For frontier markets for the next big thing in investment

Emerging markets portfolio managers specialize in the search for the next big thing. But after the conversion of many economies in Asia and Latin America during the two decades and strong yields and dominant popularity of their markets, which are left to find?

What stock markets in Africa, the countries of the Middle East and Asia, as well as to the Viet Nam, in Bangladesh and Sri Lanka? Investment advisers who focus on developing countries argue that many of these so-called border, especially in Africa, markets offer opportunities similar to markets emerging of previous generations.

"Africa will be the next great growth story that has largely unknown," said Larry Seruma, Manager of the Nile Pan Africa Fund, a mutual fund U.S. holding shares in companies that are based in the region or that are of important cases. "It can supplant the Brazil, China and the Russia if its potential is realized," he said.

It is a big if, and consider problems of Africa he only seem larger. There is misery, disease and hunger, aggravated by the other scourges that limit opportunities for Africans to improve their conditions of life: political instability, inadequate education and in some cases long military conflict.

But the case for the region and border markets elsewhere are precisely that they only set on the path of economic and social progress and still have a long way to go. It is the same journey made by the major emerging economies of today. There are barely four decades since Chinese farms were decollectivized, for example, and less than two decades the Brazilian inflation was running at more than 40 per cent per month.

"Frontier markets are often in a State of economic development much earlier than the major emerging markets and may have only recently opened to foreign investment," said Mark Mobius, one of the pioneers of investment in developing countries, who heads operations in emerging markets in Franklin Templeton, the fund company. "This helps explain their high growth potential." New markets were generally more space to grow, and the research of acute potential growth in global instability encouraged many investors to expand their horizons. »

A recent report by Citigroup has identified 11 economies should show exceptional growth in the century, including two of the usual suspects, China and the India. Most of the others are frontier markets - Bangladesh, Iraq, Mongolia, Nigeria, Sri Lanka and Viet Nam - otherwise minor emerging markets that managers of the border sometimes Portfolios invest in, as Egypt and the Philippines.

Calls to invest in places as they expect that they become future markets. Today and yesterday, it is another story. The MSCI index markets lost border approximately two-thirds of its value in the global collapse of 2008 and 2009.

This is a little more global harm than the index of MSCI emerging and mature markets, but where frontier markets are really suffering in comparison is in the period since then. The resumption of border markets was much less deep, leaving the index at least half of its 2008 high, while the other two indices have recovered almost all of their lost ground.

Pradipta Chakrabortty, a manager of Harding Loevner New Frontier market fund, attributed the weakness, especially in Africa, of the political unrest of the revolts of Arab spring and a series of economic and financial difficulties, steps over there, but to the North.

"Africa has many capital from Europe," he said. "It all started in 2010 flowing into frontier markets, but recovery is suppressed in the egg of the sovereign debt crisis".

Mr. Chakrabortty pointed out, however, that some investors deep pockets continue to funnel money markets of the border. Chinese companies make huge purchases of industrial and agricultural assets in places such as Africa and the Viet Nam.

Whenever investors decide to join them, there are three themes that fund managers expect returns of drive for the coming years: the growth of a consumer society of middle class, with all services and products which are its attributes; production and export of natural resources. and the development of infrastructure, including transport and communication networks necessary to the success of companies involved in the other two themes.

Mr. Chakrabortty is some of the best opportunities of these days in Africa and the Middle East and the Viet Nam and Bangladesh, where labour is cheaper than elsewhere in Asia. His portfolio is invested strongly focused on consumption of stocks such as Safaricom, a provider of telephone services Kenya and Equity Bank, also in the Kenya. Other selections include Squire Pharmaceuticals in Bangladesh and First Bank of Nigeria.

Mr. Mobius sees encouraging prospects for the border of the markets almost everywhere. He was "optimistic about the potential for growth in the long term in many countries" in Africa and said that "we must not forget countries of Latin America, such as the Colombia and Peru, the countries of Europe, such as the Romania and countries in Asia such as the Viet Nam, Pakistan and Sri Lanka."

Mr. Seruma focuses on Africa, but he does not feel the need to invest it to capture the promise of the continent. Its portfolio includes funds such as oil in Africa, who discovered the Kenya reservations, but have a shares listed on the Canada and Tullow Oil, which is registered in Britain and has assets of energy in Ghana and Uganda.

The Fund also has hybrids developed border as East African Breweries, which is half owned by the conglomerate global beverage Diageo and the Nestlé Nigeria. Among stocks African pure love are Guaranty Trust Bank in Nigeria and Flour Mills of Nigeria, a producer of basic food.

"As more capital gets employees" markets follows, "you will see the return to catch up with the rest of the world", Mr. Seruma predicted. For how long it will take to become a big thing, it is uncertain. "We must focus on the history of long-term growth", he said "" and be a patient investor.""

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New Investment Books Aim to Right Your Wrongs - Review

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AppId is over the quota
Tomorrow? Who knows?

