Trovena Weblog

Defining Risk

What do you consider risky?  Are stocks risky?  Sure, but remember that over any rolling five year period stocks rarely lose money, and almost always outperform bonds.  So, it brings up other questions, such as time horizon, tolerance for short term volatility, etc.  What about bonds, are they risky?  Most would say no.  Hold to maturity and you get your principal back.  Is real estate risky?  Until about a year ago many thought the answer was no.  They heard from their realtor that there has never been a year-to-year national decline in housing prices.  Oops, until last year.  Certainly cash isn't risky, right?  I mean, cash is king.  Can't lose any of it if it's stashed under the mattress.  Except for in a fire or theft.

Well, risk is a funny thing.  It comes in all shapes, colors and sizes.  Most people think of risk in one way, "what are the chances that I can lose money?"  No doubt, that's a real risk.  On a short term basis, the most real risk.  However, economists and investment people over the years have made a game of seeing who can come up with more types and definitions for risk.  They use words like, "idiosyncratic risk," to sound smart. 

So, let's break down what we mean by risk.  Essentially, there are two major categories of investment risk, and seven major types that fall under those two categories.  The first major risk category is what I just referred to, unsystematic risk, also known to us investment nerdy types as the aforementioned idiosyncratic risk.

American Savings Rate Remains Inadequate

I feel like we have heard this before.  2005 and 2006 marked the first time since the Great Depression that our country recorded a negative savings rate in back to back years.  So, how did we do in 2007?  Actually, I have no idea.  It's kind of strange.  By early February, 2007, there were numerous articles to report our back to back negative savings rate.  Now, late February, 2008, I can't find any articles about how we did last year.  So, either the data is delayed compared to the last couple of years, or it was positive, and the journalists don't find that newsworthy.

In a glimpse of what the hard numbers may reveal, a recently released report, co-sponsored by America Saves and the American Savings Education Council, indicates that barely over a quarter of non-retired Americans save at least 10% of their income.  Citing advice made popular by books, the Wealthy Barber, the Automatic Millionaire, and the Richest Man in Babylon, the report notes that experts urge individuals to save at least 10% of their income.  That sort of begs the question, is 10% enough?  I'll address that in a later post.

More on the contents of the study.

Reader Question: Free Credit Report

A recent question from a reader/client:  "How do I get my free annual credit report?"

It sounds like a simple question.  However with all of the commercial sites, and even scam sites out there trying to capture your personal information, it is critical that you go to the right web site or phone number to get your free credit report.

Do you sponsor or participate in fund raising marathons, triathlons, 5 day bike rides, etc?

I did.  It was about nine years ago.  I was sitting in the waiting area of Supercuts, waiting for my buzz and trim, when I saw a flier for the AIDS marathon training program.  I always thought it would be a great personal accomplishment to say that I ran a marathon.  Besides, I would be raising money for a great cause, AIDS research, education and support programs.  Not to mention that I was a few years out of college, and my Freshman Fifteen had turned into the Through with College Thirty (actually forty, but I was going for the alliteration).

But just last week we were talking about American's perception of the proportion of donations that go not to the end charitable cause, but to overhead and fund-raising expenses.  So, looking back on my experience, this is my attempt to recreate the expenses that were involved and how much actually may have gone to the charitable causes.

How much should a charity spend on overhead?

How much is too much?  We would all like to believe that every penny that we give to charity goes directly toward the end cause.  A nail for Habitat for Humanity, a band-aid for the Red Cross, and a pencil for the Boys & Girls Club.  But we all know that life is not so simple.  Even charities need to buy computers, turn the lights on, and pay staff.  Yes, staff.  And that includes (gasp!) fundraising staff!  You mean charities raise money to pay people to raise money?

But how much is too much?  A recent study by Ellison Research revealed that most Americans believe most non-profits spend too much on overhead.

How does the recent decline in the market impact retirees or near retirees?

The following question was recently posed by a reporter:

What kind of advice are advisors offering clients who are either retired (especially those who have recently retired) or who are preparing to retire shortly, who may have just experienced a big drop in the value of their financial portfolios, as well as possibly a drop in their home values. Beyond telling people to pare spending or continue to work, is there any good advice you can offer to people in this situation?

It's a valid question, and one of great importance to many. This topic is something that I have been addressing in a course I teach at UCLA and in presentations around the country.  If I may, let me take a moment to frame the issue.

Dow Jones to change components of popular industrial average, or "the problem with index funds"

Dow Jones announced this week that they are going to drop Altria (the cigarette maker formerly known as Phillip Morris) and Honeywell from their index and replace them with Bank of America and Chevron.  Although few Dow Jones Industrial Average Index funds exist (at least compared to S&P 500), it still brought up an interesting discussion of the impact of index reconstitution on index funds.

Index funds are perhaps the most important and beneficial invention for individual investors ever created.  It has leveled the playing field for investors, allowing them to sidestep the inherent problems in active management.  It wasn't much more than forty years ago that if you wanted to invest in a passively managed, broadly diversified basket of stocks to emulate a popular index, you had to go out and buy a bunch of shares of each of the stocks in that index.  There was no such thing as an index fund, and certainly no exchange traded funds (ETFs).

But index funds aren't perfect.

Eric Toya Quoted in the Investment News

A recent discussion with a reporter from the Investment News resulted in a quote of Eric in the Investment News publication.  The article discusses Vanguard Funds status as the top selling mutual fund family in 2007.  Click here to read the article.  Eric's quote is about 2/3 of the way down.

Pre-Approved Credit Card Opt Out and Do Not Call List

In this age of e-mail and online banking, a surprising concern for many of our clients has been the increase of "pre-approved" or "pre-screened" credit card offers in their mail, and telemarketers at all hours.  The concern is on several levels. 

First, of course, is the nuissance of the phone calls and the hassle of shredding unsolicited credit card offers.  Additionally, the junk mail is an environmental concern.  We, as a firm, try to do our part by being "green" in a number of different ways.  Reducing unncessary mail is one of those ways.  Despite the perceived move of corporate America to "go green", most of us have seen our junk mail triple in recent years.  Last, and of greatest concern, is the potential for identity theft resulting from your personal information floating around in all this junk mail.

Recently, a client asked me to research for her how she can opt out of pre-approved credit card offers and register for the national "Do Not Call" registry.  Here are the instructions that I found.

Book Review: Beyond the Grave

Synopsis

Gerald Condon, Esq., is an estate planning attorney with a couple of generations of experience.  The book is co-authored by his son, Jeffrey.  In his years, Gerald has seen the simplest of estate plans succeed, the most complicated plans fail, and everything in between.  This is not a legal text meant for lawyers, financial planners, and accountants.  Beyond the Grave was written in plain English for readers of all levels of knowledge and experience, including none.  Each chapter includes several mini case studies in the form of a "client" question, and Condon's analysis of the situation and possible resolutions.