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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. 


Be very aware.

A recent survey conducted by Rebalance IRA found that 46% of Baby Boomers don't understand that they're paying fees on the investments in their 401k account. 

When you dig a bit deeper into the numbers, those that do not understand that they're paying something for their investment accounts are a bit scary.  Only 4% of the respondents believe that they're paying more than 2%.  

If we're talking about your typical 401k, largely invested in actively managed mutual fund offerings the 4% who believe that they're paying more than 2% are off by about another 2% when you take manager expense ratios and undisclosed trading costs into account. 

For the record, these costs along with restrictions on what investments you can own (your investment offerings are generally dictated by the plan) are the main reasons why a rollover of your retirement plan when you leave work is an optimal idea. 

The survey goes on to say that the average fees were about 1.5% (that doesn't include undisclosed trading costs which are generally about equal to a funds expense ratio), among smaller plans, the average is 2.5% or has high as 3.86%.  

And what about performance? The typical respondent believes that his/her account went up in value by about 5.2%, yet target benchmark indices were up about 9.5% meaning that the average respondent underperformed the market by over 4%. I'm sure that the fees that were paid had something to do with the material underperformance of their investments.  And yet, as is often typical, the average respondent said that they were happy with their under performing by about 100%. My sense here is that most Boomers relate returns to bank interest rates and 5.2% certainly sounds good when you compare it to what you earned on a savings account. 

The additional feedback from respondents centered on savings rates and other factors. Rebalance IRA found that 28% of respondents aren't actually saving for retirement and 66% said that they are either very anxious or somewhat anxious about their readiness to retire.

Bottom line, most people make (and have continued to make) fundamentally flawed investment and retirement decisions. 

Thankfully, the Client's of my firm are NOT among them.

Where Ease of Use and Disaster Meet

We've written before about "rules of thumb" and their imminently fallible future.  It appears that one of the most widely used "rules of thumb" may take a dive.

I'm thinking "maybe" not because there's a mathematicians chance that this often used "rule of thumb" actually works, but I say "maybe" because it'll be interesting to see if the public ever finds out. 

Target Date Funds....

Oh these are a help right. Here's the premise; 

a. Lay people can't do very well picking their own investment allocations (this is something that we know to be true and is widely supported by research)

b. You can purchase or invest in a fund that will take care of all that for you, AND;

c. It will automatically adjust the percentage of stocks vs. bonds that you own as you get older so that you're experiencing the lowest risk (i.e., owning the least amount of stocks) as you get older and experiencing the highest amount of risk (i.e, owning the most amount of stocks) as you're at your youngest. 

auto pilot

Think of it, on "auto pilot", all you've ever asked for. When you're young and your earnings are highest and you can afford the most aggressive portfolio and then, without even so much as a question or concern, an automated tilt to the conservative side of the table just as incomes drop, reliance on portfolio income increases and age sets in.

Problem doesn't work, and frankly, research indicates it never did. 

It was just a ruse from the mutual fund industry that you bought and paid for likely with a fair amount of your retirement nest egg, but hey, who needs more money, you or Wall Street?

Intuitively, consider the matter: 

a. you start out with the smallest amount of money invested in the most profitable asset class, stocks.....

b. overtime, you accumulate more money as you move toward a lower yielding option, a blend of stocks and bonds, then....

c. you wind up with the most amount of money at the exact time that you're in the poorest yielding asset class of the bunch....bonds dating doesn't sound quite that interesting when you explain it that way does it?

Well, once again, Wall Street's and the actively managed mutual fund industry would conveniently like to not let the "math" cloud the issue. 

Here's a typical Wall Street spin you can try.........

If you're ever in an elevator that cuts loose from it's cables and starts plummeting to the ground, all you need do is to jump in the air just prior to impact to save your soul. Seems to make sense right?  For 95% of the "trip" you're not even actually falling are you? I mean you're standing on the floor of a "fixed" object so a good hardy "jump" at just the right moment only puts your feet about three feet off the floor which means that if you only went up three feet, you'd only come down three feet right?

Sounds plausible. It's not.  But again it sounds plausible....if you ignore the math. (P.S. if you've ever watched Myth Busters you know how the elevator story plays out.)

Bottom line is that gimmicks can get a big tailwind, especially when they're sold as something that's so obviously awesome. 

But let's not forget, "bad" ideas always need to be sold

So if you're a "target" date investor, check and make sure that the target's not on your nest egg. 

Is This The Next Advisor

Robo-Advisors are a class of financial advisor that provides portfolio management services online with a minimal amount of human intervention. Wikipedia contends, that "It's the financial equivalent of booking an Uber on your phone versus standing in the cab line at the hotel." 