But one constant, say the authors of two new business books, is the real possibility that you will do something to make your portfolio worse. The writers are out to save you from yourself.

The better of the two books, “Investment Mistakes Even Smart Investors Make and How to Avoid Them” (McGraw-Hill, $28) is, in essence, a detailed checklist — in the form of short, focused chapters — of what not to do. Larry E. Swedroe, director of research for the Buckingham Family of Financial Services, which manages $3 billion of clients’ money, and RC Balaban, a media specialist at the firm, have created 77 things to guard against in making investment decisions.

First, let’s get the nits out of the way. Of the 77 mistakes the authors describe, there are a handful like “following the herd,” not starting to save soon enough, and being too conservative (and being victimized by inflation as a result). These are things you may have heard 873 times.

And as the number climbs to 77, the authors come dangerously close a number of times to double-counting. For example, there is a chapter on not believing in luck, followed closely by one warning against winning streaks (as in, just because a mutual fund manager has outperformed the market for three consecutive years doesn’t mean she is guaranteed success in Year 4.).

And there is a chapter cautioning about believing “experts” and another about not blindly following market gurus.

No matter. A significant number of chapters should at least get you to reconsider your investment strategy.

For example, many investors minimize their exposure to real estate investment trusts, figuring that because they own a home, real estate is already represented in their portfolios.

“A home is clearly real estate. However, it is very undiversified real estate,” the authors write. “It is undiversified by type. There are many types of real estate: office, warehouse, industry, multifamily, residential, hotel and so on.” In addition, “a home is undiversified by geography.”

Another common mistake is buying an index fund and believing that you own equal amounts of the stocks in the index.

That is usually not the case. Most indexes are market-cap weighted. That means an individual stock’s representation in the index is based on that stock’s market capitalization as a percentage of the total market cap of all the index’s stocks. The larger the stock’s market capitalization, the greater the percentage of the index fund it will represent.

As a result, the authors write, “most investors would be surprised how little exposure a total market fund has to the asset classes of small-cap stocks and value stocks.” Small-cap stocks accounted for just 8.2 percent of the total at the end of 2008, the book says, while the figure for value stocks was only 5.4 percent.

The authors are huge fans of buying index funds, but they add that “indexing does not mean that an investor should hold only an S.& P. 500 Index fund or a total stock market fund.” Instead, they say, you should determine how you want your money allocated by asset class — large cap, small cap, international, etc. — and buy index funds for those classes.

Here’s another example of a common mistake: Most people know that when it comes to investing, costs matter, but the authors say investors usually don’t consider every possible expense when putting money into a mutual fund. They will look at operating expenses and may forget about taxes — yet some funds are far more tax-efficient than others. And, the authors warn: “The least-understood hidden cost is the cost of cash. The cost of cash occurs when a mutual fund holds a cash position instead of being fully invested in the market. The greater the cash position held, the greater the impact.”

A majority of investor mistakes can be summed up by the phrase “try not to shoot yourself in the foot.” And that, as David Dreman shows in his revised and updated “Contrarian Investment Strategies: The Psychological Edge” (Free Press, $30), is a lot harder than it sounds.

The good news is that Mr. Dreman, chairman and managing director of Dreman Value Management, which invests more than $5 billion of money for individuals and institutions, points to all kind of work in cognitive and neuropsychology that proves why investing is so darn difficult. For example, “the more we like an investment, the less risk we think it entails even if it is riddled with it.”

What follows from this understanding, Mr. Dreman says, is that “the psychology-aware investor holds a superior advantage, not just more theoretical knowledge, but a genuine practical investment edge.”

But the bad news is that it takes substantially more than 200 pages before he starts to tell the reader how to use that edge. The early going is all about the psychology; what’s happened in the more than 13 years since the last edition of the book, and why just about everyone else is wrong when it comes to investing. (He is particularly harsh on people who believe in “the efficient market theory,” which suggests that it’s very hard to beat the market over time.)

When he does start offering specific investment advice, Mr. Dreman presents a classic value-investing approach. This recommendation is typical: “Buy solid companies currently out of market favor as measured by their low price-to-earnings, low price-to-cash flow, or low price-to-book-value ratios, or by the high yields.”

The payoff is fine, but you have to wade through an awful lot of neuroscience and psychology, and people with even a passing understanding of behavioral economics will already know much of it.

But taken together with “Investment Mistakes,” this book is a solid reminder that one of the biggest risks to your overall investment health is staring back at you in the mirror.

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It’s Time to Rebalance the Investment Portfolio - Your Money

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AppId is over the quota
As the markets ebb and flow, the mix of investments that you originally put into place will probably change shape over time. And if you let your portfolio roam free for too long, your long-term plan can be thrown off kilter. Your retirement savings could become too heavily invested in stocks, potentially magnifying your losses when the market takes its next dive. Or your savings could become too conservative, and that’s a problem, too.

