How is your Wealth Manager talking to you about risk?

I find the whole risk conversation fascinating.  It is part art and part science.  It brings your left brain and right brain into conflict.  Portfolio Risk or "Downside Risk" is broker-ese for "someday you will experience this".

Risk is really getting a fix on:
1) What risk do you need
2) What risk are you willing to take
3) What risks are worth taking?

The Risk You Need is typically found in some sort of financial planning software to determine what is the risk necessary to achieve your goals.

The Risk You are Willing To Take is found in several new tools like Riskalyze where you are looking at stuff independently.  These software programs do have their flaws (timeframe being the biggest one), but it reminds me of going to the optometrist and giving me an objective calibration.  With my clients, I like to track how these answers change over time, given current market conditions and use that to play devil's advocate if I see a significant change.

Risks worth taking are maintaining your asset allocation, but potentially changing what you own (I do this based on what I read from Riverfront Investment Group, Barry Ritholtz, and Meb Faber).  Your capital market assumptions are another important ingredient.

I consider these questions to be lighthouses for my clients that generate three lines of bearing and it allows me to get a decent fix on their position.

How do you think of risk?

Market Corrections Analysis

A Fascinating Guide to Market Corrections in context of today

What I am reading

Indexes win 75% of the time (at least)

First Quadrant: Managing Taxable Assets

More from First Quadrant on Taxable Investing

Diversification through the lens of the VIX - fascinating read

SSA - Widows are not getting what they are entitled to

Roughly one-third of spouses ages 70 and older are not getting the maximum Social Security payouts they are entitled to because they are not being told by the government they are eligible, the Social Security Administration Office of Inspector General said in a recent report.

The shortfall amounts to an average of $2,337 for the widows and widowers not receiving all the money they are eligible to receive from SSA.

SSA’s internal watchdog noted that Social Security fails to identify and notify spouses when they become eligible for increased benefits at 70 because the agency is unaware of the spouses’ eligibility for retirement benefits when they applied for spousal benefits.

“Although SSA sends notices to widows and widowers who may be eligible for higher retirement benefits at full retirement age and age 70, it does not provide notices to spouses who may be eligible for higher retirement benefits based on their own earnings,” the report said.

SSA’s laxity has led to 26,033 of the 83,436 widows and widowers eligible for maximum benefits not receiving the biggest checks they are entitled to, according to the study.

The Inspector General’s office said it asked Social Security six years ago to send out letters to spouses telling them they can get higher payouts, but the agency declined because, it said, it didn’t have enough workers for the task.

Asset Allocation is unavoidable

Source: Capital Spectator

Minimum Volatility Equity Strategies

There are a lot of really good ideas out there when it comes to investing.

Equal Weight is one that I like.  I also like Minimum Volatility Strategy, especially given the relative valuation of bonds.

Here is some due diligence on the topic:

Source: Capital Spectator

Analysis: Advantages/Disadvantages

Vanguard Study: Advisors can add up to three percent in value

InvestmentNews Story

Vanguard recently performed a study about how advisors add value and in what categories they contribute.

Vanguard broke down 5 categories:

1) Investor Behavior:  There are several studies on this and they said that advisors can add up to 1.5% by preventing destructive behavior.  This number over a long enough period is likely accurate, but it would be tough for advisors to beat their chest over this coming off the 2013 market performance.  It is also a function of asset allocation.

2) Allocation:  Vanguard showed that asset allocation and placement/location can add up to 0.75% to a portfolio.  I am a strong believer in this attribute.  It is an areas where you can beat a rules-based tax code.  It is controlling the controllable and something that I focus on.

3) Expense ratio:  I am in the process of reaching one of my "train stops" in my process.  I revisit my non-taxable portfolios in February/August and my taxable in May/November.  I do have an exception process and a client need process as well, but having these train stops allows me to optimize client and portfolio management.  I am currently looking at portfolios with expenses between 0.1086% and 0.3112%

There are other considerations here:  turnover and tax efficiency.  Tax efficiency gets into the allocation attribute previously discussed.

4) Rebalancing:  Vanguard discusses how rebalancing can add up to 0.35% to your portfolio annually.  This is part of my "train stop" process.

5) Distribution Management:  Vanguard says this can add up to 0.70% to your portfolio annually.  This is a function of the tax code and something that I work hard on.

Does your company 401k suck? High expenses + No Match = Don't Bother

Rick Ferri today discusses High 401k fees in his blog . I have long had a rule of thumb and actually have shown a few companies and 401k contributors that their colleagues are better off not contributing.

I ran a scenario for a small software company in Atlanta.  Their fees were 1.8% and they had no match.  I showed them a plan that had a cost of 0.6%

Here is the difference of that 1.2% for someone in a Balanced Portfolio.

It was the difference between retiring at 63 and 66

OR

It was the difference between spending 60% of their current income in retirement and 50%

OR

It was the difference between spending 6,000/year and 10,000 per year to allow a retirement at 63, spending 60% of current salary.

These are the types of questions that your advisor should be answering for you and solving for you.

For this particular client, it made more sense to not contribute to his 401k.  He has since told several other colleagues.