The Most Important Thing Illuminated by Howard Marks (Book Review)

Updated. I bought the original version with my own money, but then got offered a review copy of the newly released The Most Important Thing Illuminated which contains the same material but with additional commentary from respected investors Christopher Davis (David Funds), Joel Greenblatt (Gotham Capital), Paul Johnson (Nicusa Capital), and Seth Klarman (Baupost Group) as well as an extra chapter from Howard Marks. Most serious investors will recognize these names. The original is great, but if you’re willing to spend a bit more money (eBook is $9.99), this new version does have a little more meat to it. I’ve updated this review to include the new chapter.

If you wrote a book about investing and wanted some big-name endorsements, you couldn’t do much better than this – The Most Important Thing: Uncommon Sense for the Thoughtful Investor by Howard Marks has recommendations from Warren Buffett, Jeremy Grantham, Jack Bogle, Joel Greenblatt, and Seth Klarman.

Howard Marks is already famous around many investment circles for his Client Memos as the chairman and cofounder of Oaktree Capital Management, although not as well-known as Buffett’s shareholder letters. This book is basically a distillation of those memos into book form. Here are my personal notes.

Efficient Markets
Marks is an active investor, and this book is about successfully generate excess turns (alpha). Some people seem to think that “efficient markets” is black and white – either you believe in the Easter Bunny or you don’t. Market prices are completely perfect or investing is purely skill. This book helps you view market efficiency as a continuum. Beating the market by trading large-cap common stocks which are following by thousands of professionals is exceedingly hard. Oaktree Capital chooses to focus on what he perceives as less efficient markets – things like convertible securities and high-yield debt from distressed companies (“junk bonds”).

Developing your own investment philosophy
I enjoyed this quote:

Where does an investment philosophy come from? The one thing I’m sure of is that no one arrives on the doorstep of an investment career with his or her philosophy fully formed. A philosophy has to be the sum of many ideas accumulated over a long period of time from a variety of sources. One cannot develop an effective philosophy without having been exposed to life’s lessons

Quality vs. Price
The title of the book is a bit misleading, as there is no single “most important thing”. Basically each chapter is an expansion of one or more of his memos and it titled “The Most Important Thing is… XXX”. However, an overarching theme of the book is about risk control. I’ve already written about higher risk vs. higher investment return.

A related idea is that people tend to think of investments only in terms of quality. Strong companies vs. struggling companies. Highly-rated bonds vs. Lower-rated bonds. Strong developed countries vs. Weaker emerging countries. But what’s important is the price. A high-quality company can be a high-risk or low-risk investment, depending on what price you pay for it. A junk bond can be a high-risk or low-risk investment, depending on what price you pay for it.

Cycles
Marks strongly believes in the recurrence of cycles. One side of the pendulum occurs when people seems think that there are minimal risks, either because of recent history or some new invention that eliminates risk (CDOs?). Often, the only worry remaining is that we’ll miss out on the opportunity for great returns. The other side of the pendulum is when uncertainty is everywhere. Here, people say things like “I’m staying out of the market until the dust settles.” This reminded me of a chart I pulled out a lot during the housing bubble:

If you’re going to pick a time to invest, it’s better when people are scared, because at least they are properly considering all the potential risks. It should be scary and uncomfortable. He reminds you, as Charlie Munger says, “It’s not supposed to be easy.” If you wait until the dust has settled, there won’t be great prices anymore.

Illuminated-only Bonus Chapter: Reasonable Expectations
This is good reminder about having a clear goal as to what you want to achieve with your portfolio, but also to keep that goal within reason:

The key questions are what your return goal is, how much risk you can tolerate, and how much liquidity you’re likely to require in the interim.

Extraordinary skill is rare. When someone else promises returns “too good to be true”, the next question to ask is “why me?” If they found a can’t miss investment opportunity, why are they sharing this with you? If some talking head on TV makes a bold prediction, why aren’t they busy betting their net worth on the outcome? With today’s complex derivatives and betting markets, they should be rich and sunning themselves on a yacht instead.

