Gil Hanoch

Client Story: TV without the Big Expense

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At a time where saving money is more valuable than usual, a local client shared ideas for watching TV cheaply:

  • Free Network Broadcasts: For access to the major networks (CBS, NBC, ABC, FOX) and live television broadcasts, purchase an HD antenna.  I bought the 35 mile range model from amazon Amazon.com: AmazonBasics Ultra-Thin Indoor HDTV Antenna – 25 Mile Range: Electronics and it provides me with access to SD and LA broadcasts. ($35 – one time)
  • TV Shows, Movies on Demand over Internet: For access to thousands of movies and shows on demand, Netflix (Cost:$8.99/mo for HD), Amazon Prime ($99/year), and Hulu ($7.99/mo) offer excellent options.  Netflix and Amazon offer deeper catalogs with no ads.  Hulu has current shows with ads.  I currently only do Amazon Prime as it’s the best value with their Unlimited 2 Day Shipping, Music Streaming, and Photo Storage included. Netflix and Hulu offer the flexibility to activate for a month and cancel at any time.
  • Sports: NFL, MLB, and NBA all offer season packages that allow you to watch all games on demand, on any connected device.  I only subscribe to the NFL Gamepass package ($99/year) which has the downside of not providing live broadcasts. This is not an issue for me since I can almost never carve out 3 hours in the middle of the day to watch a game.  The functionality is ideal as all On-demand games are replayed with no commercials and there is even a “condensed” version that cuts out the video between plays, allowing you to watch a game in approximately 30 minutes.
  • Sling TV: For those that want access to major networks such as ESPN, FX, AMC, they can subscribe to slingTV ($20/month) which provides live coverage of these networks previously only available through satellite and cable vendors.  They also offer the benefit of subscribing and cancelling the service by the month.
  • Connected TV Devices: Most new tv’s have web-enabled “Smart TV” hardware and software built in.  If a TV does not, all of these apps are accessible via an Apple TV, Amazon Fire TV, Roku, Google Chrome, or connecting your PC to your TV.
Disclosures Including Backtested Performance Data

How can you Evaluate the Performance of an Investment Advisor?

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While there are many factors that make a good investment advisor, expected performance is a central one. Many choose an advisor that had good performance in recent years. While easy to evaluate, it can lead them to a choice that is even worse than a random selection, since there is often a negative correlation between the past 5-year returns and the next 5-year returns (relative to a benchmark or the long-term average). Here are some steps for a more educated evaluation of performance:

  1. Repeatable performance: Identify repeatable factors, for example (for stocks): US/developed/emerging markets, size, value/growth, profitability.
  2. Statistically Significant Horizons: Evaluate at least 30 years for stocks, and longer for bonds, to get statistical significance. Since most investment vehicles and advisors didn’t operate for this long, you usually have to depend on simulated data, using indexes in the same categories. While not perfectly accurate, it is far better than using statistically insignificant data from the past 5 or 10 years.
  3. Deduct Fees: Deduct the advisor’s fees from any performance presented to you (both live & simulated), if not done already.
  4. Discipline: Check the track record of the advisor’s discipline, by asking about changes to the allocations that were later reverted. Reverted changes are often a sign of market timing, and often (but not always) result in buying high and selling low. Make sure to ask how the advisor behaved at extreme points (the peak of 10/2007 and the bottom of 3/2009 are great examples). In some cases the advisor’s behavior can hurt the returns by more than a number of other factors combined.
  5. Risk Analysis: Just like discipline, a portfolio that is too risky may work on paper, but fail in real life. There is no investment that is 100% safe under all circumstances (picture a 100% short-term government bond allocation subject to retirement withdrawals at times of high inflation). A good advisor would structure your plan to protect you from the highest risks, leading to a high likelihood of success, given your goals and needs.
Disclosures Including Backtested Performance Data

Why doesn’t Everyone Benefit from the Value Premium?

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It is well established that value stocks (stocks with low price/book value, or price relative to the company’s liquidation value) earn a higher return than the general market. The effect is very meaningful – potentially 2% excess annualized return. It was tested through long time periods, retested through new periods, and retested in many different countries (out of sample testing). It is also logical – if the price is low relative to the value of the company assets, it has room to grow to reach the valuations (P/B) of other companies.

