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What Kind of Investor Are You?

  • July 10, 2014/
  • Posted By : admin/
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  • Under : Behavior, Seeking Prudent Advice

question-mark

What kind of investor are you?  According to author William Bernstein, there are three broad groups of investors segregated by behavior:

Group 1: The average small investor, who does not have a coherent asset-allocation strategy and who owns a chaotic mix of mutual funds and/or individual securities, often recommended to him or her by a broker or advisor. He or she tends to buy near bull market peaks and sell near bear market troughs.

Group 2: The more sophisticated investor, who does have a reasonable-seeming asset-allocation strategy and who will buy when prices fall a bit (“buying the dips”), but who falls victim to the aircraft simulator/actual crash paradigm, loses his or her nerve, and bails when real trouble roils the markets. You may not think you belong in this group, but unless you’ve tested yourself and passed during the 2008–2009 bear market, you really can’t tell.

Group 3: Those who do have a coherent strategy and can stick to it. Three things separate this group from Group 2: first, a realistic appraisal of their true, under-fire risk tolerance; second, an allocation to risky assets low enough, or a savings rate high enough, to allow them to financially and emotionally weather a severe downturn; and third, an appreciation of market history, particularly the carnage inflicted by the 1929–1932 bear market. In other words, this elite group possesses not only patience, cash, and courage, but also the historical knowledge informing them that at several points in their investing career, all three will prove necessary. Finally, they have the foresight to plan for those eventualities.

“Job one for the investor, then, is to learn as best she can, to ignore the day-to-day and year-to-year speculative return in order to earn the fundamental return.” – William Bernstein

Source: Rational Expectations: Asset Allocation for Investing Adults


Skin in the Game?

  • June 26, 2014/
  • Posted By : admin/
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  • Under : Best Practices, Personal Finance, Seeking Prudent Advice

skin
Would you eat at a restaurant where the chefs didn’t eat their own cooking? Would you have joined the Hair Club if the president weren’t also a client? Then why would you invest according to an advisor’s guidance if that advisor doesn’t follow his or her own advice?

Portfolio manager Mebane Faber recently wrote,

Next time you sit down with your advisor, ask him or her a simple question:

How do you invest your own money?

Don’t settle for a simple “well, uh, I have some stocks and bonds, and, umm, some CDs”…ask them specifically what their allocation percentages are, and what funds they use etc.  Many find it very uncomfortable to disclose and many will refuse to do so!

As far as fund managers, many managers don’t even invest in their own funds.  (Here are a few articles on how little managers invest in their own funds here, here, and here.)

In addition, many commentators are willing to provide you with plenty of advice but just try getting them to disclose how they invest their own money – impossible!  How many commentators can you identify that invest in their own funds and are transparent with where they invest? They are happy to give you advice, but forbid they tell you how they invest!

We Eat Our Own Cooking!
The principals of NorthStar Capital Advisors place nearly all of their investable wealth in the same type of diversified stock and bond portfolios that we manage on behalf of our clients.  We also inform and educate our clients on how we are cooking via this weekly blog, quarterly performance reports, and around the clock access via phone and email.

So, next time you are talking with your advisor or broker, or hear someone giving lots of financial advice, ask them one simple question: “What do you do with your money?”

Money Lessons for Professional Athletes

  • June 19, 2014/
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  • Under : Seeking Prudent Advice

athletes“Many NFL, NBA and Major League Baseball players have a penchant for losing most or all of their money. It doesn’t matter how much they make. And the ways they blow it are strikingly similar.”
— Sports Illustrated

Barry Ritholtz gives a good run down on how professional athletes go broke:

Youth and inexperience: Most professionals see their salary gradually increase over the course of their career. By the time they are making the big bucks, age and experience has taught them (more or less) how to manage their finances.

Not so for the pro athlete. After being an unpaid student athlete in college, they suddenly have access to millions of dollars. I don’t know about you, but I am fairly certain that if someone gave me $2 million when I was 21, I would have died in a fiery Ferrari wreck or some other foolish thing. It is a simple formula: Youth plus inexperience with money equals bad outcomes.

Athletes have short careers: Injuries, trades and the sheer quality of competitive talent means a twenty-year sports career is the exception, not the rule. On the other hand, white-collar professionals enjoy careers that last 30, 40, even 50 years — more time to amass their wealth, as well as a much longer period to figure out how to manage it.

