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One of the ways a high-quality advisor adds value is by paying attention to asset location.  Low-quality advisors tend to ignore it. There are three reasons they may do so: They don’t care.  The advisor may have the cynical view that clients only focus on pre-tax returns so don’t worry about it.  If the primary …

A full-service, fee-only, wealth management firm can only effectively handle 100 clients per financial advisor (approximately, with a sizable standard deviation and positive skewness).  A more transactional model can manage a greater number, but since many of the smaller accounts will be neglected (to some extent at least) it is unclear that the actual revenue …

Many experienced Financial Advisors (aka Stock Brokers, Registered Reps, Financial Consultants, etc.) have learned, generally the hard way, what mistakes to avoid.  Unfortunately, newer advisors seem to make the same mistakes all over again (and many experienced folks never learn), harming their clients in the process.  Many high-quality, experienced advisors tend not to do a …

I am frequently asked by financial advisors what trade publications I read and what organizations are worthwhile.  Below is a list of my current subscriptions that I would consider most valuable: Financial Analysts Journal – free with membership in the CFA Institute Financial Planning – free for financial advisors Investment News – free for financial …

I am frequently asked for a recommended reading list, so I looked through my library and created the list below.  It is by no means comprehensive, yet in some respects it is undoubtedly redundant.  Some books are out of print and attempting to read it all would be daunting; so think of it as a …

This is primarily for my fellow financial advisors and those entering the industry and is intended to encourage us all toward higher standards.  There is (in my humble opinion) a difference between simply working as a financial advisor and being a professional.  In my experience the professionals in our industry are rare.  What makes a …

An article I wrote in May of 2006 is interesting now in light of what subsequently happened in the markets, but I also think the advice remains pertinent.  The entire rest of this post is that article: As you may have noticed there has been some turmoil in the markets lately and I wanted to …

Let’s move on now to determining the returns we should expect on our investments.  In the following discussion, I make no claim whatsoever to knowing what will occur in the short run, and in the long run these estimates will undoubtedly be wrong, but should give us the midpoint of a range of returns we …

Following is an analogy to explain how to think about expected return and what actions might be prudent if that expected return changes. The Magic Box.  Imagine there is a magic box and at the end of each year a dollar mysteriously appears inside.  Suppose you pay $10 to acquire this box.  At the end …

A while back I was having a discussion with a colleague about the mindset of a particular person and I commented that they were essentially a “poor person with money.” In the context it made sense (they grew up poor, but had subsequently done very well), but I realized that locution would seem odd to …

I was tempted to call title this post “Alternative Alternatives” but it seemed more confusing than clever.  In previous posts I have covered traditional asset classes, an overview of alternative investments, commodities & gold, real estate, and miscellaneous other alternatives.  In this post I will talk about investment opportunities that are generally not even noticed …

Following is an overview of several alternative investments that didn’t warrant their own posts: Convertible Bonds.  These are bonds that are convertible into shares of stock. They are mostly traded by hedge funds using sophisticated arbitrage strategies.  We do not use these in portfolios as they aren’t different enough from stocks to make the diversification …

Directly-owned real estate is a popular alternative investment.  While there is no right answer for every situation and different people will weigh the factors differently, here are some items to keep in mind (in no particular order): People like real estate emotionally. The fact that it is tangible and substantive, gives them comfort.  The danger …

There are three types of investments in commodities, investing in the physical commodity itself, investing in a derivative instrument, and investing in natural resources stocks.  First, we have the physical asset: The expected return on the physical asset is roughly inflation, but the historical return on the spot price is actually slightly less than inflation …

In my last post I discussed the primary asset classes (stocks and bonds) and their various subdivisions.  In this post I will give an overview of some “alternative” investments.  First we should define what an alternative investment actually is.  There isn’t a precise definition, but broadly speaking it is an investment that is not one …

An asset class is a group of investments that have similar behavior and characteristics. When selecting investments it is vitally important to have estimates of three statistics for each asset class: Expected Return – the rate of return anticipated on average. Standard Deviation – the variability likely in those returns. Correlation Coefficient – the manner …

Many comparisons of vehicles with differing tax treatments are faulty because they don’t start at the beginning and go all the way to the end.  To perform a proper analysis, it is important to start with “Pat earns a dollar” and go all the way to “Pat spends the proceeds.” If the comparison starts with …

My last post mentioned at the end that many people purchase annuities for the guarantees.  I thought I would expand on that by posting here an analysis I did a few years ago of some examples of “market linked” or “equity linked” products with some sort of guarantee.  These “guarantees” are attractive propositions to those …

To make a case for annuities, advisors often compare the most expensive, tax-inefficient mutual funds to the most inexpensive variable annuities.  However, an objective analysis, will find that annuities appear to be poor choices in most (but not all) cases. To fairly compare the two (and remove compensation considerations), I used a 0.30% marginal cost …

Tax loss harvesting is the sale of securities in a taxable account that have declined in value since their purchase in order to recognize the loss for tax purposes.  Most people (including professional financial advisors) do this at the end of the year determining whether the transaction is worthwhile by comparing the immediate tax savings …