We were honored that Rob Silverblatt at U.S. News & World Report listened to us and rigorously dug deep with us into the powerful secret of event based rebalancing over traditional quarterly or annual rebalancing. He questioned our numbers and assumptions and did a great job describing the issue. Finally someone is helping us make the distinction between “time based” and “event based” rebalancing in the press.
Most retirement investors rebalance via calender alerts on a quarterly basis. This method, however, is trumped by the deeply researched practices of large endowments that rigorously perform event based rebalancing. These large institutions have hundreds of millions if not billions at work in and understand that by setting pre-defined bans by asset class or index, they are able to have thier technology keep a watchful eye on market dynamics and harvest gains at the exact moment the portfolio moves outside of rules for the portfolio. This contrarian discipline allows these endowments and large institutions to add as much as 2% a year to their returns, not including taxes and trading fees.
At MarketRiders, we have created an retirment platform that empowers everyday retirement investor with rebalancing technology enjoyed by wealthy endowments. In our MarketRiders engine, you too can set the rebalancing bans for your retirement portfolio. If it is in a tax free account and you have low brokerage fees, you may go under your dashboard and choose Set Alert Levels to increase your rebalancing sensitivity to a setting of 4 or 5. If you are in a taxable account, we recommend a setting of 3. Whether you are a MarketRiders member or not, what matter most is that you follow the examples of the pros through disciplined event based rebalancing.
To read Rob Silverblatt’s article, go to: http://www.usnews.com/money/blogs/Fund-Observer/2009/11/11/the-great-rebalancing-debate
The news about retirement portfolio investing this week has been a little light, so we start with the lighter side. Kiefer Sutherland’s misfortune is not funny, but we’ve watched our hero in “24″ defy the odds of multiple life and death situations. So it’s ironic that in real life, he too fell victim to an investment scam. “24″ main man Kiefer Sutherland has lost $869,000 in a rip-off investment scheme. The 43-year-old actor is just one of several victims of Michael Wayne Carr, who enticed investors to fork out cash for a cattle deal that turns out to be a fraud. It happens all the time, no matter how rich and famous you are and when you can have the smartest advisors money can buy. Note to Kiefer and the producers of 24: for Day 9 (next year’s season), replace the terrorists with financial terrorists. Kiefer’s acting will be supercharged from personal experience!
Second, according to the NY Times, if you want to be considered “in the know”, just start talking about ETFs at your next party. The wave is sweeping the investment landscape and investing in them might soon be considered “cool.” ”Average investors haven’t really latched onto perhaps the biggest investing innovation of the past two decades. Despite being low-cost, tax-efficient and easy to buy or sell at a moment’s notice, exchange-traded funds remain largely the domain of institutional investors and stock-market aficionados. ‘Main Street still barely knows what they are,’ acknowledges ETF expert Matt Hougan of IndexUniverse, an independent Web site on exchange-traded and other index funds. That may soon change.”
Third, one of our Experts at MarketRiders is John Bogle, the founder of Vanguard. When he writes in the Wall Street Journal, we listen. There’s a group of investors so enamored with him, that they host a popular and growing website dedicated to following his investment theories: www.bogleheads.org. Jane Bryant Quinn lists this site as her favorite. Bogle’s editorial is well worth reading. He writes:
“(At the end of 2009) I concluded that ‘the faith of investors has been betrayed.’ How so? Because the returns generated by our corporate stewards have often been illusory, created by so-called financial engineering and produced only by the assumption of massive risks. What’s more, too many of our professional money managers have failed to act as vigilant stewards of the money that we investors entrusted to them.”
We can’t emphasize it enough — maintain an asset allocation that’s good for you so that you have diversification, and own ETFs in each asset class.
Many do not flinch at paying 1-2% of their asset in fees to a financial advisor, but if one were to better understand the Law of Compounding one might look at 1-2% differently. The Law of Compound Returns is a force of nature. Simply put, the Law of Compound Returns says money left alone creates more money. Understanding this concept is critical to your success as an investor; An Investing 101 term worth understanding.
Wall Street interrupts the Law of Compound Returns. Wall Street would have you believe that you need to interrupt this force of nature with heavy-handed human intervention and hefty costs that drain away your investment. Working counter to the Law of Compound Returns, Wall Street dooms you to failure. But it will succeed in taking your money-if you let it.
