A Sucker's Bet

It’s not supposed to be over until it’s over - but since most of the results are already in – I guess it’s over.   Hedge fund manager, Ted Seides of Protégé Partners, has conceded defeat before the “official” end of his public wager with billionaire investor Warren Buffett.   

About ten years ago, Mr. Buffett, challenged any hedge fund manager to a head-to-head competition against a passive stock index fund over a ten-year period.   He proclaimed that the index fund would earn a higher return after fees and expenses.   Each side would put up one-half million dollars of their own money with the combined $1 million going to the winner’s designated charity.   Mr. Seides was the only hedge fund manager brave enough to take up the challenge.  He was allowed to choose any five hedge funds with each being a “fund of funds” representing collectively over 100 hedge funds.  The results would be measured from January 1, 2008 to December 31, 2017.

The fund chosen by Mr. Buffett was the Vanguard S&P 500 Index Fund Admiral Shares with an expense ratio of 0.04 of 1%, which means fees of just $40 per year on a $100,000 investment.   This passive investment would compete against the best the active investment world had to offer.  By the end of 2016, the group of hedge funds was hopelessly behind the index fund and presumably is even further behind now.  With just a few months until the end of the full ten years, it’s virtually impossible for the hedge funds to catch-up, leading Mr. Seides to publicly throw in the towel.

The Vanguard S&P 500 Index Fund earned a cumulative 85% for an average annual return of 7.1%.  The collection of hedge funds gained just 22% in total during the same time for a paltry 2.2% per year.    The index fund also beat each and every one of the five hedge funds handily.    $100,000 invested in the index fund on January 1, 2008 would have been worth about $185,000 by the end of 2016, whereas the same amount in the hedge funds would have grown to just $122,000, a shortfall of $63,000!    Despite this dismal performance, it should be noted that that hedge fund managers were paid handsomely for their efforts.

Hedge funds are investment pools that invest in a wide assortment of asset classes and employ a variety of complex strategies.   Although some charge differently, they are known for the traditional price structure of “2 and 20,” which means fees of 2% of the assets under management plus 20% of any gains.   Hedge funds don’t undergo as much regulation or have as much transparency as regular mutual funds and are marketed to so-called sophisticated investors, which must mean people with more money than brains.   Why would investors give up 20% of the profits after already paying 2% of the asset base when taking all of the risk?

Hedge funds are not an asset class like stocks or bonds or real estate.  They don’t generate a fundamental return unto themselves.   They derive value in part from the underlying assets, but they also rely on the success of strategies and tactics employed.  Different approaches work well in certain types of markets, but not so well in others.  If you believe that financial markets are pretty efficient, meaning they incorporate all known information, it’s tough to outguess the markets on a consistent basis.  This doesn’t mean that the markets are always rational or always reflect intrinsic value.   After all, the markets are comprised of people and people are inheritably irrational, at times. 

Buffett’s challenge was a “sucker’s bet,” because the index fund was destined to win under most possible scenarios.  Under a moderate to strong market the Oracle of Omaha would likely win because of the huge cost advantage.  The passive index fund charges virtually nothing, forcing the active hedge funds to beat the market by at least 2% per year in order to come out ahead.  That’s not going to happen in a typical economic environment. 

In a sluggish or side-ways market, whereby U.S. stocks go up and down and trend flat for many years, hedge funds might be able to capitalize on volatility.  Even then though it would be difficult to overcome such a heavy expense drag.

Hedge funds would certainly have an advantage in a bear market, if it was long or deep enough. Thankfully, that doesn’t happen often.   Of particular interest, the wager began at the start of the financial crisis.  Mr. Seides was optimistic, because he expected a low return from stocks based on his assessment of their valuation at the time.  In fact, the index fund lost 37% during the first year of the bet and lagged the hedge funds which limited losses to about 24% during that same time.   The stock market recovered in just a few years and the index fund went on to crush the active funds.

In retrospect, it’s hard to see Mr. Buffett losing this bet, but that’s easy to say with the financial crisis in the rear view mirror.   It’s an even bolder gamble when you put down your own money, and even more importantly, your reputation on the line.    Mr. Buffett did what he has done many times in the past.  He bet on the U.S. stock market, which means he put his faith in the U.S. economy.  

I’m sure Mr. Buffett would be the first to tell you that “people” are critical to building and managing great businesses, which are the kind of businesses that he invests in as Chairman of Berkshire Hathaway.  Humans are also important to create a “market” and to handle the efficient administration of the financial markets.  However, people don’t add much to the portfolio management process.  The reason for this is simple.  Nobody can foresee the future.  Without that ability, those hedge fund managers that Mr. Buffett calls “helpers” just add layers of expenses without adding economic value.   By taking out the intermediaries, he knew that he could skew the odds in his favor.  

The rest of us can learn from this and tilt the odds in our favor as well. Of course, most of us invest in mutual funds, rather than hedge funds, but active mutual funds are like hedge funds in that they attempt to beat the market using active strategies.  Although most mutual funds charge closer to 1%, they are still likely to underperform a low-cost index fund of the same type, which makes them a bad bet.  

The typical portfolio manager, who chooses mutual funds plays a similar role to Mr. Seides by adding another layer of fees.   I call this the “1 plus 1” model, whereby active mutual funds charge about 1% and the portfolio manager adds 1% for a total of 2% per year to put together a collection of mediocre funds.      This is like doubling down on a bad bet.  Without a crystal ball, a money manager has no ability to select the best funds in advance or sidestep market declines.  This common money management approach is destined to track the overall market, but will lag because of the 2% fee drag.    The chance of coming out ahead with this approach is about the same as drawing to an inside straight.   In my view, this makes almost any type of active money management - like Mr. Buffett’s wager with the hedge funds - a sucker’s bet.

