Two Steps to Help Individual Investors Become More Successful at Investing

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Navigating the complicated world of investing can seem very intimidating and so frustrating.  There are so many pieces of information coming from the financial media that seem to conflict with each other.  At times it seems as though the markets move up or down for no apparent reason.  What is an investor to do?  Well, one of the most important things to do is to work on your emotional intelligence (EQ).  Most people assume that you need to have an extremely high IQ to navigate the financial markets.  Now it doesn’t hurt to have a lot of intelligence, but it arguably more imperative to have a high EQ.  EQ, in its simplest terms as it relates to investing, is the ability to control one’s emotions during market volatility.  Extreme market moves either up or down tend to make investors act irrationally or in a panicked way.  Instead of the old saying of “buy low and sell high”, they do the exact opposite and “sell low and buy high”.  Therefore, I wanted to share two steps to help you utilize and develop your EQ to allow you to be a more successful investor.  You will note that the two steps are more akin to practices and definitely interrelated.

Step 1 – Learn how to ignore the “noise” about the financial markets on a daily, weekly, and even monthly basis at times.

What does “noise” mean in this context?  “Noise” relates to all the reporting by the financial media and market prognosticators about the short-term direction of the financial markets.  Every day you will hear market “experts” (money managers, economists, traders, CEOs, etc.) predict with a good deal of confidence that the markets will start to rise, start to fall, or stay unchanged.  How do these discussions with plenty of evidence and thought help you?  Well, every investor (even a novice) should notice something right away.  You know that these are the only three outcomes for the market to begin with.  It really does not help to hear the conflicting opinions on a daily basis.  Note that each day at least someone is saying one of the three outcomes for the financial markets.

Who should you believe?  What should you believe?  Now here is an important note about guest appearances that have had recent accurate predictions about the direction of the stock market.  The financial news networks will rarely bring on a guest that has been totally wrong and advised clients quite poorly in the recent past.  It is not advisable for either party to make the guest look bad.  What is the point here?  There is a bias when listening to a guest appearing on a news network because only the ones whose predictions came to fruition are brought back and asked for more ideas.  The moderator never points out the times when that same guest has been wrong in the past.  Thus, it can seem like every returning guest has the best possible advice to follow as it relates to investing.  Moreover, you should adjust your portfolio as he/she suggests.  Do not get caught in that trap!

The main point and reason for step one is that the sources for investing tend to be conflicting and seeming as though the individual investor must act right now.  There are actually very few times when the financial markets reach a point of inflection that truly warrants your attention.  For example, the October 1987 stock market crash, the 1994 bond crisis, the Asian contagion in 1997-1998, the Dot Com Bubble in the 1990’s that started to burst in April 2000, and the financial crisis of 2008-2009 most recently are events that individual investors should read about and learn what is happening.  Although I will though that the difficult part is knowing in real-time what these events are.  Hindsight is always 20/20 as they say.

For additional information, I strongly recommend that you read a blog post I posted a while back.  The discussion goes into far greater detail on this subject and will help you understand the nuances far better.  The link to this blog post is as follows:

https://latticeworkwealth.com/2013/08/04/todays-news-should-prompt-you-to-adjust-your-entire-investment-portfolio/

After all the discussion above, what is the practice investors should develop?  Well, as difficult as it might be and foreign, I encourage/implore you to stop listening to financial news networks and reading financial newspapers (or Internet columns) on a daily or weekly basis.  Why?  Just as a simple truism, it is the easiest way not to succumb to the financial “noise”.  If you are not exposed to it, you will not act (or feel as though you have to act) on a regular basis.  I promise that as you use this technique you will become much more comfortable.  Your EQ will really start to develop and become more mature.  Now I am not recommending that you give up all together on the financial media and sources of information.  Individual investors should simply consult them less often.  Looking at summaries of monthly activity will give you a much more complete picture of what is going on in the financial markets.

Step 2 – Commit to Examining Your Brokerage Account Statements on a Quarterly Basis Only.

I will admit that this practice, and change in behavior, is the hardest for individual investors.  However, effective adherence to step one is only possible by following this recommendation.  Many individual investors look at their account balances on a weekly or even daily basis.  The financial markets can move up and down quite frequently in the short term.  If you constantly look at your portfolio, your EQ will be hard to control or even melt away.

The vast majority of individual investors have a long-term financial plan.  You should have determined your risk tolerance (how much market volatility you are comfortable with), set up an investment portfolio with exposure to different asset classes like stocks and bonds, and determined what financial goals you have for the future already.  By definition the plan is long term and should not be altered all the time.   Note that you will utilize your IQ to establish your investment portfolio and then harness your EQ to stick with it through the inevitable “bumps” in the road.  If you are only exposed to your account balance four times per year, you will be far more likely to make more rational decisions.  Investing is very emotional due to the fact that money is involved.  That is true and will never change.  With that being said, individual investors will have less chances to be affected by emotions using this practice; only four times per year.

What should an individual investor do each quarter?  The quarterly brokerage account statements should be examined every March, June, September, and December.  Take a look at the account balance as a whole and then how the different components of your investment portfolio performed.  Then open up the other two brokerage account statements in the quarter to simply see what the account balances were.  For example, if it was the first quarter, you would be opening January and February after you looked at March.  Now the important thing to remember is that only your terminal balance matters.  What does that mean?  It is merely a fancy way of saying that only the amount of money you have at the end of the quarter is important.  The manner in which your brokerage account balance got to be at the end of the quarter might be interesting to look at, but, at the end of the day, it does not mean much at all.  It is in the past.

These two steps will definitely assist you in becoming a more successful investor.  Note that I did not say a trader or speculator.  Investors by definition have a long-term orientation.  Traders and speculators deal in hours, days, weeks, or even minutes.  Individual investors should be focused on quarters, years, and even longer increments if a solid and well thought out financial plan is in place.

The decision and ways to reallocate one’s investment portfolio is a separate issue.  Over the course of time, it will become necessary to alter the exposure of an investor’s investment portfolio to different asset classes, sectors, or regions.  Those decisions involve the IQ again but having a well formed EQ will assist greatly in that exercise.  I will take a detailed look at account rebalancing in the next series of blog posts.

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Book Promotion on Amazon.com – A New Paradigm for Investing: Can Your Financial Advisor Answer These Questions?

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The original blog post did not make it to all informational outlets. There is a deal on one of my books in the A New Paradigm for Investing series.

