Reuters Money
5 tips to surviving a bear market
Do you need a special kind of financial adviser to deal with a bear market?
Few will debate that the months ahead will be challenging, and that the extreme market volatility will continue. There are a number of steps you can take with your adviser — or on your own — to weather these changes.
The first thing to consider is that the cards are lining up for the U.S. and European economies to backslide into recession. The Economic Cycle Research Institute is calling for two quarters of negative growth. The European sovereign debt crisis is like a wounded beast. The Federal Reserve doesn’t seem to be able to help, despite lowering short and long-term interest rates.
But a more telling indicator might be the gold-to-copper ratio, which is diligently tracked by Jack Ablin, U.S. portfolio strategist at Harris Private Bank in Chicago.
Copper, which is linked to the construction industry and economic growth in general, tends to underperform gold if a downturn is imminent, Ablin has found. “Over the past six months, copper has underperformed gold by 22 percent, suggesting an economy in reverse,” he says.
“Now that the Fed is out of ammunition, it’s unlikely that the central bank will help spur growth,” Ablin wrote in his Oct. 4 market outlook.
Of course, economists’ tarot cards are not precise. It could happen that the Europeans could figure out a grand solution to their debt woes, recapitalize their banks or buy up the bad debt. Washington may come up with a way to unfreeze the glacial housing and market. Job growth may return. Then again, I could be rabidly optimistic.
5 ways to make a bond ladder work for you
The mention of bond laddering often makes one think of retirees sitting on the sidelines of the market, buying individual bonds with staggered maturities to goose up their yields, but lately it’s not such a doddering strategy.
With bond yields low, savings account interest rates microscopic and stock volatility scary, younger investors and even college savers are starting to embrace the time-honored laddering strategy. If can work for people who don’t want to lock up all of their money in long-term investments but want more yield than they can typically get in short-term savings vehicles.
Bond laddering also adds an element of predictability to a portfolio, since each bond produces a set amount of income and returns principal at a specific date.
Stan Richelson, a financial advisor in Blue Bell, Pennsylvania, recently constructed a ladder for a couple whose child was starting college in six years. The first of the four investment-grade municipal bonds, which matures freshman year, has a tax-free yield of 1.5 percent. The last, which matures in 2020, yields 2.35 percent. That translates into taxable equivalent yields of 2.24 percent and 3.5 percent, respectively, for investors in the 33 percent federal tax bracket.
“That may not sound like all that much,” he says. “But you’re still getting a decent return and you know the money will be there when you need it.”
Bond ladders have some limitations, though.
But buying individual corporate and municipal bonds usually requires a total investment of at least $50,000 to $100,000 to get adequate diversification and avoid high markups on small transactions, says Kathy Jones, a fixed income strategist with Charles Schwab. Smaller investors can get around that by laddering Treasury securities or certificates of deposit, since investment minimums are so low.
Financial tech coming to a phone or wallet near you
Maybe you think you’re up to date on the latest financial apps and mobile solutions, but unless you are updating your money life every five minutes, you aren’t. Behind the scenes, scores of companies are throwing money at digitizing you, your cash and (even more popular than money these days) your consumer profile.
Recently I had a chance to check many of them out. I spent two days at Finovate, a financial technology conference run by Online Banking Report. It’s a cool meeting — in two days roughly 60 different companies present seven minute versions of their best selves. Usually they do this before they are fully up and running for consumers, so not everything is ready for prime time yet.
But it does give a great overview of the trends that consumers will be seeing over the next year. Here’s my take on the biggest trends for individual investors and bank customers.
You want mortgages? We’ve got mortgages, says Google
You know all those sites like Bankrate and credit.com that let you comparison shop for credit cards and mortgages? Google is gunning for their space with its new Google Advisor. At first glance, there’s nothing new here that isn’t already on lots of different sites, but as company rep Charles Gianfrante says, “We’re Google. And we are just getting started.”
So expect comprehensive listings on the clear and clean site, which covers mortgages, credit cards, bank certificates of deposit, checking and savings accounts. One big plus: You can shop for quotes without giving your real contact info to the banks in question; there’s a complicated interim-email system that blocks your identity. But of course you do have to give it to Google, which won’t let you access the site unless you sign in.
Yo, Merrill — we’re breathing down your neck
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Investment policy statements: A roadmap for volatile markets
With the markets still gyrating like a yo-yo, most investment advisers have likely been barraged with questions from their clients. But investors tend to make the worst decisions when confronted with chaos.
To avoid a reactionary and emotional response to market swings, consider an investment policy statement (IPS). An IPS is an honest assessment of your investment goals and objectives and clearly identifies how you plan to achieve them.
