blog

Top Six Tax Tips for Retirees

Mon, 26 Mar 2012 09:51:10 -0400

Good Morningstar video: "Top Six Tax Tips for Retirees."

http://www.morningstar.com/cover/videocenter.aspx?id=536928

One for the History Buffs

Tue, 31 Jan 2012 11:32:56 -0500

This short story about an art exhibit in Florence, Italy explores the relationship between art and banking in the 13th century.

http://www.npr.org/player/v2/mediaPlayer.html?action=1&t=1&islist=false&id=145731770&m=146127028

Does Past Performance Matter?

Wed, 30 Nov 2011 15:55:24 -0500

One of the many pitfalls to investing is chasing performance. Investors generally gravitate towards funds that have done well in the recent past. But how likely are they to do well in the future? The most recent S&P Persistence Scorecard sheds some light on this question.

Summary:

“Very few funds manage to repeat top-half or top-quartile performance consistently. For the five years ending September 2011, only 9.72% of large cap funds, 6.08% of mid-cap funds and 3.27% of small-cap funds maintained a top-half ranking over five consecutive 12-month periods. Random expectations would suggest a rate of 6.25%.”

“Looking at longer-term performance, 12.23% of large-cap funds with a top-quartile ranking over the five years ending September 2006 maintained a top-quartile ranking over the next five years. Only 3.08% of mid-cap funds and 20.22% of small-cap funds maintained a top-quartile performance over the same period. Random expectations would have suggested 25%.”

“While top-quartile and top-half repeat rates have been at or below the levels one expects based on chance, there is consistency in the death rate of bottom-quartile funds. Across all market cap categories, fourth-quartile funds have a much higher rate of being merged and liquidated.”

Analysis:

Searching for funds that outperform consistently will most likely be a counterproductive endeavor.
Investors can consistently outperform moderately by lowering their expenses through index funds.

An Old Quote

Wed, 03 Aug 2011 15:05:22 -0400

An old quote from an old favorite: Benjamin Graham's "The Intelligent Investor."

"These copybook maxims have always been easy to enunciate and always difficult to follow - because they go against that very human nature which produces that excesses of bull and bear markets. It is almost a contradiction in terms to suggest as a feasable policy for the average stockowner that he lighten his holdings when the market advances beyond a certain point and add to them after a corresponding decline. It is because the average man operates, and apparently must opperate, in opposite fashion that we have had the great advances and collapses of the past; and - this writer beleives - we are likely to have them in the future."

Net Worth and Self Worth

Thu, 26 May 2011 15:24:14 -0400

Being aware of how you feel about money can help you recognize destructive behavior before action is taken. A new study by Brad Klontz suggests that there are generally four "money scripts" (ways you feel about money). Which are you?

http://www.nytimes.com/2011/05/07/your-money/07wealth.html?pagewanted=1&_r=1&ref=your-money&adxnnlx=1306436455-FDbRZfHtCUgUbPt1VIlhhA

Small Changes, Big Difference

Fri, 15 Apr 2011 11:22:22 -0400

There are primarily two factors which determine how much wealth you will have by the time you reach your golden years: your savings rate and your return. All accumulators should be aware of their savings rate and the implications of small changes. Here is a link to a calculator which shows just that:

http://www.nytimes.com/interactive/2010/03/24/your-money/one-pct-more-calculator.html?ref=your-money

Get it Together Before Divorce

Thu, 31 Mar 2011 13:30:00 -0400

In marriage, we often split responsibilities rather than share them - handling the household finances is no exception.

More often than not, one partner serves as the family's Chief Financial Officer, while the other is blissfully unaware of the “money stuff”. Regardless of your role, you will need to get your financial papers in order to start piecing the financial puzzle together:

Locate Bank, Brokerage and Retirement Account Statements – This means ALL the accounts, not just the ones in your name. Keep in mind many financial institutions are sending “paperless” statements stored through online access. If you have never laid eyes on your spouse’s 401(k) statement, now’s the time to get a copy. In some cases, this could turn out to be a touchy subject. If you think there are accounts that exist but can’t be verified, take time to make a list - it will come in handy later.

Find your Employee Benefits Booklet - It is easy to underestimate the value of benefits provided by work – health insurance, retirement plans, flexible spending accounts, life insurance coverage, etc. Understanding your current coverage is especially important if you are on your spouse’s plan. These things cost money if you are providing them for yourself post-divorce.

Gather the Tax Returns– To financial folks, the tax return is like a window to your financial soul. You will need at least the last 2 years of returns with all the schedules (simply put, every single page filed, not just the first two). Temporarily unavailable (aka lost)? If a CPA prepared your return, it should be easy to obtain copies from their office. If you file using a program like Turbo Tax or paper forms, the IRS certainly has a copy.

Inventory Your Stuff – yes, everything of value. This includes the house, the cars, the furniture, and your grandmother’s china. Now is the time to determine the items that are most important to you. Keep the value of these items in perspective. We’ve all heard the stories about couples who spend thousands of dollars fighting over an item worth less than $100.

Track Your Expenses – Understanding how and where your family spends money each month will set the tone for your post-divorce lifestyle. The more accurate expense picture you can paint the better. Using programs that automatically post-expenses from your checking account and credit cards such as Mint.com will simplify the process.

Know Who You Owe – Don’t forget, the debts you accumulate during marriage belong to both of you regardless who “charge it”. Gather statements for all credit card, auto loans, lines of credit, etc. This would also be a great time to check your credit report.

