Thornton Wealth Management

Is Your 401k Working For You

2009-10-29T18:14:57Z

Is your 401k working for or against you?

You might think I’m talking about your 401k investment choices, and while that is important and needs to be aligned with your goals, what I’m talking about here are the fees that 401k providers charge companies and their employees.

Check out this brief CNN video for an example of what I’m talking about:

The mention of 3% fees in 401k plans is the rule more than it is the exception. This is sad but true.

If you don’t know the fees associated with your 401k, find out about them. They could be creating some major detours on the road to retirement.

Digital Word Of Mouth In Financial Services

2009-10-09T14:31:35Z

Check out this video, sponsored by fabeetle, featuring Brett Hurt, Founder & CEO of Bazaarvoice.

Brett discusses how digital word of mouth can positively impact the financial services industry in the future.

Please post your thoughts and reactions below in the comments section.

Client Fee Audit Results

2009-09-22T16:04:41Z

I just did a “fee audit” for a client that has a couple of accounts with other advisors. During such a fee audit, I take a thorough look at all the fees the clients are paying for their investments. This includes explicit advisor fees as well as the better hidden internal costs of mutual funds, etc.

Their LPL “SAM” account has them paying a total of 2.41% per year in fees (advisor fees + weighted average mutual fund fee) and their variable annuities are charging fees of 2.55% per year before cost of benefit riders which could add another 1-3% per year.

In an average year where the market returns 10%, they’re paying approximately 25% of their potential return in fees. In more recent years of much less than average market performance, these fees add insult to injury by “piling on” these fees in addition to already negative market returns.

Please be sure you understand ALL the fees associated with your savings and investments. These include both explicit and internal costs.

I’m going to not so delicately let these clients know that, in my opinion, they’re getting screwed by their other advisors. Make sure you’re not getting screwed too.

Behavioral Biases And Investment Implications

2009-09-15T17:46:37Z

From Dimensional Fund Advisors, republished here with their permission:

Research indicates that humans are not naturally wired for prudent, long-term investing. Scott Bosworth, Vice President and Regional Director, describes common forms of behavioral bias and discusses how these biases influence investment decision making. He also explains how knowledge and discipline can help investors control their instincts for a better investment outcome.

Please click the image below to launch the video which lasts approximately 24 minutes:

The Things That Are Really Important

2009-08-26T15:11:27Z

In my advisory work with clients, we cover much of what you might expect. We discuss things like investments, goals, taxes, retirement and other financial topics.

However, when you really get down to it, these are often just labels or categories for the things that are really important to each of us.

I had a phone conversation yesterday with a client as a follow up to a recent meeting we’d had. In our conversation, I reiterated how happy I was that he and his wife are going to be able to achieve some financial goals that they’d only dreamed about just a few short years ago.

During our discussion, he mentioned something that really caught my attention.

He said,

“You know, Russ, even when I retire, I’m not going to just sit around or play golf every day. What I’ve always dreamed of doing would be to put my lawnmower in my truck and drive around looking for people that I could help. Maybe I could mow their lawn or help with some things around the house, and I would do this for free, because I can. I think this would be a really rewarding thing to do.”

Wow!

This speaks volumes about what a great guy this is, and I’m fortunate to work with a great group of clients. But more importantly, this is a wonderful example of what the word “retirement” means on a personal level to this client. And if he’d wanted to play golf every day or sit around, there’s absolutely nothing wrong with that.

I think this is a great story of what clients dream about when they have the confidence to do so. And through our work together, these clients are now dreaming big.

This is yet another example of why I’m fortunate to be involved in my clients’ lives.

Government Intervention and Stock Returns

2009-07-29T15:58:36Z

Should equity investors be alarmed by the prospect of greater government intervention in the US economy? Weston Wellington looks at examples of US intervention in the past and examines the record of stock returns around the world over the last thirty-nine years. The evidence suggests that government intervention is just one factor among many affecting stock returns, and that an above-average degree of intervention is not necessarily associated with below-average returns.

Click the image below to watch a video about this timely topic:

A Forecast By Any Other Name . . .

2009-07-09T21:17:38Z

… is, you guessed it, still a forecast.

