Three Reasons To Stop Benchmarking Your Investments

Arbitrary, unrelated and irrelevant.....there they are three reasons. Now let's take a closer look at the rest of the story. 


Comparing your investment portfolio performance to something has been around a long time. 

Many people use an index as a benchmark, comparing their portfolio to let's say the S&P 500 Index or the Dow Jones Industrial Average.  Those are ok choices, but they're more or less meaningless in the real world. You might as well be comparing your portfolio to the performance of your colleague in accounting. 

  • Arbitrary- any benchmark you pick is of your own choosing, there's no real way to tell which benchmark is better for you than any other. What about the EAFE Index, or the Russell 2000 Value or Russell 1000 Growth Index, why not them? (Other than the fact that those are a bit harder to get data on, but that doesn't mean that they might not be better does it? Gold is harder to find than wood and that's worth more right?)
  • Unrelated- depending on your holdings, the benchmark you pick might be totally unrelated, especially if you don't have any real idea of what it is that you own, beyond a Morningstar or Lipper style designator. What about style attribution, doesn't that matter? If you own a derivative laden large company growth fund, guess what, it's not a large company growth fund is it, if the fund's leveraged to the moon, it's more like a micro-cap fund than a large company growth fund, albeit that the fund company would prefer you continue to think about them as "large company growth" especially when they out-perform their peers by 8%! (Oh, did I mention that that 8% out-performance comes at 200% of the risk?)
  • Irrelevant- ahhhh, saving the best for last. The benchmark that matters most to you is the one that is "all" about you. How much do you need to earn on average so that the net present value of your [a] future income streams such as your pension, social security, annuity payments, etc., plus the net present value of your investment assets and cash, exceeds by some meaningful amount to you, the net present value of all your future spending?  That's the number that matters most, because that's the number that gets you to the finish line.  

If your goal is your future then your benchmark should be your benchmark. Not mine, not The Wall Street Journal's and certainly not Harry's in accounting.


If, in the future, you're forced to stop going on vacations, or trading down out of your house or not being able to throw the kids a couple thousand a year for the extras that they need but can't afford, it won't matter much that you outperformed the S&P 500 will it?

No, it won't because it wasn't your performance that let you down, it'll be the fact that you didn't invest enough....something that comparing your portfolio to a benchmark other than your own can't possibly tell you can it?

If they're your goals, and it's your life, make that your benchmark. 


How Does Your Door Fit?

Is by "design" or by "default?"

As I was reading Simon Sinek's recent offering, "Start With Why," a story he told early on in the book resonated with me, not only from the standpoint of entrepreneur/business owner but also from the perspective of wealth manager/advisor. 

It seems that a ways back,  some U.S. car manufacturers had visited a Japanese auto manufacturer and were watching the various tasks that were performed along the Japanese assembly line.  While much of the work was the same as "back home,"  the one thing the U.S.  delegation noticed that was missing,  was that in the U.S. there was a last person at the very end of the line who was tasked with whacking each car door with a rubber mallet to get the door to sit properly and line up with the overall body contour. 

When questioned about why step didn't exist in Japan,  the American's Japanese counterpart noted that "we design the doors to fit from the beginning, that's the difference." 

Many people treat their efforts at achieving financial success and as a result the life that they truly desire, in the same way as the American auto assembly line; they treat each and every financial transaction, be it, picking a money market account or deciding on an investment allocation for their 401k plan, about like a U.S. car door; whack it till it ultimately fits, even if it doesn't.

The "piecemeal"  approach is seldom ever going to be efficient and like the U.S. auto builders who had to pay a union worker to swing the mallet and purchase lots of rubber mallets for them to swing, generally, in the long run to be sure, it's going to be more much more expensive. 

Because we fail to choose a path to take, cobbling together financial assets and financial decisions seems the norm.  Without a well thought out plan, we have little context to balance our decisions against. Absent a well defined standard, almost everything is going to fit more-or-less, even if we have to hit it with a mallet to make it so. But the reality remains that it didn't really fit at all did it?

To be sure, it's one more thing checked off the list. But that doesn't make it either effective or right, does it?

The fact is, that on its surface, you'd have a hard time telling the folks with a well thought out plan and path from the ones without one. But, over time, as calamity and change have their influence, it wouldn't be hard to tell at all.  If you never had a plan, it'd be awful hard to stick to it. 

