Jan 2016 newsletter

So 2016 came in swinging! Late 2015 had all the set ups with volatility, the late august downswings and then continued volatility thru last quarter. But 2016 just surprised everyone with no analysts out there predicting anything remotely close. Led by oil, global fears about various things etc. the first three weeks of Jan 2016 saw about 1500+ points downsizing of the DOW. Similar losses across the board in various sectors and indices followed. Now this blog had mentioned about some quality stocks, all American ones, like Fedex or MCD or WMT etc as core holding in the stock portfolio. These very stocks got burned just like the rest. XOM or AAPL or utility stocks-all of them had suffered. No fundamental, no CEO reassuring similar to what happened in 2008, no sector really performing well above expectations. 

A study done internally for the last 5 years showed that ETFs and low cost funds were better performers compared to individual basket of stocks - big or small .. we focussed on the big and blue ones but they fell short. A mix was a debatable option and overall some stocks are okay to hold in your portfolio but by and large, there is no point in holding too much of them or trading frequently. The study was done to also determine the usefulness of Bank of America Meril Lynch Edge brokerage program which gives $0 commission fee if you have more than 25,000 USD in assets with them. Basically, the idea was to stash 25k as solid winnings or core from so long and keep them on the side. But it fell short too and there are other CDs out there which give better interest rates, negates the need to have 30 free stocks per month. At max, I think one needs to cap free trades to about 10-20 or so per year. Anything more than that and likely you are wading into hedge fund territory from individual investor territory. Again these are numbers and different people have different strategies and limits and numbers so nothing wrong if you trade more than that and turn in a good return. But keeping in the basic philosophy of the blog about Vanguard/Bogle/Buffet and others from similar background, we would limit trading in stocks or etfs or mutual funds. Holding in Buy and hold has a reason and it is better to hold off for a longer terms and then sell in higher ranges and buy in lower ranges with new money flowing into cash positions. I think fundamentally the buy low sell high algorithm is the only sound strategy. Rest everything are just additional tools in the toolkits and salts on your algorithms which also test your resolve and patience. 

Oil is at multi year low and it could go lower than this or bounce back but certainly this qualifies as lower ranges and hence it is better to buy oil commodities or services. VDE from vanguard or XOM/COP etc are all good buys. XOM is still a tinge higher at 70s and could go lower to 60s at which point it would be a decent bargain. 

Interest rate hike

As anyone following the market must have seen by now, that the interest rates have been hiked by the Feds by about 25 basis points. Not bad for savers who were used to 0-0.25% to get that extra 0.25% likely in future. Expect to see some good hikes in the online savings bank world. The days of brick and mortar bank, just like radio shack or blockbuster or circuit city, are pretty much on the wane. Many of them, small and big, have right fully identified customer service as the key differentiator and one can see that only a handful are really surviving and rest are going to need a bailout in future if at all they make it. Anyhow, I think this will have broader impact on stock market. First off, today was a day of rally. Maybe the star wars: force awakens or whatever else is this temporary excitement, I think this is short lived. (Typical celebration in wall street maybe? ) Dont know what will be there in the long run but the indexes have pretty much tapered off and leveled off with the same ranges being breached repeatedly. If the sucker had to go up, it would have gone by now. Which means only one direction to go from here. Or maybe not. Who knows? :D.

Back to investment avenues, recently I had posted on having fixed set of investment avenues, bellweather pulses which help you identify them and create or augment them on the fly and maybe you can stick a range in which you are comfortable to buy, hold and sell them. I think that is a pretty good strategy for your ancillary holdings. Assuming your core holdings in index, this ancillary will be real turbo charge or not, and help you get some extra cushion. Various strategies here like dividend paying, growth stocks and so on, dual stocks, swingers etc can be employed for this space. But be very clear about the goals of this stocks set and how and when to convert them back to cash or index positions.

