Archive | Most Popular

RSS feed for this section

Why I Built a Liquid Alternative Robo Advisor

liquid alternative robo advisorMost financial advisors and money managers are terrified of robo advisors. And frankly, if your job description consists of selling expensive mutual funds for a commission, you should be worried. Your business model has been slowly dying for decades, and low-cost robos are the final nail in the coffin.

Technology and competitive capitalism are doing to the financial services industry what they have already done to countless industries before. They’re cutting out the middle men and passing the savings on to the ultimate consumer. That’s a good thing. A very good thing, because every dollar saved in fees is a dollar that remains in your clients’ account to compound and grow over time.

Upstarts like Betterment and Wealthfront (as well as old hands like Vanguard) can build decent traditional stock and bond portfolios that perform every bit as well as the average man-made portfolio. But where they have been less effective is in the alternative space. And this matters — a lot.

As I wrote recently for Forbes, the traditional 60/40 portfolio is dead, and it’s not coming back any time soon. With both stock and bond prices extremely elevated, returns are almost guaranteed to disappoint over the next decade. Bonds, in particular, have gone from offering a “risk-free return” to offering a “return-free risk.” So, investors wanting to earn a respectable return will be increasingly pushed into alternative investments, such as hedge funds (see In Defense of Hedge Funds…).

But the problem with hedge funds is that they are only available to the wealthy, and they tend to have high minimum investments and high fees, along with limited liquidity and transparency. While hedge funds can make all the sense in the world in the right portfolio — and I use them extensively with my accredited investor clients — they obviously won’t work for every investor.

And this is precisely why I created a liquid alternative robo advisor. I wanted my clients to have access to some of the same strategies used by multi-billion-dollar hedge funds. But I wanted to make them available to all investors rather than just the wealthy ones. And I wanted to do it at a reasonable price with full transparency.

Our liquid alternative robo advisor takes clients through a risk questionnaire, much like the more mainstream robo advisors. But rather than dump them into a generic stock/bond portfolio, it assigns them to a volatility-targeted risk parity portfolio. (For a longer explanation of the strategy itself, see our presentation.)

Our fees, at 0.80%, are a little higher than those of Wealthfront or Betterment. But remember, we’re not competing with these traditional robos. We’re competing with hedge funds and other alternative managers,  which generally charge 2% of assets and 20% of profits.  And our solution is held in separately managed account at a reputable third-party custodian.

Creating the liquid alternative robo advisor allows me to serve clients I’d otherwise never be able to serve. The biggest impediment to an advisor growing their practice is time. Your instinct is to try and serve every client that knocks on your door. But the reality is, you can’t. There aren’t enough hours in the work day to do sit-down meetings with clients that have only modest sums to invest. Time has a monetary value, and unfortunately, you actually lose money on smaller clients. And you have the same amount of regulatory compliance responsibilities with a $10,000 client as a $10,000,000 client. Arguably, you actually have more.

But a robo setup changes that. With a robo setup, you can still profitably serve smaller clients, get them the same portfolios you would give a high roller, and all the while keep the regulators happy. A robo setup also allows a larger client to “kick the tires” and try out your services before committing a larger portion of their net worth to your management.

The financial advisory business is changing — quickly. With the rise of the robos, there will be a lot of attrition, and a lot of marginal advisors will end up folding their practices. If you want to survive and thrive in this line of work, you need to bring something new to the table. My advice is embrace the robo and build one that leverages what you do best.

Charles Lewis Sizemore, CFA is the principal of Sizemore Capital, an investments firm in Dallas, Texas.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

Read full story · Comments { 0 }

Looking Beyond the 60/40 Portfolio in an Era of Low Returns

I wrote earlier this year that the 60/40 portfolio is dead. Well, rumors of its death were not greatly exaggerated. The 60/40 portfolio that served retired investors so well over the past 30 years is gone… and it’s not coming back any time soon. As investors, we have to move on.

Rest in Peace 60/40 Portfolio

6280175374_e9d75ea505_z

While it’s true that a simple 60/40 portfolio of the SPDR S&P 500 ETF (SPY) and the iShares Core US Aggregate Bond ETF (AGG) is actually enjoying a nice run in 2016, up a little more than 3% for the year, don’t get used to it. The math simply doesn’t work out going forward.

Let’s play with the numbers. Back in 1980, the 10-year Treasury yielded a fat 11.1%, and stocks sported an earnings yield (calculated as earnings / price, or the P/E ratio turned upside down) of 13.5%. This implied a back-of-the-envelope portfolio return of about 12.5% per year going forward, and for much of the 1980s and 1990s that proved to be a conservative estimate. Both stocks and bonds were priced to deliver stellar returns, and both most certainly did.