You can solve all of this, though, by regularly rebalancing, the industry’s term for putting your investments back in the proportions you originally set. But unless you hand off the reins of your portfolio to a financial planner, you need to make the time to do this yourself (ditto for investors who periodically hire a professional and want to carry out the advice themselves).

So, in theory, the task should be as simple and as automated as possible. Otherwise, you probably won’t find the time to do it. And really, most of the time, you just need to do a little maintenance.

Going through the exercise should be as easy as it is at TIAA-CREF, the financial services organization. When I recently set up a new 403(b) there for a family member — 403(b)s are essentially another flavor of 401(k) plans — I was pleasantly surprised by one of the options presented: Would you like to rebalance your portfolio back to your original allocations on your birthday?

That’s genius, I thought, and so incredibly simple. Why doesn’t my 401(k) plan offer this? Why doesn’t everyone’s plan offer this? And what online brokerages offer similar types of automated services?

As it turns out, automatic rebalancing is a standard option in many, but not all, 401(k) plans. But it should be. There’s little downside as long as you’ve already set up the proper investment mix. It shouldn’t cost you anything, there are no tax implications and you’re simply keeping your risk level intact. Aon Hewitt, a giant retirement plan administrator, said that more than half the companies in its database that offer 401(k) plans — covering more than 12 million workers — offered employees the ability to rebalance last year. That’s a large increase from a decade earlier, when less than 15 percent offered the feature.

Surprisingly, only a few of the larger online brokerage firms, including TD Ameritrade and Fidelity, offer anything remotely similar. Part of the reason, some providers said, is that the situation becomes more complicated when investors hold a mix of taxable and nontaxable accounts, since there can be tax implications and trading costs.

Of course, there are plenty of investments, namely target-date funds, that will automatically rebalance for you. These funds include a mix of investments that gradually becomes more conservative over time. As long as you fully understand what you’re buying and you’re not overpaying, they are good options for many investors, particularly those with smaller balances. Unfortunately, the entire category came under fire after the big market dive because many funds were too aggressively invested and managed to lose more than the broader stock market.

But if you’re trying to do this on your own, the question becomes this: How often should I rebalance and which providers make this as easy as possible?

There are a couple of schools of thought. Some experts recommend rebalancing based on an indicator, like when a piece of your portfolio moves a certain percentage outside your desired range, while others say it’s perfectly fine to pick a date and do it once a year. Vanguard has found that, historically, rebalancing once or twice a year — and only when a portfolio has drifted from its goal by at least 5 percent — produces results that are just as good as more complicated, frequent rejiggering strategies.

Consider what might happen if you did nothing at all. Beginning in 1987, a portfolio of 60 percent stocks and 40 percent bonds would have ballooned to 71 percent stocks by the end of last year, according to Vanguard. Rewind the same portfolio back to 1946 and it would have almost completely changed into an all-equity portfolio, at 97 percent stocks.

It is a counterintuitive strategy, since you’re basically adding money to your losing investments and selling off those that are doing well. But by sticking with it, the exercise helps take the emotion out of investing.

Of course, there are several low-cost services that can do it for you, while many online brokerages will manage your account for a fee. But here’s an informal survey of the offerings for those who want to handle it on their own, both inside and outside of retirement plans (if we missed any, you can add your own suggestions to the list on our Bucks blog):

FIDELITY The firm offers a rebalancing feature through its Portfolio Review tool, available to its 401(k) participants and to retail brokerage customers. After you set up a portfolio, it automatically sends you alerts through its “myPlan monitor” service when your portfolio drifts more than 10 percent from your goals. When you revisit the tool, it will ask you a few questions to make sure your goals remain the same and then recommend how to get back into balance. “So while it’s not automatic, there is an educational element of taking a few minutes to go through it,” said Jeffrey K. Cimini, executive vice president in Fidelity Investments’ personal investing division. Then you can “click to trade” to put everything back into balance.

T. ROWE PRICE The company offers automatic rebalancing as a standard option within the retirement plans it provides to employers. But only 25 percent of workers with access to the tool sign up for it, according to James Griffin, a senior product manager in its retirement plan services group, and that number has been declining over the last few years given the widespread adoption of target-date funds. It offers a similar option for its I.R.A. customers. After filling out a form indicating your selected mix of investments — you need to keep at least $1,000 in each fund in the portfolio — the firm will automatically rebalance your portfolio each quarter if your investments stray more than 5 percent from those goals.

VANGUARD It also offers a similar free rebalancing feature in its 401(k) plans, but employers have to choose to turn on the feature. While offering the service within a 401(k) is relatively straightforward, since there are no tax implications and rarely any related trading costs, the company said it did not currently offer the service to individual investors, though that was something it continued to consider.

SCHWAB It does not offer automatic rebalancing options to retail customers, though it has a couple of tools that illustrate whether your portfolio is off track. But its 401(k) plan participants can elect to have their portfolios rebalanced quarterly, semiannually or annually, and they receive a notice each time it has been reallocated.