Animal Spirits

The term Animal Spirits seems to have replaced The New Normal as the description of choice for economic commentators.     The new normal describes an indefinite state of slow economic growth, while animal spirits represents a more positive outlook that is underpinning the surge in stock prices since the November election.    While intriguing language, neither term helps much with understanding or navigating the financial markets.    Let me give you my perspective and a potential solution to the inherent uncertainty of the current financial climate.

The economy has been recovering at a snail’s pace since the financial crisis, but that does not mean that it will always be this way.   We are not destined for any specific path and many attributes can influence the future with policies and practices that support economic growth.  The animal spirits in the market just reflect this current potential.   It doesn’t take great insight to understand that infrastructure spending, a more efficient business tax structure and less difficult regulations would promote higher corporate profits and stock prices.   Having claimed control over all three branches of government, the Republicans are planning to introduce legislation to address each of these areas.   Prices already assume legislative progress will be made and some success will be achieved.     The devil is in the details, though.  Substantive actions and real success will be needed to maintain the current level of the stock market - much less push it higher.    Therefore, success is far from a sure thing.  

Paradoxically, it is this uncertainty that allows for stronger returns from the stock market.   With this current uncertainty absent, stocks would not return more than bonds.  The perceived risk is what drives the expected return. Law makers had better deliver on the promise of a better environment for public companies and small businesses.   If you think voters are unforgiving, wait until you see how investors respond if results fail to match expectations.    The animal spirits will disappear faster than La La Land’s Best Picture Academy Award.

By many metrics, the stock market was over-valued before the post-election gains, which makes it even more precarious now.  There is not much room for error, so this is not a time to take extraordinary risk.   Even so, I think it would be an overstatement to suggest that we’re in bubble territory.   I’m cautiously optimistic for the short-term, because the fundamentals of the economy appear to be strong.  Based on my belief in the future prospects for the world economy, I’m also pretty hopeful about the long-term.  However, I’m not so confident for the period in between.   In other words, I don’t think investors should be afraid to commit long-term capital to the stock market, but I wouldn’t let the animal spirits go to my head either.

Has there ever been a time when the future was not this uncertain?   I’m not sure things are greatly different than they have been in the past.    Republicans and Democrats have never gotten along well.   There have always been physical threats and instability around the world.   Technology continues to advance relentlessly.   Stocks have always been volatile and bonds have always been susceptible to fluctuation in interest rates.    Investors should be cautious at the current stock market level, but hasn’t that always been the case?  

I’ve witnessed many changes in the economy and the markets over the years, but in my view the solution remains essentially the same.    To achieve long-term goals, you must invest for the long-term.  That is, you have to be in the game - and stay in the game – until your long-term goals have been met.    For this strategy to work, you need a plan and the discipline to stick to it.   The foundation of any plan must be diversification and having the appropriate asset allocation at all times.     Proper asset allocation – that is consistent with your personal situation and risk profile - will not generate the greatest returns, but it should keep risk to a manageable level.  Only then will you have the fortitude to stick with the plan.

Current valuation levels still do pose a significant problem.  It could be argued that all asset classes are overvalued.    Do you want to own bonds in the face of a likely rise in interest rates?   How about cash with short-term rates still at record lows.   Real estate has done well in recent years following the crash, but it might be even more overvalued than the stock market.   Commodities don’t offer any sanctuary either.  What then is an investor to do?  If I had a crystal ball, I’d know exactly what to do.   Since I don’t, it makes sense to take a cautious and balanced approach.     

I believe that stocks will perform better than bonds over the long run, as they have done so in the past.   I also believe that bonds will earn very little, but still play a necessary and important role in a portfolio.   Cash is still just for emergencies and short term needs.  Real estate is a good diversifier, but still risky.   Commodifies are not generally desirable in a portfolio.   The more things change, the more they stay the same. 

Keeping costs low is another critical component and more important than ever in the face of meager asset returns.   Expenses reduce your rate of return by surrendering part to financial intermediaries who do not add value, leaving less for you to keep.    Fortunately, index funds make low-cost investing available to everybody.  Whereas you can’t control many aspects of investing, you can control expenses and by doing so increase your personal margin for error.

Despite the prevailing market levels, my basic approach to designing and maintaining an investment portfolio has not really changed.   The allocation that I would recommend today for a moderate risk portfolio is about the same as I might have suggested even possibly twenty years ago.  Of course, I would use index funds almost exclusively now, but the manner of managing risk and planning for the future has not changed much.  A few simple and time-tested strategies can allow you to navigate an uncertain investment world pretty effectively.  

The animal spirits might signal good things ahead, or they might be fleeting.  Managing risk is always a key component of an investment plan.  If you have a fundamentally sound plan, it is important to stick with the plan.   This includes keeping your portfolio in-line with the intended risk profile.  While I can’t predict the markets, or totally understand the short-term nature of animal spirits, I believe that a disciplined approach will ultimately lead to long-term success. 

Understanding Tax Jargon

Tax time is sure to bring out certain things, such as confusion, anxiety, and shoe boxes of records and receipts to name a few.  It also invariably invokes financial articles, providing advise such as “last minute tax saving tips” that are either irrelevant to the average reader or not really helpful.    Susannah Snider, of US News & World Report, took a refreshing twist in her piece, Making Sense of 10 Confusing Tax Phrases, where she asked financial professionals to list tax jargon that they would like to see disappear.  

I submitted “Tax Diversification,” because it mixes and blends tax planning with investing.   Even so, I don’t necessarily want it to disappear from our financial terminology.  While I’m not able to offer a better term, I proposed the phrase “don’t put all of your investments into one tax basket” as a better way to describe a confusing, yet worthwhile idea.  

That said, there is a notably different tax treatment for different types of investments, which means that having more than one type can help with tax planning.   Many people have all of their investments in a 401(k) or an IRA which is exclusively pre-tax dollars.  If you are lucky enough to also have investments in after-tax accounts, you can choose between the two types when it’s time to withdraw funds for spending.    In this way, you can exercise some control over the taxation of your income.   For example, if you are near the top of a tax bracket and need supplemental income, you could take a distribution from an after-tax account and incur no additional taxable income.  However, if limited to only pre-tax investments, you would generate taxable income and a portion could be at your highest tax rate.

