Ex-investment industry guy willing to take questions

[0121stockpicker]

Seems I'm in waay over my old head. Would you say generally, that a particular funds performance over 5 years is related directly to it's risk? That a fund paying 8% is riskier than one paying 3% over the same time?
Also, I think the market fell what in 06?, that a fund that has had positive numbers over ten years is safe?

Yes, we call that risk / reward. "In general" the more the potential reward - the greater the risk that one must take. Obviously we all try and find the exception to that rule. But there is absolute NO DOUBT that if its too good to be true it prob is.

 

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[lastleg]

Jeff, you are asking if you have to take more risk for higher returns? Not always, if you get in at the start of a bull run you won't
be like playing the slots. When I got into the REIT (Real Estate Investment Trust) the market was going up following the general
sentiment of the crowd. After the froth was over it was time to take the win and reinvest in the next going trend.

If you put your funds on auto-pilot sooner or later you get bit. The amazing thing is the resiliense of the capital markets. If you
stay in too long and get bit just stay the course and most times you gain it all back. The older I get the less risk I can abide.

Wellington has an expense ratio of 0.27, a one year return of 12.97, and in 2013 has gained 3.78%.

 

[Native Floridian]

The route I recommend to anyone starting out in investments is this:

1. The first place to start is with yourself. You need to come up with an investment plan. To do that you need to figure out what the goal is for the money you want to invest. Is it for retirement? Is it to fund an education, buy a new house, fund charitable giving etc ? Many say, I just want to make money. That's fine we all want to make money. But the question remains, what will the money be used for?

2. Once we have a goal we can set an investment time horizon. That is, how long the money will be invested. The investment time line is one of the most important factors in determining the types of investments we will make. The shorter the time line the less risk we will take. As an example, with college savings funds we gradually reduce exposure to all risk as the child approaches college age. By the time the kid is three years away from college we have removed all risk to principal. Why? There is no time to make the money back should the market take a dive off the high board. And, that happening is unpredictible. There is a hard target due date for that money.

3. Risk - everybody talks about it, but what is it? Most define risk as principal loss. However there are other types of risk. Among the biggest is perfomance risk. That is, is your portfolio achieving the returns needed to achieve your goals? It is possible to be too risk adverse.
Simply put, you need to define how much risk you need to take to achieve your goals, and how much you are willing to take. Those could be different and is something you need to reconcile. Either lower goals or add more risk. You can start defining you risk tolerence by using a simple 1 to 10 scale. One is no risk, 10 is take it to a casino and put it all on the don't pass line.
(Ok, you are asking yourself how do know how risky an investment is? With mutual funds there are several tools that can be used. One very popular way to define risk is to define it relative to market risk. That is, an investment is either more risky than the market or less risky than the market. A mutual fund tool that measures market risk against a benchmark index like the S&P 500 is called Beta. Technically, Beta measures volitility relative the market. Beta is a number that can applied to all mutual funds. A Beta of 1.0 is exactly market risk. A Beta above 1.0 is more risk(volitile) than the market, less than 1.0 is less risk than the market. This is an overly simplified explanation, but anyone can use this as a starting point. Most mutual fund families publish Beta on their fund's fact sheets, available on the web. Beta can also be found at the two largest Mutual fund statistical /analytical companies on the planet, Morningstar and Lipper Analytical. I know if you do this your next question is going to be OK, beta got it, but what's Alpha? we'll get to if need be.)

Once you've defined your goals, time horizon and risk tolerance you can formulate a plan. You can then begin your search for investments that fit your plan. Using the end number of how much dough is needed to achieve your goal you can plug in a yearly return needed to reach that goal. if the number is really high, say 20% per year, that is unrealistic. Something needs to change, either the time line has to be pushed out, or the risk substancially increased, or the goal amount lowered. To give you a number we use in planning, and understand it is just a number, we use 8% for purposes of long term planning. It's a number we are comfortable achieving over a long time frame. WE can then use this number to benchmark our position in relation to the goal as time goes on. Are we on target, running behind, ahead etc. We can then make course changes if need be. The point is, just like using a GPS we always know where we are in relation to the destination.

This isn't everything needed to be succesful, but it's enough to get started.

 

[Native Floridian]

jeff, I recommend Vanguard's Wellington Fund but first google the fund performance chart to see the long term track record
of all it's funds. Wellington holds stocks and bonds.

Eric has ignored me, maybe he can advise you on how to get the most bang for your buck.

Lastleg, You thought that i was talking down to you? Here you think Eric has ignored you. Little oversensitive?

