Objective information about financial planning, investments, and retirement plans

How Much Apple Stock Do You Really Own?


Apple (AAPL) stock has been a great investment over the years. Based upon its stock price and the number of shares outstanding it is the largest U.S stock based upon market capitalization.  This means it is the largest holding in popular index mutual funds and ETFs like Vanguard 500 (VFINX) and the SPDR S&P 500 ETF (SPY).

Chuck Jaffe recently wrote an excellent piece for Market Watch discussing the impact that a recent drop in Apple stock had on a number of mutual funds that hold large amounts of Apple.  He cited a list of funds that had at least 10% of their assets in Apple.  On a recent day when Apple stock fell over 4% these funds had single day losses ranging from 0.22% to 2.66%.

The point is not to criticize mutual fund managers for holding large amounts of Apple, but rather as a reminder to investors to understand what they actually own when reviewing their mutual funds and ETFs.

Stock overlap 

In the late 1990s a client had me do a review of their portfolio as part of some work I was doing for the executives of the company. He held 19 different mutual funds and was certain that he was well-diversified.

The reality was that all 19 funds had similar investment styles and all 19 held some of the popular tech stocks of the day including Cisco (CSCO), Intel (INTC) and Microsoft (MSFT). As this was right before the DOT COM bubble burst in early 2000 his portfolio would have taken quite a hit during the market decline of 2000-2002.

Understand what you own 

If you invest in individual stocks you do this by choice. You know what you own. If you have a concentrated position in one or more stocks this is transparent to you.

Those who invest in mutual funds and other professionally managed investment vehicles need to look at the underlying holdings of their funds.  Excessive stock overlap among holdings can occur if your portfolio is concentrated in one or two asset classes. This is another reason why your portfolio should be diversified among several asset classes based upon your time horizon and risk tolerance.

As an extreme example someone who works for a major corporation might own shares of their own company stock in some of the mutual funds and ETFs they own both inside their 401(k) plan and outside. In addition they might directly own shares of company stock within their 401(k) and they might have stock options and own additional shares elsewhere. This can place the investor in a risky position should their company hit a downturn that causes the stock price to drop.  Even worse if they are let go by the company not only has their portfolio suffered but they are without a paycheck from their employer as well.

Concentrated stock positions 

Funds holding concentrated stock positions are not necessarily a bad thing. A case in point is Sequoia (SEQUX) which has beaten its benchmark the S&P 500 by an average of 373 basis points (3.73 percentage points) annually since its inception in 1970.  Sequoia currently has about 26% of its portfolio in its largest holding and another 8% in the two classes of Berkshire Hathaway stock.  Historically the fund has held 25-30 names and at one time held about 30% of the portfolio in Berkshire Hathaway (BRK.A).  Year-to-date through August 14, 2015 the fund is up 16.5% compared to the benchmark’s gain of 2.88%.

The Bottom Line 

Mutual fund and ETF investors may hold more of large market capitalization stocks like Apple and Microsoft than they realize due to their prominence not only in large cap index funds but also in many actively managed funds. It is a good idea for investors to periodically review what their funds and ETFs actually own and in what proportions to ensure that they are not too concentrated in a few stocks, increasing their risk beyond what they might have expected.

Please feel free to contact me with any questions, comments or suggestions about this article or anything else on The Chicago Financial Planner. Thank you for visiting the site.

Schwab Intelligent Portfolios: The Evolution of the Robo Advisor?


Charles Schwab (SCHW) recently launched its much anticipate entry into the Robo Advisor space, Schwab Intelligent Portfolios.  Schwab instantly will become a major player here simply because they are Schwab.

I honest don’t know if Intelligent Portfolios are a good thing for investors or not.  I do suspect that the introduction of Schwab Intelligent Portfolios represents a big step in the evolution of Robo Advisors.

Competitor reactions to Schwab Intelligent Portfolios 

Betterment CEO Jonathan Stein appeared on CNBC recently and frankly I was taken aback at how critical he was of the new Schwab offering.

