Help Explain This Asset Allocation Chart To Me?

The Vanguard Blog for Advisors has a recent post about how we’re now in the 3rd biggest bull market since 1929, which followed the 2008 financial crisis, also known as the 3rd biggest bear market since 1929. The takeaway is that none of us know the future, so advisors need to convince their clients to rebalance their portfolios both in good times and bad.

Remember, rebalancing is not about maximizing returns, reversion to the mean, or market forecasts—it is about maintaining the risk-and-return characteristics of the portfolio an investor selected based on his or her unique time horizon, risk tolerance, and financial goals. In contrast to market predictions, rebalancing is within your clients’ control.

That’s all well and good, but included was this curious chart with the title “Rebalancing: Asset allocations show trend following”:


This chart confuses me. I assume it is supposed to show that when stocks go up, people buy more stocks and when stocks go down, people sell off their stock allocations. But if for every trade there is both a buyer and a seller, then who is taking the other side of all these trades? For instance, if everyone is buying stocks now, who are they buying it from? Is this only retail investors and the other buyers are institutional investors? Or is this chart mostly just showing changes in overall market-cap?

Target Date Retirement Funds: Beating The Behavior Gap

The general consensus behind target-date retirement funds is often “They’re okay… but here’s something better!”. Any all-in-one product will be imperfect. But I still like them on the whole and have written previously about how Vanguard’s target-date retirement funds are underrated. If you’re invested in them, this Bloomberg article and Morningstar data should make you feel even better about it.

Most mutual fund investors actually do worse than market returns due to poor behavior, termed the “behavior gap“:

But target-date funds have one big advantage over other kinds of mutual funds, the data show. The average mutual fund has a flaw, which is that the average investor hardly ever does as well as his or her funds. Investors tend to jump in and out of funds at the wrong time. They buy high, choosing funds only after they’ve done well. And they sell low, dumping underperforming funds just as they’re about to take off.

However, owners of target-date fund actually did better:


On average, target-date fund investors are doing 1.1 percent better per year than their funds. Investors in almost every other fund category lagged their funds over the past decade, including a -0.98 percent underperformance for U.S. equity funds and -1.3 percent for municipal bond funds.

The outperformance may be a temporary anomaly, but I do think there are unique features of these all-in-one funds (and their investors) that will persist:

  1. Self-selection. If you buy a target-date fund, you desire simplicity. You have a degree of humility. You don’t overestimate your skills as an investor, otherwise you’d buy something else.
  2. Optical illusions. If you own an all-in-one fund that holds both stocks and bonds together, you don’t have the problem of seeing one investment drop while the other rises. It’s all mixed together in one pot, so the impact is usually dulled. This is the benefit of buying a “balanced” fund.
  3. Automatic rebalancing. Anything that makes you look at your investments is an opportunity to make an emotionally-driven choice. Since these funds even rebalance their holdings for you automatically, you’re not even required to rebalance, which can be hard to do. Right now, a portfolio would probably have to sell stocks and buy some bonds while the media keeps talking about rising rates.
  4. Tweaking is difficult. If you have one stock fund and one bond fund, it’s very easy to buy little more of one or a little less of the other. With an all-in-one fund, it’s harder to tweak your mix.

So you don’t have to do anything, and if you want to do something besides just buy more, it’s a pain. All this means less trading, which over the long run is a good thing.

So don’t be ashamed of buying a diversified, low-cost Target Date fund like Vanguard 20XX or Fidelity Freedom *Index* 20XX funds. The article ends with a good reminder that costs still matter. Don’t overpay for one of these funds either, and maybe even raise a little stink if you are being asked to.

Expected Returns by Asset Class Tool by Research Affiliates

In the current environment of historically-high US stock valuations and historically-low interest rates, there is a lot of discussion about what investors should expect in regards to future returns. Predictions are a dime a dozen, but some are better supported than others. Research Affiliates has interactive Expected Returns tool where they freely share both their forecasts and detailed methodology. For example, here is a PDF of their equities methodology.

1st Quarter 2015 Equities 10-Year Forecast. Currently, their forecast for equities predicts that US Large-Cap and US Small-Cap stocks will have expected real (inflation-adjusted) returns of below 1% annually. Developed European and Asian Country stocks (MSCI EAFE) have significantly higher numbers, while Emerging Markets as a whole offer the best risk/return ratio (Sharpe ratio). I’m not into single-country bets, but it appears Russia is the one to take if you have a high appetite for risk.