A few posts back you said us load guys must hate Bogle. First, there is no such thing as a load guy (not talking down to you, just a fact) And second, most advisors that i know respect Bogle as a smart businessman. He's a smart guy. They disagree with his message that anybody can invest on their own as easily as dialing an 800 number. They disagree because it is fact that not everyone has the ability to manage their own investments. That Bogle says otherwise does a great disservice to those people. That Vanguard has opened their platform to fee and full service advisors shows that they understand that fact. But you will never hear a word from them that they do. Too many dollars are at stake.

 

[Brian T. Booth]

Spent twenty year in the mutual fund and investment banking industry analyzing stocks, etc. now semi-retired. Given its too cold for me to detect I'm more than happy to spend some time sharing my opinion if anyone has any investment related questions. Feel free to post or message me if you have any.

Eric

Want to get into some up and coming natural gas companies. Got any suggestions? I think natural gas is going to explode in the next 3 to 5 years. Any and all information is appreciated.

Thank You,

Brian T. Booth

 

[Native Floridian]

Brian, as a suggestion, try PMing Stockpicker. You might have better luck in getting a response.

My own opinion of Nat Gas is that it's been a tough way to make a profit. i have had one win over the years and that was in a Limited Partnership. it won big because of new reserves found lengthened the income payout stream. We didn't expect new reserves so a pleasant surprise that bailed me out of an otherwise bad investment.

With new reserves being found everyday I don't see what you see. That is not to say you are wrong. The big play today are energy MLPs. IMO the best among them are Midstream MLPs. Midstream MLPs are invested in companies that transport and store the energy product. Pure Midstream companies have almost no commodity risk exposure. The price of the commodity doesn't matter. Only the volume transported. ( there is some stock price risk because many investors don't know there is no commodity price risk and will sell if the commodity takes a dive.) The only real risk is a reduction in volume. That has happened only once in modern history - 2008.

BTW, just to get you up to speed on the terminology, as you may be aware, upstream are exploration MLPs and downstream are the refiners.


Good luck - hopefully Stockpicker gets back to you with some good ideas.

 

[0121stockpicker]

Sorry about that. I'd had gotten the boot for correcting someone's use of the English language - good vs well. Was taken as an insult. Back in action though.

 

[Peyton Manning]

and early too, welcome back

 

[Native Floridian]

Sorry about that. I'd had gotten the boot for correcting someone's use of the English language - good vs well. Was taken as an insult. Back in action though.

Happy to see you back and doing good! Ah, I mean well! Hmm, maybe I should stick with good?

I too got a mini vacation. Not looking for another one so the less said the better.

 

[slinnils]

Look up LTS. Gonna shoot to $2.20 soon.

 

[lastleg]

NF, haven't checked this board in a while. I don't get notified of recent posts. Glad Eric is back.
Index funds are OK for no-research investors. I am in fixed due to age. I know I've missed out
on big gains in equities, just shows how a little experience is no guide to bull runs.
Remember the American Gas Index Fund? Yep, natural gas burns.

 

[dejapooh]

I would like to bounce my thinking off of you and see if you see any flaws in my line of reasoning.

I've liked Dividend stocks myself (Specifically, REITs or Real Estate Investment Trusts to those who don't know), but given the current environment, I personally believe we are in for a dose of Inflation (I am not doom and gloom, 15,000%, but 50% over 5 years seems possible). The only REAL danger in REITs is if it is carrying significant debt, and if that debt is Adjustable (which most real estate debt beyond small apartments buildings would be). If I invest in REITs or TIC's (Tenant in common real estate holdings) with low debt, if inflation comes, then the value of the stock in the REIT, or the resale price of the TIC would go down, since both values are based on the yield. Over time, if Debt is not an issue, as rents rise to market, the price should rise to meet inflated value of the property. Given all of that, I should invest in other things now that are inflation protected and liquid. Once the inflationary period seems to be under control, I can cash out and buy at the bottom of the market. Does that sound about right (Of course, timing the market is always a dangerous thing to try).

 

[dejapooh]

Want to get into some up and coming natural gas companies. Got any suggestions? I think natural gas is going to explode in the next 3 to 5 years. Any and all information is appreciated.

Thank You,

Brian T. Booth

My car uses Natural Gas. I just wish there were more stations. If there were, more people would be getting in on this (Domestic fuel that costs $2.15 at the pump).

 

[Native Floridian]

What we are in for is higher interest rates. Bond markets, led by the Treasury market will likely feel the brunt. DIY investors will likely exit fixed income funds en masse creating a sizable downdraft in across the board bond prices.

Investments in areas that are dependent on leverage or where the securities themselves are leveraged will also get nicked. Many mutal funds, closed end funds, MLPs and ETFs use borrowed money to inflate income. it is one way to deliver above market income in a 1% world. So maybe a double whammy.

