Chapter 7 – Rebalancing

Chapter 7


Rebalancing is the rather simple but important process of maintaining risk at the level you have chosen. You do this by resetting your asset levels back to their original percentages (allocations) whenever they drift to far from your target. You will need to do this once or twice a year as some assets will gain faster than others or some may lose ground.

John Brennan says in Straight Talk on Investing “People tend to think about investing only in terms of making money. Making money is why we invest, but the reality is that if you don’t remember to manage risk along the way, you won’t do well at making money.”

That is a very important statement. Keep risk at the level you originally decided it should be. As assets grow, your stock allocation will become higher than you originally intended. There may be a temptation to let it ride, but this increases your risk, which you have carefully evaluated in your asset allocation model. In down markets your stock allocation will shrink. You may find it tough and counter to reason to add money to losing assets, but this is a way of buying when stocks are cheaper. Rebalancing in down years forces you to be a bit of a contrarian investor—one who doesn’t follow the crowd. This strategy can provide a bit of a return bonus and keep volatility in check over time.

There are several methods used for rebalancing, but it’s not critical that you follow an exact formula. Check your allocations once a year to see if the primary allocations have changed by more then 5% and watch smaller allocations to volatile asset classes to see that they haven’t gotten too far off the target. If you are adding new money on a regular basis, you can allocate it where needed to adjust to your targets.

Here are some general rules for rebalancing from author Larry Swedroe;
1) the main thing about rebalancing is the discipline of buying low and selling high, and restoring the risk profile.
2) you must consider costs of rebalancing (taxes and transactions costs) in taxable accounts as they will impact the frequency and timing of rebalancing.
3) rebalancing should always be done whenever you have new dollars to invest (no tax implications).
4) rebalancing can be done more frequently and more tax efficiently of course in tax deferred accounts.
5) given the evidence of short term momentum, it may not be best to rebalance too frequently (let the winners ride for short time, but not too long) . But again risk control is biggest issue to me—not returns.
6) once per year if you don’t have cash is fine—but even then I wouldn’t do it unless you had significant style drift

Mr. Swedroe advocates what he calls the 5/25 rule. When a major asset moves more than 5% off target, it’s time to rebalance. Example: Your asset allocation is 70% stock/30% bond. If equities grow to be 75%, then it’s time to rebalance. If an equity asset is 25% or less than total equity, then you use the 25% trigger. For instance, if you have 10% REIT, then the rebalance points would be plus or minus 25% of 10, which = 12.5% and 7.5%. Rebalancing at this level would not be critical for bond holdings. Rebalancing isn’t difficult, but it is important and part of your investing discipline.

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Chapter 8 – Formalize Your Investment Plan

Chapter 8

Formalize Your Investment Plan with an Investment Policy Statement

You have already done most of the work in making a plan by developing your asset allocation and  asset class percentages. Now you have to formalize it by writing it down. If that seems a bit excessive, it isn’t. Writing down your objectives, goals, and strategies:
1. declares you are serious
2. Protects against behavioral mistakes
3. helps you remember the details
4. helps you stay focused
5. makes you aware of something you may have missed.

Preparing for the future—managing money, saving, and investing—is a serious responsibility. It is no different and no less important than earning a living, maintaining a house, or protecting the things you’ve worked hard to get. The formal plan follows the same logic you might use for your next vacation, remodeling your home, or planning for your children’s education. Not planning results in nothing being done or making mistakes that waste time and money. To put it in more graphic terms, not planning and not following the plan can have a serious negative effect on your retirement life. None of the other investment rules will work in the long term without a plan and the discipline to stay with it.

A plan doesn’t need to be complicated, but it is so important that the experts agree that an investment policy statement be written and signed. A vision without a plan is an illusion. Here is what Lewis Schiff, author of “The Armchair Millionaire” has to say: “Define your financial goals and time horizon. What goals do you need to achieve in order to be financially secure or independent? For most of us, these goals would include having a certain amount to secure retirement. Your plan might target long-term growth, current income, protection of your capital, or some combination of all three. Other major goals might include college education or purchase of a home. These goals, with different time frames and different priorities will require their own investment strategy.
Define your risk tolerance.
Define your target asset allocation.
Define your individual investments.