Recap
Even though I am primarily a low-cost, buy, hold, & rebalance type of investor, I felt this book still provided me with new information for my own evolving investing philosophy. Creating alpha is not easy, and most people who try to do so consistently fail, so you should be very careful and realistic when assessing your own skills. I’ll be sure to read his future memos. Thankfully, they can be found at the Oaktree Capital website, free and available to all.

Posted in Book Reviews, Investing | 2 Comments »

Bogle on Earning Dividend Income From Stocks

I was following an interesting discussion about living off of dividend income from stocks over at the Bogleheads forum, and member Beagler posted a link to a excerpt on income investing from the book Bogle on Mutual Funds.

You may know that John Bogle is the founder of Vanguard, now one of the largest fund organizations in the world and a pioneer in low-cost index funds. But what I really like about his books is his focus on common sense as the foundation for his advice. An example of this is his Gotrocks parable [pdf] adapted from Buffett. But back to this excerpt. He first points out how stock dividends have been a good way to create an income stream over the long run that grows faster than inflation.

Of course, by investing in common stocks you assume the risk that dividends will decline during periods of recession or depression [...] What is truly remarkable is that the record of dividend payments by U.S. corporations heavily favors rising dividends over declining dividends, almost irrespective of prevailing business conditions.

Here’s a chart of the historical S&P 500 annual dividend, inflation-adjusted. (Note this is absolute dividend, not dividend yield percentage.)

Image credit to Multpl.com, data from S&P and Shiller

Now, the problem is that you can also pay too much for dividends. He shares an example of how if you were comparing the dividend income from a diversified stock portfolio yielding 3% and growing at 6% annually or a long-term bond yielding 7% each year, it would take 26 years for the dividend income to total the bond income payments.

Unfortunately, defining what constitutes too high a price for dividends is a fallible exercise, one that must take into account not only the average historical valuations for stocks but the current valuations for other investment alternatives as well. History suggests that stocks are relatively expensive when the price paid for $1 of dividends is above $30 (i.e., a yield of 3.3%) and relatively cheap when the price paid is less than $20 (a yield of 5%). However, stocks may well be attractive at a yield of, say, 3.5% if there are compelling reasons to assume that their dividends will increase rapidly or if yields on other classes of financial assets are relatively unattractive.

In the example shown in Figure 2-5, buying a portfolio of stocks at a 3% yield rather than a bond at a 7% yield might not be a sensible investment, especially considering the incremental risk incurred in holding stocks. When stocks yield 4.5% and bonds yield 6%, that may be quite another story.

What would Bogle say right now, when the S&P 500 yield is ~2% and 30-year Treasury bonds are ~3%? The relative difference between the stock yield and the bond yield is less than 1%. I would argue that his last sentence would suggest stocks are actually preferred over other classes at this point.

Now, I’m not turning in a stock bull, and I still have about 70% stocks and 30% bonds in my portfolio, but this line of thinking makes me happier with my 70% in stocks. I’ve also been looking more at living off of dividend income in “early retirement”.

Posted in Investing | 5 Comments »

SmartMoney Magazine Top Online Broker Rankings 2012

SmartMoney magazine has released the results of their Annual Broker Survey in its June 2012 issue. Check out the attached article for additional commentary and insight into rankings and methodology. You’ll find my own commentary on their findings below.

SmartMoney 2012 Top 10 Overall

1. Fidelity
2. Scottrade
3. TD Ameritrade
4. E-Trade
5. Schwab
6. TradeKing
7. Zecco
8. Merrill Edge
9. ING Direct Sharebuilder
10. WellsTrade

Best in Commission & Fees Category (5 stars)

Scottrade doesn’t have a rock-bottem per-trade commission at $7 a trade, but it’s lower than average and they still win overall due to lower fees elsewhere – such as annual fees, inactivity fees, fees to use a phone, or close out an account.

1. Scottrade
2. ING Direct Sharebuilder

Best in Customer Service Category (4 stars+)

One important factor here was speed of reply in addition to accuracy, and per the article all of the brokers surveyed now offer Live Chat online except for WellsTrade. I think TradeKing was the first to offer this feature?

