Asset Managers

Investment Analysis Clubs Saul’s Investing Discussions
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A friend my own age (mid 70’s but in good health and still working part time) asked me for help. He had put all is assets to be managed for him by a broker or asset management company (“James Company”?), and they had accomplished all of 3% for him in 2013, one of the best years for the market in recent memory. They invested 75% of his money in bonds (which paid almost nothing due to low interest rates, and then decreased in value in the latter part of the year when rates went up). The 25% they invested in dividend paying stocks made a net return of only 15%, giving him a total return of 3%.

My friend wants to take a quarter of the money and invest it himself. I suggested the Motley Fool for him, but since he was interested in income producing stocks I suggested Income Investor (which I didn’t even know existed until I researched for him), and Stock Advisor once he got more comfortable. I said investing for himself was only going to work if he put time and energy into it, and if it was fun for him. If it’s an onerous chore, it’s better to let someone else do it. I also mentioned that MF has mutual funds and an asset management service if he decided he didn’t want to do it himself.

What I wanted to discuss was how asset managers can put anyone 75% in bonds? (whatever his age). How can they ask to be paid for getting results that were one tenth of what the markets produced? I think that they must be covering themselves but investing super “conservatively”. No one can ever come back and sue them, no matter how bad their results, if they could say they invested “conservatively”.

And this was profoundly stupid! Interest rates were at epochal lows, so bond prices were at maximum high prices, and could only go lower when the Fed started tapering and interest rates started to rise. It had to happen. The writing was on the wall. But this didn’t stop them from putting my friend 70% in bonds, following some formula or something.

Lest you think that this was just because of my friend’s age, a month or two ago, a young guy in his thirties wrote in on the SA Investing Philosophy board to say that his asset managers put him 80%(!) in bonds… a guy in his 30’s!!! That’s malpractice it seems to me.

http://discussion.fool.com/1081/uh-oh-im-in-mid-30-and-my-financ…

It made me cynically wonder whether someone with a lot of bonds to get rid of paid these guys off to put their clients in his bonds.

Interested to hear other people’s opinions.

Saul

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Interested to hear other people’s opinions.

…it’s pretty clear to me Saul, that the motivations at the large brokerage firms that manage issuing debt for publicly traded companies are the same…

…selling that debt…

…stocks have crushed bonds historically, so all you need is time in the market to do the same…

…real estate also underperforms stocks over time too, but at least you get a roof over your head…you live in your house… :slight_smile:

…one of the first investments a “broker” put me in, 20+ years ago, just before I found the Fool, was a closed end bond fund, which rapidly got crushed…

…I discovered later, that it was a new issue from the firm, and they were dumping it on unsuspecting “clients”…

…the best thing to happen to me was losing my first 30,000 dollars when I was 20 something, in a leveraged currency trading firm…took about 6 months, if I recall correctly, and I was like “what”?..

…that’s when I discovered the Fools in late 1994…

:slight_smile: huibs…

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Saul,

What I wanted to discuss was how asset managers can put anyone 75% in bonds? (whatever his age).

This goes purely to the ultra-conservative, old-school advice of 100 - age = stock allocation. Some now make it 110 -. It is a silly notion for an individual that manages their own assets and assumes the risk of loss themselves.

A financial adviser risks their business on their advice. Clients losing a lot of their savings is not good advertising and brings law suits.

Most people are willing to turn-over the responsibility of investing their savings or just completely ignoring them most of the time. Often, they do not care what the markets are doing vs their accounts until something peaks their interest like a conversation at a party or seeing a news item on TV or in a paper. Then they begin to ask the questions they should have asked a long time before.

One of the respected posters in SA and elsewhere has been talking about Ben Graham and his 50-50 split and that that is still the optimal portfolio. I can’t say I could ever do that with our current market conditions.

Gene with 0.19% in a bond ETF.

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…the best thing to happen to me was losing my first 30,000 dollars when I was 20 something, in a leveraged currency trading firm…took about 6 months, if I recall correctly, and I was like “what”?..

Hi Huibs,

My learning experience was at about the same age with a futures advisory service sponsored by my broker. I also started with about $30,000, and over several months they built it up to $82,000. Then there were three limit days in a row where it opened up limit down and I couldn’t get out. Lost the whole $82,000, owed the broker several thousand more, and then the advisory service which had lost all my money, wanted to collect their commission (which I successfully refused to pay). I never again invested in futures, which is a zero-sum game, and you are gambling against professionals.

Saul

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…it’s pretty clear to me Saul, that the motivations at the large brokerage firms that manage issuing debt for publicly traded companies are the same…selling that debt…

Thanks for reassuring me that I wasn’t just being paranoid!

Saul

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Saul,
“Interested to hear other people’s opinions.” And experiences?

Sounds like what my mother’s broker did to her. She is about to turn 80 and in great health. Nearly same horrific ratios in bonds for the past 5 years. However, besides that much invested in bonds my mother’s situation has another couple layers. She was sold annuity contracts for about 70% of her total investments. Inside those annuities are 75%± bond ratios. Then with the other 30% of investible capital, he has played what appears to be a technical analysis trading game. Constant trading, anywhere from 15 day to 90 day holding periods, in which he bought and sold mostly ETFs. The trading in one year was more than 3 times the amount of the total money in her accounts. So, she is sitting with single digit returns over a five year period. At the end of last year, I got involved with her accounts, immediately dismissed her advisor, and now am deciding how to proceed.

