(The following is the fourth of a special five part series meant to be shared by professionals and non-professionals alike. This particular series covers
only one of the 7 Deadly Sins Every ERISA Fiduciary Must Avoid.)
Your 401k Stinks April 5, 2016
Tags: 401k, fees, gold, ira llc, IRA. self directed ira, self directed 401k, silver, solo 401k, wall street
Why You Lost Money Today February 12, 2016
Tags: fiduciary, lost money, scam, sd ira, solo 401k, wall street
When the market as a whole goes down, people who own mutual funds that are “diversified” lose money (in general). This includes most people who have an IRA or 401k through their employer, due to the fact that most institutional IRA’s or 401k’s are invested in mutual funds.
A true self directed retirement account lets you invest in individual stocks, precious metals, real estate, foreign markets, and more.
Large institutional banks advertise that they offer self directed accounts. This is a sham. These supposed self directed accounts only allow you to buy products that the bank that set it up for you sells – so that they can make money off of selling that product. To me this represents a break in fiduciary responsibilities.
A Chevy dealer does not want to sell you a new Ford, even if the new Ford has better fuel mileage, better reliability, and costs less. The Chevy dealer will sell you a Chevy, because that’s how he makes money – he makes a commission off of every Chevy he sells. In fact the Chevy salesman is not allowed to sell a new Ford.
Similarly, a Fidelity guy will only sell products that he makes a commission off of – Fidelity products. There may be an investment that he knows is a better fit for you, but if he makes no commission off of that sale, he won’t sell it. In fact the Fidelity salesman (lets call him what he is) is not allowed to sell you a competitor’s product.
You are the only person in the world who has your best interest in mind when making decisions. You may not always be right, but at least you are not trying to skim a small percentage of your savings, under the guise of “managing” it.
Why Asset Allocation Doesn’t Matter In The Long Run June 27, 2015
Tags: banking, broker, bubble, disclosure, economics, economy, fees, fiduciary, retirement, scam, self directed ira, solo 401k, wall street
By Christopher Carosa, CTFA | June 24, 2015
My commentary (Lars) is in red bold letters.
Asset allocation cannot produce consistent results when applied to short-term time periods, whether the duration is a single year or an entire decade. The real world evidence of this was revealed in our previous installment. But this conclusion should not surprise anyone. For years, industry pundits have questioned the use of “tactical” – or short-term – asset allocation. Speaking with Morningstar’s Christine Benz in 2010, Jason Zweig, a personal finance columnist for The Wall Street Journal, said, “There are tactical asset allocation mutual funds that have been around for a long, long time. There are also many more that no longer exist because they were closed down, because the people with multimillion dollar budgets and supercomputers, and the world’s best investing software failed at it. So I don’t think that the average investor is likely to succeed at it, and I’m really not persuaded that most professionals will either.”1
Why Long-Term Asset Allocation Might be a Better Alternative
One of the corollaries of asset allocation is the need to rebalance. This is theoretically most effective when practiced over extremely long time periods. The focus on the long-term is critical because, as 2002 and 2008/2009 attest, there always remains the possibility of a short-term “anomaly.” Mark Lund, author of The Effective Investor and located in Draper, Utah, says, “The secret to making asset allocation work is having structured funds in the portfolio mix, rebalancing, and staying with it for the long run. One must know that there will be years when the market goes down but discipline is what wins the game.”
Establishing a fixed asset allocation with regular rebalancing is said to offer the advantage of systematizing the “buy low/sell high” philosophy that investment gurus have long touted as the secret to attaining a winning investment record. Robert R. Johnson, President and CEO, The American College of Financial Services located in Bryn Mawr, Pennsylvania, says, “Asset allocation is not only a valid concept, it is an essential part of a client’s investment plan. It is the rough guide and as part of an investment policy statement, the contract between an advisor and client. Target asset allocations help the client and advisor navigate rough waters. If, for instance, a client has a target stock/bond mix of 60/40, when equity markets have outperformed bond markets, periodic rebalancing will ensure that an investor’s asset allocation doesn’t vary too much from the target. It provides a discipline of buying the asset class that has underperformed and selling the asset class that has outperformed. Straying too far from the target asset allocation can subject the client to unintended risks.”
Again, as with the short-term hypothesis in Part III of this series, it’s easy to conduct an experiment that tests a similar long-term hypothesis.
The Long-Term Test
Like the short-term test, we used the Ibbotson data for annual stock and bond returns from 1926 – 2013. Unlike the short-term test, we’ve kept the mix limited to stocks and bonds. Also unlike the short-term test, we won’t guise this test in a story loosely based on characters from a classic Hollywood movie. This time we’ll go straight to the data.
