1. In my last entry, I discussed the state of the bond markets. Today, I bring you a few words about stocks, in the form of an article I recently wrote for my regular finance column in The Saturday Evening Post.

    This article is particularly timely in that everyone now seems to be atwitter over the upcoming public offering of Twitter stock. Be careful in picking individual stocks! It’s more difficult than you think...

    Good Companies, Bad Stocks

    Company A is fast-growing, high-tech, and widely regarded as one of America’s best corporations. Company B is slow-growing, low-tech, and not even the CEO’s mother would use the word “best” to describe it. Which company should you invest in?
    If you guessed Company B, you’re right....

    [for rest of article, click link below]...



    I also wanted to make a quick comment on a recent Wall Street Journal report that many financial planners are deceptively using the term “fee only.” In the report, summarized by Journal columnist Jason Zweig in the September 21 – 22 issue of the newspaper, 661 financial planners at Morgan Stanley, UBS, J.P. Morgan Chase, Wells Fargo and a handful of other large brokerage houses call themselves “fee only,” even though they are decidedly not – they charge fees to clients, but also take commissions from other parties.

    For the record, Global Portfolios, LLC, has NEVER taken a commission, a gift, or any compensation whatsoever from fund providers or from any other source. And it never will. My sole compensation is what I charge clients directly.

    This policy ensures that I am not potentially swayed into making colored judgments when choosing the best financial products for my clients. (Those products are most often low-cost index funds, which numerous academic studies have shown are the best bets for long-term investing success. That’s not to say that all financial planners at large brokerage houses give bad advice, or are dishonest. Not at all. But when working with a commissioned planner, you need to realize that your best financial interests and his may not always be the same.

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  2. I hope everyone had a very pleasant summer.

    The markets these past weeks have been especially jumpy due largely to the turmoil in Syria. Despite this, despite lingering unemployment in the U.S., a still financially unstable Europe, and a significant slow-down in the growth of China, the stock markets have performed quite well year to date. U.S. stocks are up about 17 percent since January 1, and foreign markets are up about 7 percent (held back by negative numbers from Emerging-Market nations).

    Commodities are another story, having dipped significantly with precious-metal prices plummeting. And bonds, too, have suffered, with the aggregate U.S. bond market, a market that very rarely dips over the course of a year, losing about 3 percent. The reason? Rising interest rates.

    There is a direct inverse relationship between interest rates and the price of bonds. If you are unfamiliar, or a bit hazy on this relationship (as most people are), you might want to read the following short article that fellow advisor Kevin Brosious and I wrote for the NAPFA consumer blog:  [If you are familiar with the relationship, you can skip ahead to the bottom of this post.]

    --------------------------------------------

    Bonds and Interest Rate Risk

    By Kevin Brosious and Russell Wild


    Investment-grade bonds aren’t the slam dunk safe investment that they once were—and for this, we can thank the current interest-rate environment. Interest rates have been falling since the early 1980s, and because bond prices and interest rates move in opposite directions, bond investors have enjoyed excellent returns.

    However, all indications are that rates have bottomed out, with nowhere to go but up. [Note: this article was written about a month ago; since then, rates have climbed somewhat, but are still very much near historical lows.] And while declining rates benefit bond holders, rising rates cause bonds to sell at a discount. Think of it this way: Why would  investors pay $1,000 for a bond that pays 3% interest per year when they can purchase a new bond paying 4% for the same price?  They will buy the 3% bond only for a discount...something less than $1,000. Depending upon the maturity (years remaining in the bond) and coupon payments (how much and often interest is paid), that discount can be severe.

    For example, assume you own a $1,000, 30-year, 4% bond paying semi-annual interest. Assume that a year from today, the interest rate for the same type of bond increases to 5%. A buyer would only purchase your bond if it yields the 5% current rate. Consequently, the market value of your bond would fall to $848. You just lost 15%. Ouch.

    Of course, you can hold the bond until maturity, take your annual interest payment, and then get back your original $1,000. But then you would be stuck with a bond paying less than the market rate for 29 more years. The choice is to take the pain now and sell at a discount, or take the pain over the remaining life of the bond. It’s ugly either way.

    The example above shows why longer-maturity bonds have greater price sensitivity to changes in interest rates. In comparison, a $1,000, five-year bond under the same scenario would be priced at $963. The investor still lost money, but a whole lot less.

    However, bond issuers are smart. Most of the time, shorter-maturity bonds (less risk) pay less coupon interest. The buyer of those bonds sacrifices interest income for more bond stability.