1. TradeKing ($50 opening bonus link)
2. Scottrade
3. E-Trade
4. Zecco

Trends

• Prices are still dropping, although more slowly. SmartMoney reports that in 1994 the average commission price surveyed was $28. Last year, $8.27. This year, only $7.96. Note that every single one of their top 10 brokers have per-trade stock commissions of under $10. I suppose anything higher would just seem greedy now.
• Banking. More firms are adding banking features like debit cards and billpay to make it more likely that you’ll keep all your money there, joining firms like Merrill Lynch (Bank of America) and WellsTrade (Wells Fargo) which are already closely aligned and owned by big banks.
• Smartphone and iPad apps. These are indeed cool, but the brokers really love them because they increase your trade activity.

Omissions

SmartMoney mentions the the Merrill Edge BofA deal, where you can get 30 free trades a month if you hold a combined $25,000 as cash in your *deposit* accounts only at Bank of America. However, they don’t mention the WellsTrade deal which offers 100 free trades a year if you hold a combined $25k across acounts including your brokerage balance, but instead requires a PMA checking account that you have to keep active with “in-person” activity like writing a physical check at least once a year.

WellsTrade and Zecco enter the top 10 this year, but Vanguard and OptionsXpress were bumped out. Vanguard was #7 in their 2011 rankings. There was no mention of what happened… I’d like to know if they were notably worse in some area or were simply excluded? OptionsXpress was bought by Schwab last year, but still runs an independent site.

Finally, there was no mention of the quantity and quality of the commission-free ETF lists offered by the majority of these brokers. If anything, I thought that was more important to mention than smartphone apps that scan product barcodes at the grocery store.

Finding The Best Broker For You

Don’t forget to compare these results with the Consumer Reports 2012 Rankings and the Barron’s 2012 Rankings. The key is to drill down to see which broker satisfies your personal set of needs the best, as there is a lot of fluff in there. This is why I’d rather look at specific sub-rankings more closely than the big headline “Top 10″ rankings.

Take the “Banking” category, which included as a criteria but some brokers just don’t offer banking services and I don’t think they should be penalized for it. Another area I don’t care about is “Research” tools. I’ve ever used a broker for research. Morningstar offers me everything that I need, otherwise I just look at Google/Yahoo quotes and look for related news and blog articles. I don’t see how a discount broker would have the time or resources for unique analysis. Just give me cheap trades with good fills, solid customer service when I need it, and track my capital gains and tax lots accurately.

Posted in Investing | 12 Comments »

What’s The Record For Multiple Mortgage Refinances Within a Short Period?

…because it looks like I’m getting another one. After seeing repeated news articles titled “Mortgage rate set record lows”, I’m now looking at refinancing to a 15-year fixed mortgage for 3% with all lender closing costs covered. I’ve seen multiple quotes for under 3% and getting under or close to zero in net fees.

Here’s a chart of the historical mortgage rate averages, courtesy of HSH.com. It includes the 30-year fixed, 15-year fixed, and the 5/1 30-year adjustable. Since I bought my home less than 5 years ago, 30-year fixed mortgage rates have ranged from a high of 7% to just above 4% today.

Even though I stopped trying to predict mortgage rates a while ago, I still find it hard to believe that I started with an interest rate of over 6% and now could be paying under 3% with a no-cost refi.

Alternative investments
If I successfully close on this loan, I don’t know if I’ll be aggressively paying it down as much as before. It’s important to note that the risk levels are not the same for the options below, but the interest rate environment is finally tipping to the point that I’d consider investing instead of paying off 3% debt.