Wealthfront’s CEO wrote a very critical post about Schwab’s entrance into the Robo Advisor space.

These reactions alone tell me that Schwab’s Intelligent Portfolios are a big deal and a potential game changer in the Robo Advisor world.  Wealthfront and Betterment are two of the stronger players in the Robo Advisor space.  Both are well-funded and Betterment has forged a deal with Fidelity to allow them to offer Betterment to the advisors who custody assets with Fidelity Institutional.  The reactions of these executives tell me they are more than a bit concerned about Schwab entering their space.

Schwab Intelligent Portfolios 

Schwab Intelligent Portfolios have a low $5,000 minimum investment, they carry no management fees, investors will not incur any direct transaction costs and there are no account fees.

Like most Robo Advisors, Intelligent Portfolios will be powered by algorithms using ETFs across 20 different asset classes, as well as a cash allocation invested in a bank account at a Schwab-affiliated bank.

The Schwab Intelligent Portfolios are bit different than other Robo Advisor models in that they will allocate a significant percentage of an investor’s portfolio to several Schwab ETFs based on the fundamental indexing approach of advisor Rob Arnott. The service will utilize model portfolios for investors based upon their goals and risk tolerance.

Additionally each of the portfolios has a significant allocation to cash via Schwab’s affiliated bank. The allocation would range from 7% for a 30-year-old investor to 15% for a more conservative 65 year-old investor. The cash allocations have initially drawn a skeptical reaction from some financial advisors.

While there will be no fees for the service, Schwab will make money from the expense ratios of the ETFs, as well as the money invested via the Schwab affiliated bank.  The Intelligent Portfolios will include tax-loss harvesting for investors with at least $50,000 invested as well as automatic rebalancing.

Additionally Schwab has announced the launch of an institutional version of the Intelligent Portfolios during the second quarter of 2015 for use by financial advisors who custody assets with Schwab Institutional.

The Evolution of Robo Advisors 

Schwab’s Intelligent Portfolios represents the latest entry into the Robo Advisor space by a major financial services firms.

Fidelity Investments has formed partnerships with Betterment and Learnvest that allows financial advisors who custody assets with them to offer these services to their clients under their own umbrella.  This is a great way for these advisors to court younger clients who might not meet their normal minimums and work with them in a meaningful way until they might become full-service clients in the future.

Vanguard has launched its own Robo Advisor service and it has drawn over $4.5 billion in assets without any advertising.  Most of this money has likely come from investors with money already at Vanguard and represents an additional 20 to 40 basis points in revenue on money that is already there.

For the very reasonable fee Vanguard offers clients a financial plan, asset allocation advice, rebalancing and ongoing financial advice.  They likely will roll this service out more widely in the near future and they reportedly are thinking of offering a version for financial advisors whom their institutional sales group already calls on.

Overall the Robo Advisor offerings by Schwab, Fidelity, Vanguard, TD Ameritrade and some others represent the next step in the evolution of Robo Advisors.

At some point I envision the use of Robo Advisors by the likes of Schwab and the financial advisors who custody with them almost like Major League Baseball uses the minor leagues as a farm system.  Clients who want solid advice but who don’t meet the minimums of many financial advisors will start out in some sort of online service and as their accounts grow and their needs evolve they will move to the “big leagues” and become full service clients.

Overall I view the evolution of the Robo Advisor as a good thing for both clients and financial advisors.  For clients this represents another choice in how to get financial advice.  For financial advisors it represents a viable way to serve clients who the financial services industry has not done a good job of serving in the past.

Read more about Robo Advisors 

We Interrupt This Program To Bring You… RoboWars a great piece on I heart Wall Street.

Broken Values & Bottom Lines the piece I mentioned above by Wealthfront CEO Adam Nash.

I asked three robots how I should invest, got three different answers by Yahoo! Finance’s Michael Santolli.

I’ve written several pieces on the topic for Investopedia:

Schwab’s New Robo-Advisor Service Explained

Robo-Advisors and a Human Touch: Better Together?

Is An Online Financial Advisor Right For You? 