Are you saving for a your child’s college education, retirement, a second home? Your IPS lays out your investment constraints, your risk tolerance, and can include your expected rate of return and your portfolio rebalancing schedule, among other details. “It is a roadmap,” says Elle Kaplan, founding partner and CEO of Lexion Capital Management, an investment advisory firm in New York. “It is a flexible, living document that changes with life circumstances.”
IPSs have been around a long time but investors drift away from them during bull markets. Given the current market volatility and the expectation that it will continue, it is no surprise IPSs have made a comeback.
“Investors got re-introduced to risk in the early 2000s and ultra-high net worth individuals started to look at best practices of the institutions,” says Sharath M. Sury, executive director of the Institute for Financial Innovation & Risk Management and an adjust professor of economics at the University of California at Santa Cruz. “As people got educated about risk, they adopted ways to control or discipline their investment managers,” she says. If you have a registered investment adviser, an IPS is considered a best practice.
Unfortunately, “not enough clients do them because it requires a lot of work on their part,” says Margaret Franklin, chair of the Board of Governors of the CFA Institute and CEO of Kinsale Private Wealth in Toronto. In many cases, says Franklin, investment policy statements are either too formulaic or pre-formatted and not customized. “Managers should spend more time with clients, ask more provocative questions and listen more,” she says.
To make the most out of your IPS, consider the following guidelines:
Financial disclosures can make advice worse: Yale study
Washington watchers are sure to see a lot of one particular word in the months to come: disclosure.
The Securities and Exchange Commission is preparing a fiduciary standard for brokers that is expected to require them to disclose their financial conflicts. The Consumer Financial Protection Bureau plans to launch next week with a plan for new mortgage term disclosure forms. And Elizabeth Warren, the president’s adviser who set up that agency, has given speech after speech in which she discusses the virtues of requiring clear disclosures as a mode of financial regulation.
“Regulations should be about making sure that customers have the information they need to make the decisions that are right for them,” she has said, in some form, over and over.
There’s just one thing wrong with all of those disclosures: They don’t always work. Sometimes, they actually encourage consumers to make bad decisions, according to a new survey of academic research.
“We aren’t saying that disclosure or transparency is a bad thing,” Daylian Cain, an assistant professor of organizational behavior at the Yale School of Management, and one of the study’s authors, says. “But our research has found some instances where it has a perverse effect and can make consumers worse off. It just doesn’t work as well as we think it does.”
In addition to the obvious problems with disclosures done poorly — those overly long, incomprehensible, 60-page boilerplates that come attached to every new account and that Warren wants to simplify — there are disclosures done well enough that still have the wrong effect, says Cain. He is skeptical that commissioned investment salespeople will be able to act in the best interests of their clients if they simply are required to disclose that they are paid to sell certain products. (The leading securities industry trade group asked the SEC for just such a rule in a letter released today.)
“We found that conflicted advisers who disclose their conflict gave worse, more selfishly biased advice than those who didn’t disclose. They felt more comfortable giving misleading advice,” he says.
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Schwab plan points toward a changing 401(k) market
Charles Schwab has long been a leader in low-cost retail investing. Now, it’s gearing up for a run at the 401(k) market by hitching its wagon to two ideas whose time may have come: low-cost passive investing and investment advice for plan participants.
Schwab has never been a major player in administering 401(k) plans for employers. The market is dominated by companies like Fidelity Investments, Vanguard and Aon Hewitt. But Schwab is preparing to roll out a new platform for 401(k) plans that it hopes will help it to crack the code.
The idea is to slash investment costs through exclusive use of passive investment vehicles – index funds and Exchange-Traded Funds (ETFs). Then, Schwab intends to plow some of the savings into investment advice for workplace retirement savers that would be built into the platform.
“In the old days of defined benefit pension plans, the outcome was managed for you by professionals,” says Jim McCool, executive vice president of institutional services at Schwab. “But in 401(k) plans, only about one out of 10 investors is getting professional help with investment decisions. We want nine out of 10 to get the benefit of a managed outcome, and take significant expense out at the same time.”
“Our conviction is that the two most incontrovertible features this industry needs to get its hands around are certainty of expense and the impact of advice,” he adds. “Putting those two together is a powerful combination.”
It’s not at all clear that Schwab can make a dent in the business, considering its lack of a track record in the 401(k) market. “Schwab was late to game, and they’ve had very little success cracking large company plans,” says Mike Alfred, CEO of Brightscope, which tracks 401(k) plan performance. “They have nothing to lose by trying this. Companies like Fidelity have a cash cow to protect with their 401(k) record-keeping businesses, and actively managed funds.”
Schwab intends to roll out the new platform in two phases. The first, targeted for launch in the first quarter next year, will be an offering of indexed mutual funds combined with managed accounts; later in the year, Schwab intends to launch a second offering combining advice with ETFs.