A friend told me once, “Marriage is about Love, Divorce is about Money . Gathering the right information and providing accurate numbers, will go a long way to help you reach a fair agreement.

Market Shocks and Long-Term Performance

Tue, 15 Mar 2011 11:25:06 -0400

^{Here's a great video from David Booth, CEO of DImensional Fund Advisors, about long-term discipline and current market sentiment.}

^{http://www.dfaus.com/2011/03/aftershock.html}

Resolutions To Make You Wealthier This Year

Fri, 25 Feb 2011 17:32:08 -0500

It's that time of year when many of us think about establishing one or more New Year's resolutions. This often means committing to improving one's lifestyle by losing weight, exercising more, or drinking less. Some investors could probably benefit from resolutions targeting their financial health as well. Just as many individuals endanger their well-being with bad habits, numerous investors suffer from ill-advised practices that are detrimental to their wealth. Perhaps a set of New Year's investment resolutions, along with an advisor capable of helping investors adhere to them, will lead to a more prosperous future.

Everybody wants to be healthier, and many people want to be wealthier, but it's just not that easy. Most of us are creatures of habit and discover that making permanent changes in our behavior is surprisingly difficult. We need every possible mental crutch at our disposal to help us adhere to a new regimen; hence we establish mental road signs, such as New Year's resolutions, as behavioral aids.

To make matters worse, our commitment to change is sometimes tested by examples of those who ignore prudent behavior to their apparent advantage and those who follow it to their apparent detriment. Winston Churchill lived to age 90, fortified by an ample supply of champagne and cigars, while author and jogging enthusiast Jim Fixx died of a heart attack at age 52. In the financial world, the investor who sunk every penny into Apple shares ten years ago watched her investment multiply over forty-fold while a globally diversified equity portfolio lost money. These isolated examples may test our faith but should not encourage us to abandon a proven set of prescriptions; continuing to apply them will still improve our odds.

So, for those who find making such promises useful, here are ten investment-related resolutions that will hopefully result in better long-term wealth:

1.	I will not confuse entertainment with advice. I will acknowledge that the financial media is in the entertainment business and their message can compromise my long-term focus and discipline, leading me to make poor investment decisions. If necessary I will turn off CNBC and turn on ESPN.
2.	I will stop searching for tomorrow's star money manager, as there are no gurus. Capitalism will be my guru because with capitalism there is a positive expected return on capital, and it is there for the taking. And for me to succeed, someone else doesn't have to fail.
3.	I will not invest based on a forecast—whether it is mine or anyone else's. I will recognize that the urge to form an opinion will never go away, but I won't act on it because no one can repeatedly predict the future. It is, by definition, uncertain.
4.	I will keep a long-term perspective and appropriately consider my investment horizon (i.e., how long my portfolio is to be invested) when determining my performance horizon (i.e., the time frame I use to evaluate results).
5.	I will continue to invest new capital and work my plan because it is time in the market—and not timing the market—that matters.
6.	I will adhere to my plan and continue to rebalance (i.e., systematically buying more of what hasn't done well recently) rather than "unbalance" (i.e., buying more of what's hot).
7.	I will not focus my portfolio in a few securities, or even a few asset classes, as diversification remains the closest thing to a free lunch.
8.	I will ensure my portfolio is appropriate for my goals and objectives while only taking risks worth taking.
9.	I will manage my emotions by learning about and acknowledging the biases and cognitive errors that influence my behavior.
10.	I will keep my cost of investing reasonable.

Most of us find it hard to follow a sensible diet or a sensible investment strategy 100% of the time. If you must stray when managing your wealth or well-being, moderation is the key. Chocolate cake is OK, as long as it's not for dinner every night. Speculating on a stock or two is all right as well, as long as you don't do it with your investment capital.

Finally, just as successful athletes rely on coaches and trainers to help them achieve their goals, most investors can probably benefit from having a "financial coach" to remind them about their New Year's resolutions and keep them on track toward a more prosperous future.

I wish you good health and good wealth in 2011.

What's "New" about a New Normal?

Tue, 22 Feb 2011 12:17:35 -0500

The 2008 global market crisis and the struggling economy have left many investors fatigued. Despite two years of strong equity returns, some investors have been slow to regain market confidence. Many are accepting the talk about a “new normal” in which stocks offer lower returns in the future.¹

The concept of a new normal is anything but new. In fact, throughout modern history, periods of economic upheaval and market volatility have led people to assume that life had somehow changed and that new economic rules or an expanding government would limit growth. What they could not see was how markets naturally adapt to major social and economic shifts, leading to new wealth creation.

Let’s look at other periods when investors had strong reasons to give up on stocks, and consider the parallels to today:

1932: The US stock market had just experienced four consecutive years of negative returns. A 1929 dollar invested in stocks was worth only 31 cents by the end of 1932. Hopes were sinking during the Great Depression, and many people felt as though the economy had permanently changed. Many investors left the market, and some would not return for a generation. Amidst what is considered the roughest economic time in US history, the markets looked ahead to recovery.

US Stock Market Performance after 1932^*

5 Years 10 Years 20 Years

Annualized Return 15.35% 10.07% 13.19%

Growth of $1 $ 2.04 $ 2.61 $ 11.92

*All stock market returns based on CRSP 1-10 Index.²

Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

1941: World War II was raging, and the US had just entered the conflict. The US stock market had experienced two consecutive years of negative performance, and the economy had shown signs of sliding back into depression. Although conversion to a wartime economy would revive industrial production and boost employment, investors struggled to see beyond the conflict. Many expected rationing, price controls, directed production, and other government measures to limit private sector performance.

