Objective information about financial planning, investments, and retirement plans

Investing: Time and Diversification are your Friends


Each quarter Dr. David Kelly and his staff at JP Morgan Asset Management publish their Guide to the Markets.  This is a comprehensive chart book of investment and economic data that I find invaluable.

For the past several quarters the Guide has included this chart which as a long-term investor should be quite important to you.

The chart depicts the range of average annual returns for stocks, bonds, and a combination of the two over rolling 1, 5, 10, and 20 year periods from 1950 through 2013.  In my opinion every investor should understand the impact of diversification and time on their investments as depicted on the chart.

Understanding the chart 

The green bar depicts stocks, the light blue bar depicts bonds, and the grey bar depicts a 50-50 mix of the two.

As you can see the greatest volatility of return occurs over rolling 12 month periods.  The range of a 51% gain to a 37% loss in a 12 month period is huge.  The range for bonds is more compact and the range for a 50-50 mx of stock and bonds is slightly more compact.

As you move out to the 5, 10, and 20 year ranges you will note that the ranges from the largest gains to smallest (or a loss) become smaller with the passage of time.

Also of note is that in no 5, 10, or 20 year rolling time frame depicted does a 50-50 mix of stocks and bonds result in a negative return over the holding period.

What does this mean to you as an investor?

Diversification dampens the variability of your returns. As you can see from the chart stocks have a wider range of returns over all of the periods depicted than do bonds.  Combining the two tends to dampen the volatility of your portfolio.  Further enhancing the benefits of diversification is the fact that stocks and bonds are not highly correlated.

Taking this a step further, while an investment in an index mutual fund like the Vanguard 500 Index (VFINX) would have lost money if held over that 10 year period 2000-2009, a portfolio that was diversified to include fixed income, small and mid-cap funds, international equities, and other asset classes would have recorded gains during that same time period.

Time reduces the volatility of returns. I will leave any scientific explanation to those more attuned to this than myself, but certainly part of the reason are the ebbs and flows of market and business cycle factors that have an impact on stocks and bonds.  These might be recessions, interest rate movements, or other factors.

Implications for the future

The performance and characteristics of stocks and bonds might well differ in the future.  Diversification for most investors will likely mean holding more than just Large Cap domestic stocks and Intermediate Bonds as the graph depicts.  A few thoughts for the future, especially in this market environment of record highs for many stock market indexes:

  • Diversification reduces risk.
  • Diversification among assets with low correlations to one another further reduces risk.
  • Diversification is important because we have no way of knowing which investments or asset classes will perform well or poorly or when.
  • A longer holding period will generally serve you well as an investor in terms of smoothing out portfolio volatility. 

While every investor is different as is every investment environment, diversification and patience can be two of your greatest allies.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. Click on the Amazon banner below to go directly to the main site or check out the financial planning related selections in our Book Store.

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What Do ETFs and Youth Soccer Have in Common?


Another sign of spring here in the Chicago area is the appearance of lines on the local youth soccer fields.  All three of our kids played soccer and we still miss watching them play.

So what do ETFs and youth soccer have in common?  From our experience as the parents of three travel soccer players, including one who was a ref for several years, very few parents understand the rules of the game which sadly too often leads to some really bad behavior on their part.  From many of the questions that I get and from what I read many investors don’t understand ETFs all that well either.  This post will attempt to highlight some of the basics of ETF investing for those readers who may be unclear or have a few questions.

(One example of some over the top soccer parents occurred when our now 23 year daughter was playing in a 9 year old game.  Some parents from the other team came over to our side of the field and started a fight.  My wife ended up as a witness in soccer court and two dads ended up being banned from any Illinois youth soccer game or practice for two years.) 



What is an ETF? 

According to the NASDAQ site:

“In the simplest terms, Exchange Traded Funds (ETFs) are funds that track indexes like the NASDAQ-100 Index, S&P 500, Dow Jones, etc. When you buy shares of an ETF, you are buying shares of a portfolio that tracks the yield and return of its native index. The main difference between ETFs and other types of index funds is that ETFs don’t try to outperform their corresponding index, but simply replicate its performance. They don’t try to beat the market, they try to be the market. 