1st Quarter 2015 Fixed Income 10-Year Forecast. Currently, their forecast for fixed income predicts that both long and short US Treasuries will have expected real (inflation-adjusted) returns of basically zero. You might get under 1% real with a broad US bond fund like AGG or BND, or reach for a little more return with a high-yield junk bond fund but with roughly the same Sharpe ratio. The gambler’s choice appears to be Emerging Markets currencies (EM money market funds), which they predict will appreciate relative to the US dollar in the next decade. This is followed by Emerging Market bonds issued in local currency.


I like reading the theories and fundamental arguments for these forecasts, and consider the numbers as part of the big picture but not necessarily something to act on directly. I also keep track of other forecasts, including the follow which were previously mentioned on this blog – Jeremy Grantham / GMO 7-Year Forecasts (free registration required) and the Rick Ferri / Portfolio Solutions 30-Year Forecasts. The most recent GMO numbers also give the expected-returns edge to Emerging Markets in both the stocks and bond worlds (risk is not directly assessed).

Real Estate Crowdfunding Experiment #1 – Background and Introduction


After I took out roughly $7,500 out of my P2P lending experiment, I started looking for another place to put my money at risk. :) I decided on trying out real-estate crowdfunding, which tries to make real estate investing (either through equity or debt financing) more accessible to individual investors. Right now, all of the major sites require you to be an accredited investor as defined by the SEC. Keep in mind that these investments can be quite risky and that this is an experiment with a small portion of my portfolio set aside specifically for such purposes.

I’m going to be upfront; I didn’t spend an enormous time vetting each and every website out there. I swapped a few quick e-mail questions with a few sites and signed up with some of them (you have to sign up for a free account in order to view the investment opportunities). Due to my analytical tendencies, I missed a bunch of them because the good ones were often fully funded within 24 hours. Other times, I had time to do more research and simply never got back around to it. I finally set some simple criteria and decided that I would jump on the next one that fit the bill. The criteria:

  • Try out one of these new crowdfunding real estate websites – Realty Mogul, Fundrise, Realty Shares, Patch of Land, and others.
  • Single or multi-family residential property.
  • I wanted to be a lender, and the loan must be secured by the property, in the first position.
  • Short-term financing deal with 1 year term or less.
  • Loan-to-value of under 80%, based on my own rough numbers.
  • At least 10% annualized return (10% APR interest).
  • Invest only $5,000 per property.

I found an investment that fit, electronically signed the required documents, and the deal appears to have completed funding. Here are the results:

  • Patch of Land
  • Single-family home in West Sacramento, California
  • Loan is secured by the property, in the first position. Also have personal guarantee from borrower.
  • 6-month term (roughly April 15th to October 15th), with the goal of a quick rehab and reselling of the property.
  • LTV is 78% per my rough numbers.
  • 11% APR interest, paid monthly.
  • $5,000 invested.

pollogoI’m not sure exactly what details of this investment I am allowed to share, so I’ll save that part for later. It will be good for you guys to pick apart, but it doesn’t really matter for other investors as the project is already 100% funded. I’m just waiting on my first interest payment in May, and hope to be done by October. At the end of the year I will get a 1099-INT.

Here’s part of the pitch for Patch of Land:

Patch of Land is a curated real estate debt crowdfunding platform that sources, originates, and underwrites loans to professional, experienced real estate developers. Patch of Land is one of the first real estate crowdfunding platforms. We have been building a strong track record of funded projects and investor returns since 2013. We are considered one of the top 5 real estate platforms by leading crowdfunding publications.

Loan proceeds are used to rehabilitate residential and commercial real estate properties across the country. Loans are secured by the underlying property and personal guarantees from the borrowers. Patch of Land then matches those loans with accredited and institutional investors for funding. Loans are issued for terms of 12 months at rates ranging from 10 to 18% APR, paid monthly to investors.

What I liked about Patch of Land is their stated commitment to individuals provide significant funding and also that many of their borrowers are experienced individual real estate investors. In that way, it’s almost a peer-to-peer feel, as opposed to institutional investors providing the cash to large real estate organizations.

Along those lines, Patch of Land recently completed a $23.6 million round of funding, and $3.6 million of that came from SeedInvest, a crowdfunded start-up investing firm. So technically, I could have also been a part-owner of this start-up as well. For now, I’ll stick with being a “real estate lender” and maybe I’ll add the “venture capitalist” title later. I would like to invest another $5,000 into partial ownership of a commercial property via another crowdfunding site.