US Stock Market Performance after 1941*

5 Years 10 Years 20 Years

Annualized Return 18.63% 16.67% 16.29%

Growth of $1 $ 2.35 $ 4.67 $ 20.47

1974: Investors had just experienced the worst two-year market decline since the early 1930s, and the economy was entering its second year of recession. The Middle East war had triggered the Arab oil embargo in late 1973, which drove crude oil prices to record levels and resulted in price controls and gas lines. Consumers feared that other shortages would develop. President Nixon had resigned from office in August over the Watergate scandal. Annual inflation in 1974 averaged 11%, and with mortgage rates at 10%, the housing market was experiencing its worst slump in decades. With prices and unemployment rising, consumer confidence was weak and many economists were predicting another depression.

US Stock Market Performance after 1974*

5 years 10 years 20 years

Annualized Return 17.29% 15.92% 14.89%

Growth of $1 $ 2.22 $ 4.38 $ 16.07

1981: The stock market had delivered strong positive returns in five of the last seven calendar years, and the two negative years (1977 and 1981) were only moderately negative. Despite these results, investors were weary from stagflation, which was characterized by high annual inflation, anemic GDP growth, and unemployment, and from fears of another economic downturn. In late 1980, gold climbed to a record $873 per ounce—or $2,457 in 2010 dollars. (By comparison, spot gold reached $1,256 per ounce in 2010.) Memories of the 1973–74 bear market lingered. A 1979 BusinessWeek cover story titled “The Death of Equities” claimed inflation was destroying the stock market and that stocks were no longer a good long-term investment.

US Stock Market Performance after 1981*

5 Years 10 years 20 Years

Annualized Return 18.82% 16.58% 14.54%

Growth of $1 $ 2.37 $ 4.64 $ 15.11

1987: On “Black Monday” (October 19, 1987), the Dow Jones Industrial Average plummeted 508 points, losing over 22% of its value during the worst single day in market history. The plunge marked the end of a five-year bull market. But in the wake of the crash, the market began a relatively steady climb and recovered within two years. The effects of the crash were mostly limited to the financial sector, but the event shook investor confidence and raised concerns that destabilized markets would increase the odds of recession.

US Stock Market Performance after 1987*

5 Years 10 Years 20 Years

Annualized Return 16.16% 17.75% 11.89%

Growth of $1 $ 2.11 $ 5.12 $ 9.46

2002: By the end of 2002, investors had experienced the stress of the dot-com crash in March 2000, the shock of the September 11 attacks, and the early stages of wars in Afghanistan and Iraq. Although October 9, 2002, would ultimately mark the market’s low point, investors had endured three years of negative performance and an estimated $5 trillion in lost market value. A younger generation of investors had experienced its first taste of old-world risk in the “new economy.”

US Stock Market Performance after 2002*

5 Years 10 Years 20 Years

Annualized Return 13.84% — —

Growth of $1 $ 1.91 — —

2008−Today: The market slide that began in 2008 reversed in February 2009—gaining 83.3% from March 2009 through 2010. Despite two years of strong stock market returns, memories of the 2008 bear market and talk of the “lost decade” have led many investors to question stocks as a long-term investment. But earlier generations of investors faced similar worries—and today’s headlines echo the past with stories about government spending, surging inflation, deflationary threats, rising oil prices, economic stagnation, high unemployment, and market volatility.

Of course, no one knows what the future holds, which brings the concept of “normal” into question. What exactly is the status quo in the markets?

Since 1926, there have been only four periods when the stock market had two or more consecutive years of negative returns. In addition, annual returns are rarely in line with the market’s 9.67% long-term average (annualized). The most obvious normal may be that, over time, stocks offer expected returns reflecting the uncertainty and risk that investors must bear.

What’s new about that?

End Notes:

1. Adam Shell, “’New Normal’ Argues for Investor Caution,” USA Today, August, 16, 2010. The term “new normal” originally referred to a post-global financial crisis environment characterized by several years of sluggish economic growth, below-average equity returns in developed markets, high market volatility and risk, high unemployment, and a world in which the range of possible financial outcomes is wider than normal and wealth dynamics are moving from developed to emerging economies.

2. Returns for all periods of the CRSP 1-10 Index are annualized. Data provided by the Center for Research in Securities Prices, University of Chicago. Data includes indices of securities in each decile as well as other segments of NYSE securities (plus AMEX equivalents since July 1962 and NASDAQ equivalents since 1973). Additionally, includes US Treasury constant maturity indices.

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale.

The Financial Pyramid

Mon, 14 Feb 2011 16:04:23 -0500

Robert Brokamp, author of the "Motley Fool Rule Your Retirement" Newsletter, wrote a great article illustrating a Financial Pyramid as a guide to financial well-being.

Get Started: The Financial Pyramid

Most of us have seen the food pyramid. Created by the USDA in 1992 (though it seems like it’s been with us longer), the pyramid is intended to help Americans determine how to structure the components of a healthy diet. It has gone through several modifications (includinga revamp in 2010), its recommendations are often controversial,and its effectiveness at improving eating habits is questionable. But the fact that most American adults know about it proves that it has been at least a partially successful endeavor.