So what is one to do? Investing in low cost index funds, ultimately exchange traded funds, and taking on a more passive investment style will allow your money to grow efficiently-without the oversized management fees and tax implications that are Wall Street’s bread and butter (and caviar and steak). Diverting the 1-2% you have paid in fees over the years into your own pocket will over time be a substantial gain for you.
An example of compounding:
Let’s say you are 40 years old and invest $100,000. You earn a 9% return the first year, so now you have $109,000. You reinvest your $9,000 and it continues to earn 9%, so you have $118,810 by the end of the second year. If your investment keeps growing at 9% (and you don’t withdraw any of the gains), your money starts growing at an astounding rate.* The same holds true for the 1-2% you would keep by managing our own money. The percent itself may seem small but over time is significant in savings.
So for all you beginners to ‘do-it-yourself investing’, look to building a portfolio of low cost index funds or ETFs. With a good asset allocation and attention to rebalancing your portfolio as needed, you will benefit with more retirement dollars to spend in the future than if you hired an advisor to manage your money for you.
* Of course 9% is just an example, but it is consistent with the average annual compounding rate of the U.S. stock market over the past (80) years.
In a recent USA Today article, Exchange traded funds are a low-cost way to build portfolio, John Waggoner does a great job of outlining the benefits of ETFs, advising what to steer clear of and provides sound model portfolios.
“one of the biggest advantages of ETFs is cost. Many ETFs charge 0.5% a year or less in expenses. That’s $50 a year on a $10,000 investment, less than it would cost to retread a tire.”
Luckily, with the range of ETFs available on the market today one can easily construct a diversified portfolio with a robust asset allocation. ”You can use broad-based, low-cost ETFs to build a solid portfolio on the cheap.”
Bottom line, with the way the economy is going, one can not ignore the cost benefits of an ETF. “Over the long term, ETF investing in basic, low-cost portfolios can save you thousands — or tens of thousands — of dollars. Why give it to a fund manager if you can keep it yourself? Even if you’re not a cheapskate, you can appreciate that.” Give them a try.
Thursday, February 4, 2010
Exchange traded funds, more commonly referred to as ETFs, are gaining momentum on the investment front as more people consider ETF investing as part of their financial mix.
According to a recent New York Times article ETFs: The Next Step For Average Investors “Average investors haven’t really latched onto perhaps the biggest investing innovation of the past two decades. Despite being low-cost, tax-efficient and easy to buy or sell at a moment’s notice, exchange-traded funds remain largely the domain of institutional investors and stock-market aficionados.”
‘Main Street still barely knows what they are,’ acknowledges ETF expert Matt Hougan of IndexUniverse, an independent Web site on exchange-traded and other index funds. That may soon change.”
The wave is sweeping the investment landscape and investing in them might soon be considered “cool”. Join the revolution and invest in ETFs.
ETF stands for Exchange Traded Funds — these are funds that trade on the stock exchange just like any stock. And you follow the same procedure at your online broker to buy an ETF as you would any stock like IBM or GE. It should cost you between $4 and $10 per trade.
ETFs are not a secret, but investment professionals often don’t make fees from them, so they often go ignored.
Each ETF is a “basket” of stocks that represent a particular index. For example if you wanted to own every stock in the S&P 500 Index, you would by one of several ETFs that follows that index – an example being “SPY” or Spiders. By owning one share of SPY, you gain diversification across 500 stocks.
With ETFs you can invest in practically any market you want. Some of the most popular indexes are the S&P 500 (tracks the largest U.S. public companies), the Russell 2000 (tracks some of the smallest U.S. public companies) and the Morgan Stanley Europe Asia Far East (EAFE) index composed of companies in developed foreign countries. ETF investing also allows you to invest in real estate, bonds, commodities, sectors and other markets. There are currently over 800 ETFs now available and growing.
Mutual funds are 6 -10 times more expensive than ETFs because they hire pros who try to select a few stocks within the index that will “beat” it. But when you invest in an index fund, you basically get the exact returns of the index. Since computers (not humans) manage the stocks in an ETF, the fees are very low.
Sit back and let it ride — To allow the Law of Compounding to work its magic, it’s important to hold your ETFs as long as possible so you pay minimal taxes on dividends. And really, unless you decide to get out of a market, there are few good reasons to sell. Better to hold on and ride the markets, continuing to enjoy the benefits of Law of Compounding at rates that have averaged around 9% a year through history for stocks and 5% for bonds.
Still yearning for the excitement of individual stocks or “high-flying” mutual funds? If you’re determined to beat the house, you might as well go to Las Vegas. It has nicer hotels than Wall Street for nursing your financial wounds.
