Monthly Archives: March 2011

GMO’s Lean Investment Outlook

Bob Huebscher over at Advisor Perspectives just published an interesting article that gives an overview of Grantham, Mayo, van Otterloo & Co.’s (GMO) outlook for the coming years. The article is based on a talk given by Ben Inker, head of asset allocation at GMO.

Most investors who are aware of GMO first encounter the Boston-based investment management firm by reading some of the brilliant essays of Jeremy Grantham, one of the firm’s founders. Grantham’s market outlooks have historically been prescient.

A Bleak Outlook?

GMO’s broad outlook for investors — the firm manages $107 billion in assets — has changed since last year. Continue reading

Measuring The Performance of David Swensen’s Lazy Portfolio

Lazy sunday...
(photo:Dan Queiroz)

Over at My Plan IQ they’ve been analyzing the performance of David Swensen’s model portfolio. It’s been successful over the long term, they conclude, but recently some weaknesses have begun to hurt its performance. Continue reading

Relax: Doing Less With Your Investments

In his latest Behavior Gap Newsletter, Carl Richards nails that feeling of confusion that comes when we learn first hand that “past performance is not a guarantee of future results.”

Investing isn’t like hiring a basketball coach, Richards argues, but rather like planting an oak tree: Continue reading

Will Harry Browne’s Permanent Portfolio Continue To Work?

I just published an article over at Advisor Perspectives that is titled “What Investors Should Fear in The Permanent Portfolio” that looks at a very simple model portfolio proposed by Harry Browne.  This portfolio contains equal allocations to four elements: stocks, gold, long-term government bonds and cash.  Back in 1998 when Browne first proposed this portfolio in his book, Fail Safe Investing, it was decidedly harder to create your own version of this allocation model.  Today, you can easily implement this portfolio at fairly low cost using four ETFs. 

Harry Browne’s Permanent Portfolio has gotten a great deal of attention–and many new advocates–due to its solid performance in recent years when more traditional asset allocations suffered substantial losses.  However, the question that investors need to ask is whether this will be a successful way to invest in the future.  Continue reading

Is Dave Ramsey’s Optimistic Investing Advice Irresponsible, or Motivating?

Dave Ramsey is a well-known author and media personality famous for his focus on saving and getting your financial house in order. His books have hit The New York Times’ bestseller list and 137,000 people follow his radio show’s Twitter feed.

Praise seems to be universal when it comes to his advice on how to pay down debt and save. But his ideas about investing are far less popular with some, who argue they are irresponsibly optimistic. Why does he set hopes so high?  Continue reading

Retirement: The Good News in the Bad News

The Employee Benefits Research Institute has issued the 2011 Retirement Confidence Survey. And the answer is: We are not confident. We are somewhere between pessimistic and hands-thrown-in-the-air hopeless.

This, the smart people at EBRI tell us, is good. You must recognize any problem before you can solve it. It’s not that our retirement situation nationally has gotten all that much worse. It’s that we’re finally facing reality. Continue reading

Jim Otar’s Pearls of Wisdom

Guest blog by Steve Thorpe.

Yesterday, I posted a review of Unveiling the Retirement Myth: Advanced Retirement Planning based on Market History by Jim C. Otar, a financial advisor, Certified Financial Planner, and engineer.

In this second post, I share a few quotes that epitomize the reality-based themes and critical insights woven throughout Otar’s text:


  • Proper retirement planning requires planning for the worst.
  • This book is based on my research of retirement planning involving one hundred and nine years of market history. What you read will be depressing.
  • When it comes to retirement finances, the three main risk factors are longevity risk, market risk, and inflation risk.  A retirement plan must minimize each of these three risk factors to be considered a well-designed plan.
  • Disregard any financial research, any words of wisdom, any gibberish from financial gurus in the media that “markets eventually recover in the long term.” They are not telling you the full story: Yes, markets did always recover in the past, but your distribution portfolio retained a permanent loss for the rest of your life.

