Tuesday, September 30, 2014

Searching for a financial adviser? Here's what to ask.

A month ago the wealth management editor at The Wall Street Journal ran an article on why, after only nine months, he fired his financial adviser.  He thought he knew how to evaluate financial advisers; he didn't.

The problem he had with his new adviser was that they had different investment philosophies.  When evaluating an adviser you should understand his investment philosophy and strategy.  How does he control draw-downs -- through market timing or security selection?  How often does he trade?  Does he typically raise cash after some weakness?  Do taxes factor into his analysis?  If an adviser doesn't have a clear strategy then that is a red flag.

Fees are also very important.  When evaluating an adviser you should know how he is compensated.  If the answer is more than a sentence and is confusing then that is another red flag.  Does he receive compensation based on what he buys?  If so, there may be a conflict of interest.

The total fee you pay will be more than the fee the adviser charges, too.  If he buys a mutual fund that charges a 1.5 percent fee then you'll be paying that on top of the adviser's fee, which is likely about one percent annually.  The same is true if the adviser uses sub-advisers.  Also, what are the commission rates?  Discount brokerage firms charge less than $10 per trade.

Finally, there should be a discussion about performance.  This is tricky for the adviser because, unless all accounts have the same holdings and are traded at the same time, he can't advertise performance.  Nor can an adviser offer client testimonials.  Those are against the rules.  He should be able to offer some sample client accounts, however, and show how he'd invest your portfolio.

Choosing the right adviser is an important decision.  Make sure you are comfortable with him and his investment philosophy, and keep a close eye on fees.  Over the long run fees make a big difference.  For the record, I trade through one of the largest discount brokerage firms and never receive a commission.  Never.

— David Vomund is a fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.

 

           

Wednesday, September 3, 2014

The Bad News Bears

Have you ever noticed that when you watch national weather forecasts they always focus on the worst storms?  Most of the country might have great weather, but they'll show the area with the worst.  After watching this day after day one might think the weather is awful everywhere.  Obviously that's not true. 

The same is true for stock market coverage.  There is always something to worry about.  When one bad headline subsides another gathers attention.  Investors often wait until there is more clarity, but there is always something to worry about.  That news can be a distraction for stock investors.  The only time I can remember when there wasn't anything to worry about was early 2000.  Stocks were strong and Y2K was a non-event.  We all know what happened to stocks after that!
 
Going back to the weather theme, have you noticed we hear the term "wind chill" every day in winter?  "It's 30, but it feels like 10."  Why is it we never hear the term in the summer?  Weathermen don't say, "It's 93, but with the nice breeze it feels like 81."  Hmmm.  Maybe it's that bad news is more interesting, that's all.
 
News coverage of the stock market is a lot like weather forecasting.  For example, you often hear the term "correction" when an uptrending market pulls back.  The term implies something is wrong and needs to be corrected.  Yet when stocks are falling in a bear market, the frequent rallies are never called corrections.  Only when stocks fall in a bull market do we hear the word.
 
Today, many in the financial press are shocked that stocks are strong given the problems in Syria, Ukraine, Russia and Iraq.  Earnings and interest rates move stocks, however.  We remain bullish because rates are low and won't move significantly higher anytime soon.  Earnings are growing at 10 percent and the market's P-E ratio is near its historical average.  That's why stocks have moved higher.  And they will ... 

 — David Vomund is a fee-only money manager.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.

Monday, August 11, 2014

Here's What to Watch

The market quickly fell four percent from its high.  The financial media tell us many negatives -- geopolitical concerns, the threat of rising interest rates, etc. -- are adversely affecting the stock market.  Taken individually, the negatives are relatively insignificant.  As a group, however, they are enough to unsettle traders.  I said traders, not investors.

Geopolitical factors never have a lasting impact on the market so one should focus on earnings, which rose 11 percent in the second quarter, and interest rates.  Interest rates can be expected to rise if the economy shifts into high gear.  It is far from a certainty that growth will accelerate, however.  Since the recession ended in 2009 we've been told again and again that growth was about to accelerate only to be disappointed.  Remember the Obama/Biden "Summer of Recovery" bus tour?  That was in 2009!  Without the inventory buildup second-quarter GDP growth would have been less than 3 percent and final sales, a good measure of the economy, grew just 2.3 percent.  The economic environment can change quickly and so can expectations, as we recently saw.  To its credit the Fed continues to say that future policy moves will depend on future data.  Of course.

Goldman Sachs sees the first rate increase next fall with fed funds reaching 4 percent and the ten-year Treasury yield going to 4.5 percent in 2018 from 2.4 percent today.  Treasuries will return a mere 1 percent annually.

An unattractive bond market is good news for stocks.  In the fairly benign environment (GDP growth of 2 to 2.5 percent) Goldman foresees stocks will do well.  They forecast 2100 for the S&P 500 (an 8 percent increase from here) over the next 12-months on route to 2300 later.

Long-term investors, not traders, determine the market's direction over many years, and few are concerned about rates four years out and certainly not if they believe Goldman Sachs will be correct.  In the short term, traders can knock prices down by as much as five percent, and they do once or twice a year.  The reason, we are now told, is the incredible notion that investors are raising cash to take advantage of bond yields four years from now.  I think not.

Bottom line:  The main risk facing investors is not that interest rates will rise to a more normal level by 2018, as Goldman predicts.  No, the bigger risk is that the economy will disappoint once again and undermine profit growth.  I suspect not this time, but an awareness of that risk -- increasing to some -- plus normal profit-taking, really explains the modest selling in stocks.  

— David Vomund is a fee based investment advisor.  Information is found at www.ETFportfolios.net or by calling 775-832-8555.  Clients hold the positions mentioned in this article.  Past performance does not guarantee future results.  Consult your financial advisor before purchasing any security.