Young athletes spend too much money: Suffice it to say they spend lots and lots of money, often more than they actually have. Divorce, child support and the costs of an entourage all eat into the cash flow.

Dazzled by the lifestyles of veterans — whose longevity and endorsement deals put them way ahead of the average player in terms of income — these professional competitors may feel pressure to compete off the field. Trying to keep up is a recipe for disaster.

Everyone takes home much less than they realize: Holding aside the issue of unwise spending, let’s look at nondiscretionary spending. GQ analyzed the finances of the typical athlete making $5 million a year. Right off the top, Uncle Sam and the resident state where he plays takes a hefty share — about half for someone in that top tax bracket. Then you have the professional managers, lawyers, accountants, etc. The agent takes $250,000, while the manager may take up to twice that amount. Trainers, nutritionists, travel and courtesy tickets all eat into the net.

Before spending the first discretionary dollar, the typical $5 million player is already down about 70 percent of the gross, to $1.5 million. That sounds like a lot of money, but a naive kid who has a $5 million dollar budget in his head can quickly find himself way behind.

Barry’s five simple steps that athletes (and non-athletes!) can take to avoid financial crisis:

1 Be involved: It is important that a young investor becomes involved with financial planning from the beginning of a career. He should understand what his take-home pay is (after taxes and fees) — and know what he is spending money on.

Be aware of the other numbers involved: What your career expectancy is. How much you are likely to make. What it is going to cost to live a certain lifestyle.

2 Have a plan: A young athlete should plan for three phases of a career: rookie years, top earning years and the life after sports.

In the first part of a career, the emphasis should be on improving your game, and saving money. Don’t worry about indulging in luxuries; you have the rest of your life to do that. Once you enter your prime earning years, you can loosen up a touch and spend more — but always within your means.

The last part of athletes’ careers is often the longest: when they are no longer playing professional ball. Having enough saved to carry them for the next 40 years is important. So, too, is having a second career — whether as an entrepreneur or a color commentator on TV sports broadcasts or as a coach.

Mapping out a workable plan for these three phases is crucial to avoiding that “other” phase: Bankruptcy.

3 Keep your costs low early in your career: Investors learn that costs, taxes and excessive fees are a killer of portfolios over the long term. So, too, are all of the small costs that eat into a professional athlete’s financial pie.

It helps to find a more seasoned and experienced teammate to walk you through what you should and should not be paying for.

4 Avoid debt and leverage: Learning to live within your means is a crucial financial skill for anyone. It is especially valuable for someone earning big bucks for what is likely a few short seasons. Debt simply means you are living beyond your means, even at those big salaries.

The latest snare waiting to trip up the unwary and impatient young athlete is the payday loan. For a very large fee, professional athletes can get huge advances on their salaries. These loans can be usurious, with fees and interest adding up to annual rates of 25 percent or higher. These are to be avoided at all costs.

5 Keep your investments simple: What most people think is the hardest aspect of finance is in reality the simplest: Avoid complex (private placements) or expensive (hedge funds or private equity) investments. Don’t make loans to friends or family. Don’t back start-ups. Don’t invest in new technology. Never buy fancy financial “products.” And whatever you do, for God’s sake, don’t put money into a restaurant.

Instead, have a simple asset allocation model of broad indices (U.S. equities, emerging market stocks, corporate bonds and Treasuries). You are in your early 20s, so you should have a 40- to 50-year time horizon for these investments. Don’t waste your time stock-picking or timing, just let the markets work for you. Build a portfolio of high quality, tax-free municipal bonds (especially if you live in a high tax state). These will pay you an income as long as you hold them.

Sources:
Barry Ritholtz
Sports Illustrated


Class of 2014: Financial Advice That will CHANGE YOUR LIFE

  • May 29, 2014/
  • Posted By : admin/
  • 0 comments /
  • Under : Best Practices, Seeking Prudent Advice

PDS-CommencementThe following is a brief excerpt from the commencement address by Dr. Chris Mullis to the graduating class of Providence Day School on May 31, 2013.  The full text of Dr. Mullis’ speech, that includes career advice, financial guidance, and a few pearls of wisdom,  can be found here.

     At my investment advisory firm, we developed complex computer algorithms and use them to manage our clients’ investment portfolios.  But the basic steps you need to take to manage your own money well are deceptively simple. First, live within your means and avoid being caught up in rapid lifestyle inflation.  You will not live like your parents when you first start out. Second, save and invest your money wisely.  Let me elaborate on this point.