ETFs have been around since the early 1980s, but they’ve come into their own within the past 10 years.”

In simple terms ETFs are essentially mutual funds that trade on the stock exchanges much like shares of common stock such as Apple or IBM.  They are bought and sold during the trading day just like stocks.

While it is true that the first ETFs were index tracking products, actively managed ETFs are coming into play with perhaps the most successful active ETF so far being the ETF version of PIMco’s Total Return bond fund (ticker BOND).

Advantages of ETFs 

ETFs have several features that are advantageous to investors:

  • Most ETFs are transparent as to their holdings.
  • ETFs can be bought and sold during the trading day.
  • Stop orders can be used to limit the downside movement of your ETFs.
  • ETFs can also be sold short just like stocks.
  • Many of the index ETFs carry low expense ratios and can be quite cheap to own.
  • Due to their structure, many ETFs are quite tax-efficient.
  • ETFs provide a low cost, straightforward way to invest in core market indexes. 

Disadvantages of ETFs 

  • ETFs can be bought and sold just like stocks.  In some cases this could cause investors to trade in and out of ETFs when perhaps they shouldn’t.
  • The popularity of ETFs has caused ETF providers to introduce a proliferation of new ETFs, some are excellent, some not so much.  Many new ETFs are based on untested indexes that have only been back-tested.  Additionally there are a number of leveraged ETFs that multiply the movement of the underlying index by 2 or 3 times up or down.  While there is nothing inherently wrong with these products they can easily be misused by investors who don’t fully understand them.
  • Trading ETFs generally entails paying a transaction fee, though a number of providers have introduced commission-free ETFs in order to gain market share. 

All ETFs are not created equal 

Much of the growth in ETFs was fueled by basic index products such as the SPDR 500 (ticker SPY) which tracks the S&P 500 index.  Vanguard, ishares, and the SPDRs all started with products that tracked core domestic and international stock and bond indexes.  The popularity of ETFs grew in the wake of the financial crisis and ETF providers have been falling all over themselves to bring new ETFs to market.

Some of these new vehicles are good, but others track questionable indexes or benchmarks.  These products are essentially made up in a lab, reminiscent of Gene Wilder, Terri Garr, and Marty Feldman in Young Frankenstein.

There is a site with an ETF Deathwatch section listing various ETFs and other exchange traded products that are on life support.  This Bloomberg article comments on some ill-fated ETFs as well.

Free trades are good or are they? 

Fidelity and Schwab most notably have offered platforms that allow commission-free ETF trades for their own branded ETFs and a select menu of other ETFs.  This is fine as long as these are the ETFs that you want to own.  Note I’ve found that several of the Schwab ETFs are very low cost and track core indexes so they can be good choices.

Additionally you can trade Vanguard’s ETFs commission-free if you trade in an account at Vanguard.

At the end of the day you should buy the ETFs that are best for your situation.  This assessment should include the underlying ETF benchmark, the expense ratio, and the liquidity.  If you can trade it commission-free so much the better.

Overall ETFs can be a great investment vehicle for both traders and long-term investors.  As with any investment vehicle it is incumbent upon you to understand what you are buying and how it fits into your investment strategy.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. Click on the Amazon banner below to go directly to the main site or check out the selections on financial planning, investing,  and related topics in our Book Store.

I use Morningstar extensively for investment research and portfolio analysis in my practice.  While I have subscribed to several of their services geared to financial advisors over the years, I have maintained my premium subscription to morningstar.com.  Click on the banner (also an affiliate link, no extra cost to you) below to get a free trial for their wide array of premium services which includes extensive research and information about ETFs.

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Investing: The Bull Market Turns 5 What Now?


The S&P 500 Index hit a low of 677 on March 9, 2009 at the bottom of the market drop connected to the financial crisis.  Since then the market has been on a tear, closing at 1,878 on March 7, 2014 for a gain of 178%.  Many market averages are at or near record highs.  As the rally celebrates its 5th anniversary what should investors expect going forward?

