Dawn On Wealth

Not So Fast

2009-01-09T07:17:00.000-08:00

With the market off to a great start the first week of this New Year, many are quick to declare "the bottom" has been reached.

While it's human nature to want the pain of last year's market decline to come to an end, economic uncertainty and the longer term effects of the government bailout plan, provide significant risk to the bullish case being made in much of the popular press.

This interview with Jeremy Grantham, Chairman of the Board of Grantham Mayo Van Otterloo gives sold support for why investors should pause before fully allocating their funds to today's equity markets. Grantham Interview

2009-01-07T10:03:00.000-08:00

Many analysts believe Gold will be one of the best performing assets in 2009. With portfolios values sitting 30-50% below the 2007 market peak, there’s no time like the present to consider investments outside traditional mutual funds, individual equities and fixed income offerings.

There are numerous economic and demand-driven reasons supporting an upward move in gold values, but two primary arguments lead us to believe a potentially explosive move in gold will occur some time this coming year.

First, Gold is well-recognized as an effective hedge against inflation. While deflation is the likely scenario in the near term, massive government liquidity infusions as a result of the government’s TARP program are likely to drive inflation much higher over the longer-term. As soon as the world accepts that higher inflation is inevitable, foreign demand for gold will increase.

Secondly, gold values have historically been negatively correlated with the dollar. While the dollar has enjoyed strength during the current credit crisis, that strength was driven by foreign investors taking short-term positions in the dollar as their own economies faced credit meltdowns and banking crises. As overseas markets gain strength and developing markets advance economically, the dollar’s attractiveness is likely to wane.

Depending on each clients’ individual financial situation, a commodity holding like gold typically ranges from 0-5% of their total portfolio allocation. Some potential investments to research for exposure to Gold include GLD (tracks the price of Gold Bullion), GG (Goldcorp, Inc., engages in the acquisition, exploration, development of precious metals properties), and GFI (Gold Fields Limited engages in the exploration, extraction, processing, and smelting of gold in South Africa, Ghana, Australia, and Peru).

Current Market Commentary from Dimensional

2008-12-03T09:40:00.000-08:00

One of the great benefits of our association with Dimensional Funds is our access to some of the greatest academic minds in the fields of finance and investing. Check out these videos with market commentary from Ken French, Director of Investment Strategy for Dimensional and the Carl E. and Catherine M. Heidt Professor of Finance at the Tuck School of Business at Dartmouth College.
Buy and Hold vs. Market Timing
Stock Picking vs. Index Investing
Commodities and Your Portfolio

Things are Looking Brighter

2008-10-30T11:28:00.000-07:00

Those who thought Tuesday’s rally was the beginning of a bull market, perhaps yesterday’s down day and today’s ho hum performance are disappointing. However, there is quite a bit of encouraging news:

Governments in US, Europe and the UK have aggressively responded to the credit crisis. Monday's generous rate on commercial paper on Monday and yesterday’s Fed rate cut was further proof of our government’s willingness to do whatever it takes to get these markets moving again.
Some governments are providing fiscal stimulus to bolster economic activity. Australia recently unveiled a $A10.4 billion package. In the US there is talk of a post-election stimulus plan.
Oil prices, which until recently were seen as a major threat to global growth, have retraced significantly. From late July until early October, crude oil futures fell by 45 percent from a record $147.27.
According to Dimensional research, the average duration of bear markets in the US from the end of 1965 until the middle of this year was about 14 months. This one has lasted about one year and the longer it goes on, the closer we are likely to be to the next bull market.
Unless you have sold your holdings, your losses so far are only on paper. Market recoveries after prolonged downturns tend to come in quick sudden bursts. All you need to do to capture those recoveries is to stay in the market.
Volatility is declining and the panic selling has diminished. As markets work toward more “normal” trading conditions, the world will move on and the appetite for equities will return.

If you’re concerned about how you’re invested or wondering how your portfolio allocation can be improved, give me a call for a no obligation review and discussion. You have nothing to lose and years of future prosperity to gain.