I invite you to contact me to ask any questions that you might have, to tell me what you like or don’t like about the site, and to suggest topics that you would like to see covered here in the future. 

Please check out our Resources page for tools and services that you might find useful.

Do I Own Too Many Mutual Funds?


In one form or another I’ve been asked by several readers “… do I own too many mutual funds?”  In several cases the question was prompted by the number of mutual fund holdings in brokerage accounts with major brokerage firms including brokerage wrap accounts.  One reader cited an account with $1.5 million and 35 mutual funds.

So how many mutual funds are too many?  There is not a single right answer but let’s try to help you determine the best answer for your situation.

The 3 mutual fund portfolio 

I would contend that a portfolio consisting of three mutual funds or ETFs could be well-diversified.  For example a portfolio consisting of the Vanguard Total Stock Market Index (VTSMX), the Vanguard Total International Stock Index (VGTSX) and the Vanguard Total Bond Index (VBMFX) would provide an investor with exposure to the U.S. stock and bond markets as well as non-U.S. developed and emerging markets equities.

As index funds the expenses are low and each fund will stay true to its investment style.  This portfolio could be replicated with lower cost share classes at Vanguard or Fidelity if you meet the minimum investment levels.  A very similar portfolio could also be constructed with ETFs as well.

This isn’t to say that three index funds or ETFs is the right number.  There may be some additional asset classes that are appropriate for your situation and certainly well-chosen actively managed mutual funds can be a fit as well.

19 mutual funds and little diversification 

A number of years ago a client engaged my services to review their portfolio.  The client was certain that their portfolio was well-diversified as he held several individual stocks and 19 mutual funds.

After the review, I pointed out that there were several stocks that were among the top five holdings in all 19 funds and the level of stock overlap was quite heavy.  These 19 mutual funds all held similar stocks and had the same investment objective.  While this client held a number of different mutual funds he certainly was not diversified.  This one-time engagement ended just prior to the Dot Com market decline that began in 2000, assuming that his portfolio stayed as it was I suspect he suffered substantial losses during that market decline.

How many mutual funds can you monitor? 

Can you effectively monitor 20, 30 or more mutual fund holdings?  Frankly this is a chore for financial professionals with all of the right tools.  As an individual investor is this something that you want to tackle?  Is this a good use of your time?  Will all of these extra funds add any value to your portfolio?

What is the motivation for your broker? 

If you are investing via a brokerage firm or any financial advisor who suggests what seems like an excessive number of mutual funds for your account you should ask them what is behind these recommendations.  Do they earn compensation via the mutual funds they suggest for your portfolio? Their firm might have a revenue-generating agreement with certain fund companies.  Additionally the rep might be required to use many of the proprietary mutual funds offered by his or her employer.

Circumstances will vary 

If you have an IRA, a taxable brokerage account and a 401(k) it’s easy to accumulate a sizable collection of mutual funds.  Add in additional accounts for your spouse and the number of mutual funds can get even larger.

The point here is to keep the number of funds reasonable and manageable.  Your choices in your employer’s retirement plan are beyond your control and you may not be able to sync them up with your core portfolio held outside of the plan.

Additionally this is a good reason to stay on top of old 401(k) plans and consolidate them into an IRA or a new employer’s plan when possible.

The Bottom Line 

Mutual funds remain the investment of choice for many investors.  It is possible to construct a diversified portfolio using just a few mutual funds or ETFs.

Holding too many mutual funds can make it difficult to monitor and evaluate your funds as well as your overall portfolio.

Please feel free to contact me with your questions. 

Please check out our Resources page for more tools and services that you might find useful.

What is a Hedge Fund?


The term hedge fund is used often in the financial press.  I suspect, however, that many investors do not really know what a hedge fund is.

What is a Hedge Fund?





Investopedia defines a hedge fund as follows:

“An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).” 

Here are a few basics about hedge funds to help you understand them.  Note this is certainly not meant to be an in-depth tutorial but rather is meant to provide an introduction to hedge funds.

Who can invest in hedge funds? 

