Consider Exchange Traded Funds for Your Portfolio

Please read my latest blog post at the Arizona Republic, “When and Why Investors Should Own an ETF.”

Exchange traded funds are a low-cost, flexible tool for investors interested in gaining exposure to specific industries.  These prolific fund options track your chosen index performance, provide liquidity and cost very little.  Ideal for individual investors, especially those just getting started.





Why Investors Must Pay Attention to Investment Management Fees

In April I contributed a piece to Yahoo that discussed the eroding impact of fees on the performance of an investor’s portfolio.  I wrote:

Consider the Department of Labor’s analysis of 401(k) investment fees: An individual with a 401kbalance of $25,000 has 35 years remaining until retirement. That individual pays an investment management fee of 0.5 percent (a conservative assumption) and earns 7.0 percent per year (a reasonable assumption). At the end of the 35-year period and assuming no additional contributions (unlikely and, therefore, conservative), the balance will grow to $277,00.00. However, increase the fee to 1.5 percent (somewhat aggressive), and the account balance grows to only $163,000–or $114,000 less than the portfolio paying the lower fee. According to the DOL, that one percent higher fee compounded over 35-years reduces the ultimate account balance by 28 percent. Fees, it seems, make a difference.


I cite that passage here because the importance of fees paid by investors for investment management related activities cannot be underestimated or overlooked.  As a former professional investment manager I collected similar fees on the assets I managed for my clients.  Obviously, I am not condemning the payment of fees.  If you hire the right manager and they provide performance well in excess of the market they have earned their fee and you, as a client are much better off.   However, if the manager does not exceed the performance of the market by at least the annual fee charged (and according to NerdWallet only 24% of active investment managers have consistently done so over the last ten years) then the DOL’s analysis should alarm you.

Consider fees carefully.  Saving 1.5% per year is as good as earning 1.5% per year.



Time to Raise Your Investing IQ

The 2012-2013 Prudential research study  “Financial Experience & Behaviors Among Women” is out.  This new study explores the responses of 1400 women aged 25-68. Despite a broader pool of respondents compared to past studies, the overall insight gleaned remain constant:  Women, for the most part, are not confident in making financial decisions.

The study claims that “the majority of women (53%)  are primary breadwinners.  Among these primary breadwinners, approximately 30% consistently self-identify as lacking knowledge of financial products, including:  stocks, bonds and mutual funds.  Among all the women interviewed 70% characterize themselves as savers rather investors.  Further, 59% are “only interested in guaranteed FDIC-insured products”  and less than one-quarter of all women interviewed claimed to enjoy the “sport” of investing.

But, the glaring inconsistency for the the study respondents is revealed in the opening summary under the headline:  “Women’s financial priorities differ.”  According to the study women are very concerned with passing on money to heirs and not becoming a financial burden to their families. The study concludes, “this tendency to take care of others first can compromise their families’ futures.”

But it is not the tendency of women “to take care of others first” that will compromise their families’ futures but rather their lack of knowledge of how to invest for their futures.  This can only be accomplished by educating ourselves on the options available.  With money market rates hovering at less than 1.0% (currently averaging around 0.75%) investors cannot expect to save their way into prosperity.   Additionally, Bill Gross, the manager of the world’s largest bond fund declared (again) last week that “the three-decade-long bond price rally likely ended April 29th” according to The Wall Street Journal.  If that is true, then bond prices will decline (as interest rates rise) and those invested in anything other than short-term bond funds or money market accounts will experience a decline in the value of their investment.  That leaves stocks.

This column has stressed repeatedly that stock investments are necessary to produce long-term returns in excess of inflation.  In this way women will ensure they are not a financial burden and generate excess wealth to pass along to their family.  The May 13th edition of Barron’s again published Wharton finance professor and market historian Jeremy Siegel’s research measuring equity returns from 1871-2012.  The median annual equity returns for rolling five, ten, twenty and thirty year periods was 9.4%, 8.6%, 8.1% and 9.2% respectively.  And since 1871 it is also important to note that “all 20-and 30- year spans have been positive.”  Investing is not “sport.”  Investing is a disciplined and prudent preparation for future financial needs.

How to Generate Enviable Returns Without Being 100% Right All the Time

If there is one overriding principle to remember when investing it is this:  the most difficult time to buy a stock is often when the experts are telling you not to.

As a value investor I am frequently interested in the stocks of great companies that are out-of-favor.    And because they come with baggage they are frequently the target of many negative stories.   Bad news is the companion of investors who are interested in buying stocks when they are inexpensive.  Everyone can tell you why the company is cheap; they are not nearly as effective at telling you when it will cease being cheap. In fact, most investors won’t start talking about the stock again until the company has fixed the problems and the stock has appreciated well off the lows.

We will take a look at two great growth companies who stumbled and ultimately recovered.  Both are from my own holdings; one I bought way too early (which means I bought after the stock went down, then it went down a great deal more) and the second I purchased at just about the lows in the stock price.  By sticking to my discipline and staying with both stocks I generated performance in excess of the market; one stock did better than the other to be sure but both did significantly better than the market. Buying the stocks of out-of-favor, well-managed companies is harder than it looks in the face of the incessant chatter of the naysayers but doing so–following Intelligent Investing Rule #1, sticking with your discipline–will provide excellent returns over time.

Let’s begin with the fallen-angel growth stock I bought too soon:  Starbucks (SBUX).  Buying early is one of the occupational hazards of being a value manager.  When a growth company disappoints investors, the sentiment quickly changes from love (price appreciation)  to hate (price depreciation) to indifference (price stagnation).  It is important for the value manager to remember that growth investors can sell out of a holding much faster than the value crew will buy in.  In fact, because growth investors are often momentum driven they may exit an entire position in a stock if they even sniff trouble.  When the earnings miss or a new product or distribution glitch manifests they run–don’t walk–for the exits.  The value manager’s dilemma is to decide when to get in.  Sometimes we are too eager.   When I got a chance to buy SBUX in April of 2007, I did.  The stock was down 30% from a recent high of $40.00.  I waited for it to stabilize around the $31.00 level and began accumulating my holdings.  Then the financial crisis hit and the market sunk like a stone dragging Starbucks with it until the stock finally hit a low under $10 per share.  An unmitigated disaster you might think.

Normally I would buy more as the stock went down but I was busy with grad school and two kids graduating from high school in those two years and I, frankly, wasn’t paying close attention.  But here is the great thing about buying great companies.  You don’t have to know the exact day the stock hits bottom.  You don’t have to be right about every detail.  You just have to stick to your discipline and let the company management do the heavy lifting.

Though I bought SBUX far from where it ultimately bottomed, I still generated a return of 12.73% per year since April 27, 2007 well in excess of the S&P 500’s return of 3.53% over the same period.  Had I bottom-picked the stock toward the end of 2008, I would have received an annual return of (gulp) 57.11% versus 17.29 for the market.  A far superior return, indeed. But getting it mostly right and generating a steady return over time is our objective and despite my mistake I did just that.

The point is that stock investing is about generating consistent, excess returns over time, not necessarily about securing cocktail party bragging rights.   Remember Intelligent Investing Rule #1:  Having any investment discipline is better than having no discipline at all; once your investment strategy is established, never deviate.

Next post we will examine a value stock I bought near the price bottom.