Veritas Financial Services, LLC

Breaking Investor Mediocraty

noreply@blogger.com (Jeremy Burri) — Thu, 23 Apr 2015 19:30:00 +0000

I wanted to give some reflection on my experiences this week as a presenter at a local financial literacy/education event. I have been presenting in this program for several years, and year after year I do tend to see the same faces. The audience is predominantly made up of very educated and accomplished individuals. While presenting at this event is enjoyable, it has taken a lot of work to prepare for. Since the audience is mostly DIY investors, this, as you can image, is not a very good event for client recruitment.

If we look at the Dalbar QAIB study, the state of the average investor is, well, sad. Over the past 20 years, they calculate that the average investor has made less than half the return of the S&P 500. So, even in my classes of highly educated people, there are probably some attendees that have done great, the other half have likely preformed poorly. (However, they would not admit to this). Education and earning ability has no bearing on your investment success.

Making a change in one's investments is a huge undertaking, both mentally and even emotionally. All sorts of emotions come into play. And it's only a stronger emotional response that will spur change. That is why I have starting writing a new class: "7 Reasons Why You Will Fail as an Investor, and 6 Reasons Why You Won't Fix it". Here's a sample.

1) You are not diversified. True diversification is rare. And unless you can quantify it, you can't prove you are.

2) You use active management. This flawed philosophy has been debunked by academia. If you are not a stock picker, your mutual fund manager probably is.

3) You are not disciplined. Most investors are not.

4) You are taking more risk than you realize. Unless you can tell me the standard deviation of your portfolio, you don't even know how much risk you are taking.

5) You don't know your costs. You have no idea what you are paying in the form of fees, commissions, or opportunity costs.

6) You don't know anything about the subject. You lack even basic knowledge of investing, and are perfect prey for salesmen and women of financial "products". OR this lack of knowledge paralyses you from making ANY decisions.

7) You don't even know if you are succeeding or failing. You don't even know what you should be earning. In your simple system, a positive year is a success, and a negative year is a failure. You are failing more than you know.

Why You Won't Fix It:

1) Your current advisor is your friend. I get that. If you choose relationships over results that is your choice.

2) You are penny wise and pound foolish. You think that fees are the end all and be all of successful investing. While important, I can show you a very bad, very cheap portfolio.

3) You lack the will to make the change. You don't have the energy to look into the situation.

4) You don't know who to trust. That being said, you just remain in frozen in your current state.

5) Your Ego. You are smart. You make a lot of money. You don't want to pay an "advisor".

6) You have given up on the whole investing thing. Too much money lost; and you are not playing the game anymore.

I know this may seem a little punchy, and I certainly don't want to offend anyone, but maybe it has to be that way for the message to hit home. Do these lists resonate at all with you? While a good advisor can be a tremendous asset, ultimately your investment success is dependent on no one else but you.

Being Different Isn't Easy

noreply@blogger.com (Jeremy Burri) — Sat, 04 Oct 2014 22:05:00 +0000

It's a rainy afternoon on a Saturday, so I thought it would be a good opportunity to explain something that has certainly come to light in the past few weeks.

Sometimes it's not easy being different. 2014 is proving to be a great example of that.

As of 10/3, the S&P 500 Index (a fairly good indicator of large US stock performance) is up a hair over 8%. For the vast majority of the investing American public, they are experiencing a decent positive return on their fund's this year, simply because of the fact their portfolios very much track this index. Retail US investors own mostly Large US Company Stocks. This is not a prudent or diversified strategy. However, as blind luck would have it, this area of the global stock market is doing comparatively better than many others in 2014.

Take the Russell 2000 (a small cap stock index) for example. That is down about 8% this year. International stocks are also on the whole down a small percentage year to date. That being the case, an investor that holds a diversified portfolio may feel some unease when comparing their portfolio to their neighbors', or to the popular stock indexes quoted daily on the news. Their stock portfolio has likely declined this year.

But this is kind of year when disciplined and educated investors earn their increased returns. "Average" investors, those that hold undiversified portfolios, make poor choices, and invest like 98% of other investors, earn about 3-4% a year over time according to Dalbar's yearly study of investor behavior. It may be tempting to chase large cap stocks this year, but do you remember the "dead decade"? The 2000s were horrible for large company stocks. The truth is that every market segment will have its day in the sun- and its long stretches of underperformance. Every year it's a new winner- and that winner is not knowable in advance.

But you might think, "Doesn't spreading myself out reduce my returns? After all, if all my winners are always wiped out by losers, I will never get ahead". Well, that would be the case if the long term direction on all of the global stock markets were flat, or down, but it is our view that the long term direction on all developed stock markets is UP. Some may go up more one year, and in some years some go up and some go down (like this year). But by being more diversified, and owning more areas of the market, we tend to smooth out the long term volatility, versus placing all of our eggs in one proverbial basket.

Costs: Important Yes, but not the Whole Story

noreply@blogger.com (Jeremy Burri) — Fri, 12 Sep 2014 18:46:00 +0000

It is fairly well known among savvy investors that costs are one of the main things that can drag down your portfolio's return over time. Morningstar.com recently did a study that showed a fund's expense ratio, relatively to other funds, was a better predictor of performance than their own star system.

This leads many numbers minded people to go on a search for the cheapest, least expensive funds, and them pile them in to their portfolios. Unfortunately, while this may save on cost, it likely will not bring the desired returns.
The issue that is missed in this scenario, is that the other ingredient necessary in a good portfolio is the right mix. If investing were like baking, getting right measurements would be like getting low expenses. Baking, unlike cooking, requires fairly accurate measurements. So, in investing, being cost conscious is good, and we certainly want to eliminate any unnecessary costs.

