"The New Populism and the iPod Economy" -- TCS

Some of the best, freshest thinking I find shows up at TCS Daily. In a single story, TCS Daily - The New Populism and the iPod Economy we get a good analysis of some flawed populist thinking by Senator-elect Jim Webb in his Wall Street Journal op-ed article, discussion of the future of the American workplace, and why different types of work give back different rewards, and what trends are working to change the way our children will prosper based on how they earn their living.

The take-aways: If our country does relatively less manufacturing, is it really a big disaster that fewer of our kids will grow up to work on factory floors? (Ask the parents who have worked on factory floors.) And as our economy revolves around more and more service-type businesses, what are the determinants of which services will be best-compensated? Will those who serve up one meal at a time, even a very fine meal, be less well-off than those who find a way to serve the entertainment needs of the many? How about the investment advisory needs of the many? A fine chef can only serve so many people, even with a great support staff. The writer contrasts the way that many iPods can play the music of the few most popular (and richest) musicians, leaving the multitude of musicians, even really talented ones, searching for an audience.

I wonder if there is an oversimplification here. My music may not be his music. His music may not be your music. I don't like Springsteen all that much. Sorry! The whole potential of the iPodization, if you will, of the services economy is extreme personal customization which is now possible. If everyone liked the same music, and had no real individuality, we would just be happy to listen to our old AM-FM radios. Of course, it could all just degenerate into a huge dead-end exercise in self-indulgence, but the potential exists for something better. After bingeing on each service industry's equivalent of Bruce Springsteen's music, will we evolve a broader, not a narrower taste in life? Think Chopin, and not just played by world-famous performers: How about a world where you can listen to the best student recitals of the year? Where you can choose what you want, the way you like it, to the extent you want, in a more informed way, and with the benefit of more competitive prices than ever before. Sounds pretty good, right?

If you think of the services you personally consume as all somehow residing on a sort of big iPod, I would urge that a big free market will be just as customizable as you make it with your exercise of free choices.

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Back to a more normal routine this week, after nice visits to the in-laws and my mother and sister.

The Unknown Advisor will be writing some important things, in several parts, over the next few days, about how to determine if your financial advisor is serving himself first (at your expense,) or whether he is actually trying to serve your interests first -- and yes, you can find such financial advisors, we do exist. So the first issue up this week will be ... how do you know if your financial advisor's fiduciary standards measure up? The first part later today.

Who Needs the Financial Planners the Most? The Struggling or the Rich?

One of the fascinating and frustrating things financial planners have to deal with is the knowledge that in a sense, the planner has almost as big a task in serving a client with lesser financial assets as he or she has in serving a client with much greater sums to manage. The remuneration for serving a richer client is of course greater than that for serving a "less rich" client.

But the needs of the less wealthy client are in a real way much greater. Many clients do have enough, if it is well managed, and not eaten up by high fees. Consider the client facing retirement in a few years and perhaps finding out that she is not as well funded as she thought. Retirement, perhaps thirty years of retirement, will cost her (or you) quite a lot. Paying the bills, keeping up a home and car, and just living each day with fear of running out of money are really the more burdensome challenges.

Another client, a wealthier client, will eat well, live well, and fret about things like passing on as much of her wealth to the next generation as the tax man will permit, and in the way she wants, and perhaps accomplishing some personal charitable endeavors and all kinds of other goals. She has needs, but does not face anything dire. Her needs can of course involve overcoming significant challenges, but she won't suffer the same kind of anguish as the challenges facing the first client.

One of my personal peeves with the financial planning profession, is that not enough energy and creativity, in my opinion, have been directed to finding exemplary, non-exploitative ways to serve the first client. As far as the second, well, I think it's safe to say that most of the best planners, just like the Reverend Will B. Dunn in Doug Marlette's amusing comic strip Kudzu, feel a very strong call to serve the frightfully well-to-do.

As for the first client, I have heard one well-known speaker at a Financial Planning Association event a few years ago suggest in so many words, that you can't help that client, so just sell her an annuity and move on. I was, to be polite about it, very disappointed.

No, I cannot undo a client's lifetime of poor financial or life choices, or just plain adversity. But there are many clients who could still see a broad range of possible outcomes, with the better outcomes more likely if they are well served. But trading a sum the client now has for an annuity representing a substantially smaller present value (and pocketing a quick commission,) just does not seem like much help to me. That is what you get when you buy an annuity. I am not totally against annuities, carefully chosen, and particularly for clients like physicians with wealth protection concerns, but there are significant concerns for everyone but the salesmen and insurance companies about their costs, and about giving and getting understandable disclosure of those costs so that a financial lay-person knows what is involved -- well, does the term "surrender charges" mean anything to you? It should. If it doesn't, you are assigned to look it up for next time! hint. They can involve serious money.