LendingClub Realistic Return Expectations Chart

Thinking about investing in P2P loans? Even though I still believe that decent returns are possible, I think it is important to have realistic expectations. I’ve given out the following warnings since they started:

  • You won’t get the stated interest rates on your loans. Let’s say the loans you invested in are charging 12% interest to the borrowers. First, there are fees to pay. Second, these are unsecured loans to faceless individuals on the internet. You don’t get to repossess a house or even a car. All you can do is hurt their credit score. They could empty their bank account and walk away the next day. Defaults are gonna happen; you should expect it.
  • Your reported return will decline over time. I see many people who have loans being very happy about their 10% reported returns after a year or so. Well, expect it to drop 1 to 3% or possibly more by the time the loans actually finish their full terms. If you keep rolling over your interest into new 3 year loans, that means your average loan age will likely remain around 1.5 years (often even younger due to high prepayment rates).

Recently, LendingClub started showing this on their performance and statistics pages:

This chart illustrates how returns typically decline over the life of an investment. If your account is relatively new, it is likely that your returns will decline over time as some of your Notes become past-due and charge off. This chart is not a prediction of how your portfolio will perform and actual results may vary.

Here’s the chart with a focus on the beginning (3-9 months = 9.8% median return):


Here’s the chart with a focus on the end (24-30 months = 7.2% median return):


That’s a performance drop of 2.6% over 21 months if you take the average loan ages (6 months to 27 months). I can see why the chart starts at 3 months, as no loan can be charged off until the payments are at least 90 days late. I’m not quite sure why the chart ends only at 30 months though, not 36 months, as I think the numbers would drop even further. (As an aside, I know than some investors basically try to sell their loans on the secondary market at full expected value after 12 months or so to maximize returns. If you could find buyers at that price, that might not be a bad strategy.)

A historical 7.2% median annualized return is still pretty solid. For a rough approximation, here are the returns of some corporate junk bond funds, probably the closest publicly-traded asset class available. Per Morningstar as of 4/14/2015, the 3-year trailing total return of the Barclays High Yield Bond ETF (JNK) was 6.67%. As of 4/14/2015, the 3-year trailing total return of the Vanguard High-Yield Corporate Bond Fund (VWEHX) was 7.21%. Given that the timeframes don’t match up perfectly, I would only go as far as saying that the return figures are in the same ballpark.

It is worth noting though that the mutual funds offer the same broad diversification for everyone, whereas an individual investor at LendingClub has more scatter in returns (either higher or lower than average). As for me, apparently I’m below the 10th percentile myself with my 4.3% annualized returns. Arrgh!

Prosper vs. LendingClub Investor Experiment: 2.5 Year Update

lcvspr_clipoIn November 2012, I invested $10,000 into person-to-person loans split evenly between Prosper Lending and Lending Club, both out of curiosity and for a chance at higher returns from a new asset class. After diligently reinvesting my earned interest into new loans, I stopped my after one year (see previous updates here) and started just collecting the interest and waiting see how my final numbers would turn out at the end of the 3-year terms.

My last update was 6 months ago, so here’s what things look like after roughly two and a half years. This will be my last update before final liquidation of my portfolio (see recap below).

$5,000 LendingClub Portfolio. As of April 14, 2015, the LendingClub portfolio had 129 current and active loans remaining with a principal value of $1,003 (1 in grace period). 96 loans were paid off early and 29 were charged-off . 1 loan is between 31-120 days late and 2 are in default, which I will assume to be unrecoverable ($37.07 in principal). $417.94 in uninvested cash is left in the account, and I also withdrew $4,000 previously (payments and interest). Total adjusted balance is $5,421.


$5,000 Prosper Portfolio. My Prosper portfolio now has 110 current and active loans with a principal value of $1,404. 114 loans were paid off early, 42 charged-off. 1 loans are between 1-30 days late ($22). 3 are over 30 days late, which I am going to write off completely (~$18). $410.26 in uninvested cash is left in the account, and I also withdrew $3,500 previously (payments and interest). Total adjusted balance is $5,336.


