How may we serve you?

Wealth Management

Tending to every detail, aspiring to your greatest life goals.

Learn More

Evidence-Based Investing

Investing governed by reason, centered on you.

Learn More

Retirement-Ready Planning

Building retirement-ready wealth, from now on.

Learn More

From Our Blog

Why Every Millennial Should Consider Funding a Roth IRA

Much—too much—has been said and written about the relative superiority of Roth IRAs versus Traditional IRAs. The debate over which is better too often involves the technical numerical merits. In truth, the Roth wins in almost every situation because of its massive behavioral advantage: a dollar in a Roth IRA is (almost) always worth more than a dollar in a Traditional IRA. This is true regardless of one’s age, but the Roth IRA is even more advantageous for Millennials.

I must first disclaim that you can disregard any discussion of Roth or Traditional IRA if you’re not taking full advantage of a corporate match in your employer’s 401(k)—free money is still better than tax-free money. But after you’ve “maxed out” the match in your corporate retirement account, here are the top three reasons Millennials should consider putting their next dollar of savings in a Roth IRA:

1) Life is liquid, but most retirement savings aren’t.

Yes, of course, in a perfect, linear world, every dollar we put in a retirement account would forevermore remain earmarked for our financial futures. But hyperbolic discounting—and the penalties and tax punishments associated with early withdrawal from most retirement savings vehicles—can scare us away from saving today for the distant future. The further the future, the more we fear.

The Roth IRA, however, allows you to remove whatever contributions you’ve made—your principal—without any taxes or penalties at any time for any reason. Therefore, even though I’d prefer you to generally employ a set-it-and-forget-it rule with your Roth and not touch it, if the privilege of liquidity in a Roth helps you save for retirement, I’m all for it.

2) There are too many competing priorities.

Millennials are dropped into the middle of a financial should-fest. You should pay down school loans, save up for a home down-payment, drive a cheap ride, purchase the proper level of insurance, enhance your credit and save three months’ worth of cash in emergency reserves. All while having a life? No chance.

Most personal finance instruction tells you what your priorities should be, and if you’re looking for that kind of direction, I’m happy to help in that regard as well. But it’s also not a mortal money sin to employ some Solomonic wisdom and compromise between, say, two worthy savings initiatives—like short-term emergency reserves and long-term retirement savings. Therefore, while I can’t go so far as to suggest that you bag the idea of building up cash savings in lieu of a Roth, I’m comfortable with you splitting your forces and dipping into your Roth IRA in the case of a true emergency. The challenge we all face is to define “true emergency” without self-deception.  (And no, splurging on concert tickets or a last minute vacation with friends don’t qualify.)

3) Roth contributions cost you less today than they will in the future.

Despite my sincerest attempt, I couldn’t avoid the more technical topic of taxes—and nor should I, in this case. That’s because it only stands to reason that you’re making less money—and therefore paying less in taxes—at the front end of your career than you will be in the future.

Therefore, in addition to beginning tax-free compounding sooner, Roth IRA contributions—which are not tax-deductible—will likely “cost you” less as a career newbie than they will as a seasoned executive. At SpaceX. On the first Mars colony. Furthermore, you can also make too much to contribute to a Roth IRA, progressively phasing out of eligibility at income of $118,000 for an individual and $186,000 for a household.

Like Coachella tickets, the opportunity to invest in a Roth IRA may not be around forever. Tax laws and retirement regulations are constantly evolving, and who knows what the future may hold. This increases their value for everyone, but especially for those who could benefit from them the most—Millennials.

This commentary originally appeared February 22 on Forbes.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

photos courtesy of InvestmentZen


The Three-Step Investor’s Guide to Navigating the Financial Advisory Fiduciary Issue

As an educator in the arena of personal finance, I generally avoid matters of public policy or politics because they tend to devolve into dogma and division, all too often leaving wisdom and understanding behind. But occasionally, an issue arises of such importance that I feel an obligation to advocate on behalf of those who don’t have a voice. The issue of the day revolves around a single word: “fiduciary.”