Latticework Wealth Management, LLC

Greetings to all my loyal readers of this blog.  How would you like to learn a better way to seek investment advice?  I list and thoroughly discuss questions you can ask prospective Financial Advisors when interviewing them.  Selecting someone to assist you with the process, which is so incredibly important for you, can be a nightmare of complexity.  By reading this book, you will be in the 95th percentile of individual investors in terms of the knowledge necessary to have the tools and information to walk into those Financial Advisor meetings and understand the discussion/jargon and feel confident.  This book on Amazon.com is available for download onto a Kindle.  Additionally, there is a Kindle app for iPhones and Android devices which is free to download.  Please feel free to check out the title below.  I have provided a link to make it easier.   My email address is latticeworkwealth@gmail.com should…

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Book Promotion on Amazon.com – A New Paradigm for Investing: Can Your Financial Advisor Answer These Questions?

Tags

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Greetings to all my loyal readers of this blog.  How would you like to learn a better way to seek investment advice?  I list and thoroughly discuss questions you can ask prospective Financial Advisors when interviewing them.  Selecting someone to assist you with the process, which is so incredibly important for you, can be a nightmare of complexity.  By reading this book, you will be in the 95th percentile of individual investors in terms of the knowledge necessary to have the tools and information to walk into those Financial Advisor meetings and understand the discussion/jargon and feel confident.  This book on Amazon.com is available for download onto a Kindle.  Additionally, there is a Kindle app for iPhones and Android devices which is free to download.  Please feel free to check out the title below.  I have provided a link to make it easier.   My email address is latticeworkwealth@gmail.com should you have any questions/comments/feedback.

The link to the book is as follows:

A New Paradigm for Investing:  Can Your Financial Advisor Answer These Questions?

 

http://www.amazon.com/New-Paradigm-Investing-Financial-Questions-ebook/dp/B00F3BDTHW/ref=sr_1_3?s=books&ie=UTF8&qid=1388595896&sr=1-3&keywords=a+new+paradigm+for+investing+by+william+nelson

The book listed is normally $9.99 but I am offering it for a lower price over the course of the week (May 14, 2015 through May 18, 2015).  For most of the day today, the book is $1.99 which is 81% off.  The price of the book will be gradually increasing during the course of that period.

I would like to thank my international viewers of my blog as well.  The blog can be located at http://www.latticework.com.  I also wanted to especially thank some selected followers of my @NelsonThought and @LatticeworkWlth Twitter accounts (each of whom I would recommend following for the content and insight):

Followers on @NelsonThought:

  • The Wall Street Journal Wealth Report @WSJwealthreport – #wsjexperts
  • The Wall Street Journal Central Banks @WSJCentralBanks – Coverage of the Federal Reserve and other international central banks by @WSJ reporters
  • The Royce Funds @RoyceFunds – Small Cap value investing asset manager
  • Research Magazine @Research_Mag – Latest industry information for wirehouses and ETFs
  • Barron’s Online @BarronsOnline – Weekly financial news magazine of Dow Jones
  • Cleveland Fed Research @ClevFedResearch
  • Pedro da Costa @pdacosta – Central banking and economics reporter at The Wall Street Journal
  • Muriel Siebert & Co. @SiebertCo
  • Roger Wohlner, CFP® @rwohlner – Fee-only Financial Planner for individuals
  • Ed Moldaver @emoldaver – #1 ranked Financial Advisor in New Jersey by Barron’s 2012
  • Muni Credit @MuniCredit – Noted municipal credit arbiter
  • Berni Xiong (shUNG) @BerniXiong – Author, writing coach, and national speaker

Followers on @LatticeworkWlth:

  • Tracy Alloway @tracyalloway – US Financial Correspondent at Financial Times
  • Vanguard FA @Vanguard_FA – Vanguard’s ETF research and education
  • EU External Action @eu_eeas – Latest news from the European External Action Service (EEAS)
  • Charlie Wells @charliewwells – Reporter and Editor at The Wall Street Journal
  • Sri Jegarajah @CNBCSri – CNBC anchor and correspondent for CNBC World
  • Jesse Colombo @TheBubbleBubble – Columnist at Forbes
  • Alastair Winter @AlastairWinter – Chief Economist at Daniel Stewart & Company
  • Investment Advisor @InvestAdvMag – Financial magazine for Financial Advisors
  • Gary Oneil @GaryONeil2 – Noted expert in creating brands for start-ups
  • MJ Gottlieb @MJGottlieb – Co-Founder of hustlebranding.com
  • Bob Burg @BobBurg – Bestselling author of business books
  • Phil Gerbyshak @PhilGerbyshak – Expert in the use of social media for sales

Free Book – A New Paradigm for Investing on 50 year-old Investment Advice Available on Amazon.com

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I have decided to make my recently published book FREE for several days, May 13, 2015 through May 17, 2015 (it normally retails for $4.99).  The book is another installment in my A New Paradigm for Investing series.  In this particular book, I focus on the use of Modern Portfolio Theory (MPT) as the primary tool by Financial Advisors to recommend portfolio allocations.  The theory is over 50 years old, and most of its assumptions have been shown to be less and less useful.  I explore the reasons why in my text.  I have tried to write in such a manner that you do not need a degree in mathematics or statistics to understand its contents.  Moreover, you do not need to know about the intricacies of MPT in order to follow my logic.  You would find the same information in a college textbook but in a condensed format here.  It actually is quite surprising how little Financial Advisors know about MPT in general and how the ideas apply to individual investors.

Note that this book is available for download onto a Kindle.  Additionally, there is a Kindle app for iPhones and Android devices which is free to download.  Amazon.com Prime Members can borrow the book for FREE as well. I have provided a link below to make it easier.   My email address is latticeworkwealth@gmail.com should you have any questions/comments/feedback.