In reality though, the Wikipedia comparison fails at a couple of things. First, it's the notion that I could be sitting at a sidewalk table in the afternoon sun sipping a beverage of my choosing whilst I Uber up a ride from my iPhone vs. standing in the summer heat, sweating out the lineage waiting for the under-air conditioned cab to arrive.  I get it, that doesn't sound like a better deal than Uber'ing up my cab. 

But, here's the analogy reality.....the difference between your Robo-choice and an actual advisor is really more like using Uber to get your cab or just asking the Ritz Carlton Concierge to get a cab for you isn't it? If it isn't, then the problems not that Uber'ing up your cab is better, its that you've got get a better Concierge. 

The contention is that Robo-Advisors provide some real advantages to Consumers; 

1. They use essentially the same tools that Real-Advisors use, and; 

2. They can serve the underserved masses who either [a] don't meet the account minimums of Real-Advisors or, [b] can't afford the typically high fee structures of Real-Advisors

So, let's look at those two things. 

First, they don't come close to using the same tools are Real-Advisors any more than neurosurgeons use the same tools as auto mechanics. (You know, that tool that "removes something.") At point of fact, they might use the same "analytical tools" as Real-Advisors, but not the same tools. Making the contention that the same tools are used is inaccurate at best, lest we consider that "conversation", "goal setting" or "understanding your risk tolerance",  or "your feelings about money" or "your past behaviors and your predilections and behavioral biases" can simply be ignored. Reduced to it's simplest component parts,  an interior designer is going to use the same tools no matter who you pick right? It's more or less going to come down to, paint, rugs, curtains or window coverings and furniture isn't it?  Why muddy the waters by asking you how you feel about a certain style of furniture or paint color? 

Removing personal bias isn't good work, it's just simpler work. 

Secondarily, real-advice is expensive at really-expensive advisors, not at all advisors. Not at this advisor. And, not every advisor has an account minimum. The notion that only high-priced services result in effective outcomes is bogus, but that's in essence what you're doing when your contention is that there's only two flavors of advisors, Robo and High Priced.  If the price of things was the sole determinant of much of anything, then every golfer out there would be swinging the most expensive clubs they could find and they'd all be on the PGA tour, because of course price and success are inexorably tied to each other. Bottom line is that you're either good at what you do or you're not. Your fee schedule (while often way too high) is a marketing decision in response to market factors, not an indicator of intelligence or ability. 

There are many things surrounding the birth of the Robo-Advisor that I do agree with. I do think that as a rule, investment management fees in most instances are way too high, non-transparent and a bit over the top.  I also agree that account minimums are problematic. 

At Barry Capital we've solved the conundrum of pricing advice.  And we can prove that "Robo" is a "no-no" for most people, and clearly not your only viable pricing or advice option. 

The Retirement Gamble from PBS

You know, the advisory business is a strange business.  

Regulators say that we can't use Client testimonials in our advertising or marketing materials.  The bottom line is that you can get a succesful Botox injection or buy an awesome lawn mower and your customers can espouse your virtue everywhere and at almost any time. 

But as Investment Advisors we can't display our happy customers.  

So, you have to find another way to tell the story.  

In "The Retirement Gamble" that appears on FRONTLINE on PBS, you can hear about the retirement conundrum that's facing millions of Americans.  

It's Wall Street v. Main Street but this particular battles been going on for years.  

Watch, "The Retirement Gamble" here...


Can we get a Greek update over here?

So, whatever happend to Greece?

Can you remember when seemingly for weeks at a time, all the financial buzz was about the sovereign debt default of a country with the economic prowess of something less than the State of Indiana?

FLASH! Wall Street found something(s) more compelling to use to scare you into trading your accounts....the fiscal cliff.  But wait, we solved that one.  Ok, the how about Sequestration. Oh, wait, that didn't pan out either, but not to worry we've got a budget battle looming so that'll be next.

See, it's much easier to scare with you stuff that's close to home than something half a world away. 

Having been through all the market tumults since the late 1970's I can tell you that our most successful Clients are the ones who never got scared, never got out and never stopped putting money in.  You know why many investors feel like their 401k plan is their best investment (ok, let's ignore for a second that for many it's their ONLY investment)? Because payroll deduction ensures that they'll keep funding their future no matter what happens to Greece or Indiana, even if they do monkey around with their investment mix (P.S., that seldom helps).

So, when the domestic scare tactics abate, don't be surprised if you're taken back to the plight in Europe or the developing markets or some other short term problem that "requires your immediate attention."

Warren Buffet, clearly one of the world's most successful investors said something to the effect of the way to build significant value in the stock market is to buy good companies and keep them. Ever wonder why Cramer has a TV show but not Buffet?

Because it's kinda hard to scare someone with a buy and hold strategy.

Wall Street wouldn't like a show like that.

But you would.