Last April, I outlined the case against Goldman Sachs. In that discussion, I posed the following questions:
1. Should rating agencies rate securities on their own merit (not by considering who may or may not be investing in them)?
2. Since ACA chose the securities in this investment from a list given to them by Goldman (from a Paulson list), was it a misstatement that ACA was "Portfolio Selection Agent?"
3. Since banks and pension funds are defined as "sophisticated" investors, should they analyze the investments they are considering on their own merit (not by considering who may or may not be investing in them)?
Those questions have been answered by the Security and Exchange Commission in their settlement with Goldman.
In that settlement, the SEC found that Goldman omitted the material fact that Paulson & Co. was on the other side of the trade. That finding assumes that ACA would have selected securities differently had it known that Paulson was taking a position against, rather than investing in the securities it was analyzing. Stated slightly differently, that is analogous to saying that I would report findings on the financial health of Johnson and Johnson, the Washington Post, Moody's and Kraft Foods differently if I knew Warren Buffett was selling them than if he was buying them. That doesn't say much for me as an analyst. There's always someone selling when another is buying. When must that be disclosed? When the person is well respected? Smart? Well known?
The SEC additionally noted that material facts need by disclosed whether or not investors are "sophisticated" or not. Again, that doesn't say much for banks and pension funds, which generally have staff analysts who review the financial health of potential investments. Does the SEC feel that these analysts will conclude differently if someone they know is selling, rather than buying a security? I taught Security Analysis and Advanced Security Analysis at UCLA, and focused upon balance sheets, cash flow statements and other fundamental measurements of financial health. Not once did I recommend researching whether other people were buying or selling a stock when making a determination of its financial viability.
Put into perspective, the fine against Goldman was approximately three days' earnings, so even though it was the highest fine assessed so far by the SEC, it will not materially effect Goldman's earnings.
Further, Goldman admitted no wrongdoing in its acceptance of this agreement. Consequently, those lining up to recoup losses from their investment will have a much higher burden of proof.
My assessment of this settlement is that of a business decision by Goldman to pay a fine rather than engage in a protracted battle with the SEC. But the more meaningful message is this: The SEC has little confidence in either analysts or rating agencies.
Should you?
Showing posts with label investing. Show all posts
Showing posts with label investing. Show all posts
Friday, July 16, 2010
Saturday, April 17, 2010
An Issue of Trust
Who can you trust with your money?
If you ask the individual investor, the answer is "no one." Not after the likes of Bernard Madoff, Allen Sanford and, now, Goldman Sachs, the crown jewel of investment banks. So, if you follow the thinking of the individual investor by measuring "Investor Sentiment," you would have drastically cut back in stock investments in December, 2008, and you would not have returned to the stock market yet.
In other words, you would have sold near the market low. No wonder Warren Buffett cautions, "Be greedy when others are fearful; be fearful when others are greedy."
I follow a proprietary investment model that measures twenty one economic indicators. I've built this model over a period of over twenty years, and use it exclusively for two purposes:
Discussing each indicator, and how it relates to the overall decision was the subject of a semester's work in an advanced class at UCLA for professional financial planners who chose an emphasis in investment. Mostly geeks. I will, however, discuss one part of this analysis, Investor Sentiment, and tie that discussion to the general feeling of mistrust that is currently pervasive with the individual investor.
If you had followed Investor Sentiment as discussed above, you would have sold when the S and P 500 was at 888.61. It is now at 1192.13. As reflected above, you'd have sold low and, if you buy back in, it will undoubtedly be higher.
If, on the other hand, you would have read Investor Sentiment as a negative indicator, i.e., you did the opposite of what it suggested, you would have enjoyed a 34% increase. Hmmm. I'm reminded of what my grandmother said when I based my plea to do something on, "Everybody else is doing it." Her familiar response was, "If everybody jumped off a cliff, would you do it, too?"
So, now we have both Warren Buffett and my sweet little Meema advising us to think for ourselves, and even consider doing the opposite of what others are doing. In the particular case of the last market correction, that would have been good advice. But, does it hold true most of the time?
As it turns out, yes. Investor Sentiment is the most predictive of all twenty one of my indicators, if you do the opposite of what it says to do. And, I will add, that the stock market is nowhere near the bargain it was in March, 2008, when its cost (P/E) was about its long term average of $15.82 for every dollar of S and P 500 earnings, but even though the market has come back 75% from its low (25% lower than its high), the individual investor is still not buying.
Back to trust. Yes, Bernie Madoff is a thief. Yes, Allen Sanford appears to have bilked thousands of investors out of their money, touting "safe" international CDs. Yes, it looks like Goldman Sachs took both sides of the bet that the housing bubble would burst. But does that mean you should keep your money in the bank? Let's take a look at how that will work for you in the long term.
The best rate I could find for a two and one-half year insured CD was 2.1%. To calculate your "real return," that is, your return after inflation and taxes, subtract from that 2.1% the current inflation rate, or 2.1%. Now you're at zero, but you still have to pay taxes on your interest. For most people, your marginal tax rate is about 16%. 16% tax on 3% is .48. So, tax of .48 plus inflation of 2.1 is 2.58. 2.1 - 2.58 = -.48 You're losing about 1/2% annually.
If you're a woman with $100,000 that must last you for 30 years, at that rate, this money will produce about $3100 per year. On the other hand, if you were to invest in the stock market, using its long term average return of 9%, this money will produce about $9,700 per year.
We live longer. Inflation hits us harder. We can put our money in "safe" investments that are guaranteed to lose money over the long term, or we can listen to Warren Buffett and my sweet little Meema.
The choice is yours.
If you ask the individual investor, the answer is "no one." Not after the likes of Bernard Madoff, Allen Sanford and, now, Goldman Sachs, the crown jewel of investment banks. So, if you follow the thinking of the individual investor by measuring "Investor Sentiment," you would have drastically cut back in stock investments in December, 2008, and you would not have returned to the stock market yet.
In other words, you would have sold near the market low. No wonder Warren Buffett cautions, "Be greedy when others are fearful; be fearful when others are greedy."
I follow a proprietary investment model that measures twenty one economic indicators. I've built this model over a period of over twenty years, and use it exclusively for two purposes:
- It is my model, and I use only data from apolitical, independent sources for analysis. That keeps me protected from data that may have been skewed by someone who has a vested interest in whether I choose to invest or not;
- It removes all emotion from investment decisions. If it says that I should be 70% invested, I'm 70% invested. No panic. No euphoria. No need to trust anyone but me.
Discussing each indicator, and how it relates to the overall decision was the subject of a semester's work in an advanced class at UCLA for professional financial planners who chose an emphasis in investment. Mostly geeks. I will, however, discuss one part of this analysis, Investor Sentiment, and tie that discussion to the general feeling of mistrust that is currently pervasive with the individual investor.
If you had followed Investor Sentiment as discussed above, you would have sold when the S and P 500 was at 888.61. It is now at 1192.13. As reflected above, you'd have sold low and, if you buy back in, it will undoubtedly be higher.
If, on the other hand, you would have read Investor Sentiment as a negative indicator, i.e., you did the opposite of what it suggested, you would have enjoyed a 34% increase. Hmmm. I'm reminded of what my grandmother said when I based my plea to do something on, "Everybody else is doing it." Her familiar response was, "If everybody jumped off a cliff, would you do it, too?"
So, now we have both Warren Buffett and my sweet little Meema advising us to think for ourselves, and even consider doing the opposite of what others are doing. In the particular case of the last market correction, that would have been good advice. But, does it hold true most of the time?
As it turns out, yes. Investor Sentiment is the most predictive of all twenty one of my indicators, if you do the opposite of what it says to do. And, I will add, that the stock market is nowhere near the bargain it was in March, 2008, when its cost (P/E) was about its long term average of $15.82 for every dollar of S and P 500 earnings, but even though the market has come back 75% from its low (25% lower than its high), the individual investor is still not buying.
Back to trust. Yes, Bernie Madoff is a thief. Yes, Allen Sanford appears to have bilked thousands of investors out of their money, touting "safe" international CDs. Yes, it looks like Goldman Sachs took both sides of the bet that the housing bubble would burst. But does that mean you should keep your money in the bank? Let's take a look at how that will work for you in the long term.
The best rate I could find for a two and one-half year insured CD was 2.1%. To calculate your "real return," that is, your return after inflation and taxes, subtract from that 2.1% the current inflation rate, or 2.1%. Now you're at zero, but you still have to pay taxes on your interest. For most people, your marginal tax rate is about 16%. 16% tax on 3% is .48. So, tax of .48 plus inflation of 2.1 is 2.58. 2.1 - 2.58 = -.48 You're losing about 1/2% annually.
If you're a woman with $100,000 that must last you for 30 years, at that rate, this money will produce about $3100 per year. On the other hand, if you were to invest in the stock market, using its long term average return of 9%, this money will produce about $9,700 per year.
We live longer. Inflation hits us harder. We can put our money in "safe" investments that are guaranteed to lose money over the long term, or we can listen to Warren Buffett and my sweet little Meema.
The choice is yours.
Wednesday, April 7, 2010
The Best Investor 2010 - First Quarter Results
Last January, I posed the question that buying shares in the S and P 500 may be just as effective as following professionals' stock market picks. Some women who are participating in the Self-Invested Women Pilot Program are considering whether they are passive (people who buy an index, like the S and P 500) or active (people who buy individual stocks or types of stocks, like energy and health care) investors. This may help you make that decision.
The S and P 500 Index
This index allows investors to buy 75% of the publicly traded companies in the US, many of which derive a significant part of their income outside the country. While there are many indexes (Dow Jones Industrial, the Russell 2000, the Wilshire 5000), the S and P 500 is the index against which the vast majority of money managers measure their performance.
The Challenge
Last September, ten investment strategists gave their recommendations for which sectors of the market would outperform the total market in 2010 in Barron's magazine. We chose six of these strategists, representing US Trust, Citigroup, JP Morgan, BlackRock, Deutsche Bank and Goldman Sachs. We'll compare the S and P 500 index performance against the sectors recommended by each investment professional, assuming you were to invest equally in all sectors.