LL, I disagree about Index funds. They are guaranteed to lead to portfolio under performance. The best you can hope for with index investing is the Index minus it's expenses. You will never do as well as the index. Built in under performance.

Also, what indexes should one invest in? There are too many answers to that question to throw a general "just invest in index funds" answer. Age, risk tolerance, and goals would need to be assessed to properly answer the question. Again, this is one of the reasons that companies like Van Guard have opened their platform to Advisors.

 

[0121stockpicker]

I would like to bounce my thinking off of you and see if you see any flaws in my line of reasoning.

I've liked Dividend stocks myself (Specifically, REITs or Real Estate Investment Trusts to those who don't know), but given the current environment, I personally believe we are in for a dose of Inflation (I am not doom and gloom, 15,000%, but 50% over 5 years seems possible). The only REAL danger in REITs is if it is carrying significant debt, and if that debt is Adjustable (which most real estate debt beyond small apartments buildings would be). If I invest in REITs or TIC's (Tenant in common real estate holdings) with low debt, if inflation comes, then the value of the stock in the REIT, or the resale price of the TIC would go down, since both values are based on the yield. Over time, if Debt is not an issue, as rents rise to market, the price should rise to meet inflated value of the property. Given all of that, I should invest in other things now that are inflation protected and liquid. Once the inflationary period seems to be under control, I can cash out and buy at the bottom of the market. Does that sound about right (Of course, timing the market is always a dangerous thing to try).

Deja, a couple comments. If rates start to rise it can put pressure on yield investments like reits, utilities, etc. On the flip side, real estate does tend to be an inflation hedge and a little inflation could allow the REIT to increase rents etc. do you have a REIT fund or an individual REIT.

 

[sirlostalot]

NF Im just a dumb truck driver and havent had the education in finance that you have. Now explain to me why I would pay someone a fee to manage my money when around 80% cant beat the S&P 500 index? I think Ill play the odds and go with an index fund.

I agree bonds are not the place to be right now. Im completly out of it. When everyone panics and start selling thats when Ill be buying. Thats my investment style. When everyone getting out of an investment Ill be jumping into it.

 

[Native Floridian]

Sirlostalot, gotta like a truck driver with a sense of humor!

A few things-

if you are using mutual funds you are paying someone a fee. Even if you are using index funds. There is no free lunch!

The studies that support the 80% number (actually it's someplace around 90%) are academic studies that have sparked much controversy in the academic world. Everything from the math to the criteria has been thrown under the bus. Those studies, BTW, focused on Pension Fund performance, not mututal fund, money manager or, financial advisor performance. So when you ask why pay someone to manage your money exactly who is that someone you are asking about?

That said, there are also studies that show that it could be beneficial to hire a pro to manage your dough. Most interestingly, The DALBAR studies that show the differences between index performance and investor performance. Did you know there was a difference?

Most people dont. DALBAR shows during the 20 year period from 1990 to 2010 the S&P 500 returned 7.81% annually. Yet over the exact same time frame the typical investor averaged only a 3.49% average return. Wow, less than half! These are indexers, just like you! Why is that? Why do investors significantly underperform the index?

You actually already gave us the answer in your post. When everyone else is selling you are buying. Does that means you are selling when everyone else is buying? Regardless to be going into the market indicates you were on the sidelines at some point. There in lies the problem! You may be the one in 10,000 investors who can perfectly time the market, but everyone else doesn't have that talent. They miss the biggest moves of the market which are bounces off the bottom. They also come out too soon. Combine that with all the other timing mistakes and the reduced investor performance is neatly explained. There is no sin in that. Misreading the tea leaves is a time honored tradition.

Financial advisors may not be able to beat the market, but they can keep their clients from beating themselves. Add in risk management and the lions share of advisors are worth more than their fees.

As an example - Across my client/asset base my cost to my clients is .66%. Let's subtract that from the DALBAR S&P 500 number of 7.81%. Had we invested in the S&P 500 index over the study's time period, and never sold, that would give my clients a 7.15% net after all costs average return. 7.81 -.66 = 7.15.

Using the the numbers supplied by DALBAR a $100,000 portfoilio invested by the typical investor who tried to time the market over the 20 year period from 1990 to 2010 would have almost doubled that money, having a portfolio worth $198,000. My client after paying my fees would have had a portfolio worth $397,000. The difference? Everytime my client called me and asked me to take them out I would have told them to sit down and shut up! Yes, that sounds harsh, but it what the client is paying me to do.

Note that my cost to my clients is not an issue. That is because by following my advice to stay put i have roughly tripled the performance that DALBAR says they would have achieved on their own.

