• Markets continue to surprise analysts, which is why we do not think that Wall Street forecasters add value. The major US markets were up in January, 2012, with their best January in 15 years. Few people would have predicted these gains. As we focus on the long term, the stock allocations of our clients benefited.
• Foreign markets did better than US markets in January 2012. This is the opposite of what occurred during 2011. This further shows that stock markets cannot be accurately forecasted on a consistent basis.
• During numerous meetings with prospective clients, we saw examples of portfolios that were not even close to being properly diversified. We also saw many illiquid holdings, where these people could not readily access their funds. Other brokers had placed them into investments which may take months or years to get their money. We have never recommended such investments. Liquidity and flexibility are important.
• Almost 60% of the US large companies that have reported earnings in 2012 have exceeded their forecasts. The economy and companies continue to be resilient, despite ongoing world economic problems and political uncertainty.
• We continue to learn in many ways, both live and through technology. Keith attended a national conference in Arizona. Via Twitter, Brad closely followed many of the sessions that were held during the AICPA Personal Financial Planning conference.
• Watching the movie "Moneyball" reminded me of when I read the book, when it was first published. The theme of both the book and movie, as well as our investment philosophy, is that it is hard or impossible to predict which baseball players (or stocks) will be successful in the future. Acquiring baseball players that few want (they are like out of favor stocks) can be cheaper and can provide a greater return on your investment. Moneyball is the baseball equivalent of "value investing," which is a key component of our investment philosophy.
Showing posts with label #passive. Show all posts
Showing posts with label #passive. Show all posts
Wednesday, February 1, 2012
Wednesday, November 30, 2011
Investing: Can an Advisor Add Value?
Do you want this person/fund to manage your money? Is this the right fund for you?
Resume:
After his great track record and much publicity, his fund was in the 98th or 99th percentile in 4 out of the last 5 calendar years, through 2010. Through October, 2011, his fund is in the 82nd percentile. (per Morningstar data).
How can someone who is so "good," then become so unsuccessful?
This is a key question, which every investor must consider, in determining their advisor and investment philosophy. Was Miller lucky? Did he lose his touch? How do you know if your advisor or mutual fund manager will do the same?
Understanding what occurred with this fund, and how common this inconsistency in mutual fund performance is, is the basis for one of the fundamental investment philosophies that we adhere to. We recommend this strategy for your investment success, over a long period of time.
To describe the different philosphies, Bill Miller picked stocks for his fund that he thought were "value" stocks. He believes in active investing; that he could identify the best stocks to own that were undervalued. We believe that no one has the ability to consistently identify fund or money managers that can outperform a respective benchmark, over a very long period of time. Thus, we adhere to a "passive" strategy, which means that we recommend a very globally diversified set of stock mutual funds that hold a set of stocks in each "asset class," without making predictions or claiming to have a crystal ball.
It would have been very reasonable in 2000 or 2005 to put money into Bill Miller's fund, based on his past track record. Let's see how his fund did, and compare it to one of the funds that we use, in a similar asset class. Bill's fund is a large company value fund, so we will compare it to Dimensional Fund Advisor's (DFA)US Large Cap Value III fund (DFUVX).
For the 10 years ended 11/29/11, $10,000 invested would have grown as follows (per Morningstar.com):
Other Conclusions:
The Lost Decade: There has been much written about how the past 10 years ended in 2010 were considered the "lost decade," where investors made no money. This was true for many investors. While the figures above are for the 10 years ended in November 2011, the DFA US Large Value fund was very profitable over this period. This shows the importance of diversification and owning more than just the S&P 500 as the basis of your portfolio.
Costs and expenses:
We believe to be most successful, you should focus on the things that you can control. Thus, evaluating mutual fund expense fees should be an important part of your investment approach.
Bill Miller's fund charged various up-front fees, depending on which "class" of the fund that an investor used. None of the funds that we recommend charge such fees.
The annual expense ratio of Miller's fund is 1.75%. This means that each year, the fund subtracts 1.75% in fees, from whatever the actual performance is. The comparable DFA fund that we utilize, DFUVX charges .14%, one of the lowest expense ratios in the industry, for this fund category.