     Wealth accumulation depends on three factors: how much you save, the rate at which your money grows, and how long you save.  That last factor, time, is very, very important.  There’s an urban legend that Albert Einstein once said that compounding interest is the most powerful force in the Universe.  That quote is likely misattributed but the message is spot on.  If you save $5,000 a year for 40 years and earn 8% annually, you will eventually have $1.3M.  But if you delay starting for merely 5 years, your results after 35 years will be only $860k.  That 5-year delay preserved $25k of short-term capital but ultimately cost you >$400k in the long run.  Time is the most powerful lever in the machinery of investing.  Nothing else comes close to it.     

     So what do you need to do? Start saving and investing right out of high school regardless of how hard you think it hurts or how unpleasant the tradeoffs.  Even if you set aside only 5% of your paycheck starting out, do it to get into the habit of saving.  Delaying getting serious about investing until my 30s was a significant financial mistake on my part.  No one ever sat me down and explained how important it is to start investing early. Now that we’ve had this little talk, you’ll never be able to say that no one told you.


Know More, Make More

  • May 22, 2014/
  • Posted By : admin/
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  • Under : Best Practices, Performance, Personal Finance, Retirement, Seeking Prudent Advice

knowledge-powerA new academic study finds that more financially knowledgeable people earn a higher return on their 401(k) retirement savings.

Dr Robert Clark (NC State University), Dr. Annamaria Lusardi (George Washington University), and Dr.  Olivia Mitchell (University of Pennsylvania) analyzed a unique dataset that combined 401(k) performance data for 20,000 employees plus financial literacy data for the same workers.

Investors deemed to be more financially knowledgeable than peers enjoyed an estimated 1.3% higher annual return in their 401(k)s or other defined contribution plans than those with less knowledge.

According to the study’s authors:
“We show that more financially knowledgeable employees are also significantly more likely to hold stocks in their 401(k) plan portfolios. They can also anticipate significantly higher expected excess returns, which over a 30-year working career could build a retirement fund 25% larger than that of their less-knowledgeable peers.”

Financially savvy people tend to save more and are more likely to invest those savings in the stock market. But past studies haven’t clearly demonstrated that these people necessarily make better investment decisions. The authors look at patterns in 401(k) retirement accounts and find that more sophisticated investors do indeed get better returns on their savings.

Source: “Financial Knowledge and 401(k) Investment Performance”


Your House is Not a Great Investment

  • May 15, 2014/
  • Posted By : admin/
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  • Under : Seeking Prudent Advice

Home ownership is one of the greatest financial investments you can make, right?  Wrong!  The chart below shows that once you adjust for inflation, home prices have been essentially unchanged over the past 100+ years except during a few spectacular bubbles.

housing-real-dollarsIn a recent interview, Professor Robert Shiller delved into the popular misconception that home ownership is a good “investment”.  Via the Motley Fool article:

“The housing boom in the early 2000s was driven by a sense that housing is a wonderful investment. It was not informed by good history,” he said. Most people now agree on that much.

“If you look at the history of the housing market, it hasn’t been a good provider of capital gains. It is a provider of housing services,” he explained.

By that, he means a home gives you a place to live, a place to sleep, a place to store your stuff.

But that’s it. Americans believed — and still believe — that the value of their home will increase above the rate of inflation.

And that, Shiller says, is wrong.

“Capital gains have not even been positive. From 1890 to 1990, real inflation-corrected home prices were virtually unchanged.”

Source: TMF


Elite Colleges Don’t Buy Happiness or Extra Money for Graduates

  • May 8, 2014/
  • Posted By : admin/
  • 0 comments /
  • Under : Performance, Personal Finance, Saving Money, Seeking Prudent Advice

graduates

Attention high school seniors that were rejected by their first-choice college

A new Gallup survey of 30,000 college graduates of all ages in all 50 states has found that graduation from an elite college provides no discernible advantage over Podunk U.

“It matters very little where you go; it’s how you do it” that counts, said Brandon Busteed, executive director of Gallup Education.

Gallup’s data demonstrate that people that feel the happiest and most engaged are the most productive.  Those successful people got to that point by developing meaningful connections with professors or mentors, and made significant investments in long-term academic projects and extracurricular activities.