Even though withdrawals of principal from after-tax accounts are tax-free, the accounts still generate taxable income.   A Roth IRA is comprised of after-tax dollars and the gains are tax free, creating a third type of taxable account and even more tax diversification.   Many people who qualify for a Roth IRA never take advantage of this opportunity.

Annuities are a mix of pre-tax and post-tax dollars, but the gains are tax deferred and not tax free.  This creates another category from a tax perspective.  While I don’t recommend annuities for many reasons, they can increase tax diversification for some investors.

The disparate tax treatment of assets also lends itself to more diversification of investments in a given portfolio.   Since they are inherently tax inefficient, most advisors would suggest holding real estate funds only in a tax-sheltered account.  Someone without such an account would probably not wish to invest in real estate funds.   Conversely for someone with only tax-sheltered accounts, tax free bond funds would not be an appropriate investment.      

Deciding which investments go into which accounts is called “Asset Location”.   This term would have been another good candidate for the tax jargon article as well    While a confusing terminology, it highlights the great disparity in tax treatment between types of assets.  For instance, interest income from CDs or bonds is taxed at ordinary rates, which could be as high as 39.6%. Meanwhile capital gains and dividends are taxed at a maximum of 20%, but are often only 15% or lower.  In fact, taxpayers in the 15% normal tax bracket (or below) receive a zero tax rate for capital gains and qualified dividends.   I have many clients with a high net worth, but who also have a modest income.  Therefore, for such people, a well-crafted portfolio can generate little or no taxable income!

Current tax laws clearly favor certain types of assets and income groups.   Therefore, having dissimilar buckets of money when it comes to tax treatment can have advantages.  The terms tax diversification and asset location might be confusing, but they represent strategies that can have a positive effect on after-tax investment returns.   Jargon or not, these are useful concepts to employ when building and maintaining a tax-efficient investment portfolio.

True Believer

Are you a true believer? If you are not, it’s okay. Most people who invest in index funds do not fully understand them. You can still be a successful investor, but it would be even better if you were a true believer.

The word is getting out. Money is flowing from active mutual funds to passive index funds at an astounding rate. It’s no coincidence that Vanguard, the pioneer of index funds, has taken over the top spot as the largest fund company. Its S&P 500 index fund is the largest mutual fund. Investors are flocking to index funds and demanding that their employers offer them in their 401(k) package. Whether through their own research or on the advice of a friend, people are realizing that index funds are better than actively managed funds. However, I’m not sure they know the reason why they are considered to be better.

My clients use index funds to employ what I call a market-matching strategy, but some are not true believers. They have implemented an effective investment plan, but don’t fully comprehend it. They are putting their trust in me, which is perfectly fine, but I wish that they could really understand the undelaying logic of the plan. I think folks do “get it” during the planning stage, but they tend to forget over time. Concepts that initially seem very straightforward and logical can fade with the passage of time.

A true believer internalizes the ideas, thereby establishing a more solid foundation. As such, a true believer is less likely to panic and abandon the plan when times get rough. After all, if you “own everything” you can’t lose everything. A true believer will not fall prey to a sales pitch or get easily sidetracked. A true believer will stay the course and probably sleep better at night.

So how does a person reach this metaphysical state? I don’t know for sure, but I suspect that you will need to undertake some self-directed research. Since you might not be inclined to take such a step on your own, let me offer a brief explanation of why indexing works. You can decide for yourself if you want to go farther down the path to a higher consciousness and understanding.

An index fund provides the average rate of return for whatever sector of the financial markets it covers. For example, the Vanguard S&P 500 Index Fund (VFIAX) owns all 500 of the largest publically traded companies in the U. S. Some will do better than average and some will do worse, but the fund as a whole will match the average for the market. This means that if expenses are not a consideration, you are guaranteed to do better than one-half of all other investors. However, don’t think you’re settling for mediocrity. Once you consider expenses, you will do better than most others in the top half, because you will have much lower expenses. For instance, the Vanguard S&P 500 Index Fund has an expense ratio of 0.05 of 1%, which means expenses for a $100,000 investment are just $50 per year. The average large company domestic stock fund has an expense ratio of 1.4%, or $1,400 per year.

In contrast, active funds buy and sell largely from the same pool of these 500 stocks, but these active funds must overcome higher expenses. Why would you hire a fund manager unless he or she could beat the average and cover the higher expenses? By chance, a small percentage of fund managers will achieve a higher return even after expenses. The great majority will not beat the average by enough and therefore will underperform the index fund. My rule of thumb is that about 8 of 10 active funds will underperform an index fund with the same objective over an extended time period, such as ten years. For very long periods of time, the odds of success get even smaller. The simple act of choosing an index fund versus the typical managed fund instantly moves you to the head of the class. This works for various types of stock funds - not just large cap stocks – and is especially effective with bond funds.

Intuitively, you might want to search for the 2 of 10 fund managers that might beat the market. The problem with this approach is that it will typically be a different two each time. Identifying an index-beating fund in advance is nearly impossible and certainly not worth the time and effort. Even very skillful managers have difficulty beating the market, because they cannot see the future. All investors are looking at the same data and information. Professional investors frequently have the most sophisticated research and computer algorithms at their disposal, yet still can’t do it. The mutual fund landscape is littered with funds that were once 5-star funds according to Morningstar and are now 1-star or 2-star funds.

The Fidelity Magellan Fund (FMAGX) was once the largest fund in the world, because of its perennial 5-star status. It is now a 2-star fund, which has lagged the Vanguard S&P 500 Index Fund by an astounding 1.9% per year on average over the last 15 years. Similarly, the Janus Fund (JANSX) has fallen from 5-stars to 3-stars (and not too long ago it was 1-star). It has underperformed by 1.26% per year on average for 15 years.