With that in mind, we present to you the Foolish Financial Pyramid, which we hope will be both memorable and vastly successful. We created it in collaboration with two Garret Planning Network advisors, both Certified Financial Planners: Abby Pons of Capella Financial in North Carolina and Maine, and Diane Blackwelder of Charleston Financial Advisors in South Carolina. In fact this pyramid was their idea, conjured up after listening to a speech Fool co-founder Tom Gardner gave at the annual Garrett Planning Network retreat. Tom talked about “nutritional nuggets” of financial advice, and within an hour Abby and Diane had a draft sketched out. The Financial Pyramid illustrates several important concepts:

A successful financial plan has a strong focus on defense and protection.
The items that make up the foundation should be your first priority. That doesn’t mean that higher-up items can’t be addressed before everything else is completed, but you should focus on the foundation until its contents are accomplished.
Devoting all your time to one or two aspects of your finances while neglecting others could leave your personal empire vulnerable to a collapse. Every areamust be addressed and strengthened.

Financial and physical health have a lot in common. They both rely on smart consumption and good habits. It’s true that in the short term, good behavior may not be quite as much fun as sheer hedonism, but in the long term, it can pay off beyond your imagining — physically and financially.

As Abby explains, “Just as a good diet sets you up for good health, having your financial fundamentals right leads to long-term financial health. Without all the fundamental pieces of financial nutrition working together, you are at risk of getting really sick, and it may threaten life as you know it.” Unfortunately, the ill effects often happen afterdecades of neglect — and too late to make up for lost time.

Thus, the Financial Pyramid — like the USDA’s culinary version — emphasizes the fundamentals. It’s the monetary equivalent of Grandma’s exhortation to eat your vegetables: a solid prescription for long-term health and wealth. (And anyone who says veggies aren’t delicious is a small-f fool.)

Like all general financial guidelines, individual circumstances may warrant a re-ordering of priorities. For example, as you enter the stage of financial independence, managing your investments becomes more important. When you have $25,000, a 10% swing in the markets is a change of just $2,500. However, if you have $500,000, a 10% movement sees your net worth increase or decrease by $50,000. Those with extensive portfolios will need to spend more time on the top of the pyramid than those who are just starting out. But regardless of the size of your portfolio, you still have to maintain that foundation of financial fundamentals.

As you go through this issue — and the 2011 checklist insert — and contemplate which tasks you should tackle first, let the Financial Pyramid be your guide. It’s a surefire blueprint for being healthy, wealthy, and wise.

Fee-Based v. Fee-Only

Mon, 31 Jan 2011 11:53:06 -0500

Good Morningstar article about fee-based v. fee-only advisors:

http://news.morningstar.com/articlenet/article.aspx?id=366401

Deficits, Debt, and Markets

Tue, 04 Jan 2011 10:16:19 -0500

As government spending hits record levels around the globe, some politicians, economists, and pundits are warning that rising indebtedness may drag down economies and financial markets. This issue has raised concern among investors who assume that a government’s fiscal policy is closely linked to the country’s economic growth and market returns.

The graph below shows the projected state of indebtedness around the world.¹ Over half the Organization of Economic Co-operation and Development (OECD) member countries expect to have debt-to-GDP levels above 70%—and the US, Canada, and the UK project debt levels exceeding 80% of their economic output.

Government efforts to stimulate these economies out of recession may partly explain this level of borrowing, which is high compared to historical levels. But longer-term trends such as aging populations, expanding public pensions, and rising health care obligations are compounding the fiscal challenges of these countries.

Global investors may be particularly concerned about the economics of government spending in countries around the world. So how does public debt affect economic growth and market returns? The evidence might surprise you. Although rising levels of government debt create headwinds for economic growth, a country’s deficit and debt levels do not seem to adversely impact capital market returns.

Let’s explore these issues by addressing a few popular questions about sovereign debt:

Do rising deficits drive up interest rates?

Yes. As borrowing increases, a government must offer higher interest rates on its debt to compete for capital. The public sector consumes savings and investment that may have otherwise fueled private sector growth—a displacement of resources known as the “crowding out effect” in economic theory. Additionally, as debt levels rise, market concerns about higher default and inflation risks put additional upward pressure on interest rates.

Consistent with this theory, our analysis shows that current interest rates reflect expectations of future deficits² but that current government deficits and debt do not predict future interest rates or bond returns.³ So, long-term interest rates rise when the market expects future deficits to increase. However, today’s interest rates and bond prices already reflect information about current government spending, and markets quickly incorporate new information.

Do higher deficits hamper economic growth?

It depends on a country’s debt level. Using World Bank data from 1991 to 2008, we compared current deficits to future GDP growth in sixty-seven countries and found an increasing interactive effect between deficits, debt, and economic growth. High-debt countries that run deficits are more likely to experience lower economic growth over the next three years. But numerous forces may affect a country’s economic direction, and deficits explain only a small fraction of the variation in future GDP growth. The combination of high debt and deficits can create headwinds for economic expansion, but slower growth is not guaranteed.

So investors are justified in having some economic concern about higher government spending and borrowing. But the impact on investment returns is less clear. Let’s now consider the potential effect on equity markets.

Does low economic growth result in diminished equity returns?

No. This relationship can be tested by comparing a country’s GDP growth to its equity market performance in subsequent years. We conducted this analysis using all the developed countries in the MSCI universe, divided each year into high-growth and low-growth “portfolios” based on growth in real GDP. There was no statistical difference between the annual returns of equity markets in high-growth versus low-growth countries. In fact, low-growth countries had slightly higher average returns than high-growth countries.

The graph below illustrates this relationship in terms of a dollar invested in high- versus low-GDP growth portfolios from 1971 to 2008. The low-GDP growth portfolio’s higher annual return would have generated slightly more wealth for the period. The chart details the average annual return and real GDP growth for both groups.