The book is:

  • A New Paradigm for Investing: Is Your Financial Advisor Creating Your Portfolio with a 50 Year-Old Theory?:

http://www.amazon.com/New-Paradigm-Investing-Financial-ebook/dp/B00FQQ0CKG/ref=sr_1_1?s=books&ie=UTF8&qid=1381520643&sr=1-1&keywords=a+New+paradigm+for+investing+by+William+Nelson

I would like to thank my international viewers as well of my blog that can be found at https://latticeworkwealth.com/.  I also wanted to especially thank some selected followers of my @NelsonThought and @LatticeworkWlth Twitter accounts (each of whom I would strongly recommend following for their content and insight):

Followers on @NelsonThought:

  • The Wall Street Journal Wealth Report @WSJwealthreport – #wsjexperts
  • The Wall Street Journal Central Banks @WSJCentralBanks – Coverage of the Federal Reserve and other international central banks by @WSJ reporters
  • The Royce Funds @RoyceFunds – Small Cap value investing asset manager
  • Research Magazine @Research_Mag – Latest industry information for wirehouses and ETFs
  • Barron’s Online @BarronsOnline – Weekly financial news magazine of Dow Jones
  • Cleveland Fed Research @ClevFedResearch
  • Pedro da Costa @pdacosta – Central banking and economics reporter at The Wall Street Journal
  • Muriel Siebert & Co. @SiebertCo
  • Roger Wohlner, CFP® @rwohlner – Fee-only Financial Planner for individuals
  • Ed Moldaver @emoldaver – #1 ranked Financial Advisor in New Jersey by Barron’s 2012
  • Muni Credit @MuniCredit – Noted municipal credit arbiter
  • Berni Xiong (shUNG) @BerniXiong – Author, writing coach, and national speaker

Followers on @LatticeworkWlth:

  • Tracy Alloway @tracyalloway – US Financial Correspondent at Financial Times
  • Vanguard FA @Vanguard_FA – Vanguard’s ETF research and education
  • EU External Action @eu_eeas – Latest news from the European External Action Service (EEAS)
  • Charlie Wells @charliewwells – Reporter and Editor at The Wall Street Journal
  • Sri Jegarajah @CNBCSri – CNBC anchor and correspondent for CNBC World
  • Jesse Colombo @TheBubbleBubble – Columnist at Forbes
  • Alastair Winter @AlastairWinter – Chief Economist at Daniel Stewart & Company
  • Investment Advisor @InvestAdvMag – Financial magazine for Financial Advisors
  • Gary Oneil @GaryONeil2 – Noted expert in creating brands for start-ups
  • MJ Gottlieb @MJGottlieb – Co-Founder of hustlebranding.com
  • Bob Burg @BobBurg – Bestselling author of business books
  • Phil Gerbyshak @PhilGerbyshak – Expert in the use of social media for sales

The Hidden Dangers of Active Investing for Individual Investors

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The typical discussion surrounding active investing relates to a comparison with passive investing.  Active investing is normally defined as investing money with money managers that select individual stocks or bonds with the overall goal of beating the performance of the stock or bond market indexes.  An example might be a large cap stock mutual fund that attempts to have a total return better than the S&P 500 index.  Passive investing is normally defined as investing money in an index mutual fund or ETF that simply selects the individual stocks or bonds within a particular stock or bond index.  There is no attempt to beat that index.  Why would an individual investor choose this route?  While it may seem that settling on a strategy to be only average is “giving up” on great returns, it has been shown in numerous studies that active money managers achieve lower returns than their index over long periods of time.  In fact, if you look up this particular topic on the Internet, there will be a plethora of articles and information that looks at this topic in much greater depth.  However, I would like to look at this topic from a different standpoint.  The topics discussed below still relate to active investing, but the view looks more at an individual investor’s entire portfolio.  Well, let’s dig into the details.

  1. Active money managers may not be fully invested in the stocks or bonds that you expect at all times.

Most individual investors think that the active money managers they choose are always fully invested.  In fact, that is not normally the case when it comes to mutual funds.  Mutual funds will be used for the  purpose of our discussion since they are the most common investment held by individual investors when it comes to active investing.  A lot of portfolio managers decide that the stock or bond market may be poised to decline at any given time.  Since they have this belief in the future direction of the market, they sell stocks or bonds and raise cash in the mutual fund.  Thus, they do not hold 100% of the assets in the mutual fund in the stated investments for the investment strategy.  Why does this matter?  It is easiest to see within the context of an example.

We can examine what happens using a hypothetical portfolio for an individual investor.  Let us assume that an individual investor has a $1,000,000 portfolio.  Further assume that this investor devotes 40% of this total to large cap stocks (i.e. stocks from the S&P 500 index).  That assumption would mean that the total portfolio holds $400,000 ($1,000,000 * 40%) worth of large cap stocks.  Now we assume that the individual investor chooses one active mutual fund to invest with.  What if that active money manager decides that a large decline is coming in large cap stocks, so he/she reduces the exposure of the mutual fund to 70% invested in large cap stocks and 30% invested in cash?  The individual investors’ portfolio now has $280,000 ($400,000 * 70%) invested in large cap stocks and an additional $120,000 ($400,000 * 30%) in cash.  The portfolio is now 28% large cap stocks and 12% more in cash.  Why is this important for the individual investor?

The consequences are enormous.  When this investor initially decides on his/her portfolio allocation and tolerance for risk in relation to achieving financial goals, he/she is assuming that the portfolio will be 40% in large cap stocks.  In the aforementioned example, unbeknownst to this investor, he/she has a lot less exposure to large cap stocks and a lot more of the portfolio in cash.  The important thing to remember here is that when an individual investor embarks upon a passive investment strategy he/she is assured that the exact percentage of any given type of investment is selected.  Another thing to remember is that the individual investor could have chosen to invest only 28% in large cap stocks and an extra 12% in cash to begin with.  The decisions of the active portfolio manager thwart the individual investor’s attempts to build a portfolio of investments that meets his/her needs.  The active portfolio manager is timing the stock or bond market, and the individual investor does not know to what extent that money manager is doing at any given time.

2.  Active money managers have great latitude in the investments they choose and may not be invested in the stocks or bonds an individual investor thinks.

Most individual investors do not look at the prospectus for the mutual fund that they invest in.  The prospectus is a document required by the SEC to be given to all investors.  It includes many pieces of information like expenses of the fund and all sorts of legalese components that are very hard to understand.  One important section of the prospectus is the section that discusses the types of investments the mutual fund may choose.  Since the portfolio manager does not want to be handicapped during times of market turmoil or when unusual investment opportunities present themselves, the types of investments allowed is very broad.  For a stock mutual fund that invests in technology stocks, this section will still include the option to invest in different sectors of the stock market.  This practice is not uncommon in the industry.  What does this mean for your portfolio?

