First things first, I've often said that all-anything portfolios don't make sense to me. It is not logical that the best way to capture every part of the market that an investor would want to own could all be in the same wrapper. It seems only logical that someone with the time and inclination would own various wrappers after studying the alternatives for each desired exposure.
There are logistical considerations like it not being economically efficient for a $28,000 account to have seven ETFs and 20 individual stocks but where there are not logistical constraints going all-anything is artificial.
There was one wildly self-serving comment in there that made me literally laugh out loud;
...have convinced me more than ever that investing is not a do-it-yourself, at-home proposition.
The context was levered ETPs but as the advisor does not use levered ETPs it just struck me a very funny comment. Like all investment products, levered ETPs have pluses and minuses that people should weigh out for themselves and then either use or avoid. One point that was implied was the levered funds do progressively worse over time but that is not accurate. Some have done progressively worse over time and going forward this will be the case with some of them but the key determinant of how these particular types of funds will over periods exceeding one day is the combination of up and down says that come. This might be reason enough to avoid the funds which would be perfectly valid it but it makes sense to have accurate information about the product.
There was one interesting nugget that seemed to be behavioral in nature which is that clients of one of the advisors tend to be more critical during declines of actively managed funds than ETFs because active managers should know better about certain types of blow ups. But with ETFs, the index is what it is and his clients apparently understand the difference. This was interesting.
As mentioned, two of the portfolios seemed odd to me. One of the portfolios owns SPDR S&P 500 (SPY), Dow Diamonds (DIA), SPDR S&P Dividend (SDY) and iShares S&P 500 Value ETF (IVE) totaling 27.8% of the over all portfolio and 55% of the equity portion. All four are variations on the same thing, that being US mega caps, and the correlation between all four has been very tight. One note is that IVE may not be the correct fund, Barron's just has it listed as iShares S&P Value so it could be Small Cap Value not large cap value. Still I cannot imagine there is any need to own both SPY and DIA.
The other odd portfolio had 16 different broad based ETFs comprising 50% of the portfolio for what the manager thinks of as equity exposure (more on that in a moment). The reason to mention this is that there were two different domestic large cap growth ETFs, two different domestic mid cap growth ETFs, two different domestic mid cap value ETFs, two different domestic small cap growth ETFs, two different domestic small cap value ETFs and both EEM and VWO. In all of the listed asset classes above there is an even split between the iShares version of the fund and the Vanguard version of the fund.
Obviously the weightings are tiny. In several instances the allocation to the funds are less than 2%. This is baffling.
This same portfolio also allocates 2.5% to "equity based commodities" spread across five ETFs. The largest weightings in this little slice is 0.60% to IGE and 0.60% to VDE with 0.30% going to SLX.
The platform might be one where there is no commission for trading but even so, this seems beyond odd to me.
14 comments:
Roger how were individual segregated accounts at MF global accessed for propritary trading. Does this mean all of our brokerage accounts can be at risk for this type of action? Is nothing safe anymore. what actions can we take to prevent this from happening to us at Schawb, TDAmeritade etc.
Thanks foe this extremely important advice.
Funny, I just had a telephone conversation about this yesterday.
The easy answer is that Schwab, TD, Fido, Vanguard, Scott Trade etc don't engage in proprietary trading--I don't think they even commit capital to facilitate trade execution.
Schwab already had a very nasty and very expensive problem earlier on in the financial crisis where some of its mutual funds (maybe it was just one fund) were positioned too aggressively versus the mandate, the funds got crushed and Schwab paid out what I think was $100 million to make it right. Do you even remember that one? And the company and its clients are fine.
The discount houses will not be another Madoff or another MF Global. Those two were their own thing, were there ever to be a problem with a discount house it would be something completely different. While anything is possible these things are not probable and I have zero realistic worry about this issue.
Further, the insurance that firms carry is enormous and would not fail unless all the firms fail simultaneously.
Those are some strange looking allocations the Barron's guys are running that's for sure: Duplicated effects, blurred targets and no hedges worthy of the name; wonder what the efficient horizon of their portfolios look like. Regardless I hope they're not charging clients very much for putting that together.
