to keep fees as low as possible research index funds and index ETF's and use fee only advisors!

CBlakely CFP®, CTFA                      02/2013

Source: Schwab Insights

Viewer Discretion is Advised!

2012 seems like it could be the year prognosticators of doom and end of days theorists will be in the spotlight. Full disclosure: – I have a 2012 Mayan calendar and the kitten pictures are just too cute. But seriously, there is one prognosticator in particular that actually does scare me. Not because I think it is true, nope, that’s not even a consideration. It’s that it is loaded with exaggeration using scaremonger tactics to frighten investors into actually buying into this baloney.

Dis-infomercial

I was watching TV and saw an ad for an online video with the following warning label: “The following presentation is controversial and may be offensive to some audiences. Viewer discretion is advised.” “OK,” I said “you got my attention.” The production values are pretty high and I thought it made sense to at least skim the thing before passing judgment. So I watched this video proclaim the end of America and the dollar as we know it. Interestingly, it carried the requisite language ‘may’ and ‘likely’ added to avoid absolutes. This keeps the investment regulators at bay but makes for strange narration with phrases like – “there is absolutely no doubt that this may happen.”

What the video contains is about 45 minutes of hyperbole followed by thirty minutes of a really cheesy sales pitch for investor newsletters authored by the team at Stansberry Investment Research. Really?

Back in 2007 this group was substantially fined by the SEC for securities fraud. Now they make an end of the America as we know it pitch using scare tactics and specious charts and graphs (why are they not properly sourced or labeled?) to goad people into buying their newsletter.

While we are all entitled to our opinion a person who acts in a fiduciary capacity is held to a higher standard. Fiduciary law, putting others interests in front of your own, may be the highest law in the land. And to treat it lightly is to breach that duty. While I have read forecasts that are indeed dire, none of the pieces close by trying to sell you a way to actually make money, while the economy and the dollar and our standard of living collapse around us.

To give one example, at one point during the video Mr. Stansberry talks about something called the 100% Strategy. He claims you can make money without ever having to own a stock. OK, sure, that’s true. Then he makes the statement that you might be forced to buy a stock at less than its current value if something goes wrong with the 100% Strategy. These two positions are so obviously at odds with one another. This is one of myriad examples of how crafty yet misleading this report is.

Fool me once…….

Successful investing is difficult enough with an advisor that is working with you in your best interests, it is nearly impossible otherwise. My advice is to avoid this wolf in wolf’s clothing.

Chris Blakely, CFP® 01/2012

Stories Sell

Happy Ending?

The stories our leaders tell us matter, nearly as much as the stories our parents tell us as children, because they orient us to what is and to what could be. Our brains evolved to expect stories with a particular structure, with good guys and bad guys, a hill to be climbed or a battle to be won.  

 In that context, Americans needed their president to tell them a story that made sense of what they had just been through, what caused it, and how it was going to end. We are all scared and angry. Many have have lost their jobs, some their homes. This was a disaster made by Wall Street’s best educated, who speculated with our assets and therefore our futures. It was caused by politicians like Phil Gramm who told us that if we just deregulated we would be more competitive. Unabashed greed and recklessness were the unintended consequences.

We are suffering from the same ending we experienced 80 years ago, when the same people sold our grandparents the same bill of goods. Can we draw on their wisdom?

Like most Americans, at this point, I have no idea what the President believes on virtually any issue. The president tells us he prefers a “balanced” approach to deficit reduction, one that marries “revenue enhancements” (a weak way of describing popular taxes on the rich and big corporations that are evading them) with “entitlement cuts” (an equally poor choice of words that implies that people who’ve worked their whole lives are looking for handouts).

When 400 people control more of the wealth than 150 million of their fellow Americans, when the average middle-class family has seen its income stagnate over the last 30 years while the richest 1 percent has seen its income rise astronomically, it bodes ill for the U.S. economy. Now that Standard & Poor’s has downgraded the U.S.’s AAA credit rating, it is important to respond boldly and, at the same time, lower expectations.

