Let me get this straight

[ep82]

What is the name of your state?Ca

If I begin to invest online, and i soon start to buy shares. If the company's stock points go down does this means that i can go into a big debt if i dont pull out soon.

 

[I AM ALWAYS LIABLE]

What is the name of your state?Ca

If I begin to invest online, and i soon start to buy shares. If the company's stock points go down does this means that i can go into a big debt if i dont pull out soon.

My response:

Stocks are exactly like a beautiful woman. By "investing" your time with the woman, you can reap all of the benefits; e.g., a steady date, someone to "show off", a companion for romantic evening walks along a beach, etc.

However, just like stocks, when the relationship begins to sour, and you don't "pull out" in time, the debt of "paternity" hits you smack in the face.

IAAL

 

[Brian Belamy]

Of course that is the risk of investing in a vehicle with potentially higher profit potential.

Just park your money in general index funds (which have low fees) and let it ride for 30 years.

 

[tcpoliti]

Debt? Or just suffer the loss?

My response:

Stocks are exactly like a beautiful woman. By "investing" your time with the woman, you can reap all of the benefits; e.g., a steady date, someone to "show off", a companion for romantic evening walks along a beach, etc.

However, just like stocks, when the relationship begins to sour, and you don't "pull out" in time, the debt of "paternity" hits you smack in the face.

IAAL

So if the stocks you own suddenly lose value (the stock price falls significantly), you actually go into debt? I can see that you will lose money on the stock purchase if you sell them at the lower price, but how do you actually go into debt from this position?

 

[ShyCat]

So if the stocks you own suddenly lose value (the stock price falls significantly), you actually go into debt? I can see that you will lose money on the stock purchase if you sell them at the lower price, but how do you actually go into debt from this position?

The OP must be using a margin account to buy his stock, instead of a cash account. If you buy stock on margin, you're borrowing the purchase price from the brokerage and paying interest. Margin investors are using leverage to buy more stock than they can afford, betting that their stock picks will gain much more than the interest paid on the margin loan. A "margin call" occurs if the stock price falls below a certain point, at which time the brokerage will demand that the "investor" immediately sends in more cash to reduce the margin. Otherwise, the brokerage automatically sells the stock and applies the proceeds to the margin, leaving the "investor" in debt for the difference.

 

[longneck]

tcpoliti: If you don't know how investing works, you shouldn't be doing your own investing. Go find yourself a broker.

 

[hdwillis]

Be informed about brokers

tcpoliti: If you don't know how investing works, you shouldn't be doing your own investing. Go find yourself a broker.

Of course that is the risk of investing in a vehicle with potentially higher profit potential.

Just park your money in general index funds (which have low fees) and let it ride for 30 years.

RESPONSE:

Actually, you'll want some key info about brokers: they are not Registered Investment Advisor Representatives (RIAr). A RIAr (the company is considered a RIA the actual person is the RIAr) is required by law to keep the best interests of the client in mind in ALL transactions. Brokers have no such law. Conversely, in order to stay in business, they often must keep the best interest of the brokerage house in mind. So, if the brokerage house has a glut of ABC stock, guess what the broker is going to recommend? Exactly.

A RIAr should be able to beat any index fund over a period of time, even with the additional fees. One person said that you should invest in an index fund (because of low fees) and let it ride for 30 years. Any competent RIAr should be able to get a better overall return with a lower risk factor (known as the beta).

Index funds have two fundamental problems: they only work in a rising market and they work in backwards order of what a good investor should do.

A rising market is one that climbs up over time, as we've seen for the last 20+ years. However, many economists agree that we are going to enter a prolonged down market within the next 5-7 years, as the boomers start to retire. An index fund is prohibited from going where the market growth is (which, many believe, is the Asian-Pacific rim, western and southern Asia, and parts of South America).

The way an index fund works is like this: once a company achieves enough status, it becomes part of the index. Generally, this means that the company is at the top of its game and the stock price is higher than it was years before -- so you are buying high. A company may remain in the index for years. However, once its performance slips (which is usually followed by a decline in the stock price), the company is replaced on the index -- meaning you are selling low.

Buy hi and sell low? No, you want to buy low and sell high. A RIAr can help you do this.

************************************************
The expressions above are merely opinion and should not be taken as fact. As with any investment, take the time to consider the benefits and the downfalls and apply them to your situation. The above statement should not be considered as investment advice.