Continue reading

Investing Book Review: Jim Otar’s Unveiling the Retirement Myth

This is a guest blog by By Steve Thorpe.

(Part two of this review, Steve Thorpe’s compilation of the best advice and insights from Unveiling the Retirement Myth by Jim Otar, will run tomorrow.)

For individual investors planning for retirement, basing those plans on averages just doesn’t cut it. For example, one might estimate an investor’s expected life span, future investment returns for a given asset mix, inflation rates, etc. But the investor may live longer than average, the sequence of future investment returns could easily go against him or her, likewise inflation effects can be enormous over time. Bad luck in any of these areas can easily deplete a retiree’s investment portfolio to zero during his lifetime. Unfortunately we are unable to change the luck factors that can so profoundly affect a retiree’s future income stream – or lack thereof.

Jim C. Otar, a financial advisor, Certified Financial Planner, and engineer, clearly explains these topics and more in his book Unveiling the Retirement Myth: Advanced Retirement Planning based on Market History. This review contains only a sampling from this fine body of work; accordingly I’d recommend that you pick up a copy if you want to understand all the details.

Most Research and Many Strategies Are “Just Plain Garbage.”

He covers a lot of ground in the book including: diversification, rebalancing, optimum asset allocation, warning signals of potential diminishing luck, flaws of investment simulations, budgeting for retirement, determinants of a portfolio’s success, and many others. This review will focus mainly on two core insights. First, that luck plays a remarkably large part in how well any retirement plan holds up. Second, that lower withdrawal rates, not savvy asset allocation, is the best defense against bad luck. Continue reading

Mutual Fund Trading Costs Add Up. Are ETFs a Better Option?

According to a study by the Center for Retirement Research at Boston College , 401 (k) plans could seriously bring their costs down if they were to  substitute Exchange Traded Funds for mutual funds in their retirement saving options for plan participants.

Their findings have interesting implications for investors in general, as they shed light on an area of mutual fund expenses not commonly discussed or easily quantified.

Generally when mutual fund fees are discussed, the figure used is the fund’s expense ratio. This is the cost of paying the fund manager, marketing and other fund overhead. For some actively managed funds it can be fairly high, and it’s generally lowest at passively managed index funds. Vanguard is especially well-known for its low fees (as it turns out, partly enabled by that firm’s particular ownership structure in which the funds own the firm.) As we have previously written up, according to Morningstar research,  low fees are the single most reliable predictor of future fund performance,  better than any other metric, including Morningstar’s own five star ranking system.

Expense ratios are fully disclosed and readily available in fund literature and at sites that follow the fund industry,  including Morningstar.

The High Price of Fund Trading Fees

The study by the Center for Retirement Research focuses on a different cost, but one that is both difficult to track and quite significant: a fund’s trading costs. Continue reading

Working Longer As The Retirement Solution Has Its Flaws

Today many people expect to work past the traditional retirement age of 65. According to the 2010 Retirement Confidence Survey conducted by the Employee Benefits Research Institute (EBRI), today 33% of workers expect to retire after age 65, a dramatic increase. In 1991, only 11 percent felt that way. One reason may be that many of us won’t be eligible for full Social Security payments until age 67.

Working Longer, Not Saving Enough

Even more important, few of us feel highly confident that we’ll have enough saved for when retirement time comes: only 16% according to the EBRI survey. On this, the skeptics seem to be right. According to a study published last December by actuarial firm Nyhart, “most employees age 60-64 will likely need to work until the age of 75 to be able to afford to retire at their current levels of contribution to their 401(k).”

Extending retirement further out into the future is also frequently proposed as a solution for the funding problems facing Social Security. In her recent analysis of the the current US economic situation, USA, Inc., former Morgan Stanley Internet analyst, and current Silicon Valley venture capitalist, Mary Meeker outlines the impact of moving Social Security eligibility from 67 to 73.

But what if a worker can’t work that long? Continue reading