Experiment Recap and Conclusions

  • P2P lending has successfully gone mainstream. The fact that institutional investors are buying a significant portion of Prosper and LendingClub loan inventory would seem to prove that the concept is viable. This WSJ article says 66% of Prosper loans in 2014 had been sold to institutional investors. What started out as the Wild West of unsecured loans is now accepted by Wall Street. LendingClub had a successful IPO in December 2014 (which they generously let their lenders participate in).
  • LendingClub reports my adjusted* annualized returns as 4.30% annualized. Prosper reports my annualized returns as 4.10% annualized. These returns are certainly above that of a savings account or bank CD, but not as good as many other asset classes over the same period. Considering the weighted average interest rate on those loans was 12% for LendingClub and 14% on Prosper, I saw a lot of defaults. (*Adjusted means you assume all loans 30+ days late will be total losses.)
  • My reported returns consistently deteriorated as my loans aged. 10 months ago Prosper said my returns were 5.76%. 14 months ago Prosper said my returns were 7.55%. LendingClub reported my unadjusted annualized return 6 months ago as as 5.27%. 10 months ago, it was 5.94%. The lesson here is that your returns will continue to vary and likely deteriorate as your loans age, so don’t assume your returns will always stay the same as they are in the beginning. Also, your returns will look higher if you keep reinvesting into new loans.
  • I am not a good loan picker. But will you be better? My returns are below average when compared to the advertised historical numbers. Certainly, I have seen reported numbers from other people who have done much better. Who knows, you may be the next P2P Bond King! :) But I took my shot, diversified into over 400 loans, and here are my honest results. Not everyone who gets bad returns is willing to share about them.
  • For small-time individual investors, dealing with unfamiliar forms at tax time can be tedious and time-consuming. Dealing with the tax forms each year isn’t impossible, but it isn’t fun either. If I were to invest all over again, I would definitely do it within an IRA to avoid tax headaches. To save more time, I would also buy at least 100 loans x $25, which also happens to be the $2,500 minimum for free auto-investment at LendingClub (no minimum at Prosper).
  • I plan on liquidating the rest of my portfolio by the end of 2015. In June 2014, I still had $5,493 of principal in active loans in both LendingClub and Prosper. (The rest was idle cash, mostly withdrawn.) Now, roughly 10 months later, I only have $2,407 in principal and my total balance grew by a measly $67. $67 dollars! After filing my 2014 tax returns, I decided it was not worth the headache of dealing with the 1099s involved with these little loans. Thus, I plan on selling my remaining notes on the secondary market, probably soon but definitely by year-end. I might try again in the future inside an IRA, but for now I choose simplicity.
  • LendingClub vs. Prosper relative performance. I tried my best to invest at both websites with the same criteria and overall risk preference. As noted, my LendingClub reported returns (4.3%) are a bit higher than my Prosper reported returns (4.1%). This is also supported by my own balance updates, although I wouldn’t put too much importance on the absolute numbers as I stopped reinvesting into new loans after the first year. Here’s an updated chart:


Wealthfront Offers Tax Loss Harvesting With No Minimums

wealthtlh_logoAutomated portfolio managers like Wealthfront will set you up with a diversified mix of index funds and manage it for you for a small fee. I’m an investing geek, so I always lean towards keeping the small fee and manage things myself. But an important variable to this equation is tax-loss harvesting. Tax-loss harvesting tries to improve your returns by minimizing your tax bill, but it is also tedious work that is ideally suited to handing over to a computer.

If the management fee they charge is say 0.25%, as long as the benefit from tax-loss harvesting is at least 0.25%, then you’re already ahead of the game. The problem is that predicting the actual benefit of TLH is difficult. Wealthfront claims that based on past data, their tax-loss harvesting implementation could add 1% annually to your after-tax returns:


Up until recently, you also needed $100k in your portfolio. But Wealthfront has recently announced that as of April 2015, their daily tax-loss harvesting service will be available to all taxable accounts with no minimum balance requirement:

We’re proud to announce that our daily tax-loss harvesting service will be made available to all Wealthfront taxable accounts, starting in April. At Wealthfront, we believe everyone deserves sophisticated financial advice, and this brings us one step closer to that goal.

I would not have predicted this a few years ago: automated tax-loss harvesting for any account size and at such a low cost. A customer with $10,000 would be getting TLH and portfolio management for free. The minimum needed to open a Wealthfront account remains $5,000.

