Category Archives: Portfolio Investing 101

Financial Literacy: State of the Union in 2013

April is financial literacy month.  I believe that lack of financial knowledge is one of the most critical problems that our country faces. Continue reading

Getting Help in Choosing and Managing a Portfolio

There is currently $5 Trillion invested in Individual Retirement Accounts (IRAs), $4.7 Trillion invested in self-directed retirement plans provided by employers (401(k), 457, and 403(b) plans), and $2.3 Trillion invested in traditional pension plans offered by private companies.  These numbers are stunning for a number of reasons.  First, self-directed retirement plans (IRAs, 401(k)’s, etc.) dramatically dwarf the amounts invested in traditional pensions.  This is part of a long-term trend, as employers move away from traditional pensions, but the magnitude of the shift is striking.  With the assets in IRA’s surpassing the $5 Trillion mark earlier this year, the amount of money in individual accounts is moving ahead of employer-sponsored plans.  What’s more, it is anticipated that IRA’s will continue to grow relative to employer-sponsored plans as people retire and roll their savings from their ex-employer’s plan into an IRA.  This matters because investors in IRA’s have even less help in creating and maintaining their portfolios than investors in employer-sponsored plans.  Continue reading

Saving and Investing for Retirement: Part Five

Effective Actions in an Uncertain World: Part Five of Our Special Five Part Series

There are a number of factors that we need to predict in order to come up with saving and investing strategies for retirement.  The values that we assign to these factors will have a huge impact on whether or not we will be able to meet our goals.  First, there is the expected return that investors will make on their retirement savings.  Second, there is the common estimate that people will need about 85% of their pre-retirement income to support them once they stop working.  Finally, there is the potential impact of behavior on savings rates, investing, and spending.  Continue reading

Saving and Investing for Retirement: Part Two

Figuring Out Whether You Are On Track: Part Two of Our Special Five Part Series

Fidelity just came out with a study that estimates that people will need about eight times their final salary level, assuming they work until age sixty seven, to be able to retire and subsequently to have 85% of their pre-retirement income provided from retirement savings plus social security.  Fidelity also helpfully provides estimates of what they believe people need to have acquired at different ages. Continue reading

Saving and Investing for Retirement: Part One

We Are In Trouble: Part One of Our Special Five Part Series

As the presidential election season of 2012 has gotten underway, there is a massive issue that has gotten very little attention: how Americans will sustain themselves in retirement.  In 2010, there were 40 million Americans over the age of 65.  By 2030, that number is expected to rise to 70 million, which represents 20% of the total population.  At the same time, we have moved from a workforce with traditional pensions to one in which each person chooses how much to save and how to invest that money.

Only 42% of American private-sector workers between ages 25 and 64 have any type of retirement plan in their current job. The majority of Americans (67%) who have access to a pension plan have only self-directed accounts such as 401(k)’s and similar accounts (such as 457(b) plans which cover those who work at non-profits or who are employed by the state or local government organizations).  A large number of Americans also have IRAs.  We refer to these types of retirement plans as Defined Contribution (DC) plans as opposed to Defined Benefit (DB) plans, the traditional pensions that used to be the norm. Continue reading

The Golden Rule of Investing

Guest post by Contributing Editor, Lowell Herr, ITA Wealth Management. Lowell is a subscriber to the Portfolioist and his investment philosophy is similar to ours.  Enjoy.

The Golden Rule of Investing is simply, “Save as much as you can as early as you can.” The operative word is early. William J. Bernstein lays it out in stark language in his book, “The Investor’s Manifesto“ when he writes, “Each dollar you do not save at 25 will mean two inflation-adjusted dollars that you will need to save if you start at age 35, four if you begin at 45, and eight if you start at 55. In practice, if you lack substantial savings at 45, you are in serious trouble. Since a 25-year-old should be saving at least 10 percent of his or her salary, this means that a 45-year-old will need to save nearly half of his or her salary. Most 45-year-olds will find this nearly impossible, if for no other reason than the necessity of paying living expenses, payroll taxes, and income taxes.” Continue reading

Investors’ 10 Most Common Behavioral Biases

Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.

Barry Ritholz (of The Big Picture and a Sunday Business columnist at The Washington Post) recently contributed Investors’ 10 most common mistakes to The Washington Post Business Section quarterly investing section. It’s a commentary that he has been working on for a while — the ten topics are listed with links to longer discussions of each common mistake here. I created my own investing “checklist” (here) in response to Barry’s original list. For yet one more iteration of the theme, I offer my list of Investors’ 10 Most Common Behavioral Biases.  There are a number of others, of course, and more will continue to be uncovered.  But I think that these are the key ones. Continue reading

We Have Met The Enemy And He Is Us

Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.

Psychologist Walter Mischel’s famous 1972 marshmallow experiment, was designed to study children’s ability to defer gratification.  In the actual experiment, the researchers analyzed how long each child resisted the temptation to eat a marshmallow placed in front of them in order to obtain a second marshmallow later and whether or not doing so was correlated with future success. The kids’ struggles  to hold out for the extra marshmallow is poignant and hits home with all of us (watch kids re-create the experiment in this video).

Over 600 children who took part in the original experiment. A small minority ate the marshmallow immediately. Of those who attempted to wait, less than one-third deferred gratification long enough to get the second marshmallow. The others struggled to resist temptation and held out for an average of less than three minutes. Any of us struggling to diet or just to eat right will surely relate. For most of us, a bird in the hand is better than two in the bush, no matter how likely we are to acquire the two later.

As it turned out, those children who waited and got the second marshmallow did better later in life.  A follow-up study in 1988 showed that Continue reading

Does “Low Risk” Outperform?

Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.

A new paper by Robert Haugen, president of research house Haugen Custom Financial Systems, and Nardin Baker, chief strategist, Global Alpha, Guggenheim Partners Asset Management, claims that low risk (really low volatility) stocks consistently delivered market-beating returns in all of the 21 developed countries they studied between 1990 and 2011 (video here). Their research showed the same was true of 12 emerging markets they looked at over a shorter period since 2001. In essence, their idea is that low volatility stocks are boring and underappreciated but outperform because Continue reading

Retirement: Demographics and Destiny

In a recent interview in The Wall Street Journal titled “Bad New for Boomers,” Rob Arnott presents a fairly grim view of the retirement income that investors can expect to generate from their investment portfolios.  His thesis is that aside from all of the economic turmoil that may constrain future earnings growth, there is an additional substantial problem for investors: supply vs. demand.  As the Baby Boomers retire, they will become sellers of equities as they draw down their life savings to provide retirement income.  Having this huge generation steadily cashing out of the market, will increase the balance of sellers vs. buyers of equities and will thereby drive down equity prices.

It is crucial for investors to understand that Continue reading