Set a course for your financial future and stick to it. Decide what you'll need to live the life you truly believe that you're entitled to based on a lifetime of work, then figure out how to get there.  There are steps, pragmatic and calculable ones, that put you on the right course. 

Find them. 

Rules For A Sound Retirement Reality

EBRI (Employee Benefit Research Institute) just released it's 2015 study of the longest running national survey of retirement confidence on Tuesday. And, there's good news....well, sort of. 

The 25th annual Retirement Confidence Survey said that 37% of workers are "very confident" about the ability to live a retirement on their own terms that's double the amount from 2013 and another 36% were "somewhat confident." Terrific. 

Reality is however that little has changed in the way of underlying data to conclude that those dramatic rises in confidence are based on anything other than "hoping it to be true." 

The data shows that 57% of workers have an aggregate value of less than $25,000 in savings and investment. That's frighteningly low.

So, how do we get to the dramatic rise in optimism? Well, frankly, it's a mere extrapolation of of data and you can pretty much pick the data you'd like to delude yourself into believing. If the price of homes in your neighborhood has shot up recently, simple, just assume that that meteoric rise continues. Even though it won't. 

Stock market up 32%? Let's assume that'll continue, even though it can't. 

Unfortunately, there's no substitute for answers. 

We can fool ourselves all we want, but in the final analysis, the joke's going to be on us. 

I asked a potential Client the other day; "If I have $5,000,000, do I have enough money to retire on?"  The answer was an enthusiastic, "absolutely!"

I followed it with the following: "If I have $5,000,000 and plan on spending $6,000,000 do I have enough to retire on?" The answer was, as you'd expect, of course not. 

So it isn't about what you have. It never has been. The commercials about your "magic number" were at least partially accurate...there IS A NUMBER and IT ISN'T MAGIC. 

In the parlance of wealth management, the question is, this.......

"Does the net present value of all your projected future spending and taxes result in a number that is greater than or less than, the projected future value of your assets and income, adjusted for inflation and predicated on the fact in whole or in part that the returns on your assets will be random?"

Complicated question. One which I can assure you with almost precision like certainty, only a handful of people "know" the answer to. 

Of this we can be sure; 

  • having "things" like a 401k and an IRA are nice, they're retirement assets but they don't assure you of anything
  • having more than the $25,000 than the typical EBRI survey respondent is also nice, but that doesn't assure you of anything other than your retirement will likely be better than theirs and yet fall way short of your ideal
  • having a lot more than the typical EBRI respondent assures you of nothing, other than you'll have a retirement better than them and the guy or gal next to them and the one, after that and the one after that. 

But if you're all still falling short, who's the winner. 

Quick recommendation here....get the math done. Not some math, not sorta math, your math. 

It's your retirement, you own the outcome.

"Survey says..........."

Generation "Why?"

Hangovers are tough.

All too often we forget that different people, raised at different times and in different ways see things entirely differently than others might.  I wonder what Generation "Y" thinks about our recent financial history and how their understanding of the facts that brought about the worst financial crisis of our time will impact their actions as they move forward in life?

What would your view of the banking sector be if you were at the precipice of your financial life in 2007-2009?  I wonder how much faith and comfort you'd have as you viewed your future financial landscape and considered the role that the banking and brokerage industry would play in your goal planning? My bet is that you'd be skeptical at best and skepticism typically leads to avoidance. 

Skepticism in finance is almost never a good thing. There's already enough "built in" propensities to avoid matters of personal finance, adding to the pile of impediments is not a good thing. 

And how do we propose to alleviate the problem before it snowballs into other ones? I'm not sure that we've thought that one threw have we?

What if an entire generation has lost it's faith in "investing" and "banking" seeing them both as self absorbed sectors, bent on greed, unfairness and lack of transparency?

What will that portend for the housing market?

What will that portend for retirement for a generation afraid to trust anyone with just about anything having to do with their life's savings?

What will that portend for social programs, already straining to provide for people?

Many outcomes are unintended. The lack of intention however has no direct corollary to the disruption it causes.

What we better start getting right in our thinking is this: Our actions send a wave of information forward and that wave, like the ripples on a pond reach all points. Understanding that the impact of and implications of that ripple last long after we've last seen it traverse the surface is something that we seem to keep missing. 