I would say that I am confident the benefit of TLH over the long-run will be greater than zero. However, I would not count on 1%. But even if we split the difference and assume it is 0.5%, then using such a service still has to be considered as it is greater that their management fee of 0.25%. I hate giving up control though, so while I have put a little seed money in various places, I am still 95%+ DIY and keeping a close eye on future developments.

Current sign-up promotions. Wealthfront usually allows your first $10,000 managed for free. With this special invite link, you can get your first $15,000 managed for free, forever (an additional $5k).

(Note: Competitor Betterment also has a similar tax-loss harvesting service. The post structure is similar, but I wanted to make sure any readers that may see only one post get the full context.)

Betterment Offers Tax Loss Harvesting With No Minimums

bettertlh_logoAutomated portfolio managers like Betterment will set you up with a diversified mix of index funds and manage it for you for a small fee. I’m an investing geek, so I always lean towards keeping the small fee and manage things myself. But an important variable to this equation is tax-loss harvesting (TLH). Tax-loss harvesting tries to improve your returns by minimizing your tax bill, but it is also tedious work that is ideally suited to handing over to a computer.

If the management fee they charge is theoretically 0.25%, as long as the benefit from tax-loss harvesting is at least 0.25%, then you’re already ahead of the game. The problem is that predicting the actual benefit of TLH is difficult. Betterment claims that based on past data, their Tax Loss Harvesting+ service could add an estimated +0.77% in after-tax returns, annually:


Up until recently, you also needed $50k in your portfolio. But Betterment just sent me an e-mail today (April 2015) that their tax-loss harvesting service will be available to all taxable accounts with no minimum balance requirement:

Using our smarter technology, we’ve now made Tax Loss Harvesting+ available to you and all of our customers—regardless of balance—at no additional cost.

We are the only automated investing service to provide this tax-reduction strategy, once only available to the wealthiest, for all investors. By democratizing tax loss harvesting, we are continuing our mission of making smarter investing accessible to everyone.

I would not have predicted this a few years ago: automated tax-loss harvesting for any account size and at such a low cost. A customer with $10,000 would be getting TLH and portfolio management for $25 a year. Betterment has no minimum investment requirement.

I would say that I am confident the benefit of TLH over the long-run will be greater than zero. However, I would not count on 0.77%. But even if we split the difference and assume it is 0.4%, then using such a service still has to be considered as it is greater that their management fee of 0.15% to 0.35%. I hate giving up control though, so while I have put a little seed money in various places, I am still 95%+ DIY and keeping a close eye on future developments.

Current sign-up promotions. Betterment is currently offering up to 6 months of free portfolio management fees, depending on your initial deposit amount.

(Note: Competitor Wealthfront has a similar tax-loss harvesting service. I know my posts about both are very similar, but I wanted to make sure any readers that may see only one post get the full context.)

ComputerShare and Company-Specific DRIP Plans: Still A Good Option in 2015?

drip200Here’s a reader question that arrived this week:

I know you write a lot about investing, but can you write a little more about ComputerShare as a way to save money vs buying stock with online brokerages. I just read in WSJ how its cheaper if you are a buy and hold kind and its just as good as someone holding your paper stock certificates.

I am assuming that the WSJ article in question is the one about Ronald Read, the maintenance worker and janitor who saved up $8 million using DRIP plans.

A thrifty lifestyle, solid investing acumen, plenty of patience and the benefits of compounding were at the center of the story of Ronald Read—the quiet and simple-living Vermonter who enjoyed playing the stock market and left behind a nearly $8 million estate when he died last year at the age of 92.

Dividend Re-Investment Plans (DRIPs) traditionally refer to companies that let individuals to buy their shares directly from them and then allow them to automatically reinvest any dividends into more shares. Reinvesting those dividends increased the number of shares owned, and when combined with per-share price appreciation often leads to significant gains over time.

DRIPs were one of the first low-cost, buy-and-hold investment strategies. Stock commissions used to run over $30 per trade, whereas many DRIP plans let you buy shares for free or just a few bucks. This allowed mom-and-pop investors to put away as little as $25 a month without the entire nut being eaten by fees.

I started learning a tiny bit about investing in the late 1990s, which was near the rise of the online broker and the beginning of end of for DRIP plans. I still remember buying a book about DRIPs from Moe’s Books (used book store that is still going!) and being very fascinated by the idea. These days, paper certificates are pretty much gone and transfer agents like ComputerShare manage DRIP plans for most companies electronically. ComputerShare manages plans for Procter & Gamble, ExxonMobil, Coca-Cola, Johnson & Johnson, Wal-Mart, AT&T, Verizon, and several more.