Avenues

It makes sense to go about in the market with limited avenues of investments. These tools are generally tied to the preferred mutual fund company such as American funds or vanguard or fidelity or t.rowe.price and so on. There are many small yet well performing companies too. Similarly, there are various aspects of these vehicles such as index funds or active funds or a balanced fund or target fund which are usually a mix of index and active funds. This post will try to give you a general sense of these tools.
Fidelity for instance is led by FCNTX and co. The rest of the funds are selected based on the prevailing factors. Similarly, Vanguard has VWELX, Wellesley and Wellington funds and general balanced funds on top of index funds. Note that many times, the vanguard funds do under perform active funds such as FCNTX but in the interest of diversification you never would want to stick to any one in particular. Similarly in stocks world, the pulse basket is good but you may want to whittle down that to just few stocks. Now, do not get attached to any one of them and hence it is good to blog in general. For instance, you may look at Pepsi vs coke but look deeper and you may be comfortable with Dr. Pepper. A home depot vs lowe might give you ideas about something else in this sector. Or just stick with REIT. Same with dual stocks such as CVS/WAG or AXP/COF or the famous, or rather the preferred one of this blog which is the FDX/UPS. They might give you a general sense of things. Most importantly, they will give you a sense of how to go about with these investments in the long run. That is very important. This gives you idea about how much to invest, when to get in and when to get out and when to stay put are the three most crucial decisions in the investment landscape. Now, most of us or many of us do not do this on a day to day basis for a living. We just want to safeguard and expand our nest eggs. So most important of all, this should be something that is very very low stress and low maintenance. Think of this as iphone or i* .. so your own iFund. That you are designing this iFund to take care of everything else. Some model is needed to better understand this. The upside of having this iFund would be you would become detached from it and look at it in whole as well as look at it in pieces. As with everything else in life this is a continous learning process. Finance as a whole is not as important as say health, or life, or relationships but they are all interconnected and better to have a stable one in all aspects rather than something that drags the rest down.

Case for Overheated market

The low market of August 24 is long gone. The market of November 2015 seems to be rallying back to dizzying heights though it is obvious that it is getting overheated in most parts.

Just take a look at the rallying components - for instance some of the bellweather stocks which measure the pulse of the market and it is obvious again that they are having greed written all over it. There is euphoria which reflects in the high and insane P/E for these stocks. Are these really justified at this point ? All the indicators - statistical ones seem to be pointing to an ok economy and ok numbers and revenues but certain companies seem to be simply going up for no particular reason.

Take Fedex for instance. It zoomed from 140 to 164 at the time of this writing. Why? Is there any really good news that came out from this sector or company? Oil got shellacked and yet XOM and Chevron and Conoco are doing rather decently well. Home Depot and Lowes are simply disconnected from the real estate market reports. Walmart got beaten up badly and compounded with Buffet selling stake on Walmart. Usually there are a bunch of followers who mimic what Buffet seems to do - hedge funds, individual investors etc. Does not make sense though. Target and Costco are up too though Target is closing stores. Apple is swinging and acting like a volatile startup rather than the biggest capped player in the market. Which probably explains the wild gyration of the market indexes. Same with Google and other tech stocks such as Facebook. MCD breakfast took it to the highest point it has witnessed in decades - which makes it even weirder. And some predictable news are bolstering some sectors and companies more than it needs to be.

Bottom line: stay put, hold on buying any new stocks or indexes or any kind of funds. Unless you are into swinging as the core strategy. But even then if for some reason the market were to turn suddenly downwards, you would held with the bag of stocks like the way folks were in 2007 upturn. The market is in heated to overheated mode - a widely held belief - and likely going to be in this mode until there is an anticipated change in interest rates.

Ting referrals

Ting is a pay as you go data and voice plan that is pretty popular these days with millenials and getting traction amongst masses. It is just ala carta menu instead of the buffet that the big carriers serve. It is a neat service, neat website and the cost seems less for folks who rely on wifi for most part but want the odd directions when then venture out. If you consistently go overage - which is industry term to denote that you go over 1 GB, then you are better off using a fixed plan such as AT&T which gives 2GB for $25 and there are myraid number of MVNOs - another industry term for secondary data providers .. which means these are private operators who offer the plans which run on the Sprint or AT&T or Verizon networks. Boost Mobile or Cricket or Metro PCS give $30 plan. There are a bunch more for $20 or so. These are better than the bigger ones such as T-Mobile.

My referral if you choose to use is https://zfhaib4h08c.ting.com/

This will give us both $25 each and now for a limited period of time, till September end, you can get a ting sim card for $5 with free shipping. The phone selections that they have is not half bad either!

Review of robo advisors

In this post, we will look at some automated rebalancers and robo advisors. These have exploded in the recent few years from 2011 till 2015, slowly picking up steam and investments. Many manage in the tune of billions. If you read my last post about tax loss harvesting, you will see that it is just a tool. A strategy which should be the side one and not the main or core one. It can be used to capture some value. But I would personally not pay a dime to get this in ETF. For stocks, I would stick to my algorithms and core values and beliefs and change them. The tax loss harvesting gives some money back from IRS to soften this blow and maybe serves as a reminder from them to diversify and not take this to heart. Instead, Uncle IRS is telling you to take a chill and maybe get a sandwich with that money and play it cool.

