Click on title Important Digression
Go to the column, "Revealing Excessive 401k Fees"
Saturday, June 4, 2011
Friday, June 3, 2011
What? Stocks?
Continuing where we left off, if you are going to use the four asset classes I've been discussing, then what stocks, shat bonds and what real estate do you use?
First, if you own a house, and plan to continue to do so, then include the equity in the house as part of your portfolio in the asset class real estate. Then add up you investable funds beyond that.
Let's say it comes to $100,000 plus $100,000 of home equity. Then you may not want to include additional real estate in your investment portfolio of $100,000. You can't sell off part of your house, it falls in the illiquid asset category.
If you don't own a house, or choose NOT to include the equity as part of your investment portfolio, then you are going to divide up you $100,000 into some combo of thee big 4.
For argument's sake, let's keep it at 25% per assert class. That is 1/4th of the $100,000 goes into stocks, 1/4 to bonds, 1/4 to real estate, 1/4 to cash.
Now, what stocks?
Unless you have illegal inside information, there is no reliable way to value one individual stock over another. I know brokers talk about over-valued and undervalued, as if there were real prices that would express perfect equilibrium, but there aren't. If that was true, all stocks would sell at some multiple of their earnings, the same multiple. Say 10x last twelve months earnings. But the stock market doesn't work that way. Price/earnings multiples are all over the lot. The market collectively (all the bets of all the investors) decides to speculate on future prospects, not past success or failure. Any company's successful widget today can, via competition or product flaws, become tomorrow's whatsit, in the product trash-bin.
Your solution is to buy a basket of stocks, not an individual stock.
There is one trade off to buying one or two stocks only. You are more likely to hit the ball out of the park, and equally likely to go down in flames. So, like Dirty Harry asked, "Do you feel lucky?"
Buy an index. Do not pay a mutual fund manager to 'pick' stocks, he can't do it any better than you and a dartboard. (This includes private money managers, hedge funds or God. Even God can't pick stocks.)
Tomorrow. we'll talk about what indexes, although most of the discussion can also be revisited in earlier posts.)
First, if you own a house, and plan to continue to do so, then include the equity in the house as part of your portfolio in the asset class real estate. Then add up you investable funds beyond that.
Let's say it comes to $100,000 plus $100,000 of home equity. Then you may not want to include additional real estate in your investment portfolio of $100,000. You can't sell off part of your house, it falls in the illiquid asset category.
If you don't own a house, or choose NOT to include the equity as part of your investment portfolio, then you are going to divide up you $100,000 into some combo of thee big 4.
For argument's sake, let's keep it at 25% per assert class. That is 1/4th of the $100,000 goes into stocks, 1/4 to bonds, 1/4 to real estate, 1/4 to cash.
Now, what stocks?
Unless you have illegal inside information, there is no reliable way to value one individual stock over another. I know brokers talk about over-valued and undervalued, as if there were real prices that would express perfect equilibrium, but there aren't. If that was true, all stocks would sell at some multiple of their earnings, the same multiple. Say 10x last twelve months earnings. But the stock market doesn't work that way. Price/earnings multiples are all over the lot. The market collectively (all the bets of all the investors) decides to speculate on future prospects, not past success or failure. Any company's successful widget today can, via competition or product flaws, become tomorrow's whatsit, in the product trash-bin.
Your solution is to buy a basket of stocks, not an individual stock.
There is one trade off to buying one or two stocks only. You are more likely to hit the ball out of the park, and equally likely to go down in flames. So, like Dirty Harry asked, "Do you feel lucky?"
Buy an index. Do not pay a mutual fund manager to 'pick' stocks, he can't do it any better than you and a dartboard. (This includes private money managers, hedge funds or God. Even God can't pick stocks.)
Tomorrow. we'll talk about what indexes, although most of the discussion can also be revisited in earlier posts.)
Thursday, June 2, 2011
Doing a Little Homework
Experience is a hard teacher. It gives the test before the lesson. Do try and learn from others' bad decisions, saves you from having to learn from your own.
Before you dig in too much deeper, go way back to earlier posts on diversification and rebalancing.
Rebalancing is the only sane way to handle a portfolio. A quickie summary is, if you have your four asset classes divided equally, 25% of your investable funds would be in each. Then, each year, you see how you did. If stocks were UP 20%, bonds flat, cash would earn a bit in money market and real estate was down, then you would sell some of the stocks, and reinvest that capital in real estate, so that your get back to 25% in each asset class.
You are buying LOW, and selling HIGH, which is the idea. People talk about it, but they almost never DO it. The reason generally boils down to, "But I'm selling off some of the GOOD one and buying more of the BAD one."
Those people believe trees grow to the sky. And letting one asset class run way ahead of the others is a sure way to minimize your profit over time.