First, we had to decide upon an appropriate long-term time period. Here, for reasons made obvious in Part V of this series, we picked a 40-year time frame. Next, we determined which stock/bond allocations to use. We went with 10% increments from 100% stocks to 100% bonds, figuring this was the only sure way to include the favorite balances of 70/30, 60/40, 50/50, and 40/60. There were a total of 49 40-year periods. The hypothesis here states there exists some allocation – not either 100% stocks or 100% bonds – that will provide the optimal portfolio mix. Here’s how they charted:
What’s interesting with this graph is that it shows the best allocation is no allocation – just put everything in stocks. Across the board, the 100% stock allocation has the highest high annual return, the highest median annual return, and the highest low return. This suggests, for 40-year time periods – not an unusual time duration for someone saving for retirement – the best returns comes from not using asset allocation.
And before you can say “risk-adjusted returns,” a statistical analysis shows the 100% stock portfolio possesses one of the lowest standard deviations. Only 90/10 (0.90%) and 80/20 (0.88%) have a lower standard deviation than 100% stocks (0.99%). All other asset allocations have standard deviations in excess of 1.00%, with the figuring increasing progressively until you have 100% bonds, which has a standard deviation of 2.34%.
We can conclude, with no rebalancing, a portfolio consisting of 100% stocks both performs better and is nearly as, if not more, reliable than all other stock/bond asset allocations.
So clearly, according to this study you should pay your advisor to buy only stocks.
But this leaves us with a question – What about rebalancing? Does rebalancing improve performance? That’s another hypothesis we can easily test.
The Rebalancing Test
In this test we pick one of the more popular asset allocations – the 60% stock/40% bond mix. Again using the annual data provided by Ibbotson from 1926-2013, this time we rebalanced annually. We used a 5% variance to trigger a rebalancing. In real life, to avoid the “blinker” problem (i.e., excessive trading caused by too small a rebalancing trigger), professionals will often use a larger variance (like 5%) before rebalancing. In our case, if at the end of the year stocks exceeded 65% of the portfolio, we sold down to 60% and put the balance in bonds. Likewise, if at the end of the year bonds exceeded 45% of the portfolio, we sold down to 40% and put the balance in stocks.
Remember, the concept of rebalancing is to “sell high” and “buy low.” The hypothesis would therefore state that, by rebalancing, the buy low-sell high asset class trading would yield a higher return. We ran the numbers with the 60/40 split to test this hypothesis. Here are the results:
Again, the results of this test will disappoint the asset allocation believer. It turns out an investor who does not rebalance will receive a higher return in all areas compared to an investor who rebalances. Needless to say, if rebalancing a stock/bond asset allocation mix doesn’t beat the results of the static case, then it certainly won’t beat the 100% stock mix. Again, in this variation of the long-term test, asset allocation fails.
Why does rebalancing fail? It appears, because stocks routinely (and to a significantly higher degree) perform better than bonds. That means annual rebalancing has you selling stocks in more years than you’re selling bonds.
So, rebalancing is a scam, and you should just buy stocks.
Analyzing the results
More than a half century ago, a group of soon-to-be Nobel Prize winners made a guess. Built on the Capital Asset Pricing Model, The Efficient Frontier, and the primacy of rational markets, it became known as Modern Portfolio Theory. The consequence was asset allocation. We computed the consequences of that guess. We just now compared those consequences to experiment. The consequences disagreed with experiment. Therefore, it – asset allocation – is wrong. It’s that simple. It doesn’t make a difference how beautiful the guess was. It doesn’t make a difference how smart the proponents of asset allocation are, that its creators won a Nobel Prize, or that a lot of really famous – and even successful people – will go to their grave believing in asset allocation. It disagrees with experiment. It’s wrong.
If not short-term, if not long-term, does asset allocation offer any value? Intuitively, it seems as though we’re missing something. The practice of “asset allocation” existed long before Modern Portfolio Theory, portfolio optimization, and high-end computing power. There has to be a reason why it’s been used for so long. It had to have added some value to investors.
Maybe it was the way it was used. Maybe it would be beneficial to review how old-time portfolio managers determined whether to invest in stocks or bonds. Maybe, just maybe, knowing this might be the best way professional (human) advisers will be able to survive the coming Robo-Advisor apocalypse.
We’ll cover this in our next and final installment
This article was written for Fiduciary News, a publication written for “ERISA/401k fiduciary, the individual trustee and the professional fiduciary”. I suspect that many financial advisors and the like also read this blog.
I think it reveals some valuable information, although as studies often do, maybe not exactly the information that the researcher intended – or rather some bonus unintended information can be drawn from the focus of the study….in my opinion.
As I see it, handing the keys to your castle over to someone who’s best interest often lies in performing services for a fee(supposedly in your best interest) is not in your best interest. Generally, fees are paid for services such as management and rebalancing of your “portfolio”.
This study and the article’s author conclude that asset allocation and rebalancing are not effective; I agree.
I suspect that the author and I disagree over the value of his fiduciary services.
In other words, no disrespect is intended for the author, as I am sure he is a smart man, but I think that the person who has the most to gain or lose in a decision, should be the one making it.