However, to complete the analogy, picking the right ingredients (like baking powder vs flour) in baking is like picking the right "asset classes" or investments in your portfolio. If I made cookies and was perfectly exact in my measurements, but, used salt instead of sugar, or cumin instead of cinnamon, my cookies are not going to be very tasty. That is just like a portfolio with low expenses, but the wrong amount of money in the wrong areas.

Just take the VINIX, the Vanguard S&P 500 Index Fund, Institutional Class. It's expense ratio is only .04%. Wow. Almost nothing. However, if you loaded up on that fund 15 years ago, you would have only enjoyed about a 4.62% return per year since then. I don't even know if that is better than what bonds did over that time.

Cheap doesn't always mean good. It's important to understand all of the parts needed for a well diversified global portfolio. Your portfolio's construction will override the effects of cost every time.

Who is a Right Fit Client?

noreply@blogger.com (Jeremy Burri) — Mon, 28 Jul 2014 20:51:00 +0000

One size does not fit all.

In looking at what makes a successful long term client advisor relationship, a good long term fit is important. Each firm, because of their own unique philosophies, views, and personalities, has an ideal "right fit" client. To the extent a client is a right fit, the relationship should have all of the ingredients to be a benefit to all parties involved for many years. If deep down the client and advisor are not a right fit, eventually down the line, the relationship will likely have some issues. This article looks at what we look for in our "right fit clients".

*****

“One of the things Warren Buffet looks for is someone he enjoys spending time with. How do we know as advisors, whether it is going to work out when we meet a new prospective client”?

That’s a very interesting question. Here’s what I know: there must be a good fit for long-term success. While you are evaluating an advisor for a good fit, they should be evaluating you as well.

We reviewed our most enduring relationships and have identified Seven Key Characteristics.

________________________

They Live Their Life by Principles

Principles like honesty integrity and hard work—to name just a few—are the foundation of everything that they do. They do not sacrifice principles for results…the ends never justify the means.

They Know the Value of a Dollar

A local small business owner said it best when he said, “Every dollar that I have is valuable to me. It came by the sweat of my brow and I risked everything I owned to start this business and keep it running. I don’t want to pay one more dollar in taxes than I am required.”

They have worked hard to earn, save and accumulate their money. They want investments vehicles that work as hard for them as they did to make it.

They Believe Wealth is More than Money

They know that True Wealth has many dimensions…including personal, social, spiritual, human, and intellectual capital. They believe all wealth is worth preserving.

“Relationships are more important than my money. Of course, I want to have enough to secure my lifestyle, but I want to positively impact my family and my community.”

They Are Open to Learning about New Ideas & Abandoning Old

They approach ideas with an open mind and can make hard choices. They may believe they have a reasonable plan and good advisor…yet, they want to move to the next level.

They Know Science & Sound, Strategy Trumps Marketing Glamour

Their experience has taught them the value of strategy first: aim before you fire. They also know that when a strategy is backed by sound academic research, it is most effective. Even though this requires more time up front & personal investment, it pays off handsomely in the long run.

They avoid imprudent sales tactics and herd mentality.

They Know What They Do Well

By implication, they know what they don’t do well. “I tried the do-it-yourself route with my money. What a disaster! I know enough to be dangerous… besides, I can make more money with my time than it costs to delegate.” shared a business owner who recently converted the wealth in his business to cash.

They Care about Value and Quality

They agree with John Ruskin when he said “There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man’s lawful prey.”

They hire, respect and reward talented specialist…and desire win-win relationships with people they enjoy.

These Seven Key Characteristics have been the foundation for every enduring relationship we have…and we look for them in everyone we work with…whether business owners, retired professionals or women on their own.

Is Volatility the Enemy?

noreply@blogger.com (Jeremy Burri) — Thu, 26 Jun 2014 20:18:00 +0000

From our upcoming newsletter:

After a few good years of market returns, it’s inevitable that the "c" word begins to be uttered throughout the investment world- and by that I mean "crash". From cable news, to newspapers and magazines, to emails, people predict doom & gloom.

But is market volatility, especially negative volatility, our real enemy? Let’s look at an example based on the re-turns S&P 500. John Q, Investor, started investing in 2000. He invested, like clockwork, $10,000 on the first trading day of every year until January of 2014. But un-like most investors, he was given a choice to invest in the real stock market, or a magical one, where the direction was always up! The market genie told John, "Both stock markets will close at the same price on January 2nd, 2014, but the magical market will never lose. It’ll be a smooth ride up, the same positive return every year!" Given the opportunity to never agonize through a down year, John chose this market, as opposed to the "real" world, which saw major swings between Jan 2000- Jan 2014.

So, did John make the right choice by eliminating all downside volatility? In John’s magical stock market, he ended up with $168,050. He made about $18,000 on his investment and he never lost money in any year. He wanted to compare his results with his copycat brother in law Tom. (Tom matched John’s investments exactly, only he invested in the real world market). Tom had $221,793 by January of 2014. This beat John’s returns by almost 25%! Why? While market corrections may be no fun to live through, they do provide a period of time when our investment dollars go further. With lower stock prices, investors can buy more shares.

So if volatility is not our enemy, who is? I like to borrow a famous literary quote that says "We have met the enemy, and he is us". Poor investor decision making (like John above), is the main cause of diluted portfolio re-turns.