    Bond investors can estimate how sensitive their investment is to changing interest rates by using the bond’s “duration.” Duration measures the percentage change in the market price of a bond for a percentage change in the yield. For example, a bond fund that has a duration of 10 can be expected to lose 10% for every 1% increase in yield, and vice versa. (In other words, if you invested $1,000 in a bond fund that had a duration of 10, and interest rates increased 1 point, your investment would now be worth $900.)

    The same principle applies to investing in bond funds, too.

    So, when investing in bonds, remember that risk and reward are always linked. Bonds paying higher interest carry more risk. Using a bond’s duration to determine potential interest-rate risk can be a useful tool.

    --------------------------

    If Kevin and I had had more space, we might have delved into the long-term effects of rising interest rates on bond performance.

    But we didn’t have to. Vanguard’s investment officer Brian Scott did a very good of explaining these long-term effects in the following article, well worth the read:

    https://personal.vanguard.com/us/insights/article/bonds-rising-rates-08142013

    The bottom line (literally): Everyone is concerned about rising interest rates, which have certainly been rising, but that does NOT mean that they will necessarily rise more in coming months. (In other words, you can’t time the bond market any more than you can time the stock market.) Bonds are still the best diversifiers we have -- don't give up on them. Be cautious about “chasing yield” with high-risk bonds. Know that in the long-run, rising interest rates are not necessarily bad for bond investors, at least not for long-term bond investors. What you may lose in the price of your bonds (or bond funds), you will eventually gain back in higher yield.

    Back to the concept of “duration” as discussed in the article above... If you have a bond portfolio with a duration of 5, and interest rates pop by a full percentage point, you might lose 5 percent of your portfolio, but by gaining about one percentage point a year in added yield, you should be back within five years to where you would have been had interest rates not popped...In other words, no harm done to the investor who plans to buy and hold for at least five years.


    One thing that Scott didn’t get into, but I think is important to mention: If interest rates shoot up – as some fear – that will certainly hurt bonds in the short-run, but it could have an even greater dampening effect on the stock market. So don’t be so fast to abandon bonds in favor of stocks. You want BOTH. You want more in the way of stocks if you need higher return and can stomach higher volatility. You want more in bonds if you can’t stomach high volatility, and you’re okay with modest returns. And cash? The return on cash, unlike that of stocks and bonds, is very predictable... You will lose 2 – 3 percent a year on your money, as it is eaten up slowly but surely by inflation. Don’t minimize that potential loss from “cash drag”; it can be significant.

    Yes, these are somewhat tricky times to invest. But a well-balanced and regularly maintained low-cost portfolio of index funds should serve you well through the coming years.

    Enjoy fall’s first chill. Don’t be chilled by inevitable market ups and downs. Contact me if you question whether your portfolio is properly allocated.



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  3.  I wrote the following for Retirement Income Journal...

    Greater Yield through Closed-End Funds?

    Share

    For some, it’s a necessity. For others, it’s driven by a fond remembrance of yields past. Whichever. A desperate search for yield has gripped older investors. And that in large part explains the recent surge in closed-end funds.
    Both the number of new closed-end funds (CEFs) launched and the money going into closed-end funds are at record highs. In one month (March) alone there were four launches. “The CEF industry market size has increased to $288 billion, dispersed among 583 funds that are managed by 103 different asset managers,” according to a June report from Cerulli Associates.
    Of course, we all know that finding yield, even in today’s low-interest environment, is not really very hard. If you want a 12% return right now, you can buy 10-year bonds from the government of Greece. But there’s a catch. With high return comes high risk. Do CEFs, some of which offer yields similar to Greek bonds, offer any lesser risk?
    Unlikely. Markets tend to be efficient. But that’s not to say that closed-end funds are bad. Just move in with eyes wide open. The risk of buying Greek sovereign bonds is readily apparent (huge government deficits, riots in the streets, the potential for default). There’s no free gyro lunch.
    And there’s no free lunch in closed-end funds, either, although the risks are not always so visible. As with any fund, open or closed, you assume whatever risks are inherent in the asset class. So if you buy a high-yield bond CEF, for example, you risk that the underlying high-yield bonds may default en masse or, alternately, plummet in value should interest rates rise. You are also subject to managerial risk, as CEFs tend to be quite actively managed. And your account value is subject to the management fees of CEFs, which tend to be significantly higher than those of open-end funds.
    Then there are the subtler dangers:
    The discount factor. Because CEFs issue a fixed number of shares, demand may drive the share price higher than the net asset value (NAV) of the underlying holdings. That’s called a premium. Conversely, if the fund owners throw an IPO party and no one comes, the share price may dip below street level. That’s called a discount.
    If you buy shares at a premium, or even at a modest discount, you risk seeing those share values fall, regardless of how the underlying holdings perform. According to my Morningstar Principia software, about 120 CEFs currently sell at a premium, and many others are near par. Beware.
    Leverage. Many CEFs (about two-thirds, or 400, per Morningstar) borrow money to create leveraged positions. That’s often how certain funds deliver great yields. But, of course, leverage magnifies losses as well as yield and performance. Many of the leveraged high-yield CEF bond funds now selling at a premium, largely for their juicy 10% to 12% yields, took enormous hits in 2008. In some cases, those hits exceeded the 40% or so loss that stocks suffered.
    Cannibalism. Consuming capital to raise yield is something that rarely happens in the mutual-fund world, and when it does, it is clearly brought to investors’ attention. Vanguard, for example, has three funds with the words “managed payout” in the name. In the world of CEFs, “managed payouts” are not trumpeted. Check carefully to see whether the “distribution rate” includes a return of capital. If it does, your cherished yield may be little more than smoke and mirrors.
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  4. These early days of summer have brought considerable heat here to eastern Pennsylvania, in line with the past year’s heating up of the stock market. Nearly all developed nations are in bullish territory – the U.S. market (as measured by the S&P 500) is up 15 percent year to date; foreign developed-world stocks are up 8 percent. Only the emerging markets stocks have lagged – badly – with a year-to-date return of -7 percent.