But what about today? The 10-year Treasury yields a pathetic 1.6% and the S&P 500 trades at an earnings yield of just 4%. That gives you a blended portfolio expected return of an almost embarrassing 2.8%. [Note: The usual disclaimers apply here. These are not intended to be precise market forecasts.]

You know the refrain: past performance is no guarantee of future results. There is no guarantee, at least with respect to stocks, that expensive assets can’t get even more expensive. It’s possible that the great bull run in stocks could continue indefinitely, however unlikely it might be.

But I can’t say the same for bonds. Starting at a 1.6% yield to maturity (or even the 4% you might find on a mid-grade corporate bond) you cannot have returns going forward that are anything close to the returns of the past several decades. Bond yields would have to go negative, and I don’t mean the (0.15%) we see today on the Japanese 10-year bond. I’m talking (5%) or (10%) or even more.

That’s not going to happen. Or if somehow it did — if investors got so petrified that they piled into bonds to the extent that yields went negative to that degree — then I would assume the stock portion of your portfolio effectively fell to zero at that point.

The bottom line here is that even under the most optimistic scenario, investors are looking at disappointing returns in a standard 60/40 portfolio.

So, what are investors supposed to do about it? They can’t just stuff their cash in a mattress for the next 5-10 years. Most of us actually need to earn a return on our money.

I’d offer the following suggestions:

Consider taking a more active approach to investing.

To the extent you invest in traditional stocks and bonds, don’t be a buy and hold index investor. Yes, low fees are great. But the fact that you paid Vanguard only 0.09% per year in management fees won’t really matter if you’re returns are still close to zero.

Instead, try a more active strategy, perhaps focusing on value or momentum. Or perhaps try a dividend focused strategy. With a dividend strategy, you can realize a cash return even if the market goes nowhere for years at a time.

Consider investing outside of the market.

If you’re willing to get your hands dirty, consider starting your own business or investing in a cash flowing rental property. Yes, there is more work involved, and there is the risk of failure. But there is also risk in trusting your savings to a fickle market when both stocks and bonds are both expensive by historical standards.

Consider a truly alternative asset allocation.

This final point is really my specialty. To the extent I can, I am eliminating traditional bonds from the portfolios of most of my clients and replacing them with non-correlated (or at least minimally-correlated) alternative investments. A standard 60/40 stock / bond portfolio might instead become a 50/50 dividend stocks / alternative investments portfolio.

“Alternative investments” is a generic term that can mean just about anything. In practice, for me it has meant a combination of long/short strategies, options writing strategies, absolute return hedge funds, and liquid alternative portfolios. I’ve even incorporated a liquid alternative robo advisor into the mix.

Will a non-traditional portfolio like this outperform over time?

Frankly, I don’t know. No one does. We’ve never seen a market like today’s.

But to me, it’s the only move that makes sense. Taking the traditional path is a virtual guarantee of disappointment. Incorporating alternatives into the portfolio at least give us the potential for solid returns.

Charles Lewis Sizemore, CFA is the principal of Sizemore Capital, an investments firm in Dallas, Texas.

Photo credit: Pheonix149

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

Read full story · Comments { 9 }

Why Dividends Matter

Feel free to use this image, just link to www.SeniorLiving.Org

Photo credit: www.SeniorLiving.Org

I like getting paid in cold, hard cash. And frankly, who doesn’t?

But stock dividends are more than just a quarterly paycheck. They are a way of doing things. I would go so far as to argue that they are a philosophy of life (or at least of business).

That might sound a little kooky at first, but hear me out.

In the Wolf of Wall Street, Jordan Belfort (or at least Leonardo DiCaprio playing Belfort) says that money does more than just buy you a better life; it also makes you a better person. That’s certainly debatable. But I can credibly say that paying a dividend makes for a better kind of company. And here are a few reasons why:

  1. Dividends are an outward, visible sign of who the real boss is. Remember, the SEO in the suit running the company isn’t the owner. He’s an employee, no different than a common assembly line worker other than for his larger paycheck. You, the shareholder, own the company. And management shows that they understand and respect that by regularly paying and raising the quarterly dividend.
  2. Dividends dissuade fruitless empire building. Corporate CEOs really aren’t that different from politicians. At the end of the day, they spend other people’s money and often times waste it on useless projects or on mergers that add no value. Why? Because growth – even unprofitable growth – gives them more power and control. Well, paying a regular dividend forces management to be more disciplined. If you’re paying out half your profits as a dividend, you have to be more selective about the growth projects you choose to pursue with your remaining cash. They focus on the most profitable and worthwhile and, by necessity, pass on the marginal ones.
  3. Dividends foster more honest financial reporting. At one point or another, many (if not most) companies will… ahem… perhaps be a little less than honest in their financial reporting. Outright fraud is pretty rare. But accounting provisions allow for a decent bit of wiggle room in how revenues and profits are reported. Even professionals can have a hard time figuring out what a company’s true financial position is if the numbers are fuzzy enough. Well, while revenues and profits can be obfuscated by dodgy accounting, it’s hard to fudge the numbers when it comes to cold, hard cash. For a company to pay a dividend, it has to have the cash in the bank. So while paying a good dividend is no guarantee that the company isn’t being a little aggressive with its accounting, it definitely acts as an additional check.
  4. Share buybacks – the main alternative to cash dividends – never quite seem to work out as planned. Companies inevitably do their largest share repurchases when times are good, they are flush with cash, and their stock is sitting near new highs. But when the economy hits a rough patch, sales slow, and the stock price falls, the buybacks dry up. And another (and frankly insidious) motivation for buybacks is to “mop up” share dilution from executive stock options and employee stock purchase plans. The net effect is that a company buys their shares high and sells them back to employees and insiders low. Call me crazy, but I thought the whole idea of investing was to buy low and sell high, not the other way around. A better and more consistent use of cash would be the payment of a cash dividend.
  5. And finally, we get to stock returns. I’m not particularly excited about the prospects for the stock market at today’s prices. Based on the cyclically adjusted price/earnings ratio, the S&P 500 is priced to deliver annual returns of virtually zero over the next decade. But if you’re getting a dividend check every quarter, you’re still able to realize a respectable return, even if the market goes nowhere. And that return is real, in cold hard cash, and not ephemeral like paper capital gains.

Hey, not every great company pays a dividend. And certainly, a younger company that is struggling to raise capital to grow has no business paying out its precious cash as a dividend when it might need it to keep the lights on next month. But for the bulk of your stock portfolio – the core positions that really make up your nest egg – look for companies that have a long history of paying and raising their dividends.

Charles Lewis Sizemore, CFA is the principal of Sizemore Capital, an investments firm in Dallas, Texas.

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

Read full story · Comments { 2 }

How to Become a Financial Blogger

5379885034_0209d05ec0_o

My financial practice is an interesting creation of the internet era. I don’t do a lot of face-to-face networking, and I very rarely host dinners or live events. It’s not that I’m against doing these things but rather than they are expensive and time consuming, and I’m not very good at them. If these things were required to build a practice these days, then I would have never gotten off the ground.

I really don’t go out looking for clients. Most of my clients end up finding me after reading an article I wrote that made sense to them. In addition to my own blog, I regularly publish on Yahoo Finance, Forbes and Kiplinger’s, among other sites, so I manage to get in front of a lot of eyeballs.

I often get asked how I got into financial blogging. And my answer is always the same: I have no idea. It just sort of happened.

It was an odd experiment in trial and error, which means that I made every mistake there was to make before finally exhausting them all and managing to do a few things right. For any aspiring financial bloggers out there, I’m happy to share a little of what I’ve learned the hard way. This is by no means an exhaustive list and by no means a guaranteed path to success. There is always an element of being in the right place at the right time, but perhaps this list can better your chances of getting to that right place at the right time.

So with no more ado, here are my tips for cutting your teeth in financial blogging.

1. Use your real name and face. I have a simple policy on Twitter and StockTwits. If a person has a ridiculous handle (“KickassTrader47”) and uses a picture of a Star Wars character as their profile picture, this is not a person I take seriously. And the same goes for bloggers. First off, using your real name and face creates accountability. You can’t hide from your opinions or past recommendations. You own them, for better or worse.

And remember, as a writer you are building a relationship with your readers, even if you never meet them in person. Using your real name and face make you more personal and allows readers to identify with you and bond with you. That builds loyalty, and you need that.

There are exceptions here. One of my favorite bloggers goes under the pen name Jesse Livermore because his employer won’t allow him to write under his own name. And of course, there is “Tyler Durden” of Zero Hedge, who has created something of a cult following as a doom and gloomer. But these are the exceptions and not the rule. And if you’re wanting to build a brand around yourself, you need to use your own name and face. And don’t forget to smile in the photo.

2. Produce a ton of content. I’m always surprised by which posts of mine really get traction… and which ones flop. Thoughtful posts I’ll spend hours researching might barely get noticed… yet some hatchet job I threw together while watching Battlestar Galactica reruns might go viral. There is really no rhyme or reason to it. It seems to be totally random.

But that’s the nature of the internet. On any given day, a piece you wrote might get lost in the shuffle. But the very next day, an opinion maker might happen to stumble across an article you wrote and post a link to it. So the key is to simply get as much content out there as possible. It’s a numbers game. Put enough good content in front of enough eyeballs, and you’ll eventually get traction. It’s a marathon, not a sprint, and you shouldn’t expect instant success. Just make sure that you consistently publish content that readers will find useful or insightful.