• I could buy super-safe US Treasury bonds, with yields at ~2.2% for a 15-year maturity. Interest on Treasury bonds are exempt from state income taxes.
• I could buy a municipal bond fund like the Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX), which invests in investment-grade municipal bonds. The fund holdings have a duration of about 5 years and yields nearly 2% federally tax-exempt. If you’re in the highest tax bracket, that would be an effective yield of ~3%.
• If I lived in California, I could buy shares of the Vanguard California Long-Term Tax-Exempt Fund (VCITX) with 2.60% yield that is exempt from both federal and state income taxes, with a duration of 6.4 years. That could be an effective yield of well over 4%.
• I could take on more risk and buy shares of mature, dividend-paying companies. The Vanguard Equity Income Fund (VEIRX) has a current dividend yield of nearly 3%.

I’m going through a local mortgage broker, but you can find similar rates over at Amerisave. If the “all lender fees and points” is negative, that means the credit they give you is more than all closing costs including appraisals and title insurance. (Anyone use them before?) Compare that with rate quotes from and Quicken Loans.

Posted in Investing, Real Estate | 30 Comments »

Sell in May and Go Away? How About Remember To Rebalance In May and November

“Sell in May and go away” is a rhyming market-timing slogan that may never… go away. Here’s a graphic that seems to support the idea that stocks have historically performed much worse between May and October than the rest of the year. Credit to Reuters/Scott Barber via Abnormal Returns. Data set is the MSCI World Index from 1971-2011.

Meanwhile, The Big Picture shares a bunch of graphs from TheChartStore that don’t make it look so clear-cut. Looking at this one, why shouldn’t just bail out every September? Data set is the S&P 500 from 1928-2011.

Larry Swedroe tests the theory out using 30-day Treasury bonds as the alternative investment in this CBS Moneywatch article:

He looked at returns through 2007 from six start dates since 1950. “Sell in May” beat “buy and hold” if you started investing in 1960, 1970 and 2000, but not if you started in 1950, 1980 or 1990. “It’s pure randomness,” Swedroe says. “How would you ever know when to start?”

Throw in the tax implications of all that buying and selling, and I agree. Do you really want to base your investing strategy on a data-mining result that has no logical explanation behind it? Sounds too much like driving a car using only your rearview mirror.

However, Tadas Viskanta of Abnormal Returns has what I think is a reasonable compromise – what if you just decided to rebalance your portfolio at the very end of April and the very end of October? You should rebalance your portfolio regularly anyway, so why not do it twice a year, six months apart. If your target asset allocation is 70% stocks/30% bonds and now you’re at 80/20 due to the recent run-up, why not go back to 70/30. If things end up at 60/40 in November, then again, go back to 70/30.

You could call it “Remember to Rebalance in May and November”. It even rhymes! If “sell in may” really works, you’ll get some benefit from this mean reversion wackiness. If it’s just noise, you portfolio shouldn’t theoretically be hurt any more than picking other months.

Posted in Behavioral Economics, Investing | 11 Comments »

Why Mutual Fund Fees Are Important But Often Ignored + More Vanguard Fee Savings

I am often reminded when talking with friends and coworkers that most people don’t understand the important of low fees when it comes to investing. The Vanguard blog had a recent post exploring why a 1% expense ratio is much more significant than it appears. The problem is that expense ratios aren’t charged to you directly as a line item like an overdraft fee or a monthly bill – it is quietly taken away in tiny pieces from your returns which makes it easy to ignore.

For another, fees are expressed as a fraction of assets. A 1% equity management fee seems small and reasonable. “One percent” just sounds tiny – as in “there’s a 1% chance of rain tomorrow.” But suppose you reframe fees in other terms. Suppose you expect a stock fund to earn 8% over the long run. Assuming inflation of 3% and a tax rate of 25%, you’re in effect paying one out of every three dollars of future expected return in costs.* A fee of “one third of all of the money you make” sounds like a lot, especially when many money managers could do worse than the market averages.

Basically, if you are expecting to earn 3% a year above inflation after taxes, paying 1% to a manager is like paying 1/3rd of all your earnings. As you can see below, I could own the S&P 500 for as little as 0.05%. Things get even worse when looking at bond funds and their tiny yields.

Research has shown repeatedly that costs matter more than star ratings and past performance. The lower the expenses, the less headwind year in and year out.