    Bonds have seen about a -1 percent return year-to-date.

    Investors with well diversified portfolios are faring well, everything considered... The only mass suffering this year has been felt by the gold bugs.

    Real estate has done exceptionally well, with housing prices in particular moving strongly higher. Finally.

    I’d like to share with you my most recent column in The Saturday Evening Post, which discusses the current outlook for real estate...


    Note that although I’m wearing my “reporter’s hat” in this piece, when I don my “financial advisor’s hat” I agree with the experts I interviewed... All things considered, this is probably not a bad time to buy a piece of property... Although we can’t be certain that prices will rise (or indeed, won’t fall) from here, mortgage rates, from a borrower’s point of view, are superb.
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  5.  I wrote this article  recently for Retirement Income Journal, an excellent newsletter for financial professionals, published by Kerry Pechter, author of Annuities for Dummies....


    The Academy-Award winning film Life of Pi featured a fantastical story of wild beasts battling amongst themselves while adrift on a lifeboat after their ship goes down in a storm. Today’s politicians, pundits and investment advisors are battling amongst themselves over whether an interest-rate storm is coming, and how to build and stock an appropriate lifeboat for such an event.

    Some argue we should try to stall the storm as long as possible. Times like these, they say, with unemployment high and businesses skittish to invest, call for as loose a monetary policy as possible to keep rates from rising. In The New Yorker last week, James Surowiecki said the broader good of low interest rates clearly trumps the dampening effect of low interest rates on savings accounts, CDs, and savings bonds. His column was entitled, “Shut Up, Savers!”

    Others (name any Republican in Congress or presidential-hopeful) argue that the Federal Reserve’s efforts to keep interest rates low are throwing our seniors to the wolves (or tigers or hyenas), forcing them to accept pitifully low interest rates on their savings, and chewing them up alive (like the meerkats in Life of Pi). Some go so far as to suggest that low rates are forcing seniors back to work, and so stealing employment from the young. We must, for the sake of everyone, they argue, allow interest rates to rise.
    In a recent article in the New York Times (“A Debate in the Open on the Fed,” April 2), it was made clear that even officials within the Federal Reserve don’t agree over how to handle this stormy question of what to do about interest rates.

    Martin Feldstein argued in an April 1 guest column in this publication that regardless of government policies, regardless of what we want to happen, economic forces will eventually force interest rates up. Others, like bond guru Jeffrey Gundlach, have argued that nothing is inevitable—and that interest rates may stay low for a very, very long time.

    This uncertainly has created yet more battles about what to do in the interim, while we’re waiting for interest rates to bolt—or not.

    Some investment advisors say that we can’t sit by and watch inflation consume our savings. We should sift through the world of fixed income offerings, seeking yield in strange and usual places, like floating-rate bonds. Burton Malkiel suggests a good look at emerging-market bonds. Some say we should lower our fixed-income allocations along with our expectations, and beef up our allocations to dividend-paying stocks, and REITS.

    Other notables of the investing world, such as William Bernstein, argue that we should play it safe. He recommends high-quality, short-duration bonds, even if it means losing out to inflation, so that we can stay on top of the water once the waves of higher interest rates start to smack us hard.

