Investment Fees vs. Commissions

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Are fees the panacea for investment management clients? Are commissions EVILLLL???

In this episode I show you how fees may not be the best bet for you when you’re looking to hire an investment advisor.

We compare the American Funds Income Fund of America A shares with two indexes, the SP 500 and the Russell 2000.

The American Funds will have a 3.50% front end commission with an annual expense of around .50% or so.

The two indexes have neither.

This is before tax too, by the way.

Unfortunately, I got cut off at the end of this episode so definitely watch part 2.

Don’t forget to download my new FREE BOOK here: https://mailchi.mp/7e528cd3cfb3/taxbomb

Vanguard ETF Investment Allocation Models

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Vanguard has a wonderful chart you should use when planning your own investments.

You can slice and dice your portfolio anyway you want put remember fees and taxes are the biggest headwind you face.

Keep your fees and taxes low and you will most likely outperform the vast majority of your peers. Not all the time, of course, but more often than not.

So always remember, complexity does not equal investment success. Keep it Simple, Stupid is the #1 investing rule to follow.

And that is what makes Vanguard so great. You can get a wonderful, low cost, low turnover (tax) portfolio with just 4 of their ETFs. And then you’re done.

No fuss, no mess.

https://advisors.vanguard.com/iwe/pdf/FASINVMP.pdf

How Barney Frank Saved The Day

I’m in a ‘debate’ of sorts with some fellow financial planners about using an ‘arbitrary’ date to analyze mutual funds.

The dates I choose are 1/1/2000 to 3/9/2009 to demonstrate downside markets.  3/10/2009 to today to demonstrate upside.   You literally can not get a better picture of downside risk protection and/or upside capture than these two time periods, almost as if it were divine.

Unfortunately, a lot of professionals don’t know market history. And so the folks I”m debating accuse me of using arbitrary and cherry-picked dates.

That is not good.  It’s not good for the profession as a whole and certainly not good for the consumers who rely on us, the professionals, to know a thing or two.

It’s actually been my experience that many a “pro” will spend an inordinate amount of time on ESPN fantasy football and only know the markets by what he/she is told from his bosses at the firm.

This bothers me greatly.  The profession of offering financial advice is only as good as our weakest link. And if our weakest link doesn’t know market history, our profession will always struggle to be taken as seriously as it should.

So, for those seeking financial guidance, from a professional, let me give you something to chomp on as you do your research on whom to employ.

Ask this two simple questions; “What happened on March 9, 2009? And why is that date so important?”

Any student of the business will at LEAST be able to recite without a second hesitation that this was the date the market bottomed.  Now, they might not know why this specific date was the bottom. I’ll forgive that ignorance to some degree.  But if they don’t know at least this date for it being the floor of the worst market decline in our lifetimes, that’s a problem.

So, why did the market bottom out on this specific date, you may ask.  Well, as much as I disagree with Barney Frank on pretty much EVERYTHING he was a pragmatist.  Oh, don’t get me wrong, Mr. Frank was a liberal’s liberal.  But he also wanted to get things done. And on this date he got stuff done and we are ALL wealthier because of him.

I’d invite you to read this article by an economist named Brian Wesbury.  In fact, I’d encourage you to read EVERYTHING from Wesbury.  If he writes something, you should read it. I do.

You can’t help but be optimistic once you read his work. Brian knows that things are better today than they were last year and the year before and the decade before that and so on, politics be damned. He was optimistic under Obama and he’s optimistic under Trump.

But politics can get in the way.  The mark to market accounting rule was one of those times.  But thanks to Barney Frank it was dealt with on 3/9/2009 and as you can see by your own portfolio growth, the rest is history.

Interest Rates, i.e. Yields, Are Based Mostly on Demand

In my morning readings, I came across this post from Bloomberg about Chinese bond issuers facing troubles.  The headline reads:

China Set for Record Defaults, and Downgrades Tip More Pain

Key takeaway:

“rising yields are set to make the refinancing of maturing debt all the tougher for private companies that lack the access to the state-dominated banking system that national behemoths enjoy.”

What does this have to do with anything, you may be asking? Well let me answer that question with one of my own.  What causes yields to rise???