So here let us review all the available or leading players in the tax effeciency business and the final recommendations regarding it.

1) Wealthfront: free upto first $10,000

2) Betterment: 

It has dynamic pricing.

3) hedgeable: same as above, 0.35% - 0.75%

4) https://www.sigfig.com/site/#/home/am

First $10k is free. After that is 0.25%.

5) Wisebanyan seems free but I am not sure about their sign up process or investment strategy

6) Future Advisor: The most impressive in this list apart from Wealthfront. https://www.futureadvisor.com/content/pricing/retirement-advice .. their fees are free.

7) Charles Schwab Intelligent portfolios: Free. This looks good too.

8) Vanguard: New kid in the block and since most of the above funds leverage on Vanguard ETFs  anyway, it makes sense for Vanguard to look at their voyager clients, anyone with more than $50k in assets to use this service for 0.3% fee. I think this is an overkill and  might not be needed.

9) A whole remaining bunch: Personal Capital, Moneyfront?, RebalanceIRA, Liftoff, tradeking, motif?, what-have-you and so on. Even TD Ameritrade pitched me this about 8 years ago for some x% fee. 

Recommendations:

Split the amount between Future Advisor and Wealthfront. This is not a terrible investment to have and even might make you money. But make sure you put the taxable money in here since your IRAs are anyways tax -deferred and hence you might not really need to save the taxes there or take advantage of tax loss harvesting strategy. Second, in view of the tax loss harvesting do not lose sight of the fundamental strategy of buy low sell high. In 2015 the market is high and volatile. Be ready to sell quickly. It is fine to enter into the index funds in some way now and maybe exit if there is a popup. But still overall individual stocks or etfs, invest conservatively and in drops for now. Third, go all out 100% risk in such accounts. I mean, if you want to invest conservatively, you have your own bond funds or CDs where you can hold your money. There is also balanced funds which will do this for you. Vanguard Wellington and Wellesley funds come to the top. Apart from their balanced funds. So with this robo advisors - go 100% stock funds .. which basically is 100% stock etfs with Domestic and Emerging markets mainly.

Apart from the above two, go with the Charles schwab (https://intelligent.schwab.com/) if you want more assurance on the security front. In terms of loss harvesting strategy, basic rebalancing, I would not venture beyond the above three recommended ones. Maybe I will start with something small and gradually build up from there.

One cant fail to notice the way Schwab or Vanguard have structured their funds with minimum requirements of $5000 or $50,000 in their respective accounts. I think they might do a basic rebalancing along the lines of fixed time based or portfolio allocation based rebalancing. It is low fees to nothing for them. So just like at the outset of this research, I am not too sold on robo advisors. It is good to have some in your portfolio to optimize the tax loss harvesting in taxable account. But beyond that there are simply too many avenues out there to make this the core or central piece of your overall investment strategy.

The semantics of loss harvesting (continued, part 2)..

Betterment, wealthfront - ring a bell? A whole slew of automated robots have come off in recent years. They are basically a layer on top of the vanguard etfs typically that will operate on the "when" aspect. Like you, they also buy vanguard or ishares or what have you etfs. Typical investors mess with timings. They sell here and there, forget to rebalance etc. Enter automated trading which just sets the ratio to what you like say 50-50 or 70-30 and then forget it. It will automatically balance it periodically on said date or likely on limits getting reached and rebalance it. This is nothing but automation of the yearly or bi-annual rebalance that you may do or just spend 10  minutes per month or per weekend to check out the pie chart and then rebalance or better yet, get a balanced ETF and forget it. 

These funds charge you another few percentage points over your expense ratio for this service. I think you are better off doing this on your own. But here is the key differentiator. Many of them tout automatic Tax loss harvesting. Many say these fees are worth the free time and no need to worry about rebalancing or tax loss harvesting etc. So this post will dwell more on tax loss harvesting. 