Respectively, the operating expense ratios of these funds are 0.83% and 0.84%, which are lower than the average stock fund but much higher than the 0.05% for the corresponding index fund. When I looked up the performance, I expected to see an under-performance about equal to the difference in cost, which is the typical case for most active funds. Surprisingly, the shortfall was even greater than the cost difference. This means that the stock picking of the two funds was even below average irrespective of expenses!

You might think that I have cherry picked these results and to be honest - I have. I’ve done so to make an important point. These are the flagship funds of two of the best known mutual fund companies. They can choose from an extensive line-up of in-house talent or go outside to hire anyone to manage these funds. Even so, they have not matched the performance of the passive index fund. What chance do you have of finding the next great managed mutual fund?

I wasn’t always a true believer. I’ve used some index funds for as long as I can remember, but it wasn’t until about eleven years ago that I converted from active to passive investment. Many others have also converted to indexing, but I can’t think of anyone who has reverted back to active management. Warning: once you have internalized this concept, you will never want to go back!

It’s almost like the episode of Seinfeld when Jerry projects what George’s life will be like after his parents move to Florida and creates a “buffer zone” for him, Jerry Seinfeld said, “You have no idea how your life is gonna improve as a result of this. Food tastes better. The air seems fresher. You'll have more energy and self-confidence than you ever dreamed of.”

Okay, so maybe the food won’t taste better, but I believe that you will have a greater peace of mind and more confidence as an investor if you are a true believer. You won’t have to worry about being gouged by excessive fees, poor fund manager performance, or a host of other issues that characterize active management. You will also have more time and energy for more enjoyable pursuits. Of course, you can achieve nearly the same result based solely on my recommendations, but I can tell you from personal experience, it really helps to be a true believer.

New "Fiduciary Rule" for Retirement Accounts

Last week, the Department of Labor (DOL) issued a rule change that imposes higher standards on brokers and other commission-based investment advisors in an attempt to reduce conflicts of interest.   The DOL, which overseas retirement accounts such as 401(k) plans and IRAs, issued the new regulations after six years of debate.  These regulations impose fiduciary responsibility on anyone giving advice regarding retirement accounts and are supported by the CFP Board, the National Association of Personal Financial Advisors (NAPFA) and the Financial Planning Association (FPA).  The fiduciary standard says that advisors must put the interests of the client ahead of their own. 

Proponents of the fiduciary standard believe that consumers need protection from advisors selling unsuitable financial products to prevent further erosion of their retirement portfolios.    Not surprisingly, the brokerage industry has been fighting this effort using its considerable political and economic clout.   It has argued that the move to fiduciary responsibility would force brokers to stop serving small investors and discontinue IRA sales.   This of course is hogwash as brokers are not going to abandon this lucrative market. Besides, small investors can get competent financial advice from 401(k) administrators, hourly-based planners like the Garrett Planning Network, and low-cost investment platforms like Vanguard. 

There will be a lot of analysis to follow as both sides digest the 1,000 page ruling and the labyrinth of arcane laws regulating retirement investments.  The SEC is likely to make similar changes for investment advice outside of retirement accounts.  The stakes are high and the battle will continue in courtrooms and on Capitol Hill.   Lawmakers are undergoing intense lobbying efforts and I would not be surprised if they intercede to neutralize the new law.    Brokers will no doubt seek creative ways to circumvent the rules. 

I have the feeling that both sides gave a huge sigh of relief at the announcement.  The brokerage industry feared that it could have been worse for them.  Even though some concessions were made which diluted the original proposal, supporters of conflict-free advice see this as a great step in the right direction.  These new regulations won’t even be fully implemented until January 1, 2018.

The new fiduciary rule will curb some unscrupulous practices, but it would be a “fantasy” to think this will truly put advisors on the same side as the clients.  While I agree that it needed to be done, I’m not confident that it will stop many of the abuses that I see on a daily basis.   For too long, the industry has operated under the philosophy of the outlaw character, Calvera, from the 1960 western The Magnificent Seven, where he stated “If God did not want them sheared, he would not have made them sheep.”   I don’t see the industry attitude changing anytime soon. 

Since opening my business, I have been a fiduciary advisor by both law and by practice.  I’m not directly affected by the change.   One major benefit, though, is that the debate has brought a great deal of attention to the topic.   More and more people are starting to understand what the term “fiduciary” means and are beginning to demand an advisor who adheres to the higher standard of responsibility.  

Despite the new regulations designed to protect retirement account investors, the deck remains stacked against them.  You must be vigilant and protect yourself.   Don’t rely on any government agency to make investment advice fair and affordable.     It’s not likely to happen.  Like the computer says in the movie War Games, “The only winning move is not to play.”   My advice is to continue to save and invest, but play “the game” on your own terms.   There are plenty of great resources available, and ways to get independent advice if you are willing to look.

Two Social Security "Loophole" Options Closed

With the recent Bipartisan Budget Act of 2015, Congress has closed the door on two social security claiming strategies that it considered “loopholes.”    The File-and-Suspend strategy allowed a person to delay his or her own benefit in order to get a higher amount later while still allowing a spouse to claim spousal benefits based on the worker’s earnings record.  The Restricted Application technique allowed a person to collect a spousal benefit, while delaying their own benefit to get a higher amount later.    These procedures had been used either separately or together.   Following a brief transition phase, the File-and-Suspend and Restricted Application strategies will no longer be available.  

This news will not mean much to most retirees, because not many would have used these strategies anyway.  They were most popular with people who could afford to delay social security benefits and who understood the arcane rules.   However, people were increasingly becoming aware of the opportunity and taking advantage of these strategies.    Under the new rules, the File-and-Suspend provision will end, but some people can still implement the strategy if they act quickly.  The following specific circumstances are required: If you will be age 66 by April 29, 2016 and want to delay the start of your benefits and you have a spouse who might want to claim only spousal benefits while earning delayed credits on their own record, then you must File and Suspend by April 29, 2016 in order to be “grandfathered” under the old rules.  