So, why doesn’t everyone focus on owning them? Value stocks tend to be less known and less glamorous. They often have low price relative to their book value as a result of poor recent returns. People like to see that the stock “proved itself” before investing in it. They also like to imitate others’ success. To make matters much worse, value stocks don’t always do better. They can do worse for long stretches of 5+ years. I have seen people think logically about investments, and stick through tough periods. But, as the period gets longer, they lose faith in the long-term success.

A strong example from recent years is Emerging Markets Value. This asset class suffered in multiple ways – both emerging markets and value suffered poor performance for the past 5 years. To add insult to injury, the more known US market had unusually high returns. This led people to think that the US is a better investment and to sell from emerging markets to buy US investments.

US stocks reached high valuations (P/B), and emerging markets reached low valuations (P/B). The relative valuations between the S&P 500 and emerging markets value almost doubled in the past 5 years. Your emerging markets investments would not reach the S&P 500’s P/B, until they approximately triple in value – that is about 200% gain. An observation of the past 17 years of emerging markets value returns, shows how surges emerge from low valuations. Here are distinct 12-month periods with ~100% gains in this timeframe:

Period starting at 12-month return
9/1998 120%
4/2003 97%
3/2009 117%

These returns occurred approximately every 6 years. The value premium is greatest when having big gains that stem from low valuations. For example, in the recent 2009 surge, emerging markets value outperformed the general emerging markets by more than 20%.

What is the logic for these surges? As explained above, the past selling results in poor performance, leading for more people to sell, and propagates the poor returns. This is a snowball that can go on for a while. As valuations reach very low points, any bit of marginally good news can lead to a surge – whether it is a reduction in interest rates, government spending, or economic results that are not bad enough to justify the very low valuations.

Your strong value tilt means that you buy the unloved companies that people sell. When people are completely desperate and lose all faith in these companies, you buy low, and when the turnaround comes, you reap the greatest benefits – life changing benefits. This focus on value stocks is one big thing you have in common with Warren Buffett, one of the greatest investors of all times.

Disclosures Including Backtested Performance Data

When Emotions Should Play a Role with Money

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Money can be an emotional topic.  It can raise feelings of greed, fear, entitlement, or shame, among others.  It is important to have emotions impact money in one stage of the investment process:  when defining your goals.  Here are a few examples:

  1. You expect to have great emotional suffering when your portfolio declines.  This may lead you to have a greater allocation to low-volatility investments (CDs or bonds) than financially called for.  It can make sense when done in the planning phase, and not during a deep decline.
  2. You may be stuck in the rat race for too long, and decide to take actions to live within your means.  As a part of the solution, you are willing to accept short-term volatility for the ultimate goal of having sustainable spending relative to your assets.

Once you are done defining your goals, emotions can harm your investment results.  Here are a few examples:

  1. Fear:  After a big market crash, the media is very negative about the economy and stocks, and you are ready to sell stocks low, or stop investing new savings.
  2. Greed:  After unusual gains in stocks, you decide to increase your stock allocation (buy high) beyond what you planned for originally.
  3. Familiarity Bias:  You fall in love with a company, believe in their product and business plan, and decide to invest in it, without looking at valuations (price relative to book value or earnings) and other information.

The solution is easy to describe and tough [psychologically] to implement:

  1. When developing the plan, view its impact on your entire life, and balance the various risks.  Accept that there is no safe investment – you simply choose which risk you can tolerate most.  Examples of risks to account for are: a need for money during a big decline, panic selling during a decline, outliving your money, and inflation.
  2. Once the plan is developed, be cautious of making changes without changes in your personal circumstances.  Unless you have very substantial assets relative to your expenses, and you don’t watch your investments frequently, you have to expect to feel uncomfortable with your investments at various points in life.  The difference between success and failure can be the action you took against your interests under the emotional stress of an uncomfortable period.
Disclosures Including Backtested Performance Data

Feel Wealthy or Be Wealthy?

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Did your income jump significantly at any point in your life?  If you are fortunate enough to experience that, you may face a tradeoff between feeling wealthy and being wealthy.

If you feel wealthy, you are likely to increase your spending significantly, which can make you less wealthy very quickly.  If this doesn’t make sense to you, Sports Illustrated estimated in 2009 that 78% of National Football League (NFL) players are either bankrupt or in serious financial trouble within two years of retirement.  This is a group of people who typically make several millions each year.  While this is an extreme example, you can get in trouble even without feeling adventurous or being irresponsible.