There are many other lessons to be gained from reviewing the experience of this fund and this fund manager, as well as carefully evaluating most mutual funds, or your own investment portfolio.
Important notes: The above examples are illustrative only. No one fund should constitute an investment portfolio. The above figures do not include an investment advisory fee, which our firm charges, separate from mutual fund fees. Legg Mason's fund would have charged a load, which is not included in this information.
Sources: Morningstar website, 11/30/11; article by Weston Wellington, Dimensional Fund Advisors, dated 11/29/11
Resume:
- Beat the S & P 500 every calendar year from 1991-2005
- Named "Portfolio Manager of the Decade" in 1999 by Morningstar
- Barron's included him on its "All-Century Team" in 1999
- Fortune Magazine desribed him as "one of the greatest investors of our time" in 2006 profile
- And then there is this fact: For the five year period ending December 31, 2010, this fund was LAST among 1,187 US large cap stock funds, as tracked by Morningstar.
After his great track record and much publicity, his fund was in the 98th or 99th percentile in 4 out of the last 5 calendar years, through 2010. Through October, 2011, his fund is in the 82nd percentile. (per Morningstar data).
How can someone who is so "good," then become so unsuccessful?
This is a key question, which every investor must consider, in determining their advisor and investment philosophy. Was Miller lucky? Did he lose his touch? How do you know if your advisor or mutual fund manager will do the same?
Understanding what occurred with this fund, and how common this inconsistency in mutual fund performance is, is the basis for one of the fundamental investment philosophies that we adhere to. We recommend this strategy for your investment success, over a long period of time.
To describe the different philosphies, Bill Miller picked stocks for his fund that he thought were "value" stocks. He believes in active investing; that he could identify the best stocks to own that were undervalued. We believe that no one has the ability to consistently identify fund or money managers that can outperform a respective benchmark, over a very long period of time. Thus, we adhere to a "passive" strategy, which means that we recommend a very globally diversified set of stock mutual funds that hold a set of stocks in each "asset class," without making predictions or claiming to have a crystal ball.
It would have been very reasonable in 2000 or 2005 to put money into Bill Miller's fund, based on his past track record. Let's see how his fund did, and compare it to one of the funds that we use, in a similar asset class. Bill's fund is a large company value fund, so we will compare it to Dimensional Fund Advisor's (DFA)US Large Cap Value III fund (DFUVX).
For the 10 years ended 11/29/11, $10,000 invested would have grown as follows (per Morningstar.com):
- Legg Mason Fund: $8,363 (a loss of $1,637)
- DFA US Large Value $15,388 (a gain of $5,388)
- Vanguard S&P 500 $12,627 (a gain of $2,627)
Other Conclusions:
The Lost Decade: There has been much written about how the past 10 years ended in 2010 were considered the "lost decade," where investors made no money. This was true for many investors. While the figures above are for the 10 years ended in November 2011, the DFA US Large Value fund was very profitable over this period. This shows the importance of diversification and owning more than just the S&P 500 as the basis of your portfolio.
Costs and expenses:
We believe to be most successful, you should focus on the things that you can control. Thus, evaluating mutual fund expense fees should be an important part of your investment approach.
Bill Miller's fund charged various up-front fees, depending on which "class" of the fund that an investor used. None of the funds that we recommend charge such fees.
The annual expense ratio of Miller's fund is 1.75%. This means that each year, the fund subtracts 1.75% in fees, from whatever the actual performance is. The comparable DFA fund that we utilize, DFUVX charges .14%, one of the lowest expense ratios in the industry, for this fund category.
There are many other lessons to be gained from reviewing the experience of this fund and this fund manager, as well as carefully evaluating most mutual funds, or your own investment portfolio.
Important notes: The above examples are illustrative only. No one fund should constitute an investment portfolio. The above figures do not include an investment advisory fee, which our firm charges, separate from mutual fund fees. Legg Mason's fund would have charged a load, which is not included in this information.
Sources: Morningstar website, 11/30/11; article by Weston Wellington, Dimensional Fund Advisors, dated 11/29/11
Friday, November 11, 2011
11 Wealth Management Tips for 11/11/11
1. Have a written investment plan, based on your need, willingness and comfort to take risk. It does not have to be fancy. But it is extremely important.