Some people will also be grandfathered to file a Restricted Application in the future, but no specific action is required now.   If you were age 62 by January 1st this year, you preserve the right to file a restricted application for just spousal benefits at your Full Retirement Age (FRA) which would be 66 in such a case.  For example if you are 63 now, you would still be able to claim benefits on your spouse’s record at age 66, while receiving delayed credits in order to switch to a higher benefit amount at age 70 based off your own work record.     Unlike the elimination of File-and-Suspend, you don’t have to take any proactive steps now. 

The most important thing to do now is to evaluate your own situation to see how these rule changes might influence your filing decisions.  My wife and I are 60 and 61 respectively and would have been good candidates for the File-and-Suspend and Restricted Application strategies in a few years under the old rules.   Since we are not within the age range to be grandfathered, these specific strategies will no longer be an option for us.   Even so, we still retain the ability to delay our own retirement benefits until as late as age 70, if it makes sense for us.   Alternatively, we could start as early as age 62, if we want.    The decision could have a significant impact over our lifetimes.  We could both file at 62, or both wait until 70, or we might each choose a different age anywhere between 62 and 70.  There are many possible combinations.  This might sound complicated, but our decision will be easier than for some folks, because our benefit amounts and ages are pretty close together.  People with a wider age gap or who have a large difference in historical earnings face a more difficult decision.     

Everyone’s claiming strategy should also consider work status, tax situation, sources of income, investment assets, risk profile, long-term goals, family health history and other factors.   In other words, the decision about when to begin social security should be integrated with other aspects of your financial plan.    In my 2012 blog post, Making Smart Social Security Decisions, I wrote that you cannot know in advance the optimal strategy because you don’t know how long you will live. That said, you can make a smart decision that best fits your personal situation. 

Should the new budget bill have struck down these claiming strategies?  One of the underpinnings of the social security system has been that when a person is entitled to multiple benefits, they could choose the higher amount.   Used independently or in concert, these two strategies utilized this principle to potentially enhance the total amount of social security benefits.    There are other situations still allowed within the system to take the higher benefit amount when qualifying for more than one benefit.    Further, very few people actually used the strategies according to SSA data and the impact on the federal budget was negligible.    

In my view, this was a way for Congress to pretend it’s doing something positive to avoid solving the real problem.  If our lawmakers really want to do something to shore up the social security system, they could start by not pilfering the assets of the Social Security Trust Fund!  For years, the government has withdrawn all of the receipts from payroll taxes and spent them on other things.  They have replaced them with a giant stack of IOU’s.   The system is a huge Ponzi scheme with the outgoing benefits to retirees paid from new contributions from current workers.    This has allowed benefits to continue to be paid, but unless something is done to fix the system, benefits could be reduced in the not-to-distant future.

The Social Security Retirement System is critically important to millions of Americans who rely upon it for a sizable portion of their income.  Although I can’t be totally confident, I do think it will get fixed eventually, so that promised payments will be made.   As with many things in life though, I believe you should focus on what you can control and not worry about what you can’t.  To a great extent you can control how much you save for retirement and how well you invest your savings.  Sensible planning can greatly enhance your financial security and retirement lifestyle.   

It’s said that when one door closes, another opens.  Making smart social security decisions is still an important part of retirement planning despite the elimination of two claiming strategies.  You might want use this opportunity to take a closer look at your social security filing strategy. 

The Build-A-Bear Experience

When my younger son Kevin was just a little guy (he’s sixteen and six-feet tall now), he absolutely loved stuffed animals.  More specifically, he loved stuffed dogs.  He had dozens of them, which we called his “buddies.”  On special occasions such as birthdays, the family would visit the Build-A-Bear Workshop store at the local mall to shop for a new buddy.   The Build-A-Bear store allows children to follow an assembly line and create their own personalized stuffed animals.  Kids select an animal, fill it with stuffing, and choose outfits, accessories, scents, and sounds.    At the end of the production line to complete the Build-A-Bear experience, the child gives the new friend a name and even creates a birth certificate!

Kevin never really wanted to go through the entire build-a-bear process.  He just wanted the stuffed animal!  He would invariably choose a dog (never a bear) already on the shelf.  He selected the type of dog, the color, texture and size, and sometimes he even bought an accessory, such as a tiny skateboard or a hat.   The other kids no doubt enjoyed the “process” and were happy with their purchases.  That said, Kevin also got exactly what he wanted - he got it quickly and he was just as happy as the other kids.  

The build-a-bear experience reminds me of the difference between “traditional” financial planning and my methodology.  Not all adults want or even need the customary financial planning process.  The experience is not pleasant for everyone.   There is data to gather, meetings to schedule and attend, homework assignments, to-do-lists to complete, and serious issues to contemplate.   If mistakes have been made in the past or if you are faced with unpleasant realities, the requisite topics can invoke negative feelings.   Further, the spreadsheets, charts, and graphs encountered can cause your eyes to glaze over (unless of course you are an engineer).   Let’s face it, the standard “financial plan” rarely gets read (although it can be used effectively as a door stop). 

Some people may want “the experience” in addition to the results.   You might like having greater involvement in the nuts and bolts or following a structured routine.   You might even be willing to pay more for the experience.   More commonly, I find that people want answers to questions and solutions to problems.  Much like preparing their tax return each year, they are focused on a necessary task at hand and are willing to undertake whatever is necessary to get the job done.  Even so, they are not looking to make it any harder than necessary.  They want to get it done and they want help from someone with knowledge and experience to formulate a game plan.    

For these reasons, I’ve designed a streamlined process to deliver the same benefits of “traditional” planning but with less of the “experience”.     The plans that I develop are customized to the client, but they take much less time.    The client’s unique lifestyle goals drive the process and the client is still the ultimate decision maker.   My job is to create an environment and a decision-making framework to get the desired result.     This self-directed methodology does not mean “do-it-yourself.”  Self-directed means that “you” maintain fully responsibility and control over your financial life.   