Birthday Party BashAccording to CNBC:

  • This Bull Market is the 2nd strongest since World War II
  • This is the 6th longest Bull Market of all-time
  • This is 4th strongest Bull Market of all-time 

How long do Bull Markets typically last? 

According to Zacks Investment Research the average length of a Bull Market since 1921 is 62 months and the average gain is 180%.  The median gain is 115% and the median length is 50  months.

At 60 months and counting with a gain of about 178% the current Bull Market is about average.

What’s next?

Over this past week I’ve heard varying opinions on CNBC.  Perpetual stock market Bear Harry Dent is predicting the Dow Jones Industrial Average will drop to 6,000 by 2016 from its current level of 16,453.

Another guest thought we were in the middle of a 15 year secular Bull Market.  Basically anyone’s guess is as valid as anyone else’s.

What should you do now? 

Perhaps more than ever a financial plan will put you on the right path.  If you stayed in the markets through the financial crisis and through these past five years your portfolio has likely done pretty well.  Perhaps you are even ahead of your retirement goals.  Your financial plan will help you determine where you stand relative to your goals.  This process will also help you determine if your asset allocation is still appropriate or if perhaps you should dial down your level of risk.

Investing when it feels good can be dangerous.  I wrote Investing: John Hancock’s TV Ad – Brilliant and Disturbing last year criticizing the company’s ads suggesting now was a good time to get back into the market.  Clearly anyone who did invest at the time of these ads did pretty well in 2013, but time will tell on longer term basis.  Moreover investors who feel the need to jump back into the markets because they feel like they missed out may live to regret that decision.

I have no idea what the future holds and I’m not saying that investing in equities is a bad idea.  What I am saying is that investors should not get caught up in the current market euphoria, but rather they should invest based upon their goals, risk tolerance, and the time horizon in which the money will be needed.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss  all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services. 

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. Click on the Amazon banner below to go directly to the main site or check out the selections in our Book Store.

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The Super Bowl and Your Investments


Lombardi Trophy - Super Bowl XXXI

It’s Super Bowl time and once again my beloved Packers are not playing.  At least they beat the hated Bears to make the playoffs.  Every year the Super Bowl Indicator is resurrected as a forecasting tool for the stock market.

This indicator says that a win by a team from the old pre-merger NFL is bullish for the stock market, while a win by a team from the old AFL is a bad sign for the markets.  Looking at this year’s game, Denver is an original AFL team while Seattle is neither.  The Seahawks came into existence in the 1970s (post-merger) first as an NFC team, then moved to the AFC, and are now back in the NFC.  To me this disqualifies them from this “scientific” prognostication tool but what do I know?

According to a recent Wall Street Journal article the indicator seems to work around 70% of the  time mostly because old NFL teams (which include the Steelers, Colts, and Ravens) have won a majority of the time (there is a 70% probability of this according to the WSJ article).  A notable exception occurred when the Broncos won in 1998 and 1999 and the stock market went up both years.

What should you do?

My suggestion is to enjoy the game, the halftime show, the commercials, and eat plenty of unhealthy food.

As far as your investments, I think you’ll agree that the outcome of the game should not dictate your strategy.  Rather I suggest an investment strategy that incorporates some basic blocking and tackling:

  • A financial plan should be the basis of your strategy.  Any investment strategy that does not incorporate your goals, time horizon, and risk tolerance is a bit flawed.
  • Take stock of where you are.  Have the strong stock market of 2013 and the almost five year rally since March of 2009 caused your portfolio to be over weight in equities?   If so perhaps it’s time to rebalance.
  • Costs matter.  Low cost index mutual funds and ETFs can be great core holdings.  Solid, well-managed active funds can also contribute to a well-diversified portfolio.  In all cases make sure you are in the lowest cost share classes available to you.
  • View all accounts as part of a total portfolio.  This means IRAs, your 401(k), taxable accounts, mutual funds, individual stocks and bonds, etc.  Each individual holding should serve a purpose in terms of your overall strategy.  

As far as the game, it should be a good one.  I suspect we will root for Seattle only because of Pete Carroll (we are USC fans and the proud parents of a 2010 USC grad).  On the other hand how can you not like Peyton Manning?