With that knowledge, Vanguard has announced another round of fee cuts! Vanguard says the price drops are a result of them being client-owned and passing on any savings resulting from increased assets. Others speculate that it’s a reaction to competition from other low-cost ETF providers like Schwab. Either way, investors win. The drops are pretty small, but to me it’s like getting a little guaranteed boost in returns that will compound every year. A selected sample of funds with fee drops below:

Admiral shares are now open in most index funds with a $10,000 investment, and you can always start like I did with the Investor shares at $3,000 and convert to Admiral when the balances grow. ETFs usually offer the same low expense ratios as Admiral shares, but you should also keep in mind the cost of trade commissions. Buying Vanguard ETFs and mutual funds directly with an account with Vanguard is free. TD Ameritrade also offers commission-free trades on a wide variety of Vanguard ETFs (along with other providers).

Over the last year or so, Vanguard has made several moves that lowered my portfolio costs. They added Admiral shares, removed purchase fees on their Emerging Markets fund, and dropped expense ratios again.

Posted in Investing | 10 Comments »

Creating Retirement Income Only From Dividends and Interest?

What happens when you finally want to live off of your portfolio? Most withdrawal methods call for a combination of spending dividends and selling shares to cover the rest. But what if you wanted to live only off of dividends from your stocks and the interest from bonds? I was curious to see how this would have worked out historically.

Let’s say you had $100,000 invested in a mutual fund, and you had to live off the dividend income produced from those shares without any additional buying or selling. I found historical price data and dividend distributions for select funds from Yahoo Finance that went back to 1987-1990, and added up the trailing 12 months of dividends to see how much money they would have generated over a year’s time.

The Vanguard Wellesley Income Fund (VWINX) is a low-cost, actively-managed fund which has been around since 1970. It is composed of approximately 35% dividend-oriented stocks and 65% bonds (mostly corporate for higher yields). This conservative allocation is designed to create a steady income stream with less focus on capital appreciation. Let’s see how $100,000 invested in 1988 would have done in terms of income:

In 1988, interest rates were relatively high and $100,000 of Wellesley shares would have created nearly $9,000 of annual income. In 2012, that same set of shares would be worth $156,000 and your income would be about $5,400 annually. The income produced had some swings, but overall did not seem to track with inflation although the share price did better. According to the CPI, $100,000 in 1988 would buy as much stuff as $180,000 today.

The Vanguard 500 Index Fund was the first index fund available to the public and is now one of the largest funds in the world, passively following the S&P 500 index of large US companies since 1976 and thus always 100% stocks. Even though this is not a dividend-focused fund, it still does produce a regular stream of dividends from the companies it tracks:

In contrast, $100,000 of the Vanguard 500 Fund would have only created about $2,700 of income in 1988, but that income has grown over the next 24 years to about $8,800 today in 2012. Also of high significance is that the value of your $100,000 worth of shares from 1988 would be worth around $500,000 today.

This is just a limited snapshot of two funds, but it would suggest that you can’t just buy an income-oriented fund that has a large chunk of bonds and expect to sit back and spend whatever dividends are spit out. However, things would have turned out much better if one was reinvesting a big chunk of those Wellesley dividends when the overall yield was high. I can still envision a income-oriented portfolio, but I will have to set a reasonable withdrawal rate that isn’t too high and have the discipline to plow the rest back into buying more shares.

Posted in Investing, Retirement | 14 Comments »

Financial Status Bar & Goal Updates

It’s time for some Spring cleaning and I have updated this post which explains my ratio-based method of tracking our financial progress towards early retirement (as shown by the status indicator on the top right of every blog page). I’ve made some clarifications/edits and also added links to recent updates.

Cash Reserves / Emergency Fund

Our goal is to always have a full year of expenses in cash equivalents as our “emergency fund”. (This is not the same as a year of income. Our expenses are much lower than our income.) This is a cushion for a variety of potential events including job loss, health concerns, or other unplanned costs. It also allows us to take a more long-term view with our investment portfolio since we know we won’t have to touch it.

