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There are a multitude of reasons why investors who are transactional do very poorly relative to the market as a whole. The emotion of what and when is fraught with pitfall. Why do we do it? Because we are wired to see patterns that don't exist, and we love to make a game of everything. Some people spend a lifetime repeating the process only to claim the game is rigged against them. When you are using current info to predict the future, yes it is.

This often happens because we are unwilling to admit that what happens next will be a surprise to most. We take current info and project it into the future without any assumption that changes will occur along the way. We then get defensive about our positions and refuse to hear the new info, especially if we are already behind. We also are wired to think in terms of worst case scenario. We tend to prepare for events outside the bell shaped curve in statistics. We find thin tail events appealing because they have a remarkable payoff that is extraordinarily unlikely. Lotteries survive on this instinct. All of this mental quirkiness...

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We've been getting a few calls about volatility and advisability of reducing stock risks in portfolios. The short answer is that we generally don't do it. The reasons are abundant.

In 2007, fearing a recession, we did have the foresight to raise cash in some accounts; mostly the now Segment all-ETF strategy. That move proved both fortuitous and futile.

It was fortuitous because it deflected a big portion of the downside during 2008-2009. It was futile because, as is typically the case, it felt so good to have cash we missed the optimal re-entry point by a large margin. Our ultimate re-entry was after the bottom had long since passed. Yes, it made it a less agonizing ride, but after taxes were paid from selling and missing the bottom, I doubt we were much better off. We also lost our place in line for a tax-free step up in basis, should any client carry shares to the end of their life. This point is overlooked by most, and it is almost impossible to value, but it surely has some value that should be protected when possible. This should lead to a natural bias to stay...

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Anyone who knows me, knows I love to tell stories from which we can learn real life lessons. Some stories might be pretty lame, but I don't think this is one of those.

I have two clients who both died last year. We'll call them Barry and Alvin. I had worked with both of them for more than a decade before I learned that they actually knew each other from college 60 years before and 2000 miles away. They were born in the same year, graduated college in the same year, married in the same year, and died in the same year. They even both retired in 1994 and lived off their nearly identical $3.5mil nest eggs during 23 years of retirement. As profound as their similarities were, their investing styles were polar opposites, as were their results.

Barry was fidgety and insecure, and Alvin was patient and optimistic. Barry would watch his money online every day and squeal with each nasty market drop, wondering each time if the sky was falling. Alvin barely noticed, and if he did, he was scanning his cash to buy more stocks at each drop.

As time went on Alvin's dividend...

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Investors love dividends, and for good reason. Getting paid to hold a profitable stock is always an added bonus, and dividends receive preferential tax treatment too, being capped at a 23.8% rate. However, dividend yields are greatly misunderstood by many. Many investors think of dividend yields as a return on invested dollars, thus a higher yield implies a better investment. In some ways we are programmed to look for recurring cash inflows as a means for survival, making this lesson a little hard to digest. But a good understanding of how to think of dividends can help deliver better investment results while meeting your income goals.

Let's start with the basics - why do investments or assets earn an income? For a risk-free treasury bond, the income is a compensation for parting with current liquidity. You are parting with a hundred dollars today to receive back the hundred at a future date. If that future date is a year from now then you earn an income of two dollars for the year; if it's ten years away then you can earn almost three dollars each year....


Fidelity upped the ante earlier this week in the mutual fund price war by declaring that two of their index funds would carry zero cost for investors.

This goes to show that investors may have taken the pursuit of low cost to a ridiculous level. Considering the hundreds of funds that Fidelity manages for $Billions in annual fees, giving two funds away for free surely won't break the bank at Fidelity. As a matter of fact, one of the new "free" funds previously had a fee of 3/100 of 1% (.03%). That's $3 per year on $10,000, whoopee! I don't see Fidelity making a splash lowering their fees on their hundreds of other funds, some of which carry costs one-hundred times higher! They're hoping investors won't know the difference. This is likely since the majority of so-called no-load fund investors already believe (wrongly) that these funds were free to begin with. This is unlikely to change much. The scenario feels eerily similar to the old days of free toasters for buying a CD at a bank. The CD may offer an awful return, with awful tax characteristics on interest, buy hey, you...

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Most investors think of stock ownership decisions as somewhat binary: buy/avoid; sell/keep. There's another choice: Sell what you don't own in hopes of it declining. This is called shorting. Segment almost never shorts because the math of ownership is simply too compelling. Yet, with the trauma inflicted by the market decline of 2008-2009, many investors are lured into believing that a tad of shorting could reduce the harm of being "long".

With prospective investors having a built-in appetite for something less risky, many hedge funds and mutual fund companies are happy to oblige with funds designed to add a "tad of shorting". These "Long/Short" Funds sound great in concept. But once again, Wall Street tells a story that the math simply doesn't support.


Several clients have recently expressed concern over new tariffs possibly setting off a trade war. I don't think so. The market has generally shrugged, but downside has mostly persisted since the tariff enactment and rhetoric are both ratcheting higher.

These events give me little concern. The reason is that while I don't know President Trump, I do see a pattern in how he deals with people. He is bombastic. He is aggressive and stern, leaving weaker adversaries with no choice but to renegotiate. This pattern has already yielded tax reform and the seeming denuclearization of North Korea; pursuits abandoned as "impossible" by several past administrations. I have no doubt he will retreat on tariffs once he has gained ground on the trade rules he seeks.

These actions seem to be part of what makes him so scary to those who oppose him. Love him or hate him, let's face a few facts. Politicians want to be liked. President Trump just wants to win. His willingness to be disliked makes him difficult to "be played". His grandiloquent style and disruption of the status quo bring...

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In speaking with investors and advisors over the past few months, I have come to realize that a serious misunderstanding exists when it comes to the facts on advisory fees. One recurring area of confusion is how account level fees and product fees mix with one another. Clients nearly always assume that the account level fee they see on their statement is all they are paying. This myth is further propagated by advisors using terms like "all-in" costs while showing an incomplete view. The fees a client can't see on their statement are often the more costly and complicated of the two. Product fees are found in mutual funds and ETFs and are charged against the funds assets' value before it is reported on an investor's statement. These fees can vary widely from the stated "expense ratio" you are likely to be quoted by a broker.


Gil Baumgarten, president of Segment Wealth Management, was recently quoted in an article entitled 3 Factors That Drive Performance In Your Portfolio published in Forbes.

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Any routine reader of this blog will know I'm a fan of Exchange Traded Funds (ETFs). ETFs are fast becoming the world's most popular investment product. The king’s crown of most popular product still belongs to active mutual funds, but ETFs are on pace to dethrone them.

With rare exception, ETFs are far cheaper to own and have much lower tax drag than most active mutual funds. Most mutual funds are also sold for a commission by the largest sales force, the million or so stockbrokers in the US. The big brokerages (Merrill Lynch, Morgan Stanley, et al) along with the big active fund families (Fidelity, Dreyfus, et al) generally find ETFs are eating their lunch. The reasons are many; mostly indexed construction (eliminating typical fund underperformance); generally lower cost (sometimes by 40x lower); and better tax treatment (often zero declared taxable gain on a 1099). You can clearly see why a near wholesale shift is underway. But this has not come...


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