For the most part, there are better low-cost, buy-and-hold options out there now. Let’s take a look at the Coca-Cola DRIP plan. It costs $10 to set up, $2 per automatic purchase plus a $0.03 per share processing fee. Reinvestment of dividends cost 5% of amount reinvested up to a maximum of $2.00. You need $500 to start and there is a $50 ongoing minimum investment.

Every company has different rules, and sometimes there is a purchase price discount. However, you are still buying individual stocks so what happens when you end up holding a Enron, MCI Worldcom, or even a Kodak or Sears? You could juggle 30 different stock plans like Ronald Read did – one of his stocks bombed too but his diversification protected his portfolio – but that gets to be a lot of work and paying $2 times 30 starts adding up.

Now consider that you can buy an ETF like the Vanguard Total Stock Market ETF (VTI) with zero commission and zero setup fees from Vanguard or TD Ameritrade and holds 3,800 stocks for you all at once for an expense ratio of $5 a year per $10,000 invested. If you like the dollar-based simplicity of DRIPs (all of your $50 a month gets invested in partial shares), you can buy the mutual fund version (VTSMX) at Vanguard which supports fractional shares and free automatic dividend reinvestment.

Even if you still wanted to buy individual stocks, many discount brokers including TradeKing and TD Ameritrade offer low commissions and free dividend reinvestment. Hold one stock or 100, all on a single statement. The Robinhood app lets you buy stocks with zero commission if you have a smartphone. You can buy up to 30 stocks at once for $9.95 at Motif Investing.

NAPFA: Warnings When Finding a Financial Advisor

warning_signMany people feel more comfortable with someone else helping them with their finances. A common piece of advice these days is to find a fee-only advisor that doesn’t work on commission. Many times this leads to a recommendation of the National Association of Personal Financial Advisors (NAPFA), whose members must promise to be fee-only and act in a fiduciary manner (putting your interests first). They are regularly mentioned in Kiplinger’s magazine, and I’ve even referred a few readers to their website myself. You’d think that putting your money with the president of NAPFA would be a sound idea, right?

I was surprised to read the following warning from Phil DeMuth in his book The Affluent Investor:

The National Association of Personal Financial Advisors (NAPFA) will happily refer you to a fee-only advisor. Despite their lofty mission, no fewer than two of its recent presidents have been investigated for kickback schemes (one for defrauding clients by secretly putting $47.5 million of client money in a start-up he founded). Several years ago, I referred someone who was looking for an advisor to this group. When I followed up to ask how it went, he said, “The guy they sent me to tried to sell me a variable annuity.” This is exactly what fee-only advisors are not supposed to do: push high-margin commissioned products. This organization is a useful idea and I wish I could endorse it, but the execution leaves something to be desired.

Naturally, I had to learn more about these former NAPFA presidents. Here is a good summary excerpted from Wikipedia (emphasis mine):

Two former presidents of the NAPFA, Mark Spangler (serving in 1998) and James Putman (serving in 1996 and 1997) were charged by the SEC with fraudulent behavior: Putman in 2009, for accepting $1.24 million in kickbacks related to unregistered investment pools, and Spangler in 2011, for secretly investing $47.7 million of client money in two technology companies that he or his firm owned. […]

On April 24, 2012, a Wisconsin federal court awarded summary judgment to the Commission on its claims against James Putman (“Putman”), a defendant in an action filed by the Commission in May 2009 and orders Putman to pay disgorgement and prejudgment interest in the amount of $1,530,129 and a civil money penalty of $130,000, for a total amount of $1,660,129. […]

Spangler, a Seattle investment adviser, was found guilty 11/7/13 of 31 counts of fraud and money laundering after deceiving clients by secretly investing more than $46 million of their money into two risky startups in which he had an ownership interest. […] Spangler was sentenced 3/14/14 to 16 years in prison […]

It is important remember the relatively loose relationship between NAPFA and its members. There are many reputable, honest fee-only financial advisors out there that are members of NAPFA. BUT, you can’t solely rely on NAPFA membership to mean that the person you pluck out of their directory will be reputable and fee-only. It’s not very difficult to become a member, so unscrupulous people can join to get that layer of credibility and then abuse it.