At stake is a Department of Labor ruling set to take effect this coming April that would require any financial advisor, stock broker or insurance agent directing a client’s retirement account to act in the best interest of that client. In other words, the rule would require such advisors to act as a fiduciary. The incoming Trump administration has hit the pause button on that rule, a move that many feel is merely a precursor to the rule’s demise.

Why? Because a vocal constituency of the new administration has lobbied for it—hard. They stand to lose billions—with a “b”—so they’re protecting their profitable turf with every means necessary, even twisted logic.

The good news is that informed investors need not rely on any legislation to ensure they are receiving a fiduciary level of service. Follow these three steps to receive the level of service you deserve:

1) Ask your advisor if he or she acts as a fiduciary.

It’s not a good sign if you get the deer-in-headlights look followed by “Fid-oo-she-WHAT?” If your advisor gets defensive, telling you that you’re better off with the status quo, that’s also concerning.

2) Ask your advisor if he or she acts ONLY as a fiduciary.

One of the biggest challenges facing investors today is that many advisors with a genuine fiduciary label are actually part-time fiduciaries. This is where it gets tricky, because there are at least three different regulatory requirements in the financial industry.

Those beholden to the Investment Advisers Act of 1940 and regulated by the SEC are fiduciaries already, and they have been for a long time. Those who sell securities—typically known as stock brokers and regulated by FINRA—are held to a lesser “suitability” standard. Those who sell insurance products may be beholden to an even lesser standard—caveat emptor, or “buyer beware.”

But what if your advisor is like many who are licensed sufficiently that they may act as a fiduciary when they choose, but may also take off the advisory hat and sell you something as a broker or agent? Do they tell you when they’ve gone from one to the other?

You want a full-time, one-hat-wearing fiduciary.

3) Determine if your advisor is a TRUE fiduciary.

This may be the hardest part, because it requires you to read between the lines. There are advisors who now realize that it’s simply good business to be a fiduciary. And while there’s nothing wrong with profitable business, you don’t want to work with someone just because they’ve realized fiduciary mousetraps sell better than their rusty predecessors.

Not everyone who is a fiduciary from a legal or regulatory perspective is a fiduciary at heart, and yes, it is also true that there are those who are fiduciaries at their core even though they don’t meet the official definition in their business dealings.

You want a practitioner who’s a fiduciary through-and-through—a fiduciary in spirit and in word.

“The annulment of the government’s fiduciary rule would clearly be a setback for investors trying to prepare for retirement,” says sainted financial industry agitate Jack Bogle. “But the fiduciary principle itself will live on, and even spread.”

Yes, the good news—for both advisors and investors—is that there is a strong and growing community of fiduciaries, supported by the Certified Financial Planner™ Board, the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (NAPFA).

Advisors can join the movement. And investors can insist on only working with a true, full-time fiduciary.

This commentary originally appeared February 24 on Forbes.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE

Dispersion Shows Diversification Matters

portfolio_returns_sm

I previously examined a recent study that offered investors powerful evidence regarding a reduction, though not the elimination, of geographic diversification benefits in a flattening world. To more fully understand the integration of global equity markets, I then explored the correlation of returns between international and domestic stocks. Today I’ll resume my analysis with a look at the dispersion of returns among foreign and U.S. equities.

Dispersion Of Returns

In 2009, we saw very wide dispersion of returns. For example, while the S&P 500 was up almost 27%, the MSCI Emerging Markets Index rose 79%. And emerging market small and value stocks produced even higher returns. In addition, international large value and small value stocks, as well as international REITs, outperformed their domestic counterparts by wide margins.

Note the correlations were positive, as all equity asset classes produced above-average returns. However, the world didn’t look very flat in 2009.

In 2010, even though the S&P 500 returned about 15%, emerging markets stocks outperformed it by about 4 percentage points. On the other hand, U.S. large, large value, small, small value and REIT funds outperformed their foreign counterparts by significant margins.

In 2011, while the S&P 500 returned just greater than 2%, in general, international stocks provided negative returns. The MSCI Emerging Markets Index lost more than 18%.

In 2012, the relative performance of U.S. and international funds reversed; international funds outperformed their U.S. counterparts in all asset classes, although the return differences were relatively small.