Fees
It requires no management fee to invest in an index like the S and P 500. Investment advisers' fees range from 2% to 5%. We'll use the lower figure, 2%, for this comparison, and deduct 1/2% every quarter from the recommendations by the advisers.
Since there are trading costs for both individuals and money managers, we'll consider this a "wash."
Long Term Investing
We'll assume that we're in the stock market for long term investing, not short term "trading." Therefore, one quarter's data is insufficient to make this decision. We'll look at this performance all year, and discuss how relevant this little experiment is to your long term strategy.
First Quarter Performance
S and P 500
S and P 500 was up 6.04% in the first quarter this year.
US Trust
Technology + 10.45%
Materials + 6.89%
Energy + 5.04%
Industrials + 4.77%
Weighted Average performance +6.7875%, less 1/2% fee = +6.2875%
US Trust's recommendations beat the S and P 500 by about a quarter of one percent in the first quarter.
Citigroup
Materials + 6.89%
Financials - 3.68%
Software + 10.45%
Energy + 5.04%
Weighted Average performance + 4.675%, less 1/2% fee = +4.175%
Citigroup's recommendations lagged the S and P 500 by about 1.87% the first quarter.
JP Morgan
Energy + 5.04%
Industrials + 4.77%
Financials - 3.68%
Technology + 10.45%
Materials + 6.89%
Weighted Average performance + 6.166%, less 1/2% fee = +5.666%.
JP Morgan's recommendations lagged the S and P 500 by about 3/8 of one percent in the first quarter.
BlackRock
Energy + 5.04%
Health Care + 8.53%
Weighted Average performance + 6.785%, less 1/2% fee = + 6.285%.
BlackRock beat the S and P 500 by just under 1/4 of one percent in the first quarter.
Deutsche Bank
Technology + 10.45%
Health Care + 8.53%
Energy + 5.04%
Industrials + 4.77%
Weighted Average performance + 7.1975%, less 1/2% fee = +6.6975%.
Deutsche Bank beat the S and P 500 by 3/4 of one percent in the first quarter.
Goldman Sachs
Energy + 5.04%
Materials + 6.89%
Financials - 3.68%
Technology + 10.45%
Weighted Average performance + 4.675%, less 1/2% fee = 4.175%.
Goldman Sachs lagged the S and P 500 by 1.865% in the first quarter.
Summary
So far this year, three underperformed the S and P 500 and three lagged behind its performance, with Deutsche Bank doing best, and Goldman worst.
Last year, only Deutsche Bank and JP Morgan beat the averages, and four lagged behind.
Another update after the second quarter.
We'd love to hear your thoughts. Are you an active or passive investor - and why?
The S and P 500 Index
This index allows investors to buy 75% of the publicly traded companies in the US, many of which derive a significant part of their income outside the country. While there are many indexes (Dow Jones Industrial, the Russell 2000, the Wilshire 5000), the S and P 500 is the index against which the vast majority of money managers measure their performance.
The Challenge
Last September, ten investment strategists gave their recommendations for which sectors of the market would outperform the total market in 2010 in Barron's magazine. We chose six of these strategists, representing US Trust, Citigroup, JP Morgan, BlackRock, Deutsche Bank and Goldman Sachs. We'll compare the S and P 500 index performance against the sectors recommended by each investment professional, assuming you were to invest equally in all sectors.
Fees
It requires no management fee to invest in an index like the S and P 500. Investment advisers' fees range from 2% to 5%. We'll use the lower figure, 2%, for this comparison, and deduct 1/2% every quarter from the recommendations by the advisers.
Since there are trading costs for both individuals and money managers, we'll consider this a "wash."
Long Term Investing
We'll assume that we're in the stock market for long term investing, not short term "trading." Therefore, one quarter's data is insufficient to make this decision. We'll look at this performance all year, and discuss how relevant this little experiment is to your long term strategy.
First Quarter Performance
S and P 500
S and P 500 was up 6.04% in the first quarter this year.
US Trust
Technology + 10.45%
Materials + 6.89%
Energy + 5.04%
Industrials + 4.77%
Weighted Average performance +6.7875%, less 1/2% fee = +6.2875%
US Trust's recommendations beat the S and P 500 by about a quarter of one percent in the first quarter.
Citigroup
Materials + 6.89%
Financials - 3.68%
Software + 10.45%
Energy + 5.04%
Weighted Average performance + 4.675%, less 1/2% fee = +4.175%
Citigroup's recommendations lagged the S and P 500 by about 1.87% the first quarter.
JP Morgan
Energy + 5.04%
Industrials + 4.77%
Financials - 3.68%
Technology + 10.45%
Materials + 6.89%
Weighted Average performance + 6.166%, less 1/2% fee = +5.666%.
JP Morgan's recommendations lagged the S and P 500 by about 3/8 of one percent in the first quarter.
BlackRock
Energy + 5.04%
Health Care + 8.53%
Weighted Average performance + 6.785%, less 1/2% fee = + 6.285%.
BlackRock beat the S and P 500 by just under 1/4 of one percent in the first quarter.
Deutsche Bank
Technology + 10.45%
Health Care + 8.53%
Energy + 5.04%
Industrials + 4.77%
Weighted Average performance + 7.1975%, less 1/2% fee = +6.6975%.
Deutsche Bank beat the S and P 500 by 3/4 of one percent in the first quarter.
Goldman Sachs
Energy + 5.04%
Materials + 6.89%
Financials - 3.68%
Technology + 10.45%
Weighted Average performance + 4.675%, less 1/2% fee = 4.175%.
Goldman Sachs lagged the S and P 500 by 1.865% in the first quarter.
Summary
So far this year, three underperformed the S and P 500 and three lagged behind its performance, with Deutsche Bank doing best, and Goldman worst.
Last year, only Deutsche Bank and JP Morgan beat the averages, and four lagged behind.
Another update after the second quarter.
We'd love to hear your thoughts. Are you an active or passive investor - and why?
Monday, January 4, 2010
Sizing Up the Competition
We're going head to head with stock market pros this year, by comparing the results of buying the S and P 500 Index with that of professional investment strategists. In order to compare track records, let's look at how they did last year. All initial recommendations were taken from Barron's Magazine December 22, 2008 (and changes to portfolios were published as of September 7, 2009, and calculated as of September 30, 2009).
What Happened Last Year
S and P 500 Ended the Year at 1115.10
S and P Earnings were $55.91
Fed Funds Rate was .25%
10 Year Treasury was 3.85%
Best Performing Sectors were:
Technology (59.92%), Materials (45.23%), and Consumer Discretonary (38.76%)
If you'd bought the Index, you'd have been up 23.45% for the year.
What the Pros Predicted
Black Rock (Robert Doll)
S and P 500 - 1050 (5.8% low)
S and P Earnings - $57.5 (3% high)
Fed Funds Rate - 1% (300% high)
10 Year Treasury - 3.25% (16% low)
Best Performing Sectors: Technology (49.47%), Energy (11.29%), and Health Care (17.07%).
Sold Technology in the 4th quarter.
Portfolio return 25.94%
Deutche Bank Private Wealth (Larry Adam)
S and P 500 - 1025 (8% low)
S and P 500 Earnings - $71 (27% high)
Fed Funds Rate - .125% (50% low)
10 Year Treasury - 2.75% (29% low)
Best Performing Sectors: Technology (59.92%), Consumer Staples (11.2%) and Health Care (17.07%)
Sold Consumer Staples in 4th quarter, and replaced with Energy and Industrials.
Portfolio return 32.4%
JP Morgan (Thomas Lee)
S and P 500 - 1100 (1% low)
S and P 500 Earnings - $65 (16% high)
Fed Funds Rate - 0% (was .25%)
10 Year Treasury - 1.65% (57% low)
Best Performing Sectors: Financials (14.8%), Consumer Discretionary (38.76%) and Health Care (17.07%). Sold Consumer Discretionary and Health Care in 4th quarter and replaced with Energy, Technology, Industrials and Materials.
Portfolio return - 28.04%
US Trust (Christopher Hyzy)
S and P 500 - 1020 (8.5% low)
S and P Earnings - $60 (4% high)
Fed Funds Rate - .5% (50% high)
10 Year Treasury - 3% (22% low)
Best Performing Sectors: Energy (11.29%), Consumer Staples (11.2%), Utilities (6.8%), Technology (59.92%). Sold Consumer Staples, Utilities, and replaced with Industrials and Materials.
Portfolio return - 22.64%
Citigroup (Tobias Levkovich)
S and P 500 - 1000 (10% low)
S and P Earnings - $62 (10.8% high)
Fed Funds Rate - 0% (was .25%)
10 Year Treasury - 3% (22% high)
Best Performing Sectors: Technology (59.92%), Financials (14.8%), Consumer Discretionary (39.76%), Telecom Services (2.63%), Health Care (17.07%) and Industrials (17.27%). Sold Consumer Discretionary, Telecom Services, Health Care, and bought Materials and Energy.
Portfolio return - 23.26%
Goldman Sachs (David Kostin)
S and P 500 - 1100 (1% low)
S and P Earnings $53 (5% low)
Fed Funds Rate - .125% (50% low)
10 Year Treasury - 3.6% (6% low)
Best Performing Sectors: Consumer Staples (11.2%) and Health Care (17.07%). Sold both and replaced with Energy, Materials, Financials and Technology)
Portfolio return - 20.35%
Commission and Taxes
Do-it-yourself investors typically pay about .5% in annual fees, and full service brokers typically charge about 2% for their services.
Short-term capital gain tax rates are the same as ordinary income tax rates, which are 25% for most people (who earn between $33,950 and $82,250 per year). We'll ignore the tax effect on the relatively low (1.94%) dividend rate on both the index and its sectors in this comparison.