If you said a shrinking demand for the debt that is already out there, you should be a money manager.

But next we’d need to answer this question…Why is demand shrinking?

Because investors don’t believe the bonds will be repaid. Thus the supply of bonds being sold is increasing as current investors try to get out of their holdings but the demand is decreasing as few people want to buy them. Basic supply and demand economics. Higher supply and lower demand do what to prices? Yup, drop them.  Lower prices do what to CURRENT yields? Yup, raise them.

hmmm…sound familiar? In 2007 and 08 that’s exactly what happened here in the good ole US. There was no demand for any bonds other than government. (Warren Buffet being one of the exceptions.  He was on the prowl for buying cheap, cheap debt with his immense cash holdings.  Please learn from him and realize that cash IS an asset class).

Prices drop, yields go up.

With the US currently paying rates significantly higher than other countries, and I mean WAY HIGHER, decreasing demand is not a problem we face.

I am generally not the biggest fan of bonds. Simply because after taxes and inflation you are losing purchasing power.  But the bond market dwarfs the stock market and for your own financial management it’s good to have an idea of what’s going on out there.

Right now the US 10 Year is at 2.84%.  Could it go back to its normal 6% or so.  Sure.  Will it?  One would need to answer what would cause the demand of US debt to drop soooo much that rates would rise that much.

Hard to see that happening anytime soon.

Analyzing Stocks: How I Do It

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Stock analysis is basically a loser’s game. No one, and I mean NO ONE, knows what’s going to happen to a stock regardless of fundamentals.

How do I know this? Well, the Wall St.Journal used to run a report of monkeys literally throwing darts at a stock chart vs. the best and brightest analysts in the world and more often than not the monkey’s did better.

Why is that? Anyone’s guess. Some stocks, money managers, investors, get lucky. Others…not so much.

However, when it comes to YOUR portfolio, one thing any good financial planner is going to recommend is NOT having more than 10% of your assets in any one security.

So, today I received a call from a client who has a large position, relative to his/her asset base in GPC stock. My client wanted to know what I thought of it.

My first inclination is that the client holds TOO much of it, regarldess of the stock because GPC represents nearly 40% of the total liquid net worth. That’s a problem.

But how about fundamentals? I do need to have a look at fundamentals too and that’s what we do in this episode. I go over the things I look at when analyzing individual stocks.

A couple things to understand here. I own NO individual stocks. I got burned too much in the early aught’s that I simply refuse to go down that road again.

Two, I know NOTHING about the business of GPC. The only think I know is that it has a three letter ticker symbol meaning it trades on the NYSE, thus it’s a blue chip stock of some sort.

Three, this is NOT a recommendation for buying or selling. I literally don’t ANY opinion on what YOU should do. I am only looking at this stock on the basis of the person I am dealing with.

So, do not take this as any advice whatsoever. Do your OWN research to make your own investment decisions.

A few things to consider:

  • dividend yield
  • dividend payout ratio
  • price to earnings ratio
  • current ratio
  • debt to equity
  • cash flow
  • debt levels
  • ebitda

Arguments in FAVOR of Retirement Plan Loans

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In this video I go over some of the objections about retirement plan loans.

These are the big ones:

* Money you borrow will be out of the market and thus not growing
* Why pay off a mortgage or equity line debt when that interest is tax deductible?
* What if I leave my employer before the loan is paid off?
* I’m paying the loan back with after tax money, only to have it taxed later when I take it out.

Retirement Plan Loans

Love to hear your comments as these are 4 main reasons I hear NOT to borrow against your 401k.

But while they all have SOME validiity, not to the extend that it seems EVERYONE is always saying “DON”T EVER BORROW AGAINST YOUR 401K,! ONLY FOOLS DO THAT!”

I disagree.

Here’s another post on this topic.

 

 

Why Investing is Like The NFL

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What does the average record each year in the NFL? Remember, there are 32 teams and they each play 16 games.

The average record is 8-8, which is a 500 wining percentage. And that will ALWAYS be the average record.