Applying the same methodology to the MSCI emerging market countries shows an even greater return difference, although the data period is much shorter (2001 to 2008). The return of the high-growth country portfolio averaged 19.77% (with 2.5% GDP growth), versus 24.62% for the low-growth portfolio (-4.94% GDP growth).

Other research has confirmed a weak relationship between a country’s economic growth and its stock market returns.⁴ Several factors may contribute to this decoupling effect. For one, with globalization, a multinational company’s stock price in its home market may not reflect economic conditions in other countries. Also, the fruits of economic growth do not accrue exclusively to public companies, but also to income earners, non-public businesses, and private investments.

Finally, consider that risk, not economic growth, determines a stock’s expected return. Research indicates that this principle also applies to a country’s stock market.⁵ Similar to value and growth stocks, markets with a low aggregate price (relative to aggregate earnings or book value) have high expected returns, and markets with a higher relative price have lower expected returns. Consequently, while holding a “growth market” may be a rational investment approach, investors should not expect to earn higher returns by tilting their portfolios toward countries with high expected GDP growth.

Do fiscal deficits lead to currency depreciation?

No. It is commonly believed that large fiscal deficits and high debt cause a currency to depreciate as the government borrows more from foreign sources, and investors who are concerned about inflation and default risk flee the currency. Although recent developments in the US would seem to support this relationship, there is less convincing long-term evidence that deficits affect currency rates. During the 1970s and 1980s, the dollar strengthened while the government increased deficit spending.⁶This observation is consistent with academic studies concluding that exchange rates appear to move randomly, and there are no models to date that can reliably forecast currency returns.⁷

Conclusions

Some economists claim that developed market countries are moving into an era of high government deficits and lower market returns. While higher deficits and debt may impact a nation’s interest rates and economic growth to some extent, the investment implications are not easily discerned. History does not offer strong evidence that current deficits predict future bond or equity returns in a country’s financial markets, or anticipate short-term currency movements.

Investors should assume that stock and bond prices reflect all that is currently known and expected about government spending and debt, economic growth, risk, and other issues affecting performance.

Endnotes:

1. The Organization of Economic Co-operation and Development (OECD) is an international economic organization of thirty-three countries founded in 1961 to stimulate economic progress and world trade. It defines itself as a forum of countries committed to democracy and the market economy.

2. Today’s interest rates reflect expectations of future deficit levels. The analysis compared five-year US deficit projections (as a percent of GDP) to yield spreads (five-year US Treasuries minus three-month US Treasuries) from 1992 to 2010. The yield spread increased 29 basis points for every one percentage-point increase in projected deficits. Data sources: Baseline projected deficits from the Congressional Budget Office; yields from Federal Reserve Bank of St. Louis.

3. Today’s deficits do not predict tomorrow’s interest rates or bond returns. Regression results show that current deficits do not reliably predict changes in the five-year US Treasury yield spread (1982 to 2009) or future bond returns (1947 to 2009). Data source: Federal Reserve Bank of St. Louis.

4. MSCI Barra Research Bulletin, “Is There a Link Between GDP Growth and Equity Returns?” May 2010.

5. Clifford S. Assness, John M. Liew, and Ross L. Stevens, “Parallels between the Cross-Sectional Predictability of Stock and Country Returns,” Journal of Business 79, no. 1 (March 1996): 429–451. Their research uncovered strong parallels between the explanatory power of aggregate book-to-market and aggregate earnings-to-price ratios for country stock markets.

6. Another common assumption is that current account deficits and currency appreciation are related. (The current account balance is the difference between a country’s receipts and payments to the world. This account is composed mostly of the balance of trade, with net income and foreign aid playing a smaller role.) Academic research yields equivocal results on whether this relationship holds.

7. Richard A. Meese and Kenneth Rogoff, "Empirical exchange rate models of the seventies: Do they fit out of sample?" Journal of International Economics 14, no. 1 (February 1983): 3–24. Kenneth Rogoff and Vania Stavrakeva, "The Continuing Puzzle of Short Horizon Exchange Rate Forecasting" (National Bureau of Economic Research working paper No. 14071, June 2008).

Dimensional Fund Advisors is an investment advisor registered with the Securities and Exchange Commission. This material is provided for informational and educational purposes only. It should not be considered investment advice or an offer to buy or sell securities.

Five Awful Investments to Avoid in 2011

Wed, 29 Dec 2010 11:07:13 -0500

Timeshares, Lottey Tickets, and Life Insurance Investments. Buyer beware.

This article was originally written 20 years ago by Bert Whitehead, M.B.A., J.D., a colleague from Michigan. Here is some of his timeless advise from the past for the future:

Timeshares This preposterous “investment” is based on the doubtful proposition that a $117,000 condo is really worth $585,000 because 50 chumps can be convinced to rent it one week a year for the rest of their natural lives, and pay most of the rent (totaling $11,700) in advance and the rest annually disguised as maintenance fees. These are always sold by very friendly people, usually named Joe, who cannot begin a sentence without grasping your forearms and saying, “Let me be honest with you.” In addition to a very fuzzy explanation of the investment potential, you will find out how you could get AIDS from hotel sheets (presumably not a danger at Vacation Ownership Resorts because they don’t have maid service).

A hint: If after reading this, you still can’t help yourself and simply must buy a timeshare, buy it on a the secondary market (i.e., look in the classified ads and buy one from some dummy who spent his kid’s college money for it last year and now is trying to dump it at half price). This is still twice what it is worth.

