OTAlexFA wrote:

Anonymous wrote:

Anonymous wrote:What would your rate be for a longer term CD? The difference in the rate may be enough that it makes up for the penalty for early redemption.

For example - if your penalty is all dividends for 6 months (Navy Fed conditions for early withdrawal of more than 1 year, less than 5 years early) then it may be worth it. If you have a 2 year at 1.25, that yields 5031. If you take a 6 year at 2.3 (NFCU current 6yr rate) the yield for 2 years is 9305, penalty of 2311, so net 6994 for an extra 2k return.

Given your high 2 year rate, your 6 year rate may also be higher, so potentially a larger difference.

OP here, this is the advice I need. Thanks to you and the other PP with a a similar suggestion. I can get a 2.27% interest (2.3% APY) CD for six years, with 270 days of interest penalty for early withdrawal. Can someone explain to me if that would make sense?

My math may be wrong but, based upon the statements, if you essentially are giving up 75% of interest in one year of a 2.3% APY CD (I rounded up), your net effective yield comes out to 1.03% if you withdraw that after two years. The 2 year CD is a better bet in that case.

Anonymous wrote:

Anonymous wrote:What would your rate be for a longer term CD? The difference in the rate may be enough that it makes up for the penalty for early redemption.

For example - if your penalty is all dividends for 6 months (Navy Fed conditions for early withdrawal of more than 1 year, less than 5 years early) then it may be worth it. If you have a 2 year at 1.25, that yields 5031. If you take a 6 year at 2.3 (NFCU current 6yr rate) the yield for 2 years is 9305, penalty of 2311, so net 6994 for an extra 2k return.

Given your high 2 year rate, your 6 year rate may also be higher, so potentially a larger difference.

OP here, this is the advice I need. Thanks to you and the other PP with a a similar suggestion. I can get a 2.27% interest (2.3% APY) CD for six years, with 270 days of interest penalty for early withdrawal. Can someone explain to me if that would make sense?

Good lord, forgive me here.

Just looked at our offerings and the best net yield on a 2-year CD that we have for 200K is 0.65%. If you have 1.25%, take it.

Anonymous wrote:

Anonymous wrote:

OTAlexFA wrote:

Anonymous wrote:OK, so here is your opportunity to help someone i. Your line of work keep a client. If my net of fees return on my investments so far this year is 5.2% and the S&P 500 Price Index return for the same period is 6.1%, why am I not better off just putting all my money into an S&P 500 Price Index fund?

Especially given your earlier comment that advisors can't beat the market.

Because I would hope that you hired an advisor for something more than picking stocks. That's only a portion of what they are there for.

If someone is getting a fee to manage a portfolio, what else are they doing other than picking stocks?

OP, can you address this question? I know some financial advisors sell insurance, but that is not something you need to buy every year.

I hope I can but first - A "Portfolio Manager" is different than a "Financial Advisor." A portfolio manager should be evaluated on results. For instance, I am an FA and, for particular clients, I will use a PM platform for my client. FAs are the quarterbacks. Outside of that, I will start with something similar to a question that someone posted earlier about what mistakes retail investors make...

*Creating and evolving your financial plan. This is the big one. Having a definitive and reviewable plan and direction instead of just throwing money at their portfolio. This should be reviewed at least annually with evolving the plan as needed. Do you know what your goals are? Do you know how to get there? How do you know when your plan is successful? Many people just try and amass a dollar amount they conceive in their head by the time they retire and assume it will work. Will it? For this, I light-heartedly introduce myself as a "Future Lifestyle Consultant." What lifestyle do you want in retirement/the future? Let's get you there.

*Rebalancing your portfolio. Monitoring the parameters that you establish and ensuring that your portfolio stays within those bounds. See, financial plan.

*Research and advice. Bigger firms pride themselves on their research and accessibility. FAs are typically a conduit to the client for that purpose. If you trust your FA, you can trust the advice they're providing. With the internet, there is SO MUCH INFORMATION available to the consumer, often times reflecting opposite sides of positions. If you find a firm you trust, they can filter that for you.

