Beware Of Yield Fixation







I listen to the radio commercial in my car which goes something like this: “For years David Lerner has been providing steady income to our investors…”  - that’s when I change the channel.

I check my voice mail in the office “Hi, this is so and so from so and so investment management, and I want to speak with you about showing your clients our core income strategy…” – that’s when I hit the delete button.

How many financial marketers do you hear that start with an offer of income?

It sounds appealing, especially to those of us in or nearing retirement, but I don’t buy it.  In fact, I think it can be harmful to investors.  A fixation on income often leads to investor mistakes because “safe” income investments provide little income (today more than ever).  So if you stay with safe “income investments” your purchasing power insidiously erodes to inflation.

Often advisers/investors will then “reach” for higher yield and in the process swing too far the other way, assuming too much risk.  Perhaps with “high yield” bonds (i.e., junk) And the higher the yield, the riskier the investment is.  Or maybe they reach for more yield with preferred securities or high dividend paying stocks.

Look at what investors experienced in the iShares Dow Jones Select Dividend Index Fund (DVY).  At the end of 2007, 46% of the portfolio was in banks and other financials.  During 2008, the fund’s value fell 33%. (Today the fund has about 15% in financials.)  Also, dividend and income-producing investments held in taxable accounts can have payouts eaten up by tax bills.

Forget income.  Focus instead on asset allocation and a total return target that is consistent with your financial objectives and long-term plan.  The right amount of revenue will come as a by-product.

Living To 100 And Your 401K

If you are a married couple, age 65, your joint life expectancy is around 93 (50/50 chance one of the two will live to 93).  If you are an educated, white collar worker, it’s probably higher. One of you may make it to 100, so you should plan for needing about 3 decades of retirement income. And due to inflation your real living costs will rise considerable over 3 decades, not to mention un-reimbursed healthcare expenses. Further there will be less dependence on government entitlements and corporate benefits.

For example, in 1985, out of the 100 largest companies in the U.S. 89% offered their employees a guaranteed pension in retirement, by 2002 it is only 50% and by 2010 only 16%







For better or worse the 401-k will be the most practical way to fund for this kind of retirement. Almost anyone can have a 401k. If you work for a large or mid size company you probably have one - (if not, give me a call) and if you’re lucky a match from your employer as well.  Small companies can easily set one up and even if you are self employed you can start a Single K.

Finally, don’t forget about the ROTH feature, where you can contribute after tax dollars but the income that comes out – maybe for 30 years or more  - is all tax free!







In the 401k world a practice that was known as “revenue sharing” has come under scrutiny.  The concept:  A mutual fund or insurance company offers multiple share classes, often associated with a letter.  The various share classes own the same securities; the only difference in these share classes is the cost.  The lowest cost share class is typically referred to as “institutional” and represents only the real cost of managing the fund.  The difference between that cost and the total expense of these other share classes is used by the provider to make opaque and indirect payments to other vendors.

It’s a way of trying to hide fees and only makes things more complicated and gives the industry a bad reputation.  I prefer an arrangement that is more transparent – utilizing only institutional share classes while the fees to other providers are separate – either billed directly to the plan sponsor or disclosed as direct line item debenture on the participants statements.  No need to hide or cover it up

But if you are going that route, you still need to make to obtain institutional share, or you will be paying twice – and that’s not always so easy.  In a recent project for a 401k plan sponsor, I was commissioned to find the institutional share class (or lowest cost if they call it something else) version for a bunch of funds.  In doing the research here are the share classes I found for one of the funds:

Allianz NFJ Mid-Cap Value

Class A                                              PQNAX                      1.26

Class B                                               PQNBX                      2.01

Class C                                               PQNCX                      2.01

Class D                                               PREDX                       1.26

Class Inst                                         PRNIX                          .91

Class Other                                      ANRPX                       1.01

Class Other                                      PRAAX                       1.16

Class Retirement                          PRNRX                       1.51

This insane confusion of share class choices was typical for most of the funds we researched.

More plan sponsors are choosing to pay the 401k fees outside of the fund expense ratios (which I recommend).  But make sure you have the right people finding the right share class!



Sell In May And Go Away










It’s an adage thrown around this time of year.  The notion that markets do worse in the summer, or according to some, from mid – May to October.  Is there any wisdom to it?

Conceptually, it does make some sense as the summer is slower and quieter with folks on vacation, at the beach, etc..  Hence, there is less volume which perhaps leads to lower returns.  And a look at historical data does indeed reveal some seasonal tendencies:

The average monthly returns (excluding dividends) for the S&P 500 by month since 1950

Jan       Feb        Mar      Apr      May      Jun       Jul         Aug       Sep        Oct       Nov     Dec

1.03     0.05     1.17      1.48     0.21     -0.03    0.98     -0.09    -0.52    0.94     1.50     1.62

It is a fact that June, August and September have been negative, historically, but notice how July makes up for all of it!  And October has been pretty good on average, contrary to popular perception (likely stemming from two big crashes 1987 and 2008 which were in October).

So it turns out that, historically, an investor would have under-performed a buy and hold strategy by around 1.5% annually for being out of the market (S&P 500) from May – October. (That’s without taxes and transaction costs, heaven knows what they add to the cost)

Perhaps very skilled traders might benefit from taking more aggressive trades seasonally – but it’s risky even for them, especially in any one year.  And if there are some seasonal tendencies based on low volume historically, who is to say they will continue into the future with more and more trading occurring electronically (That is even when the traders are on the beach!)

So my best guess is that 99% of us should NOT sell in May and go away but instead create, monitor and stick to a longer term financial plan, even if it gyrates through summer and winter alike.

Cruising On Autopilot Checking The Engine








In our last post here, I pointed out the importance of featuring managed portfolios, usually target date funds, in 401k line-ups as research has shown that the majority of participants lack the time and interest to select and monitor their portfolios.  Cruising on autopilot, in other words.

That said, when one cruises on autopilot, they still need to occasionally check the engine, right?

So let us take a closer look at target date funds (TDFs):

The basic concept is that a participant only needs to select the date that most closely corresponds to their anticipated retirement year.  The fund provider creates portfolios of stocks, bonds, cash and for some “alternative asset classes” that are risk/return appropriate based on the investors’ time horizon – and then gradually and automatically adjusts the mix as the investor moves to and through retirement.  This adjustment is known as the “Glide-Path” But here is where TDFs differ and why we still need to check the engine:

When investors are more than 25 years away from their retirement age – virtually all funds allocate a high % of the portfolios to equities.  However when one is AT retirement age there is a wide gap – with funds ranging from 25% equities to 60% equities – also the allocation adjustments can vary dramatically through retirement.  Which approach is better is of course in the eye of the beholder (i.e., investor, adviser, participants, Et. Cetera).

The important point here is to be aware of the allocation mix and to understand the glide path approach of the provider and make sure it fits into your overall financial and retirement planning strategy.

Cruising on autopilot is a good thing for many investors, especially 401k plan participants, but it never hurts to check the engine.