Investing for retirement
The Anti Free Lunch
Bob Black
Life401.com
Three parts
1. Bad and Ugly
2. Tools
3. Portfolio
Sad but true
The Bad and The Ugly
Broker Conflict
Annuities
Churning
Pushing under writings
Pump and dump
Not fiduciaries
Inflation
Free lunch
Manipulation
Black Pools
Ponzi
Mutual fund Analysis by Forbes
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Non-Taxable Account
Taxable Account
Expense Ratio
.90%
Expense Ratio
.90%
Transaction Costs 1.44%
Transaction Costs 1.44%
Cash Drag
.83%
Cash Drag
.83%
Tax Cost
1.00%
Total Costs
3.17%
Total Costs 4.17%
The Bad and the Ugly 2
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Mutual fund success 30%
How clients drive bad outcomes
How funds come and go
Mutual fund survivorship ( Review of Finance )
20% Lower when dropped funds are included
Mutual fund broker commission
2.3 % – 5.75%
Style (The herd)
Stock picking letters ( Like a tout at the track )
Reversion to the mean
• Horace Secrist 1933
• Harold Hotelling
Real interest rates
Interest and inflation
(1970 to 1980 105.8%)
Inflation in Weimar Republic
Fixed Income Securities
Banks - Checking, CDs, Safety Box
TIPS – Insurance not a good investment
Everbank Foreign Currency CD everbank.com
Foreign Bonds
Bond Funds
Tax Free Municipal Bonds or Funds
Bond Fundamentals
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Maturity date
Yield to maturity
Discount / Premium
Callable
Taxable
Revenue source
http://screener.finance.yahoo.com/bonds.html
REITs
It represents ownership of property
Depreciation Tax advantage
Use all of the stock tools to pick
Look at their properties
Royalty Trusts
99% Oil and Gas
SDT,CRT,SBR,SJT,BPT,CHKR,PER,ROYT
Not actively managed
Earnings distributed
Depletion tax advantage
Will run out
Think of it as an energy cost insurance
policy
LPs
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Nearly all oil related
Use deprecation to show little income
Pay a good dividend
Basis is reduced by: dividend-income
Usually mid stream pipeline
Tax deferred
Must be inherited to avoid big tax hit
Gold
• Does not keep up with inflation
• Costs to own
• Not productive
• Is insurance against rapid inflation
Why buy stocks?
Indirect ways to own stocks
• Mutual funds
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Good
Bad
Managed
Lower outcomes, tax
• Closed end funds (Also works for bonds)
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Good
Managed
Buy at a discount
Not driven by their owners
Tax Efficient
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Bad
Sell at a discount
Indirect ways to own stocks 2
• ETFs
Good
Tax Efficient
Low cost
Do as well as the market
Bad
Not managed
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Good
Tax Efficient
Low cost
May do better than the market
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Bad
Added risk of the model
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• Smart Beta ETFs
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AAII Recommended ETF
Portfolio
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As of June 30, 2014
Weight
YTD
2013
Expense
Guggenheim S&P equal weight 500 RSP
Guggenheim MidCap 400 Pure value RFV
Guggenheim SmallCap 600 Pure Value RZV
iShares MSCI Frontier 100 FM
Vanguard REIT index VNQ
Performance
40%
20%
20%
10%
10%
100%
8.4
6.5
2.9
9.9
17.7
7.7
35.6
38.3
45.1
25.6
2.4
33.7
.40
.35
.35
.79
.10
For Comparison S&P 500 SPY
100%
7.1
32.2
.09
Diverse portfolio
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53%
8
3%
20%
12%
3%
1%
Broad US stock market:
REITs
Royalty Trusts
International
Fixed income
limited Partnerships
Gold and Silver
Retirement Assent Allocation
No debt: House, car etc.
Emergency Fund – Three months
20-40% Fixed when rates are market rates
50-70% Equities
5-15% Specialties
REITs, Closed end Funds, Royalty Trusts
0-2% Gambles
Do not have blinders
Risk
Civilization Collapses -Guns, ammunition and
food
Inflation – Commodities, foreign stocks and
bonds, manufacture of things that will
appreciate and short term securities
Deflation - Longer term bonds, money and not
Commodities
Expropriation – Investments outside of the US
Formerly only a risk in third world countries
Rules
Understand it or don’t do it
Know the source of the money
Be bold when others are fearful and be
fearful when others are bold
Never give a Broker control
Use only FINRA Brokers and SEC
Advisors
Do not buy Annuities