Educate and protect yourself. NAPFA is a trade organization, so it mostly about marketing and getting good publicity. There’s nothing wrong with that, but as a potential client there is much more due diligence to be done before settling on an advisor. Make sure your money is kept at a well-known third-party custodian such as Schwab, Fidelity, or TD Ameritrade. Know what products are often sold by commission. Use the helpful resources at this broker check page.

Portfolio Rebalancing Frequency: Even Less Than Annually?

scaleHere’s another data point on the debate on how often to rebalance your portfolio to your target asset allocation. Econompic Data writes about rebalancing a portfolio back to 60% S&P 500 / 40% Barclays Aggregate Bond index from 1976-2014 and finds that rebalancing every 3 years actually produced slightly better average annual returns that rebalancing monthly (via Abnormal Returns):


Momentum is cited as a potential reason why this works. Looks good at a glance, but look at that y-axis. We are comparing 10.3% and 10.2%. Is that really significant?

I would point out that in a previous Vanguard research article, a similar backtest was done on a 60/40 Broad US Stock/Broad US Bond portfolio rebalanced across various thresholds from 1926-2009. Their conclusion (emphasis mine):

We found that no one approach produced significantly superior results over another. However, all strategies resulted in more favorable risk-adjusted portfolio returns when compared with returns for portfolios that were never rebalanced.


From a 2008 paper from Dimensional Fund Advisors:

Aside from avoiding excessive trading, there are no optimal rebalancing rules that will yield the highest returns on all portfolios and in every period.

From advisor and author William Bernstein:

The returns differences among various rebalancing strategies are quite small in the long run.

Instead of there being a benefit to rebalancing less often, it may just be safer that the frequency doesn’t matter. On the other hand, given the potential cost of rebalancing from taxes, commissions, and bid/ask spreads perhaps lowering the frequency doesn’t hurt.

I think the most important thing to note is that in every test case above, the rebalancing was done on a strict schedule and without emotion. The problem you are really trying to avoid is being afraid buy whatever has been getting crushed and selling what has been doing awesome. There’s that behavioral/emotional component again.

As for me, I try to check my portfolio once a quarter, but rebalance no more than once a year. An annual frequency is as easy to remember as your birthday, it’s not too often and not too seldom, lots of smart people are proponents, and it gives me the opportunity to do tax-loss harvesting. I use tolerance bands such that if my major asset classes are off by more than 5%, then I will rebalance. Otherwise, I “rebalance lite” year-round using any new money to buy underweight asset classes.

The Only Two States of Your Portfolio: Happy All-Time High or Sad Drawdown

emoinvestQuick question – What was the highest value ever for your investment portfolio? Now, what was the value exactly a year before that? You probably know the answer to the first question, but not the second, even though both have little to do with your final portfolio value.

I am currently reading the e-book Global Asset Allocation by Meb Faber and he had a good observation that I don’t recall ever expressed in this specific manner (emphasis mine):

It is a sad fact that as an investor, you are either at an all-time high with your portfolio or in a drawdown – there is no middle ground – and the largest absolute drawdown will always be in your future as the number can only grow larger.

We tend to carry the highest value of our portfolio around in our heads because of the powerful cognitive bias of anchoring. Let’s say that 10 years ago you started with $20,000 and today with your contributions and investment growth your total is $100,000. If next year your portfolio experiences a drawdown to $80,000, you’ll probably identify your portfolio as being 20% down from $100,000, as opposed to a 400% increase from $20,000. $100,000 is “what you had” and you will forever be anchored to that number, even if for it only lasted just for a day.

That is, until you reach another all-time high (yes! $105,000) and that will be your new anchor. (This applies to individual holdings as well – I’ve found this especially pervasive when using brokerage smartphone apps that allow me to frequently check in with just a tap.)

If your portfolio is anything like mine, it has been repeatedly been hitting all-time highs for a year or two. The problem is, sooner or later, there is a 100% chance I’ll be stuck in a prolonged drawdown phase. I will think about my high-water value every time I check my statements (which is why perhaps it is better not to check your investment value much more than once a year). I will question my existing asset allocation and how to invest my new money.

Now add in loss aversion – the other finding from behavioral economics that people feel the pain of losses much more severely than the pleasure of gains (studies suggest we hate losses roughly twice as much as gains).

That means drawdowns are always lurking around the corner, and we hate them twice as much as any investment gain. It’s no wonder that investors are often their own worst enemies by not sticking to their investment plans.