 

[anteater]

RESPONSE:

A RIAr should be able to beat any index fund over a period of time, even with the additional fees. One person said that you should invest in an index fund (because of low fees) and let it ride for 30 years. Any competent RIAr should be able to get a better overall return with a lower risk factor (known as the beta).

Care to make a pathetic attempt to provide any evidence for this statement?

 

[hdwillis]

Pathetic? No. Informative? Yes.

Care to make a pathetic attempt to provide any evidence for this statement?

Wow! Sounds like an unscrupulous financial advisor has burned someone.

Ok, here is the evidence that my statement is true:

I chose mutual funds from a medium sized company: Waddell and Reed. W&R was chosen for several reasons: (1). They have been around since the 1930s and actually had one of the first mutual funds in the nation. (2). They have some funds that are large and some funds that are small -- different sizes have advantages and disadvantaging. (3). Their fees are in line with the rest of the industry.

Ok, here is the hard evidence you wanted. When applying asset allocation theory, as almost all TRUE financial advisors (RIAr) do today, I took four of their funds with a 15-year+ history. I allocated the portfolio in this way: Growth and Income at 10% (W&R Core), High Yield at 20% (W&R High Income), Growth at 30% (W&R New Concepts), and Aggressive Growth at 40% (W&R Science and Tech).

Again, a good RIAr will do an annual rebalance to keep the proportions where they are and to capture the gains and to purchase under performing sectors. The numbers came out like this: Average Annual return of the portfolio: 13.67%. Average Standard Deviation (another common measurement of risk -- I'm still searching for the Beta numbers. After you read this and you still want them, I'll figure out the beta for you): 17.17.

Now, here are the results for the S&P 500 composite over the same period: Average Annual return: 8.56%. Average Standard Deviation: 14.94.

While the SD for the S&P is lower, its proportion to growth is significantly higher. Meaning, that for every 1% of growth, a 1.75 SD goes along with it. The professionally managed portfolio has a SD of 1.26 for every 1% of growth. So, the SD in the S&P was 39% higher when compared to actual growth.

One footnote: I was only able to obtain the last 15 years standard deviation data for the S&P. So there is a chance that the S&P REALLY kicked up its performance, but that is doubtful.

As for the fees, Vanguard has an expense ratio of .18% on its 500-index fund. Even if W&Rs fees are 1% higher, your overall returns are still significantly better.

Sorry for not giving you a pathetic response. This should show you how a true financial advisor, and not a broker or an index fund, will be able to out perform the market index.

 

[hdwillis]

Beta

Ok, I found some info on the 15 year beta for W&R funds. It took some calculations, but I've got a number for you.

Since the S&P is the standard, its beta is 1.0.

The 15-year beta for the the Waddell & Reed portfolio used in the example: 1.003.

Essentially, the same beta, better average annual return, and lower standard deviation per growth percentage.

How's that for a pathetic answer?

 

[anteater]

Oh wowie zowie! I am awestruck.

Here, let me take a look in my rear view mirror, put together a mish-mash of funds that have nothing to do with the S&P 500, compare it to the S&P 500 (without including S&P 500 dividends), throw in some babble that a software program spat out, and treat the whole thing as proof.

This is a cheap shot, but I find it ironic that you have the phrase "unscrupulous financial advisor" in one paragraph and in the next paragraph use W&R as an example. Let's see, who just settled with the NASD for $32M for churning annuities?.

Yep, some unscrupulous financial advisor may have burned someone. But it ain't me.

 

[hdwillis]

Here, let me take a look in my rear view mirror, put together a mish-mash of funds that have nothing to do with the S&P 500, compare it to the S&P 500 (without including S&P 500 dividends), throw in some babble that a software program spat out, and treat the whole thing as proof.

I'm sorry, maybe I misunderstood your statement. I thought I was to prove how a financial advisor would beat an index fund -- did I misunderstand? If so, let me know. I was merely using the S&P as a baseline for comparison since most folks who invest in an index fund invest in one based upon the S&P.

And yes, I did get some of the numbers from a software program but other I used by calculating them on my own.

You were correct about W&R though. It is a shame that they did what they did. But did you read about the case that the NASD put together? They did not look at the added features that the new annuities gave to the client -- features that cost more. They only looked at the costs associated with the new annuity.