How has the Super Bowl Indicator done?

Going back to the game played in 2000 (following the 1999 season) the Super Bowl Indicator has been right 8 times, wrong 5 times, with one that I would call not applicable.  The 2003 game saw Tampa Bay an NFC team that came into existence post-merger won and the market (defined as the S&P 500 for this analysis) did go up so I will leave it to you be the judge on this one.

Notable misses during this time period:

  • St. Louis (an old NFL team) won in 2000 and the market dropped.
  • Baltimore (an old NFL team that was formerly the original Cleveland Browns) won in 2001 and the market dropped.
  • The New York Giants (an old NFL team) won in 2008 and the market tanked in what was the start of the recent financial crisis.

The Super Bowl Indicator is another fun piece of Super Bowl hype.  Your investment strategy should be guided by a financial plan, not the outcome of a football game.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your financial planning and investing questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services. 

Photo credit:  Flickr

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My Fearless 2014 Investing Forecast


With the start of a new year, there is no shortage of forecasts about almost everything under the sun.  Forecasts about the economy and the financial markets abound throughout the financial news media and on the various cable financial news shows.  Here is my fearless and guaranteed to be accurate 2014 stock market forecast.

English: Dartboard with darts. Suomi: Tikkataulu.

As the top financial officer of one of my retirement plan sponsor clients predicts at the start of each year, I can say with 100% confidence that the stock market as a whole and the various market benchmarks will finish 2014 either higher, lower, or unchanged when compared with the levels at the end of 2013.

Further I will make the same prediction for your overall portfolio and for each of the individual investments you hold including mutual funds, ETFs, individual stocks, bonds, closed-end funds, and all other investment vehicles.

Forecasts are fun, but at the end of the day the performance of the financial markets and your individual holdings is beyond your control.  While the details underlying some of these forecasts are worth reading, as investors we need to focus on the factors that we can control versus worrying about what the market will or won’t do.

Investment expenses 

Morningstar, the PBS Frontline program The Retirement Gamble, and many other sources have highlighted the negative impact that high cost investments can have on your returns and the amount you accumulate for retirement and other goals.

Investment expenses can include:

  • Expense ratios on mutual funds, ETFs, closed-end funds, and variable annuities.
  • Transaction costs to buy or sell investment vehicles, this also includes front and back-end sales charges on mutual funds and annuities.
  • Expenses for investment advice.

Like anything else you want to keep these expenses as reasonable as possible and be sure that you are receiving appropriate value for any expenses incurred.

Portfolio risk 

While many of the pundits are saying stocks are undervalued, with the Dow, the S&P 500, and other market benchmarks at or near record highs the markets are inherently more risky.

For example the S&P 500 had its best year since 1997.  Even after big gains in 1997 the index had solid years in 1998 and 1998 before the Dot Com bubble and subsequent decline from mid 2000 thru most of 2002.  The markets may well continue on this pace in 2014 and beyond, but at some point we will see a correction.  Don’t become overconfident or complacent.

A good way to keep portfolio risk in check is to periodically rebalance your portfolio.  This is very important in a rising market like this one where your equity allocation can quickly exceed your desired allocation.

Along these same lines make sure that your portfolio is diversified.  This does not mean owning a large number of individual holdings but rather having some portfolio holdings whose performance is not closely correlated to the rest of portfolio.

Invest with a plan in mind 

Perhaps the most important investing element under your control is having a financial plan in place.  My biggest beef with “financial advisors” who focus on selling financial products is that they seem to lead with a sales pitch rather than with a financial plan.

Regular readers of this blog know that I am an advocate of an investing strategy that is an outgrowth of your financial plan.  I view investing as a vehicle to achieve your financial and life goals such as funding college for your kids and retirement.  How can you invest in a fashion that supports your goals and is appropriate for your time frame to achieve these goals and your risk tolerance without a financial plan in place?