*Estate Planning

*Dependent care (parents' long-term care, children's trusts, etc.)

*COMMUNICATION. Our business is a relationship business; that's no secret. Unlike this board, performance is rarely ever the main reason a client fires a financial advisor. It's communication, or, specifically, lack thereof. Evaluating and validating the decision making process. Without communication, the person that originally posed this question is absolutely correct - "What am I paying you for?"

Anonymous wrote:What do you of financial advisors that are paid an hourly fee? I'm comfortable making financial decisions on my own, but want an expert to spend time with me validating and/or challenging my choices.

No way I am paying somebody a 1% AUM fee. That's thousands a year.

By financial decisions, do you mean the holdings in your portfolio, as well as when to buy/sell? If we can presume that's what you're implying, then it depends on your activity. If you're very active or have an elaborate portfolio, the 1% or whatever the charge is may make sense because that should cover account and transaction fees, too. The amount of trades and quarterly or semi-annual rebalancing, combined with the justification of those choices all wrapped up in the fee, may work itself out.

If you're more of a set-and-forget, the 1% makes ZERO sense. Also, how often are you meeting with this hourly advisor? It's all cost analysis. Not to mention, with the AUM fee, you should just get on-demand access to your advisor instead of having to set meetings. Again, all depends on your activity within the account(s).

If you have your brokerage account at a firm with an advisor, they should have tools to determine your risk and model an allocation for you (ours is 10 questions and can be done quickly). The only one that knows how comfortable with your risk is you. At that point, you can figure out how you would like to proceed as you wait on your correction.

Anonymous wrote:

OTAlexFA wrote:The good news is, even though they're not matching, your employer is required to contribute to your SIMPLE IRA. So, that's a good deal for you.

Outside of that, make sure you can qualify for a Roth (salaries) and determine how much you would like to put away (SIMPLE has higher contribution limits). Roth IRAs are amazing vehicles, if they're right for you.

How are they required to contribute? I've had mine for years and my employer hasn't contibuted.

Contributions:
Employer is required to contribute each year either a:
*Matching contribution up to 3% of compensation (not limited by the annual compensation limit), or
*2% nonelective contribution for each eligible employee

Under the “nonelective” contribution formula, even if an eligible employee doesn’t contribute to his or her SIMPLE IRA, that employee must still receive an employer contribution to his or her SIMPLE IRA equal to 2% of his or her compensation up to the annual limit of $255,000 for 2013 (subject to cost-of-living adjustments in later years)

http://www.irs.gov/Retirement-Plans/Choosing-a-Retirement-Plan:-SIMPLE-IRA-Plan

The good news is, even though they're not matching, your employer is required to contribute to your SIMPLE IRA. So, that's a good deal for you.

Outside of that, make sure you can qualify for a Roth (salaries) and determine how much you would like to put away (SIMPLE has higher contribution limits). Roth IRAs are amazing vehicles, if they're right for you.

Anonymous wrote:

OTAlexFA wrote:The market environment suggests it is currently a stock picker's market. So, active management for that hypothetical client is where I would lean.

This is 12:57, 14:05 and 14:33 again.

Why specifically does this environment suggest it's a "stock picker's market"?

I find that during big bull periods when almost everything goes up, people make this assumption that there was not a lot of variance within different segments of the market, or between individual stocks, when this isn't actually true. It's just that because everything went up, people don't notice the variances as much, as 30% versus 50% between two stocks doesn't trigger any emotional reaction.

By contrast, when a market is likely to churn sideways, these same variances will actually involve red versus green on a screen (i.e., you now see a -10% versus 10% between these same two stocks), so it's more noticeable to people. Hence, all the active managers pipe in with the "stock picker's market" cliche, as if every market isn't a stock picker's market.

Put another way, what statistical or empirical evidence can you point to that "alpha" can be generated in a market like this more than in a different environment?