Yet, in 2017, there were 17 teams with winning records, records above a 500 winning percentage and only 14 teams who were sub-500, with only 1 team going 8-8.

How can that be? Shouldn’t there be the exact amount of teams with winning records and losing? No. Because some teams do far worse than average, in this case the Cleveland Browns went winless.

What does this have to do with investing? The EXACT same thing happens in investing. Some stocks do incredibly well and others not so much, in fact some stocks go bankrupt, never to be heard from again.

However, regardless of what happens to Google or Sears all the investors will return an average each year. And just like the NFL if there are two teams both can not be above average. The records will always level off at 8-8.

In investing if one investor ‘wins’, i.e., beats the average, one must lose. Both investors can not be above average. It’s impossible.

But unlike the NFL, ALL investors CAN win the Super Bowl. How? Because investing is simply owning shares of companies that are increasing earnings and maybe paying dividends.

If I own a company that is growing in value and thus my net worth improves that has no affect on you whatsoever. We can BOTH increase our net worth at the same time regardless if we ‘beat’ the market or not.

Investing is nothing more than owning growing companies. As long as those companies earnings grow, we ALL make out. Notice it has NOTHING at all to do with “beating the market”. It solely has to do with owning companies that grow.

Yet, everyone seems to focus on ‘beating the market’. Why? If you ‘beat the market” inherently I must lose as like I said before we both can’t win.

The irony though is we can both lose! THink about it like this. The market averages 8%. Yet you got 8.15% and I only 7.85%. So, you win….

Oh but hold on there chap! Your investment strategy cost you .50% in fees as did mine. So, NET of fees, which is all that matters, you had 7.65% and I had 7.25% returns. We both underperformed the market average.

When fees are factored investing actually becomes a less than zero sum game because the vast majority of investors dont’ even get the average returns. THey are so focused on ‘beating the market’ the miss the forest for the trees.

If they simply reduced their expenses, diversified among owning many companies, via an index fund, they would have average returns, which would actually outperform the vast majority of investors.

This would be like the average NFL team being docked a win because of high salaries or something and thus the average team, NET OF COSTS, would be 7-9 when the average actual record was 8-8!

And we haven’t even factored taxes in yet either. Throw taxes in because of excess trading and the average investor does even worse.

So remember investing is simple. Own companies that are going to grow. Some will some won’t but on average in a somewhat capitalistic economy you could get decent growth out of these companies.

You making money does not prohibit me from making money either. The only time when we are in competition as investors is when we’re trying to beat the market. Then, one of us has to lose, but in reality, after taxes and fees we both will.

TSP G FUND – What You Need To Know

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I’m a huge fan of the Thrift Savings Plan offered to Federal Government employees, including military personnel.

A cheaper investment platform I do not know. The funds in the TSP average 3.3 basis points in expenses. That means for every $1000 you have invested in the TSP your cost is 33 cents.

That’s incredible Think about it another way, if you pay 1% in investment expenses it’s going to cost you $10 per $1000 per year.

Your investment manager must have some pretty good chops to overcome that starting point. And, in fact, he/she most likely won’t.

IN this episode I analyze the G fund in the TSP. The G Fund is the Government securities fund.

I show you why you shouldn’t expect more than around 3% a year in rates of return over the next decade. Doesn’t mean I think it’s a bad fund, it just is the reality of the interest rate cycle.

Remember folks, bonds do not have capital appreciation. You get paid interest and interest only. That interest you receive is determined the day the bond was issued.

A 10 year Treasury bond issued today (July 2018) pays 2.85%. Thus if you invest in a 10 year Treasury bond you will get… 2.85% return over the next 10 years. No more, no less. It’s basic math.

Yet a lot of people want to say “Well the fund did XYZ% over the last 20 yrs so we should be able to get close to that.”

Nope Not in bond funds. The only thing that matters in bond funds and government bond funds in particularly is the coupon at issuance and thus the yield it’s paying today. Nothing else matters.

 

Beware of Investment Models With MONSTER Returns

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If someone told you he was able to get his clients 18.7% a year over the last 20 years would you give him your money to manage?

I hope not! As in this video I show you how people use, “misuse?”, investment models as a way to show their investment performance.