A better hint: Put your $11,700 in a well-balanced investment portfolio. Each year use the accrued earnings to rent a timeshare anywhere in the world. Then go job hunting while you’re there and write it off!

Lottery Tickets They sort of work like variations of the old 50/50 church raffle except the church doesn’t tax your 50 percent and then pay you over 20 years. Assuming a tax bracket of 33 percent, and an annual present value of money at 8 percent instead of a return of 50 cents for every dollar bet, you actually “win” slightly less than 17 cents. This is not attractive, even compared to roulette tables in Las Vegas where they pay 95 cents for each dollar bet. Plus you get free drinks.

Hint: If you could borrow $7.7 million at 8 percent over 20 years and buy every single number on the Michigan lottery, you would be a sure winner if the jackpot was $22 million or more. (If you don’t have to split the pot with some bloke on the dole.)

Life Insurance Investments These quaint arrangements were popular and considered by some to be relatively competitive in the Fabulous ‘50s. Then your only alternatives were U.S. Savings Bonds (which your elders still called “war bonds”), paying 4 percent, and savings accounts which aggressively paid 4.5 percent. Pseudo-tycoons had Christmas Club accounts, a scam whereby you gave money to the bank every week and then they gave it back to you at the end of the year. No interest, but no service charge either. Now, bank savings accounts pay virtually no interest which is dwarfed by service charges if you don’t have very much money and just let it sit there. The service charge compensates the tellers who take your money out for a walk every month until it all evaporates. But we digress: back to life investments. They are variously called whole life, variable life, universal life, permanent life, etc. They sport many supposed advantages none of which are exclusive to this investment vehicle. Despite reams of projections and lengthy enthusiastic explanations, these investments are bereft of S.E.C. scrutiny, and the investor thus usually is at the mercy of inscrutable policy language as explained by a hyperkinetic salesperson with a snappy patter but no prospectus to evaluate risk or disclose the sales commission. Moreover, these are inevitably touted as “Long-term Investments”. Long Term Investments in financial lingo refers to generally inferior investments that are impossible to fully understand on which salespeople earn very large commissions.

Hint: Continue to ask your insurance person A) exactly how much commission is paid for selling this to you and B) exactly how much of your money you get back if you bail out after two years. If you can get a straight answer, you will be amazed that the amount of money you will lose under B is uncannily close to the amount disclosed under A. If still in doubt, we will demonstrate how much better you will be buying term insurance and investing the difference in the S&P 500 Index mutual fund. NOTE: This does not mean you should cancel or cash-in existing policies.

Any Investment Sold Over the Phone Legitimate investments are never sold over the phone. Period. If their investment was as good as they say it is, and then they wouldn’t be spending their time talking to strangers like you on the telephone. Actually we encourage clients to never buy anything over the phone because of the increased exposure to fraud. And also because it only encourages even more unsolicited telephone intrusions.

Any Investment Someone Comes to your House to Sell You If you think it through: anytime someone comes out to see you , at your convenience, in the comfort of your own home, and you are under no obligation, you are going to get a very high pressure sales pitch for something you probably never before considered buying, at an outrageous price. The sales commission on these arrangements is usually 25-50 percent of your investment. This makes shopping at home very expensive.

Getting Ready for Tax Season

Fri, 10 Dec 2010 16:24:10 -0500

Here are a few tips to help you get ready for tax season:

1. Contribute as much as you can to employer retirement plans. Consider a ROTH IRA or non deductible IRA if you have maxed out other plans. Given the same risk level, money grows faster in a tax-deferred environment compared to one that is taxable.

2. File your tax receipts carefully. If you cannot produce them, you are losing money to taxes.

3. A refund is an interest-free loan to Uncle Sam. Adjust your deductions or estimated tax payments to arrive at a minimal refund.

4. Donate items you no longer need to charity and receive a charitable deduction. Bonus: reducing clutter will clear your mind.

5. Use a good financial software package next year to keep your records organized and accessible.

6. Check your portfolio for tax effectiveness. Mutual funds with a high turnover usually generate higher taxable income, while lower turnover funds produce gains at lower capital gains rates.

7. Save some taxes while helping your kids with a 529 college savings plan. Some states allow a state deduction for contributions.

8. Improve returns by working with your financial advisor. They are able to often see your situation in different context.

9. Don't procrastinate filing your return. Get your records organized now so you have time to prepare your return properly. Haste makes waste.

Economic Growth and Market Performance

Tue, 07 Dec 2010 10:23:33 -0500

Economic growth and stock market performance are not related. The market is a great equalizer.

Great article about how economic growth doesn’t equal stock market growth:

http://news.morningstar.com/articlenet/article.aspx?id=359629

Implications: Have a globally diversified equity portfolio and rebalance systematically.

Tips on How to Focus

Tue, 16 Nov 2010 15:28:46 -0500

Here are some thoughts on How to Focus from http://www.lifeoptimizer.org/ website:

Focus is essential to achieve anything we want in life. In fact, not only should we have focus, we should have it at every level of our life. There are different levels of focus and we may have focused on one or two levels, but if we do not focus on the other levels then the results won’t be optimal. So what are the different levels of focus? (1) Lifetime, (2) Yearly, (3) Weekly, (4) Daily, and (5) Currently.