Since our emergency fund is relatively large, I try to maximize the yield. If we stuck it all in a money market fund, the yield would be barely above zero. With a bit of work, our cash earns a blended rate of over 2% annually without taking on extra risk. We use the same accounts to make money from no fee 0% APR balance transfer offers, but currently don’t play that “game”. Here are recent updates on where we keep our cash:

March 2012 Cash Reserves Update
May 2011 Cash Reserves Update
January 2011 Cash Reserves Update

Home Equity

I don’t think everyone should buy a house (or more accurately, take out a huge loan on a house). I don’t necessarily think it works out a very good investment over time. However, if you are geographically stable, I do think buying and eventually owning a house free and clear can be a solid component of an early retirement plan. My current forecast is to have our house paid off in 10-15 years. Housing is very expensive where I live, so once that mortgage payment is gone, the actual income my investments will have to produce will drop drastically.

There are many ways to define home equity, and I am sticking to a simple method of calculating home equity by taking 100% minus (outstanding mortgage balance / original home purchase price). As of 2011, our home price has rebounded to over the original purchase price according to a refinance appraisal and comparable sales. Overall, I’d rather enjoy having continuous progress without worrying about my home’s exact market value. Here are some historical mortgage updates:

November 2011 Mortgage Payoff Update
February 2011 Mortgage Payoff Update

Investment Portfolio

The goal of my investment portfolio is allow withdrawals to support our needed expenses in “retirement”. Again, income and expenses are not the same thing. After mortgage payoff, I expect our required expenses to be less than 25% of our current income. I like to assume a simple 3% safe withdrawal rate, which means for every $100,000 saved, I can generate $3,000 a year of inflation-adjusted income for the rest of our lives. I used to use 4%, but since our target “retirement” age is in our 40s and not 60s, I feel that 3% is better. Even 3% is not guaranteed, but again it does provide a quick estimate of progress. Here are recent portfolio updates:

February 2012 Investment Portfolio Update
November 2011 Investment Portfolio Update
July 2011 Investment Portfolio Update

My initial goal was to try and keep the home equity and expense replacement ratio about the same so that both will reach 100% at the same time, but we’ll see. I am still (very slowly) researching shifting to a more income-oriented portfolio that yields about 3% and has a principal value that can grow with inflation.

The actual implementation of my plan will probably require more flexibility. At some point, I plan on using some of my money and invest in an immediate annuity to hedge against living too long (a problem I hope to have). I’ll also need to vary my exact withdrawal rates a bit from with market conditions. Once I reach age 70 or so, Social Security will kick in something. I don’t think Social Security will disappear although I do expect means-testing, but I also don’t expect to be so rich as to not get anything.

Posted in Goals, Investing, Real Estate, Retirement | 24 Comments »

ShareBuilder Promotion Codes: Free Automatic Trades (Updated 2012)

Update: Added new codes and cleaned up old ones. Thanks to all who have contributed in the comments.

Here are some promotion codes for existing ShareBuilder accounts. ShareBuilder is a discount brokerage now owned by the same folks behind ING Direct. They give out codes for various promotions, and they often work in your account even if you weren’t given the code directly. Sometimes they don’t though, so have reasonable expectations.

Don’t have an account yet? Grab this $50 opening bonus first, all you have to do is deposit $2,000 or more before 6/30/12, and then add the promo codes below afterward. You can usually double-dip on codes if you have both a individual account and joint account. Got kids? Get even more by opening up custodial accounts for each of them.

How To Use
To enter the codes into your account, first log in to ShareBuilder, and then go to the Accounts tab > Overview > Profile & Settings > Enter Promotion tab shown below.

In the marked box, enter a code. If it works, you should see a confirmation that says something like:

Thank you for referring ShareBuilder to your friends! Your 2 real-time trades have been credited to your account and are available to use immediately.

Active Codes

3AIP
3AIP*GEJZOH (try if above doesn’t work)
SK483GXM2BU9 (5 free automatic investments, expires 12/31/2014)
TAF2RPL*6O52v9 (mixed success)
BDAY12AL or BDAY12MR

Read the rest of this entry…

Posted in Deals & Offers, Investing | 139 Comments »

Dilbert Teaches You About Investing

The Dilbert comic often dispenses good investing advice, but sometimes it’s either so spot on or so subtle that I think it’s worth repeating to makes sure everyone gets the lesson behind the joke.