Sitting on The Fence May 9, 2015
Tags: 401k, banking, bernanke, bubble, economics, economy, federal reserve, goldman sachs, interest rates, ira, market, stock market, wall street, yellen
Do you consider yourself a market timer?
Are you a market maker?
Do you know when the next market crash will happen?
Can you call the peak?
Do you have insider information regarding when Goldman Sachs will pull the carpet from under the U.S. stock market?
Is Janet Yellen your cousin? Does she give you tips?
If your answer is no to all of these questions, then why aren’t you taking this opportunity to divorce yourself from this bubble while it’s still inflated?
It is amazing to me that more people are not taking this amazing opportunity to take profits, and instead are electing to roll the dice on market timing or give the keys to their future to some guy who has no stake in their success.
I know that I should not be surprised, as history seems to repeat itself every 7 to 10 years these days. People have exceedingly short memories and attention spans that can only be measured in milliseconds.
I really don’t want to be that guy who said “I told you so”…or “I tried to tell you”. I get no joy in hearing sob stories about how people waited too long and got wiped out by the debt tsunami.
The current market value has no basis in reality. When it goes pop, it is going to destroy the retirement of millions of Americans who blindly followed the pundits on CNBC.
Please, Americans, spend more time thinking about your future and less time getting re-educated by mass media.
Longboat Retirement Solutions LLC
Call for a FREE consultation
How Does Your Investment Advisor Make Money? March 8, 2015
Tags: banking, broker, disclosure, investing fees, investment advisor, investment schemes, self directed ira, solo 401k, wall street
Longboat Retirement facilitates the creation and initial set up of Self Directed IRA’s and Solo 401k’s.
We don’t push investment schemes, make investment recommendations, or sell financial products. We do not give tax or legal advice.
This makes us truly independent. We have no interest in making commission on the sale of any financial or investment products. We don’t charge fees based on “assets under management” because we do not manage people’s assets.
Our interest is strictly helping our clients achieve control of their retirement and their future.
Why do People Continue to Give the Wall Street Criminals Their Money? February 11, 2015
Tags: 401k, Edward Jones, elections, Fidelity, finances, ira, sdira, solo 401k, TD Ameritrade, wall street
Anytime I talk to people in random social situations and the conversation veers towards finances, I hear the same mantra: “All of the bankers are a bunch of crooks!” To that I reply: “Why do you continue to give them your money?”
The initial response invariably is that they have no choice, their employer has their 401k managed by Fidelity or TD Ameritrade or Edward Jones, or any of the other big banks. Of course this is incorrect. They do not need to leave their money with the big crooks, whoops, I mean banks, in most cases.
The other common thing that I see all the time is people spending more time analyzing the pros and cons of a particular TV set or internet provider than their retirement plan. This is crazy, but such is the nature of the human mind. We spend too much time concerned with trivial things and too little with life’s most important decisions.
So, to answer my own question: “Why do people continue to give the Wall Street criminals their money?” – because they lack the knowledge that they have a choice, and they lack the fortitude to face the real issues that affect their future.
I may sound harsh in my analysis, but I can come to no other conclusion.
Certainly the big media propaganda and collusion plays a factor. After all, big media gets paid big bucks by the big banks to put out investment “news” that paints a rosy picture of the stock market and the associated banks.
The herd mentality doesn’t help, nor does the mindset of “Oh yeah, most investment advisors are nothing more than used car salesmen, but my broker is great!” That’s the same state of mind that gets us the same representatives in congress elected cycle after cycle, even thought these guys and gals have a 16% approval rate.
How can this be? Congress has a 16% approval rate, and Wall Street banks continue to get wacked with hundreds of millions in fines for duping investors, yet the same clowns will get re-elected to congress and the same criminals will continue to live in mansions on the hill while stealing from old ladies’ retirement funds.
Please, pull your head out of the sand and explore the options you have, and for Pete’s sake don’t re-elect someone or give them your life’s savings just because their name sounds familiar!
General Smedley Butler, USMC, Shedding Some Light on the Military Industrial Complex November 23, 2012
Tags: bankers, big business, military, politicians, wall street
“I spent 33 years and four months in active military service and during that period I spent most of my time as a high class muscle man for Big Business, for Wall Street and the bankers. In short, I was a racketeer, a gangster for capitalism. I helped make Mexico and especially Tampico safe for American oil interests in 1914. I helped make Haiti and Cuba a decent place for the National City Bank boys to collect revenues in. I helped in the raping of half a dozen Central American republics for the benefit of Wall Street. I helped purify Nicaragua for the International Banking House of Brown Brothers in 1902-1912. I brought light to the Dominican Republic for the American sugar interests in 1916. I helped make Honduras right for the American fruit companies in 1903. In China in 1927 I helped see to it that Standard Oil went on its way unmolested. Looking back on it, I might have given Al Capone a few hints. The best he could do was to operate his racket in three districts. I operated on three continents.” General Smedley Butler, USMC