Looking at those numbers, do you think people who do pay someone to manage their money are getting their money's worth? Only you can be the judge! But places like Merrill Lynch exist for good reason. The people who employ them are not stupid, lazy, or uninformed.

That said, the do it yourself industry, which is the Vanguards and Money Magazines of the world make a huge deal out of cost. That is where they focus investor attention.They compare before and after costs performance numbers to make their case. While costs are very important, the correct comparison to make is investor performance, not investment performance. Who gives a hoot how the investment did? it's how you do that counts! If a financial advisor can stop an investor from making the mistakes that shoots them in the foot, thus increasing their returns, they are worth their fee and more.

 

[Native Floridian]

Another point to be made is that most finanacial advisors have asset minimums. That is because asset management is a business. Like any other business choices have to be made on how to control costs. Just as lostalot, as a trucker, has to decide what loads make sense financially and what loads don't, financial advisors must do the same when chosing who to do business with.

The average Merrill Lynch financial advisor makes about $420,000 a year. That's off of revenue of about $935,000. At UBS the numbers are even higher with average income of about a 1/2 million dollars.

On an average 2080 hour work year that works out to $200 to $240 per hour. The average account takes six to ten hours to open = $1200 to $2000. Yearly contact/ analysis/maintenance would be another 4 to 8 hours= $800 to $1600.

If you walk in with $100,000 they want to help you, but economically, it doesn't make sense. Even at the max fee of 1.5% it would take them three years just to recover the cost from year one. So, it isn't that they don't like you, it is the math doesn't work for them. just as it doesn't pay for a trucker to haul freight for less than his cost to operate.

That said, Merril, UBS. Morgan etc are the big leaugues of financial mangement. There are independent advisors who will take clients with lower account minimums. Those using an independent can get some really good bang for their buck. Many of these guys have decided they were fed up with Mother Merrill or another A level firm, quit, and decided to hang out their own shingle.

Lastly, the only advisors i would caution against would be insurance agents. Don't use your insurance agent. Selling homeowner's insurance does not qualify you to sell secuirities at any level. If the feds wanted to get the most bang for the buck with investor protection legislation they would ban these people from selling securities.

 

[sirlostalot]

NF in the example you had for the S&P 500 for the buy and hold for 20 years, what would be the value of the $100,000 account if the fee was .05 instead of .66? The .05 is what I pay on my S&P 500 fund.

Do I understand the diffrence between index and investor performance? Actually I do. I also understand the reason for diversification. I have S&P, Growth, Value, Reits, Small Cap, Medium Caps and International. Just got out of bonds but will get back into them when they drop.

You mentioned that sometimes someone will get out of an investment to soon. But if they got out and it went up a little then dropped past where they got out then they did good. Lets not be to greedy no one can call the tops all the time.

You ask if Im selling when everyone else is buying. Usually no. Just putting new money to work. Im never setting on the side. I move my funds around to diffrent investment where I think they will do better but Im sure you do the same thing.

Im not even going to mention anything about how much a financial advisor makes except to say Im in the wrong business.

 

[Native Floridian]

NF in the example you had for the S&P 500 for the buy and hold for 20 years, what would be the value of the $100,000 account if the fee was .05 instead of .66? The .05 is what I pay on my S&P 500 fund.

Do I understand the diffrence between index and investor performance? Actually I do. I also understand the reason for diversification. I have S&P, Growth, Value, Reits, Small Cap, Medium Caps and International. Just got out of bonds but will get back into them when they drop.

You mentioned that sometimes someone will get out of an investment to soon. But if they got out and it went up a little then dropped past where they got out then they did good. Lets not be to greedy no one can call the tops all the time.

You ask if Im selling when everyone else is buying. Usually no. Just putting new money to work. Im never setting on the side. I move my funds around to diffrent investment where I think they will do better but Im sure you do the same thing.

Im not even going to mention anything about how much a financial advisor makes except to say Im in the wrong business.

The study shows that timing is a mistake that costs investors money. In your first post above you admit to waiting for the market. You buy when everyone else is selling. As much as i agree with that, it indicates that you are timing the market. IOW, trying to out guess it.

My only point is this: One of the primary jobs of advisors is to keep their clients from making the mistakes that shoots them in the foot. Market timing is but one example. Usually, just by eliminating the mistakes the advisor can improve performance by more than enough to cover the fee. As i said, we do our best to keep the clients from beating themselves.

That alone is worth the fee!

At you 15 basis point less cost, i gotta think you've got a better way to spend your time than keeping up with investments.

As for being in the wrong biz, as long as you love what you do, the money is secondary.