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Personal Capital Review: What’s Good and What to Watch Out For

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personal capital review Most of us are familiar with the idea that there is no free lunch – but tech companies are very, very good at convincing us that this is not the case. If you’ve seen the news lately, you may have noticed that Facebook & Google have been in hot water because of the controversial use of their data. I don’t want to put Personal Capital in the same category, but don’t think for a second that they create and maintain all of their neat tools as a gesture of goodwill. Wondering how Personal Capital works and if it’s worth the cost? Here’s our review.

Personal Capital Review: How Does it Work?

Personal Capital’s crown jewel is an account aggregation system – a very unsexy term for something that actually does a bunch of really cool things. Essentially, you hook up all of your financial accounts – think credit cards, checking, investments, 401k from work, even your house! Personal Capital automatically crunches that data for you and lets you everything from what your total net worth is to your potential capital gains tax exposure. It’s like a financial Oracle – you after you’ve fed it your personal data, you can pretty much ask it any question you want to.

Here’s the thing – You aren’t the only one asking! Personal Capital anonymizes its data, so no one else is looking at your actual account numbers, but what they are looking at is how much you have, where you have it, and if Personal Capital can manage it. Personal Capital is actually a Registered Investment Advisor, which is a type of investment company that manages assets on a fiduciary basis (in your best interest).

This puts them ahead of traditional wealth management companies like Merrill Lynch and Morgan Stanley, but they like to sell themselves as being a FinTech company. In reality, their core business is much more similar to that of Fisher Investments, a traditional hard selling RIA firm.  A lot of Personal Capital’s senior management team came from Fisher, so it should not shock you that their company culture is similar.

The Good

  • .89% is a low price to pay for true fiduciary wealth management
  • Personal Capital uses low-cost ETFs and efficient investment vehicles

The OK

  • The amazing set of free tools is counterbalanced by the fact that all of that info is going to Personal Capital – you are a lead in their system

The Not So Good

  • The advice given is highly dependant on who you talk to
  • The financial advisors receive compensation primarily for getting new assets onto the books, not keeping existing clients happy
  • If you don’t take advantage of or don’t want the financial planning aspect, you are paying .89% for no reason
  • Vanguard has a similar experience for only .3% at higher account balances

What You Need to Know about Personal Capital

Personal Capital currently has about $8 Billion of assets under management, which is certainly more money than you or I have, but tiny compared the other giants in the investment space. What they do have, however, is over $674 billion of tracked assets via their app – assets that they’d like to get on their own platform and charge .89% to manage. Because of this, its shiny free to use tools come with a cost. Buried in the fine print which I’m sure you didn’t read is a clause that allows Personal Capital to solicit you for advisory services.

If you have more than $100,000 in financial assets linked to the platform, you’d better expect a call from Personal Capital. You can always block their number or give them a fake phone number when you sign up, but that’s not very nice, is it? Those financial advisors from Personal Capital will be calling to try and get you invested in one of the three options below, depending on how much you have.

Personal Capital operates on a 3 tiered investment plan system – but unless you’ve got over a million dollars or more to invest, there’s no guarantee you’ll talk to a Certified Financial Planner. In a world where there are over 80,000 CFPs, there’s no reason to settle for anything less. It’s important to note that Personal Capital is not a robo advisor. While the advisors will attempt to put you in a managed asset program that may trade on certain automatic triggers, there are humans involved in all investment decisions.

In fact, once you get over $200,000, they will stop investing you in an all ETF strategy and move you into a basket of individual stocks that will act like an index – which can have several advantages.  The ability to tax loss harvest at the individual stock level can increase real returns and should not be discounted. In addition, they offer full financial planning for free (which in my opinion they should position much more strongly).

Is It Worth the Fee?

The truth is that these days you can get an efficient investment allocation for pennies. If you choose the three fund portfolio, the cost for that allocation is something like .05% (the average weighted expense ratio of the funds). If you wanted to dial up the sophistication a bit, you could go to a robo advisor like Wealthfront and pay .25% (plus the expense ratio of the underlying funds) for a portfolio that trades automatically and can also tax loss harvest at the stock level – so why pay .89% for any of Personal Capital’s offerings?

Here’s the key difference – at Personal Capital you are (horror stories notwithstanding) not paying just for the investment management. Personal Capital is not a robo advisor – they even made a whole video explaining they are not a robo:

Now I tend to agree with them that one of the worst deals in finance is investing with a robo advisor. They are charging you a lot for taking a quiz once – and unlike a human advisor, no one’s there to talk you out of buying a bitcoin at $20,000 or letting you know how many years retirement you’ll postpone by if you go ahead and buy the house with the chef’s kitchen. Humans cost more than any robo (though with Vanguard’s Personal Advisor Services, not much more) but the value you get back from them is measurably higher because they serve as a wall between you and your worst impulses.