The Schwab blowup was just one fund, The "YieldPlus Fund." Touted as a better-then-money market it outperformed for number of years by taking on more maturity risk until the music stopped during the '07 credit panic and it was left without a chair. I read prospectuses and knew what the fund was but used it for awhile. I liquidated most of it to raise cash in '07, most of which went into shorting mortgage REITs and builders, but there was a bit left which made me part of the settlement so that's how I know. The fund is still around I think, doubtless with a less equivocal disclosure statement; e.g., high risk, low return [lol]
What we re-learned in '07/08 was the same lesson as other big crashes -- there is no such thing as insurance during a panic -- but the additional lesson when a credit and solvency crisis is added to the mix is that there is not likely to be insurance afterward either.
RW,
You're so smart. Thanks for sharing your brilliance...again.
Thanks Roger and RW for your answers. So if Schwab or TD sells my shares short in my account for another account and that other account has problems is my account going to be OK? Are discount brokerages really safe as we assume? Can we do any other things to make them safer? I feel the average self doer is not told the truth. Thanks again.
BTW I have already told Schwab that my shares cannot be lent, but who knows what is happening since I do not have shares in my hand, just a book entry.
As far as a brokerage lending your shares out, have you read your hypothecation agreement? do you own shares in a margin account with a margin debt?
I do not know what a hypothecation agreement is. My account is a margin account, this is the standard account, that both TD and Schwab want you to have- maybe they do better with these accounts. I do not have any margin debt and never have.
This article sounds hilarious. 5 commodity funds, each at half a percent?
The local Borders is gone and the Barnes and Noble is always out of Barrons. I'll poke around and see if I can find a copy of the article online.
Anon 6:40, The Schwab agreement is pretty standard and, in the case of a margin account, gives them wide authority to use your assets for collateral or to loan to other accounts (for shorting or what have you); that is, they may pledge (w/ transfer), hypothecate (pledge w/o transfer) or borrow (loan consent) any security or other property in your account.
The absence of a margin agreement restricts that authority almost completely (there are exceptions if you owe Schwab money or assets).
If you are not using margin and do not intend to then it's a simple matter to contact Schwab and tell them to remove that feature from your account.
Anon 8:11, snark duly noted but if you'd gotten as badly beat up as I did shorting RE in the early days ('06) -- those fraudulent punks at IndyMac damn near had my lunch along w/ my margin -- with a huge pay-day later for sticking to discipline you'd be crowing about it for a few years too. Frankly I don't expect to make money that hard and that fast ever again but it was certainly memorable. My only real regret was that, unlike the S&L debacle w/ over a thousand prosecutions, I didn't get to see the fraudulent punks perp walk.
Got around to browsing the Barron's article and must say Roger, if that is your competition then you are way ahead of the game. Frankly couldn't even figure out what the strategy was in two of the cases (contra what they said it was).
They may still succeed in terms of gathering more AUM of course -- not always a strong correlation between that and portfolio success to say nothing of how many yachts customers may wind up with, but I suspect the clients who find you first won't regret it.
JMO of course.
clearly AUM is not one their shortcomings.
This was really a mediocre article and Roger is quite right, the guys at index universe were doing pieces like this several years ago. There is no reason do it at home investors cannot succeed on their own provided they have a long-term, disciplined strategy and stick to it. I also think that for accounts less then $100K an advisor just does not make sense. Where I think an adviser can really help add value though is not just in the actual investments he/she picks, but in helping their clients control their emotions during periods of market declines or turbulence. Everyone is a genius when things are going up, but how do "do it your-selfers" respond to the bad time? Unfortunately, many sell at the bottom and/or buy at the time, which is why the help of a caring and concerned adviser can help, as many of us little guys do get in and out at just the wrong times due to our emtions.
Saw this article yesterday, and, like you, snorted at that silly little sell about people not being able to manage their own money.
There were some reasonable points in there, but to me these guys sail very close to the wind.
The more broadly you recommend a set of big, obvious ETFs, the more the client can do it himself.
I suspect that this style helps the managers cut internal costs in the tough times they talk about, as well as avoid better the relationship problems of making wrong stock calls, but what the two all-ETF guys are doing is so standardized that it's easy to question their fees.
After the initial recommendation, what value do you get out of the guy with that 'two-of-everything' portfolio?
It's just Noah's Ark.
Well done Dr. Nussbaum, I was going to compare the returns of those portfolio's to 50% VTI and 50% BND, but then figured why bother?
My beef is that time after time, boring generic portfolio's (the kind you don't like) win. Compare the returns of those Lazy portfolio's to yours or mine. They are pretty darn close.
I think you mentioned that for your portfolio's you buy individual bonds, I favor ETF's (diversification and less trading friction) What are your thoughts on muni etf's?
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