Using these assumptions to adjust the returns:
S and P 500 Index - 23.45% - .5% commission = 22.95% net return
Black Rock - 25.94% - 2% commission - 3.25% capital gain taxes = 20.69% net return
Deutche Bank Private Wealth - 32.4% - 2% commission - .58% capital gain taxes = 29.8% net return
JP Morgan - 28.04% - 2% commission - 1.42% capital gain taxes = 24.62% net return
US Trust - 22.64% - 2% commission - .5% capital gain taxes - 20.14%
Citigroup - 23.26% - 2% commission - 1.61% capital gain taxes = 19.65%
Goldman Sachs - 20.35% - 2% commission - 1.94% capital gain taxes = 16.41%
In 2009, 1/3 of the pros listed beat the S and P 500 net return with their recommendations for investing, and you can see for yourself how each predicted the other investing categories for the year.
Congratulations if you followed the advice of Deutche Bank Private Wealth or JP Morgan last year. I suspect, however, that Deutche Bank Private Wealth charges higher than 2% for its advice, but we'll keep the figures consistent for comparison purposes.
If you followed the other 2/3, you'd have been better off just buying the S and P 500 Index. It will be interesting to see if Deutche Bank and JP Morgan will continue to outperform, and whether the others will improve their performance in 2010.
What Happened Last Year
S and P 500 Ended the Year at 1115.10
S and P Earnings were $55.91
Fed Funds Rate was .25%
10 Year Treasury was 3.85%
Best Performing Sectors were:
Technology (59.92%), Materials (45.23%), and Consumer Discretonary (38.76%)
If you'd bought the Index, you'd have been up 23.45% for the year.
What the Pros Predicted
Black Rock (Robert Doll)
S and P 500 - 1050 (5.8% low)
S and P Earnings - $57.5 (3% high)
Fed Funds Rate - 1% (300% high)
10 Year Treasury - 3.25% (16% low)
Best Performing Sectors: Technology (49.47%), Energy (11.29%), and Health Care (17.07%).
Sold Technology in the 4th quarter.
Portfolio return 25.94%
Deutche Bank Private Wealth (Larry Adam)
S and P 500 - 1025 (8% low)
S and P 500 Earnings - $71 (27% high)
Fed Funds Rate - .125% (50% low)
10 Year Treasury - 2.75% (29% low)
Best Performing Sectors: Technology (59.92%), Consumer Staples (11.2%) and Health Care (17.07%)
Sold Consumer Staples in 4th quarter, and replaced with Energy and Industrials.
Portfolio return 32.4%
JP Morgan (Thomas Lee)
S and P 500 - 1100 (1% low)
S and P 500 Earnings - $65 (16% high)
Fed Funds Rate - 0% (was .25%)
10 Year Treasury - 1.65% (57% low)
Best Performing Sectors: Financials (14.8%), Consumer Discretionary (38.76%) and Health Care (17.07%). Sold Consumer Discretionary and Health Care in 4th quarter and replaced with Energy, Technology, Industrials and Materials.
Portfolio return - 28.04%
US Trust (Christopher Hyzy)
S and P 500 - 1020 (8.5% low)
S and P Earnings - $60 (4% high)
Fed Funds Rate - .5% (50% high)
10 Year Treasury - 3% (22% low)
Best Performing Sectors: Energy (11.29%), Consumer Staples (11.2%), Utilities (6.8%), Technology (59.92%). Sold Consumer Staples, Utilities, and replaced with Industrials and Materials.
Portfolio return - 22.64%
Citigroup (Tobias Levkovich)
S and P 500 - 1000 (10% low)
S and P Earnings - $62 (10.8% high)
Fed Funds Rate - 0% (was .25%)
10 Year Treasury - 3% (22% high)
Best Performing Sectors: Technology (59.92%), Financials (14.8%), Consumer Discretionary (39.76%), Telecom Services (2.63%), Health Care (17.07%) and Industrials (17.27%). Sold Consumer Discretionary, Telecom Services, Health Care, and bought Materials and Energy.
Portfolio return - 23.26%
Goldman Sachs (David Kostin)
S and P 500 - 1100 (1% low)
S and P Earnings $53 (5% low)
Fed Funds Rate - .125% (50% low)
10 Year Treasury - 3.6% (6% low)
Best Performing Sectors: Consumer Staples (11.2%) and Health Care (17.07%). Sold both and replaced with Energy, Materials, Financials and Technology)
Portfolio return - 20.35%
Commission and Taxes
Do-it-yourself investors typically pay about .5% in annual fees, and full service brokers typically charge about 2% for their services.
Short-term capital gain tax rates are the same as ordinary income tax rates, which are 25% for most people (who earn between $33,950 and $82,250 per year). We'll ignore the tax effect on the relatively low (1.94%) dividend rate on both the index and its sectors in this comparison.
Using these assumptions to adjust the returns:
S and P 500 Index - 23.45% - .5% commission = 22.95% net return
Black Rock - 25.94% - 2% commission - 3.25% capital gain taxes = 20.69% net return
Deutche Bank Private Wealth - 32.4% - 2% commission - .58% capital gain taxes = 29.8% net return
JP Morgan - 28.04% - 2% commission - 1.42% capital gain taxes = 24.62% net return
US Trust - 22.64% - 2% commission - .5% capital gain taxes - 20.14%
Citigroup - 23.26% - 2% commission - 1.61% capital gain taxes = 19.65%
Goldman Sachs - 20.35% - 2% commission - 1.94% capital gain taxes = 16.41%
In 2009, 1/3 of the pros listed beat the S and P 500 net return with their recommendations for investing, and you can see for yourself how each predicted the other investing categories for the year.
Congratulations if you followed the advice of Deutche Bank Private Wealth or JP Morgan last year. I suspect, however, that Deutche Bank Private Wealth charges higher than 2% for its advice, but we'll keep the figures consistent for comparison purposes.
If you followed the other 2/3, you'd have been better off just buying the S and P 500 Index. It will be interesting to see if Deutche Bank and JP Morgan will continue to outperform, and whether the others will improve their performance in 2010.
Saturday, January 2, 2010
Who's Smarter, the Pros or the Little Guy?
Last September, I published the 2010 investment advice given by several market professionals and posed the question,
"What would earn you the most money,
Taking the advice of the market pros would cost you a much higher fee, because
Who,
What Sector, Price
Kitty,
S and P 500, 1115.10
Black Rock,
Energy, 429.95
Health Care, 362.22
Deutche Bank Private Wealth Mgmt
Technology, 370.71
Health Care, 362.22
Industrials, 242.99
Morgan Stanley
Health Care, 362.22
Technology, 370.71
Energy, 429.95
Prudential
Financials, 193.78
Technology, 370.71
Material, 199.81
Industrials, 242.99
US Trust
Technology, 370.71
Materials,199.81
,Energy, 429.95
Industrials, 242.99
Barclays Capital
Industrials, 242.99
Technology. 370.71
Citigroup
Materials, 199.81
Financials, 193.78
Technology, 370.71
Energy, 429.95
Goldman Sachs
Energy, 429.95
Materials, 199.81
Financials, 193.78
Technology, 370.71
JPMorgan/Chase
Energy, 429.95
Industrials, 242.99
Financials, 193.78
Technology, 370.71
Materials, 199.81
RBC Capital Mkts
Technology, 370.71
Consumer Discretionary, 235.07
Financials, 193.78
Industrials, 242.99
I'll give you an update at the end of every calendar quarter. What do you think? Will trading make you more money than just buying the Index?
It will be an interesting experiment, and one that just may result in you taking charge of your investments yourself.
"What would earn you the most money,
- Buying the entire S and P 500 Index or
- Buying just the sectors of that Index that the market pros suggest?"
Taking the advice of the market pros would cost you a much higher fee, because
- You'd need, not only to know what to buy, but also when to sell.
- You pay a commission when buying and selling, and must pay capital gain taxes on any gain on your gain on sale, unless you buy in a tax-deferred retirement account.
- Then, you pay an additional commission when replacing the sold securities with another investment.
Who,
What Sector, Price
Kitty,
S and P 500, 1115.10
Black Rock,
Energy, 429.95
Health Care, 362.22
Deutche Bank Private Wealth Mgmt
Technology, 370.71
Health Care, 362.22
Industrials, 242.99
Morgan Stanley
Health Care, 362.22
Technology, 370.71
Energy, 429.95
Prudential
Financials, 193.78
Technology, 370.71
Material, 199.81
Industrials, 242.99
US Trust
Technology, 370.71
Materials,199.81
,Energy, 429.95
Industrials, 242.99
Barclays Capital
Industrials, 242.99
Technology. 370.71
Citigroup
Materials, 199.81
Financials, 193.78
Technology, 370.71
Energy, 429.95
Goldman Sachs
Energy, 429.95
Materials, 199.81
Financials, 193.78
Technology, 370.71
JPMorgan/Chase
Energy, 429.95
Industrials, 242.99
Financials, 193.78
Technology, 370.71
Materials, 199.81
RBC Capital Mkts
Technology, 370.71
Consumer Discretionary, 235.07
Financials, 193.78
Industrials, 242.99
I'll give you an update at the end of every calendar quarter. What do you think? Will trading make you more money than just buying the Index?
It will be an interesting experiment, and one that just may result in you taking charge of your investments yourself.
Thursday, December 31, 2009
Four Extraordinary Financial Predictions for the Coming Decade
As we leave the year of the "Great Recession" behind, knowing four likely financial outcomes will show us how to position ourselves for financial prosperity in the coming decade.
FOUR FINANCIAL PREDICTIONS
1) Global growth
Emerging economies were economically superior in the last decade. Without the effect of the tech and housing bubbles in their past, their demand is not hampered by enormous public (and private) debt. The better run of these economies will prosper in the coming decade, and provide markets for economies weakened by the lingering effects of the recent recession.
2) Inflation
As we emerge from the Great Recession, the reality of the damage is becoming more clear. Without government support, we'd be in a Depression. While the steps taken by G-20 nations were inarguably necessary, it effectively covered old problems with borrowed dollars, while keeping interest rates artifically low in order to give life to a near-death economy.
