Should I Use A Fee-Only Advisor?

Polaris Everlasting NesteggNOTE:  This post is part of an ongoing education series.  This information is for educational purposes only.  This information does not constitute investment advice.  Please consult with your financial advisor before taking any action.  For planning advice contact Polaris Financial Planning.

It can be argued that the best way to invest is to do all of the work yourself,  for some people this is true.  If you are really interested the subject and willing to spend the time needed you will likely do well.

However, most people are busy and there are other demand on their time.  Often jobs, kids or other project keep them occupied.  If you aren’t careful with your investments you can make big mistakes.  In a busy life, we often use experts to help us.  Instead of learning all of the legal details, you can hire an attorney to create a will.  Instead or working on your own car you can hire a mechanic.  You can do these things if you spend the time needed to acquire the skills or, you can hire an expert and have more time to do the things you want to do.  I see investing the same way.

When you are looking for a financial advisor you need to know, there are two types:

1) Commission

and

2) Fee-Only!

Most advisors collect a commission to sell product to you!  However, a small percentage collect a fee from you these are Fee-Only advisors and they are paid by you.  Therefore, they work for you.  They focus is on getting the best results for their clients, not selling more stuff to make more commissions.

I think About.com summed it up really well….

A fee-only financial advisor cannot receive compensation from a brokerage firm, a mutual fund company, an insurance company, or from any other source than you.  This means they represent you and your interests when giving you advice.  After all, think about where someone’s paycheck comes from, and that will tell you quite a bit about where their loyalty lies.

When selecting an advisor you should ask these two questions:

1)  “How are you paid?”

2)  “Where do you invest your money?”

An advisor that is paid by commission may have to make choices based on how much commission is paid by a specific investment product.  Some complex insurance product may pay an advisor 10-15% commission and a managed mutual fund may pay  up to 8.5% commission.  Do they want to make 3% or 15% helping you “invest” the $100,000.  What would you do?  There is the temptation for a commission advisor to put your money in a product that pays the higher commission so they can make more money.  They may be able to resist this temptation – but how will you know?

As I have discussed before, one of the single best things to use for investing is low-cost index funds.  However, these funds do NOT pay a commission.  A commission based advisor would have to choose between getting paid or getting you the best product.  I suggest you avoid being put into this situation and get a Fee-Only Advisor!

What Is A Mutual Fund?

mutual-fundsWhat is a Mutual Fund?

NOTE:  This post is part of an ongoing education series.  This information is for educational purposes only.  This information does not constitute investment advice.  Please consult with your financial advisor before taking any action.  For planning advice contact Polaris Financial Planning.

When I was a kid I loved looking at numbers, charts and graphs.  I’m sure it was not the norm for my age but I remember looking at stocks in the news paper.  Nothing like the smell of a newspaper and its ink on your fingers.

When you buy a stock, you buy a small piece of a company.  If you put all of your money in one company you can make a lot if the company does well but you can also lose all of your money if the company goes broke.  Remember Enron?

For more on the value of diversification read this….

According to Investopedia the modern mutual fund began in 1924.

The creation of the Massachusetts Investors’ Trust in Boston, Massachusetts, heralded the arrival of the modern mutual fund in 1924.

NOTE:  I will be talking about Open-end mutual funds.  Closed-end funds are different and I don’t recommend them.

A mutual fund allows people with small amount of money (<$10,000) the ability to invest in the stock market and reduce their risk (vs. one stock).  Studies have shown that owning just 10 stock can limit your volatility (risk) by half and 30 stocks reduce your stock risk to almost the same level as owning 500 stocks (Standard deviation of 20.87 vs. 19.27).  If you had to buy the stocks and invest just $3,000 in each one, you would need $90,000 to have a diversified stock portfolio.  Each time you want to add money you would have to buy more shares in one of the stocks and, of course, pay a commission on the trade.

The modern mutual fund solves many of these problems.  You can usually start with a few thousand dollars and can add money at any time.  This type on investing can help keep your costs down.

Sadly 53% of Americans don’t own any stocks.

Wikipedia lists these advantages for mutual funds….

  • Increased diversification: A fund must hold many securities. Diversifying reduces risks compared to holding a single stock, bond, other available instruments.
  • Daily liquidity: Shareholders may trade their holdings with the fund manager at the close of a trading day based on the closing net asset value of the fund’s holdings.
  • Professional investment management: A highly variable aspect of a fund discussed in the prospectus. Actively managed funds funds may have large staffs of analysts who actively trade the fund holdings.
  • Ability to participate in investments that may be available only to larger investors: Foreign markets, in particular, are rarely open and affordable for individual investors.

I agree with all of the above points.

  • Ease of comparison: Picking a mutual fund is a lot like judging a dog show. You select the best of the breed which has the qualities you seek.

I disagree.  It is very hard to pick a good mutual fund.  Ironically, picking funds that have recently done very well can actually increase your risk.  This is why I recommend and put my money in Index Funds.

THE GREATEST SCAMS ON EARTH

Today we’re looking at PT Barnum and his book Humbugs of the World. After all, there’s no one who knows a sham better than a professional sham salesman. “Humbug” as you probably know, is an old world for “bullshit” or “flim-flam” but PT Barnum generously defines humbug as mere…. exaggerations of the truth. And as long as people were getting their money’s worth, humbug here and there isn’t a problem. Whatever you say, PT.

Humbugs came out in 1865, following the huge success of Barnum’s autobiography. Humbugs did pretty well too, and you can probably find really beautiful copies of both books in your local used book store – but it’s public domain and free on Kindle. If you want to see a really beautiful copy, CFI Amherst has a lovely leather copy in their library with gold lettering on the cover and gold on the edge of the pages.