The most important consequence for your portfolio is that you may own stocks or bonds that you do not expect, or you may own the same investment in two or more different active mutual funds.  As it relates to the former, you might own an active stock mutual fund that invests in US stocks.  However, if the portfolio manager decides that an international stock is a great investment, he/she may invest in that stock as long as it has been disclosed in the prospectus as being allowable.  As an investor, you may not want to take on the extra risk of investing in international stocks.  As it relates to the latter, there are times when an active portfolio manager invests in a stock or bond that begins in one category of investment and morphs into another over the holding period of that stock or bond.  An example here would be in the case of a small cap mutual fund.  Most people define a small cap stock as a company with a market capitalization of $1 billion to $5 billion.  There are times when an active mutual fund invests in a larger small cap company that does well over time and becomes a mid cap stock by definition.  Why is this important?  Well, if an individual investor selects the desired percentages of particular stocks or bonds he/she wants to have exposure to, he/she may have overlap between different stocks or bonds in different mutual funds without knowing.  A great way to determine how pervasive this phenomenon is within your portfolio is to use the Instant X-Ray feature of Morningstar.  Here is the link:

http://portfolio.morningstar.com/NewPort/Free/InstantXRayDEntry.aspx

You will be able to see how many stocks or bonds are included in two or more mutual funds that you own.  The great advantage of using a passive investing strategy is that the index mutual funds and ETFs are totally transparent.  Individual investors are able to ensure that they never invest in stocks or bonds they do not want or invest extra amounts in the same investment.

3.  Some active money managers engage in “window dressing” their mutual funds.

The term window dressing is applied whenever an active money manager adds the best performing stocks or bonds to the mutual fund right before the end of the quarter or prior to a report being issued. There are times when an active money manager is underperforming relative to his/her benchmark index. One of the things he/she can do is to add stocks or bonds that have done particularly well during that time period. Thus, the mutual fund did not own that investment for the entire period. However, it looks great to investors because they assume that the portfolio manager is making savvy investment decisions. How does this occur? The main reason this occurs is that mutual funds do not report the purchase date of any stock or bond. They are only required to show how many shares/bonds are owned and the corresponding market value when applied to the closing price at the end of the time period. The only way to check to see if window dressing happens is a messy process. The individual investor must look back at prior reports to see if the stock or bond was actually owned then. Even using this method is imperfect because the portfolio manager may indeed have purchased the security in question at the beginning of the period. The main point is that window dressing is simply a shell game that misrepresents the portfolio manager’s stock or bond selection ability over the time period.

4.  Performance returns presented by mutual funds are only on a gross basis. The taxes an individual investor pays on dividends and capital gains are not reflected which provides a net basis of the actual performance return.

The first thing to point out is that this particular discussion only applies to taxable accounts.  If you have your investment in a 401(k), 403(b), Traditional or Roth IRA, or other tax-exempt accounts, you are not subject to income taxes.  Therefore, there are no tax consequences at this point in time that reduce your gross basis performance returns.  If you only have tax-exempt accounts, you can skip this discussion or read on simply for your own knowledge.

Now it is not the fault of mutual funds for neglecting to present net basis performance returns after tax.  Why?  Well, each individual investor is in a different tax bracket and may have different tax situation.  With that being said, it is important to note that active mutual funds almost always have more taxable items than any passive index mutual fund or ETF.  The reason for this occurrence is due to turnover of the mutual fund.  What is turnover?   The definition of turnover is how many times a mutual fund (or any investment vehicle for that matter) buys and sells the entire grouping of stocks or bonds during any given year.  The simplest example is a turnover of 100%.  A turnover of 100% means that the mutual fund bought and sold all stocks or bonds during the year.  Another way of putting it in more simple terms is that the mutual fund held the stocks or bonds for one year on average prior to selling.  A turnover of 200% means that the average holding period was six months.   A turnover of 50% equates to an average holding period of two years.

Higher turnover in the mutual fund means that there are more capital gains (and capital losses too).  Thus, there are more tax consequences to the individual investor.  Recent studies have shown that the average turnover for an active mutual fund is roughly 80%.  When you contrast that with passive index mutual funds or ETFs, the turnover is low by definition.  The index providers usually only make changes to the members of that index annually.  There are usually only a small number of stocks or bonds added to or deleted from the index.  This means that turnover is very low; it can be 10%-20%.  The main thing to remember for individual investors is that gross returns are all right for a baseline of performance.  However, he/she really should focus on after-tax performance returns of the mutual fund.  It is the money you have left in your brokerage account.

Summary

The hidden dangers of active investing touched on within this article are the main ones.  The importance of these hidden dangers is mainly that, if an individual investor uses active money managers to build his/her investment portfolio, it is nearly impossible to do with any degree of confidence.  When you create an investment portfolio yourself or with the guidance of a financial professional, you are doing two things.  You are looking at your tolerance for risk and determining what your financial goals are for your lifetime.  The second step is deciding what types of investments should be included in your portfolio and what percentages are appropriate to allocate to each type of investment.  As we have seen above (especially in the first three dangers), there are constant forces working against an individual investor when using active money managers to keep the portfolio as designed.  If you choose the passive route to investing via index mutual funds or ETFs, you are assured of obtaining the percentages within each investment category that you desire.

The argument of the merits of active investing or passive investing will go on and on.  However, that discussion usually looks at a single type of investment vehicle choosing stocks or bonds for individual investors.  Did this mutual fund beat its benchmark index this year?  When it comes to individual investors, it is far more important to decide on the proper investment allocation of his/her portfolio in order to achieve one’s financial goals.  The cross currents and confluence of having numerous active mutual funds makes it infinitely more complex to set up a portfolio.  Passive investment vehicles are transparent at all times, so the individual investor is able to choose the exposure to large cap stocks, small cap stocks, international stocks, domestic bonds, international bonds, emerging market stocks, and so on that may be appropriate given his/her risk tolerance and financial goals.  An individual investor can try to establish a portfolio using active managers.  However, the discussion points (hidden dangers) above show the difficulty in this approach.  First, the active money manager may not be fully invested.  Second, the active money manager may invest in stocks or bonds that the individual investor does not intend or replicate holdings by different money managers.  Third, the active money manager may engage in window dressing making it difficult to measure that money manager’s ability to choose the best performing stocks or bonds.

The First Key to Successful Stock Investing is Understanding and Accepting Reality

Latticework Wealth Management, LLC

The first key to successful stock investing has more to do with your emotions than a fundamental understanding of what causes stocks to move up or down. Emotions about money can be a powerful thing and cause people to behave in irrational ways. One of the most common phrases passed on to investors as a piece of wisdom is to “buy low and sell high”. However, study after study has shown that most individual investors fail to heed that advice. Why does this happen? Well, I would submit the real cause is behavioral and based upon incomplete information. Let’s dig into that statement a little further and reveal the key as well.