Some Good News for Retirees

2008-10-28T11:03:00.000-07:00

The 2009 Social Security benefits of our nation’s older Americans are slated to receive a 5.8% boost—the largest hike in 26 years. That compares to the 2008 increase of only 2.3%. In 2008, the average monthly Social Security payment for retirees amounted to $1,090. That will increase to $1,153 in January.

Another positive for retirees is the announcement that 2009 standard Medicare premiums will remain unchanged. However, premiums do increase for “higher income” individuals (defined as singles earning more than $85,000 and couples earning more than $170,000).

This development provides welcome positive news in light of recent price inflation in food and energy and the severe erosion of most retirement accounts. In addition, escalating health care costs in recent years have resulted in many retirees struggling to maintain their standards of living. More recently, the financial crisis and recessionary economy have left those dependent on fixed incomes amongst the hardest hit.

Comments on Today's Market - Fox5 Midday Report

2008-10-24T09:08:00.001-07:00

In case you missed my comments today on Fox5's midday report, here are some of the excerpts:

Going in to the morning, we expected there could be as much as a 1000 points down on the Dow based on the very negative futures.
The panic was started, in part, due to the negativity on the overseas markets (Japan down ~9%). Several of those markets halted trading due to large sell offs.
Fortunately, the early morning/opening action was encouraging, although futures were down 550 points (capped at that level), the open was slightly better than that with improvements throughout the morning.
We are not recommending drastic actions at this time. Investors should not be trying to pick a bottom and, in most situations, it is not advisable to sell at these levels (there are always exceptions depending on particular circumstances).
There are some positives on the horizon, not the least of which is the huge reduction in oil prices to levels of 1 year ago. That translates into savings at the pumps for consumers and savings for businesses who incur transportation costs or use oil as an input commodity.
Although the news screams for investors to bail out now, we think it's time for calm, thoughtful action. When the experts are throwing in the towel, historically that has been a good sign of bottoming.
There's probably more pain coming due to expected forced hedge fund liquidations. That causes prices to decouple from reality (they already have) and shouldn't push you to sell, but may present buying opportunities for younger, more liquid clients.

Tune in to channel 5 for occasional live comments from me and visit Fox5DC.com for continuing coverage of the financial crisis.

In the midst of this crisis, feel free to give me a call at 301-670-0994 with your specific questions. Or, you can email me at dawn@dawnonwealth.com with your ongoing concerns.

Kiplinger Magazine reviews Dimensional Fund Advisors

2008-10-20T08:00:00.000-07:00

Kiplinger magazine recently featured an article outlining the philosophy of Dimensional Fund Advisors. This is a great summary for those who are either unfamiliar with the virtues of passive investing or for those comparing alternative passive investment products such as Vanguard Funds and ETFs. For the full article, reference Kiplinger’s site at Kiplinger Dimensional Article Link

Also, note that I now have “turned on” the comment capability for the blog so feel free to leave your comments or questions or email me directly at dawn@dawnonwealth.com for a personal response.

Planning Tips for Today’s Bear Markets

2008-10-16T06:45:00.000-07:00

Recent stock market weakness is presenting some additional financial planning opportunities. If markets continue to trade in a sideways trend at historically depressed levels, you may want to consider some of the following planning techniques:

Convert to a ROTH IRA: If you have considered converting from a traditional to a ROTH IRA, compressed valuations make this an opportune time to do so. ROTH conversion results in taxable income for the current year, but any future distributions from the converted account are completely tax free. If you expect equity valuations will be higher when future distributions occur, this technique can provide substantial tax savings over the long term. (Note: conversions are allowed only for taxpayers with Adjusted Gross Income below $100,000).
Fund a 529 College Savings Plan: These plans allow withdrawal of all funds, including any gains, completely tax free if the funds are used to pay qualified higher education costs. If you have young children or grandchildren, depositing funds when markets are low can result in gaining thousands of tax-free dollars for college expenses. Where else can you take equity gains tax free?
Complete annual gifting: If you utilize the $12,000 per person annual gift exclusion to gift securities to family members, it may make sense to complete your 2008 gifting now, while valuations are low, rather than waiting until year end. (note that the annual figure increases to $13,000 in 2009)

So, while down markets are discouraging for overall wealth creation, proper planning can create wealth even in difficult market periods.