My philosophy is centered on doing the things that matter most, so we don’t spend time on things that don’t add value to the client’s financial plan.   I don’t attempt to predict unpredictable events or ascribe a level of precision to planning that doesn’t exist in the “real world.”   The challenge of making decisions in an uncertain world is not helped much by financial models so I don’t spend timing inputting data into a forecasting software program.  Nor do I use a risk tolerance questionnaire, when I can get the same result by just talking with a client. Further, I’m not interested in budgets that have as much chance of success as the typical diet.  Planners tend to dwell on many areas where the time spent has questionable value.   In contrast, my plans are strategic action plans that focus on the key activities that will drive long-term financial success. 

Making the planning process as painless as possible is both the objective of my methodology and its by-product.  Another by-product is a speedy solution to problems.  From the initial inquiry to the final results, my clients get solutions in a few weeks rather than a few months.    This can save money as well since the cost of unbiased professional advice is a function of time.  A lengthy process naturally will be more expensive.   

Please understand that I am not against traditional financial planning.   The benefits of any type of financial planning are enormous, no matter which approach is used.  Financial planning brings peace of mind knowing that you have taken steps to achieve your most important goals.   The exercise also optimizes your resources by protecting your assets from potential financial catastrophes. In turn, it also increases future choices by reducing expenses and taxes which hinder wealth creation.   I would love for anyone, who is so inclined, to seek the help of a fee-only planner.    

Surprisingly, like Build-A-Bear Workshops, “fee-only” financial planners are not plentiful.   There are only a couple thousand fee-only planners nationwide and only a few hundred who work on a “fee-for-serve” basis.   The best places to look are the Garret Planning Network (www.garrettplanningnetwork.com) and the National Association of Personal Financial Planners (www.NAPFA.org) both of which I am a member.  Most of the Garrett and NAPFA members follow the traditional approach and are highly qualified.  

Like the kids at the Build-A-Bear Workshop, you can choose to work the production line and I’m pretty sure you will be happy with the outcome.    In fact if you prefer such an experience, I would encourage you to use a traditional planner.   Though, if you are like my son Kevin and just want the “bear”, you can step quickly to the end of the line and get what you really wanted.   Just like buying a stuffed animal, when it comes to “build-a-plan” financial services, you do have a choice.     

Much Ado About Nothing

The investment world has been all a twitter lately, both literally and figuratively. Since Bill Gross announced he was leaving Pacific Investment Management Fund Co. (PIMCO), the company he co-founded more than forty years ago, and moving to Janus Capital, investors have been uncertain what to do.   The investors and advisors have been wringing their hands and anguishing about whether or not to stay with the PIMCO Total Return Fund managed by Mr. Gross, or move money to other bond funds.

Continue Reading

Piano Guy

Have you seen the PBS program where Scott “The Piano Guy” Houston teaches adults who have always dreamed of playing the piano to learn to play using a simple, easy method?  Whenever the Learn Piano in Flash program airs (usually during pledge week), I stop what I’m doing and watch.

Continue Reading

Lucky Man

As June rolls around each year, the time comes again for the annual graduation speeches.  Though most will be quickly forgotten (and probably should be), some do provide valuable inspiration and insight.   Thanks to YouTube, I stumbled upon a speech that struck me as particularly meaningful. In a baccalaureate address given by author Michael Lewis (Liar’s Poker, Blind Side, Moneyball) to the Princeton graduating class of 2012, Lewis made a succinct statement about the role of luck in life’s successes.

Continue Reading

Beware of Fido

Our family dog, Brittney, is very affectionate and has a sweet disposition most of the time.  However, when provoked she can get aggressive.  As with all dogs, you have to be careful around her when she might be protective of her food, yard or one of the family members.  As a comparison, I hope my clients will exercise similar caution when dealing with Fidelity Investments.

Continue Reading

The Right Stuff

When it comes to investing in commodities, I don’t recommend them to my clients for one simple reason: I don’t understand them well enough.

The first rule of investing is to never invest in something you don’t understand. Don’t get me wrong, I know what commodities are and I’ve done enough research to form an opinion. I just don’t understand enough to know specifically what to expect from commodities in the future or to have any confidence that the asset class will provide an adequate return on investment.

Continue Reading

The Best of Times/The Worst of Times

It was the best of times; it was the worst of times. This is what author Charles Dickens said of eighteenth century London and Paris around the time of the French Revolution. These same words could also be used to describe the current environment for investors in America.

Continue Reading

The Tyranny of Compounding Costs

Bringing awareness to excessive and unnecessary costs and fees has often been a subject of my writings, as it affects many portfolios and so few investors are aware of the “true costs” they are incurring.  On April 23, 2013 PBS Frontline aired a hard-hitting expose´ called The Retirement Gamble.  I don’t know if it will be broadcast again, but you can click here to see a replay from the PBS website.

Continue Reading

401(k) Awareness

E*Trade, known for its talking baby TV commercials, aired a different TV commercial recently stating that a typical family could pay $155,000 in hidden fees in their 401(k) over their lifetime.  The ad prompted viewers to Google “401k 155k” to learn more, so I did.  I found an article discussing the basis for the claim.

Continue Reading

March Madness

The NCAA basketball tournament (otherwise known as March Madness) tipped-off last week beginning three weeks of basketball frenzy that some have compared to a national holiday.  It’s certainly one of the best sporting events of the year, but it’s more than that.  Some studies have shown that when March Madness arrives, there is a huge productivity loss across America as many workers get caught up in the excitement.

Continue Reading

Making Smart Social Security Decisions

Lately, one of the hottest topics in financial planning concerns maximizing one’s social security benefits.   In fact, it’s hard to find an industry publication without an article on the subject.  Even the mainstream financial magazines, such as Money Magazine and Kiplinger’s Personal Finance, have made social security claiming strategies one of their favorite subjects.

Continue Reading

Benchmarking Performance

“How are your investments doing?” If you don’t know the answer to that question, don’t feel so bad. Most investors don’t know the answer either.