In addition to the above, a good human advisor can provide counsel to make sure that assets are correctly titled, can advise on trusts and wills, help you open a Donor Advised Fund to give to charities, review your tax return and more. Robo-advisors can only invest the money you’ve given them.

At Personal Capital they claim to offer you a ‘team’ of financial advisors at $100k, two financial advisors at $200k, and access to a Certified Financial Planner once you’ve accumulated a more than a million dollars with them. Because Personal Capital pays its financial advisors mostly for converting assets from off platform to assets under management – every minute their advisors spend talking to current clients is a minute they can’t use to convince potential new clients to join Prospect Capital. Most of these advisors are really just looking to gather up any of your assets that aren’t yet managed – providing them with additional fees and charging you more.

What About Vanguard’s Personal Advisor Services?

Most people know Vanguard as a go-to asset manager of choice for inexpensive, passively managed index ETFs and Mutual Funds. They currently have over $5 Trillion of assets under management – over $1 Trillion of which their discount brokerage account now holds.

Vanguard has taken a similar approach as Personal Capital, using this $1 trillion as a base to source clients for its own managed services program, called Vanguard Personal Advisor Services. There are a couple of key differences. Vanguard’s PAS is closer to a true robo advisor until you get to $500,000 – where you can get a CFP to do one time planning for free. At $1 million under management, you get a dedicated CFP for free.

So What Should You Do?

If you’ve got a million dollars or more, Vanguard seems like the no-brainer option to get a Certified Financial Planner (if you are ok with a call center delivering advice). If you have less than that or want a more experienced CFP focused on building a long-term relationship, try one of the many independent RIA firms out there that will treat you as a client and not a number.

You may pay more, but having a long, lasting relationship with someone who intimately knows your situation easily pays for itself when you need to make big life-changing financial decisions. If you just want investment management from a robo-advisor and to keep the pesky humans away, Schwab and WiseBanyan both offer a 0% fee algorithmic solution (though you will pay a small fee from the ETF expense ratios) – so you might as well skip robo advisors charging any price at this point.

Personal Capital is an underwhelming choice in any of these slots, so unless you really value the tools they offer, it is generally best to take your money elsewhere.

Author Info: Michael V. Spelman is a Certified Financial Planner, and co-owner of Myrmidon Private Capital, an RIA specializing in retirement planning.  He’s also president at The GUL Guy, a specialty life insurance comparison agency.

Is It Time for the Market to Crash?

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Every once in a while, I like to shake the Magic 8 Ball to see what might happen next.  Recently, I’ve been getting a lot of “Reply Hazy.  Try Again” and “Cannot Predict Now.”  This is very frustrating, since I’m supposedly a ‘professional.’ I’ve taken those answers to mean that I need to do a bit more research on my own.

On a complete side note: You now can just use the internet to “shake” the Magic 8 Ball: http://8ball.tridelphia.net/  Too funny.

Whenever we trend up to either a new high, all-time high, or a cyclic high, I start to get a little antsy…almost like the sensation right before you go over the big hill on the new rollercoaster.  Unfortunately, that analogy works too well.  It seems like whenever we go higher – whenever you start hearing Jim Cramer, etc. telling us all to BUY BUY BUY – a big pullback happens.  Let’s look at where we are today:

This is a Year-to-date chart of the S&P 500.  Up, up, and up some more. (Up 5.35% YTD)

Here’s a chart for the 1-year S&P 500 (Up 10.37%)

And another 5-year chart (Up 11.29% – which also includes the 2008 recession)

And finally, a 10 year chart – up an astonishing 77.14%

Since March 13, 2009, the S&P 500 is up over 119%!  This is wonderful!

But it makes me pause.

As I look through history, and it’s the only guide we have, it seems like every 5-7 years something comes along and knocks the wind out of our sails.  It’s 2013, five years ago was 2008.  Before that was 2000-2002.  Before that was the LTCM mess is 1998.  Then the recession in 1991.  Black Monday in 1987.  Are we on the verge of another recession?  Worse maybe?  A depression?

If you listen to the news, or better yet, the commercials on satellite radio, the answer is an unequivocal “yes!” (I’m talking to you, Mr. “Critical Warning number 6”  guy).

So, what do all the recessions, depressions, declines, flash-crashes, etc. have in common?  The market has always rebounded from them all.  Each an every one.  Ask your grandparents what they thought of investing in stocks in 1940.  Or your parents and grandparents about investing in the 70s.  They’d all say the same thing…”This time is different.”

This time isn’t different.  Today’s apocalypse du-jour is tomorrow’s back page story.