As more countries take on huge amounts of debt, the numbers of lenders who have the money and motivation to lend decrease. It's a simple formula that we all know: less demand for a commodity causes the price of that commodity to fall. If nobody is buying the farmer's apples, the farmer lowers her prices.
In the case of our debt (in the form of bonds), when bond prices fall, yields go up. Here's an example
Maturity Date - One Year. Price of bond - $1000. Interest paid by borrower - 4% Yield to lender - 4%
If the price of that $1000 bond falls to $980,
Maturity Date - One Year. Price of bond - $980. Interest paid by borrower - 4% Yield to lender - 6.1%
Higher interest rates mean higher inflation. The Fed can't keep rates artificially low forever.
3) The mortgage market
We have just seen the effect of lending to less-than-qualified-borrowers in the recent mortgage meltdown. You may be able to cut mortgages into little pieces and sell them to Iceland, but in the end, the mortgages will still go bad if the borrower can't pay it back. Since the crisis, financial reform has stalled. Mega-banks are repaying taxpayers for the money we spent keeping them alive, and, while lending standards have tightened, the genie has been let out of the bottle.
Investment bankers now operate under commercial bank charters. Structure finance has diminished the barrier to entry to the mortgage market. This demand, together with stricter lending practices, will provide additional upward pressure on interest rates.
4) Wealth transfer
Over the last decade, emerging nations have produced good for the insatiable US consumer, who bought with abandon. Now debt laden, US consumer growth is diminishing. Emerging nations, however, have newfound wealth. Those nations now lend money to our government, and have a huge and growing middle class.
China is the most obvious example, but there are others. These nations, assuming that they avoid the pitfalls of asset bubbles, will provide the majority of global growth in the early part of this decade with their newly acquired wealth.
A SHIFT IN THE PORTFOLIO PARADIGM
Before the effects of globalization, all but those who ascribed to "Modern Portfolio Theory" (those who invested a set percentage of their money in various asset classes) were confident in keeping their money largely in US equities and bonds.
With future diminished US growth prospects, however, this investment strategy is unlikely to be as successful in the next decade. History has shown that this strategy has not been effective in the past, as well. Investment veteran Art Cashin, Director of Floor Operations at UBS, recently reiterated his "theory of the 17.6-year cycle." He pointed out that the periods 1966-1982 and 1929-1947 were "lean cycles," and predicts that we are entering another such cycle at this time.
Consequently, the old benchmark of "Subtract your age from 100, put that percentage of your portfolio in high quality US stocks, and the remainder in bonds" may well be over.
What now? If you agree with the four assumptions discussed above, Pimco's Emerging Market fund manager (and former Harvard Endowment fund manager) Mohamed Il-Erian proposes the following portfolio:
STOCK 15% US, 15% Non-US Advanced Economies, 12% Emerging Markets, 7% Private Equity.
BONDS 5% US, 9% International, 5% US Treasury Inflation Protection Securities.
REAL ASSETS 6% Real Estate, 11% Commodities, 5% Infrastructure.
SPECIAL OPPORTUNITIES 8%
With an increasing investment in fast-growing emerging markets, with an emphasis on TIPS and real assets, this portfolio seeks growth with protection against inflation. If you agree that inflation will cause rates to rise, you'll want to delay your US bond purchases until rates are higher, and wait until gold prices fall before investing in that commodity. Depressed real estate prices, other than commercial property, show good value now.
Of course, as we've learned through the painful correction in the last decade, this portfolio does not include cashflow you will need in the next five to ten years. That is best kept in short-term Treasury issues or insured savings. Yes, rates are low now. But, they're likely to rise, as inflation picks up, and for this money, you want return OF capital more than return ON capital.
Have a safe, happy, healthy and prosperous new decade.
FOUR FINANCIAL PREDICTIONS
1) Global growth
Emerging economies were economically superior in the last decade. Without the effect of the tech and housing bubbles in their past, their demand is not hampered by enormous public (and private) debt. The better run of these economies will prosper in the coming decade, and provide markets for economies weakened by the lingering effects of the recent recession.
2) Inflation
As we emerge from the Great Recession, the reality of the damage is becoming more clear. Without government support, we'd be in a Depression. While the steps taken by G-20 nations were inarguably necessary, it effectively covered old problems with borrowed dollars, while keeping interest rates artifically low in order to give life to a near-death economy.
As more countries take on huge amounts of debt, the numbers of lenders who have the money and motivation to lend decrease. It's a simple formula that we all know: less demand for a commodity causes the price of that commodity to fall. If nobody is buying the farmer's apples, the farmer lowers her prices.
In the case of our debt (in the form of bonds), when bond prices fall, yields go up. Here's an example
Maturity Date - One Year. Price of bond - $1000. Interest paid by borrower - 4% Yield to lender - 4%
If the price of that $1000 bond falls to $980,
Maturity Date - One Year. Price of bond - $980. Interest paid by borrower - 4% Yield to lender - 6.1%
Higher interest rates mean higher inflation. The Fed can't keep rates artificially low forever.
3) The mortgage market
We have just seen the effect of lending to less-than-qualified-borrowers in the recent mortgage meltdown. You may be able to cut mortgages into little pieces and sell them to Iceland, but in the end, the mortgages will still go bad if the borrower can't pay it back. Since the crisis, financial reform has stalled. Mega-banks are repaying taxpayers for the money we spent keeping them alive, and, while lending standards have tightened, the genie has been let out of the bottle.
Investment bankers now operate under commercial bank charters. Structure finance has diminished the barrier to entry to the mortgage market. This demand, together with stricter lending practices, will provide additional upward pressure on interest rates.
4) Wealth transfer
Over the last decade, emerging nations have produced good for the insatiable US consumer, who bought with abandon. Now debt laden, US consumer growth is diminishing. Emerging nations, however, have newfound wealth. Those nations now lend money to our government, and have a huge and growing middle class.
China is the most obvious example, but there are others. These nations, assuming that they avoid the pitfalls of asset bubbles, will provide the majority of global growth in the early part of this decade with their newly acquired wealth.
A SHIFT IN THE PORTFOLIO PARADIGM
Before the effects of globalization, all but those who ascribed to "Modern Portfolio Theory" (those who invested a set percentage of their money in various asset classes) were confident in keeping their money largely in US equities and bonds.
With future diminished US growth prospects, however, this investment strategy is unlikely to be as successful in the next decade. History has shown that this strategy has not been effective in the past, as well. Investment veteran Art Cashin, Director of Floor Operations at UBS, recently reiterated his "theory of the 17.6-year cycle." He pointed out that the periods 1966-1982 and 1929-1947 were "lean cycles," and predicts that we are entering another such cycle at this time.
Consequently, the old benchmark of "Subtract your age from 100, put that percentage of your portfolio in high quality US stocks, and the remainder in bonds" may well be over.
What now? If you agree with the four assumptions discussed above, Pimco's Emerging Market fund manager (and former Harvard Endowment fund manager) Mohamed Il-Erian proposes the following portfolio:
STOCK 15% US, 15% Non-US Advanced Economies, 12% Emerging Markets, 7% Private Equity.
BONDS 5% US, 9% International, 5% US Treasury Inflation Protection Securities.
REAL ASSETS 6% Real Estate, 11% Commodities, 5% Infrastructure.
SPECIAL OPPORTUNITIES 8%
With an increasing investment in fast-growing emerging markets, with an emphasis on TIPS and real assets, this portfolio seeks growth with protection against inflation. If you agree that inflation will cause rates to rise, you'll want to delay your US bond purchases until rates are higher, and wait until gold prices fall before investing in that commodity. Depressed real estate prices, other than commercial property, show good value now.
Of course, as we've learned through the painful correction in the last decade, this portfolio does not include cashflow you will need in the next five to ten years. That is best kept in short-term Treasury issues or insured savings. Yes, rates are low now. But, they're likely to rise, as inflation picks up, and for this money, you want return OF capital more than return ON capital.
Have a safe, happy, healthy and prosperous new decade.
Monday, November 16, 2009
Mid-November Economic Outlook
Some very smart women I know noted recently that some women financial columnists, not unlike some of their male counterparts, sway their commentary toward a political point of view. In my opinion, that does justice to neither financial analysis, which one would hope would lead where the data follow, nor politics, which one would hope to be policy-driven. Whatever our point of view, data show both parties have contributed to the deficits we currently have.
In this column, I endeavor to give financial information as it is, and put it into some historical context, in order that we might understand our best individual financial strategies and which governmental policy decisions one would support which are consistent with a given outcome.
I. Unemployment
The unemployment rate rose to 10.2% last month. Anyone who read the July 13 column was expecting this rise, when comparing the recent recession to that in the early 1980's, wherein I noted "the average unemployment rate in the last five months of the recession ended Nov, 1982 was 10.18%, and it averaged 9.8% for the year after that recession was over."
Although this was expected, it is not good news. Coupled with the fact that consumer confidence is trending lower, it does not bode well for any sector of the ecomony reliant on discretionary spending.
II. Other Economic Indicators
Here, the outlook is inconsistent.
Economy as a Whole
Given these general economic conditions, it is unlikely that the US Gross Domestic Product will match previous 3.5% growth in the fourth quater. Given current data and trends, it appears that the year will close with a 2% - 2.5% quarter, and possible decline to 2% at the beginning of 2010. As the year progresses, if pos-recession employment trends hold true, growth will likely rise to 3% as 2011 approaches.
Investors
Investor sentiment has been very positive of late. My macroeconomic analysis includes 22 indicators, and of all of them, I think sentiment is most predictive. It is, however, a negative corollary, i.e., the higher the sentiment, the worse the outcome. It's not the bargain it was before it rose 50%, and I'll quote Warren Buffett, "Be fearful when others are greedy: be greedy when others are fearful."
I've started hearing, "Get in before you miss the boat." That always makes me want to jump ship.
In this column, I endeavor to give financial information as it is, and put it into some historical context, in order that we might understand our best individual financial strategies and which governmental policy decisions one would support which are consistent with a given outcome.
