blog

Young Professionals Edition: Meet Mr. Mustache

Mon, 29 Apr 2013 11:41:58 -0600

The Washington Post has an interesting article about a family that is retired at age 30 here. Many are achieving financial independence at a young age by following a philosphy of voluntary simplicity and efficiency, often with environmental motivations.

Year-End 2012 SPIVA Scorecard in

Tue, 26 Mar 2013 19:24:10 -0600

Passive investors have some new ammo with the YEAR-END 2012 SPIVA Scorecard. This keeps track of the percentage of U.S. Mutual Funds that are outperformed by their respective benchmarks. Out of all the U.S. Equity funds, 66.08% were beaten by the index.

In fact, only two categories outperformed their benchmarks in 2012: Large Cap Growth and Real Estate. However, if you extend the time horizon to three or five years, the numbers are dramatically in favor of passive investing. For the five year period 89.67% of all Large-Cap Growth funds and 77.88% of all Real Estate funds were beaten by their benchmarks.

Boomer Balance Sheets a Mess

Mon, 25 Feb 2013 17:25:22 -0700

Morningstar has a great article summarizing a study by the AARP Public Policy Institute with research based on the Federal Reserve Survey of Consumer Finances.

Key Findings:

1. Debt to Assets ratios have jumped for all age groups.

2. While net worth growth varies from -32% (ages 25-49) to +52.8 (ages 65-74) it has decreased for all age groups since the great recession.

Great Fund Bad Investor

Tue, 05 Feb 2013 17:11:10 -0700

One of our core beliefs is that market timing is mostly counterproductive. Although some market timing is based on strategy, fear and greed rule the hearts and minds of most investors. Because of this, investors, even professional ones, can under-perform the actual funds they are invested in.* This is called the Behavior Gap.

Morningstar has a great article highlighting this for different types of funds over the past 10 years. The one that sticks out the most is the category of international stocks. The average fund returned 9.95% over the past 10 years while the investor got 6.84%, or 3.11% less per year. The implications of this are huge over long periods of time. Consider that $10,000 invested at 9.95% grows to $25,819.77. The investor would have grown his $10,000 into $19,378.33, or 25% less.

There are ways to close the behavior gap.

1. Always stay invested. Choosing an appropriate risk level to begin with will be of the utmost importance.

2. Rebalance to your risk level as the investments move around.

3. Use funds that do not have a lot of "hot money" coming in and out of the fund. Index funds are particularly useful for this as the majority of investors in the funds are long-term and disciplined.

*Fund returns are calculated using time weighted returns which assumes $1 invested at the beginning of the period and no additions or subtractions. Investor returns are internal rate of returns which take into account flows.

Adam Baker - Freedom for the Young Professional

Tue, 15 Jan 2013 15:40:47 -0700

Adam Baker has a good video on what freedom means in your financial life.

Essential Math for All Investors

Fri, 11 Jan 2013 16:11:41 -0700

Great video for basic math concepts relating to investing!

Charleston Financial Advisors, LLC on News Channel 4

Thu, 03 Jan 2013 13:00:17 -0700

Our own William C. Prewitt, M.S. CFP® talks to Eric Egan at News 4 about the fiscal cliff here.

Passive Investing: The Evidence

Tue, 11 Dec 2012 10:18:18 -0700

This 54 minute video PASSIVE INVESTING: The Evidence (© sensibleinvesting.tv) offers a great explanation of the virtues and rewards of passive investing. Enjoy!

Balancing Your Fixed Income Decisions

Mon, 03 Dec 2012 09:50:25 -0700

Fixed income can play an important role in a portfolio. But its role may vary according to an investor’s financial needs and concerns. For example, many investors look to fixed income for safety, income, and more stability in their portfolios. They must weigh these priorities against their concerns over future interest rates, inflation, government debt, and other factors that might affect fixed income returns.

Striking this balance can be a challenge in any market environment, but especially now, as low interest rates have sent many investors on a quest for higher-yield bonds or alternative investments. Depending on your approach, this pursuit of yield may invite more risk—some of which may be hard to see or understand.¹

So, what’s an investor to do? How can you make prudent fixed income decisions while also addressing today’s low interest rates? Consider these principles:

Remember How Markets Work

The same core investment principles apply in any market environment. One key principle is that in a well-functioning capital market, securities prices reflect all available information. Today’s bond values reflect everything the market knows about current economic conditions, growth expectations, inflation, Fed monetary policy, and the like. So, according to this principle, the possibility of rising interest rates is already factored into fixed income prices.

This is one reason investors should view future interest rate movements as unpredictable. Even the market experts who have access to vast amounts of research have a hard time predicting the direction of interest rates. For instance, despite regular predictions of rising interest rates over the past two years, nominal yields on US Treasuries and longer-term bonds have continued falling and now are at historic lows.

Rather than trying to predict macroeconomic forces that are difficult to foresee, investors can look to the market to set prices and focus on the variables within their control.

Start with a Clearly Defined Goal

Fixed income choices should follow a broader investment strategy that defines the role of fixed income in a portfolio. The portfolio can then be customized to meet those specific goals while managing tradeoffs.

The chart below illustrates how portfolio objectives can influence a fixed income approach. An investor who wants to seek to avoid losing market value might have a different fixed income allocation from someone who wants to take a balanced approach, needs immediate income, or is seeking higher returns. Investors with different objectives typically have different tradeoffs regarding risk, expected return, and costs.