The returns this year argues that it hasn't been. It doesn't mean that the environment wasn't in place, or so people would lead you to believe. Record highs, perceived "overvaluation", calls to end the bull market which I didn't feel were accurate, etc. Is there economic data to support the upward climb? No. But, is there anything suggesting it won't continue? No. I'm just personally in the camp of, within the next 3-5 years, history suggests a swing. But, no, you're right...there's no data to suggest it, except for historical charts.

Anonymous wrote:OK, so here is your opportunity to help someone i. Your line of work keep a client. If my net of fees return on my investments so far this year is 5.2% and the S&P 500 Price Index return for the same period is 6.1%, why am I not better off just putting all my money into an S&P 500 Price Index fund?

Especially given your earlier comment that advisors can't beat the market.

Because I would hope that you hired an advisor for something more than picking stocks. That's only a portion of what they are there for.

Anonymous wrote:

OTAlexFA wrote:So as to not continue quoting such long responses, I will say that we are on the same page, yes. Steeped investors like yourself who are passionate about doing it themselves would likely not need an advisor, unless there was some area you thought were lacking (planning aspect, insurance, estate, etc.). Everyone should be so knowledgeable. (Well, maybe not, because then I'd be out of a job.)

My concern lies when people throw around recommendations on here without knowing the depth of what the concerned is asking. People immediately shout "index funds!" when it isn't always the right answer.

Obviously people have different desire/need to take risks, but I have a hard time thinking of a situation where an equity index fund is not appropriate for the equity portion of a person's portfolio (esp. for people coming on DCUM to ask questions). Care to suggest one?

Sure. I would say anyone looking to get involved right now with a 3-5 year time horizon. The market environment suggests it is currently a stock picker's market. So, active management for that hypothetical client is where I would lean. That being said, I wouldn't concentrate any equity position into a singular fund, index or otherwise, unless the level of assets is too low and limits our options.

So as to not continue quoting such long responses, I will say that we are on the same page, yes. Steeped investors like yourself who are passionate about doing it themselves would likely not need an advisor, unless there was some area you thought were lacking (planning aspect, insurance, estate, etc.). Everyone should be so knowledgeable. (Well, maybe not, because then I'd be out of a job.)

My concern lies when people throw around recommendations on here without knowing the depth of what the concerned is asking. People immediately shout "index funds!" when it isn't always the right answer.

Anonymous wrote:

OTAlexFA wrote:

Anonymous wrote:

OTAlexFA wrote:

Anonymous wrote:Why don't I just put my money in index funds rather than you? Will your fee + the returns outperform index funds + fees?

This one feels like a trap.

In a bull market? Maybe not. Index funds are outstanding when everyone is making money. However, are you going to tactically manage those passive funds? If not, you can guess what happens when the market "corrects" (a term I don't like). You'll get virtually 100% of the market growth now and then virtually 100% of the downcapture, as well. There's no hedge. As most of us know from math, if you lose 20%, it takes 25% of gains to get back to even.

Index funds are very popular, particularly on DCUM, I've seen. I like them. I use them. The question is, does it fit your strategy? What's your time horizon? What's your goal? Index funds are great; they just aren't a cure-all.

And I liked your answers up til this one.

I think an advisor can make sense as a coach-- avoiding mistakes like changing your asset allocation in the middle of a bear market. But you've gone from saying your purpose isn't to outperform the markets to saying your purpose is to get 100% of the gains and less than 100% of the losses of the market. Those sentences don't make sense together.

I think I see what you're saying and I will try to be clearer. Again, I like index funds and will use them as a portion of a portfolio. That sleeve will get all the gains and all the downcapture of a market. However, the entirety of the portfolio will likely neither outperform nor capture all of the draw downs. Like I said earlier, if you would like to go all index funds, I won't argue with you, unless there is a distinct reason to (age, needs, etc.).

Make a little more sense, maybe? Or was that more confusing?

No that is more confusing. I can't tell if you are distinguishing between stock index funds and some other equity investments in the portfolio, or between stock index funds and fixed income investments. Certainly I have no desire to be 100% invested in the stock market and get 100% of the gain and losses of the stock market, but how I allocate my investments among different asset classes has little to do with whether I used index funds for my investments.