The bottom line: All of your investing decisions should be grounded in your own investment policy statement (IPS). By taking a ‘top-down’ look at your finances and writing out a road map, your policy will add an important element of discipline to your approach.”

Sticking to a plan can be difficult at times. Any investment plan will be occasionally challenged by the market and second-guessed by the investor. The market will challenge your asset allocation decision at times by making it look like you’re doing it all wrong. Various sectors and segments of the market can get hot and everyone around you is jumping in. Even your best friend is clobbering your returns. On the other hand, the whole market may take a nose-dive and all you hear is gloom and doom. Temptation to join the crowd or rein in stock allocations can be very strong. These pressures can lead to common behavioral mistakes, which can be the major cause of losses for individual investors. You must be efficient in capturing all of the potential returns you can.

Ninety percent of what you read and see is useless noise and must be ignored. That’s easy to say, but actually very tough to do. Listening to noise is one of the major mistakes investors make and why you absolutely need to commit to a strategy and put it in writing. I don’t mean to say you should not alter your asset allocation when life style or goals change, but don’t flinch for any other reason. Take into account what might make you flinch, then set your allocation accordingly from the start.

This is the sort of blitz you are up against as Paul Farrell notes in an April 2005 Marketwatch article: “Last year, I estimated that the average investor was being overwhelmed by 43,000 fund and stock recommendations, via newspapers, magazines, cable television, radio and the Internet. The intensity of this noise confuses and brainwashes investors, resulting in costly mistakes.”

Chandan Sengupta, in “The Only Proven Road to Investment Success,” also warns of the danger: Noise is a constant problem and you have to recognize it and then dismiss it as not only worthless, but harmful. If you are not going to stick to your chosen investment method through thick and thin, there is almost no chance of your succeeding as an investor.”

John Brennan, in “Straight Talk on Investing” sums up the planning process nicely: “Making a plan need not be complex. It is all about looking ahead and assessing where and when your needs for money will occur. Then you decide on how you’re going to meet those needs. It’s essentially a three-step process:
1. Determine how much money you’ll need to have.
2. Figure out which kinds of investments should provide you with the money.
3. Calculate how much you need to set aside in order to make those investments.”

Your plan needs to consider building assets and managing existing assets in all accounts, including tax-deferred accounts at work like a 401(k) or 403(b), IRA, Roth IRA, as well as taxable accounts and emergency funds. Once that is done, you can subdivide your plan into individual goals. Goals with different time horizons will require different allocations, but it is best to keep the overall top-down view for a full perspective. Generally, money allocated to goals within a five-year time period should not be in stocks. The one exception, of course, is retirement. You will need to keep some stock in retirement because you will still be investing throughout your retirement years.

You can come up with an investment policy statement yourself or get some assistance from a financial advisor. Just remember, you need to have some idea of where you’re going and how you want to get there. If you don’t, an advisor may not be able to provide effective help. Here is an example of how a long-term plan for retirement might look:

IPS (Investment Policy Statement)
1) Investment Horizon – 30 years
2) Risk Tolerance – High due to investment horizon and evaluation of both financial and emotional ability to handle dramatic losses.
3) Financial Objective—2 million dollars. This objective can be achieved by starting with a sum of $30,000 and adding $12,000 per year for 30 years while getting a return of 8.5%. This financial goal will allow me to withdraw $80,000 per year (4%) beginning at age 62 for at least 30 years with a high probability of preserving the principal.
4) Rebalancing: I will review my allocations once per year (Feb.) and I will make adjustments by adding new money to adjust percentages back to targets.
5) Primary Asset Allocation: 75% equities, 25% fixed income
Equities – 70% domestic, 30% international
Fixed income – 100% domestic
Equities: Domestic allocation – Total market 25%, Large Value 25%, Small Value 10%, REIT 10%, Total International 30%
Fixed income: Total 25% of Portfolio – 25% Treasury Inflation-Protected Securities, 65% total bond market, 10% hi-yield
6) The plan allows for reduction in equity allocation as retirement gets closer and risk tolerance decreases. Allocation changes may also be evaluated if life-style changes or significant new goals occur. I will not let investor sentiment and Wall Street noise influence my allocation.


When should you get serious about an investment plan? Right now!
Here is a link to additional Information on Investment Policy Statements. Note that the first part is a quite detailed overview of what you need to think about. The second part is a detailed example. The third part is a real-world example. Notice that it is not complicated or lengthy.