When Panic Sets In

2008-10-10T08:20:00.000-07:00

I’m guessing that many of my readers have thought about throwing in the towel these last few days. With market declines at historic levels and non-stop media coverage of a doom and gloom scenario, you aren’t alone in your fear and desire to take action.

In fact, studies of investor behavior show that many investors do respond fearfully. Unfortunately, such reaction results in dramatic and long-term hits to their portfolio returns.

The most cited study on this topic was conducted by Dalbar, a research company that examines many factors affecting mutual fund, broker/dealer, discount brokerage, life insurance, and banking industries. DALBAR's study, entitled Quantitative Analysis of Investor Behavior (QAIB), concluded that most individual investors sell during market lows and, as a result, on average achieve returns that are lower than inflation. Specifically, the study found that:

From 1985 to 2004 when inflation averaged 3.0%, average mutual fund investors achieved a 3.7% annualized return as compared to the S&P500 return of 11.9%.
Investor greed leads them to invest in top performing funds at the end of bull markets while fear leads them to withdraw money toward the end of a bear market.

Today, fear is at all time highs and we’re seeing individual investors cashing out their 401ks and turning stock portfolios to cash. When you hear your friends taking such actions, it’s tempting to follow in their footsteps.

One of the main benefits of working with an advisor is access to an independent opinion in times of panic. Advisors often step in to prevent investors from acting out of fear. In addition, good advisors will construct well-diversified portfolios that reduce risk during volatile times and provide a level of equity exposure that is appropriate to the individual client’s financial situation.

Those investors who have a plan, have appropriate allocations, and who avoid fearful reaction to difficult equity markets are rewarded with the returns they deserve - average long-term equity market returns in the range of 8-10%.

See me on Fox5 tonight - 10 & 11 PM

2008-10-06T13:20:00.000-07:00

Fox News just requested that I appear tonight as a financial expert. I'll be available to answer your questions via FOX's chatroom from 10-11:30pm. Log in to myfoxdc.com and tune in for live commentary on today's market actions.

And, in case you missed my last appearance, here's a link myfoxdc.com

It’s a Good Time for Charity

2008-10-04T11:35:00.000-07:00

Until recently, the provision allowing IRA owners over age 70 ½ to transfer up to $100,000 of their IRA directly to charity had been eliminated. Having used this unique provision for my clients in the past, I was pleased to see that the provision was retroactively extended through year end 2009 as part of the recently-passed “TARP” legislation.

For those unfamiliar with this planning technique, here are some highlights.

The provision applies to investors age 70 ½ or older who are required to take distributions from qualified retirement plan assets (i.e. IRAs, IRA rollovers from qualified company plans).
Qualifying gifts must be made by 12/31/2008 (or 12/31/2009 for '09)
Any direct transfer to a charity from an IRA will satisfy the required minimum distribution for the year (with a $100,000 limitation, $200,000 per married couple).
If made directly to the charity, the distribution does not have to be included as taxable income. Therefore, taxes are lower than if you took the required distribution and subsequently donated the funds. In some cases, the reduction in taxable income may move you to a lower tax bracket or may preserve tax deductions or other tax benefits tied to Adjusted Gross Income levels.
Unlike other charitable contributions, you DO NOT receive a charitable contribution deduction.

In these difficult times it's encouraging to see that our government didn't forget the many charitable organizations that depend on the generosity of our nation's retirees. Even for those who give substantially less than the $100,000 limitation (i.e. regular giving to religious organizations), this is a great strategy benefiting investors and charities alike.

Is This Time Different?

2008-09-30T13:58:00.000-07:00

After today's volatile market action, many are asking whether current market conditions indicate an impending financial calamity requiring individual investors to take drastic actions.

In response, we're providing the informational video below. The video provides data and analysis of historical stock market events with comments on recent market actions as they relate to historical events and trends. See video now DFA VIDEO.

If you only have a few short minutes, view at least the first three slides and the second to last slide for a good summary of our perspective on the current situation.

As always, feel free to contact me via phone or email with any comments or questions either about the information contained in the video or about questions pertaining to your specific portfolio.