We need to find better ways to serve you if you are more like the first client.

While we are considering "inadequately funded retirement" concerns, I would note that for those able to work, the usual financial planner's suggestion to keep on working a few years more and save every dollar you can in that time has some practical shortcomings -- I found one beautifully illustrative article awhile back in USA Today. The link is below. Retirement may come before you expect it.

A hopeful thought: Have you got something you always dreamed of doing?

Come back and see the Unknown Advisor soon!

Here's that story: Many Americans retire years before they want to

Is the Time Still Right for Foreign Bond Funds?

Is the Time Still Right for Foreign Bond Funds? - New York Times

(Another hat-tip to the Kirk Report)

One thing many long-term investors are still doing is missing a good way to add some degree of currency diversification to the bond component of their portfolios. Foreign bond diversification. Roger Gibson, in his wonderful book on asset allocation, titled, um, Asset Allocation, Balancing Financial Risk, 3rd Edition, Mcgraw-Hill, 2000, presented some fascinating information about the inclusion of some foreign bonds in your bond allocation: a strong possibility of both improved performance and reduced overall portfolio volatility over most five-year holding periods. Almost the proverbial "free lunch" that we all were taught early on just does not really exist. This is the nearest thing to a free lunch you may see. And frankly, long-term heavy pressures on the dollar will be working to deliver some benefit from a measured exposure to unhedged foreign bonds

Gibson argues for an unhedged foreign bond approach. Dimensional Funds, not an outfit you can easily go against, prefers a hedged approach. I like Gibson's reasoning -- at least I think his arguments have yet to be clearly rebutted by anything I have seen. For those wanting more on this, the "Vanguard Diehards" forum at Morningstar.com has some good threads which you can search out. You can read the forums free. In fact, Morningstar has a lot of free content. Just don't start obsessing over star ratings.

Anyway, the idea is great; the difficulty is in the implementation. The preferable vehicle, an unhedged foreign developed-markets indexed bond fund with low expenses is just not yet readily available to smaller investors to this point. There are hedged funds, and some actively-managed unhedged mutual funds exist, and I have a working choice I use, but you get the usual pretty high expenses with those. ETFs may be coming into the picture, see below. And of course, just as the article says, this asset class really should only be placed in a tax-deferred account, like an IRA or 401(k). These are taxable bonds. beacause of all these factors use of this asset class -- foreign bonds -- is a judgement call, even for an investment professional, who must weigh client-specific risk and volatility tolerances as well as all the above. As usual, professional advice should be sought if you have serious doubt about the utility of this kind of fund for your own situation, or do not understand the issues involved.

As an additional note, there may be developments in this asset class in the world of ETFs. I'm a bit careful with new ETFs myself, though, and like to see some significant trading volume and tracking error history first, before I get serious about using them, for any number of reasons. And I know I'm not the only one who feels that way.

Bye from the Unknown Advisor for now.

Finally, as with just about anything else you will see discussed in this blog, we are specifically limiting our discussions to long-term investing. Only. That means a multi-year holding period, say, optimally five years or longer. Trading-oriented folks, please get a grip. Stick with what works best for your approach!

I actually can spell.

And also use punctuation, and am working on HTML. Aargh.

Get Your 401(k) Working Right! Beat Longevity Risk.

Longevity risk is the risk of outliving your money. It shows up in financial projections for an individual frequently. Many financial planners see it as the greatest financial risk.

This article is really very good. It catches many of the common issues with 401(k)s, from plan shortcomings, to the most common things you as the employee can fix. If you are feeling too busy to find out a bit about doing 401(K)s the right way, this article could be your start.

Make your own choices, as each person's situation is different, but some good generalities should apply:

I would emphasize: if you are young, consider having the great bulk of
the money in equities. Yes, they do go up and down. That is nothing to get depressed over, because as a long-term investor, you do not have live in terror of normal market volatility, or even cyclical market declines. Markets go up when they're done going down. They're like that. No other asset class will get the job done for you as well as equities. Do not get trapped into just choosing the moneymarket fund or the stable value fund. The danger of being underfunded when you are old is greater than that from market volatility. Educate yourself more. I will be building a blogroll of the sites and people I respect the most. For a beginning, if you want something right now, search the internet for Scott Burns' columns archive. He is phenomenal. You must prudently seek appreciation by balancing the risks with equities and other asset classes -- learn about asset allocation. It is what gives you a functional portfolio, rather than just a bunch of stocks or mutual funds.