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Chapter 9 – Behavioral Mistakes

Chapter 9.

Behavioral Mistakes

You have now completed the chapters on the mechanics of investing basics, and behavioral mistakes have been mentioned several times. If you wanted to apply the term ‘elephant in the room’ to the reason investors lose out on potential returns, behavioral errors would be it.

Behavioral finance as it’s called is a relatively new field. It attempts to better understand and explain how emotions and cognitive errors influence investors and the decision-making process. And while the researchers are beginning to understand what investors do to hurt returns, the investors themselves are quite oblivious to the mistakes they make.

As Warren Buffet has said, investing is simple, but not easy. Why? Because the cognitive skills needed to invest properly are in direct conflict to how we have learned to respond to familiar situations. We approach investing with those ideas learned in the family environment and in our own experiences unrelated to investing. Then, when faced with a new challenge, we apply those biases already ingrained in our memory. For instance, we are taught to be the best, don’t settle for average, you can do it if you really try. New investors are overwhelmed with information and endless recommendations, forecasts, insider tips (secret stuff) and excitement! These are bad stimuli for the investment brain, but to sort things out we fall back on things we know, although they may be very inappropriate when applied to investing. Furthermore, we can rationalize almost anything when we subconsciously want to choose one decision over another.

While the investment method discussed in this primer tends to keep behavioral mistakes minimized, you must be aware of the natural temptation to do the wrong thing. Don’t get emotionally involved. Good investing should be about as exciting as watching grass grow. And to go a bit further with this analogy, think of investing as a plow horse cultivating a field, and not a race horse.

Here are the most common behavioral errors and how they create bad decisions
1. Overconfidence. Overconfidence is perhaps the most common behavioral mistake, and while it’s pretty easy to spot by someone who is overconfident, it’s almost impossible for the afflicted investor to recognize it in himself. Ask any group of active investors trying to outperform average market returns and they will tell you they are indeed better than average. Why else would they attempt to beat the market in the first place? To make matters worse, overconfident investors are subject to something called the Dunning-Kruger effect. The Dunning–Kruger effect is a bias in which an unskilled person makes poor decisions and reaches erroneous conclusions, but their incompetence denies them the ability to realize their own mistakes. Overconfidence leads investors to frequent portfolio changes and higher risk taking due to overestimating knowledge and ability while underestimating risk. Ultimately, the results are higher costs and lower returns. Professional stock analysts and fund managers are not immune to this problem either.

Overconfidence is the most common problem, but it is also the most difficult to overcome. Many investors believe that they are adequately competent when they learn to speak the language of Wall Street as well as the pundits on TV, or they know the fundamentals of choosing stocks or mutual funds. What they fail to realize is there are millions of investors with the same knowledge and simply knowing facts is not knowledge, and knowledge is not wisdom. Overconfidence cannot be eliminated unless the investor takes a disciplined, neutral approach to the investing process. The investor must also realize that beating the market is not an easy task that can be accomplished with a little extra work. There are many factors involved beyond the investor’s control.

For an average investor, and that is most of us not formally schooled in finance and economics and without the Wall Street electronic equipment and constant research, it is best to not get caught up in the idea that we are better than average. Average on Wall Street is a very high water line and you are most likely underwater. If you believe you have the ability to choose winning stocks or fund managers, reading up on stock market history might provide a more sobering picture.

2. Loss Aversion and Risk Aversion. Loss aversion refers to the tendency for people to strongly prefer avoiding losses over acquiring gains. Loss aversion has several implications, but the fact is investors experience more pain over losses than they feel pleasure over the same amount of gain. In one classic experiment, players were asked how much they would need to win in a coin toss game before they would play when the other player won $100 if the coin turned up heads. The logical answer, of course would be $100, but the actual answer players gave was close to $200. They weren’t willing to lose $100 until the a win paid almost double.

Investors who experience loss aversion will focus obsessively on one investment that’s losing money, even if the rest of their portfolio is in the black. They are also more likely to sell winning funds in an effort to “take some profits,” while at the same time not wanting to sell losers. Loss aversion naturally leads to risk aversion. Risk aversion is the reluctance of a person to accept an investment with an uncertain payoff (stock risk) rather than an investment with a more certain, but possibly lower, expected payoff (bonds or bank account.).