2. Regularly rebalance your portfolio. Be disciplined about this. It will help you to buy low and sell high.
3. Evaluate your portfolio performance against a set of benchmarks, at least annually.
4. A significant part of your stock portfolio should be invested in international and emerging markets.
5. Recognize that you do not have a crystal ball and cannot predict the future. Recognize that no one else can predict the future either. If you are using an advisor, and he or she regularly makes predictions or "bets," you may need to make a change. Do not focus on past performance, as it is not an indicator of future performance.
6. Diversification. Always. For everything. You should own large and small companies. Growth and value companies. In many countries and industries. Understand the reason to own smaller and value companies.
7. Know when it makes sense to own municipal bonds. Know which municipal bonds sectors to avoid, due to higher historical default statistics. If you own municipal bonds, they should be diversified across many states, not just the state you live in.
8. If you have significant fixed income investments, like bonds or CDs, you should not own bond funds. And definitely not long term or low credit quality bond funds.
9. Focus on what you can control. Focus on costs and your asset allocation. You cannot control or influence any company, industry or the stock market.
10. Review your estate plan documents and retirement plan beneficiary designations, to make sure they reflect your wishes and are accurate. If you have a revocable trust, make sure that it is actually funded.
11. Use a fee-only financial advisor. Their interests will be aligned with your interests. Find an advisor that can provide many benefits and value. They can help you plan for the future. They can listen to you, so you can handle volatile markets and prevent big mistakes. They can save you time, improve your investment experience and provide your family a greater sense of comfort and security.
I hope this list is helpful and provides you with real value. If there are items on this list that you are not familiar with, or would like to discuss further, please contact us.
2. Regularly rebalance your portfolio. Be disciplined about this. It will help you to buy low and sell high.
3. Evaluate your portfolio performance against a set of benchmarks, at least annually.
4. A significant part of your stock portfolio should be invested in international and emerging markets.
5. Recognize that you do not have a crystal ball and cannot predict the future. Recognize that no one else can predict the future either. If you are using an advisor, and he or she regularly makes predictions or "bets," you may need to make a change. Do not focus on past performance, as it is not an indicator of future performance.
6. Diversification. Always. For everything. You should own large and small companies. Growth and value companies. In many countries and industries. Understand the reason to own smaller and value companies.
7. Know when it makes sense to own municipal bonds. Know which municipal bonds sectors to avoid, due to higher historical default statistics. If you own municipal bonds, they should be diversified across many states, not just the state you live in.
8. If you have significant fixed income investments, like bonds or CDs, you should not own bond funds. And definitely not long term or low credit quality bond funds.
9. Focus on what you can control. Focus on costs and your asset allocation. You cannot control or influence any company, industry or the stock market.
10. Review your estate plan documents and retirement plan beneficiary designations, to make sure they reflect your wishes and are accurate. If you have a revocable trust, make sure that it is actually funded.
11. Use a fee-only financial advisor. Their interests will be aligned with your interests. Find an advisor that can provide many benefits and value. They can help you plan for the future. They can listen to you, so you can handle volatile markets and prevent big mistakes. They can save you time, improve your investment experience and provide your family a greater sense of comfort and security.
I hope this list is helpful and provides you with real value. If there are items on this list that you are not familiar with, or would like to discuss further, please contact us.
Tuesday, October 11, 2011
Dieting, Exercise and Investing. What's the Lesson?
How do you succeed at dieting, exercise and investing?
Are these unrelated? Not really.
Success at all three requires discipline, consistency and a program that you can stick to over the long term.
So how does this relate to investing? As advisors, we have adopted an investment philosophy that can be adhered to over the long run. It is rational, and provides our client’s with peace of mind, so they can stick with it.
In the past few weeks, the financial world has provided further evidence of why our approach makes sense, which gives us even greater confidence in our long term philosophy regarding stock investing. The markets have been very volatile since July, and our clients with stock investments have incurred losses, as have most others. But there is a distinct difference in approach.