    In the Wall Street Journal last week (“Pay Off That Mortgage Now!” April 6), columnist Brett Arends argued that it may not make sense to hold bonds at all. We should trash the bonds and pay off our mortgages, he says. Others have argued strenuously that this is the best time ever to lock in on low-hanging mortgage rates.

    All told, the controversy over what we should do about interest rates, as both a matter of both public policy and as investors, is one of the hottest controversies of the era... and not one to be solved anytime soon. As for as public policy goes, I’m in the let’s-stall-as-much-and-as-long as possible group. As an advisor, I’m trying to delicately balance the advice of both Malkiel and Bernstein by squeezing out a bit of extra yield—just a bit—without taking undue risk. On the debt front, I’m all for taking on long-term mortgages and not liquidating our bonds. It’ll pay in the long-run. Maybe.

    Of course, my story is one of many. As protagonist Pi said at the end of the movie about the wild beasts, many alternative stories can be told about storms and lifeboats and survival. You get to choose the one you prefer.
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  7. As often as my Dad, Lawrence R. Wild, would say, “Rich or poor, it’s good to have money,” Raymond J. Lucia Sr., host of a nationally syndicated radio show, author of several books on investing, and popular seminar leader, would refer to “buckets of money.” Well, he hasn’t been chattering about those buckets so much lately. The SEC has filed charges against Mr. Lucia, claiming that the performance numbers he was giving the public for his investment strategies were “misleading.” At the crux of the SEC’s case are Mr. Lucia’s supposed returns that relied on back-tested data and hypothetical performance.

    Goodness, there should be more of these cases.

    Please, please do not jump to invest in any funds, or trust any investment guru, whose performance figures rely on back-testing. Back-testing means that the touted investment strategy hasn’t ACTUALLY earned, say, 12 percent a year for the past 10 years. Back-testing says that IF you had invested in X, Y, and Z…at a certain time and a certain price…and if you had sold X, Y, and Z at a certain time and a certain price, THEN you WOULD have made extraordinary returns… The problem with back-testing is that it often ignores real-world trading costs and fees, not to mention the possibility that you might not have been able to jump into and out of X, Y, and Z at precisely the right moments…  The difference between reality and back-testing can be, and often is, HUGE.

    I bring this up because many of the newer ETFs, especially commodity ETFs (and ETNs), are based on back-testing. Beware. The SEC has not cracked down – in fact, the agency may not take action, because the ETF providers are usually up-front about the nature of their performance figures. But you should always consider back-testing and actual, real-time performance to be as different as, well, rich and poor.
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  8. A few weeks ago, Charles Schwab announced, with full-page advertisements in many newspapers, that it was lowering the management fees on its ETFs. In some cases, Schwab’s ETFs are now cheaper than those offered by Vanguard, the industry’s historical price leader. For example, the broad-based Schwab Multi-Cap Core ETF (ticker SCHB) now charges an annual management fee of .04 percent (4 hundredths of 1 percent), as compared to Vanguard’s VTI, which charges .06 percent. On an investment of $50,000, this would mean an extra $10 in your pocket over the course of a year…maybe. While I applaud Schwab for this move, and I do LOVE low costs, the difference in management costs is not enough for me to recommend wholesale swaps of Vanguard’s ETFs for Schwab’s. There are other costs of investing in ETFs (or anything else, for that matter), such as the spread between “bid” and “ask” prices. Given the greater volume – at least for the time being – of Vanguard ETFs over Schwab ETFs, Vanguard gets the nod here. Commissions and, in some cases the tax consequences of a swap, offer more reasons to sit tight. And, of course, all ETFs differ in their construction. Low management fees are great, but they aren’t the only consideration when choosing an ETF.
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  9. Hello. It’s been almost a month since my father, Lawrence Wild, passed away.

    I have a few words to share today on the topic of finance, but before I get there, I want to share Lawrence Wild’s favorite saying on the subject…

    Rich or poor, it’s good to have money.

    How true, Dad.


    The State of the Markets

    The stock market has been kind to us lately. Year to date, U.S. stocks are up by about 15 percent, and foreign stocks, about 9.5 percent. Volatility levels have been uncharacteristically high, which is due in part to the uncertainties surrounding the upcoming elections. But the volatility also reflects one aspect of the so-called new normal…computer-generated, high-frequency trading, which is now estimated to account for more than half of the daily trades on the U.S. stock market.