In 2013, U.S. stocks outperformed international equities by wide a margin. For example, the S&P 500 Index, which returned 32.4%, outperformed the MSCI EAFE Index by about 10 percentage points and the MSCI Emerging Markets Index by approximately 35 percentage points. The world didn’t look very flat in 2013, either.

In 2014, domestic stocks generally not only far outperformed international stocks, but U.S. stocks rose and developed, non-U.S. markets generally fell. Again, the world didn’t look flat.

Integration Doesn’t Erase Diversification

In 2015, returns were all over the place. For instance, U.S. large stocks and developed, non-U.S. stocks produced similar returns, both close to zero. On the other hand, the MSCI EAFE Small Cap Index rose about 10%, while the MSCI EAFE Small Value Index rose roughly 5%. Their U.S. counterparts lost 4% and 5%, respectively. At the same time, the MSCI Emerging Markets Index lost almost 15%. Once again, the world didn’t look very flat.

Through Dec. 16, 2016, the world didn’t look all that flat either, with emerging market stocks underperforming developed market stocks. While Vanguard’s 500 Index Fund (VFINX) had returned 12.7%, the firm’s Emerging Markets Index Fund (VEIEX) returned 10.6%. DFA’s passively managed Emerging Markets Small Fund (DEMSX) returned a similar 10.4%, but its Emerging Markets Value Fund (DFEVX) returned 20.1%.

Once again, we see a wide dispersion of returns, showing the benefits of diversification even in a flatter world. (Full disclosure: My firm, Buckingham, recommends DFA funds in the construction of client portfolios.)

Hopefully, the evidence presented here demonstrates that, even though the benefits of a global equity allocation may have been reduced by market integration, they certainly have not disappeared. Thus, broad global diversification is still the prudent strategy. But there remains another important point we must cover.

The Death Of Diversification Has Been Greatly Exaggerated

Antti Ilmanen and Jared Kizer, in their 2012 paper, “The Death of Diversification Has Been Greatly Exaggerated,” which won a prestigious Journal of Portfolio Management award for best paper of the year, argues that factor diversification has been more effective at reducing portfolio volatility and market directionality than traditional asset class diversification. In other words, investors need to think differently about diversification.

In our new book, “Your Complete Guide to Factor-Based Investing,” my co-author, Andrew Berkin, and I make the case that investors can benefit from diversifying their portfolios across a small number (eight) of the more than 600 factors identified in the literature, a number so great that John Cochrane called it a “zoo of factors.”

We present evidence demonstrating that the market beta, size, value, momentum (both cross-sectional and times-series), profitability, quality, carry and term factors meet the criteria of being persistent across time and economic regimes; pervasive across sectors, countries, regions and asset classes; robust to various definitions; having intuitive risk-based or behavioral-based explanations for why we should believe they will continue to produce premiums; and are implementable (meaning they survive transaction costs).

In addition to each factor having earned significant premiums, they all have low-to-negative correlations to each other, which results in a portfolio with higher Sharpe ratios. The following table shows the annual correlations of the equity factors mentioned above during the period 1927 through 2015.

Note the low-to-negative correlations each factor has with the others, with the sole exception of the correlation between profitability and quality. The high correlation of these two should be expected, because one of the characteristics of quality is profitability.

Integration of Global Markets_Chart

We also present evidence demonstrating that building a portfolio that diversifies across these factors greatly reduces the risk of producing negative outcomes.

The important message from the book is that investors can benefit from changing the way they consider diversification, moving away from the more traditional view of thinking only about diversifying across asset classes.

We believe investors are better served by thinking more broadly and looking at diversification across more unique sources of risk and return, which is really what factor-based investing is all about. And many of these factors, such as value, momentum, quality (also referred to as defensive) and carry, can be diversified across asset classes, bringing further diversification benefits.

Summary

There is evidence that, due to the greater integration of markets, the benefits of traditional global diversification of equity risk have been reduced. However, by accessing other unique sources of risk called factors, and diversifying those unique sources across stock, bond, currency and even commodity asset classes, more efficient portfolios can be created—ones with the important benefit of having less downside risk.

This commentary originally appeared January 6 on ETF.com

By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.

The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.

© 2017, The BAM ALLIANCE