A look at some famous market forecasters 

As long as I can remember there have been people forecasting what will happen in the financial markets.  Here are a few of the more colorful and noteworthy of this group:

Joe Granville was a well-known market forecaster of the 1970s, 1980s, and 1990s.  He published a popular newsletter, The Granville Market Letter, which had a notoriously poor track record.  He was also quite entertaining.  I had the occasion to see his “show” circa 1980 or ’81 as a graduate student at Milwaukee’s Marquette University.  All I recall is Granville playing the piano in his suit and boxer shorts on stage at a local movie theater.  Mr. Granville died in 2013, rest in peace Joe.  Check out this excellent piece about Granville by Mark Hulbert on Market Watch Four lessons Joe Granville taught us.

Elaine Garzarelli was an analyst with Shearson Lehman when she successfully called the 1987 market crash.  She was subsequently fired from the firm in the mid 90s after the firm cited the high cost of her research operation.  Ms. Garzerelli was a top-notch research analyst who became a bit of celebrity, even serving as a pitchwoman for pantyhose in a TV commercial.  Her call on the markets in 1987 is what launched her career and she is a true “one hit wonder.”

Meredith Whitney made a famous call about impending doom and gloom in the municipal bond market in an interview with 60 Minutes in late 2010.  Guess what, outside of the Detroit bankruptcy her prediction was pretty much a bust.  This hasn’t stopped the likes of CNBC from featuring here as a frequent guest expert. Barry Ritholz summed it up very nicely in this post Meredith Whitney, 2011 Winner, Elaine Garzarelli One-Hit Wonder Award on his excellent blog The Big Picture.

I’m not dismissing market forecasts out of hand; much of the research and analysis behind these forecasts is interesting and valuable to investors.  However at the end of the day investing is about you, your goals, and your tolerance for risk.  Control the factors that you can control and don’t lose a lot of sleep worrying about the factors you can’t control.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your financial planning and investing questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services. 

Photo credit:  Wikipedia

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New Stock Market Highs: It’s Different This Time Right?


Dow Jones (19-Jul-1987 through 19-Jan-1988).

It seems like every time we hit new highs in the stock market, the pundits tell us that somehow it’s different this time.  In 1999 we didn’t need to worry that many of the high-flying tech stocks had no balance sheet or even a viable business plan behind the company.  We all remember how that turned out.

In 2007 Wall Street couldn’t securitize questionable mortgages fast enough.  Mortgages and real estate were very secure investments.  Again we recall how that turned out.

This year the markets are again reaching record highs.  Both the Dow Jones Industrial Average and the S&P 500 stand at record levels as I write this.  No worries say the experts.  Valuations are reasonable and this isn’t a bubble (translation, it’s different this time).  We don’t know how this will turn out, but hopefully those of you with any degree of common sense will recall and apply the lessons of the past 15 years.

Who’s paying the pundits? 

Day after day there are guests on CNBC and similar programs touting stocks.  The chief investment strategist of a major financial services firm recently dismissed any talk of a bubble in stocks at least in the near term.

These folks may be right; perhaps this almost five year old bull market still has a way to go.  But somewhere in the back of my mind I also have to wonder if they aren’t touting stocks because it is in the financial interests of their firms (and perhaps their annual bonuses) for investors to keep investing in stocks.

So what should investors do in this stock market environment? 

What should you do now? 

If you are a regular reader of this blog nothing that I’m going to say below will surprise you nor will it differ from what I’ve been saying for the 4+ years that I’ve been writing this blog or the almost 15 years that I’ve been providing advice to my clients.  For starters:

  • Step back and review your financial plan.  Where do the recent gains in the stock market put you relative to your goals?
  • Does your portfolio need to be rebalanced back to your intended allocations to stocks, bonds, cash, etc.?
  • Review your asset allocation.  Is it still appropriate for your situation?
  • Review the holdings in your portfolio.  In the case of mutual funds and ETFs, how do they compare to their peer groups (for example if you hold a large cap growth fund compare it against other large cap growth funds)?  Would you buy these holdings today for your portfolio?
  • Ignore the market hype from the media and from financial services ads.

If you don’t have a financial plan in place this is a great time to get this done. 