Most individual investors are told when they start investing in stocks via mutual funds and/or ETFs to expect an annual return of 8% to 9% per year. You will find that many financial calculators to help you plan…

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The First Key to Successful Stock Investing is Understanding and Accepting Reality

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The first key to successful stock investing has more to do with your emotions than a fundamental understanding of what causes stocks to move up or down. Emotions about money can be a powerful thing and cause people to behave in irrational ways. One of the most common phrases passed on to investors as a piece of wisdom is to “buy low and sell high”. However, study after study has shown that most individual investors fail to heed that advice. Why does this happen? Well, I would submit the real cause is behavioral and based upon incomplete information. Let’s dig into that statement a little further and reveal the key as well.

Most individual investors are told when they start investing in stocks via mutual funds and/or ETFs to expect an annual return of 8% to 9% per year. You will find that many financial calculators to help you plan for retirement on the Internet have that as one of the inputs to calculate the growth of your portfolio over time. While that information is not too far off the mark based upon historical returns of the S&P 500 stock index, the actual annual returns of stocks do not cooperate to the constant frustration of so many investors. That brings us to the first key to successful stock investing: The actual yearly returns of stocks very rarely equal the average expected. The most common term for this phenomenon is referred to as volatility. Stocks tend to bounce around quite a bit from year to year. Volatility combines with the natural instinct of people to extrapolate from the recent past, and investing becomes a very difficult task. I will get deeper into the numbers in a later post for those readers who like to more fully understand the concepts I discuss. I do need talk in general about annual stock returns at this point to expand upon the first key.

Below I have provided a chart of the annual returns of the S&P 500 index for every year in the 21st century:

Year

% Return

2001

-11.9%

2002

-22.1%

2003

28.7%

2004

10.9%

2005

4.9%

2006

15.8%

2007

5.5%

2008

-37.0%

2009

26.5%

2010

15.1%

2011

2.1%

2012

16.0%

2013

32.4%

 

What is the first thing you notice when looking at the yearly returns in the table? First, you might notice that they really jump around a lot. More importantly, none of the years has a return that is between 8% and 9%. The closest year is 2004 with a return of 10.9%. If the only piece of information you have is to expect the historical average over time, the lack of consistency can be extraordinarily frustrating and scary. In fact, individual investors (and sometimes professional investors too) commonly look back at the last couple of years and expect those actual returns to continue into the future. Therein lies the problem. Investors tend to be gleeful when returns have been really good and very fearful when returns have been very low. Since the average never comes around very often, investors will forget what returns to expect over the long run and will “buy high and sell low”. It is common to sell stocks after a prolonged downturn and wait until it is “safe” to buy stocks again which is how the sound advice gets turned around.

I will not get too heavy into math and statistics, but I wanted to provide you will some useful information to at least be prepared when you venture out to invest by yourself or by using a financial professional. I looked back at all the returns of the S&P 500 index since 1928 (note the index had lesser numbers of stocks in the past until 1957). The actual annual return of the index was between 7% and 11% only 5 out of the 86 years or 5.8%. That statistic means that your annual return in stocks will be around the average once every 17 years. The 50-year average annual return for the S&P 500 index (1964-2013) was approximately 9.8%. Actual returns were negative 24 out of 86 years (27.9% of the time) and greater than 15% 42 out of 86 years (48.8% of the time). How does relate to the first key of stock investing that I mentioned earlier (“The actual yearly returns of stocks very rarely equal the average expected)?

Well, it should be much easier to see at this point. If you are investing in stocks to achieve the average return quoted in so many sources of 8% to 9%, it is definitely a long-term proposition and can be a bumpy ride. The average return works out in the end, but you need to have a solid plan, either by yourself or with the guidance financial professional, to ensure that you stick to the long-term financial plan to reach the financial goals that you have set. Knowing beforehand should greatly assist you in controlling your emotions. I recommend trying to anticipate what you will do when the actual return you achieve by investing in stocks is well below or quite high above the average in your portfolio. Having this information provides a much better way to truly understand and your risk tolerance when it comes to deciding what percentage of your monies to allocate to stocks in my opinion. I will readily admit it is not easy to do in practice during powerful bull or bear markets, but I think it helps to know upfront what actual stock returns look like and prepare yourself emotionally in additional to the intellectual side of investing. Now I always mention that statistics can be misleading, conveniently picked to make a point, or not indicative of the future. Nevertheless, I have tried to present the information fairly and in general terms.

As previously mentioned, I will be writing another related blog post that will discuss the numbers in more detail with math and statistics.  I have separated these discussions so that those intimidated by math or who do not want to get into all the details can skip that part.  However, I will be providing some advice on how to use the information I have provided to assist you in moving past the first key to successful stock investing.

Is There a Way to Discern Whether or Not a Prospective Financial Advisor Will Provide You with Top-Notch Service? Short Answer is Yes.

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Most individual investors rely primarily on trust and the ability to develop a long-term relationship primarily to determine whether or not a prospective financial professional is the right choice.  Turning over the management of your investments to someone else is a major decision that has many implications.  Your current lifestyle in retirement or future lifestyle in retirement and meeting your other financial goals along the way are of paramount importance.  The assessment of your personal risk tolerance and understanding of how the financial markets work is inextricably linked.  With so many choices out there in terms of whose investment advice to value, it can be extremely challenging to decide who to pick or what firm offers the best investment, financial planning, and tax/legal advice.  With that being said, there is a critical step that I wanted to share with you that can limit the possibility that you might end up with a financial professional or firm that will not work as hard as you would like to ensure that your financial future is secure.

The answer to this question lies in the compensation to the financial professional as a result of taking on your business.  Now keep in mind that not all financial professionals will fall into this generalized group.  However, financial incentives and time constraints make this a significant factor in the servicing of your account.  The single most important question you can ask a prospective financial advisor, as it relates to this topic, is how much the average value of a client account is.  Why is this so important?  The reason it is so important is that any financial professional has a number of client accounts to service, and time is limited and constrained of course.  From the financial professional’s perspective, the ideal would be to acquire new clients that offer the most potential revenue.  Let’s go over some of the specifics of the financial services industry to illustrate the importance of this average account size bogey.