    Should long-term, buy-and-hold investors – especially those who invest mostly in indexed ETFs – be concerned about these swings in the market? Well, we do have less reason to be concerned than most others. Presumably, the prices of stocks, and the ETFs that invest in stocks – in the long-haul – will continue to mirror corporate earnings, as they always have. The daily manipulations of the market shouldn’t affect this equation all that much. But at the same time, volatility eats into returns, and that is not a good thing. (If you don’t believe me, just take $100, subtract 50 percent, and then add 50 percent, and see what you’re left with…)

    Although not a topic of much discussion in the current elections – or in the media in general for that matter – I would like to see our leaders work to discourage rapid-fire trading, and encourage long-term investing. It wouldn't be all that hard. I would recommend a steep capital gains tax for ultra-short-term holdings; a lower capital gains tax for long-term holdings; a significantly lower tax yet for very long-term holdings. As John Bogle has said, the market shouldn't be run by stock "renters," but owners.
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  10. Years ago, I dreamed of investing my money – and yours – in socially responsible fashion. I still do. But the realities of the investment marketplace make socially-responsible investing (SRI) difficult, at best.
    One problem is that most SRI funds invest in stocks. And most stock transactions occur on the secondary market. After the initial public offering of stock by a company, people generally don’t buy stock directly from the firm but rather from a third party through an impersonal exchange. In other words, you aren’t really withholding capital from a do-bad company when you buy a fund that avoids do-bad stocks.
    If you wish to extend capital to do-good companies, you run into the same problem. 
    If you want to invest in a company that has the potential to do good or bad, and you wish to use your shareholder votes to influence company management, it makes most sense to invest in the company directly – which, of course, is also problematic if you believe, as I do, that the need for deep diversification makes owning individual stocks generally a poor investment option. If you want to buy a mutual fund that invests in companies that can potentially do good for society, that makes more sense…PROVIDED, of course, the management of the mutual fund is going to go to bat for your interests, both financial and moral. It’s hard enough to find a fund manager who can simply keep up with the performance of the indexes, never mind go to bat for your particular brand of social responsibility.   
    For all of these reasons, it may make more sense, in my mind, to invest your stocks in low-cost, tax-efficient index funds, and to practice SRI more on the bond side of the portfolio. Alas, we encounter there another problem: SRI bond funds generally charge considerably more than other bond funds…and many of the bond holdings are similar, if not the same. In today’s low-low-low-interest rate environment, the difference between paying 0.20 percent and 1.20 percent to a bond-fund manager is likely to make the difference between staying ahead of inflation or falling behind. You do have options, however. Thanks in large part to the prompting of one of my clients, I looked again into the world of fixed-income SRI, and discovered Calvert Community Notes. See the next paragraph for the description I provide in Bond Investing for Dummies, fresh off the press! Please note that I do not invest in Calvert Community Investment Notes myself, as I happen to live in one of four states where the Notes have not yet been approved for sale. If, upon reading the blurb below, and reading the prospectus, you do wish to invest, these notes might reasonably be substituted for short- to intermediate-term corporate bonds that currently might be represented in your portfolio by a fund such as the Vanguard Short-Term Corporate Bond ETF (VCSH) or the Vanguard Short-Term Investment Grade Bond Fund (VFSUX).
    Calvert Foundation Community Investment Notes are sort of like any other individual bonds in the sense that they have a maturity date, pay a steady rate of interest, and can be purchased through many brokers. But the similarity ends there. You select the term -- between 1 and 10 years -- and you select the rate of interest (up to a modest limit). The money you lend goes to fund affordable housing, make small business loans to people who otherwise couldn’t get them, and build community facilities that provide healthcare and education to the underserved. The Calvert Foundation began the project 15 years ago; no investor has yet to lose a dime; and the loans have undoubtedly helped to alleviate poverty worldwide. The notes are available to U.S. residents of all states, with the exceptions of Arkansas, Pennsylvania, South Carolina, and Washington (subject to change). The sliding rate scale (the less you earn, the more altruistic your investment), purchase instructions, and more information on the various anti-poverty projects funded by the foundation can be found at www.calvertfoundation.org, or by ringing 1-800-248-0337.
    Please note that Calvert Notes are not entirely liquid. Use them as a substitute for short- to-intermediate-term -bonds only in those cases where the bonds are part of your long-term portfolio. In some cases, I’ve recommended the use of these funds as “near-cash” positions – generally for expenditures that you might expect to incur in six months to two years. See my advice about “near-cash” in the recent New York Times article… http://www.nytimes.com/2012/07/14/your-money/brokerage-and-bank-accounts/interest-starved-savers-have-some-options.html?_r=1&smid=fb-share

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