If you want to succeed, you should be focused at all five levels. Lacking focus at any of them will decrease the performance of the rest. In addition, you should also be careful not to be obsessed. The art of maintaining the balance without falling to the lacking focus or being obsessed states is an art that will take time to master. Let’s look at the five levels of focus and see how to focus at each of them:

1. Lifetime Being focused at the lifetime level means that you should have a purpose for your life. What is your life purpose? Have you followed it? Finding your life purpose is perhaps the most difficult thing to do in all five levels, but it is also the most rewarding. It sets the directions of the other levels. If you have this level wrong, you may end up making many wrong decisions in your life. Here are some things you can do to find your life purpose:

a. Find what matters to you This is the starting point to finding your life purpose. There is one question that can help you find what matters to you: “What is the thing that you care so much about that you are willing to do it for free?”

b. Explore your passions Everyone has multiple passions that are waiting to be explored. Don’t limit yourself to only one passion. Build your portfolio of passions.

c. Find the intersection between your passions and the things that matter to you The intersections between the things you are passionate about and the things you care about are clear signs of what your life purpose could be.

d. Make a mission statement After you have an idea of what your life purpose is, you should write it in a mission statement. Ideally, it should be a one-liner: ten words or less.

e. Keep refining Finding your life purpose is not something you can do in one day or even one year. Just start with what you have and keep refining it. Over time, the direction of your life will be clearer and clearer.

2. Yearly After dealing with the lifetime level, you should then go down to the yearly level. Here you should have a goal for the year related to your life purpose. Your goal should be both specific and measurable. To ensure that you are focused at the yearly level, you should have only one goal for the year (or two if you must). One thing to remember is your yearly goal should be related to your life mission. Otherwise, there is a missing link between the lifetime and yearly levels.

3. Weekly To have focus at weekly level, you should set a goal for the .week ahead. What do you want to achieve in the following week to help you achieve your yearly goal?

4. Daily The next level is daily in which you set your goals for the day. What are the things that you want to achieve today? You can start by setting your Most Important Task (MIT) for the day. Your MIT should be the thing that will make the most difference if you accomplish it today. Here is a question to help you set your MIT:

“If I can only finish one task today, what will that be?”

You can then set other goals using a variant of the same question:

“If I can only finish one more task today, what will that be?”

By asking this question repeatedly you will get a list of the tasks based on priority.

5. Currently After setting your goals for the day, the next level is the present. To get optimum result, you should be focused in whatever you are doing. It means that:

a. You should not multitask

b. You should prevent distraction

c. You should use ultradian sprint (an intense, focused work session) to accomplish as much as possible within the working session

There is one thing to remember though: while being focused at all levels is good, we should stay flexible if we want to avoid falling to being obsessed state. Perhaps you have set some goals for the day, but you should be flexible enough to adapt to changes that happen during the day. Your heart is often the best guide since it somehow knows what is right.

The Twelve Pillars of Investing Wisdom

Mon, 11 Oct 2010 15:17:03 -0400

It seems in the world of investing, the more things change the more things stay the same. I recently stumbled across a speech given in 2001 by John C. Bogle, Founder of The Vanguard Group, where he shared twelve sensible guidelines to successful investing.

Pillar 1. Investing Is Not Nearly as Difficult as It Looks.

The intelligent investor in mutual funds, using common sense and without extraordinary financial acumen, can perform with the pros. In a world where financial markets are highly efficient, there is absolutely no reason that careful and disciplined novices—those who know the rudiments but lack the experience—cannot hold their own or even surpass the long-term returns earned by professional investors as a group. Successful investing involves doing just a few things right and avoiding serious mistakes.

Pillar 2. When All Else Fails, Fall Back on Simplicity.

There are an infinite number of strategies worse than this one: Commit, over a period of a few years, half of your assets to a stock index fund and half to a bond index fund. Ignore interim fluctuations in their net asset values. Hold your positions for as long as you live, subject only to infrequent and marginal adjustments as your circumstances change. When there are multiple solutions to a problem, choose the simplest one.

Pillar 3. Time Marches On.

Time dramatically enhances capital accumulation as the magic of compounding accelerates. At an annual return of +10%, the total value of the initial $10,000 investment is $108,000, at the end of 25 years, nearly a tenfold increase in value. Give yourself the benefit of all the time you can possibly afford.

Pillar 4. Nothing Ventured, Nothing Gained.

It pays to take reasonable interim risks in the search for higher long-term rates of return. The magic of compounding accelerates sharply with even modest increases in annual rate of return. While an investment of $10,000 earning an annual return of +10% grows to a value of $108,000 over 25 years, at +12% the final value is $170,000. The difference of $62,000 is more than six times the initial investment itself.

Pillar 5. Diversify, Diversify, Diversify.

By owning a broadly diversified portfolio of stocks and bonds, specific security risk is eliminated. Only market risk remains. This risk is reflected in the volatility of your portfolio and should take care of itself over time as returns are compounded.

Pillar 6. The Eternal Triangle.

Never forget that risk, return, and cost are the three sides of the eternal triangle of investing. Remember also that the cost penalty may sharply erode the risk premium to which an investor is entitled. You should understand unequivocally that investing in a fund with a relatively high expense ratio—more than 0.50% per year for a money market fund, 0.75% for a bond fund, 1.00% for a regular equity fund—bears careful examination. Unless you are confident that the higher costs you incur are justified by higher expected returns, select your investments from among the lower-cost no-load funds.

Pillar 7. The Powerful Magnetism of the Mean

In the world of investing, the mean is a powerful magnet that pulls financial market returns toward it, causing returns to deteriorate after they exceed historical norms by substantial margins and to improve after they fall short. Reversion to the mean is a manifestation of the immutable law of averages that prevails, sooner or later, in the financial jungle.