Diversification is up next. We know we have, for most people, four asset classes. Stocks, bonds, cash, real estate.
But what stocks, what bonds, what real estate? Cash is money market, there's not much to think about, a short CD, T-Bill or money market all accomplish the same thing, safe principal, a few bucks in interest or dividends.
Next up, your choices for the other three.
Before you dig in too much deeper, go way back to earlier posts on diversification and rebalancing.
Rebalancing is the only sane way to handle a portfolio. A quickie summary is, if you have your four asset classes divided equally, 25% of your investable funds would be in each. Then, each year, you see how you did. If stocks were UP 20%, bonds flat, cash would earn a bit in money market and real estate was down, then you would sell some of the stocks, and reinvest that capital in real estate, so that your get back to 25% in each asset class.
You are buying LOW, and selling HIGH, which is the idea. People talk about it, but they almost never DO it. The reason generally boils down to, "But I'm selling off some of the GOOD one and buying more of the BAD one."
Those people believe trees grow to the sky. And letting one asset class run way ahead of the others is a sure way to minimize your profit over time.
Diversification is up next. We know we have, for most people, four asset classes. Stocks, bonds, cash, real estate.
But what stocks, what bonds, what real estate? Cash is money market, there's not much to think about, a short CD, T-Bill or money market all accomplish the same thing, safe principal, a few bucks in interest or dividends.
Next up, your choices for the other three.
Tuesday, May 31, 2011
Asset Classes Simplified
Now that we've figured out liquid and illiquid, what are asset classes? I like simplicity. Complication frequently passes for wisdom, but it really is a method for obfuscating the issue.
If you can't understand it, then you must need an 'advisor' who does. Then you can pay him/her to make decisions for you. If it's simple, you don't need them, and that doesn't get their kids through college. That's why lawyers like more laws, doctors like more illnesses and accountants like more convoluted tax codes.
So, there are, to my mind, four asset classes. Things the average human being can realistically invest in.
Stocks
Cash
Bonds
Real Estate
People will throw up stuff like gold and silver, stamps, art. That's fine, but regular people don't buy that stuff. For collectibles, it's almost impossible to overcome the difference between what you pay and what you can resell for, unless it is your children's children who are doing the selling. The markups on art, stamps, antiques is simply too high. If you bought it for $1,000, and try and resell it the next day, you'll be offered $500. Unless you can find your own sucker at some point.
Gold and silver are less so, and I suppose there's a place for them. I watched the Hunts go broke 'playing' silver, and the price of gold do nothing for thirty years, then a recent boom. Personally, I think the current price is preposterous, approaching tulip bulb levels at their peak, but what do I know? I do know there's no shortage of gold, and no shortage of diamonds. It's merely a controlled market creating artificially high prices. Maybe I'll go into it in another blog.
In setting up your investment portfolio, you can do quite well with a mixture of the four asset classes above.
How much you devote to each, what percentage of your investable dollars, is a matter of personal risk tolerance. Can't answer that one for you. Here's some general guidelines.
You are a finite entity. Sorry to break the news, but you not only can't take it with you, but past a certain age, it doesn't do you much good. After age 75 or 80, what in heck can you spend the money doing? Hang gliding, mountain climbing, Parkour? Existing in doctor's offices and hospitals? Early bird dinner specials? The horror of baby boomers 'rockin' out' to Proud Mary?
Institutions, like Endowments, Trusts, Pension plans, are, at least theoretically, infinite entities, you are not.
That means they can take on more risk than an individual, because an individual retires and starts spending his savings and investments, or he dies and his inheritors start spending it.
Consequently, a Trust or Endowment can buy riskier investments because they have a very long time horizon for the investment to work out favorably.
On the other hand, I just made an argument for spending it while you're young enough to enjoy it. And there's one thing you can bank on, you can't spend money and save it at the same time. (Although realtors will happily explain why a huge mortgage and contributing to a 401k both make sense. They don't, that's where the complicated jive I mentioned above comes in.)
We'll chat more about houses (gag) later.
In sum, while the temptation to spend, spend, spend while you are young and lovely is there, you might want to think over being laid off at 55, at which point no corporation on earth will pay you a living wage, (overcompensated CEO's excepted) and you're 10 or more years out from social security, which isn't a living wage either.
You'll need something in the bank or investment account to draw down for those Proud Mary moments unless you want to burden your children, or don't mind shacking up in a cardboard box.
Next time, we'll talk about WHAT stocks, bonds, cash and real estate. Stay in touch.
If you can't understand it, then you must need an 'advisor' who does. Then you can pay him/her to make decisions for you. If it's simple, you don't need them, and that doesn't get their kids through college. That's why lawyers like more laws, doctors like more illnesses and accountants like more convoluted tax codes.