To this day, I meet with both existing and prospective Client's of a certain age who also don't trust "investing" or "ETF's" or "advisors" or much of anything else, absent dirt, a purposely built home and cash. 

Their starting point; the Great Depression. 

Bottom line is that "it" lasts longer than we think, takes more of a toll than we realize and consumes the thoughts of a generation. 

The failure of the Financial Crisis and the havoc it caused might need to be measured for the rest of most of our lives. 





Hidden Taxes Still Cost Money

A recent article from Russell Investment only confirms what some of us already know; 

"Your mutual funds taxes are impeding your progress"

The article is a good one and kudos to Russell Investments on writing it. It confirms for us however, factors we've known for a long time. Your investments are incredibly expensive and those costs make the chances of your meeting your long term investment goals or any financial goal for that matter, daunting at best. 

If the math is correct in the article (we have a lot of faith in the Russell organization, so let's assume it is ok?) a taxable capital gain of nearly $8,969 is bad enough, but with having 15% of that being a short term distribution, the tax impact is considerable. 

Look we're not saying that all or even a majority of your investment decisions should be driven by tax factors, but if they aren't driven by them, clearly they should at least be a consideration in the grand scheme of things shouldn't they? We think that they should especially when they can be avoided without too much effort. 

As we've written before, how may layers of costs can the mutual fund industry heap on investors before they wake up and stop the insanity? 

If we have expense ratios (the cost of operating the fund) of about 1.3% to 1.5% of assets (Source: Investopedia) and if the Wall Street Journal was right a few years back that "undisclosed trading costs to mutual fund investors was annually about equal to the funds expense ratio, then we've got just the cost before commissions or fees of owning the damn things at about 2.6% to 3.0% per year.

Add to that, either commissions or advisor fees and you've got costs of about 3.0% to 4.0% per year. Now let's factor in taxes because if we take the hypothetical investor from the Investopedia article, taxes in his case were ANOTHER 2.4% getting the total costs to about 5.4% to 6.4%. 

Ever wonder why actively managed mutual funds can't beat an index fund or passive ETF with any consistency? If you did, just go back and re-read the last paragraph again. 

So, let's take and example for a minute. Let's say we're trying to pay for a child's college education in ten years. Here's what we can reasonably count on for our math.

1. The average cost of a college education will come in at roughly 2x the inflation rate. For the sake of this post, let's consider the inflation rate to be 3.1%. That means that the average college tuition will increase year-over-year by about 6.2% so we have at least earn that

2. We then have to earn enough to cover the expense ratio, another let's say 1.3%, so now our investment has to earn 7.5% just to keep pace

3. Then we have to cover the trading costs of another 1.3% so our "required earnings" are not up to 8.8% and then; 

We have to earn enough to cover any tax bill and any fees or commissions. 

If you believe that's going to happen I've got an actively managed mutual fund I can sell you. (That bridge reference just wasn't appropriate here, even though based on recent infrastructure analysis "it" has about as much of a chance as falling down on the job as your actively managed mutual fund will.) 

If you're saving for college and you can clear that probably about 9% a year hurdle, you're on your way to making some real money.....just one problem.  If you make 11% you're not keeping much of any of it now are you? 

Nuveen investments some 20 years ago used to run an add campaign that said, "it's not what you earn, it's what you keep." 

I wish I'd have though of it, because it may be the only thing about investing that still rings true today. 

I know what your saying, that since Barry Capital doesn't use active management (we'd prefer that you keep them money that otherwise gets wasted) we've got a bias. Well, you'd be right on both counts, we don't use active management and we have a bias. Our bias just happens to be spreading around the world.  If you've got 81 mintues to spare you can check it out here. 


As I wrap this up, I just took a look at the four largest portfolios that we manage in each of our core investment strategies.  The grand total on this years (2014) capital gain distributions were: $0. (Unless we rebalanced your portfolio at some point and realized a gain as a result of that effort, an effort we can assure you at some point you'll be glad we undertook on your behalf.)

If you can't change your investment program, you'll have a tough time. If you can change it please do so for your own benefit. 

We'd be happy to help. 

When More Is Actually Less. The Social Security Conundrum

As with most things that are related to personal finance, what seems like a good deal upfront, often (very often actually) is not. 

Social Security benefits are an integral part of any retirement plan for anyone. To some degree, we all count on Social Security to provide us with at least a modest amount of retirement income and with it, some retirement comforts as well. 