At times, Humbugs reads like PT Barnum is simply defending his own humbuggery by pointing at people who are bigger liars than he is. And hey, the guy has a reputation to keep. But that all fades away when he talks about spiritualists and mediums. Barnum never hired a single one and he has nine chapters full of venom and scorn for the lot of them. If you’re into the history of spiritualists, this is worth picking up just for those chapters alone.

Otherwise, the book gives us a nice overview of the scams and psudoscience of the day, like the “Golden Pigeons of California”, the weird and wonderful moon hoax (the one with the demons having a party on the moon), witch hunts, Monsignore Cristoforo Rischio (a “model for our quack doctors”), blood purification pills, and the list goes on and on. The chapters on financial scams are tailor made for Skeptic money readers, with lottery humbugs, Tuipomania, the largely fictional (but very profitable) New-York and Rangoon Petroleum Company , and page after page of money swindles. The book is mostly anecdotes and feels like a friendly conversation with Barnum. It’s also pretty sarcastic and light-hearted, so it’s very readable, despite the 150+ years of language difference.

There is some serious historical culture shock. He has two chapters devoted to avoiding food and alcohol-related scams; for example, watering down alcohol to “homeopathic” doses. Barnums words, not mine. It took me a minute to remember that these were the days before FDA and basic food regulations. I’ve never felt so grateful for modern food regulations in all my life. I’ll let you read them for yourself, but it’s all very scary. It’s for the germaphobe. The chapters on quack medicines are even scarier with magic sand, rampant placebo use at doctor’s offices, and hashish candy. It’s a wonder anyone was able to survive a doctors visit at all.

Other chapters left me really disliking Barnum. The 1800′s were a bit racist. Ok, they were really racist. And boy-howdy is Barnum right in step with his era. The chapter on the Miscegenation pamphlet is flat-out unpleasant. I get that he had to sell copies of the book to all parts of the US (I’m looking at you, post-civil-war-south) but I took very long breaks from that chapter. It ended up being worth reading for the history of the word “Miscegenation”, but I feel like that information could also be learned from Wikipedia without reading about Barnums disgust with racial mixing. His chapters on religious humbug is where he can really loose me. He’ll start waxing on and on about pagan cultures on distant lands or ancient heathens and my eyes glaze over. On the upside, he does move onto “ordeals”; traditional christian “trials” that would determine your innocence if you survived drowning, poisoning, burning, etc. Apparently these were still practiced during his time.

Overall, it’s a fun read and many of the lesser scams in the book aren’t available to research on the internet. If you’re into history in general or if you feel like you’ve simply run out of new ways to be shocked by scam artists, well,  you’re only gunna find this stuff here and Barnum is awesome. Go check it out.

 

Humbugs of the World is public domain and is available on Project Gutenberg for free, and currently is free in the Kindle bookstore.

The audio recording is free at the Internet Archive, and was recorded by volunteers at Librivox.org

US Market Segment Analysis 2011-12-31

Post by Phil Ferguson

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NOTE:  This post is part of an ongoing education series.  This information is for educational purposes only.  This information does not constitute investment advice.  No rational person would make investment decisions based on a blog post.  Please consult with your financial advisor before taking any action.  If you wish to have specific advice for your situation please contact Polaris Financial Planning.

Every quarter I take a look at how different segments of the investing world are doing.  Below is the historical performance 6 US market segments.  I divide the US market this evaluate performance and future opportunities.

Over long periods of time (10+ years) all segments tend to perform about the same so, unlike most advisors, I generally think of a hot sector as a contrarian indicator.  That is to say, the better one of the segments has done and the longer it has exceeded the long term mean of the other sectors, the less desirous it is.

Data as of 12/31/11

12-Month Return 3-Year Average 5-Year Average 10-Year Average
Large Growth Average -2.01 15.90 1.13 2.67
Large Value Average 0.01 12.49 -1.53 3.70
Mid-Cap Growth Average -3.52 18.46 2.25 4.94
Mid-Cap Value Average -3.32 16.96 0.13 6.20
Small Growth Average -4.10 17.18 0.32 6.32
Small Value Average -3.51 18.65 1.55 4.83

2011 was a rough year for the market as a whole but, the last 3 years have been great.  3-year average returns range from 12.49% to 18.65% per year.  Keep in mind, these numbers compound year after year.  The Small value has an average of 18.65% per year but a total return is 67.05% for the 3 years and not just 3 x 18.65% (55.95%) as one might expect.

Over the 10 year time frame the differences between large cap and small / mid cap has grown.  Very roughly, the 10 year average for large caps is just over 3% and the small / mid caps are around 5.5% per year.  The difference is only 1.5% per year but when compounding is taken into account the 10 year total returns are around 35% for the large caps and 71% for the small / mid caps.

Now is the time for a subtle change in the allocation matrix for the portion of your funds invested in the US stock market.  Over the past several years I have given a positive bias to the small and mid cap indexes and this allocation has proved to be very rewarding.  I am now moving toward a more neutral market cap balance.

If you don’t know how your assets are allocated, I would be happy to help you find the right balance.  If you would like more information or specific advice on your portfolio please contact me.

Buffett Explains The Buffett Rule

NOTE:  This post is part of an ongoing education series.  This information is for educational purposes only.  This information does not constitute investment advice.  No rational person would make investment decisions based on a blog post.  Please consult with your financial advisor before taking any action.  If you wish to have specific advice for your situation please contact Polaris Financial Planning.

 

via CNN.