11/18/2009 Historical Post

From: Dale BEALS Financial Wisdom LLC <dbfwllc@me.com>
Subject: Fwd: bloomberg article
Date: November 18, 2009 4:02:54 PM CST

Dear client and friends,

I thought you would enjoy the attached article from Bloomberg Magazine talking about the changes in the financial industry. Investors are leaving traditional banks and brokerages in droves for independent Registered Investment Advisors…. like us!
Thanks,
Dale

Announcing Free Asset Allocation Help / Education!

Something has always bothered me about the fact that Mom and Pop investors who have most or all their retirement savings in 401k’s or their own IRA’s don’t seem to get much help making their investment decisions for a reasonable price. So, I have created 6 model portfolios using a scaled down version of the methodology I use for my firm’s clients, and made them available on www.portfoliowisdom.com for free. Each week, I plan to update the allocations for each model. I have provided theoretical historical backtests since 1/1/2004 for each portfolio model, so people can decide which model best fits their situation. Also available are instructions for how to use these models for your own information, including how to use the model allocations to inform your own 401k or 403b decisions.

Please let me know what you think about this free service. If there is enough demand, I am open to expanding this to apply the models more specifically to Guidestone, Fidelity, Tennesse Teachers, or other retirement plans.

Access to your Morningstar Reports from PortfolioWisdom.com

As you know, we use Morningstar to produce our client performance reports. Until now, you needed to remember a separate web address to reach the web portal for a look at your current portfolios. You also needed to store performance reports as you received them for later reference.

No longer. Now, just go to www.portfoliowisdom.com and look at the menu line across the top of the page. At the left is a link directly to the Morningstar web site. From now on, your performance reports will be available there also, archived for your convenience and later reference.

Thanks again for your business.

Market Indecision

For the life of me, the markets seem to be holding their collective breath. I really do not believe that anyone who really knows what happens behind the scenes is going to say anything on the news. So, I advise you to ignore most of what we are seeing and hearing on CNBC and Bloomberg. I doubt that any market movement is truly attributable to the after-the-fact “causes” and “reasons” they give each day for why the market went up or down.

We continue to be very cautious, currently holding a lot of cash, which we will move gently in to the market between now and year-end, unless one of these fiscal problems explodes.

You may notice some other posts to our web site. I’m creating a free section of the web site called portfolio wisdom to help individual investors who do not have financial advisors. I’m actually going to make available a limited but very useful version of the methodology to anyone who wants to learn from it. So, those posts you see may not apply to you, but if you have friends who need help with their 401k’s or IRA’s, send them our way.

Current Model Portfolio Allocations

Here are the current 6 asset model portfolio allocations. They will be updated every 4 weeks or so, depending on market behavior. For the sake of consistency, this table will use the same ETF’s as the PortfolioWisdom Mobile App. Be aware that the PortfolioWisdom Mobile App may produce slightly different allocation calculations, because the data updates to the App may not occur at exactly the same time as the data update to this spreadsheet.  If you always want the latest allocation calculations for 6, 9, or even 12 asset classes, feel free to subscribe to the PortfolioWisdom Mobile App. Also, be aware that Mr. Beals will sometimes use different ETF’s for his client portfolios or otherwise customize the models to their specific situations. Use the tabs in the embedded spreadsheet to view the allocations for each different model.

 

Volatility Slowly Decreasing?

Although the news continues to reflect great fear and uncertainty, volatility seems to be gradually diminishing in almost all asset classes (which is a good thing). Each peak of fear in the market is a little lower than the peaks of fear in August, September, and then October. If this trend continues, I expect to be fully allocated back into the model portfolios by the end of the year.

5. Rebalance as needed (huh?) … Don’t worry I’ll explain :-)

Rebalancing your portfolio means buying and selling shares to bring the asset allocation percentages back in line with the model portfolio you are following. It’s that simple. There are basically two big money-makers (or money savers) that we can put to work for us using this approach.

    1. As the market fluctuates, some assets classes may rise while others fall.  Most of the time, there is a lot of this “back and forth” movement which can make us money, depending on how much it costs us to trade a low number of shares. That’s why the clients of my firm use discount brokers, and why I recommend you do as well. Keep the transaction costs low enough that you can benefit from the weekly or monthly market fluctuations. If any high net worth or high income readers want to discuss the tax implications of this approach, feel free to contact me.
    2. As different asset classes come into favor, become the hot performers (think stocks in 1998-1999, or gold in 2009-2010), and then lose their luster, people who do not have an investment plan or discipline get sucked into the losers game of chasing what has done well for the last 4-5 years… over and over. Our model portfolios adjust the target allocations to the different asset classes, like stocks, bonds, real assets and cash, based on mathematical equations I developed. My algorithms take a look at the behavior of each asset class and of the whole portfolio, and reduce risk when the market begins to stampede. This forces us to manage risk (avoid big losses), buy low and sell high, which how money is made in the long run.

Personal Observation: So much research has shown that almost all stock pickers, portfolio managers, mutual fund pickers, or even separate account management pickers, fail to consistently out-perform their target indexes after all the costs paid by the customer. No matter how great a stock picker is… when all stocks are going down, her picks probably will also. If you have too much allocated to stocks, whatever the reason, your portfolio will take a big hit, and you may have to completely change your retirement plans. The key to portfolio management, in my experience, is in the asset allocation decision… not the stock picking decision.

How often do we rebalance?  Good question. The answer is “When appropriate”. Most people tell you to rebalance quarterly or annually. However, I recommend rebalancing when an asset class is off-target by more than, say, 0.5%. Most of the time, rebalancing monthly can work very well, but in volatile times, it makes sense to rebalance more often.

I plan to post model portfolio numbers at the end of the week every one to four weeks or so. You can decide, based on your own portfolio and your own trading costs, when you should rebalance. My theoretical backtests are based on weekly rebalancing, but don’t include estimates for trading costs and taxes. The disclaimers are listed with the backtest results, for your review.

4.Invest your money according to your chosen (and modified) model … either all at once or gradually … your choice

This step is simple, but it represents the big plunge. Since you have already decided which portfolio model best suits you, simply check for the model portfolio’s latest target allocations, and buy the appropriate number of shares to meet the target allocations. We publish them about once each week, usually on a Friday morning.

Here are the current model portfolio allocations.

Now, sit back, relax, and wait for the right time to rebalance!

3. Choose a Custodian (discount broker) if one has not already been chosen, and open and fund your account.

I’ve already covered the reasons I recommend using a discount broker, but here’s a quick review.  Our methodology is based on broad diversification and rebalancing frequently when the markets move away from the model’s target asset allocations. Unlike the rebalancing frequency recommended or offered by traditional brokers and advisors, this might mean rebalancing monthly, or even weekly. So, trading costs are a huge issue and must be minimized to gain the benefit of our approach.

Many of my firm’s clients use Interactive Brokers, Charles Schwab, or Scottrade. There are other fine discount brokerages out there, and you can find comparisons and evaluations of them elsewhere. You would do well to research their commissions and fees to find which one best suits you. Firms like Schwab, Scottrade, Fidelity, Interactive Brokers, and others, even have Exchange Traded Funds (ETF’s) that are commission free for their clients. Find out which firm has the most commission-free ETF’s that correspond to the ones we use in our portfolio, and you may have found your discount broker! Don’t forget financial strength and stability, customer service, small-print fees, and other criteria for your evaluation! Do your homework.

After selecting the Custodian of your choice, open and fund the account, and you’re ready for the next step!