3. Recency Bias and Information Overload . Recency bias is the tendency to weight recent market action as the basis for intended long term decisions. But of course, investors who use recent performance never make any decisions that last very long. Recency bias leads to buying high, selling low, and excessive, irrational portfolio changes. Information overload is somewhat similar to recency bias. The danger of too much information is we believe we can absorb it all, but the memory is selective to information we perceive as supporting our position.

In another simulation experiment done by pioneers Richard Thaler, Amos Tversky, Danial Kahneman and Alan Schwartz, two groups of subjects were given identical portfolios consisting of one stock fund and one bond fund to manage. One group was given updated information on the portfolio and the stock market monthly and the other was given information only annually. The groups could only make portfolio changes at the time the information was provided. The results showed that the group who received information monthly made more portfolio adjustments; however, at the end of the simulation time, this group underperformed the less active group by a remarkable 50%. When it comes to Wall street information, less is better.

Recency bias and performance chasing are made by investors who are either unaware of this common behavioral mistake, or they lack discipline and a good long-term investing plan.

4. Fear of Regret. Regret comes from the emotional reaction people get when they conclude they’ve made an error in judgment. Sometimes the decision is wrong, but it may have also have been correct, but the outcome was negative. Because investors don’t separate correct process decisions from outcomes, the feedback leads to further errors. Mistakes are treated as major failures, and they reduce confidence and freeze rational thought. Fear comes into the picture the next time a decision has to be made. Investors do lnot like to regret what they’ve done; therefore, they may be hesitant to make the next required decision and they may also drift from the correct decision making process and make a worse decision. Investors can become paralyzed if they focus on an anticipated outcome rather than following their established process.

Again, awareness is much of the battle. Investors need to establish a plan that is logical and uncomplicated and stick to it. Yes, occasionally a result may not turn out as hoped, but an undesirable outcome should be blamed on a good decision making process, and there should be no regret. In the long run, the plan will be rewarded.

5. Anchoring. When new or unfamiliar situations are presented, people attempt to relate oranchor” the new information to a familiar reference point even though it may have no relationship to the new situation. This tendency may cause investors to base decisions on irrelevant past experience or an illogical reference point. As an example, an investor may make a decision to buy more of a stock which has dropped in price based on previous high values without knowing any new information that may have triggered the drop. The investor anchored on the previous high value.

Overcoming the anchoring problem is not too difficult. The caution flag should go up when a conclusion is made without much examination or thought about new data simply because it seems to fit a previous conclusion. The proper approach is to explore the facts from a different perspective, or to seek input from other investors who don’t always agree with you.

6. Confirmation or Comfort Bias. This is a tendency for investors to form a consenting opinion of first impressions that align with preconceived ideas because information is selectively favored. Confirmation bias also leads investors to look for and file additional information that supports their beliefs. Overcoming confirmation bias requires the investor to actively seek and discuss and weigh opposing viewpoints.

7. Procrastination
Procrastination is very common and it leads to investors neglecting to manage their portfolios properly. It may cause them to not rebalance when necessary or to simply not pay attention to the performance of actively managed funds in their portfolio. Procrastinators may end up with a very different portfolio than they created and they may be caught off-guard in sudden market changes.

The six listed behavioral mistakes are major ones, but certainly not the only ones. Have a look at this list and review it once in awhile as a reminder:

Behavioral Issues and the Bottom Line
Studies have shown that behavioral mistakes reduce the return on investments that investors actually receive by 10% to as much as 75%. So what do investors need to do to pocket more of the returns? One word: discipline. Don’t focus on becoming too smart; instead focus on avoiding foolish behavior and you’ll be successful.

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Chapter 10 – On Your Own or Hire an Advisor

Chapter 10

On Your Own Or Hire An Advisor?

Jack Brennan in his book, Straight Talk on Investing says, “Remember, it’s in the interest of many financial services companies to make you think that investing is difficult.” While Mr. Brennan’s statement is true, so is Warren Buffet’s, “Investing is simple, but not easy.” What Mr. Buffett is referring to is the natural tendency to make behavioral mistakes, which can really hurt returns. So, if you are not disciplined, then you might need someone to keep you on track. But there may be another reason to use an advisor that is just as important—do you want to spend time managing your assets? Delegating management to an advisor can provide you with freedom to do things you enjoy more and insulate you from nerve-racking market gyrations that cause worry.