Recently, I watched a recorded presentation by Dave Loeper of Wealthcare Capital, and he made a comment that really got under my skin. I might be misquoting him, but he said something along the lines of “mean reversion is really just a fancy term for a market forecast”.

Think about that for a minute. Really let it sink in.

For those not familiar with the term “mean reversion” it essentially means that the farther and longer something (anything) diverges from its long-term average, the more likely it is that it will move back (or revert) to that average (or mean). If someone has a clearer or more concise explanation, I welcome you to leave it in the comments below.

Back to the topic … is mean reversion a forecast? I would have to agree that it is. Whether discussing the market or the weather, we might have a hunch of what will happen in the future, but we really don’t know. And just because something has diverged from an average, doesn’t mean that it will return to that average in any expected or rational manner.

Let’s expand this concept … for people out there that subscribe to the Fama-French model espoused by Dimensional Fund Advisors (this includes me, by the way), you would generally agree that there is additional expected return, albeit with additional expected risk, to be achieved by overweighting or tilting toward value and small companies. But isn’t this just another forecast?

Sure, Fama & French have applied exhaustive academic research to demonstrating this value and small cap “premium” in the past, but to hold any expectations for it to continue into the future is still subscribing to a market forecast.

I realize that I might draw some heat for sharing these thoughts, but isn’t it my job as a financial advisor and fiduciary to my clients to ask these questions and challenge the status quo? Then again, maybe I’m just stating the obvious.

Do I have a better solution or alternative to offer? No, I do not and don’t know that I ever will.

However, I think it’s misleading to ourselves and our clients to demonize market forecasting in any color, shape or form, while at the same time implementing a forecast ourselves. Investing, by its very nature, involves making some forecast, whether explicit or implicit. If we didn’t think stocks were going to go up over time, which is yet another manner of forecast, why are we investing at all?

I hope this will spark some discussion and I welcome your comments, questions and critiques in the comments section below.

What do you think?

Is the Market Rational?

2009-06-18T11:00:00Z

Thanks to a colleague, who wishes to remain anonymous, for the following:

Over six years ago, Fortune writer Justin Fox wrote an article titled, “Is the Market Rational?” Much of the article focused on the intellectual rivalry between two Chicago professors—Eugene Fama and Richard Thaler—and Fox made no secret which of the two he found more persuasive. The next generation of finance professors, he said, were “ripping Fama’s teachings to shreds,” and market efficiency as an organizing principle was being shouldered aside by something called “behavioral finance.” In this view, irrational investors make systematic judgment errors that produce predictable patterns in stock prices. Fox noted approvingly that the Nobel Prize in economics had been awarded the previous month to a Princeton psychology professor in recognition of his work on behavioral biases and suggested it was possible for investors with sufficient “contrarian gumption” to outperform the market by exploiting such biases. But he doubted most of his readers would be successful in this effort, due to their own propensity to make mistakes. His conclusion for investors? “That’s easy,” he wrote. “Buy and hold. Diversify. Put your money in index funds. Pay attention to the one thing you can control—costs—and keep them as low as possible.”

Fox has been hard at work since that time; the article has mushroomed into a 328-page book and the title is no longer a question but an assertion: The Myth of the Rational Market. The book has much to recommend it—a wide-ranging survey of the battle of ideas among financial economists over the last century, with an enormous cast of characters. Readers of Peter Bernstein’s Capital Ideas will find themselves covering familiar ground, but there is enough new material to make it worthwhile. Fox’s breezy style is effective in distilling complicated ideas into digestible portions, and his colorful sketches help maintain our interest in a dry, statistics-laden topic. Social critic Thorstein Veblen, for example, is a “crotchety philanderer.” Yale economist Irving Fisher is a prohibitionist and health-food advocate. Milton Friedman finds the early research on efficient portfolio design similar to his work during World War II on the statistical properties of artillery shell fragmentation.

There is so much ground to cover that some intriguing questions are left barely explored. After pointing out the flaws of the efficient market hypothesis using the CAPM model of expected returns, Fox quickly dismisses the alternative Fama/French multifactor approach as “clunky” and moves on. The value premium, in his view, is attributable primarily to investor irrationality. This is certainly one interpretation, but a more nuanced view deserves attention as well. Chicago Ph.D. and hedge fund manager Cliff Asness has pointed out that despite the extensive literature on the issue, an explanation for the value premium remains a “gigantic, subtle, and still unsettled academic debate.”