Say your income jumped from $100,000/year to $300,000/year.  You make the following adjustments to your annual expenses:  $1.5M house, with $72,000/year mortgage payments (30-year fixed loan with 4.5% interest), $18,000 property taxes, $15,000 repairs & improvements, $10,000 utilities + cleaning + gardening, $40,000 private schools for 2 children, $5,000 classes for the children, $20,000 food, $10,000 car payments, maintenance, gas & insurance, $10,000 travel & vacations, $10,000 various types of insurance, including medical & dental & medical bills for the family, $10,000 clothes, toys, household items, etc..  If you don’t have children, you may spend more on nice clothing, eating out, jewelry, hobbies, etc.

I didn’t include all categories of spending, and already consumed your entire net income of $220,000, with nothing left to save.  If you lose your job, you are left with high expenses and low savings.  Furthermore, you have no money left to help your children with higher education, or to fund your own retirement.  By feeling wealthy, and spending accordingly, your financial security dropped lower than before the big raise.

Instead, you can decide to not feel wealthy.  You increase your spending to $120,000 – a significant jump, but low enough to leave $100,000 to save.  Within a few years, you accumulate meaningful savings.  If you lose your job, your savings can carry you for a much longer period of unemployment.  In addition, finding a job to cover your $120,000 in spending will be much easier than replacing the $300,000 salary.  Here are some key ideas for making this work:

  1. Keep your focus on spending-to-assets, and strive to reach a sustainable ratio of 3%-4% per year.  While it would be impossible for most people to reach this rate for a long time (even with $300,000 or $600,000 in annual earnings), use any big jump in earnings to increase your spending modestly and your saving rate significantly.
  2. Never feel wealthy thanks to high income.  No matter how much you earn, you can end up with no financial security, and no wealth.  It can start with nicer cars, expensive jewelry, a nicer home, vacation home, full-time staff in each of your houses, yacht, private jet, private island, or private jumbo jet.
  3. Once you approach sustainable finances, you can increase your spending along with your assets, and enjoy the continued increase in standard of living without losing your peace of mind.
Disclosures Including Backtested Performance Data

Tips for Handling Hard Earned Money, Won Money, Found Money & Inherited Money

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Say you inherited $10,000.  Would you use it the same way you use $10,000 you got for weeks of work?  How about if you won it in a bet, casino, or found it on the street?  If you are more likely to spend easily found/won money because you didn’t work hard for it, you are not alone, and you are subject to a bias called Mental Accounting.  You associate different meanings to money depending on the source.  But, in reality, all money is the same, no matter how you got it.  Specifically:

  1. If you would save hard earned money, you would rationally save found money.
  2. If you would spend money you earned on overtime work or a bonus, you would rationally spend the same amount from an inheritance.

Here are some ways to avoid mental accounting:

  1. Put all money earned, found, won, or inherited into the same account (see exceptions below).  Now you can look at it as one pot of money, and forget about its source.
  2. Put any money that needs to be in a separate account for tax purposes in the account that fits the tax requirements.  Examples are:
    • Retirement:  IRA, Roth IRA, 401k, Roth 401k
    • Inherited Retirement: Inherited [Roth] IRA
    • Education: Coverdell ESA, 529
    • Different Individuals or entities: children, businesses.
  3. Do not use separate accounts for different goals, unless required for tax- or accounting-purposes. Set priorities for money.  Here is one potential ordered hierarchy:
  4. Set priorities for money. Here is one potential ordered hierarchy:
    1. Basic necessities, including: rent/mortgage, food, children’s education, cars, etc..
    2. Retirement/sustainability.
    3. Children’s education accounts.
    4. Discretionary (fun/non-critical) spending.
Disclosures Including Backtested Performance Data

Money Can Buy Happiness with One Powerful Action!

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Money can buy many things that give happiness in life.  But, once you cross a moderate standard of living, more money leads mostly to temporary increases in happiness until you get used to the new normal (e.g. new car, private jet).

One thing that can stick is the ability to stop worrying about money.  This happens when you save money, and have enough available for surprise needs, beyond the routine expenses, such as a major repair or unexpected health care expenses.