Remember the lessons learned from the market downturns of 2000-2002 and 2008-2009.  While your portfolio will likely sustain losses in a major market downturn or even a more moderate and normal sell-off, diversification helps.  Diversified portfolios fared far better than those that were overweight in equities during the decade 2000-2009.  Portfolios with a diversified equity allocation generally fared better than those heavily weighted to just large cap domestic stocks that use the S&P 500 as a benchmark.

Of note, bonds have been a great diversifier in the past, especially over the past 30 years with the steady decline in interest rates.  With rates at historically low levels at the very least investors may need to rethink how they use bonds and what types of fixed income products to use in their portfolios.

My point is not to imply that a market correction is imminent or that investors should abandon stocks.  Rather the higher the markets go, the greater the risk of a stock market correction.  Make sure your portfolio is properly allocated in line with your financial goals and your tolerance for risk.  Many of the investors who suffered devastating losses in 2008-2009 were over allocated to stocks.  Tragically many couldn’t stomach the losses and sold out near the bottom, booking losses and in many cases missing out on the current market gains.

Revisit your financial plan and rebalance your portfolio as needed.  Most of all use your good common sense.  It’s not different this time regardless of what the experts may say.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

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ETF Price Wars: A Good Thing or Just More Hype?


Fidelity has fired another salvo in the ongoing ETF price wars with the introduction of a number low cost sector ETFs.   Schwab, TD, Blackrock, Vanguard, and others have also participated in this price war in one form or another over the past couple of years.  Low ETF expenses and low or no transaction fees are a good thing, but should they be the deciding factor in your decision where to invest?

Walmart on Black Friday 2009

Understand what you are buying 

As we’ve learned from the PBS Frontline special The Retirement Gamble among other sources, low investment costs are a key determinant accumulating a sufficient retirement nest egg.  The first and most important factor in choosing an ETF to include in your portfolio is to understand what the ETF invests in.

An ETF that tracks an index such as the S&P 500 is pretty simple.  However ETF providers are introducing new products seemingly every day.  According to Chuck Jaffe in a MarketWatch article, a Vanguard report found that “1,400 U.S. listed ETFs track more than 1,000 different indexes. But more than half of these benchmarks had existed for less than six months before an ETF came along to track it.”

Beyond commissions and expense ratios 

Fidelity recently published an excellent piece on its site, Beyond Commissions: An ETF’s Price Matters.  According to the article:

“Commissions aren’t the only cost to consider when buying an ETF. Most investors compare expense ratios, but a less appreciated—yet important factor—is the bid-ask spread, which is the difference between the highest price a buyer is willing to pay for an asset (bid) and the lowest price at which a seller is willing to sell (ask). While investors should consider the Net Asset Value (NAV) of an ETF, the price you pay is a seller’s ask price, which can be at a discount or premium to the NAV.

“It’s important to remember that not all ETFs are created equal,” says Ram Subramanium, president of Fidelity brokerage services. “So, investors may want to look for ETFs with established track records and low bid-ask spreads relative to their peers.”

As an interesting aside here, one of the low cost sector ETFs that Fidelity recently introduced was its materials ETF Fidelity MSCI Materials ETF (FMAT).  This ETF competes directly with the Vanguard Materials ETF (VAW) and has an expense ratio of 0.12% vs. 0.14% for the Vanguard ETF.  However the recent bid/ask spread for the Fidelity ETF was 11.68% vs. 1.57% for the Vanguard ETF (according to Morningstar).  The passage above from the Fidelity article might indicate that the older, more established Vanguard ETF is a better choice here.

Other factors to consider

  • Unless you are a frequent trader or you are purchasing ETFs in small dollar amounts trading commissions really shouldn’t be a major factor in your ETF investing decisions.
  • Consider the full breadth of the investment products available to you as well as your investing objectives when choosing an investment custodian.  ETF price wars are much like loss leaders in retailing.  Major custodians such as Fidelity are using low cost ETFs to get you in the door and to hopefully entice you to use their services to invest in mutual funds, stocks, and other investment products via Fidelity.
  • Are the commission-free ETFs the right ones for your portfolio?  For example a number of the ETFs offered on Schwab’s commission-free platform are not ones that I would generally choose for my client’s portfolios.
  • How cheap is cheap?  I doubt that selling one ETF and buying another to save say 0.02% on the expense ratio makes sense, especially if there are transaction costs or capital gains to consider when selling.
  • How well does the ETF track it’s benchmark index?  I’m often surprised by the variations when comparing two ETFs that I would assume to be identical other than the name of the ETF provider.