TD AMERITRADE Its customers can automatically rebalance through its free Portfolio Planner tool, where you can analyze an existing portfolio or get help building a new one. While the service does not send any automatic reminders letting you know when your portfolio needs to be rebalanced, after you go through the tool, you can choose to “align your current portfolio to your target portfolio,” and it will do the math and set up and execute your trades with a few clicks. You can try to keep commission costs to a minimum by using its 100 commission-free exchange-traded funds and more than 700 mutual funds that don’t charge any transaction fees or commissions.

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The Value of a Written Investment Policy Statement

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AppId is over the quota
Financial planners and registered investment advisers have been using them for years with their clients; brokers less so. While the statement is time-consuming to assemble and maintain, it will serve you well, particularly in volatile markets.

The basic investment policy statement puts on paper answers to your questions about objectives, return expectations, risk tolerance, time horizon and portfolio allocation. Should you weight your holdings more toward bonds or stocks? Do you want to save for college and a second home in addition to retirement?

Why is it important to write all of this down? The statement will help keep you focused on your goals. You will not only be taking the appropriate amount of the risk, you will have some idea of how your portfolio will do in a down year.

Most important, once it’s reviewed by a fiduciary adviser you engage to take legal responsibility for drafting your retirement plan, your policy statement can show you over time if your return expectations are realistic. Keep in mind that you also need to estimate inflation, market factors and tax liability.

“What matters is after-tax wealth,” said Michael A. Dubis, a fee-only certified financial planner in Madison, Wis. “I will tell clients if their return expectations don’t make sense. Hope is not a strategy.”

Mr. Dubis sees a policy statement as part of a coordinated financial planning process. Although most advisers are generally focused on investments, they can also work with tax, estate and insurance advisers on protecting your assets and helping them grow over time.

To draft a policy statement, you need to determine your investment philosophy. What kind of investor should you be? Can you afford to be aggressive? Maybe not, if your income is tied to a volatile industry like financial services. Are you an active or passive investor? Trading is rarely a good idea when hundreds of index funds are available, offering broad exposure to nearly every market.

Advisers should include in the statement their style of money management, how much they charge, their responsibilities and a periodic review schedule. They may even include some language on what they won’t or can’t do — like estate planning or tax planning — although they often coordinate with other professionals. Even computerized Monte Carlo analyses of the probability of achieving your goals are useful.

Once you review your objectives, what you own, how you want to invest and risk and return expectations over given time periods, you can sit down with your planner to construct a portfolio that’s right for you. The amateur investment group Bogleheads provides an excellent introduction to the process.

A draft portfolio is a synthesis of the information you supply your planner. A sample might stress long-term growth in United States and international stocks, along with bonds, real estate investment trusts and inflation-protected securities.

Larry Swedroe, director of research for Buckingham Asset Management in St. Louis, said people needed to do some self-analysis and chat with family members before the final statement was in place.

“You need to separate desires from needs,” said Mr. Swedroe, who wrote “The Only Guide You’ll Ever Need for the Right Financial Plan” (Bloomberg Press 2010). “It’s critical to integrate your plan with taxes, estate planning and insurance needs. It’s a necessary condition for success, but not a sufficient one.”

Mr. Swedroe recommends that clients also do a mind map, which is like a flow chart that shows relationships among family members, assets, advisers, interests, values and goals.

While this process sounds tedious and time-consuming — it can take up to four meetings to draft and review a policy statement with your adviser — it is worthwhile because it may address needs you’ve never discussed with your family or advisers.

What do you do if the market dives just before your retirement? Can you save more? What if you have to support an aging relative? What if you sell some real estate and downsize? Your statement can be adjusted as you go along.

At the very least, your adviser should be able to tell you the worst- and best-case range of returns given your investment allocation. That way, you can insulate your portfolio from a dismal year like 2008.

A few paragraphs on how your adviser will manage your money is also essential before you actually build the portfolio. If his or her objectives differ from yours, you need to discuss it. Do you want an actively managed, aggressive growth strategy? Or are you more focused on capital preservation and income? Don’t stay with an adviser whose approach doesn’t match your needs.

Like any moving vehicle, an investment policy statement needs regular care, maintenance and rebalancing. It should be flexible to accommodate changes in your life: divorces, aging parents, inheritances. As the route of your journey changes, you may need a new road map.

John F. Wasik, co-author of “iMoney,” is a Reuters columnist.

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What to Look For in an Active Investment Manager

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AppId is over the quota
Yet investors regularly ask for a mutual fund’s track record over one, three, five years or more before putting their money in. Sure, the fund may keep going up, and the past performance is an indicator. But what happens if the fund starts to drop? Should the investor sell, or hang on because the fund did well in the past?

A report released this week from Barclays Wealth and Investment Management, “The Science and Art of Manager Selection,” aims to lay out the risks of trying to read past performance into future returns when selecting active managers — as opposed to passive management of your money through index and exchange-traded funds.