Yup, I'm confused too. My original intent was to explain the index fund in comparison to the rest of the hypothetical portfolio assuming a diversified allocation across asset classes.

Anonymous wrote:

OTAlexFA wrote:

Anonymous wrote:Why don't I just put my money in index funds rather than you? Will your fee + the returns outperform index funds + fees?

This one feels like a trap.

In a bull market? Maybe not. Index funds are outstanding when everyone is making money. However, are you going to tactically manage those passive funds? If not, you can guess what happens when the market "corrects" (a term I don't like). You'll get virtually 100% of the market growth now and then virtually 100% of the downcapture, as well. There's no hedge. As most of us know from math, if you lose 20%, it takes 25% of gains to get back to even.

Index funds are very popular, particularly on DCUM, I've seen. I like them. I use them. The question is, does it fit your strategy? What's your time horizon? What's your goal? Index funds are great; they just aren't a cure-all.

NP here. This answer is ridiculous.

Index funds get you market average returns for nominal fees. They do that in bull and bear markets.

Active management only guarantees higher fees. It's possible that active management will outperform or underperform in a bull market. It's also possible that active management will outperform or underperform in a bear market. There is nothing magical about a "hedge" that lessens the amount of your bear downcapture in a way that more than offsets the drag you feel during the bull run where you are underperforming due to holding that same hedge. There are plenty of active managers who have overweighted cash the last 5 years as a "tactical" strategy for a correction that never happened - active managers have no magic crystal ball to know when the next correction will occur. Your answer is just the marketing speak that active managers use to draw you away from the fact that active management, over the long run (i.e., multiple market cycles) is statistically likely to underperform the market as a whole, as it's very difficult to overcome the headwind of significant fees over the long run.

I personally use both active and passive strategies, but the simplistic notion that active management outperforms during bear cycles is disingenuous.

All fair points, although I think ridiculous may be a bit extreme. In short, index funds are designed to mimic the benchmark you're trying to achieve. When that index goes down, that fund goes down virtually 1:1. The fees, as a result of no active management, are in fact less. Sometimes, significantly so! However, in certain market environments and according to your client's level of risk, some products that have active management that are predicated on limiting downside capture are appropriate. To take the most advantage of those, is there market timing involved? Of course. Or, it could just be part of your long-term strategy which, in that case, the OP is spot on. You will lag behind and see higher management fees.

Again, I think the OP and I may be assuming concentrated positions in those index funds which may or may not be what the investor intends.

Anonymous wrote:

OTAlexFA wrote:

Anonymous wrote:Why don't I just put my money in index funds rather than you? Will your fee + the returns outperform index funds + fees?

This one feels like a trap.

In a bull market? Maybe not. Index funds are outstanding when everyone is making money. However, are you going to tactically manage those passive funds? If not, you can guess what happens when the market "corrects" (a term I don't like). You'll get virtually 100% of the market growth now and then virtually 100% of the downcapture, as well. There's no hedge. As most of us know from math, if you lose 20%, it takes 25% of gains to get back to even.

Index funds are very popular, particularly on DCUM, I've seen. I like them. I use them. The question is, does it fit your strategy? What's your time horizon? What's your goal? Index funds are great; they just aren't a cure-all.

And I liked your answers up til this one.

I think an advisor can make sense as a coach-- avoiding mistakes like changing your asset allocation in the middle of a bear market. But you've gone from saying your purpose isn't to outperform the markets to saying your purpose is to get 100% of the gains and less than 100% of the losses of the market. Those sentences don't make sense together.

I think I see what you're saying and I will try to be clearer. Again, I like index funds and will use them as a portion of a portfolio. That sleeve will get all the gains and all the downcapture of a market. However, the entirety of the portfolio will likely neither outperform nor capture all of the draw downs. Like I said earlier, if you would like to go all index funds, I won't argue with you, unless there is a distinct reason to (age, needs, etc.).

Make a little more sense, maybe? Or was that more confusing?