That said, it’s a logical question and one that should have an easy answer. After all, there is an abundance of financial companies touting numerous products and services as well as scores of investment advisors representing individual investors. The technology also exists to provide results with great speed and accuracy. Therefore, what makes it so difficult to know how well your investments are performing?

Continue Reading

The Top 1%

How would you like to be in the top 1%? You might be surprised how easy it can be to attain this elite 1% status.

No, I’m not talking about people with the highest income or net worth – those individuals who currently are the target of the Occupy Wall Street movement. If you’re not already there, I can’t get you into that group. However, I can tell you how to become one of the top 1% of the most effective investors.

Continue Reading

Free Lunch

The common phrase “there's no such thing as a free lunch” was made famous by the Nobel-Prize winning economist Dr. Milton Friedman. In economic terms, it means that everything must be paid for by someone in some way.

Have you ever been invited to a lunch or dinner at a nice restaurant by a local investment advisor? If you think the meal is really free, think again. There will be a cost, which could range anywhere from relatively small to extremely expensive.

Continue Reading

Gold Rush

Over the last few years, the price of gold has soared. Spurred by advertisements on television, people have been predictably rushing to buy. It has also been a topic of interest for many of my clients. While I had planned to write this article for some time, I have procrastinated until now, because it seemed like such a daunting task.

For one thing, it’s hard to define. Is gold an investment? Is it money? It’s even more difficult to place a value on gold. Will prices continue to escalate? Is it too late to buy? Are we in the midst of a price bubble?

Continue Reading

Downdraft and Downgrade

It was quite a week. We had just breathed a collective sign of relief after the debt ceiling compromise was reached, when the Dow Jones Industrial Average tumbled 512 points in one day based on fears surrounding the global economy. This was followed by the announcement late on Friday that Standard and Poor’s had downgraded the U.S. credit rating. While these are both unsettling events to say the least, neither should have been a surprise.

Continue Reading

High Anxiety

In today’s volatile market, I find it interesting that lately clients are showing higher anxiety about their bond holdings than about the stock market. They hear that interest rates “have to rise” and bond values “will get hammered” as a result. The logical inference from these ominous warnings is to avoid bonds, but there are some problems with such thinking.

Continue Reading

Speaking Plainly

Although it will go largely unnoticed by most consumers, there has been a major change within the investment industry.

All registered investment advisors must now provide a “Plain English” disclosure document to all clients and prospects outlining their business practices as well as any potential conflicts of interest. Some disclosure was required previously, but in a much less readable and less comprehensive way. Despite the mandate for advisors to write in “plain English,” the government regulators have titled the new document Form ADV Part 2 Brochure. Although the name lacks panache, it is a positive step for consumers and serves a useful purpose.

Continue Reading

Take It to the Limit

Like the 1970’s Eagles song “Take It to the Limit,” our political leaders are about to take it to the limit one more time.

The national debt sits just a hairsbreadth from the statutory ceiling of $14.3 trillion. Unless Congress votes to raise the debt limit again, as it has done a number of times, the government could default on its obligations within the next couple of months. If that happens, the full faith and credit of the United States of America will never mean the same again.

Continue Reading

Phone a Friend

Do you remember the prime-time hit game show hosted by Regis Philbin called Who Wants to be a Millionaire? If game contestants got in trouble answering a question, they had several lifelines to use. One lifeline was to “phone a friend” for the answer.

Every so often, I learn that a client has deviated in a significant way from the game plan that we had formulated together. They forgot their “phone a friend” option. For example, a client might hire a high-priced investment management service, even though there are much better options available. Since I have an open line policy that encourages clients to call before making any major financial decision, I do not fully understand a client’s reasoning for under-utilizing one of their financial information lifelines.

Continue Reading

How to "GRASP" the Investment Process

When new clients come to me for help in their implementation of an investment plan, I go through five major steps. Whether you intend to design and manage your own portfolio - or hire me as your personal consultant, it would help you to know the key steps for building a successful investment plan. The acronym G•R•A•S•P is a good way to remember the process:

  • G - Goal identification
  • R - Risk assessment
  • A - Asset allocation
  • S - Select investments
  • P - Performance monitoring

Continue Reading

How to Invest Like a Pro

In September 2010, I was quoted in the on-line edition of Financial Advisor Magazine in an article titled Pension-Style Investing Limits Individuals. Despite the title, I believe just the opposite is true. I think many individuals would do well to emulate pension plans.

Continue Reading

A Simpler Life

Especially around the time of the New Year’s holiday, thoughts come to mind of finding ways to simplify our lives. For this very reason, my new-client questionnaire has a section on lifestyle goals with a list of thought-starters. The purpose is to initiate discussion and to help clients prioritize what is most important to them. One of the most commonly expressed desires is to simplify one’s financial life.

Continue Reading

Shopping for Funds

Last Saturday, I was forty-five minutes early for an appointment, so I decided to wait in my car and listen to the radio. I listened to The Mutual Fund Show. This program is hosted by Adam Bold, the founder of The Mutual Fund Store. Although I’ve listened to the show before, I was especially struck by the amount of self-serving and disingenuous comments made in such a short period of time.

Continue Reading

The New Normal

According to Bill Gross, co-chief investment officer of the PIMCO money management firm, the U.S. economy is going to be sluggish for the next few years and investment returns muted. Therefore, investors should get used to it. Mr. Gross is one of the most highly respected investment managers on the planet. He is credited with coining the term “The New Normal” to describe an economic environment quite different than we have experienced during our lifetimes. The new normal will be characterized by a slower growth in economic activity, more government intervention and lingering high unemployment.

Continue Reading

Fix Our Mix

I recently participated in a “money makeover” project for Money Magazine. In the August 2010 issue’s Fix Our Mix feature, I advised a couple from Southfield, Mich. in their early 40’s on how to integrate their separate financial lives to better communicate in order to achieve their common goals. Since the subjects, Michelle and Scott, also needed to be more aggressive savers and less aggressive investors, I prescribed a 15% savings rate target for retirement and a significant reallocation of the investments.