Without risk, there is no reward. Will the market "crash" again. Most certainly. It always has, and it will over and over again. No one can predict with certainty when. What matters is our response to it. Wise investors will whether through them, and look at the bright side of the situation. But this is not to say investing is without risk. Each investor needs to answer the question, "how much market volatility am I willing to bear?"

Buffet vs the "Experts"

noreply@blogger.com (Jeremy Burri) — Fri, 07 Feb 2014 17:20:00 +0000

This post is largely taken from an article from NBC news, but I thought it would be worth commenting on it. The article can be found at:

http://www.nbcnews.com/business/markets/buffett-has-big-lead-stock-bet-vs-experts-n23646

About six years ago, the famed Warren Buffet made a wager with a group of hedge fund managers. Hedge fund managers are touted as the most sophisticated, nimble, and adept money managers on the planet. They are not burden by the regulatory issues facing mutual funds, and they can employ a vast array of financial maneuvers. Warren's ten year wager was that he could outperform a group of hedge fund managers using a simple low cost index fund; meaning that for all their flash and sizzle, the masters of the financial universe would be unable to beat the market due to the market's efficiency.

With four years remaining, Warren's simple index fund has a commanding lead, earning 43.8% vs 12.5% for the hedge funds (as of the time of the article). What is more telling is that Warren chose an index fund to compete against them, not his own company's stock.

2013 Year In Review

noreply@blogger.com (Jeremy Burri) — Mon, 23 Dec 2013 21:30:00 +0000

It is likely that 2013 will go down in the books as a very good year for the markets. As of December 13^th, the S&P 500 Index (a US market index) was up over 27%. The international markets were also up, with the MSCI EAFE Index returning over 16%. Most investors are pleased with these results. However, it is at times like these that questions begin to be raised:

“What do you think the markets are going to do now?”

“Aren’t the markets really high?”

“When is the correction coming?”

It is impossible for anyone to tell what direction the market will go. I can recall specific instances, even back in January of 2012, of people saying that they were going to stay out of the market because it was “too high”. Those same people have missed out on the gains that have since occurred. It is impossible for anyone to tell which direction the next 10, 20, 30 or even 40% move in the markets will go. It could be up, it could be down.

There has never been a 100% decline in the global stock market- and if it would occur, the state of your investments would (likely) not be your greatest concern. After all, such an event would have to wipe out the entire value of all companies, all over the world. By contrast, if we examine the historical record, 100% increases, over varying time intervals, have certainly occurred.

Remember that the day to day, week to week, and month to month market movements are largely random. In our world of instant gratification, investors need to learn to ignore the minute by minute market news given by media sources. By weathering the volatility of the markets, long term investors who are disciplined ensure they are fully invested when the market makes a true and meaningful move upward. On the contrary, many undisciplined investors try in vain to time the market to avoid losses and lock in gains; but in reality the record shows this mostly leads to frustration, regret, and missed opportunities. But like many things in life, the rules to successful investing are easy. It's actually adhering to them that is difficult.

Reality Check

noreply@blogger.com (Jeremy Burri) — Sat, 02 Nov 2013 12:54:00 +0000

Over past few months, and even years, investors who have braved getting back into the market have enjoyed strong returns. That is a fact. However, in recent conversations, a few investors seem to be getting increasingly nervous about the pending "correction" coming. In their view, the market is "too high" and has to come down. And as such, they are shelving any long term investing decisions. In fact, it wasn't just this year, but even in 2012. Those investors have lost out on what was a prosperous 2013 thus far.

In one respect they are right. The market will, as it always has, go down from time to time. It is not a straight shot up. The point to take from the question is, that even if they are right, what is the long term consequences? I would argue, nothing. A bear market is usually defined as a market decline of 20% or more. If I look back at history, we have had a bear market, or worse, in every decade (including the 90s) in recent memory. However, if you were a long term investor over those years, these bear markets were nothing more than a great buying opportunity, and were not a portfolio destroying event. As long term investors, it is vitally important to keep a long term view, and not be influenced by the day to day hype.

Default: Nightmare on Wall St?

noreply@blogger.com (Jeremy Burri) — Sat, 12 Oct 2013 13:08:00 +0000

Nothing on the news this week seems to be encouraging. There is gridlock in Washington, and there are dire warnings of financial meltdown if the US defaults on it's debt. I am sure the memories of 2008 are still fresh in investor's minds, and on the whole they are terrified of going through that again just as many people have recovered their losses from the last correction.

As the debt ceiling showdown looms, I thought it would be a good idea to look at the possible effects of a US default on the financial markets- namely the US Stock markets. To do that, we can look at the last global debt default.

The last time a major world power defaulted on its debt was Russia in 1998. The combination of the Asian financial crisis and falling natural resource prices put the Russian economy in dire straits. By August of that year the Russian gov’t was no longer able to make good on its obligations. From January to August of 1998, the Russian stock market declined about 75%. The black line on the first chart below tracks the Russian stock market (the red line is the Dow Jones, just for comparison).

There are two things I’d like to draw from the below chart. The first is that Russia’s default, and most other sovereign debt defaults, are the end result of some other drastic economic effect. As you can see below, the Russian markets were falling long before the actual default later in 1998- serious trouble had surfaced before then. There were real economic and financial reasons why the country was unable to pay its debt service, and eventually they had to accept default. Our current situation is nothing like that. Instead of economic reasons, the only reason we would have a default is through a self-inflicted wound due to the total failure of our government. It’s unclear how the markets would react to a default with this unique set of circumstances. After all, if a default were to occur, it would be surprising if it was anything but very short. This fact alone would make our “voluntary” default somewhat novel.