Pillar 8. Do Not Overestimate Your Ability to Pick Superior Equity Mutual Funds, nor Underestimate Your Ability to Pick Superior Bond and Money Market Funds.

In selecting equity funds, no analysis of the past, no matter how painstaking, assures future superiority. In general, you should settle for a solid mainstream equity fund in which the action of the stock market itself explains about 85% or more of the fund’s return, or an low-cost index fund (100% explained by the market). But do not approach the selection of bond and money market funds with the same skepticism. Selecting the better funds in these categories on the basis of their comparative costs holds remarkably favorable prospects for success.

Pillar 9. You May Have a Stable Principal Value or a Stable Income Stream, But You May Not Have Both.

Contrast a money market fund—with its volatile income stream and fixed value—and a long-term government bond fund—with its relatively fixed income stream and extraordinarily volatile market value. Intelligent investing involves choices, compromises, and trade-offs, and your own financial position should determine the most suitable combination for your portfolio.

Pillar 10. Beware of "Fighting the Last War."

Too many investors—individuals and institutions alike—are constantly making investment decisions based on the lessons of the recent, or even the extended, past. They seek stocks after stocks have emerged victorious from the last war, bonds after bonds have won. They worry about the impact of inflation after inflation, having turned high real returns into so-so nominal returns, has become the accepted bogeyman. You should not ignore the past, but neither should you assume that a particular cyclical trend will last forever. None does.

Pillar 11. You Rarely, If Ever, Know Something The Market Does Not.

If you are worried about the coming bear market, excited about the coming bull market, fearful about the prospect of war, or concerned about the economy, the election, or indeed the state of mankind, in all probability your opinions are already reflected in the market. The financial markets reflect the knowledge, the hopes, the fears, even the greed, of all investors everywhere. It is nearly always unwise to act on insights that you think are your own but are in fact shared by millions of others.

Pillar 12. Think Long-Term.

Do not let transitory changes in stock prices alter your investment program. There is a lot of noise in the daily volatility of the stock market, which too often is "a tale told by an idiot, full of sound and fury, signifying nothing." Stocks may remain overvalued, or undervalued, for years. Patience and consistency are valuable assets for the intelligent investor. The best rule: Stay the Course.

Source:

The Twelve Pillars of Wisdom

Remarks by John C. Bogle
Founder, The Vanguard Group and
President, Bogle Financial Markets Research Center
The Arizona Republic Investment Strategies Forum
Phoenix, Arizona
April 27, 2001

45 Lessons

Mon, 05 Jul 2010 06:46:00 -0400

This is something we should all read at least once a week. It was written By Regina Brett, of The Plain Dealer, Cleveland , Ohio. When she turned 90 years old, she wrote the 45 lessons life taught her to celebrate growing older. It was her most-requested column:

1. Life isn't fair, but it's still good.
2. When in doubt, just take the next small step.
3. Life is too short to waste time hating anyone.
4. Your job won't take care of you when you are sick. Your friends and parents will. Stay in touch.
5. Pay off your credit cards every month.
6. You don't have to win every argument. Agree to disagree.
7. Cry with someone. It's more healing than crying alone.
8. It's OK to get angry with God. He can take it.
9. Save for retirement starting with your first paycheck.
10. When it comes to chocolate, resistance is futile.
11. Make peace with your past so it won't screw up the present.
12. It's OK to let your children see you cry.
13. Don't compare your life to others. You have no idea what their journey is all about.
14. If a relationship has to be a secret, you shouldn't be in it.
15. Everything can change in the blink of an eye. But don't worry; God never blinks.
16. Take a deep breath. It calms the mind.
17. Get rid of anything that isn't useful, beautiful or joyful.
18. Whatever doesn't kill you really does make you stronger.
19. It's never too late to have a happy childhood. But the second one is up to you and no one else.
20. When it comes to going after what you love in life, don't take no for an answer.
21. Burn the candles, use the nice sheets, wear the fancy lingerie. Don't save it for a special occasion. Today is special.
22. Over prepare, then go with the flow.
23. Be eccentric now. Don't wait for old age to wear purple.
24. The most important sex organ is the brain.
25. No one is in charge of your happiness but you.
26. Frame every so-called disaster with these words, 'In five years, will this matter?'
27. Always choose life.
28. Forgive everyone everything.
29. What other people think of you is none of your business.
30. Time heals almost everything. Give time time.
31. However good or bad a situation is, it will change.
32. Don't take yourself so seriously. No one else does.
33. Believe in miracles.
34. God loves you because of who God is, not because of anything you did or didn't do.
35. Don't audit life. Show up and make the most of it now.
36. Growing old beats the alternative -- dying young.
37. Your children get only one childhood.
38. All that truly matters in the end is that you loved.
39. Get outside every day. Miracles are waiting everywhere.
40. If we all threw our problems in a pile and saw everyone else's, we'd grab ours back.
41. Envy is a waste of time. You already have all you need.
42. The best is yet to come.
43. No matter how you feel, get up, dress up and show up.
44. Yield.
45. Life isn't tied with a bow, but it's still a gift.

Financial Reform, A New Day for Consumers

Fri, 25 Jun 2010 10:43:00 -0400

Provisions in the financial bill will change many ways of doing business.

The New York Times deccribes some of the biggest consumer issues addressed in the financial reform bill:

From Card Fees to Mortgages, a New Day for Consumers

By RON LIEBER and TARA SIEGEL BERNARD

Published: June 25, 2010