The first step is for our political leaders to frankly acknowledge the problems at hand: The U.S. economy will face a hard slog for an extended period; the political system is polarized; and, under current policies, the budget deficit will remain large.

Expect Slow Growth
We can expect sluggish economic activity for years, not quarters, and we face the risk of another recession. Those who in January were predicting growth of 4 percent or more for 2011 did not sufficiently appreciate the evidence from economists that foretell what most often comes after a systemic financial collapse is a decade of weak growth. (Read “This Time is Different: A Panoramic View of Eight Centuries of Financial Crises.”) Two years ago Bill Gross of PIMCO called it the “new normal.” I sense he was right.

Government Opportunity

We should take this opportunity to reconsider what government should properly do. We need to invest more in roads, bridges, railroads and the like, and the best way to do this would be to create a new infrastructure bank in the same mold as the Tennessee Valley Authority.

The Executive branch needs to lead us again with a simple but strong narrative repeated over and over to keep our attention focused on the slog ahead and importantly the light at the end of the tunnel.

Our Opportunity

Rahm Emanuel, the former White House chief of staff, once famously remarked that one should never let a serious crisis go to waste. It may be time to make nuanced shifts in your portfolio.

This correction is likely near a bottom and therefore, valuations in the U.S. are now attractive on a long-term basis. Price to earnings ratios on forward (future) earnings for most major U.S. stock market averages are under ten. On an earnings yield basis, stocks look remarkably attractive relative to bonds.

On a relative basis, stocks are about as cheap as they have ever been compared with bonds.

 Hard Assets - It’s too late to buy gold and other precious metal safe havens for this cycle. In the long-run no one knows. But, a price drop would happen quickly, if at all.


 Bonds - Keep your powder dry. Shorten bond durations and look to corporate notes for a little yield, or Canadian or German government bonds if you must own sovereign debt. There is very little value left in the U.S. Treasury curve at this point.


 Equities - Financials have completely broken down, but have dropped to extremely attractive long-term values. Consumer staples and utilities act defensively during market downturns, but leadership usually shifts to other sectors at the bottom of the market. Consumer discretionary, industrials, materials and tech should lead as the economy finds stable footing.

CBlakely CFP, CTFA  08/2011

Sources: This Time is Different: A Panoramic View of Eight Centuries of Financial Crises, Reinhart, Rogoff: The New York Times Sunday Op-ed page July 2011, Bloomberg LP. PIMCO

Useful Mutual Fund and Annuity Facts!

A study by Dalbar, a mutual fund research firm in Boston, found that in the 20 years ended December 2010,the average stock fund investor had annualized returns of 3.8 percent, compared with 9.1 percent for the Standard & Poor's 500-stock index. The average person would have been better off, much better off buying an index fund and holding it for 20 years. This again makes the case for professional management or at least index investing if you are a diy type. Why do we keep listening to Sam Waterston?

Why is it when questioned about retirement, nearly everyone prefers the certainty of guaranteed income, like a defined benefit plan, commonly referred to as a pension? But when offered the chance by buying an annuity, nearly everyone declines. Economists call this the "annuity puzzle." Using standard assumptions, economists have shown that buyers of annuities are assured more annual income for the rest of their lives, compared with those who self-manage their retirement assets. There is the term "self-manage" again. Professional advice is invaluable.
Buying an annuity can be scary, make a mistake and there is usually a large upfront penalty in the form of a surrender charge.There are psychological ramifications as well. Rather than view an annuity as insurance against living a very long life, they are viewed as a gamble, in which you have to live a certain number of years to break even. And they can be very expensive - guaranteed income for life, sounds like it should be an expensive option to me. Are they good or bad? Yes and no. It depends on your income needs and investment objectives and risk tolerance. Also, if you can, buy direct from the insurer, it's the least expensive way to purchase an annuity.

CBlakely CFP, CTFA   6/2011

sources: Dalbar, Richard Thaler - NYT