Investors are asking the wrong question when they argue whether active or index funds are better, said Aaron Gurwitz, chief investment officer at Barclays and one of the authors of the report. “The question is, Can you identify managers who are going to perform well in the future?” he said. “If you can’t, you should be in an index fund. If you can, then you should select managers the way we do.”

The report highlights a basic problem in investing — that the obsession with recent returns hurts long-term performance. Psychologists and behavioral economists call the phenomenon the recency bias, and it is not confined to investing.

“We’re like pattern-finding machines,” said Terrance Odean, professor of finance at the Haas School of Business at the University of California, Berkeley. “If lightning strikes and something falls off the table, we think the lightning caused it. Or worse, the book falls and lightning strikes and you think the book caused it.”

But searching for patterns does not add up to a good investing policy. “The investor who is in the market and is constantly seeing patterns better have a good day job,” Mr. Odean said.

In a paper in 2008, “All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors,” Mr. Odean and a co-author, Brad M. Barber, a finance professor at the Graduate School of Management at the University of California, Davis, found that individual investors were more likely to buy a stock if they saw something about it in the news or if it had a high one-day return. The two professors attributed this to how difficult it was to do detailed analysis on thousands of stocks before buying one.

But how can investors be broken of their habit? The Barclays paper advocates a mix of what its authors call the art and science of picking active managers.

The art refers to the idea that the ability of most mutual fund and hedge fund managers to outperform their indexes peaks and then declines as more money comes into the funds. (Private equity managers have better luck because they are essentially repeating the same strategy with different companies.)

David Romhilt, the head of manager research and selection at Barclays and the lead author of the report, said active managers went through four phases: start-up, growth, maturity and decline. He sought to identify those managers in the second phase, growth, because that is when they have had enough success with their strategy but not so much success that money has poured in and changed how they invest.

One example of this life cycle is Bill Miller, the chairman and chief investment officer of Legg Mason Capital Management. He outperformed the Standard & Poor’s 500-stock index from 1991 to 2005 with his Value Trust fund. Then, for five of the next six years he either underperformed or significantly underperformed the benchmark.

The Barclays report does not address individual managers, but its authors say the decline should not be shocking. As assets grow, managers have to take enormous stakes in single companies or diversify into too many different securities. The fund loses the nimbleness it once had.

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It’s Time to Rebalance the Investment Portfolio - Your Money

The remote server returned an unexpected response: (417) Expectation failed.
The remote server returned an unexpected response: (417) Expectation failed.
As the markets ebb and flow, the mix of investments that you originally put into place will probably change shape over time. And if you let your portfolio roam free for too long, your long-term plan can be thrown off kilter. Your retirement savings could become too heavily invested in stocks, potentially magnifying your losses when the market takes its next dive. Or your savings could become too conservative, and that’s a problem, too.

You can solve all of this, though, by regularly rebalancing, the industry’s term for putting your investments back in the proportions you originally set. But unless you hand off the reins of your portfolio to a financial planner, you need to make the time to do this yourself (ditto for investors who periodically hire a professional and want to carry out the advice themselves).

So, in theory, the task should be as simple and as automated as possible. Otherwise, you probably won’t find the time to do it. And really, most of the time, you just need to do a little maintenance.

Going through the exercise should be as easy as it is at TIAA-CREF, the financial services organization. When I recently set up a new 403(b) there for a family member — 403(b)s are essentially another flavor of 401(k) plans — I was pleasantly surprised by one of the options presented: Would you like to rebalance your portfolio back to your original allocations on your birthday?

That’s genius, I thought, and so incredibly simple. Why doesn’t my 401(k) plan offer this? Why doesn’t everyone’s plan offer this? And what online brokerages offer similar types of automated services?

As it turns out, automatic rebalancing is a standard option in many, but not all, 401(k) plans. But it should be. There’s little downside as long as you’ve already set up the proper investment mix. It shouldn’t cost you anything, there are no tax implications and you’re simply keeping your risk level intact. Aon Hewitt, a giant retirement plan administrator, said that more than half the companies in its database that offer 401(k) plans — covering more than 12 million workers — offered employees the ability to rebalance last year. That’s a large increase from a decade earlier, when less than 15 percent offered the feature.

Surprisingly, only a few of the larger online brokerage firms, including TD Ameritrade and Fidelity, offer anything remotely similar. Part of the reason, some providers said, is that the situation becomes more complicated when investors hold a mix of taxable and nontaxable accounts, since there can be tax implications and trading costs.

Of course, there are plenty of investments, namely target-date funds, that will automatically rebalance for you. These funds include a mix of investments that gradually becomes more conservative over time. As long as you fully understand what you’re buying and you’re not overpaying, they are good options for many investors, particularly those with smaller balances. Unfortunately, the entire category came under fire after the big market dive because many funds were too aggressively invested and managed to lose more than the broader stock market.

But if you’re trying to do this on your own, the question becomes this: How often should I rebalance and which providers make this as easy as possible?