The key factor that makes this work is the extra unused money.  $1M invested in Quality Asset Management’s portfolio Long-Term Component is likely to provide perpetual annual income of $40k, growing with inflation.  Any unexpected expenses up to this amount can be handled with great piece of mind.

The ultimate worry-free life (financially) is reached when your investments can cover all of your ongoing + unexpected expenses perpetually (e.g., $5M providing $150k for routine expenses + $50k for surprise expenses, at 4% annual withdrawals).  At that point, you can avoid worrying about money, and feel the lasting happiness.

The good news is that you don’t need to wait for decades to reach the ultimate goal, to start reaping the benefits.  With every bit of increased savings (relative to spending), you get reduced stress and increased happiness.

Disclosures Including Backtested Performance Data

9 Signs for a Misleading Article

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I read many articles every week, and came up with ways to filter out misleading articles. This is critical for me, so I can keep my investment decisions rational and unbiased. Using the wrong article to affect investment decisions can cost you real money. Here is a quick checklist to uncover many of the misleading articles:

  1. Focuses on recent history without offering a long-term perspective.
  2. Talks to your emotions, without accompanying with data or logic.
  3. Presents recent history in present tense to imply that it will continue the same way (“stocks/bonds/pesos/you-name-it are currently out of favor”).
  4. Focuses on a narrow asset class (e.g., large U.S. stocks, the S&P 500, Japanese stocks, the BRIC countries) when discussing stock investments in general, or diversified asset classes.
  5. Presents only partial returns (e.g., index returns without dividends).
  6. Provides opinions of well-known people to give credibility, without hard data or logic to back the claims.
  7. Depends on traditions to back the claims, without providing logic (e.g. shift allocation to bonds with age, regardless of the total picture).
  8. Provides specific advice without any comments qualifying who this applies to (e.g. referring to a retiree without discussing their withdrawal rate).
  9. Offers a prediction of the near-term future of an investment (stocks, bonds, gold, etc.) with high certainty.
Disclosures Including Backtested Performance Data

Better than Dividends!

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In the article  6 Problems with Dividends for Income [December 2013] you saw a long list of disadvantages of dividends when compared to selling from your investments to generate any required income.  Yet, retirees still like dividends.  Why is that?  The reasons are psychological, and several are listed below:

  1. Disciplined spending:  By limiting spending to dividends, you can resist the temptation to spend the principal.  It gives structure.
  2. Avoiding selling at a loss:  Dividends are given whether the investments are up or down.  A dividend withdrawal at a decline doesn’t require actual selling at a loss.
  3. Avoiding regrets over missed gains:  If you spent dividends, it feels like you spent cash.  But, if you sold from your investments, and they gained substantially, you may regret the sale.  People tend to regret action more than inaction.

Since income can be generated by selling from the portfolio instead of dividends, it is best to avoid focusing on high-dividend investments just for the sake of income generation.  By sticking with selling, you gain control over the amount, timing and regularity of income, as well as investment choice and improved tax-loss harvesting.

The missing piece is the psychological comfort.  That can be obtained by sticking to a conservative cap on withdrawals from the portfolio (typically 3%-4% of the peak value of the investments).  Having an outsider (investment advisor, family member, close friend) track the withdrawals can strengthen the discipline.  As a Quality Asset Management client, you receive the available withdrawal amount in your quarterly email, so you can view your investments very clearly as a sustainable income stream.

Disclosures Including Backtested Performance Data

2 Hidden Benefits of Emerging Markets

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International markets offer a tradeoff of higher potential returns at the price of higher volatility, when compared to the U.S.

Emerging markets offer even higher potential returns, at the price of even higher volatility, when compared to both the U.S. and international markets.

While these characteristics are well publicized, emerging markets investments hold two additional benefits that are typically not discussed:

  1. Technology Leaps: The technologies developed in the U.S. and other developed countries are readily available to emerging markets, allowing for leaps to the newest technologies.
  2. Rotating Countries: The most advanced countries keep being replaced by less advanced countries in emerging markets funds. As long as there are countries that are not advanced enough to be part of emerging markets funds, we get a fresh supply of countries that can leap forward.

These benefits are the key for emerging markets investments sustaining a very high growth rate.

Disclosures Including Backtested Performance Data