Continue Reading

The Power of 'Best of' Lists

In the June 2010 issue of Hour Magazine, I was named one of the top wealth managers in the Detroit area. You might think that I would feel honored by the recognition, but I find it a little troubling that these types of lists carry so much weight with consumers. It’s natural to want to work with the “best of” any profession. Even so, I believe if you are serious about hiring someone to help with your financial life, you should do more than select from a simple list.

Continue Reading

As the Stomach Turns

Like an episode of the well-watched daytime soap operas, the stock market has been full of drama lately. On May 6th between 2:00 and 3:00 p.m. EST, the Dow Jones stock market average plunged nearly 1,000 points. If you didn’t watch the evening news that day, you might not have even known about it. You won’t see it reflected on your month-end financial statements, because by now the loss has already been largely recovered.

Continue Reading

Advice for the New Grad

Shortly after writing Taking Aim at Target Funds, I was contacted by Jane Hodges, who was writing a story for the Wall Street Journal. Jane was looking for funds that a new investor should consider for a fledgling portfolio. Naturally, I suggested target-date index funds. How can you beat an investment that is low-cost, extremely diversified, and easy to purchase and maintain?

Continue Reading


Before accepting recommendations from anyone concerning your financial future, there is one thing you should always remember - everyone has an agenda.

Their agenda could support your objectives, or it could also be hazardous to your financial health. To protect yourself, you need to keep your eyes wide open.

Continue Reading

Taking Aim at Target Funds

In today’s market, it seems that target-date funds and other lifecycle funds have a bull’s eye on them. Many financial commentators have taken aim at these investments claiming that they have failed investors. I think it’s the critics who have missed the mark.

Continue Reading

Motley Fool Endorses Garrett Planning Network

I’m writing to let you know about an exciting new development in my business. The Motley Fool has exclusively endorsed and is promoting the services of financial advisors affiliated with the Garrett Planning Network, the international organization of fee-only financial advisors with which I am proud to be associated.

The Motley Fool has long admired Garrett’s approach to fee-only financial advice. And we are fans of The Fool’s approach to everything they do to educate, empower and amuse the public and their members about investing. Garrett, The Motley Fool and I share a commitment to make trustworthy financial advice accessible to everyone.

Continue Reading

Helpful Tip: Moving Funds to a Roth IRA

Recently, I wrote about the opportunities and potential pitfalls of employing a Roth IRA conversion strategy. In a previous article for those who otherwise would not qualify due to income limitations, I also presented a back-door way to get money into a Roth IRA. Although these techniques require careful thought and analysis, I can also present a much simpler way to take advantage of Roth IRAs that is often overlooked.

Continue Reading

Roth Conversion Confusion

If you’ve read the financial press lately, you’ve seen many articles trumpeting the benefits of converting traditional IRAs to Roth IRAs. The Roth conversion is the latest ‘hot idea’ in financial planning, because of a new provision in the tax laws to take effect January 1, 2010. This revision repeals the income limit and permits the tax bill to be spread over the two years following the conversion year. This change is undoubtedly a great opportunity for some people, but does it make sense for you?

Continue Reading

Garrett Planning Network

This past September, my three-year term as a member of the Garrett Planning Network Member Advisory Board ended. It was a privilege to serve on the inaugural panel of advisors, whose role is to provide a sounding board for Sheryl Garrett as she steers the organization toward her vision to make competent, objective advice accessible to all people. I’m please to have played a small role in helping shape the direction of the organization.

Continue Reading

Buffet's "All In" Bet

I must confess that I do something, which I tell my clients not to do. I watch CNBC.

I can’t help myself. I like watching CNBC, even though I don’t care about the daily machinations of the stock market or what’s happening with individual stocks. You can go crazy from the cacophony of financial information and endless commentary from talking heads throughout each business day. I watch more to follow the major events and trends that shape the financial markets. Every so often, something noteworthy happens.

Continue Reading


The media loves milestones. Last month, there was a proliferation of “One Year Later” articles to mark the anniversary of the Wall Street meltdown. I almost wrote one myself.

Last week, CNBC ran a special called “Dow 10,000” to commemorate the stock average breaking the milestone. It was a feel-good story, but not nearly as exciting as their first “Dow 10,000” special 10-1/2 years ago when the stock market hit the landmark level the first time. They didn’t have a special when the market plunged below 10,000 on its decent to 6500, nor did I hear how the mark had been crisscrossed many times during this decade.

Continue Reading

One Week is Not Enough

I hope you are enjoying Financial Planning Week! If not, perhaps you haven’t heard the news.

The week of October 5-11, 2009 is officially Financial Planning Week. Each year around this time the Financial Planning Association (FPA) designates a week to help individuals discover the value of financial planning and make smart decisions to achieve life goals and dreams. I’m not really sure how official this is, but some states have issued proclamations to support the designation. I haven’t always given the FPA my full backing for this effort, so this year I’m determined to do my part.

Continue Reading

The Economic Stimulus Hits Home

I just realized that I qualify for a special 2009 sales-tax deduction for purchasing a new car. In fact, my household will get two deductions because my wife also purchased a new vehicle this year. It’s about time that some of the stimulus dollars stimulated my pocketbook.

I’d heard about this, of course, but I figured it would not apply to me. These types of tax give-a-ways never seem to come my way, usually due to income restrictions. But sure enough, I checked the IRS website www.IRS.gov/recovery and it says the following:

Continue Reading

A Blogger's First Blog

I never thought that I’d be a blogger - but here I am – blogging my first blog.

It seemed a little pretentious to think I’d have enough to say to warrant a blog. Of course, that hasn’t stopped many others from putting pen to paper - or should I say - keyboard to html? Political commentators, sports writers and financial columnists who have a hard time writing one good article now treat us to daily doses of their wisdom.

Continue Reading