There are a couple of schools of thought. Some experts recommend rebalancing based on an indicator, like when a piece of your portfolio moves a certain percentage outside your desired range, while others say it’s perfectly fine to pick a date and do it once a year. Vanguard has found that, historically, rebalancing once or twice a year — and only when a portfolio has drifted from its goal by at least 5 percent — produces results that are just as good as more complicated, frequent rejiggering strategies.

Consider what might happen if you did nothing at all. Beginning in 1987, a portfolio of 60 percent stocks and 40 percent bonds would have ballooned to 71 percent stocks by the end of last year, according to Vanguard. Rewind the same portfolio back to 1946 and it would have almost completely changed into an all-equity portfolio, at 97 percent stocks.

It is a counterintuitive strategy, since you’re basically adding money to your losing investments and selling off those that are doing well. But by sticking with it, the exercise helps take the emotion out of investing.

Of course, there are several low-cost services that can do it for you, while many online brokerages will manage your account for a fee. But here’s an informal survey of the offerings for those who want to handle it on their own, both inside and outside of retirement plans (if we missed any, you can add your own suggestions to the list on our Bucks blog):

FIDELITY The firm offers a rebalancing feature through its Portfolio Review tool, available to its 401(k) participants and to retail brokerage customers. After you set up a portfolio, it automatically sends you alerts through its “myPlan monitor” service when your portfolio drifts more than 10 percent from your goals. When you revisit the tool, it will ask you a few questions to make sure your goals remain the same and then recommend how to get back into balance. “So while it’s not automatic, there is an educational element of taking a few minutes to go through it,” said Jeffrey K. Cimini, executive vice president in Fidelity Investments’ personal investing division. Then you can “click to trade” to put everything back into balance.

T. ROWE PRICE The company offers automatic rebalancing as a standard option within the retirement plans it provides to employers. But only 25 percent of workers with access to the tool sign up for it, according to James Griffin, a senior product manager in its retirement plan services group, and that number has been declining over the last few years given the widespread adoption of target-date funds. It offers a similar option for its I.R.A. customers. After filling out a form indicating your selected mix of investments — you need to keep at least $1,000 in each fund in the portfolio — the firm will automatically rebalance your portfolio each quarter if your investments stray more than 5 percent from those goals.

VANGUARD It also offers a similar free rebalancing feature in its 401(k) plans, but employers have to choose to turn on the feature. While offering the service within a 401(k) is relatively straightforward, since there are no tax implications and rarely any related trading costs, the company said it did not currently offer the service to individual investors, though that was something it continued to consider.

SCHWAB It does not offer automatic rebalancing options to retail customers, though it has a couple of tools that illustrate whether your portfolio is off track. But its 401(k) plan participants can elect to have their portfolios rebalanced quarterly, semiannually or annually, and they receive a notice each time it has been reallocated.

TD AMERITRADE Its customers can automatically rebalance through its free Portfolio Planner tool, where you can analyze an existing portfolio or get help building a new one. While the service does not send any automatic reminders letting you know when your portfolio needs to be rebalanced, after you go through the tool, you can choose to “align your current portfolio to your target portfolio,” and it will do the math and set up and execute your trades with a few clicks. You can try to keep commission costs to a minimum by using its 100 commission-free exchange-traded funds and more than 700 mutual funds that don’t charge any transaction fees or commissions.

View the original article here

What to Look For in an Active Investment Manager

The remote server returned an unexpected response: (417) Expectation failed.
The remote server returned an unexpected response: (417) Expectation failed.
Yet investors regularly ask for a mutual fund’s track record over one, three, five years or more before putting their money in. Sure, the fund may keep going up, and the past performance is an indicator. But what happens if the fund starts to drop? Should the investor sell, or hang on because the fund did well in the past?

A report released this week from Barclays Wealth and Investment Management, “The Science and Art of Manager Selection,” aims to lay out the risks of trying to read past performance into future returns when selecting active managers — as opposed to passive management of your money through index and exchange-traded funds.

Investors are asking the wrong question when they argue whether active or index funds are better, said Aaron Gurwitz, chief investment officer at Barclays and one of the authors of the report. “The question is, Can you identify managers who are going to perform well in the future?” he said. “If you can’t, you should be in an index fund. If you can, then you should select managers the way we do.”

The report highlights a basic problem in investing — that the obsession with recent returns hurts long-term performance. Psychologists and behavioral economists call the phenomenon the recency bias, and it is not confined to investing.

“We’re like pattern-finding machines,” said Terrance Odean, professor of finance at the Haas School of Business at the University of California, Berkeley. “If lightning strikes and something falls off the table, we think the lightning caused it. Or worse, the book falls and lightning strikes and you think the book caused it.”

But searching for patterns does not add up to a good investing policy. “The investor who is in the market and is constantly seeing patterns better have a good day job,” Mr. Odean said.