The other thing you can observe from the chart below, is that the Russian markets did in fact recover. It was not fun to be an investor there in 1998, however, two years later in 2000 the markets had recovered, and then some. In fact, from 1998 to 2008, while the Dow Jones made almost no gain, the Russian market would have grown by a factor of at least four even AFTER the 08 crash (second chart). So in short, a default on sovereign debt, as we have seen elsewhere, is temporarily disruptive, but in the long run not the portfolio destroying event it is hyped up to be.

I have to credit www.tradingeconomics.com for these graphs. The site is a wealth of statistics and charts.

Horse Sense

noreply@blogger.com (Jeremy Burri) — Fri, 27 Sep 2013 19:43:00 +0000

Horse Sense

by Margaret Wittkopp, President

Do you have “horse sense”? Having good horse sense means you know how to handle yourself, have common sense and are a prudent person. A person without “horse sense” is not considered to have much common sense. Maybe you have horse sense when you are around your horses…but do you have the same horse sense when it comes to your financial life?

There are many commonalities between good horse sense and good financial sense, especially when it comes to investing. Here are a few examples:

Patience: It takes patience to train a horse, gain their confidence and get them to do what you want them to do. Some have used abusive and brutal techniques to get a horse to behave, but anyone with horse sense knows that is not an effective way to train horses.

It also takes patience to be a good investor: knowing your risk tolerance and structuring your investment according to your objectives, riding out the ups and downs of the markets, prudently re-balancing and avoiding the pitfalls of the quick fix.

Discipline: Having the discipline to work your horse regularly and with consistent cues is hard work and necessary for good results with your horse.

Discipline is also a necessary ingredient to financial success. Avoiding the pitfalls that so many investors fall into like: track record investing, market timing, and speculative investments among other deadly practices.

Soundness: A sound horse is a healthy horse, and a sound investment/financial plan is based on sound science, is academically proven, and verifiable. Before I buy a horse I want it checked out by a veterinarian I trust. A sound Investment plan should undergo the same scrutiny.

VERITAS Financial Services, LLC

506 East Mill Street Suite 101

Plymouth, WI 53073

920-893-5262

923 South Main Street Suite E

Oshkosh, WI 54902

920-251-4862

www.veritasinvesting.com

www.facebook.com/veritasinvesting

Courage: It takes courage to ride a 1000 lb animal. No matter how they act on the ground, under saddle anything can happen. We all know that, and still the desire to ride overcomes our fear.

To be financially successful it is important to “bridle” the forces of the market to our advantage. We do this through investing in the market. When done in a prudent and cost effective way we can, and generally will, experience the rewards of the market. To get the rewards of the market we must have the courage to seek the truth about investing and implement it.

Everyone needs a COACH/Trainer: A good trainer is invaluable, from braking out a horse to knowing how to ride the horse to ...well you name it. To have a great experience with our horse we need coaching along the way.

A Coach, (not a salesperson disguised as an “advisor” “planner” "wealth manager” etc.) helps you understand markets, structure your investments prudently, according to your personal needs and objectives. And most importantly a Coach tells you want you need to know…. not what you want to hear, to keep you moving toward your goals and helping you have a successful financial life.

Confidence: This is the reward we receive from our discipline, patience and the courage we develop from working with our horse.

Confidence is also what we gain when we know how to answer the: “20 Must Answer Questions for Financial Peace of Mind”. See the attached quiz and find out how you are as an investor. Answers must be 100% sure to count as a yes…and only you will benefit from knowing.

Fund Manager Success: Repeatable or Not?

noreply@blogger.com (Jeremy Burri) — Tue, 03 Sep 2013 21:11:00 +0000

For those of you who read my blog posts or receive our emails, you'll know that Standard and Poor's compiles some very interesting information on mutual fund manager performance versus their benchmarks. The SPIVA Scorecard is a piece that I reference often.

Today, I ran across a new paper from S&P, The Persistence Scorecard. This report looks at performance persistence in mutual funds. For example, let's say a broker tries to sell you a fund whose manager has been on fire this year, beating the market by 10%. Should you take this as an assurance that you will enjoy these lofty returns into the future?

Without retyping the entire article, I'll relay one of their findings that essentially summarizes the findings. Over the three year period ending March of 2013, out of the top 25% of all performing US Equity funds at the start, only 4.69% of those funds remained in the top 25% of performers at the end of the 3 year period.

So, if you are entertaining purchasing a fund just because of its manager's stellar record, you may want to reconsider that decision, and find other, better criteria for fund selection.

Fidelity's at it Again

noreply@blogger.com (Jeremy Burri) — Thu, 08 Aug 2013 17:50:00 +0000

Well folks, remember when I did the blog post about Fidelity encouraging advisors to sell their stock mutual funds a few months ago--- after much of the market has recovered? Well, they are at it again with a new slick marketing piece. This is just the inside. It's more than a postcard this time.

I'd just like to make a few comments on this. First, they do point out that the market (S&P 500) is up 160% since the low in 2009. How many of these marketing pieces did Fidelity make like this at the bottom? Zero. Stock funds will sell now because stocks are up.

Second, notice the first sentence "Fidelity experts forecast". Whenever you see the word forecast from your investment professional, you should run, not walk, away. Forecasting is part and parcel to market timing and stock picking, two activites that are speculating, not investing.