In order to invest in a hedge fund you must be an accredited investor.  The current definition of an accredited investor is someone with a net worth of $1 million (excluding the equity in their home) and at least $200,000 in income ($300,000 with a spouse) over the past two years.  Many hedge fund investors are institutional investors such as foundations, endowments and pension plans.  About 65 percent of the capital invested in hedge funds comes from institutional investors.

What is the minimum investment? 

The minimum required to invest is often $1 million or more though some smaller hedge funds and funds of funds may have lower minimums.  New companies like Sliced Investing are seeking to change these high minimums by allowing investors to invest as little as $20,000.

Do I have access to my money? 

Unlike mutual funds, ETFs, closed-end funds and individual stocks hedge funds typically do not offer daily access to your money.

Some hedge funds allow investors to subscribe (invest) or redeem their money monthly, for others this might be quarterly or based upon some other time period.  Most hedge funds will require advanced notice for redemptions which might be as long as 180 days.  This allows the fund managers time to raise sufficient cash and allows for an orderly sale of fund investments especially if the redemption is a significant amount.

Some hedge funds also require a lock-up which means that there are no redemptions allowed during this initial period.  A typical lock-up period is one year, though some are as long as two years.  In some cases the lock-up period is “soft” meaning that redemption can be made but there will often be a penalty ranging from 2 percent to as high as 10 percent. 

Some hedge funds may also have the ability to enforce “gates” on redemptions which means they can decide to process only a portion of the redemptions requested.  This provision came into focus during the 2008-2009 market downturn as hedge fund redemptions requests swelled as many investors sought to raise cash.

What types of fees are charged? 

The fees charged by hedge funds vary widely.

Many hedge funds charge a management fee of 2 percent or more.

There might also be incentive fees of 10 to 20 percent of the fund’s profits or more.  This rewards the fund manager for superior performance.  The flip side of this is that the manager generally only collects an incentive fee if the fund’s performance exceeds its former highs, known as a high water mark.

If a fund loses 5 percent in a given year, no incentive fees will be paid to the manager the following year until the 5 percent loss is made up.

The term two and 20 is a common one in the hedge fund world meaning that the fund would charge a 2 percent management fee and a 20 percent incentive fee.  This may seem pricey but if the performance is stellar then investors won’t mind paying it. 

What types of investment strategies are available? 

There is a vast range of investment strategies across the hedge fund landscape.  These might include long-short, global macro, market neutral, convertible arbitrage, distressed securities and many others.  Additionally there are a number of fund of funds offered which means that the fund offers a collection of strategies and fund managers under one umbrella.   

What should I consider before investing in a hedge fund?

From reading the above you might ask yourself why would I invest in hedge funds?  Let’s remember that hedge funds are considered alternative investments.  Ideally they will have a relatively low correlation to the traditional long-only equity and fixed income investments in your portfolio.  At their best well-managed hedge funds can add balance and reduce the overall risk of your portfolio, in some cases the strategies are designed to provide absolute returns across all investing environments.

Before investing in a hedge fund or any alternative investment make sure you have considered and fully understand the following:

  • The fund’s investment strategy.
  • How this investment strategy fits with your overall portfolio and investing strategy.
  • What the fund “brings to the table” that you can’t get with more traditional long-only stock and bond investments.
  • Who is managing the fund and their history and investment track record.
  • The required minimum investment.
  • Any redemption restrictions and/or lock-up periods.  Make sure that you won’t need to tap this money during this time period. 

The Bottom Line 

Like any investment option you might consider it is important to understand the pros and cons of hedge funds in general and any specific fund or strategy that you might be considering for your portfolio.

Disclosure: This blog post was written for Sliced Investing pursuant to a paid content arrangement I have with the company’s representatives as part of an effort to raise awareness about alternative investment options. All views expressed are entirely my own, and were not influenced or directed by Sliced Investing.

Photo courtesy of Wikipedia

Robo Advisors – A Brave New World?