I. Unemployment
The unemployment rate rose to 10.2% last month. Anyone who read the July 13 column was expecting this rise, when comparing the recent recession to that in the early 1980's, wherein I noted "the average unemployment rate in the last five months of the recession ended Nov, 1982 was 10.18%, and it averaged 9.8% for the year after that recession was over."
Although this was expected, it is not good news. Coupled with the fact that consumer confidence is trending lower, it does not bode well for any sector of the ecomony reliant on discretionary spending.
II. Other Economic Indicators
Here, the outlook is inconsistent.
- Housing is trending upward
- Manufacturing is improving
- Non-manufacturing sectors look questionable
- Car sales have slowed after the "cash for clunkers" program ended
- Discount and luxury retail sales are moving slightly upward
- Corporate profits are improving
Economy as a Whole
Given these general economic conditions, it is unlikely that the US Gross Domestic Product will match previous 3.5% growth in the fourth quater. Given current data and trends, it appears that the year will close with a 2% - 2.5% quarter, and possible decline to 2% at the beginning of 2010. As the year progresses, if pos-recession employment trends hold true, growth will likely rise to 3% as 2011 approaches.
Investors
Investor sentiment has been very positive of late. My macroeconomic analysis includes 22 indicators, and of all of them, I think sentiment is most predictive. It is, however, a negative corollary, i.e., the higher the sentiment, the worse the outcome. It's not the bargain it was before it rose 50%, and I'll quote Warren Buffett, "Be fearful when others are greedy: be greedy when others are fearful."
I've started hearing, "Get in before you miss the boat." That always makes me want to jump ship.
Greed and Fear
I was just looking over a list of the cities where the highest percentage of homes was "under water," i.e., the mortgage is higher than the house is worth.
And a light went on in my head.
I used to manage money. I heard people throw around the words "greed and fear" almost every day. When markets were expensive, EVERYBODY wanted to buy. When they crashed, you couldn't give stock away.
So, back to mortgages, more than half of the people in these cities owe more on their houses than they can get from a buyer.
The return on investment for investors in the stock and real estate market, over the long term, is very similar. Apparently, so is the motivation to buy. We know, as investors, we should strive to "buy low and sell high," or as Warren Buffett says, "Be greedy when others are fearful: be fearful when others are greedy." But that's not what we do.
Back to the stock market, you may have noticed it's going up. A lot. Let's take a look at that for a moment.
First of all, it's up about 50% from its low. It came down 50% from its high. So, does that mean we're back where we started? Far from it.
Since we're near Thanksgiving, let's use the example of pie. If we put a pie on the table, and the kids eat half of it, it's easy to visualize what's left: half a pie. If we increase that half a pie by 50%, we add a quarter of a pie. We've got 3/4 of a pie, or 25% less than the full pie that we put on the table.
So, if the market is down 25% from its high, does that mean that it's cheap?
If we look at history, the average price investors pay for every dollar the S&P 500 earns is $15.82. Right now, you'll pay about $21 for next year's earnings. At the market low, you'd have paid under $11. So, it's more expensive than its average price, but that's not surprising, since it's roared back over 50% from last March. Does that make you feel greedy (I've got to get in before I miss the boat) or fearful (I should have bought when it was down, and now it's probably due for a correction).
The best way to feel, in my opinion is emotionless. Being rational, rather than greedy or fearful, is the best strategy. One very good strategy is to review your spending, put some money aside every month and invest it no matter where the market is, making sure, of course that what you invest is long term money. That means you won't be using it for ten years or so.
This constant investing strategy is called "dollar cost averaging," and will result in you buying sometimes when the market is low, and sometimes when it's high. Overall, you'll average out the peaks and valleys and invest rationally - for the long term.
Then you can leave greed and fear for the drama queens.
And a light went on in my head.
I used to manage money. I heard people throw around the words "greed and fear" almost every day. When markets were expensive, EVERYBODY wanted to buy. When they crashed, you couldn't give stock away.
So, back to mortgages, more than half of the people in these cities owe more on their houses than they can get from a buyer.
- Bakersfield, CA
- Riverside, CA
- Fort Meyers, FL
- Fairfield, CA
- Orlando, FL
- Reno, NV
- Port St. Lucie, FL
- Phoenix, AZ
- Stockton, CA
- Modesto, CA
- Merced, CA
- Las Vegas, NV
The return on investment for investors in the stock and real estate market, over the long term, is very similar. Apparently, so is the motivation to buy. We know, as investors, we should strive to "buy low and sell high," or as Warren Buffett says, "Be greedy when others are fearful: be fearful when others are greedy." But that's not what we do.
Back to the stock market, you may have noticed it's going up. A lot. Let's take a look at that for a moment.
First of all, it's up about 50% from its low. It came down 50% from its high. So, does that mean we're back where we started? Far from it.
Since we're near Thanksgiving, let's use the example of pie. If we put a pie on the table, and the kids eat half of it, it's easy to visualize what's left: half a pie. If we increase that half a pie by 50%, we add a quarter of a pie. We've got 3/4 of a pie, or 25% less than the full pie that we put on the table.
So, if the market is down 25% from its high, does that mean that it's cheap?
If we look at history, the average price investors pay for every dollar the S&P 500 earns is $15.82. Right now, you'll pay about $21 for next year's earnings. At the market low, you'd have paid under $11. So, it's more expensive than its average price, but that's not surprising, since it's roared back over 50% from last March. Does that make you feel greedy (I've got to get in before I miss the boat) or fearful (I should have bought when it was down, and now it's probably due for a correction).
The best way to feel, in my opinion is emotionless. Being rational, rather than greedy or fearful, is the best strategy. One very good strategy is to review your spending, put some money aside every month and invest it no matter where the market is, making sure, of course that what you invest is long term money. That means you won't be using it for ten years or so.
This constant investing strategy is called "dollar cost averaging," and will result in you buying sometimes when the market is low, and sometimes when it's high. Overall, you'll average out the peaks and valleys and invest rationally - for the long term.
Then you can leave greed and fear for the drama queens.
Saturday, October 3, 2009
Important Pricey Leather Handbag Information
I. Gender Marketing says. . .
Men identify deeply with their jobs. They're hardwired for task orientation. When they lose their jobs, they tend to lose their identity.
"Women are . . . worried about their jobs, but not to the extent that they feel their . . .existence is being threatened, and so they are in the mood to buy despite the crisis," gender marketing expert Diana Jaffe told Reuters recently.
So, do we conclude that men face the current economic slump by questioning their identity and cutting back on spending, and women make themselves feel better by shopping for pricey leather handbags?
II. Why do we buy?
Maybe watching "Madmen" has hurled us back in time and made us behave as though we were living in far less liberated 1960's. Maybe we are taking the ostrich approach to managing our money, and, like Nero, are fiddling while Rome burns. Maybe, in this particular case, we should behave more like men - but for very different reasons.
We need not define ourselves by the way we earn a living in order to face our current economic situation. We can continue to be well-rounded human beings who know that our net worth and our self worth are very different. But in order to pursue the things that bring us happiness, we'd best ensure we have a roof over our head and food on our table in our old age before we buy "pricey leather handbags."
Yet, the fashion industry send us messages - four times a year, via preposterously thin teen-age girls - that we "need" what they offer. Do we? Does spending money on handbags and shoes really make us feel good enough to forego providing for our long term needs?
III. Put Yourself First
If you have put aside enough for yourself to live comfortably for the rest of your life and you need a handbag, by all means buy one, as long as you have the money. But if you have not provided for your long term security, exactly what do you accomplish by buying something that you truly cannot afford?
The appearance of wealth is nothing. It is for someone else. It speaks to others - not you.
IV. You Say
Times are difficult. Current times are more difficult than the grueling recession that took place in the 1970's, when I began working in finance. It was a time when wealth was lost in a grinding market correction that took place over years and cut portfolios in half. Inflation was out of control and job losses made the national mood grim. It was also the time when Warren Buffett invested heavily in the stock market and earned wealth that is measured only slightly less than that of Microsoft founder Bill Gates.
It is your right to buy whatever you want, whenever you want. You can be tempted by the fashion industry to buy gladiator shoes, designer bags or whatever it is - as long as it speaks to your authentic self.
You can also decide to put that money aside in investments that will outperform the ravages of inflation, like stocks and real estate, which will provide for you for the rest of your life.
One in four of us will live to age 95. Elderly and destitute with a pricey handbag in my closet, is not the choice I make for myself. I invite you to join me in defying gender marketing research, and investing your time and resources in investing in your future.
Men identify deeply with their jobs. They're hardwired for task orientation. When they lose their jobs, they tend to lose their identity.
"Women are . . . worried about their jobs, but not to the extent that they feel their . . .existence is being threatened, and so they are in the mood to buy despite the crisis," gender marketing expert Diana Jaffe told Reuters recently.
So, do we conclude that men face the current economic slump by questioning their identity and cutting back on spending, and women make themselves feel better by shopping for pricey leather handbags?
II. Why do we buy?
Maybe watching "Madmen" has hurled us back in time and made us behave as though we were living in far less liberated 1960's. Maybe we are taking the ostrich approach to managing our money, and, like Nero, are fiddling while Rome burns. Maybe, in this particular case, we should behave more like men - but for very different reasons.
We need not define ourselves by the way we earn a living in order to face our current economic situation. We can continue to be well-rounded human beings who know that our net worth and our self worth are very different. But in order to pursue the things that bring us happiness, we'd best ensure we have a roof over our head and food on our table in our old age before we buy "pricey leather handbags."
Yet, the fashion industry send us messages - four times a year, via preposterously thin teen-age girls - that we "need" what they offer. Do we? Does spending money on handbags and shoes really make us feel good enough to forego providing for our long term needs?
III. Put Yourself First
If you have put aside enough for yourself to live comfortably for the rest of your life and you need a handbag, by all means buy one, as long as you have the money. But if you have not provided for your long term security, exactly what do you accomplish by buying something that you truly cannot afford?