Most full-service financial services firms will categorize the client accounts of a financial professional in various tiers.  There are normally tier one, tier two, tier three, and other clients.  Tier one clients are those who offer the most revenue potential.  These clients tend to have the largest amount of assets.  Tier two clients are clients that have less assets than tier one but offer the promise of moving into tier one in the near future.  Tier three clients have below average assets in comparison to the other tiers and show no immediate promise for a lucrative revenue opportunity in the coming years.  There are then all other accounts that really should be transitioned to another financial services firm.  When the firm considers all the costs associated with maintaining that client account, it does not make economic sense.  It is far better for the financial professional to recommend that the client picks another financial services firm and professional most always does so via a referral.  Note that different firms have different terms to describe these classifications.  However, the general concept holds across the entire industry.

Here is the key component as it relates to individual investors specifically.  Tier one clients tend to be the top 20% clients in terms of account size for a financial professional.  Typically a certain relationship holds in these cases.  This tier of clients usually will yield roughly 80% of the overall revenue for financial professional.  Oddly enough, it follows very closely with the famed Pareto Principle.  The tier two clients fall below that top tier, but they show promise for the future.  Many times these individuals have investment accounts at other financial firms or will be coming into a good deal of new monies in the future.  They might be converted to tier one status.  These accounts tend to fall into the 21%-50% of clients managed by the financial professional.  The tier three clients are the bottom half of the accounts managed by that financial professional.  There also are “legacy” accounts that really offer little to no revenue and sometimes are unprofitable under certain circumstances.

Now you can look at the financial incentives from the financial professional’s prospective.  Let’s say that the financial professional earns a 1% fee on all assets under management (AUM) which is very common across the industry.  Therefore, if a client has $1,000,000, the annual fee is $10,000 ($1,000,000 * 1%).  A client with $250,000 at the same AUM fee will yield an annual fee of $2,500 ($250,000 * 1%).  Thus, it would take four of the latter clients to equal the revenue from the other single client.  Given that any financial professional has limited time to meet with clients, it makes perfect sense that he/she would prefer to have only one client since the compensation is the same.  The financial professional with the $1,000,000 client can service that account and look for another three clients to increase that revenue (i.e. similar time/effort expended overall).  The general key is to garner the most assets under management with the fewest amount of clients.  That allows the financial professional time manage his/her time most effectively and efficiently.

Here is the most important question you can ask any prospective financial professional:  What is the average account size of your clients?  If the average account size is higher than your investment portfolio, the chances are quite high that your account and relationship will receive much less attention than that financial professional’s larger account.  Now there can be extreme cases where a few large client accounts distort the average account size to the upside, but you can always ask the general range of client account size overall.  Two things will be at play in a situation where your investment account value is less than the average.  First, it makes more sense for the financial professional to spend more time with the tier one clients from a compensation perspective.  Other financial firms are constantly trying to “steal” these accounts to their firms by offering more services and additional financial product offerings.  Second, depending on the amount that your account size strays from the average, you will most likely receive customer service contact from a junior member on the team and/or a “cookie-cutter” investment portfolio recommendation.

I will expand a bit more on the last comments.  Most financial services firms use what is termed a “turn-key approach” for tier three clients.  There are set asset allocation models with a limited amount of components in the recommended portfolio.  The advice can be nearly identical to what you might find by simply going onto the websites of Vanguard, T Rowe Price, Fidelity, or Morningstar for free.  Now please do not infer that I am intimating that the asset allocation models of those websites are not valuable or match your particular risk tolerance and financial plan.  The point is why should you pay a financial professional to get a recommended asset allocation that is virtually identical to these offerings.  You would be better off not paying a fee whatsoever since you can replicate those portfolios for free and follow the ongoing changes to these model portfolios over time.  Note that the underlying investments in these model portfolios are quite transparent and regularly updated on the websites and in many cases come from regulatory filings to the SEC.

While it is true that some financial professionals provide the same level of service without regard to client account size, but these financial professionals predominantly tend to charge a flat-fee or hourly fee for investment advisory and financial planning services.  Financial professionals that are compensated with AUM fees or via commissions have a very tempting incentive to not only spend more time with larger client accounts to retain the client over time but concentrate on obtaining new clients with potential to be in the aforementioned tier one category.

To summarize at this point, the primary question to weed out the vast majority of potential financial professionals to manage your money is to ask “What is your average client account balance?”  If your account would be less than that average, there is a strong probability that the future attention to your account relationship will be less than the other client accounts.  If you have questions in the future, especially during volatile times in the global financial markets or major life changes, you may not be able to get a hold of your financial professional for guidance in a timeframe acceptable to you.  The other options you have are to find a financial professional where you are above the average or find a financial professional that charges a flat-fee or on an hourly basis.  At least in the latter option, you know that the financial profession spends more of an equal amount of time with each client.  Every client account tends to get the same amount of attention, and there is very little distinction in terms of importance.  Think of it this way, it is your hard-earned money and your future is on the line, you deserve to be one of the important clients of your financial professional.  Not just a name and account number.

A New Paradigm for Investing on 50 year-old Investment Advice Available on Amazon.com

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I have decided to make my recently published book FREE for today only, March 1, 2014(it normally retails for $4.99).  The book is another installment in my A New Paradigm for Investing series.  In this particular book, I focus on the use of Modern Portfolio Theory (MPT) as the primary tool by Financial Advisors to recommend portfolio allocations.  The theory is over 50 years old, and most of its assumptions have been shown to be less and less useful.  I explore the reasons why in my text.  I have tried to write in such a manner that you do not need a degree in mathematics or statistics to understand its contents.  Moreover, you do not need to know about the intricacies of MPT in order to follow my logic.  You would find the same information in a college textbook but in a condensed format here.  It actually is quite surprising how little Financial Advisors know about MPT in general and how the ideas apply to individual investors.

Note that this book is available for download onto a Kindle.  Additionally, there is a Kindle app for iPhones and Android devices which is free to download.  Amazon.com Prime Members can borrow the book for FREE as well. I have provided a link below to make it easier.   My email address is latticeworkwealth@gmail.com should you have any questions/comments/feedback.