So, there are, to my mind, four asset classes. Things the average human being can realistically invest in.
Stocks
Cash
Bonds
Real Estate
People will throw up stuff like gold and silver, stamps, art. That's fine, but regular people don't buy that stuff. For collectibles, it's almost impossible to overcome the difference between what you pay and what you can resell for, unless it is your children's children who are doing the selling. The markups on art, stamps, antiques is simply too high. If you bought it for $1,000, and try and resell it the next day, you'll be offered $500. Unless you can find your own sucker at some point.
Gold and silver are less so, and I suppose there's a place for them. I watched the Hunts go broke 'playing' silver, and the price of gold do nothing for thirty years, then a recent boom. Personally, I think the current price is preposterous, approaching tulip bulb levels at their peak, but what do I know? I do know there's no shortage of gold, and no shortage of diamonds. It's merely a controlled market creating artificially high prices. Maybe I'll go into it in another blog.
In setting up your investment portfolio, you can do quite well with a mixture of the four asset classes above.
How much you devote to each, what percentage of your investable dollars, is a matter of personal risk tolerance. Can't answer that one for you. Here's some general guidelines.
You are a finite entity. Sorry to break the news, but you not only can't take it with you, but past a certain age, it doesn't do you much good. After age 75 or 80, what in heck can you spend the money doing? Hang gliding, mountain climbing, Parkour? Existing in doctor's offices and hospitals? Early bird dinner specials? The horror of baby boomers 'rockin' out' to Proud Mary?
Institutions, like Endowments, Trusts, Pension plans, are, at least theoretically, infinite entities, you are not.
That means they can take on more risk than an individual, because an individual retires and starts spending his savings and investments, or he dies and his inheritors start spending it.
Consequently, a Trust or Endowment can buy riskier investments because they have a very long time horizon for the investment to work out favorably.
On the other hand, I just made an argument for spending it while you're young enough to enjoy it. And there's one thing you can bank on, you can't spend money and save it at the same time. (Although realtors will happily explain why a huge mortgage and contributing to a 401k both make sense. They don't, that's where the complicated jive I mentioned above comes in.)
We'll chat more about houses (gag) later.
In sum, while the temptation to spend, spend, spend while you are young and lovely is there, you might want to think over being laid off at 55, at which point no corporation on earth will pay you a living wage, (overcompensated CEO's excepted) and you're 10 or more years out from social security, which isn't a living wage either.
You'll need something in the bank or investment account to draw down for those Proud Mary moments unless you want to burden your children, or don't mind shacking up in a cardboard box.
Next time, we'll talk about WHAT stocks, bonds, cash and real estate. Stay in touch.
Monday, May 30, 2011
Back to Basics..Asset Allocation
Perhaps a recap of salient points from earlier blogs:
What is asset allocation?
For most of the population, asset allocations is deciding if they can afford to take the kids to a movie, or only go to the park and hope there's no icecream vendor.
Kids, as anyone who has them know, are a money sponge. Life has many money sponges, golf, slot machines, boats, any mechanical device, and the mother of all sump holes, a house.
I'll visit the joys of home ownership in later posts.
But, we are discussing a different sort of asset allocation. We mean in an investment portfolio.
Assets come in simple to understand forms:
-Liquid assets
No, not vodka and wine, joyous as they are. Stay with me here, I mean that is either cash, or can be turned into cash easily. Money market accounts, short-term CDs, listed stocks and bonds, including mutual funds.
Liquid assets may or may not give you back the same amount of money you put up. Cash is cash. $100 bucks in the mattress is $100. (Inflation or mice may eat it, but that's not what I
mean.) Money in a savings account or money market fund will earn a little interest, you can get at it fairly easily and it will give you back no less than what you put in.
Liquid assets like stocks and bonds are also easily turned into cash (exceptions noted below) but may give you more, or less, than what you put in. That's called risk. Risk has advantages, we'll talk about risk more down the line.
-Illiquid assets are those that can't be unloaded easily. Like spouses and houses.
Whether your spouse is an asset or liability is fungible, and changes for day to day, even minute to minute.
I consider an illiquid asset anything that takes more than a week to turn into cash, or involves an attorney.
Some stocks and bonds start out liquid, then petrify and become illiquid. Owners of adjustable rate preferreds, some mortgage backed paper and auction rate securities found this out the hard way, by experience.
Here's a couple of rules:
-Everything is liquid until there are no buyers
-It's far less stressful to learn from someone else's mistake
As Lily Tomlin said, "Don't be afraid of missed opportunities. Behind every failure is an opportunity someone wishes they had missed."