Do not ignore foreign stocks or small-cap stocks. Each has powerful reasons for inclusion. A bit of a value orientation to your equities choices is a plus.

Do a little mutual fund research. Find the best alternatives your 401(k) plan offers. Bug you plan administrator for prospectuses of the fund choices you have, or rummage around the plan website for them. Dig down for the fees disclosure. Get really annoyed if you see a bunch of 12b-1 fees in your plan choices, or if Morningstar.com describes your plan's fund choices with terms like "asset-bloated", "perennially underperforming" or "closet index funds".

The article referred to above is quite correct as to the age/target/destination funds having a problem with being overly conservative. more and more research is coming along now from objective academic finance big guns indicating that you should not reduce the percentage of your assets in equities as fast or as much as has previously been commonly recommended. Your risk of outliving your money is the greatest risk you face. Balance out the risks in a responsible fashion for you.

Don't try to time the market, by doing things like going to cash after the market has gone down some. You'll miss the recovery! Financial markets go up over the long run, though sometime the long run can be a long time coming. And don't be changing you fund choices around all the time. You'll just cost yourself money almost every time you do that.

You might even consider joining the school of thought I subscribe to: market volatility can be your friend, not the enemy, if you get your asset allocation really well thought out, and applied, and stick tenaciously to it.

The Unknown Advisor

S&P 500 P/E Still About 17, same as 4 Years Ago

This is good news.

In another Bloomberg story, via the always interesting and useful The Kirk Report (yes, by the way, the Unknown Advisor does read other things and see other websites!) The S&P 500 is still valued at about 17 times trailing earnings per share, just about where it was four years ago at the beginning of the current bull market.

Noteworthy, that's what it is. Earnings have grown and kept pace with the run-up of share prices, overall , during the bull market. My working conclusion, to this point: The bull market is intact, and probably not ready to quit for a good bit yet.

Remember, this was the P/E relative to trailing earnings, not projected or forecast earnings. It would be a lot easier to question a P/E based on forecast earnings.

The Unknown Advisor is not into market predictions, nor is he into short-term trading or technical analysis! If the economy is growing, (and it is, albeit not a strongly,) and if stocks are not priced at high multiples relative to historical valuation ranges, then why the angst in so much of what you read and hear?

The Bonus Checks are Flying on Wall Street. Did You Contribute?

Disclaimer: Nothing anywhere in the Unknown Advisor blog is to be construed as as offer to sell any investment product or advisory service or any financial service whatsoever. The material here is for general informational purposes only.

The Unknown Advisor is ready to blog. Today's editorial:

If you did not see the story on Bloomberg, it is titled Never in the history of Wall Street have so many earned so much in so little time. It's a good read, and a reminder for investors.

Every dollar that the huge brokerages make, comes out of someone's pocket. Your pocket, perhaps. As investors, you and I both need to look for ways to invest in cost-efficient ways. And no, we don't begrudge someone a good living. Especially if the service is good. But you want a good living too. And if too much of your portfolio returns are going to an intermediary, you might not have the good retirement you're hoping for, have worked for. All too often, Wall Street's business seems to be making money, lots of it, from investors, rather than for investors or along with investors.

You owe it to yourself, you must either learn how to be a good do-it-yourself investor, without paying for things like load funds' sales charges, old-line full-service high commissions, expensive wrap accounts or separately-managed account arrangements, or greedy advisors with unduly high advisory fees, or the guys who just stick you in some load fund and get on with looking for someone else to do the same thing to. They exist, they are too common. Just say "No, thank you." and escape. Or firmly show them the door.

If you do not have the time, the energy, or the knack, you should get yourself an investment advisor, but if you do, tenaciously search out one with extremely high fiduciary standards and relatively low advisory fees. If they indicate that you do not have sufficiently high assets to be worth their time, (politely, let's hope,) ask them for a recommendation of a good fiduciary advisor who will work for you.

Stock brokers are not fiduciaries. People who sell you load funds, heavily-commissioned variable insurance products or heavily-commissioned annuities are not fiduciaries. People who sell you limited partnerships are not fiduciaries. All of these are really just salesmen. They may be nice salesmen. If they put your interests first, they will not meet their goals and will soon be unemployed salesmen. Fiduciaries, real fiduciaries, put your interests first, and know enough about the lamentable investment performance of those kinds of things to decide not to be commission-junkies, and to look for ways to work in the investments realm which allow them to give clients things which have a better chance to work well. I guess you could say they have a serious case of scruples.

It has been said that the best financial advisors have the lowest advisory fees and the worst advisors have the highest fees. I didn't say it first, but I wish I had. It's counter-intuitive, but true, in the Unknown Advisor's opinion.