The problem with models is EVERYONE and their mom has a model they can backtest to “prove” anything. As someone once said, if you torture the data enough it will confess to anything.

So tell me…how is YOUR investment model going to generate positive alpha over ALL the other models, algorithms, PhDs, AI, etc.? You think you’ve found the magic solution that NOONE else can exploit?

What happens with investment models is that when they work for a bit they generate excess cash flows. And thus the model loses its ability for future outperformance. And many a money manager is left on the streets without shoes wondering what went wrong. “it always worked before,” they’ll say.

Yup, always does. Until it doesn’t. Just hope you weren’t leveraged when the markets caught up to you, as it certainly will.

Models also never take taxes into consideration. For instance, the guy I hammer in this video he simply says the way to generate excess return is to get out before the markets drop and back in before they go up.

Whoa! Who knew??? But even if you were able to do that, what’s the tax consequence of all that selling?

Crickets.

Yeah, I’m cynical. Been around too long not to be.

Hopefully, my cynicism can rub out on you too so you can protect you assets.

What’s the best way to get good returns??? Shhh…don’t tell this to anyone.

It’s to stay in the market, good times AND bad. Historically, the good times have outweighed the bad and thus you made money. Will that continue? Anyone’s guess.

But the alternative is what??? A 2.84% 10 Year Treasury bond. Oh, and that’s BEFORE tax and inflation. Not going to make much return there.

The Government Is NOT Going To Take Away Your Roth IRA

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I love the Roth IRA. And you should too!

But, one of the oddest challenges I hear about the Roth is that people are worried the government will change the tax code after the fact to get rid of the benefits. Or they’ll even confiscate the Roth.

Folks, while literally ANYTHING can happen, I just find this line of thinking absurd and I don’t want you to follow it.

Did FDR banish private ownership of gold? Yes. Tell farmers to plow over their fields while Americans were starving in order to keep the price of crops high? Yes. Were Japanese citizens sent to Internment Camps in the US? Yes. Trail of Tears? Slavery? Yes. All these things have happened. Some were more horrible than others, without question. And just more reason to remain diligent on what is going on in Washington DC.

But to punish YOURSELF, and your family, because of a fear that the government will tax away what is yours just strikes me as terrible planning.

Let’s put it like this. You do the Roth. Some future legislature and President will either pass legislation to do something with that Roth, or not. Now, why would they act in such a way?

Well, because they need money obviously. But the Roth isn’t where the money is. The REAL money is in tax deferred accounts, IRAs, 401ks, TSPs, 403Bs etc.

The Investment Company Institute reports that at the end of 2016 almost $8TRILLION in assets was in IRAs. Of that only $660 Billion was in Roth. And that doesn’t include Qualified Retirement Plans like 401ks and such.

So, as you can certainly see, the percentage of Roth vs. deferred accounts is tiny. For a government desperate enough to break the rules in order to raise money the Roth IRA isn’t the place to go.

If the government needed assets badly enough, the simple and least controversial way for them to do this is like they always do “small” tax increase on the “wealthy” but don’t index the threshold for inflation. This way, slowly over time, more and more people will be sucked into pay the tax.

Witness what happened to taxation of Social Security benefits. Very few people paid tax on their Social Security when the legislation was first signed by Ronald Reagan in 1983. But guess what? Almost everyone is paying tax on benefits now. Weird right?

Alternative Minimum Tax was the same until the new Tax Bill of 2017 eliminated a huge amount of taxpayers from having to pay it.

Oh, don’t overlook NIIT. What’s that? It’s the 3.8% tax on passive income that was tacked on to the Obamacare bill. That tax is not adjusted for inflation either. So, right now, very few people are affected. But just wait…

Ultimately, it’s only YOU who is hurt by not taking advantage of the benefits of the Roth IRA. I am not here to convince anything, actually. You have to do what you feel comfortable with YOUR money.

But I am here to say that your concern with the tax or confiscation of the Roth is the least thing you should worry about when it comes to a government running huge deficits.

You should be more worried about the taxation on your IRA distributions. That, my friends, is prime ground for a hidden tax at some point.