Guaranteed Income Sources

To one degree or another, current retirement planning research suggests that having "higher" amounts of guaranteed income during retirement is a factor that can ultimately impact the success or failure of retirement plan.  Annuity payments, fixed or inflation adjusted pension payments, Social Security, etc. are all items of guaranteed income that may well have an influence on your retirement plan. Why? Well the reasons are as varied as the authors, but in summary it amounts to a few key value added factors; 

  • Having more rather than less guaranteed income covers more rather than less, non-discretionary spending. Think items like real estate taxes, food, health care, etc. 
  • Having more of these items "offset" by guaranteed income sources, means that the bulk of post retirement spending that needs to be covered by a distribution strategy; falls into the camp of discretionary spending. 
  • Discretionary spending is entered into at the choosing of the spender, so "timing" becomes a critical value added. Think of it this way, had you had that $15,000 European world-wind trip planned for 2008 when markets crashed, you could have rethought that whole trip and pushed it to year when markets made funding it a bit more tenable.
  • Since discretionary spending can be somewhat "timed" to match with the performance of your portfolio and other factors, you can then take a more "aggressive" approach to how your money is managed and what type of portfolio you are invested in post-retirement. This may mean a more robust portion of your assets in stocks rather than bonds. You can then time your spending to the markets and the impact on your portfolio. While 2008 might not have been a year to take Europe by storm, the near 30% return on the S&P 500 in 2013 might have made a 2014 European trip feel just right

So, the notion of "more" is better than "less" seems prescient. 

Social Security Claiming Strategies

Most of us are aware that when it comes time to take Social Security Benefits, we have options. And, those options extend well beyond "do I take my benefits at 62, 66 or 70?

There are a host of options beyond those which can and should be analyzed. 

The graphic above depicts an actual analysis we recently completed for a Client. You'll no doubt note that "maximized" strategy vs. the "what if" strategy.  The "what if" is a prototypical "we both take our benefits at our normal retirement age" strategy. The maximized strategy here appears to be the big winner, generating $1,207,388 in life time dollars vs. $1,084,427 using the "normal" retirement scenario. 

                            Normal Strategy

                           Normal Strategy

                       Maximized Strategy

                      Maximized Strategy

But, Can You Afford It?

Looking at the totality of retirement issues, the amount of personal vs. retirement assets, pensions, lifestyle expenses, etc. you might be surprised to see that the "maximized actually reduces the probability of retirement success by quite a bit. Lower than we'd ideally like to see it going into retirement. But why? How does nearly $200,000 of Social Security income over a lifetime result in less successful outcomes?

Because, in postponing taking benefits (at least in this situation, and all situations are unique to themselves) we forget that the cash flow that would have been there had we taken benefits at a "normal" pace have to replaced by something else and that something else is your current assets. Like Elvis "leaving the building" the value of the additional withdrawals taken by a retiree to cover a four or five year period of spending has an impact. In personal finance, there are really very few "stand alone" items. Everything financial tends to be somehow inexorably connected to each other. While someone might gain on the aggregate amount of Social Security benefits, then by design, they have to sacrifice that value somewhere else in most cases. 

In this context, (as it relates to Social Security benefits in this particular example) more is not better than less. Is it in your situation?

And, the same context would hold true if we were talking about annuity payment options, or pension payment options as well. 

                               "What's the best way to work towards a more defined retirement plan?"

                              "What's the best way to work towards a more defined retirement plan?"

The Death of Absolutes

As you can imagine, we can think of a host of reasons to work with a financial planner on a comprehensive wealth management plan, but none more important than the death of absolutes. There are very, very, few givens in personal finance. And, what "givens" there are doesn't take a Wealth Manager, or financial planner, or CFP® to figure out. 

You'll need money, that's a given, you'll need to eat, own a car, have health care, etc. We all know those. 

But extending that thinking to other areas fails on it's face. As you can see here, "more" in this case, is actually "less." 

Figuring all this out, creating the plan, designing the strategies, we believe, extends beyond the realm of what most individual can "effectively" do for themselves. While consumers have and will continue to have, biases, preferences, history and other "things" to fall back on, we need to be reminded that our vision of what should be isn't even a waving acquaintance to what will be. And, there aren't many second chances to get it right.