Their comment of "why are your clients avoiding stocks" should more accurately be put "why are you avoiding stocks". During the market decline we never sold our clients out to cash, gold, or any annuity product.

But, who can blame them. Fidelity needs to sell funds. With their gold fund down 46.65% year to date, why not go with what's doing well.

Are You a High Net Worth Investor?

noreply@blogger.com (Jeremy Burri) — Wed, 26 Jun 2013 16:08:00 +0000

Almost daily we recieve solicitations from companies wanting us to sell their products, and advising us on how to "target" high net worth individuals.

Are you a high net worth individual? Are you tired of being "targeted" by commissioned based agents/advisors? Many firms specialize in targeting individuals with $250,000 or more to invest. (Trust us, we can buy lists of these exact prospects). These individuals are vulnerable to salespitches that are not necessarily designed for their best interest. Held capitive by commission based compensation, the typical advisor has strong incentive to close the sale and make sure their bills get paid.

Maybe you don't think of yourself as a "High Net Worth" individual.. but you are if you have $250,000 or more in your 401K or other investable assets. If you want a prudent no-nonsense approach to managing your "nest egg" maybe you should learn about the Veritas approach.

What is the Real Rate of Return?

noreply@blogger.com (Jeremy Burri) — Wed, 19 Jun 2013 22:13:00 +0000

One of the intriguing paradoxes in investing is the difference between a fund’s reported return, and the personal rates of return for the people that own that fund. For example, fund x may have earned 10% in the last 3 years on average, but, what did the “average” investor in that fund earn over the same time period? The difference may be surprising to you.

Let’s look at a stalwart fund of the broker sold community: The Growth Fund of America. If you look up the fund on any internet based reporting service, you notice that its five year return is 3.73% per year. Not bad considering that time period held some of the 2008 downturn. But what does that number mean? That is not the return of the average investor, it is simply the return of the fund. For an investor to have earned that, they would have had to buy the fund on day one, held it entirely, and still have been holding it at the end of the five year period. As advisors and investors, what concerns us is INVESTOR return, not fund return. The average investor return over that same period was only 1.18%! That means that if we look at all of the investors that held that fund during that five year period their average return was only 1.18% per year.

How could that be? Well, here again we see that investor behavior trumps the many other factors that contribute to successful investing. Over that five year period, investors in that fund continued to engage in many of the bad behaviors that investors fall prey to, among them likely market timing and track record investing. But this is not something that we only see at American Funds. Fidelity Growth company has a five year return of 7.04%, while its five year “investor” return is only 3.86%. Here again, investor’s fail to get their full rate of return because of a lack of discipline; discipline which can only be acquired through a commitment on the part of the advisor and client to lifelong investor coaching. Without it, investors do and will continue to leave money on the table.

And now, for a truly amazing thing. Do you know that an investor in a fund can actually earn MORE than the fund itself? Take for example a fund that many of our clients own internally in their own portfolio, DFA US Small Cap. Its five year fund return is 9.44%, while the INVESTOR return over that period was 10.22%. Can you figure out how this can possibly be? We’ll have the answer in our next newsletter.

What We Do

noreply@blogger.com (Jeremy Burri) — Thu, 30 May 2013 15:54:00 +0000

I received a phone call this morning from a non-traded REIT wholesaler (salesman), requesting to set up an appointment with me. For some background, a REIT is a real estate investment trust. In a REIT, investors pool their funds, and a manager purchases properties with these funds. The investors earn a return from these properties when the tenants of these properties pay rent, or properties are sold off. Non-traded means that you typically cannot easily "sell" out of these arrangements. Once you are in, you are in.

What struck me in a subtle way, was how the wholesaler kept feeding me facts about how these would be easy to sell to my clients. He mentioned the 6% dividend, and how much "success" they have had in raising funds. Nothing was said about the dangers for REITs, how they were not appropriate for most investors- and how many of them fail. It was all about how I could get my clients money into their product...all about me.

That got me to thinking, what is another way I can describe what I do? Why do I do what I do? This relates to other conversations that I have had along the lines of "can't I just go direct to ______ (Vanguard, E Trade, etc) ? Why should I pay you?" The direction of this industry, like many other things, is going online.

Here is the bottom line. You can go direct to an online brokerage, or work with a broker that will just give you want you want: gold, hot stocks, annuities, oil and gas partnerships.... what do all of these have in common? They are not in business for you. They are in business to earn profits from your activity, and believe me there will be no end to the neat "activities" they will show you. They have no responsibility to keep you disciplined, or to keep you from getting in over your head. In fact, the more you transact, the better they do. They only have to recommend things that are "suitable". Not the best options, just ones that are not completely inappropriate. They are the dealers at the black jack table of investing. We, on the other hand work for you. We won't let you do anything under the sun. We stick to an academic and disciplined plan. We want you not necessarily to have the most "fun" in your portoflio, we want you to get the best results possible. Sometimes that is bitter medicine. That is why coaching is important. You could go to a gym and have a trainer write you a 365 day plan for total fitness. If you followed it exactly, you would get the results you wanted on 12/31. However, how many people, with a written plan only, will be successful at the end of the year? I am guessing close to 0. Why? No discipline and no accountability. What if we added to that written plan, an in person trainer who you met with regularly? Do you think your weight loss results would increase? We think the same concept applies with money management.