Protecting your Money Market Funds

2008-09-26T07:20:00.000-07:00

As a result of the bill passed on Friday, note that FDIC insurance has now been raised to $250,000 per account. We will revise this posting, which was written prior to the drafting of the bill, once we have thoroughly reviewed the new provisions.

After last week’s announcement of money market giant, Primary Fund (RFIXX), freezing assets due to Lehman holdings and hearing that Ferris, Baker Watts temporarily froze a friend's money market, I thought I’d offer some tips on how to protect the cash you may be holding in your accounts. For more complete information, refer to this Wall Street Journal article, the source of this information. Full Article

First, consider that the FDIC insures bank deposits up to $100,000 per person per bank. So, if you have less than that in your bank account, there’s no need to worry even if the bank fails. However, most high net worth clients of mine have substantially more cash, either because we’re choosing to be conservative in this market or because their cash flow needs warrant holding more than $100,000. In these cases, there are several courses of action:

Buy CDs through a brokerage account: Through Fidelity, we have access to CDs from institutions across the US, including Puerto Rico. Purchasing multiple CDs with multiple institutions all at levels below the $100,000 is a safe and expedient way to consolidate your cash in one account yet receive full insurance protection (i.e. in one brokerage account you could be insured for $300,000 as long as you had 3 different CDs from 3 different banks.)
Joint Accounts: Insurance coverage is for each account holder, so holding cash in a joint account provides $200,000 of insurance
POD Acccount: This account titling is accomplished by adding beneficiaries to your account. The result is an additional $100,000 of coverage for each beneficiary. However, this needs to be considered carefully in conjunction with your will and estate plans as it can circumvent intended bequeaths.
Retirement Accounts: In addition to the benefits of tax deferred growth, another great reason to maximize contributions to your qualified retirement accounts is the additional insurance coverage afforded to such accounts. Traditional IRAs, ROTH IRAs, and Rollover IRAs are insured up to $250,000.
Revocable Living Trusts: While an attorney is required to draft trust documents for these trusts, there are special FDIC regulations affording such accounts more protection.

Begin by checking to see if your total cash balance per account falls below the FDIC insurance levels. If not, take action to reduce balances in these regular accounts to the $100,000 limit, or employ some of the above techniques to increase insurance protection provided in your account. Secondly, check the status on money markets used in your brokerage firm accounts. If there is any reason for concern, either move funds from that money market to Treasuries (I use Vanguard’s Short-Term Bond ETF symbol BSV) or withdraw the funds altogether.

Feel free to email me if you have any concerns or want further information on how to protect yourself. These turbulent times in our nation’s banking system are not over yet.

As seen on Fox 5

2008-09-22T07:43:00.001-07:00

I had the pleasure of appearing on Fox's morning news today. Below is my segment. You can reference FOX Business News for more money tips and continuing coverage on the latest in market news. See my FOX News video clip, click here

The Risk of Market Timing

2008-09-21T18:52:00.000-07:00

(double click to expand)

The harsh reality of the market’s recent tumbles has not stopped traders and investors from attempting to read the future. With large drops late last week, many were calling for a “market bottom”.

Market timing offers a seductive prospect – predict market direction ahead of time and capture only the best-performing days and avoid the worst. The reality is that, trying to forecast which days or weeks will yield good or bad returns is a guessing game that can prove costly for investors.

Large gains often come in quick, unpredictable surges. An investor who misinterprets events may leave the market at the wrong time (i.e. Monday or Tuesday of last week) and miss the surges (Thursday and Friday). Missing only a small fraction of days—especially the best days—can defeat a timer’s strategy.

The above graph tells the story. The graph plots the S&P 500’s annualized compound return since 1970. The green bar (far left) shows what a buy-and-hold investor would have earned in annualized return for the entire period – about 11%. The bars to the right show the returns if an investor had missed a certain number of “best days” in the market. Missing the best 25 trading days would have significantly cut S&P 500 Index annualized compound return. Investors who attempt to predict market drops are just as likely to miss out on strong return periods.

A better strategy is to stay invested in a diversified portfolio though the tough times so that you're in the market to enjoy the eventual good days.

