Archive for Investment Planning

Stock selection

Normally, I don’t recommend that most people invest in individual stocks. But if you do, you might find my latest article for BetterInvesting Magazine helpful. P/E Ratios can also be useful for comparing mutual funds, as the article discusses.




No investment is forever

Lo! How the mighty are fallen. That darling of everyone, Apple Inc., has hit a rough patch lately which at one point had dropped its share price by about 20%. Then, it was revealed that Berkshire Hathaway had taken a $1 billion stake in the stock, and up it went, because we all know that Buffett and Berkshire only buy great investments at a bargain, right? (No, don’t rely on that either).

Another old venerable, Exxon, recently had its S&P bond rating reduced from AAA to AA+. It’s been AAA since 1949. Even bond ratings ripple from time to time. On the other hand, Apple’s rating was in junk territory in 1997, and now it’s the same as Exxon.

Exxon, along with a few other large caps, has usually been considered a “widows and orphans” company—safe for the most conservative investors. Johnson and Johnson is another one, but it’s had a rocky road of recalls and product attacks. Nothing is forever, and you should make an effort to be aware of changes, even though I encourage you not to be whipsawed by every bit of news.

During my recent conference at Dimensional Fund Advisors, a speaker mentioned that Apple and Exxon each represent 3-4% of the entire market! In fact, DFA reduces their holdings in both these companies from what a typical index fund (which tries to mirror the market) will hold.

Oh, you say, but I don’t own these individual stocks. Um, somewhere you probably do. For example, the Fidelity Puritan Fund has 2.24% (its 2nd largest holding) in Apple. Vanguard Wellington has 1.08% in Apple and 1.27% in Exxon. Vanguard Total Stock Index has 2.26% (its largest holding) in Apple and 1.68% in Exxon—and just about any target retirement fund you have is going to have one or both of these companies, probably as one of its largest stock holdings. And in a real “contra” move (NOT!), the Fidelity Contrafund has 2.91% of its portfolio in Apple. If you also own some individual shares (my hand’s up, but don’t take this as any recommendation) or put a little money in a technology sector fund, you may be way more invested than you think in this very small segment.

You can hardly avoid these two stocks, and they may actually be companies that are too big to fail, at least without disastrous impact on the world economy. The point I want to make is that a target date or life strategy or any balanced or all-purpose fund still needs to be examine for what exactly is in the portfolio. Especially with target date funds, we think we know how they’ll operate, but they don’t have a long enough history for us to be sure. Examine your portfolio for overlap if you intend to protect yourself by diversification. You may have less variety than you intended.

New investment possibility

DFA logoI’m so pleased to announce that I have been approved by Dimensional Fund Advisors (DFA) to use their funds in managed portfolios. This is really a step up in the quality of funds I can select and offer to you.

DFA only works with advisors (not the general public) because one of their strategies to keep costs low is to prevent the kind of day trading and panic selling that sometimes leaves even no-load passively managed funds awash in capital gains (or losses). When a fund experiences high inflows or outflows, managers are forced to redeem shares to cover costs, and everyone feels the pain in sometimes unexpected tax consequences. In fact, with recent redemptions at the Sequoia fund, managers actually distributed stock to people who wanted large redemptions. Since Sequoia didn’t give shareholders a choice on what stocks they got, it made for some strange tax gyrations. In addition, DFA believes that investing in their funds demands guidance and communication between investor and advisor—they’re not one size fits all.

We’ve discussed so many times (that “we” is me, the press, and probably even the almighty) the difference between active (boo!) and passive (yay!) management, but DFA offers a third way—research driven. Based on research by Nobel Prize economist Eugene Fama, Ken French, and David Booth (all still involved at DFA), certain factors have been identified that, when used to tilt a primarily passive portfolio, have resulted in improved results. I have about a ton of information on the specifics of this and would be super happy to discuss it with you.

DFA has been around for 35 years, and in the economic crisis of 2008-2009 actually saw inflows to their funds, a testament to how much fee-only advisors believe in and communicate a message of faith in the market and faith in their products.

I hasten to add that DFA is still no-load and I’m always going to be a fee-only fiduciary for you—I don’t get any commissions from them. It was quite a vetting process: phone interviews, reviews of my portfolio selections, business approach, and investment philosophy, culminating in a two day trip to Austin, TX, headquarters for an amazing but grueling amount of seminar information-dump. I went in somewhat skeptical that they had a better mousetrap, and left totally convinced that they’re an extremely fined tuned and successful investing machine.

Schedule a meeting and I’ll be excited to tell you about this great offering and what it can mean to your long-term investing picture.