The piece below is written by Doug Dahmer and originally appeared under the title “Robo-Advisors” – rise of the machines on Jon Chevreau’s site Financial Independence Hub.  Jon is at the forefront of a movement he calls “Findependence.”  This is essentially looking at becoming financially independent so that you can pursue the lifestyle of your choosing.   Jon is a Canadian author and journalist, check out his book Findependence Day.  Jon has contributed several prior posts here as well. 

I know Isaac Asimov’s Three Laws of Robotics, I read Arthur C. Clarke’s 2001: A Space Odyssey and I love the Terminator movies (I’ll be back!).

From all this I know three things: Robots are very smart. Robots always start off to help you. Robots have a tendency to turn on you.

One of the newest crazes and buzzwords in personal finance is: “Robo-Adviser.” If you’re not familiar with the term, it refers to investment management by algorithm in the absence of human input.

With a “Robo” you are asked to complete an on-line risk assessment questionnaire. Your responses determines the prescribed portfolio of ETFs (Exchange-Traded Funds) with a built-in asset allocation best suited to your needs. Once a year the portfolio is rebalanced to this prescribed asset allocation recipe. 

Dynamics change as shift from Saving to Spending

The “Robo” approach relies heavily upon a basic “buy/hold/rebalance” investment strategy. This passive strategy can work to your advantage during your accumulation years. These are the years when time is your friend, and dollar cost averaging through market cycles offers the opportunity to give your returns a boost.

However, as we get older and begin to prepare for and transition into our spending years, things change. Unfortunately, too few people realize that the investment strategies that served us well during our savings years turn on their head and work to our disadvantage as the flow of funds reverses and savings turns to spending. 

Dollar Cost Ravaging

Suddenly time changes from friend to foe where “dollar cost averaging” turns to “dollar cost ravaging” or what we call, the Mathematics of Catastrophe. (More about which in our next Hub blog). During the second half of your life the simplistic money management approach followed by “Robo- Advisers” can start to look like a “deed of the devil.”

Another concern is that “Robos” are unable to deal with the reality of expense variability. If you believe that in retirement, a fixed, annual withdrawal rate from a diversified portfolio will address your income needs I can with confidence suggest you are at best short-changing yourself and at worst setting yourself up for a cataclysmic financial failure.

I have been in this business a long time and know beyond a shadow of a doubt that a properly constructed life plan is very important in the second half of your life. It is only when you know what you want to do, when you want to do it and what it will cost to do it, that you can start to build the financial framework to make it happen.

Only through your life plan are you able to anticipate years of surplus and years of deficits and take the steps to bend them to your benefit. You need to bring together cash flow optimization, tax management and pension style investment management to make it happen and in the process add hundreds of thousands of dollars to your lifetime assets and cash flow. 

Robos ill equipped to link life to investment plan

Linking your life plan to your investment plan is the secret to success, but “robo investing” is not equipped to handle the nuances of that linkage. A Retirement Income Specialist knows that the type of money management you need is much more complex where the cash-flow demands outlined in your life plan need are linked to your investment plan. Tax planning, income optimization and risk mitigation means it is dangerous to leave your investment management running on auto-pilot.

Isaac Asimov’s first law of robotics holds that: A robot may not injure a human being or, through inaction, allow a human being to come to harm.

“Robo-adviser” firms would do well to review this law. When it comes to investors heading into the second half of their lives, “Robo Advisers” may well be about to break it. 

Doug Dahmer, CFP, is founder and CEO of Emeritus Retirement Income Specialists. With offices in Toronto and Burlington, Emeritus’ C3 process is one of the industry’s most comprehensive retirement planning processes. 

Online financial advisors or Robo Advisors are popping up all over the place and if you believe the financial press they are the future of financial advice.  In part I believe they are or will at least shape the future of financial advice.  I weighed in on this topic recently via  Is An Online Financial Advisor Right For You? for Investopedia.

Please feel free to contact me with your questions.  

Check out an online service like Personal Capital  to manage all of your investment and retirement accounts all in one place. Please check out our Resources page for more tools and services that you might find useful.