Merrill and Lehman Customers

2008-09-15T16:00:00.000-07:00

I started my day with our firm's emergency early morning meeting to address the current financial crisis. Our firm's principal, John Ferguson, called the meeting to provide his thoughts about the current state of affairs and prediction for today's market action.

With 30+ years in this business, this isn't the first crisis John has seen and weathered through with clients. I, too, have had my share of panic management as an advisor during the noted "Black Monday" back in 1987.

We've been on the phone with our clients all day. Many are very concerned, and rightly so. Recent actions by the nation's largest financial firms are indeed unprecedented. No one knows what further bad news is yet to be uncovered. I'm betting we'll see at least one more day of severe market declines as the reality of this news works through the market.

With the market closed now, I wanted to take a minute to pass some of our insights to my blog readers.

To those of you with assets held with Lehman, Merrill, or any other commission-based organization, we offer the following suggestions:

1. Review your account for the bonds or stock of the brokerage firm holding your account. Very often in these accounts we see that brokers have purchased assets invested in their own company. In this market, clients may be holding Merrill/Lehman securities that ultimately will have little to no value and/or liquidity.
2. Don't expect your broker to tell you that you own the above securities. Even the very best brokers often won't bring these issues to light in the midst of such market events.
3. Immediately contact your broker to discuss plans he/she has for accounts if he/she chooses, or is forced, to leave the firm.
4. Do not purchase any A share mutual funds. Brokers may try to sell these high commission products to generate temporary, short-term commission income for themselves or the firm.
5. Be wary of proposed sales of assets in individual accounts as these will create taxable events. However, tax implications should not completely drive investment decisions - i.e. if there is a good reason to remove the asset from your portfolio (i.e. it's invested in a failing firm), then sell no matter what the tax consequence.

Call us if you have any concerns about the allocation or fees related to your current portfolio. Wouldn't you rather put your trust in an independent firm that has positive cash flow, financial liquidity, thiry years of fee-only experience, and a reputation for serving the client above self?

Ode to Investors

2008-09-15T12:44:00.000-07:00

In light of recent market actions, I wanted to share this poetic commentary written by our firm's principal, John Ferguson. John's insight, gleaned from 30+ years in the business, is invaluable to all of us during these troubled times.

My Broker's going broke
The poor misguided bloke
His investments have soured
On loans that he made
The yields were so high
They were done in the shade
The money he wasted and squandered away
Was hard earned and accumulated
For MY rainy day

Dear Congress

2008-09-13T12:54:00.000-07:00

The giants of finance have fallen
Upon hard times.
Please bail them out so their yachts still float
And they still buy Gucci bags
Don't let them fail
You've sent some of them to jail
For far less than wasting billions of dollars
On schemes that paid them huge bonuses
It is incumbent on you to save them
Since they have supported you with many gifts
Remember how you clodes the thrifts and..
Then found out they would have survived.
Save them, it's too late for me.

Lehman Brothers Ponders Sale of Investment Management Unit

2008-08-05T17:49:00.000-07:00

Today, CNBC reported that Lehman Brothers Holdings Inc may sell it’s investment management business, including private equity and hedge fund holding as well as the Neuberger Berman money management business.

The announcement comes as a result of the bank’s need to raise funds to cover Lehman’s recent $2.8 billion loss, confirmation that the sector’s issues are still unfolding. With its first loss since 1994, the firm is forced to raise new capital and considers sale of the investment management assets to provide the needed liquidity.

Lehman is not the only one in need of cash. On July 29, Merrill Lynch announced a $5.8 billion third quarter writedown related to the unloading of risky debt investments. The firm’s writedown follows an astounding $19.2 billion loss for 2007.

Will these firms go the way of Bear Stearns? Do you want your assets held at a firm in dire need of cash to stay afloat? There are many other options. A better one is to work with a financially stable, independent firm that doesn’t need to raise billions or sell key assets to survive.

Brokerage Firms Under Investigation for Selling Investors Illiquid Securities

2008-08-01T17:15:00.000-07:00

In late July, the Texas State Securities Board notified UBS of expected hearings to determine whether the firm’s investment bank and wealth management business securities licenses should be suspended. The suspension is threatened due to actions related to the sale of auction-rate securities. In the midst of the current credit crisis, investors have been unable to access money invested in the securities due to freezing of the market for these securities.