For those hoping to find some concrete suggestions for improving the investment results, the book is apt to be disappointing. Fox finds little evidence of success among professional money managers in exploiting the inefficiencies he believes are so clearly evident. He has some kind words for academics who have set up money management firms to apply research on behavioral biases to generate superior returns, but he cites no evidence of their success, perhaps because their results are generally well explained by the standard asset pricing models he is so quick to condemn.

Fox appears frustrated that the evidence of market irrationality appears so clear but the evidence of investor success in exploiting these mistakes is so thin. His brief message to investors toward the end of the book carries an air of resignation—all the effort devoted to identifying flaws in the rational market model doesn’t appear to offer hope of a superior approach. Almost as an afterthought, his practical advice to investors includes the following suggestions:

“If you have money to invest, the only sensible place to start is with the assumption that the market is smarter than you are. You don’t have to stop there. But if you do come up with an idea for beating the market, you need a model that explains why everybody else isn’t already doing the same thing you are.”
“If you’re picking somebody else to manage your money, the chances of finding a market-beating path are even harder.”

Bottom line: Ideal way to bone up on financial economics if you want to sound like a know-it-all. But it’s unlikely to change anyone’s mind with regard to the optimal investment strategy.

Asness, Clifford. “The Value of Fundamental Indexing.” Institutional Investor, October 19, 2006.
Bernstein, Peter. Capital Ideas: The Improbable Origins of Modern Wall Street. Hoboken, NJ: Wiley, 2005.
Fox, Justin. “Is the Market Rational?” Fortune, December 3, 2002.
Fox, Justin. The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street. New York: HarperBusiness, 2009.

What If You Couldn't Fail . . .

2009-06-17T13:12:58Z

How would you live your life or what would you do differently?

Now, before you think I’ve gone all New Age on you, I consider myself a practical guy and realize you can’t just “wish” your problems away. Further, I don’t subscribe to the notion that if you blindly follow your passions you’ll find an emotionally and financially rich and rewarding life along the way, although it can certainly happen.

At the end of the day (or maybe I should say the end of the month), you still have to pay your bills and put food on the table.

Having said all that, I still think this is a valuable exercise. Seriously, think about it … What if you couldn’t fail?

I know I’m guilty of making decisions and living my life, in part, based on preconceived notions of what’s acceptable and what’s expected of me. I also know that some things are automatically categorized as too risky or not worth taking the chance. These influences, whether conscious or sub-conscious, come from family, friends, co-workers and society at large.

But if you could mentally escape all that for a moment and forget about what’s expected of you or even what you expect of yourself, what would your life look like?

Would you take that trip to Asia you’ve always dreamed about?
Would you quit your job to pursue a long-held passion?
Would you take a kick ass vacation and renew your vows with your spouse on a beach somewhere?
Would you take drawing or dancing classes just because you’ve always thought it would be fun?
Would you volunteer at a local shelter and do your small part to make the world a better place?

I mean, if you think about it, we all carry around a lot of baggage, and most of it has been loaded onto our backs, even if unintentionally, by our closest family and friends.

I challenge you, just for a moment, to put the “baggage” down and dream about what you’d do different if you weren’t so concerned about the consequences or what other might think?

I think most of us, and I include myself, define personal failure based on the thoughts and feelings of others. But that’s not for them to decide, and you shouldn’t empower other people to have such influence over your life.

While this concept certainly has application in my work as a financial planner, I think it’s also a much larger issue with broad ramifications.

So, I ask you again, what would you do if you couldn’t fail?

I hope you’ll leave some thoughts, feedback and comments below.

David Booth Discusses Retirement, Risk And Return

2009-06-09T22:10:58Z

In the following video, David Booth, Chief Executive Officer, Dimensional Fund Advisors, discusses the importance of balancing volatility risk and purchasing power risk when investing for retirement.

He explains that T-bills have not produced the real returns necessary to preserve living standards over the long haul, and illustrates how investors can manage both types of risk through an appropriate commitment to stocks.

Please leave your feedback and comments below.