We recognize that we cannot predict the future. We do not believe that we can identify which fund or money managers will do the best over the long run. Thus, we have adopted a philosophy which recognizes this.
A few weeks ago, Fidelity Magellan replaced the manager of this very large mutual fund, after years of underperformance. Over the last 10 years, this fund, once the largest in the world, ranked in the 95th percentile (1 being the best), trailing its benchmark and the S & P 500 by approximately 2.7% per year.
Fidelity, and this manager, have vast resources and a huge, global staff to assist in the research and stock picking for this fund. Despite all these resources, Fidelity’s staff was unable to outperform or come close to its target benchmark on a consistent basis, or even a majority of the time. The lesson: it is hard to pick a good money manager, in advance, that will outperform its respective benchmark, on a consistent basis over a long period of time.
The second example has been a number of reports of hedge funds reporting huge losses or funds that are simply shutting down, due to underperformance or dissatisfied investors. John Paulson, a hedge fund “titan” was an investment hero in 2008, as he placed huge bets against mortgage and financial stocks, and he was right.
Now fast forward to 2011. The WSJ reported today that two of his funds are down 32% and 47% for the year, far worse than market averages. He has placed huge bets on Bank of America, Hewlett-Packard and China’s Sino-Forest Corp. He has been very wrong in 2011. His funds have also lost billions on investments in gold and gold related stocks. Many of his clients are impatient and not willing to wait for his next great idea.
The lesson: There are many. Making huge, concentrated bets are risky. Sometimes they work, sometimes they don’t. When they don't, and your bets are very concentrated, the results can be horrendous.
Diversification, and not making concentrated bets and predictions, does work, which is why that is one of our core philosophies.
Our next post will further explain our investment philosophy.
Sources: Morningstar, for Fidelity Magellan; WSJ for Paulson information, 10/11/11 online
Are these unrelated? Not really.
Success at all three requires discipline, consistency and a program that you can stick to over the long term.
So how does this relate to investing? As advisors, we have adopted an investment philosophy that can be adhered to over the long run. It is rational, and provides our client’s with peace of mind, so they can stick with it.
In the past few weeks, the financial world has provided further evidence of why our approach makes sense, which gives us even greater confidence in our long term philosophy regarding stock investing. The markets have been very volatile since July, and our clients with stock investments have incurred losses, as have most others. But there is a distinct difference in approach.
We recognize that we cannot predict the future. We do not believe that we can identify which fund or money managers will do the best over the long run. Thus, we have adopted a philosophy which recognizes this.
A few weeks ago, Fidelity Magellan replaced the manager of this very large mutual fund, after years of underperformance. Over the last 10 years, this fund, once the largest in the world, ranked in the 95th percentile (1 being the best), trailing its benchmark and the S & P 500 by approximately 2.7% per year.
Fidelity, and this manager, have vast resources and a huge, global staff to assist in the research and stock picking for this fund. Despite all these resources, Fidelity’s staff was unable to outperform or come close to its target benchmark on a consistent basis, or even a majority of the time. The lesson: it is hard to pick a good money manager, in advance, that will outperform its respective benchmark, on a consistent basis over a long period of time.
The second example has been a number of reports of hedge funds reporting huge losses or funds that are simply shutting down, due to underperformance or dissatisfied investors. John Paulson, a hedge fund “titan” was an investment hero in 2008, as he placed huge bets against mortgage and financial stocks, and he was right.
Now fast forward to 2011. The WSJ reported today that two of his funds are down 32% and 47% for the year, far worse than market averages. He has placed huge bets on Bank of America, Hewlett-Packard and China’s Sino-Forest Corp. He has been very wrong in 2011. His funds have also lost billions on investments in gold and gold related stocks. Many of his clients are impatient and not willing to wait for his next great idea.
The lesson: There are many. Making huge, concentrated bets are risky. Sometimes they work, sometimes they don’t. When they don't, and your bets are very concentrated, the results can be horrendous.
Diversification, and not making concentrated bets and predictions, does work, which is why that is one of our core philosophies.
Our next post will further explain our investment philosophy.
Sources: Morningstar, for Fidelity Magellan; WSJ for Paulson information, 10/11/11 online
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