Auction-rate securities are debt instruments issued by municipalities, student loan agencies, and other debtors. Unfortunately, the sale of auction-rate securities is not isolated to UBS. In fact, these investments have been sold to investors by many other large brokerage firms.

As evidence of the widespread problem, yesterday Massachusetts regulators charged Merrill Lynch & Co. with fraud related to auction-rate security sales. New York State followed suit today by threatening action against Citigroup.

As these leading brokerage firms respond to the aggressive regulatory actions, brokers employed by the firms are taking actions of their own. Many successful brokers are facing the prospect of leaving embroiled firms for competing firms, who are aggressively targeting them to leave, bringing their customers with them.

If your accounts are at any of these firms, there are several potential outcomes: your broker may solicit you to take your business to another firm, the brokerage firms will face distracting regulatory proceedings with potentially stiff fines or license suspensions, your investments may be illiquid if you were sold auction-rate securities.

A better alternative is to work with an independent advisor who only invests in liquid securities with transparent underlying equity or fixed income positions. You want your advisor’s focus to be on managing the success of your portfolio, not on fighting regulatory battles or finding his next job.

With the Market So Volatile, Should I Buy, Sell, or Hold?

2008-07-25T19:28:00.000-07:00

Given recent ups and downs in the market, I've been asked this question a lot lately. I believe there is only one right answer to the question, and the answer is “That depends”.

The correct answer will depend on each individual client’s situation. That's why for some clients I've been reducing equity exposure, with others I've added to existing holdings or purchased new asset classes, and still others I've advised to do nothing.

I'm willing to bet that if you pose this question to a commissioned broker, you'd probably get an answer that included plenty of macroeconomic/market statistics and little to no reference to your particular situation.

Conversely, a quality Certified Financial Planner will answer this question by asking you several questions before providing an answer. Some good questions may be:
How is your health?
How close are you to retirement?
What is your total net worth?
Do you have assets earmarked for a particular large purchase (i.e. vacation home, expensive college education, wedding)?
What is your overall asset allocation?
What does your Investment Policy Statement state as your level of risk?
Do you have a pension and is it indexed for inflation?
How many dependents do you have?
What is your marital status?
What are the potential tax ramifications of liquidating assets?
How much money have you recently added or subtracted from your accounts?
Do you expect any large inflows i.e. from sale of a business or inheritance?
How much equity do you have in your home?
What are your retirement income needs or goals?
What are your legacy plans?

Here are some real life examples to illustrate my point:

A 75 year old widowed client has a total net worth of $300K. He relies on his investments for 70% of his total living expenses. His overall health is excellent and he expects to live in his current home indefinitely. He resides a long distance from each of his 4 children and has a limited support system in his local area. In this case, I would consider selling some of his equity exposure to protect from downside risk that could cripple his finances in the case of a long-term care need in the future.

On the other hand, I would more than likely hold an equity allocation if, for example, the 75 year old had a pension indexed for inflation providing 75% of his living expenses and wealthy parents who were likely to leave an inheritance to him.

In a different case, I may be buying equities if the 75 year old had substantial wealth and intended to gift assets to his grandchildren through a generation-skipping trust.

As you can see, the "right" answer is different depending on the circumstances.

True Wealth Management requires an experienced professional capable of interpreting market dynamics in light of your specific life circumstances and financial status. If anyone tries to answer this question without considering your specific goals and total financial picture, you may get the wrong answer even though you're asking the right question.

It’s a Good Time to Buy Business Assets

2008-07-15T20:30:00.000-07:00

The current economic slowdown has many entrepreneurs reducing business spending, especially on big ticket capital improvement items. Recently, the Economic Stimulus Act of 2008 created spending incentives by allowing businesses to significantly accelerate cost recovery for equipment placed in service in calendar year 2008.

Previously, a business that purchased new equipment could deduct only up to $128,000 of qualifying equipment purchases. The ACT almost doubled that expense limit to $250,000.

The Act also provides a higher first-year bonus deduction – an amount equal to 50% of the adjusted basis for qualified property.