This new study’s results are well aligned with the existing body of academic research.  For example, economist Stacy Dale published  an insightful paper in 2004 that found that students who were accepted to elite schools, but attended less selective schools, went on to earn just as much money as their elite counterparts.

“Individual traits matter more than where you went,” Ms. Dale said. “It’s a lot more important what you learn later in life than where you got your undergraduate degree.”

Source: WSJ


When promised quick profits, respond with a quick “no”

  • March 27, 2014/
  • Posted By : admin/
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  • Under : Scams & Schemes, Seeking Prudent Advice

Warren Buffett and Lloyd Blankfei At Detroit Small Business EventWarren Buffett is one of the most successful and sage investors alive today.  Students of investing anxiously await his annual letter to shareholders to glean pearls of the wisdom from this master.

Here’s one of our favorite Warren Buffett quotes from the 2014 letter:

“You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick ‘no.’”

Unfortunately there are many people that are victimized by financial fraudsters.  Just this week a Charlotte, NC man, Mitchell Brian Huffman, was ordered to a pay $2.1 million civil penalty for operating a Ponzi scheme that bilked clients out of about $3.2 million.

Huffman told his 30 victims that he was generating outrageously high annual rates of return of 100% to 150% using a proprietary trading program. Huffman used their money to fund a lavish lifestyle including classic cars and luxury vacations.

 


11 Questions To Ask When Hiring A Tax Preparer

  • February 6, 2014/
  • Posted By : admin/
  • 0 comments /
  • Under : Seeking Prudent Advice

unclesam-taxesThe IRS started accepting tax returns January 31st so it’s a good time to start thinking about your own taxes.  Kelly Phillips Erb recently wrote an article that provides an excellent check list of questions to ask your tax preparer when filing your taxes before handing over your w-2’s or 1099’s:

  1. Do you have a PTIN?   (This is a Tax Preparer Identification Number)
  2. What is your tax background? (CFP®, CPA, EA, JD, VITA) Tax preparers that are being compensated for their time should carry one of the these professional designations or certifications: CERTIFIED FINANCIAL PLANNER™, Certified Public Accountant, Enrolled Agent, Juris Doctor, Voluntary Income Tax Assistance.
  3. Have you prepared a tax return before?
  4. Do you know the requirements for filing returns in my area? (Filing taxes for income earned in multiple state or states other than the one you are currently residing in)
  5. What records or documentation will you need from me?  It is a good idea to bring the previous year’s tax returns as well as all income documentation, and proof of any expenses that you think could be deductible.
  6. How do you determine your fee? (By the hour or per line item on the return, etc.)
  7. Can I file electronically? (Pretty much a given – just about all returns are e-filed now)
  8. Who will sign my return? Remember the first question. Do not trust a preparer that will not sign your return or cannot tell you who will be signing your return.
  9. Will I receive a copy of my return? (This sounds like a given but sometimes preparers do not provide a copy of the return without a request)
  10. How do I find you if there is a problem with my return after the tax season is over? (Especially important if the preparers is only in business during tax season)
  11. What happens if I get audited?

Be sure to check out Erb’s article for the “right” and “wrong” responses to these key questions.

Source: Forbes


Sir Isaac Newton: Monumental Scientist, Terrible Investor

  • January 30, 2014/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior, Seeking Prudent Advice

220px-GodfreyKneller-IsaacNewton-1689Most people recognize Sir Isaac Newton as one of the most influential scientists of all time, but did you know he was a horrible investor?

Newton’s experience with the South Sea Company vividly demonstrates the financial perils of chasing hot markets, getting caught up in investment bubbles, and not maintaining a diversified portfolio.

In the early 18th century the South Sea Company was established and given a monopoly on trade in the South Seas in return for assuming England’s war debt.  Investors liked the idea of that monopoly and the company’s stock began to take off.

Newton hear the siren call of the South Sea Company, invested his cash in early 1720 and managed to turn a nice profit.  But then the stock kept soaring after he had gotten out. So Newton jumped back into the stock with a lot more money than his original investment.

Newton subsequently lost 20,000 pounds, almost all of his life savings!  From this terrible outcome, Newton supposedly decreed, “I can calculate the movement of the stars, but not the madness of men.”

No warning on Earth can save people determined to grow suddenly rich.
— Lord Overstone

newton-investsSource: Sovereign Man

 

 


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