Perils of market timing explained:

Alternate title: Momentum investing explained, via Abnormal Returns

Survivorship bias explained:

This actually happens!

Financial advisors with high costs and bad incentive structures explained:

Buyer beware…

Subprime mortgage crisis explained:

Diversification!

On a more serious and practical note, don’t forget about Dilbert’s One-Page Guide to Everything Financial.

Posted in Funny, Investing | 4 Comments »

Simple Portfolio Rebalancing Spreadsheet Template

Since I’ve been reviewing a bunch of portfolio management services, all which are intended to be cheap and use index funds, I thought I’d refresh an old post on how I do basically the same thing myself. I rebalance my portfolio using this very simple Google Docs spreadsheet, which is embedded below*. Yellow cells are those meant to be edited.

1. You have to decide on a desired asset allocation. I personally don’t think there is one perfect portfolio, here are several model portfolios. Below is what I have settled on for now. Details here. You only have to enter this once as long as your target asset allocation stays the same.

2. Choose how often to rebalance. You can do it on a set calendar basis such as annually on your birthday or quarterly. Another method is to only rebalance once your percentages are off by a certain amount, like a tolerance band. I personally check in quarterly to see where I should invest any new cashflows, and if things are really off then I rebalance by selling something.

3. Manually enter your total balances for each asset class. I grab my holdings either from logging in to each individual website (less than 5 for me) or by using an aggregation service like Mint.com. I only hold a limited number of index funds so it’s easy to determine the appropriate asset class for each.

4. Check out the actual breakdown vs. your target breakdown. The spreadsheet shows the actual percentage breakdown vs. the actual breakdown, as well as the dollar amounts of any differences. In the fictitious example shown, I’d feel that I was close enough that I wouldn’t really bother with any rebalancing. If things were really off, I could buy/sell as needed.

I would say this method takes me about 20 minutes each quarter, and I like that it keeps me buying low and selling high. It definitely made the rebound from 2009 pay off more than simply doing nothing or worse, panicking.

(* Note! I am sharing this online in read-only format. If you wish to customize or add your own values, you must make a copy of it (File > Make a copy) over to your own Google Spreasheets account (log in first) or download it as an Excel file (File > Download as). Any requests for edit access to the original public spreadsheet will be denied, because you would be changing the appearance for everyone.)

Posted in Investing, Tools & Calculators | 34 Comments »

FutureAdvisor: Free Online Portfolio Management and Asset Allocation

Another new online portfolio management tool is FutureAdvisor. I want to say they were invite-only for a while, but they appear to be wide open to new accounts now. Their basic account is free “forever”, and you can add 24/7 portfolio rebalancing alerts along with an annual videoconference call with an advisor for $49/year. The process of setting things up is pretty simple with the following steps laid out:

Personal Profile
Enter pertinent information such as current age, current income, desired retirement age, and desired retirement income. I like that they don’t just assume that you want to spend 80% of your current income in retirement. However, the total of your portfolio holdings entered here will be replace by whatever you share in the next step. I’m not really sure why they bother asking.

Financial Profile
You can either manually enter your portfolio holdings or have them import it automatically using your username and password. Most major brokerage companies including 401k accounts are available, but I did notice some that are currently not supported. The supported list includes Vanguard, Fidelity (w/ Netbenefits), Schwab, Merrill, and TD Ameritrade. The unsupported list includes TradeKing, Zecco, and Interactive Brokers.

Asset Allocation
Based on the information given and that same ole’ multiple-choice risk questionnaire, they will suggest to you a model asset allocation. You can tweak the target by picking between Conservative (60/40 stocks/bonds), Moderate (80/20), and Aggressive (90/10). Here’s the conservative asset allocation assigned to me:
Read the rest of this entry…

Posted in Investing, Retirement, Reviews | 3 Comments »