Are ETF price wars a good thing for investors?  Yes.  Are ETF price wars being used by major custodians and ETF providers to create hype in the financial press in order to lure investors?  Again yes.  The bottom line here is that your financial plan and investment strategy should guide your choice of ETFs, mutual funds, or any investment vehicle, not a slightly lower cost or the lure of free trades.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.   

Photo credit:  Flickr

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Some Stock Market Perspective amid the Government Shutdown


English: , Deputy Director of Management at th...

Every quarter JP Morgan distributes their Guide to the Markets piece.  Dr. David Kelly and his colleagues prepare perhaps the most extensive, yet concise set of data charts  on the markets and the economy available.  These charts are timely as the news is currently dominated by the short-term issues surrounding the shutdown.  At times like these it can be helpful for investors to take a step back and gain some perspective.

The long view of the stock market 

This chart showing the S&P 500 Index from 1900 through September 30, 2013 covers a lot of history including two World Wars, the Great Depression, Vietnam, the tragedy of 9/11, and the financial meltdown of 2008-09 to name just a few events.  Yet over time, with a lot of bumps in the road to be sure, the overall trend is up.  The past is no indication or guarantee of what might happen in the future, but it is helpful to step back and look at the longer term trends while listening to the all of this gibberish about the shutdown and its possible implications.

What should you do with your investments in response to the government shutdown? In my opinion nothing.  I’ve been in this business since the mid 1990s and there is always some big event happening. In the long run I’ve found that it is a good idea to stick with your long-term financial plan rather than reacting to every economic or political event.

Time and diversification heals many wounds

This next chart illustrates that benefit of being a longer-term investor.  The chart shows the variation in the returns of stocks and bonds over 1 year annual periods and rolling 5, 10, and 20 year rolling periods.  As you can see there are wide fluctuations in the returns for stocks over these 62 annual periods, less fluctuation for bonds, and still less for the hypothetical mix of 50% stocks and 50% bonds.

The fluctuation of just stocks, just bonds, and the 50/50 mix is reduced over 5 year rolling periods and reduced even further over 10 and 20 rolling time periods.  Again, to put this chart into perspective the time period 1950-2012 covers a lot of history including many periods of political and economic fluctuation.

The take-away here is that diversification and a longer-term investing horizon reduce investment volatility.

As I write this we are entering day 3 of the government shutdown.  Our so-called leaders in Washington are still posturing and playing politics with the issue of funding the government.  Certainly if this drags on this could become a more serious issue, more so if we get to mid-October and we hit the country’s debt ceiling limit.

However, investors should keep in mind that there’s always something. Stepping back and reviewing charts like those above can lend some perspective to the madness of situations like the shutdown.  While we don’t know where this is all headed, I suggest focusing on your long-term financial plan and goals such as retirement.

Please contact me at 847-506-9827 for a free 30-minute consultation and to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.   

Photo Credit:  Wikipedia

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Investing Lessons from Vanguard’s Gus Sauter


Graph With Stacks Of Coins

I had the pleasure of attending Vanguard’s Investment Symposium here in Chicago recently.  The entire session was excellent and very well done.  The highlight for me was the opportunity to hear Gus Sauter, Vanguard’s recently retired Chief Investment Officer, speak.  Gus closed his presentation with several investing lessons that I want to share with you.

Equity volatility is a fact of life 

We experienced two sharp, drastic stock market downturns in the first decade of this century:  2000-2002 and 2008-2009.  In addition we had the Flash Crash in 2010 and a sharp downturn in 2011 following the fiscal wrangling in Washington.  Whether event driven or driven by other factors; volatility in the stock market is a fact of investing life.  I suggest that you embrace this volatility or at least factor it into your financial planning assumptions.

Sauter’s suggestion:  Ignore emotional reactions to market volatility and stay the course. 