The appearance of wealth is nothing. It is for someone else. It speaks to others - not you.
IV. You Say
Times are difficult. Current times are more difficult than the grueling recession that took place in the 1970's, when I began working in finance. It was a time when wealth was lost in a grinding market correction that took place over years and cut portfolios in half. Inflation was out of control and job losses made the national mood grim. It was also the time when Warren Buffett invested heavily in the stock market and earned wealth that is measured only slightly less than that of Microsoft founder Bill Gates.
It is your right to buy whatever you want, whenever you want. You can be tempted by the fashion industry to buy gladiator shoes, designer bags or whatever it is - as long as it speaks to your authentic self.
You can also decide to put that money aside in investments that will outperform the ravages of inflation, like stocks and real estate, which will provide for you for the rest of your life.
One in four of us will live to age 95. Elderly and destitute with a pricey handbag in my closet, is not the choice I make for myself. I invite you to join me in defying gender marketing research, and investing your time and resources in investing in your future.
Thursday, September 24, 2009
Happiness Is. . .
"Happiness is," said a song that was popular when I was a girl, "different things to different people."
A few days ago, New York Times columnist Maurine Dowd noted that the General Social Survey, "which has tracked America's mood since 1972," found that men are getting happier and women are "getting gloomier." Ms. Dowd quotes Marcus Buckingham, a former Gallup researcher and current Huffington Post blogger, as noting that "women begin their lives more fulfilled than men, as they age, they gradually become less happy."
From the women of The View to moms on the playground, opinions about why this state of mid-life malaise abound.
A few days ago, New York Times columnist Maurine Dowd noted that the General Social Survey, "which has tracked America's mood since 1972," found that men are getting happier and women are "getting gloomier." Ms. Dowd quotes Marcus Buckingham, a former Gallup researcher and current Huffington Post blogger, as noting that "women begin their lives more fulfilled than men, as they age, they gradually become less happy."
From the women of The View to moms on the playground, opinions about why this state of mid-life malaise abound.
- Our lives are more crowded with our increased options of family, work, friends
- Our biology makes us more sensitive, and therefore vulnerable
- Our culture is youth obsessed, especially as it relates to women
Stretched too thin, feeling responsible for far too many things for time to allow, becoming less and less culturally attractive, who would NOT feel unhappy? In every discussion I've heard, reasons are many, but, as Ms. Dowd concludes, the answer is a paradox.
Perhaps. But, maybe our answer is the fact that we simply do not take time, individually and as a group, to address our unhappiness. Perhaps we have invested our time, energy and resources in others and have left ourselves feeling impoverished. As a person who has earned her living in advising others how to invest their wealth, I now wonder whether the same structure that one uses to develop a portfolio can address this problem. Here is a general example of how this process works.
- What is your goal? In investment terms, the answer is a number. In life terms, the answer is your response to "What makes you happy?" Answering that question requires enough time to consider what it is that brings you true joy. It's much easier to say, "I don't have time to think about that," than "I don't know what makes me happy." The latter statement is a symptom of not having nurtured oneself. And, over time, that lack of nurturing will likely result in deep unhappiness.
- What must you do to achieve your goal? In investment terms, this answer requires both sacrifice and risk. Sacrifice involves putting money aside for the future, and risk involves investing in assets which can, as we have all seen lately, fluctuate wildly in short term price, but, over the long term, earn more than inflation. In life terms, we must also be willing to make sacrifices and take risk to get what we want. We must develop a strategy to acquire those things that bring us great joy, whether they be experiences or self expression. We must surround ourselves with those who will help us, and rid ourselves of those who will not. We must cease to think of providing for ourselves as "selfish," and begin to treat ourselves as the valuable beings that we are.
- What must you do to stay on course? In investment terms, this requires a minimum of an annual check-up to measure progress. In life terms, we must also constantly monitor our progress, and ensure that we do not allow ourselves to feel guilty, unappreciated, dismissed, or any other negative emotion about achieving what it is that we want.
By following this investment structure, we will find that our lives cannot become too crowded for ourselves, because we will filter out that which is not fulfilling our life goal. We will expand our sensitivity to ourselves by putting ourselves first, without a moment's thought that we are being selfish. We are merely nurturing ourselves in order that we can be more nurturing to others. Finally, we will dismiss any assertion that we are not attractive people. We will value ourselves much too highly to think we must look any certain way in order to be attractive. We will define ourselves by our own standards.
Then, we may give our daughters, nieces and young women friends the priceless gift of valuing themselves on their own terms. And, perhaps, like us, they will use their options to achieve happiness as they define it.
Wednesday, June 17, 2009
Executive Pay
Lexington, Kentucky realtor Diana Nave suggested, “I think it is important for people to understand the spread between executives and workers and how far apart it has become.” Agreed. Let’s take a look.
A Little History
In 1940, executives (the three highest-paid officers in the 50 largest US companies) earned 56 times their average worker’s pay. In 1950, that ratio slipped to 34 times, and fell further in 1960 and 1970 to 27 and 25 times, respectively.
Then, in 1980, executive pay grew to 33 times their average worker, and in 1990, to 55 times, approximately equal to that of 1940. In the year 2000, executives were paid nearly 120 times that of their average worker.
So, what was the economic situation in 1940, how was it similar to 1990, and what happened between 1990 and 2000 that caused the average worker to lose so much ground?
1940
The Great Depression may have improved to a recessionary status from 1938 to early 1940, but no economic recovery of significance could take place without government fiscal intervention. The recovery would have likely taken much longer if left to the private sector.
The US Gross National Product had passed the $100 billion mark in 1940, but was just 9 percent above the GNP level of 1929. It was the federal purchases of goods and services for national defense in the pre-war period - a rise from $1.2 billion in 1939 to $2.2 billion in 1940 - when the economy felt the rise in government spending that marked the end of an economically depressed era through the injection of government funds directly into the economy. While many credit the “New Deal,” evidence points more heavily toward defense spending.
After a protracted period of 14%+ unemployment, a combination of a “take any job” mentality, and a new, somewhat underpaid female workforce during the war exacerbated the CEO vs. average worker chasm during this decade, which was not again achieved until fifty years later in 1990.
1990
After a protracted recession in the 1970’s, the 1980’s was a decade during which economic growth depended on a steady rise in consumer spending supported by both increasing debt and prices of stocks and homes. The present U.S. slump signals the end of that consumption-led growth, with an overbuilt housing market and an over employed consumption sector, from car dealers to malls. The question is whether our system can adapt to create new growth to fill the void left by embattled consumers.
The 1940s was a “boom” cycle due to government defense spending, and the 1990s, a “boom” cycle due to consumer spending. Neither was sustainable.
However, in the 1990s, a fundamental economic change took place – a “monetizing” of the financial asset growth – that largely rewarded the financing side of cash flow more than the operating side. Basically, there are three components of Cash Flow:
· Operating Activities, or producing revenue by operating the business at a profit
· Investing Activities, or buying and selling investments like property and equipment
· Financing Activities, or issuing/repaying long term debt (bonds) and issuing/buying back company stock.
As seen in both the Internet bubble in the 1990s and housing bubble in the 2000s, investors often were more highly rewarded for “flipping” their investments (or selling after owning them for a very short period) than for investing for the long-term. Both capital (stock and bond) and real estate investors saw a dramatic increase over the historic long term returns during these periods, and accepted and expected a continuation of those unsustainable returns.
Further, with the focus upon “short term” returns, management compensation became rooted in their ability to produce and sustain those returns by lessening their percentage of “salary” and increasing their percentage of “stock options” and the like, justified by their having the same stake in achieving profitability as their stock holders. Unfortunately, as seen by the collapse of the financial system, incenting management to achieve short-term profits over long-term viability can have disastrous consequences.
Now What?
It’s back to basics, now, for the capital and real estate markets. Real estate loans are again being made as they were for decades – 20% down, 30 year terms, with housing costs no more than 30% of gross income to borrowers with good credit. Stock prices are again reflecting management’s ability to turn a long term profit on the business more than their ability to buy back their own stock at a high return on investment. And executive pay is again reflected primarily in salary rather than stock options.
Are salary caps now appropriate? In my opinion, no. Any attempt to artificially cap prices, as was attempted in the 1970s, has ended in disaster. But, it has also not worked well to “let the market dictate,” as we are well aware now.
Companies must find a way to have the freedom to “bid” for talented people to run their businesses without undue interference, while recognizing that paying those talented people 120 times the salary of their average worker is a poor investment. It’s a complex problem that is fraught with both the tendency to over regulate and do nothing, both of which would be a terrible mistake.
And, while consumer consumption is severely mitigated by unemployment rates not seen since the 1980s, a return to conspicuous consumption seems, at least for the foreseeable future, passé. It is incumbent upon the US to convert the financial to the operating side of its future cash flow by innovating, i.e., producing new goods and services that address the needs of a global population in need of sustainable sources of food, housing and energy. As those businesses form, those who provide capital for their formation must demand a more horizontal business model that compensates innovators more closely to the level of their managers.
It’s a big job.
A Little History
In 1940, executives (the three highest-paid officers in the 50 largest US companies) earned 56 times their average worker’s pay. In 1950, that ratio slipped to 34 times, and fell further in 1960 and 1970 to 27 and 25 times, respectively.
Then, in 1980, executive pay grew to 33 times their average worker, and in 1990, to 55 times, approximately equal to that of 1940. In the year 2000, executives were paid nearly 120 times that of their average worker.
So, what was the economic situation in 1940, how was it similar to 1990, and what happened between 1990 and 2000 that caused the average worker to lose so much ground?
1940
The Great Depression may have improved to a recessionary status from 1938 to early 1940, but no economic recovery of significance could take place without government fiscal intervention. The recovery would have likely taken much longer if left to the private sector.
The US Gross National Product had passed the $100 billion mark in 1940, but was just 9 percent above the GNP level of 1929. It was the federal purchases of goods and services for national defense in the pre-war period - a rise from $1.2 billion in 1939 to $2.2 billion in 1940 - when the economy felt the rise in government spending that marked the end of an economically depressed era through the injection of government funds directly into the economy. While many credit the “New Deal,” evidence points more heavily toward defense spending.