Mind Over Money

noreply@blogger.com (Jeremy Burri) — Mon, 13 May 2013 16:21:00 +0000

Last week the advisors of Veritas Financial were in Colorado Springs for a Matson Money Conference. It was an excellent conference, and I thought I would summarize a few of the takeaways that I had after the conference, and how this applies to investors.

We always thought the "enemy" was active management-- or retail mutual fund companies, and the brokers who unknowingly preach that failed way of investment thinking. However, there is a new, much more powerful force waging war on the American investor. This is the true "Evil Empire" as they were coined. Collectively, these four companies hold a vast amount of investor wealth, and are accumulating more each day: Fidelity, E Trade, TD Ameritrade, and Charles Schwab.

Just how big are these firms? E Trade: $201 Billion. Schwab $1.9 Trillion. TD $481 Billion, and adding $160 M each day. Fidelity $1.7 Trillion. Many investors are by and large ditching their brokers and going to do it themselves. Why? Well, these four firms are doing an all out assault on advisors, spending hundreds of millions on advertising. Secondly, the average investor, with their own experiences, have lost faith in the brokerage industry (which, of course, we would say you could predict with their behavior as it is). And the traditional broker dealers see the writing on the wall. Did you know that LPL now has it's only "direct" channel to investors? No longer do you need your friendly LPL agent, go directly to LPL itself!

These firms tell you to ditch your advisor, and save boat loads of cash in expenses. The problem is, that these firms a) do not have the investor's best interest in mind, and b) are not all that cheap after all. E Trade has it's own advisory fees. You want Fidelty's low cost trades? Better be ready to trade 110 times a month. You also may be pushed to trade in complicated securities, like options. Many of the same costs you think you are avoiding, will crop up again. Instead of disciplining investors, these firms amplify bad investor behavior by encouraging constant trading in pursuit of the best investments.

Investors are their own worst enemenies, and it is very difficult for them to resist this urge to break away. Many believe they are "sophisticated", and don't need an advisor. Here is one concept that is very hard to swallow for investors: THERE ARE NO SOPHISTICATED INVESTORS. Just take a look at the victims of Bernie Madoff. There were professional money mangers among that list, people who worked in the industry for years, yet fell victim to the most simple of all schemes: the ponzi scheme. Secondly, we think that investing is so easy... how can we possibly mess it up? We just have to follow three basic rules: diversify, rebalance, and own stocks.

Lets look at something also very "simple". We all are taught at an early age to brush our teeth and floss regularly to keep our teeth and gums healthy. But in 2002, we spent over $70 Billion dollars in dental expenses (much of it was surely preventable). A very simple thing, but we fail to do it. We also have an obesity epidemic in a country where almost everyone knows what they need to do to stay fit; with fitness centers in every city and easy access to athletic trainers. But investing has an added element: If you skip brushing your teeth for one day, or you splurge on the dessert for a weekend we can fairly easily repair the damage. But with investing, one lapse in judgement can destroy thousands in wealth. Just one.

So what is the bottom line? It is this. Investing isn't all about the portfolio. True, a good portfolio is important. But why investors fail is not that we have people with portfolio problems, we have portfolios with people problems. If investors are to be saved, it will take not just academically sound portfolios, but actual disciplined guidance. As financial coaches we work hard to educate our clients. It's good that you trust us, but unless you are educated and disciplined, eventually your emotions will betray you. We won't be there at 2am when you are up at night, worrying about the market, or when that annuity salesman knocks on your door. Only a good investor education can keep an investor grounded for the long term.

A Money Smart Week Review

noreply@blogger.com (Jeremy Burri) — Fri, 26 Apr 2013 15:04:00 +0000

This week was the annual "Money Smart Week" event, sponsored by the Federal Reserve. For us, that means a long week of daily presentations on financial topics. And for the public it is a great opportunity to get some financial education without the pressure of a sales pitch (as that is not allowed by the rules of the event). We had great attendance in Sheboygan County, and last Saturday's Money Conference in Oshkosh was a great success.

However, I still can't help but wonder what happens after all of the events are done. As a presenter I get a lot of interesting questions, and I tend to hand out a fair many business cards over the course of the week. However, these are not great client acquisition events for us, and the time spent on paper and presentation design are quite high compared to the return on investment. But we do it anyways because of our commitment to investor education.

I often wonder what people decide to do. Do they go just get busy and put these great intentions of change on hold? Do they go back to their old broker and get talked out of things--or further confused? Do they simply try to take what they learned and apply it on their own. In any event, some day it sure would be interesting to know. What I fear that happens in many cases is that they will take all of the wonderful knowledge they learn attempt to implement it on their own, and will yet again be unhappy with their results. I mentioned this in my one classes this week. You can do everything right on the costs aspect, you can remove all active management from your portfolio and make it extremely cheap, but there are other overriding factors that determine investor success.

DALBAR does a study every year on the do it yourself crowd; their QAIB study. Each year it looks back at the past 20 years and compares average investor performance to the S&P 500 Index. Year in and year out the index outperforms the average investor by about 2 to 1. If we are honest with ourselves, we know that we cannot all be above average investors, and only the very luck or very very highly trained are getting a return any where close to the market average. This is human nature however to deny our "averageness". A famous way to show this bias is to ask all of the people in the room who feel they are above average drivers to stand up. Usually about 75% of the crowd will stand up. We of course know that that cannot be true- half of the people in the room are below, and half of the people are above, the average skill level driver.

Even if somone realizes they do need help, I think people struggle with what to look for in an advisor. That will be a topic for my next blog post.

