Sound Advice

Always Look at Underlying Fund Holdings It seems easy enough to look at the name of a mutual fund or exchange-traded fund and assume what kinds of stocks are held by the fund.  But in more than a few cases, that assumption could prove costly.  A common example of this would be mutual funds that are labeled “aggressive”.  That’s a label that one would think suggests the likelihood of above average potential for gains.  More likely, however, it means the fund holds stocks that are highly volatile.  In weak markets, they will probably fall farther; in strong markets, they might rise faster.  But the greater likelihood is that the label is a marketing gimmick for underlying holdings that are relatively benign. There is another wrinkle of greater concern.  That’s the tendency of some investors to buy a number of large, well-known funds to provide what they believe will be diversification.  At first glance, that would seem to make sense.  The p...

“ . . . the daily machinations of the stock market are like a tale told by an idiot, full of sound and fury, signifying nothing.”                                                                                                                  John Bogle, founder of Vanguard   One can only be mystified by the ongoing torrent of verbiage about the stock market’s dramatic movements from day to day, much less moment by moment, and how those who would consider themselves investors pay any attention.   Yet with straight faces the “experts” maintain nonstop development and regurgitation of essentially useless explanations for whatever is happening on...

Buys, Holds, and Sells One of the fascinating things about the world of investing is the proliferation of stock recommendations.   Most come from brokerage firms, but more than a few come from the print and broadcast media.   Rarely does a day go by without seeing “10 Stocks To Buy Now” or “Five Funds To Hold Forever.”   My sympathies to those who take this stuff seriously. In the good old days when stock commissions were hefty, as in $150 or more per ticket, big pay days were earned by institutional stock analysts who generated massive tomes of commentary and data about companies they considered outstanding investments.   That was prior to May 1, 1975, when the Securities & Exchange Commission ruled that brokerage firms had to negotiate commissions.   Before then, those reports often ran to dozens of pages in support of the thesis.   In most cases, their best use was as kindling in a fireplace. Most of the recommendations were Buys and there were...

  Alphabet Soup When I began as an investment adviser, I was disappointed to learn how uninformed most folks were about financial matters and financial advisers.  One example was a gentleman who had difficulty understanding the difference between an investment manager and a stockbroker.  My response?  The investment manager is the architect of the portfolio; the stockbroker is the builder of the portfolio.  That concept is easy enough to grasp, but given the multiplicity of letters that may follow one’s name, the situation appears to get much more complex.  A few of the designations require considerable effort and time to acquire.  And then there are those that can be obtained by a modest charge on one’s credit card and no time spent learning about anything. One tipoff is when there are numerous cryptic designations following one’s name.  More often than not, a series of this sort will strongly suggest that the value is what our British bret...

Why Asset Allocation? Asset allocation is a fancier way of describing diversification.   For Wall Street purposes, it’s a variation on “don’t put all your eggs in one basket.”   That phrase is the bottom line for what’s known as Modern Portfolio Theory.   Sounds complicated, but it’s nothing more than the reality that in the world of Wall Street, all investments do not always move in the same direction.   In fact, with rare exception, their paths of progress differ considerably.   Equities, more familiarly known as stocks, move up and down in reflection of the trend of profits of the underlying companies.   When business is good, companies make more money and stocks go up.   And vice-versa. Fixed-income holdings, most of which are bonds, rise and fall in price in response to changes in interest rates.   When rates are rising, the prices of most fixed-income investments will fall.   In the U.S., interest rates are largely controlled by t...

Crypto Eulogy Late last March, when bitcoins were at their year’s peak above $47,000, I was interviewed by Paul Vigna of The Wall Street Journal, who asked me about my thoughts on cryptocurrency.  Rather than an extensive response with all the reasons for my opinion, I offered a simple answer: “My clients would kill me if I bought bitcoins for their accounts.”  Since then, the ceiling has all but caved in on this and other fantasy currencies, not surprising since, in the words of Mihir A. Desai, professor at Harvard Business School and Harvard Law School, “. . . they are a manifestation of a magical thinking that had come to infect part of the generation who grew up in the aftermath of the Great Recession . . .” Cryptocurrencies have no underlying value.  There is no consumer protection.  There are no dividends.  So long as they are trading and prices are swinging up and down, those who are willing to accept extraordinary risk may buy for brief periods in expe...

The Bigger Retirement Question Although financial planning is best begun as early as possible, the reality is that most folks don’t begin giving serious thought to what lies ahead until they are in their 50s . . . or even 60s, a time when it’s getting perilously close to being too late.   I recall a couple who pulled up in two brand new Mercedes sedans when they arrived for a talk about their retirement years.   Those who would be impressed by this display might have speculated that this couple’s finances were in good shape.   The reality was otherwise.   When we began their review, we noted that their assets were barely more than $200,000.   That was before getting to their debts and how their prospective income stacked up against their expected expenses.   Sad to say, it only got worse from there.   Even so, the question about whether you will have enough pales in comparison with an even more important concern: What will you be doing when you a...