If you are just starting out and you haven’t accumulated a large asset base, you probably do not need advice, and you don’t need to spend a lot of time on your investments. However, if you have accumulated a hodgepodge of investments in various places, you may need some help in sorting things out. Before you decide one way or the other, evaluate your own situation and personality. Jonathan Clements in a Wall Street Journal article comments “If you want to see the greatest threat to your financial future, go home and take a look in the mirror.” Jane Bryant Quinn in The Washington Post gives a similar warning “The green—in our eyes and in other peoples wallets—brings out the worst in us. I don’t mean morally, I mean our worst instincts as investors. We think we make rational decisions. More often, we veer from hope to fear and back again, with out putting our brains into gear at all.”

Know Your Tendencies
You now know that building a good portfolio is not difficult, and if you can do that an advisor cannot put you into better investments. But there may be unseen behavioral hazards awaiting the unsuspecting investor, and this is where a good advisor may pay off.  Ask yourself the following questions:
*Am I impulsive?
* Do I have the temperament to act without panic?
* Can I view my situation objectively?
* Can I stay with the plan through thick and thin?
* Am I too competitive?
* Do I tend to procrastinate?

Answering yes to any of these questions may increase the tendency to make behavioral mistakes which cost money. Mistakes are generally made by investors who do not know the fundamentals, including the behavioral pitfalls. Belsky and Gilovich in “Why Smart People Make Big Money Mistakes” suggest that when we consider important financial decisions, instead of asking knowledgeable friends or professionals what they think about the changes we are considering, ask them what they think about the process used to make the decision. It is far more revealing.

In addition, there is the issue of desirability. Do I enjoy managing my own investments? Am I willing to take the time to learn what I need to know. If the answer is “not really,” then this is a valid reason to hire an advisor.

A good advisor may save an investor from making major errors, which would more than justify the added expense. So, there are very valid reason to use an advisor. But then, the investor needs to avoid another major mistake—choosing the wrong advisor. If you decide you need professional guidance, there are two ways to get it. One is to put your assets under management (AUM). The other is to manage your own investments but consult with an advisor occasionally on an hourly basis to ensure you are on the right track.

Here are the general ways advisors are compensated.
Commission only: No direct charge for financial planning or investment advice. Recommendations consist of investments and financial products that have commissions or fees that will come out of your investment. And investment choices will be limited to those investment options that pay commissions. Most of the investment options that carry no commissions will be excluded.
Fee-based or fee and commission: A fee is charged for financial planning or investment advice. Recommendations consist of investments and financial products that have commissions or fees that will come out of your investment.
Salaried: No direct charge, but incentives and awards are often provided in addition to the salary when certain financial products are purchased based on the advisor’s recommendations. Recommendations may also include investments and financial products that charge commissions or fees.
Fee only: The advisor receives no commissions; his or her only compensation is the fee you pay directly. The advisor may charge in one of two ways. Either a percent of assets under management or other direct fees that might include hourly consultation or a retainer for a specific project. The advisor receives no commissions; his or her only compensation is the fee you pay directly. There should be no investments or financial products offered that asses commissions.

Choosing An Advisor
The great paradox of using an advisor is that you must know some basics in order to evaluate the advice, and once you do, you also know enough to consider doing your own management. If you have gotten this far through the primer, you are already a more knowledgeable investor.

You now have some sense of what proper investing fundamentals are, which means you have some defense against really bad advice. The professional advice you receive may or may not be in your best interest, but from what I’ve seen, you are far more likely to get biased or even harmful advice if you don’t choose carefully. Unfortunately, because of extremely loose industry standards, it isn’t easy to find an advisor who is qualified and one you can trust.

What comes to mind when you hear the terms financial planner, financial advisor, investment counselor or wealth manager? You might be surprised to learn that these titles mean absolutely nothing. The Financial Institution Regulatory Authority (FINRA), formerly NASD, does not recognize them. Here is some enlightenment from Rick Ferri, who holds the Chartered Financial Analyst (CFA) certification: “The financial industry plays the game like no other. Every advisor calls himself something that makes him seem like an expert, but few people are. At brokerage firms, everyone is a Vice President. If they are not a VP, they are either very new or on their way out the door. In addition, everyone calls himself or herself a Financial Consultant, Financial Advisor, Financial Coach, Retirement Specialist, or some other nonsense title that means nothing. These are all self-appointed titles, and they can change with the wind.”