The book is:

1)      A New Paradigm for Investing:  Is Your Financial Advisor Creating Your Portfolio with a 50 Year-Old Theory?:

http://www.amazon.com/New-Paradigm-Investing-Financial-ebook/dp/B00FQQ0CKG/ref=sr_1_1?s=books&ie=UTF8&qid=1381520643&sr=1-1&keywords=a+New+paradigm+for+investing+by+William+Nelson

I would like to thank my international viewers as well of my blog that can be found at https://latticeworkwealth.com/.  I also wanted to especially thank some selected followers of my @NelsonThought and @LatticeworkWlth Twitter accounts (each of whom I would strongly recommend following for their content and insight):

Followers on @NelsonThought:

–  The Wall Street Journal Wealth Report @WSJwealthreport – #wsjexperts

–  Institutional Investor @iimag

–  The Royce Funds @RoyceFunds – Small Cap value investing asset manager

–  Research Magazine @Research_Mag – Latest industry information for wirehouses and ETFs

–  Barron’s Online @BarronsOnline – Weekly financial news magazine of Dow Jones

–  Cleveland Fed Research @ClevFedResearch

–  Euromoney.com @Euromoney

–  Pedro da Costa @pdacosta – Central banking and economics reporter at The Wall Street Journal

–  Muriel Siebert & Co. @SiebertCo

–  Roger Wohlner, CFP® @rwohlner

–  Ed Moldaver @emoldaver

–  Sylvia Maxfield @sylviamaxfield – Dean of the Providence College of Business

–  The Shut Up Show @theshutupshow

–  Berni Xiong (shUNG) @BerniXiong

Followers on @LatticeworkWlth:

–  Tracy Alloway @tracyalloway – US Financial Correspondent at Financial Times

–  Vanguard FA @Vanguard_FA – Vanguard’s ETF research and education

–  EU External Action @eu_eeas – Latest news from the European External Action Service (EEAS)

–  Direxion Alts @DirexionAlts

–  Charlie Wells @charliewwells – Editor at The Wall Street Journal

–  Jesse Colombo @TheBubbleBubble – Columnist at Forbes

–  Alastair Winter @AlastairWinter – Chief Economist at Daniel Stewart & Company

–  AbsoluteVerification @GIPStips

–  Investment Advisor @InvestAdvMag

–  Gary Oneil @GaryONeil2

–  MJ Gottlieb @MJGottlieb

–  Bob Burg @BobBurg

–  TheMichaelBrown @TheMichaelBrown

–  Phil Gerbyshak @PhilGerbyshak

– MuniCredit @MuniCredit

What is the 800-Pound Gorilla in the Room for Retirees? It is 12.5.

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The 12.5 I am referring to is 12.5%, and it relates to investment advisory fees.  I have discussed the effects of investment advisory fees at length in previous posts.  In general, most individual investors pay fees to financial services firms that are too high in comparison to the value provided in many cases.  For example, the vast majority of individual investors do not need complex, strategic tax planning, estate planning and legal advice, or sophistical financial planning.  However, the firms that most people invest with offer those services within the fee structure.  There is very little in the way of options to select a larger wealth management firm that will provide only asset allocation advice at a reduced fee because the individual investor does not need the other services when it comes to tax, legal, and sophisticated financial planning.  I wrote an article several months ago in regard to how you can look at the value added by your financial professional.  It is worth a review in terms of what he/she can do for you that you cannot simply do yourself using a passive investing strategy.  Here is the link:

https://latticeworkwealth.com/2013/10/26/are-your-financial-advisors-fees-reasonable-are-you-actually-adding-more-risk-to-your-ability-to-reach-your-long-term-financial-goals-here-is-a-unique-way-to-look-at-what-clients-pay-for/

I would like to focus on a different way of looking at investment advisory fees.  My primary focus will be on retirees; however, the logic directly applies to those in the wealth accumulation phase of life trying to save for retirement.  As I have mentioned previously, the standard fee for investment advisory services is normally 1% of assets under management (AUM).  This structure simply means that an individual investor pays $1 in fees for every $100 invested.  Another way to look at it is that you will pay $10,000 annually if your account balance is $1,000,000 ($1,000,000 * 1%).  I would like to go through an illustration to show what this means in terms of your investment performance, overall risk profile, and the ability to reach your long-term financial goals.

Most individual investors do not write out a check to their financial professional.  Rather, they have the investment advisory fees paid out of the investment returns in their portfolios.  My example does not make any difference how you pay your fees, but it can be somewhat hidden if you are not writing out a check.  The fees just appear as a line item on your daily activity section of your brokerage statement; most investors skim over it.  In order to make the mathematics easier to follow, I am going to use a retiree with a $1,000,000 account balance and a 1% AUM fee annually.  My entire argument applies no matter what your account balance is or your AUM fee.  You just need to insert your personal account balance and AUM fee which may be higher or lower.  So let’s get started.

In my hypothetical scenario of a $1,000,000 portfolio subject to a 1% AUM fee, this retiree will have to pay $10,000 to his/her financial professional for investment advisory services rendered.  Well, we can look at this fee from the standpoint of the portfolio as a whole in terms of investment performance necessary to pay that fee.  The portfolio will need to increase by at least 1% to pay the fee in full.  Now most financial professionals will tell clients that they can expect to earn 8% per year by investing in stocks.  So using that figure (which is close to the historical average), we can get to the fee by allocating $125,000 of the overall portfolio to stocks in order to increase the portfolio on average by 8% to be able to pay the $10,000 fee ($125,000 * 8% = $10,000).

What does that mean in terms of your overall portfolio allocation to stocks?  You can imagine that, whatever your total allocation to stocks is, 12.5% of that amount is invested simply to pay fees.  For example, if you are just starting out in retirement at age 65 and have 60% allocated to stocks, 12.5% of the expected return (8%) from stocks in your total  portfolio will go to pay your annual investment advisory fees and 47.5% of the expected return (8%) from stocks in your total portfolio will add to your account balance. 

The math works out this way:  $1,000,000 * 60% = $600,000 // $600,000 (invested in stocks) * 8% (expected return from stocks) = $48,000 // $48,000 – $10,000 (AUM fee at 1%) = $38,000.  An alternative way to do the math is to take the total allocation to stocks and subtract the necessary allocation to stocks to pay the AUM fee, and that result is the investment return for the year that remains in your account balance which is $38,000 (So take 60.0% – 12.5% = 47.5% // $1,000,000 * 47.5% * 8% = $38,000).