A Question of Ethics

noreply@blogger.com (Jeremy Burri) — Wed, 03 Apr 2013 19:26:00 +0000

Recently I came across a situation that I thought would make a good topic of discussion, as it deals with understanding how people in our industry get paid, and also ethics.

For this story to make sense, you have to first understand how people in financial services get paid.

The first method is under the old commission based system. The true name for these individuals is "investment representative", although they will use many different titles. In the old days they were just called brokers, but that name has taken on a negative connotation. In this system, individuals are paid a comission by the company who's product they sell to you. This product could be a mutual fund, insurance policy, or annuity. These payment rates will all vary by product, and as you can imagine one way these companies try to attract agents is to pay a good commission rate. You, the customer, are not paying the agent directly. Many people critique this system, pointing out the obvious conflict of interest between client and financial products company. The agent may be inclined to sell the products with a higher payout, while another product may be better for the client. Interestingly enough, brokers only have to sell a product that is "suitable". A suitable product may or may not be the best for the client- but it's ok.

The other payment arrangement a person like us who can work under is a fee arrangement, or fee based planning. Here, advisors may charge hourly rates, a fee for a specific plan, or a fee on assets they oversee. Here there are fewer conflicts of interest because whether the client buys fund a or fund b, the advisor is paid the same. Here the client pays the advisor directly.

And here is where our story begins. Let's say a financial advisor (fee based), charges a client for a financial plan (and not a small fee, like over $1000). This advisor is free to recommend any product in the financial universe- and they still get their fee because the client is paying them for "the plan", and not selling them the fund. But what if the advisor is also a broker?

Do you think it is unethical for a financial advisor to charge a client for a financial plan and then have them purchase a fund that they will in turn earn a commission on by being broker? Personally I think it is.

Callan Periodic Table

noreply@blogger.com (Jeremy Burri) — Tue, 26 Mar 2013 22:08:00 +0000

Today I thought I would comment on an investor phenomenon routinely encountered by advisors called "selective diversification".

Recently, I had more than one individual tell me that they wanted to hold off investing because they thought the US stock market was too high, while a colleague had an investor wanting to get of overseas markets because of recent events. Callan, a investment consulting firm, releases their "periodic table of investements" every year. It's purpose is to rank different investment categories each year by performance. As you can see, in 2012 Emerging Markets (orange) took the prize, with Bonds taking last place in performance (green). I really like this chart because it illlustrates the random and unpredictable nature of the markets, and that not all markets move together. For example, winners may or may not repeat, and losers may, or may not become winners the following year. For example, look at Emerging Markets in 1999. They had been the worst performing class in the two prior years. Now in 1999 they were first. Was 2000 the year to jump on the bandwagon? Nope, they were back to the bottom of the pack in 2000. What about S&P500 growth stocks in 2004 (red)? They had been a loser for the three prior years. Time to get in? Nope, they were in second last place in 2004-2006! Emerging Markets in 2005-looks like time to head for the hills right? History proved it was not. They continued to perform well for two more years.

The lesson in this story is that "high" and "low" are very subjective. What is happening today in any market doesn't give us a clue on what we should do tomorrow.

Fidelity's Ironic Announcement and True Independence

noreply@blogger.com (Jeremy Burri) — Wed, 06 Mar 2013 02:04:00 +0000

Today's post is a two for one.

The first is a comment about a recent sales flier I got from Fidelity just a few days ago. It stated that now may be the time for US Equities (stocks). Inside the brochure it details the various reasons, such as a rebounding housing market and a resurgence in manufacturing that may take place. I find it ironic that Fidelity makes this announcement now, as the DOW is sitting at a new all time high. Where was this announcement in March of 2009? This is an all too familiar theme in the investment industrial complex. As a retail investor you are "sold" what feels right at the time and seems to make sense. If Fidelity was really on your side, they would have been saying this forever, and especially in 2009. But, from a sales perspective what is easier, telling people to buy stocks in 2009, or trying to sell them something safe like bonds or some alternative investment like commodities? There is a difference between giving investors what they want and what will sell, and telling what they need. Sometimes doing what is necessary does not feel good at the time.

Also, today I had to laugh on the way home. On a local channel I heard a wealth management firm advertise how it was "independent" and not beholden to any large national financial firms. It wasn't influenced "by the manufacturers of financial products". Sounds nice, doesn't it? But, then comes the fine print. Any investment office out there is either a) a brokerage office, or b) a fee based planner. If they have a broker dealer, they ARE affiliated with a larger firm and DO sell financial products. This firm that claimed to be independent, is, in fact not. They are an Linsco Private Ledger (LPL) office. Thus, they have to do things that LPL says it must do. Secondly, they DO then also sell manufactured financial products. If they really wanted to act in the best interest of the client, they would not need a broker dealer. The only reason you need a broker dealer is to collect commissions on the sale of commissionable products (financial products). So, in short, this ad was a sham in my humble opinion. The firm is not truly independent, and it also does sell the very products it pretends to eschew. Now, no one outside of the industry is going to be able to tell you about this distinction, but that is our mission at Veritas- Investor Education. Catch our next class on March 28th.

Target Date Funds

noreply@blogger.com (Jeremy Burri) — Wed, 27 Feb 2013 03:24:00 +0000

The subject of target date funds is brought up in Pound Foolish, the book I told you I was reading in my prior post. Their popularity in the 401k market has exploded. According to the book, in 2004 only 2% of Vanguard's defined contribution investors used target date funds. By 2011 it was 42%. That is big increase in a short amount of time.