The type of advisors who hold no useful credential almost always promote high cost commissioned products. These are the high profile guys. They’re the ones who advertise heavily and aggressively look for your business. They promote through “free” seminars, dinners, mailing campaigns and cold calls. Friends and business acquaintances frequently recommend them simply because they’ve met them through business associations, and they don’t know any better. You don’t have to look for these advisors; they will find you!

Bruce Miller, CFP® clarifies; Real Certified Financial Planners (CFP) are bound by something called the ‘brochure rule’, that requires us to immediately disclose lots of information to a prospective client…including from whom and how much we are paid, even if by commissions. This is done by contract before any data collection or advising is done.“The CFP® Board now requires that all CFP® Certificants provide the fiduciary standard to their clients who retain their financial planning services.

And this is what AARP had to say in their July 2006 online magazine: “Fiduciary” means that the person working for you owes you the highest possible duty of care and loyalty, so that a relationship of trust and confidence exists between you and the planner. While you may think that this sort of trust and confidence will naturally exist, a fiduciary relationship usually depends on the facts and circumstances of a particular situation.

This link provides the definition of fiduciary responsibility as defined by The National Association of Personal Financial Advisors (NAPFA):

In the strictest sense, there is a distinction between a financial planner and an investment advisor. The role of ‘Financial Planner’ is unregulated and anyone may refer to themselves as such,  regardless of their training or lack thereof. An ‘Investment Advisor’ is regulated by the SEC, and requires that anyone who holds themselves out as an investment advisor and is compensated for it, must register with the SEC or their state’s equivalent and meet full disclosure requirements and must apply a fiduciary standard to their client’s investments. One other option is the large mutual fund companies themselves. The fees seem to be competitive, and if you are opening a large account, the fees may be reduced or waived. T. Rowe Price, Fidelity and Vanguard are three large, respected companies who are now offering advisor services. Recommendations will be from the company you go with of course, but these three companies offer a wide variety of funds so choices should not be a problem.

Factors to Evaluate When Looking for an Advisor

Look for CFP and CFA designations. Check for any non-compliance issues.
Education and background
Verify that education and background are consistent with credentials.
Do not hire anyone you cannot fire without personal repercussions—friends, family, members of church or social network.
Look for advisors with at least five years experience
It is very important that you get along with your advisor and you have trust in him/her.

Bruce Miller, CFP®: Once you find several credentialed advisors in your area, call and ask them what they specialize in. Tell them what your approximate goals are and if they think they’d be able to assist you. I recommend you then set up personal interviews with at least 2…. 3 is better.

When you do meet, like a visit to your doctor, they should ask questions, listen and take occasional notes. You should do most of the talking. At the end of 30 minutes, they should be able to clearly summarize your position and recommend a general course of action. They should have no hesitation in encouraging you to think over their general recommended approach and their estimated cost range. Any talk of financial products or recommended specific solutions, or even the slightest pressure to sign an agreement at the end of this first meeting is a bad sign and suggests you should go elsewhere.”

Questions to ask potential advisors;
1. Are You a Registered Investment Advisor under the Investment Advisors Act of 1940?
What are your qualifications? Licenses, certifications, regulatory agencies. What organizations, affiliations. How much experience?
2. Do you accept fiduciary responsibility?
3. Please provide a copy of your most recent and accurate disclosure form. ADV-II (Registered Advisor), U-4 (Broker / Dealer)
4. What services do you offer?
How many clients, what type of clients, minimum asset requirements?
5. Are you independent of financial-product sponsors–brokerage firms, insurance companies, banks? Do others you work with or recommend provide you with benefits for your recommendations?
6. What approach to planning and investing do you favor? Stocks, mutual funds, what kind of funds, annuities? Note: The advisor’s approach and risk management style should be in line with yours.
7. Will you be the only person working with me? In the office, outside professionals?
8. How much do you typically charge and how are your fees applied?
9. Will you provide a written statement of all fees, including direct fees and fees paid to other firms or organizations?
10. How will I pay you for various services?