My mom’s broker could only have been looking out for his own interests; conservative with bonds, selling annuity contracts, and constant trading. Malpractice indeed!

I trust MF implicitly, which it sounds like you do too since you suggest your friend follow their investment advice through Income Investor. Not saying you do everything the way they do it, but that you believe they are doing what is good, right, and beneficial for their Foolish clients.

I would love to see some 30% per year returns on my mom’s investments to get back some of the missed gains from the last 5 years. However, I am a bit of a novice on the analysis skills and think my attempt to apply an approach as “aggressive” as yours might expose my mom to trouble over the next five years.

We all work within our levels of experience and competence. So with my mom’s cash assets it will be a blending of individual security positions with a smaller percentage of her funds and putting the larger portion into Mutual Funds or ETF’s and letting the indexes and time work on her and the estate’s behalf. Within the annuities I will re-allocate from bonds to large/small growth/value M & ET funds.

The former broker took roughly 3%/year commission off my mom’s accounts and barely made her more than that. In derision, I refer to him as a joker rather than a broker.

Some opinion and some experience. For What It’s Worth, interesting or not,
KLVanLiew

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Wow, KL, your mother had it even worse than my friend. That advisor was a crook, just milking her for commissions.

Saul

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trust MF implicitly, which it sounds like you do too since you suggest your friend follow their investment advice through Income Investor. Not saying you do everything the way they do it, but that you believe they are doing what is good, right, and beneficial for their Foolish clients.

If you are managing an account for someone relying on monthly income, there is no Fool service you can use as a template. Even Income Investor is just a collection of stock ideas with no guidance on how to make a portfolio yield enough to make a living.

I started managing about half of my parent’s portfolio in the fall of 2010. They were mostly Fido and WFC and EJones. All of it was mutual funds and the yield was 3% and barely enough to meet the bills. The mix of funds was poorly thought out. Some were OK and a fair number of muni bond funds were in the port. A 3% yield is not good even in these low interest environments

When you manage a port for income there are a lot of aspects that are critical the Fool will never address or serve as a guide for. It’s not as simple as buying a high yielding asset and plugging it in. Timing is critical and there can be no gaps in the income stream while waiting for something to start paying. It’s very difficult to sell and buy and at the same time deliver a reliable cash flow. It involves careful planning and thinking 10 steps ahead while trying to take advantage of specific ops.

For example when I started blue chips were insanely cheap and yields were good but care needed to be taken to ease into them while easing out of monthly fund payers since stocks usually pay quarterly. When blue chips ran up and it was necessary to move into other assets like corporate bonds, you needed to stagger the payouts so they wouldn’t all hit at once leaving long dry spells. And when it was difficult to find high yielding bonds, REITs started looking interesting but again when you manage for income, you don’t want to put a lot of cash into a name 3 months before it’s going to start paying. For someone looking for income every 30 days, three months can be an eternity.

Managing money for income is difficult and while brokers are usually not a great answer, sometimes it’s hard to do better when the pressure’s on and you have to perform.

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LeKitKat,

True, and currently I am beginning to feel said pressure. To make it all work definitley takes, as you suggest, diversification and diligence. And, “although we don’t believe in timing the market”, “Timing is critical”, as you stated. In an effort to reduce the scary critical nature of timing I implement the folowing methodology.

One thing I have determined to do in the effort to mitigate the ‘in-between-times’ you mentioned is to keep what is the equivalent of 2± years cash needs stashed. My mom needs $2000/month in additional monthly income to keep things static. So I keep $50,000.± as cash. That way with down-market or investment income payout transitions or fluctuations, she is be able to count on the monthly $2k without question or worry for up to 24 months. I simply make up the shortfall from the cash stash. If things were that bad and that dry for that long we would definitely be taking other steps. Then, when the returns are better/greater than the needs I replenish the cash stash by one means or another and re-invest the surplus. This insures the necessary income stream and allows us to invest and sell on our own times and terms rather than selling out of necessity, during potentially bad markets.

Another piece of the puzzle. Thanks for the discussion,
KLVanLiew

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Amen! But, we are on a different and upward path now.

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…the best thing to happen to me was losing my first 30,000 dollars when I was 20 something, in a leveraged currency trading firm…

I think I must have had an account with that same firm! I only lost $10,000 before I called a halt.

John

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We have used a financial planner for the majority of our assets, and use MF for stock investing with about 5%. MF gives great education.

We had a financial planner who was all over the board, and even put us into illiquid assets like an MLP and private REIT. We fired them, and went with a manager who used Dimensional Funds Advisors. Thanks to MF education, I was able to learn more about this service, and liked their approach. The savings in management fees is a big help.

http://www.dfaus.com

Our new planner, Dan Goldie, wrote a book on his approach, called the Investment Answer, and is very systematic and methodical. We’ve been very happy with his services, the portfolio allocation, and maintaining of cash reserves, and the lack of emotional concern about investing.

http://www.amazon.com/Investment-Answer-Daniel-C-Goldie/dp/1…

There are good planners out there, but we wouldn’t have found them without the education from the MF community.

Iain

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Our new planner, Dan Goldie, wrote a book on his approach, called the Investment Answer, and is very systematic and methodical. We’ve been very happy with his services, the portfolio allocation, and maintaining of cash reserves, and the lack of emotional concern about investing.

…just be sure to compare his results to simple metrics, like the S&P 500…

…and don’t listen to “risk adjusted returns”, as that’s mumbo-jumbo for folks saying, “I know, you didn’t beat an index fund, but hey, look how safely you didn’t beat it”…

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