Illiquid doesn't necessarily mean worthless. Auction rate securities, other adjustable rate paper may still pay the interest or dividend. You just can't sell it because the buyers are gone.
Given the number of stocks and bonds on the market, it doesn't happen very often. It happens most when some securities dealer has a 'New Idea.'
Here's another rule:
-'New Ideas" are frequently the types of securities caught in this quicksand.
The premise that a security would 'adjust' the dividend based on market conditions sounded great. Your principal stayed intact, you get a yield higher than CDs, for instance, and the rate would fluctuate with some interest benchmark. Except when new buyers decided they wanted no part of them. Old owners had no one to sell them to.
The lesson is, if the security you are interested in doesn't have a reasonable amount of daily trading, you may find that you can't sell it when you wish. That may or may not be a bad thing, but it isn't liquidity.
Nest, we'll do more detail on asset allocation. Stay in touch.
What is asset allocation?
For most of the population, asset allocations is deciding if they can afford to take the kids to a movie, or only go to the park and hope there's no icecream vendor.
Kids, as anyone who has them know, are a money sponge. Life has many money sponges, golf, slot machines, boats, any mechanical device, and the mother of all sump holes, a house.
I'll visit the joys of home ownership in later posts.
But, we are discussing a different sort of asset allocation. We mean in an investment portfolio.
Assets come in simple to understand forms:
-Liquid assets
No, not vodka and wine, joyous as they are. Stay with me here, I mean that is either cash, or can be turned into cash easily. Money market accounts, short-term CDs, listed stocks and bonds, including mutual funds.
Liquid assets may or may not give you back the same amount of money you put up. Cash is cash. $100 bucks in the mattress is $100. (Inflation or mice may eat it, but that's not what I
mean.) Money in a savings account or money market fund will earn a little interest, you can get at it fairly easily and it will give you back no less than what you put in.
Liquid assets like stocks and bonds are also easily turned into cash (exceptions noted below) but may give you more, or less, than what you put in. That's called risk. Risk has advantages, we'll talk about risk more down the line.
-Illiquid assets are those that can't be unloaded easily. Like spouses and houses.
Whether your spouse is an asset or liability is fungible, and changes for day to day, even minute to minute.
I consider an illiquid asset anything that takes more than a week to turn into cash, or involves an attorney.
Some stocks and bonds start out liquid, then petrify and become illiquid. Owners of adjustable rate preferreds, some mortgage backed paper and auction rate securities found this out the hard way, by experience.
Here's a couple of rules:
-Everything is liquid until there are no buyers
-It's far less stressful to learn from someone else's mistake
As Lily Tomlin said, "Don't be afraid of missed opportunities. Behind every failure is an opportunity someone wishes they had missed."
Illiquid doesn't necessarily mean worthless. Auction rate securities, other adjustable rate paper may still pay the interest or dividend. You just can't sell it because the buyers are gone.
Given the number of stocks and bonds on the market, it doesn't happen very often. It happens most when some securities dealer has a 'New Idea.'
Here's another rule:
-'New Ideas" are frequently the types of securities caught in this quicksand.
The premise that a security would 'adjust' the dividend based on market conditions sounded great. Your principal stayed intact, you get a yield higher than CDs, for instance, and the rate would fluctuate with some interest benchmark. Except when new buyers decided they wanted no part of them. Old owners had no one to sell them to.
The lesson is, if the security you are interested in doesn't have a reasonable amount of daily trading, you may find that you can't sell it when you wish. That may or may not be a bad thing, but it isn't liquidity.
Nest, we'll do more detail on asset allocation. Stay in touch.
Sunday, May 29, 2011
The Return of the Advisor
I've been gone for a while, the crash happened, no I didn't 'predict' it. My regular job got in the way of posts, so I rectified that by quitting. Now we're going to pick up the pace.
Again, the idea behind this blog is to help regular human beings make intelligent choices for their 401ks, their IRAs or Rollovers, or for their personal investment accounts. Although the basics apply to any market investor, corporate, trust or pension plan.
The principles outline in earlier posts still apply.
John Wayne said, "Talk low, talk slow, and don't talk too much."
Your Advisor says, "Costs low, go slow, and don't trade too much."
Remember our motto, courtesy of Warren Buffett, and backed by my personal observation and experience, "Most ideas are bad."
Again, the idea behind this blog is to help regular human beings make intelligent choices for their 401ks, their IRAs or Rollovers, or for their personal investment accounts. Although the basics apply to any market investor, corporate, trust or pension plan.
The principles outline in earlier posts still apply.
John Wayne said, "Talk low, talk slow, and don't talk too much."
Your Advisor says, "Costs low, go slow, and don't trade too much."
Remember our motto, courtesy of Warren Buffett, and backed by my personal observation and experience, "Most ideas are bad."
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