In a paper in 2008, “All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors,” Mr. Odean and a co-author, Brad M. Barber, a finance professor at the Graduate School of Management at the University of California, Davis, found that individual investors were more likely to buy a stock if they saw something about it in the news or if it had a high one-day return. The two professors attributed this to how difficult it was to do detailed analysis on thousands of stocks before buying one.

But how can investors be broken of their habit? The Barclays paper advocates a mix of what its authors call the art and science of picking active managers.

The art refers to the idea that the ability of most mutual fund and hedge fund managers to outperform their indexes peaks and then declines as more money comes into the funds. (Private equity managers have better luck because they are essentially repeating the same strategy with different companies.)

David Romhilt, the head of manager research and selection at Barclays and the lead author of the report, said active managers went through four phases: start-up, growth, maturity and decline. He sought to identify those managers in the second phase, growth, because that is when they have had enough success with their strategy but not so much success that money has poured in and changed how they invest.

One example of this life cycle is Bill Miller, the chairman and chief investment officer of Legg Mason Capital Management. He outperformed the Standard & Poor’s 500-stock index from 1991 to 2005 with his Value Trust fund. Then, for five of the next six years he either underperformed or significantly underperformed the benchmark.

The Barclays report does not address individual managers, but its authors say the decline should not be shocking. As assets grow, managers have to take enormous stakes in single companies or diversify into too many different securities. The fund loses the nimbleness it once had.

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New Investment Books Aim to Right Your Wrongs - Review

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The remote server returned an unexpected response: (417) Expectation failed.
Tomorrow? Who knows?

But one constant, say the authors of two new business books, is the real possibility that you will do something to make your portfolio worse. The writers are out to save you from yourself.

The better of the two books, “Investment Mistakes Even Smart Investors Make and How to Avoid Them” (McGraw-Hill, $28) is, in essence, a detailed checklist — in the form of short, focused chapters — of what not to do. Larry E. Swedroe, director of research for the Buckingham Family of Financial Services, which manages $3 billion of clients’ money, and RC Balaban, a media specialist at the firm, have created 77 things to guard against in making investment decisions.

First, let’s get the nits out of the way. Of the 77 mistakes the authors describe, there are a handful like “following the herd,” not starting to save soon enough, and being too conservative (and being victimized by inflation as a result). These are things you may have heard 873 times.

And as the number climbs to 77, the authors come dangerously close a number of times to double-counting. For example, there is a chapter on not believing in luck, followed closely by one warning against winning streaks (as in, just because a mutual fund manager has outperformed the market for three consecutive years doesn’t mean she is guaranteed success in Year 4.).

And there is a chapter cautioning about believing “experts” and another about not blindly following market gurus.

No matter. A significant number of chapters should at least get you to reconsider your investment strategy.

For example, many investors minimize their exposure to real estate investment trusts, figuring that because they own a home, real estate is already represented in their portfolios.

“A home is clearly real estate. However, it is very undiversified real estate,” the authors write. “It is undiversified by type. There are many types of real estate: office, warehouse, industry, multifamily, residential, hotel and so on.” In addition, “a home is undiversified by geography.”

Another common mistake is buying an index fund and believing that you own equal amounts of the stocks in the index.

That is usually not the case. Most indexes are market-cap weighted. That means an individual stock’s representation in the index is based on that stock’s market capitalization as a percentage of the total market cap of all the index’s stocks. The larger the stock’s market capitalization, the greater the percentage of the index fund it will represent.

As a result, the authors write, “most investors would be surprised how little exposure a total market fund has to the asset classes of small-cap stocks and value stocks.” Small-cap stocks accounted for just 8.2 percent of the total at the end of 2008, the book says, while the figure for value stocks was only 5.4 percent.

The authors are huge fans of buying index funds, but they add that “indexing does not mean that an investor should hold only an S.& P. 500 Index fund or a total stock market fund.” Instead, they say, you should determine how you want your money allocated by asset class — large cap, small cap, international, etc. — and buy index funds for those classes.

Here’s another example of a common mistake: Most people know that when it comes to investing, costs matter, but the authors say investors usually don’t consider every possible expense when putting money into a mutual fund. They will look at operating expenses and may forget about taxes — yet some funds are far more tax-efficient than others. And, the authors warn: “The least-understood hidden cost is the cost of cash. The cost of cash occurs when a mutual fund holds a cash position instead of being fully invested in the market. The greater the cash position held, the greater the impact.”

A majority of investor mistakes can be summed up by the phrase “try not to shoot yourself in the foot.” And that, as David Dreman shows in his revised and updated “Contrarian Investment Strategies: The Psychological Edge” (Free Press, $30), is a lot harder than it sounds.

The good news is that Mr. Dreman, chairman and managing director of Dreman Value Management, which invests more than $5 billion of money for individuals and institutions, points to all kind of work in cognitive and neuropsychology that proves why investing is so darn difficult. For example, “the more we like an investment, the less risk we think it entails even if it is riddled with it.”