Despite lower expected returns, bonds still play a significant role 

Coming out of 2008 many very solid bond funds suffered large losses that were based almost entirely on investor’s fears of anything that wasn’t a Treasury.  I was able to earn some very solid returns for my clients post-2008 via the use of selected bond funds.  The poor performance of bond funds YTD in 2013 is likely a preview of the low upside many of see in bond funds going forward, especially when the predictions of higher interest rates actually comes to fruition.

According to Mr. Sauter bonds still have a role in most portfolios as a diversifying element.  Bonds have historically done well when stocks haven’t.  Going forward bonds will likely revert to their more traditional role of reducing investment volatility.

Sauter’s suggestion:  Maintain a balanced portfolio.

Manager selection is difficult, past performance is not a predictor of future returns 

Selecting an active mutual fund manager who is likely to outperform their benchmark on a consistent basis is difficult.  Sauter presented a slide that showed that mutual funds underperformed their benchmark by an average of 120 basis points in the 36 months following their receiving a 5 star rating from Morningstar.  This isn’t a knock on Morningstar as they would be the first to admit that their star system is not a predictive ranking but rather one that rewards funds based upon past performance.

Sauter’s suggestion:  Focus on low cost investing. 

Market timing is difficult 

Sauter cited a USA today graph that showed that over a six month period ending in June of this year buy and hold investors achieved returns that were almost 75% higher than a group of investors with a portfolio turnover rate ranging from 51% – 75% during the same period.  This during a period of strong stock market returns.

Sauter’s suggestion:  Establish a strategic asset allocation and think long-term.

Investing fads come and go.  A long-term investing strategy that is tied to a sound financial plan is timeless.

Please contact me at 847-506-9827 for a free 30-minute consultation and to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.   

Photo credit:  Flickr

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Stock Market Highs, Bond Market Woes, and Some Finance Links

stock market

As I write this the Dow Jones Industrial Average and the S&P 500 stand in record territory.  In fact yesterday the S&P finished above 1,700 for the first time ever.  Bonds on the other hand have started to fizzle with virtually all bond categories suffering a loss during the second quarter.

As an investor what now?  Here are a few thoughts:

Tune out the media 

If you watch CNBC or similar shows the bulk of the guests are encouraging investors to get into stocks even at these high levels.  I’m not saying that new money invested in stocks will turn into losses, but I am saying that record market levels are not a reason to suddenly become euphoric about stocks.

Review your asset allocation

As you review your statements look at your portfolio’s current asset allocation to see if the gains in stocks have gotten you away from your target allocation.  Certainly market highs are a good time to look at rebalancing your portfolio.

Additionally this might also be a good time to review your target allocation in the context of your financial planning goals.  Have the gains in the stock market put you ahead of schedule in terms of reaching financial goals such as retirement and college funding?  Perhaps it’s time to take some risk off of the table and adjust your allocation to stocks a bit lower.  In any event this is a great to review your financial plan if you have one or to get one in place if you don’t.

Review your fixed income strategy 

Bonds and bond funds have operated in a favorable environment for the past 30 years.  This changed in the second quarter, though things have recovered a bit in July.  None the less at some point we will see interest rates rise.  This is a good time to look at your bond and bond fund holdings with and eye towards perhaps shortening up on duration.

It’s been a few weeks since I’ve given recognition to the many excellent investing articles and blog posts out there so here are a few links to some excellent reading:

Mike Piper offers A Look Inside Vanguard’s International Bond Funds at Oblivious Investor.

Ken Faulkenberry explains the difference between Geometric Average vs. Arithmetic Average For Investment Returns? at AAAMP Blog.

Morningstar’s Christine Benz walks us through A Bucket Portfolio Stress Test.

Market Watch’s Brett Arends comments on The return of ‘Dow 36,000’.

Jon  shares Stock Basics: The P/E Ratio at Novel Investor.

Please feel free to contact me at 847-506-9827 for a free 30-minute consultation to discuss your investing and financial planning questions. All services are offered on a fee-only basis, no financial product sales, no commissions. 

Please check out our Mutual Fund Investing page for links to additional posts about mutual fund investing.

Photo credit:  Flickr


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