Get an agreement, including costs, in writing for services that will be provided. It may be a good idea to copy these questions and send them before you meet with potential advisors. That will save you and the advisors some time. And it will send them a message that you know what you’re doing.

Be leery of any advisor who suggests annuities, with the exception of low-cost single payment immediate annuities (SPIAs) . Avoid wrap accounts, separate accounts, limited partnerships, private real estate trusts, leveraged funds, equity-indexed annuities, insurance products, cash value life insurance, or any products the advisor tells you can’t lose money. Never hire an advisor that says you don’t pay him—the fund company pays him.

If you hire an advisor, remember he or she works for you.

Bruce Miller (quote): Sometimes the best you can do is to find a planner who doesn’t have a compensation plan that would seem to be at odds with your best interests. And if you have a planner who has decided that ‘his/her own best interests are served by consistently providing a quality plan to his/her clients’, that is probably as good as it gets.

Two links for finding an advisor:

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Chapter 11 – Final Thoughts, References

Chapter 11

Final Thoughts, References, Glossary

While this investment primer touches on proper investment fundamentals, it isn’t intended to cover all you need to know. Following up with one of the suggested books will help solidify new concepts. And reading the primer first will help you digest the book material more easily.

I hope I have given you an idea of the mountain of research, data and facts that exists on the subject – information that you won’t find by asking an industry that prefers you remain in the dark. I also hope you have developed a warning radar for detecting information, suggestions and advice that are in conflict with your best interest

Investing in stocks is a way to generate future income, but it isn’t the only way and it requires that you take risk with your money–but it is a risk that has provided results worth the risk. Settle on a risk/reward measure that will help you achieve your goals while protecting what you’ve accumulated, not one designed to beat the market average. There are no hurdles you need to jump–balance risk against a reasonable return. Investing is not a competitive sport—don’t get fancy, and don’t listen to TV or magazine hype—what Jane Bryant Quinn calls “investment porn.” Ignore temptations to go after hot funds or choose funds based on recent past performance.

If stock returns came from history books, then the wealthiest people would be librarians.”
Warren Buffett

Managing your money is about the unglamorous task of being a defensive lineman, not the star quarterback.” Ben Stein, Phil DeMuth – authors of several investing books.

Don’t begin by looking at funds. Do a risk analysis and choose an allocation first, then figure  out how you want to diversify your investments – large caps, small caps, international, REITs, value, blend and growth. Only then should you consider funds.

If you’re just starting out, you may not have enough to invest to meet the fund’s minimum investment in every category. If not, then look for target retirement funds, or other funds that give you exposure to several funds in one. Also look at balanced funds that contain both stocks and bonds. If you have already accumulated a larger portfolio, the process is the same, but you might wish to choose individual funds to fill your diversification slots.

The most important investment a person can make is in education.

Good First Books
“The Bogleheads’ Guide to Investing” by Taylor Larimore, Mel Lindaur and Michael LeBoeuf
“The Coffeehouse Investor” by Bill Schultheis
“The Informed Investor” by Frank Armstrong

The Big Investment Lie” by Michael Edesess
“The Investor’s Manifesto” by William Bernstein

Books with More Depth
“John Bogle on Mutual Funds” by John Bogle
“Common Sense on Mutual Funds” by John Bogle
“Four Pillars of Investing” by William Bernstein
“Random Walk Down Wall Street” by Burton Malkiel
Any book by Rick Ferri or Larry Swedroe

Behavioral Finance
Why Smart People Make Big Money Mistakes” by Belsky and Gilovich
What Investors Really Want” by Meir Statman.
“Predictably Irrational”, by Dan Ariely
“Behavioral Finance and Wealth Management” by Michael Pompian
“The Little Book of Behavioral Investing” by James Montier

Free Online Books
Investing for the 21st Century” by Frank Armstrong

Serious Money, Straight Talk About Investing for Retirement” by RickFerri,

For General Information on Investment Basics (general information, recommendations, discussions based on MPT) (articles)

Advanced Information and articles on Investing (many good articles)

For General Information on Mutual Funds (Reference Library) (fund information and leaning center)

For Advanced Information on the portfolio selection method (modern portfolio theory) (theory and practice) (academic articles)

For Information on Exchange Traded Funds (ETFs)

For Information on 401k and IRA (401k help) (IRA help)

For Information on Financial Planners

For Information on Retirement Withdrawals

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