What follows from this understanding, Mr. Dreman says, is that “the psychology-aware investor holds a superior advantage, not just more theoretical knowledge, but a genuine practical investment edge.”

But the bad news is that it takes substantially more than 200 pages before he starts to tell the reader how to use that edge. The early going is all about the psychology; what’s happened in the more than 13 years since the last edition of the book, and why just about everyone else is wrong when it comes to investing. (He is particularly harsh on people who believe in “the efficient market theory,” which suggests that it’s very hard to beat the market over time.)

When he does start offering specific investment advice, Mr. Dreman presents a classic value-investing approach. This recommendation is typical: “Buy solid companies currently out of market favor as measured by their low price-to-earnings, low price-to-cash flow, or low price-to-book-value ratios, or by the high yields.”

The payoff is fine, but you have to wade through an awful lot of neuroscience and psychology, and people with even a passing understanding of behavioral economics will already know much of it.

But taken together with “Investment Mistakes,” this book is a solid reminder that one of the biggest risks to your overall investment health is staring back at you in the mirror.

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The Value of a Written Investment Policy Statement

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The remote server returned an unexpected response: (417) Expectation failed.
Financial planners and registered investment advisers have been using them for years with their clients; brokers less so. While the statement is time-consuming to assemble and maintain, it will serve you well, particularly in volatile markets.

The basic investment policy statement puts on paper answers to your questions about objectives, return expectations, risk tolerance, time horizon and portfolio allocation. Should you weight your holdings more toward bonds or stocks? Do you want to save for college and a second home in addition to retirement?

Why is it important to write all of this down? The statement will help keep you focused on your goals. You will not only be taking the appropriate amount of the risk, you will have some idea of how your portfolio will do in a down year.

Most important, once it’s reviewed by a fiduciary adviser you engage to take legal responsibility for drafting your retirement plan, your policy statement can show you over time if your return expectations are realistic. Keep in mind that you also need to estimate inflation, market factors and tax liability.

“What matters is after-tax wealth,” said Michael A. Dubis, a fee-only certified financial planner in Madison, Wis. “I will tell clients if their return expectations don’t make sense. Hope is not a strategy.”

Mr. Dubis sees a policy statement as part of a coordinated financial planning process. Although most advisers are generally focused on investments, they can also work with tax, estate and insurance advisers on protecting your assets and helping them grow over time.

To draft a policy statement, you need to determine your investment philosophy. What kind of investor should you be? Can you afford to be aggressive? Maybe not, if your income is tied to a volatile industry like financial services. Are you an active or passive investor? Trading is rarely a good idea when hundreds of index funds are available, offering broad exposure to nearly every market.

Advisers should include in the statement their style of money management, how much they charge, their responsibilities and a periodic review schedule. They may even include some language on what they won’t or can’t do — like estate planning or tax planning — although they often coordinate with other professionals. Even computerized Monte Carlo analyses of the probability of achieving your goals are useful.

Once you review your objectives, what you own, how you want to invest and risk and return expectations over given time periods, you can sit down with your planner to construct a portfolio that’s right for you. The amateur investment group Bogleheads provides an excellent introduction to the process.

A draft portfolio is a synthesis of the information you supply your planner. A sample might stress long-term growth in United States and international stocks, along with bonds, real estate investment trusts and inflation-protected securities.

Larry Swedroe, director of research for Buckingham Asset Management in St. Louis, said people needed to do some self-analysis and chat with family members before the final statement was in place.

“You need to separate desires from needs,” said Mr. Swedroe, who wrote “The Only Guide You’ll Ever Need for the Right Financial Plan” (Bloomberg Press 2010). “It’s critical to integrate your plan with taxes, estate planning and insurance needs. It’s a necessary condition for success, but not a sufficient one.”

Mr. Swedroe recommends that clients also do a mind map, which is like a flow chart that shows relationships among family members, assets, advisers, interests, values and goals.

While this process sounds tedious and time-consuming — it can take up to four meetings to draft and review a policy statement with your adviser — it is worthwhile because it may address needs you’ve never discussed with your family or advisers.

What do you do if the market dives just before your retirement? Can you save more? What if you have to support an aging relative? What if you sell some real estate and downsize? Your statement can be adjusted as you go along.

At the very least, your adviser should be able to tell you the worst- and best-case range of returns given your investment allocation. That way, you can insulate your portfolio from a dismal year like 2008.

A few paragraphs on how your adviser will manage your money is also essential before you actually build the portfolio. If his or her objectives differ from yours, you need to discuss it. Do you want an actively managed, aggressive growth strategy? Or are you more focused on capital preservation and income? Don’t stay with an adviser whose approach doesn’t match your needs.

Like any moving vehicle, an investment policy statement needs regular care, maintenance and rebalancing. It should be flexible to accommodate changes in your life: divorces, aging parents, inheritances. As the route of your journey changes, you may need a new road map.

John F. Wasik, co-author of “iMoney,” is a Reuters columnist.

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