What I’m Reading-Packers Reign Supreme Edition


It’s Cyber Monday (can you say contrived promotional event) and I have already been to O’Hare to drop my daughter off.  Amazing how crowded it was even at 5 AM.

Great football games over the holiday weekend, but none better than the Packers beating the Patriots yesterday in what was deemed a Super Bowl preview.  Feels good now but the next week is another game.

Here are a few financial articles I suggest for some good Post-Thanksgiving financial reading:

Jim Blankenship offers some Year-End Charitable Giving Tips at Getting Your Financial Ducks in a Row.

Mike Piper answers a reader question Which Accounts Should I Spend From Each Year In Retirement? at Oblivious Investor.

Christine Benz provides an example of A Conservative Retirement Saver Portfolio for ETF Investors at Morningstar.com.

Larry Light shared a piece from financial advisor and blogger Jeff Rose Make Your Money Last In Retirement (Pt. 2) at Forbes.

Ben Steverman writes Hedge Funds Lose Money for Everyone, Not Just the Rich at Bloomberg.

John Wasik shares Five Ways to Protect Yourself on Cyber Monday at Forbes.

For now the Packers reign supreme but the Falcons visit Lambeau for next week’s Monday Night game and they will pose a tough challenge.  Enjoy Cyber Monday and the rest of the week.

5 Reasons Investors Use ETFs


Fidelity recently polled nearly 600 high net worth investors to gain a better understanding of their thinking about the market and where they plan to invest in 2014. Notably, 43% of investors said they are planning to increase their investment in ETFs over the next 12 months.

Fidelity created this graphic that highlights 5 reasons investors use ETFs (or don’t use them).

 5 Reasons Investors Use ETFs

Other key findings of the Fidelity study include:

  • Despite the small gains this year in the DJIA (1.6% as of June 5, 2014), 55% believe it will end the year up 5% or more.
  • When it comes to the U.S. economy, investors continue to feel cautious. The majority (71%) feels it’s headed in the right direction vs. 29% who say it’s stagnant or headed in the wrong direction.
  • 62% of investors also believe a market correction—when a major index declines by at least 10% from a recent high—is likely to happen in 2014.
  • The indicators that would motivate the most investors holding cash to re-invest into the market are a stronger U.S. economy (28%) and higher interest (12%). 25% report holding no cash on the sidelines.
  • Over half (59%) of investors prefer to grow their portfolio by investing in domestic equities vs. 18% in international equities.
  • Over a third (35%) invest in ETFs for broad market exposure (indexes), while 27% of investors don’t invest in ETFs because they need to learn more. 

Advantages of ETFs 

ETFs have several features that are advantageous to investors:

  • ETFs are generally transparent regarding their holdings.
  • ETFs can be bought and sold during the trading day.  This offers additional opportunities for investors.
  • Stop orders can be used to limit the downside movement of your ETFs.
  • ETFs can also be sold short just like stocks.
  • Many index ETFs carry low expense ratios and can be quite cheap to own.
  • Many ETFs are quite tax-efficient.
  • ETFs can 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 serve to promote excessive trading that could prove detrimental to investors.
  • ETF providers have introduced a proliferation of new ETFs in response to their popularity.  Some of these ETFs are excellent, some are not.  Many new ETFs are based on untested benchmarks 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.  

ETFs have proven to be a great innovation for investors.  If used properly they are a great addition to your investing toolkit.  Like any investment make sure you understand what you are investing in (and why) before you invest.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  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. 

Time for a Mid-Year Financial Review


It’s hard to believe that the first half of the year has come and gone already.  We enjoyed having all three of our adult children home over the holiday weekend.

Financial Review

Mid-year is always a good time for a financial review and 2014 is no exception.  So far in 2014:

  • Various stock market indexes are at or near record high levels. The Bull Market in stocks celebrated its fifth anniversary earlier this year and through June 30 the S&P 500 Index is up 190% since the March 2009 lows.
  • Bond funds and ETFs have surprised us by posting some pretty decent returns.  This is contrary to what many expected, especially in the wake of weak performance in 2013.
  • After largely not participating in the in the strong equity markets of 2013 REITS have been a top performing asset class YTD through the second quarter.
  • Emerging markets equity lost money as an asset class in 2013 and has also staged a nice recovery YTD through the first half of 2014.
  • Small cap stocks have underperformed so far in 2014 after a very outstanding 2013. 