Not every post has to be a masterpiece. I’m published blog posts that were nothing more than an embedded StockTwits tweet or a YouTube video. Just publish something that conveys an idea, even if it is a simple one.

3. Find publishing partners. SeekingAlpha might be the single best thing that ever happened to the aspiring financial writer. Anyone can submit an article. Now, not every article gets prominently published, of course. That’s up to the editors. But anyone that has a good idea to share can share it. Writing for SeekingAlpha got me noticed by InvestorPlace, which in turn got me noticed by other publishers. All of this is part of building name recognition and your personal brand.

You should also reach out to other bloggers and quote posts that you like. And when you do, make sure the blogger knows about it. Find their Twitter or StockTwits handle and post them the link. That can lead to retweets and to more eyeballs for your post.

4. Optimize your posts for search. “Search engine optimization” sounds complicated. It really isn’t.

Sure, you can get really scientific about it, but you don’t necessarily have to. Following a couple basic steps will get you most of the way there. First, you should obviously include the terms that would be relevant for search. If you are writing a piece about Walmart’s earnings release, you should probably include the terms “Walmart earnings” and “WMT earnings” somewhere in the post. You should also try to include those terms in the title of the post and the URL if possible. Second, include relevant outbound links… and if possible, get others to link to you. The more embedded you are in the web, the more you matter to Google.

Along the same lines, if you write about individual stocks, regularly post your pieces to StockTwits and include a cashtag. For example, if writing about Walmart, include “$WMT” in your tweet. This will get your tweet in the message stream for that stock… and get you on the Yahoo Finance page for that stock too under Market Pulse.

5. Have fun. And finally, have fun with it. If you enjoy what you do and your personality comes out in the posts, people will gravitate to you. If your posts read like a lifeless Reuters press release generated by a computer, they won’t. People crave human interaction and want to read the work of a real person, typos and all.

I try to keep it somewhat professional though certainly not formal. Basically, this means that I avoid profanity and personal insults and try to avoid industry jargon (no one wants to read about EBITDA). But importantly, I try to make it lively.  You don’t have to have the writing skills of Ernest Hemingway. You just need to have something a interesting to say.

And finally, I would add that superficial touches can make a big difference. Add a stock photo from Flickr or Google Images to add a little color to your post. And stock charts from BigCharts or any number of other sources make for a nice effect too.

Best of luck. The pool of quality financial bloggers gets bigger every day. There is no reason why you can’t be one of them.

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. 

Photo credit: Mike Licht

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

Read full story · Comments { 1 }

Blast from the Past: Walmart Dividend Letter from 1985

I was digging through an old file cabinet that had belonged to my grandfather, and I found this little blast from the past: a Walmart (WMT) letter to shareholders from 1985, signed by Chairman and company founder Sam Walton.

As a child in the 1980s, I actually remember my grandfather proudly showing me a paper certificate for his shares of Walmart stock, and I remember the day he went electronic by handing the paper certificates to the trust department at the bank. He wasn’t sure he trusted the system and made sure to photocopy his certificates before handing them over…just in case.

Paper stock certificates seem so anachronistic today in this age of online trading and instant liquidity. It makes me wonder how different the world of trading and investment will be when my future grandchildren are going through a drawer of my personal effects.

1985 Walmart Dividend Letter

The truth is, I’m not sure how beneficial instant liquidity is in building long-term wealth. In fact, it’s probably downright detrimental. When my grandfather bought his shares of Walmart, the high cost of trading discouraged him from short-term trading. As a result, he was a de facto long-term investor, which ended up working out to his benefit as Walmart grew into one of the largest and most successful companies in history. Long after my grandfather passed away, the cash dividends from the Walmart stock he accumulated in his lifetime continued to pay for the retirement expenses of my grandmother–and for my college tuition! Had my grandfather had access to the instant liquidity of today, he might have been tempted to sell far too early.

My grandfather also practiced his own version of Peter Lynch’s advice to invest in what you know long before Peter Lynch became a household name. He was an Arkansas boy–born and raised not far from Fort Smith–and he liked to invest in local companies that he could observe firsthand. Walmart was one of those local companies; its headquarters in Bentonville is less than an hour and a half from Fort Smith by car.

I remember fondly my grandfather taking me to Fort Smith’s Walmart and buying me an Icee at the snack bar. He liked to walk the aisles personally to see what Mr. Walton was doing with his money. That might seem a little old fashioned today, but then, it’s still the approach taken by Warren Buffett and by plenty of long-term value investors. If done right, it works.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

Read full story · Comments { 0 }