The paragraph above has major impacts for your portfolio.  Firstly, it illustrates how much additional risk you are taking on in your portfolio as a whole.  In order to breakeven net of fees, you need to invest 12.5% of your portfolio into stocks.  Retirees are in the wealth distribution phase of life, and most are living off the investment account earnings (capital gains, dividends, and interest) and principal.  Since retirees have no income from working and will not be making any additional contributions, they are impacted greater than other investors in the way of volatility.  Stocks are more volatile investments than bonds but offer the promise of higher returns.  It is the simple risk/reward tradeoff.  Second, it shows that the higher the fees for retirees the more vulnerable they are to volatility as a whole.  Since retirees need to withdraw money on a consistent/systematic basis, a higher allocation of their portfolio to riskier investments are more vulnerable than other investors that have longer timeframes prior to retirement (wealth accumulation phase). If there are major downturns in the stock market, retirees still have to withdraw from their accounts in order to pay living expenses.  They do not have the luxury of not selling.  Yes, a retiree could sell bonds instead of stocks but then the allocation of stocks has to rise by definition as a percentage of the entire portfolio.

There is a way to rethink the investment strategy for a retiree.  In today’s investing environment, there are many more investment offerings that offer financial products at much lower expenses than traditional active mutual fund managers.  These include ETFs and index mutual funds.  The expenses typically are less than 0.20% (in fact, most are significantly lower than this).  Additionally, there has been the proliferation of independent Registered Investment Advisors (RIAs) and Certified Financial Planners (CFPs) over the past 10-15 years who charge fee-only (hourly) or flat fee.  Most of these financial professionals charge significantly lower fees than the traditional 1% AUM fee.  In fact, it is possible to cut your fees by 50% at least.  Now the flipside may be that you might not have the ability to consult with some about certain sophisticated tax, legal/estate, and financial planning strategies.  However, most retirees do not need that advice to begin with.  The average retiree only needs a sound asset allocation of his/her investment portfolio given his/her risk tolerance and financial goals.  To learn more about independent RIAs and CFPs, I have included these links:

1)       RIA – http://www.riastandsforyou.com/benefits-of-an-ria.html

 

2)      CFP – http://www.plannersearch.org/why-cfp/Pages/Why-Hire-a-Certified-Financial-Planner.aspx

The main benefit in terms of reducing fees is not only that the retiree keeps more money, but, more importantly, he/she can reduce the overall risk of the portfolio.  Let’s go back to our hypothetical example of a retiree with a $1,000,000 who is charged a 1% AUM fee or $10,000 per year.  If the total investment advisory fees are reduced by 50%, the total annual fee is 0.5% or $5,000 per year.  What does this mean?  In our first example, the retiree had to allocate 12.5% of his/her portfolio of stocks to pay the $10,000 annual AUM fee (assuming an 8% expected return).  If the fees are 50% less, the retiree now only has to allocate 6.25% of the portfolio to stocks in order to pay the annual investment advisory fees ($1,000,000 * 6.25% = $62,500 // $62,500 * 8% = $5,000).

Now if we go back to the longer example of a simple 60% stock and 40% bond portfolio, the retiree in this case is able to invest 53.75% in stocks and 46.25% in bonds and still pay the annual investment advisory fees.  The math is as follows:  ($1,000,000 * 53.75% = $537,500 // $537,500 * 8% = $43,000 // $43,000 – $5,000 new annual fees = $38,000).  You will note that the retiree has $38,000 in his/her portfolio after the annual fees are paid out.  This dollar amount is equal to the other hypothetical retiree who had to pay a 1% AUM fee.  The example illustrates that both investors have the same expected increase to their portfolio but the retiree with the lower fees is able to get to that figure with a portfolio that is less risky because he/she is able to allocate 6.25% less to stocks.

Another way to look at this scenario is that the retiree in the second case with 50% lower fees could have alternatively chosen to reduce his/her stock allocation by 5%.  For example, the retiree could have started with a portfolio allocation of 55% instead of using the 53.75% stock allocation.  In this example, the retiree would have an expected return after fees that is $1,000 higher than the retiree from the first example and take less risk.  The math is as follows:  ($1,000,000 * 55% = $550,000 // $550,000 * 8% = $44,000 // $44,000 – $5,000 = $39,000 // $39,000 – $38,000 = $1,000).  The retiree in this example would have a higher expected return from his/her entire portfolio of 0.1%.  While this figure might not sound like much, the more important point is that this return is achieved with less risk (only 55% allocation to stocks versus a 60% allocation to stocks).

A financial professional might argue that he/she is able to create an asset allocation model for an average retiree that will end up having investment returns higher than that recommended by the independent RIA or CFP.  Of course, this might be the case.  However, in order to have the retiree be indifferent between the two scenarios, the portfolio recommended by the financial professional charging a 1% AUM fee must be able to return 0.5% more annually at an absolute minimum.  Now this does not even consider the riskiness of the retiree’s portfolio.  In order to have a portfolio earn an additional 0.5% per year, the client will have to accept investing in riskier asset classes.  Therefore, given the additional risk, the retiree should require even more than an additional 0.5% overall return to compensate him/her for the potential for higher volatility.

As you can see, the level of fees makes a big difference.  The more you are able to cut the fees on your retirement account (and any account for that matter) the less risky your portfolio can be positioned.  In the aforementioned example, the overall reduction in the exposure to stocks can be a maximum of 12.5% to stocks.  Now the average retiree will most likely not want to forgo any investment advice from a financial professional.  However, in the case of person able to lower his/her investment fees by 50%, he/she was able to reduce his/her investments in stocks by 6.25% (12.5% * 50%).  In fact, you can figure out the possible reduction in exposure to stocks by multiplying the 12.5% by the reduction in fees you are able to achieve.  For example, let’s say that you are able to reduce your investment fees by 70%.  You would be able to reduce your allocation to stocks by 8.7% (12.5% * 70%).

The entire point of this article is to show you how you can be able to reduce the volatility in your portfolio and not sacrifice overall investment returns.  If investing in stocks during your retirement years makes you nervous, this methodology can be used to help you sleep better at night because you have less total money of your entire retirement savings allocated to stocks.  However, you are not sacrificing investment returns.  Always remember that in the world of investment advisory fees, it truly is a “zero sum game”.  All this means is that the investment advisory fees are reducing your net investment portfolio gains.  The gain in the value of your portfolio either goes to you or your financial professional.  The more you learn about how investment advisory fees, the types of financial professionals available to advise you offering different fee schedules, and how the financial markets work, the more gains you will keep in your portfolio.