After a protracted period of 14%+ unemployment, a combination of a “take any job” mentality, and a new, somewhat underpaid female workforce during the war exacerbated the CEO vs. average worker chasm during this decade, which was not again achieved until fifty years later in 1990.
1990
After a protracted recession in the 1970’s, the 1980’s was a decade during which economic growth depended on a steady rise in consumer spending supported by both increasing debt and prices of stocks and homes. The present U.S. slump signals the end of that consumption-led growth, with an overbuilt housing market and an over employed consumption sector, from car dealers to malls. The question is whether our system can adapt to create new growth to fill the void left by embattled consumers.
The 1940s was a “boom” cycle due to government defense spending, and the 1990s, a “boom” cycle due to consumer spending. Neither was sustainable.
However, in the 1990s, a fundamental economic change took place – a “monetizing” of the financial asset growth – that largely rewarded the financing side of cash flow more than the operating side. Basically, there are three components of Cash Flow:
· Operating Activities, or producing revenue by operating the business at a profit
· Investing Activities, or buying and selling investments like property and equipment
· Financing Activities, or issuing/repaying long term debt (bonds) and issuing/buying back company stock.
As seen in both the Internet bubble in the 1990s and housing bubble in the 2000s, investors often were more highly rewarded for “flipping” their investments (or selling after owning them for a very short period) than for investing for the long-term. Both capital (stock and bond) and real estate investors saw a dramatic increase over the historic long term returns during these periods, and accepted and expected a continuation of those unsustainable returns.
Further, with the focus upon “short term” returns, management compensation became rooted in their ability to produce and sustain those returns by lessening their percentage of “salary” and increasing their percentage of “stock options” and the like, justified by their having the same stake in achieving profitability as their stock holders. Unfortunately, as seen by the collapse of the financial system, incenting management to achieve short-term profits over long-term viability can have disastrous consequences.
Now What?
It’s back to basics, now, for the capital and real estate markets. Real estate loans are again being made as they were for decades – 20% down, 30 year terms, with housing costs no more than 30% of gross income to borrowers with good credit. Stock prices are again reflecting management’s ability to turn a long term profit on the business more than their ability to buy back their own stock at a high return on investment. And executive pay is again reflected primarily in salary rather than stock options.
Are salary caps now appropriate? In my opinion, no. Any attempt to artificially cap prices, as was attempted in the 1970s, has ended in disaster. But, it has also not worked well to “let the market dictate,” as we are well aware now.
Companies must find a way to have the freedom to “bid” for talented people to run their businesses without undue interference, while recognizing that paying those talented people 120 times the salary of their average worker is a poor investment. It’s a complex problem that is fraught with both the tendency to over regulate and do nothing, both of which would be a terrible mistake.
And, while consumer consumption is severely mitigated by unemployment rates not seen since the 1980s, a return to conspicuous consumption seems, at least for the foreseeable future, passé. It is incumbent upon the US to convert the financial to the operating side of its future cash flow by innovating, i.e., producing new goods and services that address the needs of a global population in need of sustainable sources of food, housing and energy. As those businesses form, those who provide capital for their formation must demand a more horizontal business model that compensates innovators more closely to the level of their managers.
It’s a big job.
Friday, June 12, 2009
Researching Investments
We briefly touched on how to research investments in our previous discussion, but will do so more thoroughly here.
Independence
As we said before, the first consideration regarding research is independence. Why? Let's think for a moment about the way investment banks (now chartered as commerical banks, by enlarge, but still fulfilling the primary roll of raising capital for publicly owned businesses) are structured.
The part of brokerage firms with which women are most familiar is that of the investment advisers. This consists of brokers who invest money on behalf of clients, and either:
Independence
As we said before, the first consideration regarding research is independence. Why? Let's think for a moment about the way investment banks (now chartered as commerical banks, by enlarge, but still fulfilling the primary roll of raising capital for publicly owned businesses) are structured.
The part of brokerage firms with which women are most familiar is that of the investment advisers. This consists of brokers who invest money on behalf of clients, and either:
- Earn commissions for buying and selling securities; or
- Earn a commission based on a percentage of assets under management.
In a related part of the firm, the brokerage earns fees from companies for raising money for them by
- Selling ownership in the company (stock) to their brokers' clients
- Borrowing money for the company (bonds) from their brokers' clients
- Providing strategic management advice to the company about their capitalization (stock and bonds outstanding)
In a separate part of the firm, the brokerage owns stocks and bonds in its own account, and buys and sells those securities to make a profit.
In an additionally separate part of the firm, the brokerage provides investment advice (buy and sell recommendations) to its brokers and to the general public.
While legally, there is a "Chinese wall" separating these various functions in a brokerage firm, it is apparent that there exists the possibility that, if a brokerage wanted to sell a stock from its own account, its analysts could be encouraged to provide a "buy" recommendation on that stock in order to provide both a market and favorable price to sell that stock to its brokers' clients and the general public who follows its research. I am not saying that this does happen; rather, I am saying that it could happen, and therefore there is the a possibilty of impropriety.
Remember, too, that Standard & Poor's and Moodys both provided their highest ratings to so-called Auction Rate Securities, securities that were backed by mortgages, some of which were sub-prime. When reviewing the procedures used to qualify for that rating, it became clear that the fact the issuers of those securities were paying fees to these rating agencies for the rating, resulted at least in part to receiving that highest available rating- the same as is provided to US Treasury debt. Here, the conflict of interest was obvious.
So, researcher independence is critical. Who, then, independent?
Some companies are paid for their research by their clients who are subscibers - not by the companies they analyze. The largest, and most experienced of these companies are
- Value Line (specializing in stock research)
- Morningstar (specializing in mutual fund research)
MORAL: Your research is best when in comes from a company that does not benefit from your decision of whether to buy or sell a security, and has a lengthy track record.
MORAL: Even if you use a full service broker, ask what research she uses. If it's not independent, neither is your broker.
Methodogy
Broadly, there are three types of investing: growth, value and passive.
- Growth investors choose securities that are growing faster than the stock market as a whole, and try to take profits before any negative news causes the stock to drop
- Value investors buy high quality but out-of-favor companies that are inexpensive because of a negative short-term situation
- Passive investors buy an "index" that replicates the market averages, thinking that no one, after trading costs and taxes on sales, beats long term market performance
Growth investors will find Value Line stocks rated as 1 for timeliness as meeting their general criteria. It is noteworthy that, over the last 25 years, a portfolio of such stocks beat the S&P 500 average significantly.
Perhaps the most famous value investor in our time is Warren Buffett. Those securities in his Berkshire Hathaway portfolio are examples of long term value investing. For individual stock research, Mary Buffett's "Buffettology" series is a good way to learn to select and evaluate such stocks. I have worked and taught with Mary, and find her books the most accurate and easy to understand approach to learning value investing research and principles.
Passive investors, and those who prefer to buy mutual funds can use Morningstar reports to find funds that meet their investment goals.
Value Line, Morningstar and the Buffettology series should all be available to you through your public libraries.
There are many other sources of independent research. If you choose to use one, check the author's experience and portfolio performance carefully, and ensure that both have been evaluated independently over at least ten years.
MORAL: Pick an investment strategy and stick to it. Moving back and forth (e.g., growth and value) does not work. Once you know your preferred strategy, use the best source of information available for that method of investing.
Thursday, June 11, 2009
Part I - How to Find an Adviser - Investing (cont'd)
In the previous discussion, we discussed the issues involved in selecting an investment adviser if you require that person to do virtually all of your work for you.
This is for those of you who take more of a "hands on" approach, and are likely to do your business through a discount, or deep discount broker.
1. Research
By far the most important aspect of your investing issues is where you get your information. Any company which benefits from you taking their advice is, in my opinion, automatically suspect. You may recall the recent stories about Standard & Poor's providing the highest available safety rating for so-called "Auction Rate Securities" consisting of mortgage securities, which became unsaleable soon after the mortgage crisis. The issuers of the mortgage securities were paying S&P for the rating. Whether there was actually a conflict of interest or not, there was certainly the appearance of potential impropriety.
Moral? The more independent the research, the more reliable it is.
So, who is the author of the "research reports" provided by your broker? The best sources would be those who earn their revenue from their subscribers, like Value Line and Morningstar.
2. Fees
a. Mutual Funds
If you are a mutual fund investor, keep an eye on your fees. No-load does NOT mean no fees.
Mutual funds that do not pay a "load," or commission to a broker or planner to sell the fund, instead pay advertising and marketing fees to sell the fund directly to you. These are called 12(b)1 fees, and vary widely from company to company. Your fund will also charge you "management fees" to compensate the person(s) who manage the fund.
You will pay these fees every year, and these fees will be deducted from the return on your investment.
If you are a mutual fund investor, know your fees.
b. Brokerage
Before opening your account, get a complete fee schedule. Will there be a charge:
This is for those of you who take more of a "hands on" approach, and are likely to do your business through a discount, or deep discount broker.
1. Research
By far the most important aspect of your investing issues is where you get your information. Any company which benefits from you taking their advice is, in my opinion, automatically suspect. You may recall the recent stories about Standard & Poor's providing the highest available safety rating for so-called "Auction Rate Securities" consisting of mortgage securities, which became unsaleable soon after the mortgage crisis. The issuers of the mortgage securities were paying S&P for the rating. Whether there was actually a conflict of interest or not, there was certainly the appearance of potential impropriety.
Moral? The more independent the research, the more reliable it is.
So, who is the author of the "research reports" provided by your broker? The best sources would be those who earn their revenue from their subscribers, like Value Line and Morningstar.
2. Fees
a. Mutual Funds
If you are a mutual fund investor, keep an eye on your fees. No-load does NOT mean no fees.