To continue on what we said in the last post, tax loss harvesting is a simple principle of softening your losses by "harvesting" the loss and claiming this loss in your tax returns. Meanwhile, you continue to hold on to your investments and hope that it would go up significantly. Automated robots to etf level tax loss harvesting and get this additional value. While you can do the same at stock level too. To continue with the example  that I gave  previously, why would you want to hold on to a loser stock in this case? To some extent it colludes your ideas, clouds your thinkings and judgements and maybe compromises objectivity ? Why ? Take for instance you had C at 50 and then it went down to 5, you can of course hold on to it and then harvest this big huge loss down the line. Or you could keep harvesting it as it keeps going down. Which is in a way a fool's game. You are paying commissions here unlike the ETFs. Speaking of ETFs, I think this is good for maybe a 2 billion or 10 billion pool in an investment running into trillions of assets under management. If this was worthwhile the big houses of Vanguard and Fidelity would be all over it. In practice, this is not feasible or optimal. In theory it does not lead to effecient market hypothesis and maybe undermines other investors. Maybe the small investor can get some value but it harms the overall market interest or even the individual stocks due to constant selling pressure. So for ETF perspective, I dont think this trend would be widely adopted. But the likes of wealthfront might adopt this to differentiate themselves in the market and add that few values. Not to be harsh but back to the C example, instead of going down on it, if you are so determined, why not short this stock ? You can gain a ton by shorting it or maybe go the options route. I agree that options is more betting. While this is more objectively harvesting the loss and realizing the value. But then if you sell, you exited, you are out. Why not take this C position and put it in say WFC. That would have given you more money that the value can ever give you. 

My point is simply this, in a straightforward world, you put say 100 in stock A which went to 50. You sell half your position here and put it in B which is at 50 now and is going to 100 in next two years. At the end of two years, you have made your loss and are essentially at the same principal amount. Your capital gains from B is offset by capital loss or tax harvesting of A. Simple as that. What is being sold these days is hold on to A and keep harvesting the loss. You will never exit this position then.  But assuming you manage to separate all this out, the net gain or value you are talking is , subjectively speaking , not much. Why? Let us look at hedge funds. Many use this strategy already. You can call it loss harvesting or just focusing on a stock and buying and selling on a daily basis no matter what. Say there is a theoratical stock - like BAC or C which have huge volume and everyone trades it. Any daily trader would go for such stocks given the liquidity. Since there is volume, any small gain would help realize a huge margin. Similarly, a small loss means you get a huge red. Which you can promptly write off against your profit. You can do this ad infenitum on huge amount of money. In fact, there are many "market makers" and a huge pool of money which does such things. Many might go on the dark side too .. they notoriously call it "dark pool" just like "dark web" . Many are legally sanctioned for large institutions but not for individuals. All that aside, in market people just hold on, I mean even if you buy and sell like a computer to a buy and sell approach of a human that holds on for 10 years - in either case, you hold. That is the predominant position. One essentially is on waiting period. This holding period. And this is where one thinks. People like John Bogle said, ignore this, buy etf and let market do its own. If not, go the buffet way. Buffet says, do your homework well and hold on. But buffet does sell his investments too. He probably uses tax loss harvesting but I doubt on a daily basis. Maybe periodically when he sells a turd and landed a good capital gains on another. I dont have info on that. But you get the gist, the academic and good view of this is not to abuse it. What if IRS closes this loophole, will tax loss harvesting work in that case? So in this holding period, some other get nervous, they sell. Some hold on till x years. Some sell - it is just a mix of emotions from fear to greed to "I have hard earned money, I will just keep mine and not lose it and keep it fair and straight" to really anything in between. Tax loss harvesting is the guy who says, hey life gave a lemon, might as well make a lemonade.  So fundamentally nothing wrong but it should not be core part or strategy. Maybe put a few bucks and see how it works. So it is basically not core strategy. It is one of the tools you have. More than ETF level, I am more concerned about the stock level. Except that the strategy here would be once you sell a dog, do not repurchase the full dog. Go for half dog, half cat. Because once a dog cant be trusted, lets not confuse further. 

And always remember, this whole thing - investing etc. might get you that extra push but it never is going to literally make a millioinaire out of you unless you own it. You own your business and you have bought it low and then you sell it high. Literally, the wall street ones are the ones making money off commissions and legal structures rather than a super bet of seeing the stock going from 100 to 200. Anyhow, I distracted from the topic. At an individual level, it makes sense to use some services of automated advisors or robo advisors. But overall, at a stock level, I would still stick with focusing on market and not on tax loss harvesting. Unless you are a full time trader which by the way would be alarming if you are one and reading this blog :D