In just about any year at the midpoint there will be asset classes that outperformed and some that have underperformed expectations.  That’s completely normal.  As far as your mid-year financial review here are a few things to consider.  These apply whether you do this yourself or if you are working with a financial advisor.

Review your financial plan 

Whether you do this now or at some other point in the year you should review your financial plan at least annually.  Given the robust stock market gains of the past five years this is a particularity opportune time for this review.

  • How are you tracking towards your financial goals?
  • Have your investment gains put you further ahead than anticipated?
  • Is it time to rethink the level of investment risk in your portfolio? 

Adjust your 401(k) deferral

If you aren’t on track to defer the maximum amount of your salary allowed ($17,500 or $23,000 if you are 50 or over at any point in 2014) try to up the percentage of your salary being deferred to the extent that you can.  Every little bit helps when saving for retirement.

Rebalance your portfolio 

This should be a standard in your financial playbook.  Different types of investments will perform differently at different times which can cause your overall portfolio to be out of balance with your target.  Too much money allocated to stocks can, for example, cause you to assume more risk than you had anticipated.

While it is a good idea to review your asset allocation at regular intervals, you don’t want to overdo rebalancing either.  I generally suggest that 401(k) participants whose plan offers auto rebalancing set the frequency to every six months.  More frequent rebalancing might be appropriate if market conditions have caused your portfolio to be severely misallocated.

Note some investment strategies call for a more tactical approach which is fine.  If you are using such a tactical approach (perhaps via an ETF strategist) you will still want to monitor what this manager is doing and that their strategy fits your plan and tolerance for risk.

Review your individual investments 

Certainly you will not want to make decisions about any investment holdings based upon short-term results but here are a few things to take into account during your mid-year financial review:

  • If you hold individual stocks where are they in relation to your target sell price?
  • Have there been key personnel changes in the management of your actively managed mutual funds?
  • Are any of your mutual funds suffering from asset bloat due to solid performance or perhaps just the greed of the mutual fund company?
  • Are the expense ratios of your index mutual funds and ETFs among the lowest available to you?
  • Has your company retirement plan added or removed any investment options?
  • Is the Target Date Fund option in your 401(k) plan really the best place for your retirement contributions? 

Review your company benefits 

I know its July but your annual Open Enrollment for employee benefits at most employers is coming up in the fall.  This is the time where you can adjust your various benefits such as health insurance, dental, etc.  Take a look at your benefits usage and your family situation as part of your financial review to see if you might need to consider adjustments in the fall.

Review your career status 

How are things going in your current job?  Are you on a solid career path?  Is it time for a change either internally or with a new employer?

A key question to ask yourself is whether you feel in danger of losing your job.  Often companies will time their layoffs for the second half of the year.  Ask yourself if approached with a buyout offer to leave would you take it.

For most of us our job is our major source of income and the vehicle that allows us to save and invest to meet financial goals such as retirement and sending our kids to college.

Start a self-employed retirement plan 

If you are self-employed you need to think about starting a retirement plan for yourself.  The SEP-IRA and the Solo 401(k) are two of the most common self-employed retirement plans, but there are other alternatives as well.

You work too hard not to save for your retirement.  If you don’t have plan in place for yourself it is time to take action.

Mid-year is a great time for a financial review.  Take some time and take stock of your situation.  Failing to plan your financial future is a plan to fail financially.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  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. 

Photo credit:  Flickr

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 feel free to contact me with your questions. 

Check out an online service like Personal Capital to manage all of your accounts all in one place.  Please check out our Resources page for more tools and services that you might find useful.

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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?

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

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 with your investing and financial planning questions. Check out an online service like Personal Capital to manage all of your accounts all in one place or purchase the latest version of Quicken. Check out our Resources page for more tools and services.

Photo credit:  Flickr

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