(One such feature that Nationwide has is what is called a "One-Year Step-Up". In simple terms, it says that before you annuitize the contract, your death benefit is guaranteed not to go down, it can only grow. This means that if the market does really one year and your $100,000 grows to $110,000, you will NEVER have less than that amount paid out as a death benefit. Even if the market goes to the pooper and your cash value is at $80,000, your death benefit stays at $110,000. I know a lot of folks who would love to have a feature like that!)

That said, it is reasonable to think that some of these transactions were done for pure commissions sake. However, I believe that most folks are honest enough to do what is right for the client. And if that means putting them into a different annuity with higher costs and higher benefits, then so be it.

Again, let me know if I did not understand your question the first time around.

 

[anteater]

No. Your original statement was, "Any competent RIAr should be able to get a better overall return with a lower risk factor (known as the beta)." Which has turned into, "I thought I was to prove how a financial advisor would beat an index fund."

And, for proof, we:

1) Adjust the rearview mirror,
2) Put together a group of funds whose asset allocation is different than the S&P 500,
3) Compare it to the S&P 500 anyway, and
4) When called on it, say that most people think of the S&P 500 when index funds are mentioned.

Real rigorous. Tired trick. I can sit here and do it all day long if I am allowed to use my rearview mirror.

Bye bye.

 

[hdwillis]

No. Your original statement was, "Any competent RIAr should be able to get a better overall return with a lower risk factor (known as the beta)." Which has turned into, "I thought I was to prove how a financial advisor would beat an index fund."

And, for proof, we:

1) Adjust the rearview mirror,
2) Put together a group of funds whose asset allocation is different than the S&P 500,
3) Compare it to the S&P 500 anyway, and
4) When called on it, say that most people think of the S&P 500 when index funds are mentioned.

Real rigorous. Tired trick. I can sit here and do it all day long if I am allowed to use my rearview mirror.

Bye bye.

Wait, let me get this straight ... you thought I meant that a RIAr would be able to invest individually into the same individual stocks of an index fund, do it for a lower cost, and get a better return all at the same time? If that is what you meant, then you need to read the rest of the original post when I shared two fundamental problems with index funds. As for the comparison, anyone with a little more knowledge of investing than the basics would know exactly what I was talking about. However, it seems like you need an elementary course in investing 101, so here we go:

1) Adjust the rearview mirror

What exactly does this mean? Looking back at historic performance? You have to, unless you and your Quigi board know the future of the market. If so, I know folks who would want to hire you.

2) Put together a group of funds whose asset allocation is different than the S&P 500,

The statement was "Any competent RIAr should be able to get a better overall return with a lower risk factor (known as the beta)." The obvious point to this statement: Properly managed money will beat an index fund any day of the week. Why? Well, read the rest of the original post -- index funds operate backwards to the way an investor should use their money. Index funds buy high and sell low and still make money. Buy low and sell high -- make a lot more money.

3) Compare it to the S&P 500 anyway, and
4) When called on it, say that most people think of the S&P 500 when index funds are mentioned.

Is there a different index fund to which you were referring? A small cap index fund perhaps? Maybe an indexed-bond fund? Is there a different gauge of the overall market to which you can compare an investment portfolio?

Seriously, Anteater, it seems like you are either: (1). A pissed off investor or (2). Some college sophomore who is in the final weeks of his first finance class out to prove to the world he knows just ohh so much. My money is on the latter.

Look, the whole point of this -- which you missed -- is how managed money can beat an index fund any day of the week. I used tangible means to prove this beyond a shadow of a doubt. If you like, I can go into the non-tangible means as well. However, my guess is that would be over your head.

I consider this discussion over with unless you find something intelligent to say (again, I'm not banking on that).

 

[anteater]

Look, the whole point of this -- which you missed -- is how managed money can beat an index fund any day of the week. I used tangible means to prove this beyond a shadow of a doubt. If you like, I can go into the non-tangible means as well. However, my guess is that would be over your head.

I consider this discussion over with unless you find something intelligent to say (again, I'm not banking on that).

ROTFLMAO. I was about to say almost the same thing. Another advisor/planner/broker with constipation of the brain and diarrhea of the mouth giving the same tired, nonsensical sales pitch to justify their existence.

Bye-bye.