DIY investing gets more sophisticated
A number of relatively new websites are offering self-directed investors some pretty high-end portfolio management for small amounts of money, and that’s good for do-it-yourself investors.
But, as I report in my Stern Advice column today, they aren’t all created alike. Some offer advice and others don’t. Some cost more than others. You won’t know the players without a scorecard.
Here’s an overview of some of the newish companies operating in that space.
FolioInvesting Started by former Securities and Exchange commissioner Steve Wallman, this is an online brokerage that specializes in pre-mixed portfolios of individual stocks. That distinguishes it from most other sites that focus on exchange traded funds. It means that investors are able to trade individual stocks in and out of their so-called “folios” to capture tax losses and manage their gains.
The portfolios are based on investment themes, fundamental screens, newsletter recommendations and strategies. For example, there are target date folios for one-stop shoppers. Investors can create their own folios or choose among the 150 or so featured on the website. Unlimited trading costs $29 a month, or $290 a year.
Marketriders Aimed at value-conscious retirement investors who believe in modern portfolio theory, Marketriders creates diversified portfolios of exchange traded funds for investors who answer three questions: How old are you? How experienced are you? When will you need the money?
The site recommends an asset allocation and suggests very low cost index-based ETFs, and leaves it to you to make the trades with your own discount broker. It costs $149.95 a year.
At Flat Fee Portfolios accounts under $250,000 are only $129 a month, so the percentage of that size account is actually closer to .75% and it isn’t for do it yourselfers, you have a dedicated advisor that is a CFP practitioner that guides you and does proactive reviews, as well as provides performance reports for your specific account not what a model did.
Currency trading: 5 ways to hedge your bets
Investors, be forewarned: tread lightly when it comes to currency trading.
Whereas professional investors have more resources at their disposal to hedge, the average investor could be left in the dust — especially during a time where political unrest and crises are cause for big market swings in futures and currencies.
Individual retail investors “are the minnow in the shark tank; they might get some crumbs, but they’re playing with some really big, really aggressive players,” says Rick Brooks, vice-president of investment management at Blankinship & Foster. Brooks notes that while retail investors may trade anywhere from a few thousand to maybe a million dollars, professional traders are trading hundreds of millions of dollars a day, if not a minute, and are therefore privy to critical information.
“The retail investor cannot stand up against that kind of trading volume,” he continued. “If they’re lucky, they’ll fly under the radar and they might make some profitable trades, but generally speaking these guys are moving very large amounts of money and the retail investor is just going to be along for the ride.”
For investors who travel often or who get paid for work in another currency, dual exposure could actually be a good hedging mechanism since it provides insulation from day-to-day currency fluctuations. Great ways to do this include foreign property investments and buying ETFs or mutual funds in that currency.
George Middleton, financial adviser for Limoges Investment Management, says it’s easier for larger firms to better hedge and make riskier bets based on economic conditions because of their stake in multiple currencies. He says trading currencies can be beneficial to a retail investor if you’re looking for a longer-term investment.
“I own multiple currencies, but I buy them with the intent of holding on to them and it’s because of my concern for the U.S. dollar,” Middleton says. “If I thought the dollar was going to go up, I wouldn’t be holding other currencies.”
Can a short ETF work for average investors?
This piece originally appeared on Portfoliost.
John Del Vecchio’s new Active Bear Exchange Traded Fund (HDGE) is the opposite of what you’d expect: it’s relatively expensive in a category dominated by low-cost funds, it’s transparent in a field (shorting) that’s all about secrecy, and though it was only launched a month ago, it’s already collected $37.7 million in assets under management.
Exchange-traded funds (ETFs) have grown into a $1 trillion asset class largely because they’re a cheaper version of index mutual funds. But HDGE is part of a new breed of ETFs, funds that are not just passive plays on an index, but are instead actively managed, requiring expertise and research, and carrying higher fees.
Like their index-shadowing brethren, actively-managed ETFs trade throughout the day like any stock does, while mutual funds can only be bought and sold at the end of the day. ETFs also must list their holdings at the close of the day, unlike funds which disclose that information quarterly. That’s an especially interesting wrinkle for HDGE, given the secrecy in which shorting stocks is generally conducted.
Short sellers borrow stock, then sell the borrowed stock. They hope for it to go down in price, so that when they have to replace the borrowed stock, they can do that with cheaper shares and pocket the difference as profit. One of the reasons short sellers are generally so quiet is fear of something called a short squeeze, where other investors buy up a lightly traded company which many sellers are shorting. This drives up the price of the stock, which leaves shorts, who have to buy at those high prices to cover the shares they borrowed, deep in the red.
Del Vecchio says he avoids this issue by largely trading highly liquid stocks, many with a low level of short activity.
He also does not use leverage in his fund or derivatives, techniques which have gotten other ETFs into trouble.