Mutual funds that do not pay a "load," or commission to a broker or planner to sell the fund, instead pay advertising and marketing fees to sell the fund directly to you. These are called 12(b)1 fees, and vary widely from company to company. Your fund will also charge you "management fees" to compensate the person(s) who manage the fund.
You will pay these fees every year, and these fees will be deducted from the return on your investment.
If you are a mutual fund investor, know your fees.
b. Brokerage
Before opening your account, get a complete fee schedule. Will there be a charge:
- To close your account?
- If you fail to keep a minimum amount?
- Annually to maintain your retirement plan?
- To talk to a representative?
- If you don't make a minimum number of trades per year?
3. A Second Pair of Eyes
In previous discussions, we talked about financial planners. They may practice similarly to a broker, i.e., charging commissions only when selling a product or "fee only," which is similar to the way an attorney or accountant charges.
Periodically, even if you are a very experienced investor, it is a good idea to have a review of your portfolio. This can be accomplished very cost-effectively by finding a financial planner who specializes in investments review and comment on your portfolio. Generally, unless you have an extraordinarily complex situation, this should be about a two hour project, and will be well worth the time and expense if you have overlooked anything critical in your portfolio.
Wednesday, June 10, 2009
Part I - How to Find a Financial Adviser - Investing (cont'd)
From the previous article, you have a general idea of whether you need a lot, a little, or almost no guidance in choosing investment from your adviser.
If you are a woman who is best suited with an adviser who will walk you through the entire investing process, this discussion is for you.
Broadly, there are two type of advisers who fit your needs:
If you are a woman who is best suited with an adviser who will walk you through the entire investing process, this discussion is for you.
Broadly, there are two type of advisers who fit your needs:
- Full service brokers (like those employed by Goldman Sachs, JP Morgan, etc.)
- Fee-only financial planners
Full Service Brokers
Education and Experience
Series 7 License
A full service broker will have a Series 7 (General Securities Registered Representative)licence, that shows at least 70% accuracy in answering 250 questions about
- Stocks
- Bonds
- Mutual Funds
- Options (derivative instruments)
- Commissions
as well as a Series 63 (State specific) license.
This individual will have passed a background check by the employing firm and be fingerprinted.
Most investment bankers (Goldman Sachs, JP Morgan, Morgan Stanley, etc.) have changed their charter to commercial bankers because it allows them to raise money more cost effectively. If, for example, you bank at Chase, you will find that it is owned by JP Morgan, formerly an investment bank. In your bank branch, you may find a person who sells securities. This person is not a bank employee, but works under a separate "umbrella" company - which is different and separate from JP Morgan brokerage.
Series 6 License
These advisers may have only a Series 6 (mutual fund representative) license, and are not authorized to sell individual stocks and bonds.
These advisers will be familiar with general guidelines as to whether a particular fund or group of funds is appropriate for your level of risk.
CFP - Certified Financial Planner
This is a national designation that the adviser has passed a rigorous course of study that includes budgeting and cash flow, investments, taxation, risk management, education financing and estate planning. There are additional requirements for continued education.
CFA - Chartered Financial Analyst
This person will be skilled in analyzing both portfolios and individual securities.
Other Professional Designations
Advisers may also have licenses to sell insurance products (such as annuities), regional professional designations issued by the American Banker's Association, various universities and other financial education providers. Contacting the issuer will give you the scope of training represented by the license or designation.
ASK THE ADVISER
- What licences she has
- What professional designations she has
- The length of experience she has
and verify that information through:
http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm
or http://www.cfp.net/search/ for a fee only planner.
You want a person that has significant experience and training.
2. Type of Client
The type of adviser that will likely serve you best is one who serves people like you. If your adviser's clients are primarily 70 year old retired executives from Boeing and you are a 30 year old middle management woman, your adviser may not have the background to best address your particular financial needs.
ASK THE ADVISER TO DESCRIBE HER TYPICAL CLIENT.
- Age
- Average account size
- Occupation
- Risk tolerance
If the description is significantly different from your situation, you may be best advised to keep looking.
3. Historic performance
Over very long periods of time
- The stock market yields about 8 - 10% per year
- The bond market yields about 4.5% - 6.5% per year
- A portfolio of 60% stock and 40% bonds yields about 6.6% to 8.6% per year
- With significant differences from year to year.
One of the red flags that should have been seen by Madoff and Standford's clients was consistently beating market averages year after year after year, with no apparent increase in risk. Not Peter Lynch, not Warren Buffett, not ANYONE has achieved this performance, and no credible investment managers would intimate that such returns are either probably or possible.
Ask your adviser what her average annual performance for clients has been with similar risk tolerance as yours over the past 5 years, and verify that information with her employer.
4. A word about risk tolerance
As it applies to you as an investor, risk tolerance is the answer to "How far can your portfolio go down before you freak out and
- Sell
- Wake up in the middle of the night with cold sweats
- Call you broker and ask what the heck happened to all your money
Markets predictably and regularly correct by 20% +, and as you can see from the recent correction, sometimes 50% +. In the mid-1970's when I was but a babe in the financial industry, such a correction occurred. Another one is in process now. Answer the question about risk tolerance in terms of what percentage of your portfolio are you capable of losing before you panic.
State your risk tolerance in terms of a percentage, and obtain a commitment that your portfolio volatility will remain within an amount acceptable to you.
5. Charges
Keeping in mind the general market returns provided in 3 above, ask what percentage of your portfolio you will pay for management on an annual basis. Fees will vary (some mutual funds charge 5% to buy as a one-time charge), so ask for estimated fees over a 5 year term. Ask the adviser to subtract her fees from your expected portfolio annual return, provide this estimate in writing, and tell that adviser that you're comparing fees with other investment professionals.
6. Discretion
Never ever ever ever grant discretionary trading authority to an adviser, unless you open a "wrap" account, i.e., one where your broker assigns your money to a private money manager. Under any other circumstances, this is a highly inadvisable practice.
Tuesday, June 9, 2009
Part I -How to Find a Financial Adviser - Investing
Types of Investment Advisers
Recently I asked a group of very bright women in what subjects they were most interested in their financial lives, and one question was "how to find a financial adviser."
When thinking about that subject, that simple question became a very complex answer, so we'll discuss this in the form of a series of articles.
Personal finance is generally split into categories that include:
Recently I asked a group of very bright women in what subjects they were most interested in their financial lives, and one question was "how to find a financial adviser."
When thinking about that subject, that simple question became a very complex answer, so we'll discuss this in the form of a series of articles.
Personal finance is generally split into categories that include:
- Budgeting and Spending
- Risk Management (Insurance)
- Investing (capital markets and real estate)
- Estate Planning (wills and trusts)
- Tax Planning
We'll start with Investing, since that's the category most women equate with having "Financial Advisers." There are many types of financial advisers available for investors, and the first way to narrow down that huge number is to ask, "How much work do YOU want to do?"
Do you want a person to manage the entire process for you? That person will be very different from (and charge much more than) a person who just buys and sells what you tell them to.
1. Full Investment Management
This person will
- Determine your financial goals
- Determine your tolerance for risk
- Suggest a portfolio that reflects both your goals and risk tolerance
- Suggest when it is appropriate to reconfigure your portfolio
- Periodically review your progress and answer any questions you may have.
Examples of this type of manager include advisers with Investment Bankers such as Goldman Sachs, JP Morgan and Raymond James.
2. Discount Broker
A person will be available for you to ask periodic questions, but research assistance is provided primarily through source material for you to use independently. Investors who are best candidates for this type of service will know
- The type of investor she is (growth, value, modern portfolio theorist)
- The level of risk she can tolerate (maximum level of price fluctuation she will accept before being tempted to sell)
- Both when to buy and when to sell an investment, and how to best replace it when selling
Examples of this type of service are Fidelity and Charles Schwab.
3. Deep Discount Broker
Assistance is provided in the form of research material, but no advice is given. Investors best suited for this type of broker are experienced investors, generally those with at least ten years' experience in investing for themselves and make all their own decisions. Some clients of deep discount brokers will employ a "Fee Only" financial planner every year of so to review her portfolio.
Examples of deep discount brokers are Scottrade and eTrade.
Now that you have made a categorical decision about the type of advisor you may wish you employ, we will discuss the level of training you can likely expect and some questions to ask that advisor before employing her in our next installment.
Please feel free to comment and share your experiences, and we do encourage you to subscribe to this blog as well.
Monday, June 8, 2009
Welcome
Dr. Tessa Warshaw, author of "Rich is Better," titled her book after Sophie Tucker's quote, "I've been rich and I've been poor. Rich is better."
Dr. Warshaw, Mary Buffet and I all participated in developing and presenting a UCLA seminar titled "Financial Planning for Women." Why just for women, you ask?
Having developed and taught much of the Investing portion of the Financial Planning curriculum for UCLA, I noticed that a significant number of my students were male, and those few women who did attend these classes tended to sit in the rear of the auditorium and rarely participated in discussions. Yet, these women had longer life expectencies and earned less money than men. Mastering investment skills is more critical for women.
In order to attract women attendees, we developed a seminar just for them, and found every one nearly filled to capacity.
Perhaps women prefer to discuss money with each other.
This is a forum to do that very thing in the virtual world, and you are invited to ask questions, recommend content or share your experiences that may benefit others.
Welcome.
I look forward to our discussions.
Dr. Warshaw, Mary Buffet and I all participated in developing and presenting a UCLA seminar titled "Financial Planning for Women." Why just for women, you ask?
Having developed and taught much of the Investing portion of the Financial Planning curriculum for UCLA, I noticed that a significant number of my students were male, and those few women who did attend these classes tended to sit in the rear of the auditorium and rarely participated in discussions. Yet, these women had longer life expectencies and earned less money than men. Mastering investment skills is more critical for women.
In order to attract women attendees, we developed a seminar just for them, and found every one nearly filled to capacity.
Perhaps women prefer to discuss money with each other.
This is a forum to do that very thing in the virtual world, and you are invited to ask questions, recommend content or share your experiences that may benefit others.
Welcome.
I look forward to our discussions.
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