So why are target date funds a bad idea?

First, they are typically not diversified. The typical target date fund has a few bonds, a few small cap stocks, but is primarily a large cap (US and foreign stock) fund. This is rather marginal diversification considering that Large US and Large Foreign stock, as asset classes, are not highly uncorrelated.

Second, they are costly. In the book, Olen states "Fidelity's Advisor Freedom series charged investors in the fund a hefty 1.08% annually.... Oppenheimer's Life Cycle series got away with a 1.68% expense ratio." Many fund companies load these funds with their own funds, creating a "fund of funds". This creates often times a whole new layer of expenses that are not necessary.

Third, investors are very confused on what they (target date funds) are actually are suppose to do! According to a survey mentioned in the book, more than half of those surveyed believed that a target date fund's performance was guaranteed. The SEC had similar results in one of its own surveys. Obviously this is not the case, and these funds are no more guaranteed than any other mutual fund.

Economic Outlooks and Investments

noreply@blogger.com (Jeremy Burri) — Fri, 22 Feb 2013 03:09:00 +0000

Should the less than exciting outlook on the US economy give you reason to fret about your portoflio, especially in this political climate? Watch this video by Mark Matson to find out:

http://www.markmatson.tv/?p=2930

Interesting Book

noreply@blogger.com (Jeremy Burri) — Wed, 20 Feb 2013 21:24:00 +0000

I've been reading a book called entitled "Pound Foolish, Exposing the Dark Side of the Personal Finance Industry",by Helaine Olen, and thus far its been an entertaining read. To date I've read about the interesting history of Suze Orman, Dave Ramsey, and others. I'll share an excerpt from one of the next chapters:
"Here are two things you need to know about variable annuities. First they are increasingly being marketed and sold to baby boomers who are more and more afraid of outliving their retirement savings. Second, this is a product so complicated, so difficult to understand, with so many financial penalties should one decide it is not the right investment after all, that Suze Orman, a former annuities saleswoman herself, begs people to stay away from them."

While they may have their place in an investors portfolio, I would tend to agree with her. They are vastly oversold with little attention paid to their long term costs.

If I were considering a variable annuity purchase, I would ask the following questions:
1) If I cash in my entire policy in 1,5,7, and 10 years, what would be the surrender charge I would pay?
2) If I invest my money and the market goes down by 50%, and I surrender (cash in) my entire policy, what would I get? My original investment or something less?
3) If I assume the prevailing investment return in the market will be 6% for the next 20 years, what would my policy be worth compared to a regular investment account that has lower fees. (For this one if they can't put in it numbers for you I would be very cautious- there expenses should include M&E expense and all the costs of any riders).

Return of the Investor

noreply@blogger.com (Jeremy Burri) — Tue, 12 Feb 2013 04:01:00 +0000

I recently posted on our facebook page in regard to this story, but I also noticed an article in Investment News.

Before January of 2013, April of 2011 was the last month that investors, as a group, invested money into stock mutual funds, versus taking money out. At the time of this article, investors had invested a net $23.6 Billion in stock funds as of 1/16. January did finish as a net positive for fund inflows. From March of 2009, until the end of 2012, investors took an astounding $400 Billion net from stock funds. While some of this was probably due to economic reasons (unemployment was very high and something has to pay the bills), another reason was simply fear and uncertainty. According to Investment News, the return on the S&P 500 over that same time was more than 100%. Unfortunately investors that bailed on the market missed out on that return.

Value of an Advisor

noreply@blogger.com (Jeremy Burri) — Fri, 01 Feb 2013 21:01:00 +0000

Margaret Wittkopp brought up this article at our investor education class on Wednesday in Plymouth. This is from Financial Advisor magazine, and was a study that tracked retirement plan participants going back from 1994 through 2008. I like this study because it looks at the average investment results of different categories of investors that we commonly see, and how their actions have likely effected their bottom line.

The yellow line is pool or group of participants/investors that had no plan. They had no advisor, nor did they personally try to implement any plan. This is the "head in the sand" group. It is probably no surprise to anyone that this group performed the worst. At the end of this study in 2008, this group had far less money than any other.

The next line from the bottom is the self directed group. This group was actively involved with planning their retirement, but they did it on their own. The DIY crowd. While I can only speculate, I am guessing the reasons for this is that they did not want to pay for the services of an advisor. That mindset is pretty common actually. With the wealth of financial "information" out there, many people feel that paying for the input of an advisor would be an unnecessary expense.

The green line represents people that worked with someone in the financial services industry, but not necessarily a comprehensive planner; like someone that may have sold you an annuity, or a few mutual funds. You may even own an IRA through them. Although they can provide financial products, they really aren't giving you tax advice or overall financial guidance. This group trailed the self directed group until later in the 2000s. Why? My theory is this: I am guessing many of the self directeds after 2007 and 2008 stopped contributing or pulled out of their plans in fear (remember the market in 08?). By contrast, the group who at least had a casual advisor was able to stay the course.

The last and best performing group worked with comprehensive advisors, people who were not just there to sell them stuff, but who helped them look at the whole picture. Sure, these people also probably paid the most in fees, but there is evidence to suggest that the fees they paid did earn results in the long run. These investors also weren't afraid to engage their advisor frequently for advice and education. Don't ever be afraid to call your advisor or planner. That is what we are here for. There is a positive correlation between how much client/advisor interaction there is, and the ultimate client experience in the end. Both the advisor, and the client have a responsibility in that regard.