Other incentives to place assets in service in 2008 include revisions to rules on corporate vehicle deductions. For business owners utilizing corporate cars, the Act increased the luxury auto depreciation limit from $2,960 for passenger vehicles to $10,960. The depreciation limit for vans and trucks was similarly increased by $8,000.

These are just some of the recent benefits provided by the Economic Stimulus Act of 2008 to small business owners. To determine whether your business can take advantage of these higher write off amounts, consult a CPA familiar with the details of your business operations.

Dimensional Returns Win Again

2008-06-13T09:27:00.000-07:00

I've been focusing on investment expenses lately because that's one of the easiest factors to control in managing your porfolio's overall return. Every day I talk to investors who are losing valuable investment dollars to unnecessary expenses. This post turns attention to the issue of overall portfolio return.

As most days, today began with a review of my clients' portfolio returns against relevant indexes. I also compared our portfolio returns to those earned by some of the popular active managers.

For example, today I ran an analysis comparing returns from Dimensional Funds portfolios to an investment in a Fisher Investments fund, Purisima Total Return (symbol PURIX). This Purisima fund's holdings tend to mirror the equities held in Fisher's privately managed accounts. You're probably familiar with Fisher Investments because they made a name for themselves by sending mass mailings directly to individual investors.

Results from today's analysis were consistent with what I see day in and day out. The Dimensional Funds portfolios delivered higher returns with a lower standard deviation versus PURIX in 10,5, and 3-year time periods. DFA clearly delivered more with less risk.

Specifically, for the 10 years May, 1998 - May 2008 PURIX achieved an average annual return of 7.42% while a comparable all equity portfolio of DFA funds returned 10.6%. That's a difference of 3.2% each and every year for the last 10 years.

For the 5 year period May, 2003 - May 2008 the annual return differential was a whopping 7.1% each and every year. In total, PURIX provided 93.4% over the time period while the comparable DFA portfolio returned 162.8%. For a $500,000 investment, that's a difference of almost $350,000!

These returns are net of all fees - including porfolio management fees charged by the advisors. Of course past performance is no guarantee of future performance.

Can you afford to give up 3-7% per year in your portfolio returns?
Do you have any idea how your investment return stacks up against a low-cost, diversified DFA portfolio?

If you answered "No" to either question, email me and I'll run your numbers. At no cost and no oblication to you, I'll provide a review of your specific portfolio and provide tips on how to get more return in your pocket.

Don't Overpay

2008-06-06T10:16:00.000-07:00

(Double click the image to expand)
These charts illustrate the massive difference in fees charged by active versus passive mutual fund managers. For domestic equity investing, you could reduce fees by more than 50%+ by simply converting to passive investment vehicles.

Advisors/brokers who sell actively managed funds attempt to convince investors that investors cover higher fees with better performance. Review my other posts and you'll see that both academic research and the experience of everyday investors shows that actively managed mutual funds do not consistently outperform the much lower cost alternative passive investments.

Make sure you're aware of the all fees you're paying. If your advisor doesn't give you a clear answer when you ask that question, that tells you it's probably a lot higher than you think.

Buy an Index, Increase Your Return

2008-05-23T15:26:00.000-07:00

As detailed in my Mutual Fund Fees 101 post, the expenses you pay to hold mutual funds are a hidden cost that can be substantial. Every dollar you pay towards expenses erodes your return. The impact is even more substantial when you compound it over the average investor's lifetime.

A recent study found that, collectively, investors spend about $100 Billion Per Year trying to beat the market. If you're invested in an actively managed mutual fund (i.e. those A, B, C, "loaded" with extra cost mentioned in my prior post), some of your own dollars are in that whopping $100 Billion figure.

Click on the following link to read the entire New York Times article. Note that the referenced academic research showed that a typical investor can increase annual return by just shifting to an index fund and eliminating the expenses trying to beat the market.

The researchers also concluded that the best course is to buy and hold index funds for the long term because the odds are against you if you try to beat the market.

http://www.nytimes.com/2008/03/09/business/09stra.html?_r=1&scp=1&sq=can%20you%20beat%20the%20market&st=cse&oref=slogin