Confessions Of An Asset Allocator

Several years ago when I made my first real attempts at managing my own assets the idea of a fixed asset allocation strategy made a lot of sense. Diversify by allocating broadly to a wide range of foreign and domestic securities using fixed income to control volatility. Rebalance regularly, limit transactions as much as possible, and always mind fees. When you run strategies such as these through a back-test the results come out to be fairly decent over many different time periods and market cycles. There is nothing wrong with these strategies, and the vast majority of individual retail investors out there are most likely well served through such investment policies. The difficulty is often finding a strategy that aligns with one’s personal preferences and tolerance for volatility.

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Linchpin

Over the past few years I’ve found myself having a recurring conversation with friends, colleagues and family members. Despite indications that the economy is healthy and moving along, it sure doesn’t feel that way, and it’s tough to identify exactly why. Consider the following US economic data from the end of 1999 through 2014

1999 2014 Annualized
Change
Median Household Income $57,843 $53,657 -0.5%
Real After Tax Corp. Profits $523.1B (Q4) $1,700B (Q4) 6.2%
Real Gross Domestic Product $12,323.3B (Q4) $16,151.4B (Q4) 2.0%
CPI (Inflation) 168.3 (Dec) 234.812 (Dec) 2.4%
Effective Federal Funds Rate 5.30% (Dec) 0.12% (Dec)
Source: Federal Reserve Economic Data (See Below)

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Exercising Some Humility

“To err is human” as Alexander Pope once wrote. No one is perfect, and we all make mistakes. It’s in our nature. For individuals that are more hardy and honest, difficult experiences can provide some of the best learning opportunities. Here are two of my past investing transgressions, the lessons learned, and how they have helped guide me to a more sound strategy.

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How And Why I Save

When I first got out of college and started earning “real money” I found that a good chunk of my paycheck was being used to service debt payments. The majority of my obligations were student loans but I also had a a car payment and some credit card debt. All of these payments left me with limited money to pursue the activities that I enjoyed or save for my future. To add insult to injury a lot of the “things” I had purchased with debt weren’t exactly making me happier. A few expensive car repairs and the stress involved with continually paying off debt made me realize that I had to change my ways. The first thing I did was build up an emergency fund of cash in a savings account. This prevented me from having to take on more debt when unexpected expenses found their way into my life. The next thing I had to do was find ways to save so I could put more money towards paying off my debt quicker. Here’s some of the methods that I employed.

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New Year, New Market Predictions?

One of the consequences of reading up on personal finance and investing is that people are always looking for your opinion or a tip. This has been especially true for me around the holidays and the recent holiday season was no exception. “I heard on the news that the market is overvalued. Do you think it is?” is a fairly typical question.

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Mutual Fund Mea Culpa

I firmly believe that revisiting your mistakes is one of the best ways to learn. Two of the most important lessons I learned early on in my investing experience were: 1) high fees negatively impact returns and 2) actively managed funds typically under-perform passive indexes over longer periods of time. [1] Prior to using low cost index funds in an asset allocation strategy I owned a number of high fee actively managed mutual funds. Below I’ve compiled a list of the active funds that I used to own against a comparable offering from Vanguard. Ten year annualized returns and volatility of the funds are included for comparison. A more detailed description of my ownership with my insights is included for each fund below.

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The Client’s Best Interest

The financial services industry often gets a bad reputation and some of my personal experiences justify that sentiment. One such experience occurred back in the summer of 2011. The economy was still in the early stages of recovering from the financial crisis and the Federal Government was facing a potential shut down. As a consequence the stock market was experiencing some fairly drastic moves.

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