Investment Objective Helps Determine Fixed Income's Role in a Portfolio

Objective Role of Fixed Income

Avoid losing Money Capital preservation

Keep portfolio in balance Volatility customization

Meet income needs Liability management

Seek higher returns Total return

Know What You Own

Strive for transparency in a portfolio. This means understanding an investment manager’s basic strategy and knowing how the instruments held in the portfolio might respond in different economic, market, and interest rate scenarios.

Unfortunately, investors who chase performance often make their investment decisions based on the past performance and perceived popularity of the strategy. For example, some of the mutual fund categories experiencing the heaviest inflows of cash in the industry are in asset groups that have recently experienced higher than average yields. Higher yields are typically accompanied by higher risks. But do investors know what risks their managers are taking to deliver those attractive yields?

Understand the Tradeoffs

When reaching for higher yield, investors should carefully consider the potential effects of their decisions on expected portfolio performance and risk. In the fixed income arena, investors have two primary ways to increase expected yield and returns on bonds. They can:

Extend the overall maturity of their bond portfolio (take more term risk).
Hold bonds of lower credit quality (take more credit risk).

These may be reasonable actions. But pursuing higher income means accepting more risk, as measured by interest rate movements, price volatility, or greater odds of losing value if the issuer defaults.

Higher yield can also bring potentially higher volatility. Note that high-yield bonds (as represented by the Barclays US Corporate High Yield Index) have exhibited more volatility relative to other bonds.

Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Barclays data provided by Barclays Bank PLC. CRSP data provided by the Center for Research in Security Prices, University of Chicago. BofA Merrill Lynch Indices are used with permission; copyright 2012 Merrill Lynch, Pierce, Fenner & SmithIncorporated; all rights reserved. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned subsidiary of Bank of America Corporation.²

Pay Attention to Costs

Investors typically do not realize that investment-related costs determine a large part of a portfolio’s yield and return. This applies especially to fixed income securities. In fact, research has shown that a bond mutual fund’s expense ratio helps explain much of its net performance—and funds with the highest expenses tended to have the lowest performance within their peer group.³

Consider a Global Fixed Income Strategy

Investors have other tools to enhance risk and expected returns in fixed income. You can expand your opportunity set by moving beyond your domestic fixed income market to access yield curves in other country markets. By owning bonds issued by governments and companies from around the world, investors can enhance diversification in their fixed income portfolios. After hedging against currency risk, bond markets around the world have only modest correlations. (Correlation refers to how similarly two investments perform in the same period.) As a result, a global hedged portfolio should exhibit lower volatility than a single-country portfolio or a global portfolio that does not hedge currency risk, and offer the opportunity to take advantage of more attractive yield curves abroad.

Summary

No one really knows when and by how much interest rates will change. Many market pundits have forecasted an upward move for several years now. Investors looking for higher bond yields should understand the higher risks tied to their decisions. Most investors might be best-served by building a fixed income strategy to complement their broader portfolio objectives, understanding the sources of risk and expected return, paying attention to fees, and looking beyond their own country to capture yields in other countries’ markets.

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

Investing risks include loss of principal and fluctuating value. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, liquidity, prepayments, and other factors.

Endnotes

1. When interest rates rise, the value of an existing bond declines; when rates fall, existing bond values rise. The market adjusts a bond’s price to match the yield available on a new instrument. Investors who hold fixed income securities with longer maturities are exposed to the amplified effects of term risk. A long-term bond is more exposed to rate changes than a short-term instrument, and usually (but not always) offers a higher yield to compensate investors for the extra risk. Also, lower-coupon bonds are more affected by interest rate changes than higher-coupon bonds. For example, if rates move 1%, a bond that pays 3% will experience a greater gain or loss than one paying 5%.

2. CRSP 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). The Barclays US Corporate High Yield index measures the performance of fixed-rate, non-investment grade debt. The Barclays US Aggregate Bond Index measures the performance of the investment grade, US dollar-denominated, fixed-rate taxable bond market. The BofA Merrill Lynch One-Year Treasury Note Index measures the performance of US Treasury notes. The index is representative of the universe of fixed-rate, non-investment grade debt. Indices are not investment products available for purchase.

3. The study examined monthly alpha and expense ratios for bond funds in the CRSP survivorship-bias-free mutual fund database from January 1992 to December 2011. Source: Dimensional Fund Advisors.

Is the 4% Withdrawal Rule Still Viable?

Tue, 20 Nov 2012 09:44:49 -0700

Morningstar has a short video that is a good introduction into withdrawal rate research and the factors that should affect one's decisions in retirement.

Young Professional Edition: Student Loans

Wed, 20 Jun 2012 16:19:34 -0600

Morningstar has a couple of good article regarding student loans. Consolidating Student Loans is Not a No-Brainer is about when consolidating makes sense. A Study Guide for Student Loans is a short video that goes over the basics.

Breaking Up Is Hard to Do: Why You Should Use a Divorce Financial Planner

Fri, 01 Jun 2012 15:03:04 -0600

Morningstar has a good article about why you should use a divorce financial planner. To keep it short, a Certified Divorce Financial Analyst like Charleston Financial Advisor's own Diane Blackwelder, CDFA™ CFP® can help you look at the long-term implications of a settlement.

A Note on Market Timing

Wed, 30 May 2012 12:23:56 -0600

Greg Mankiw of Harvard University has a short post today that highlights one of the tenets of our investing philosphy...Don't time the market!

A Bond Market Meme, Revisited

Top Six Tax Tips for Retirees

Mon, 26 Mar 2012 09:51:10 -0600

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 -0700

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 -0700

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 -0600

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 -0600

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 -0600

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 -0600

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.