You might think, then, that I must be all smiles all the time and a traditional buy-and-hold forever type of investor.  I’m not.  But neither am I chicken little.  At times like these – when the market’s doubled in just inside 4 years – you must plan for dark days ahead.  If you do, and you make logical, fact-based plans today, when the markets turn tumultuous, you can just pull out the plan you made when you were level headed.

 

Here’s what might be in your “Time for the Market to Crash” plan:

 

1.  A profit maximization strategy.  If you’re like some investors, you’ve continued to buy your bi-weekly allotment of 401(k) funds and Roth IRA stocks over the past several years.  That has served you well. It’s time to make sure you have a profit strategy in place.  If you own individual stocks, set a stop-loss price on your positions.  If you have mutual funds, set a day every two weeks or so to review the price.  Write down at what price you’ll sell to lock in some profits.  In my business we try to aim for a trailing 10% stop loss.  For example, if I bought GE at $7, and today it’s at $23, my stop-loss might be at $20.  I’ll continue to adjust that upward as the stock moves higher.

2.  A cash accumulation plan.  Investors who were well prepared for 2008 weren’t prepared by selling all their positions in 2007, but rather they had accumulated a large cash position so that when GE was trading at $6 a share and Warren Buffet plunked down $5 billion, they could do the same.  Since the market’s near an all-time high, it may be time to start directing some of your monthly savings into a pure cash position – ready to strike when the fire sale happens.  Whenever it happens.

3.  A plan for choppy markets.  What happens if the market doesn’t do anything, a la 2011?  Can you still make money?  You sure can.  Consider investing in options, high dividend paying stocks and bonds, as well as investments that profit from volatility.

4.  A plan to educate yourself.  It amazes me how many people I see and talk to each and every day who are completely OK with being an idiot.  You don’t have to go get a master’s degree in actuarial sciences, but it doesn’t hurt to read a little (unbiased) commentary about stocks, investing, the markets, and the history of all those things.  Being prepared for the next “event” whatever it is, means more than just having money set aside in the right places.  It means having a prepared mind as well.

No one knows what’s going to happen tomorrow in the market.  Anyone who says they have even the faintest idea are fooling themselves.  But, that doesn’t mean you should just throw in the towel and bury your head in the sand.  Winston Churchill once said, “Plans are of little importance, but planning is essential”

Make sure you take time this weekend to do a little planning.  Your investment portfolio will thank you later.

All charts from Big Charts

Investors Beware: What the 3 Biggest Brokerages Really Do With Investor Money

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Today’s guest post comes from Susan Lyon, financial analyst with NerdWallet. Thanks, Susan!

What do E-trade, Schwab, and TD Ameritrade all have in common?  Aside from being the three largest online brokerages and some of the biggest brand names in investing, they also all charge investors upwards of $7.99 or more on the typical stock trade.

 

Think this doesn’t sound so bad?  Think again.  A recent study by NerdWallet found that over 17 million investors are overpaying $1.8 billion every year on unnecessary (and sometimes very complicated or hidden) fees with the largest brokerages.

 

In light of the ongoing ETF price wars, you’d think a little of this competitive spirit would trickle down into the trading sphere – but this remains to be seen.

 

Where Is My Money Really Going?

Brokerages all make money by charging commission: that much is plain and simple.  But how much is too much, and is the peace of mind that comes from trading with a brand name broker worth it, NerdWallet asks?  The data says otherwise.

 

It’s easy to assume that a brand name brokerage is giving you top-notch treatment and the best money can buy, but NerdWallet’s study breaks down the top 3 brokerages’ financial statements to question this assumption.  The key findings:

 

  • The big 3 online brokers spend a smaller percentage of their money on trade execution – what benefits the investor – compared to the little guys.
  • The big 3 spend far more on advertising and overhead expenses.

 

This data breaks down expenses at major brokerages by trade execution (what matters to the investor the most) versus advertising, employees, physical, legal and indirect costs:

 

Lesson learned: active traders can meet their needs just as well by bringing their business to a new firm.  The average investor doesn’t need most of the “extras” offered by the big 3 anyways.  Why pay for something you aren’t even using?

 

Investors Can Avoid Fees By Shopping Around

The typical investor with these companies makes between 1 and 2 trades per month, so while a one off expense might not seem like a lot, we did the math and it really adds up.  If the typical investor makes only one stock trade per month, of approximately 100 shares, their annual fees at the largest 3 brokers come out to be:

 

  • E-trade $119.88
  • TD Ameritrade $119.88
  • Schwab $107.40

 

To make shopping around for better deals quicker and easier, NerdWallet’s new brokerage comparison tool allows investors to compare their many options side-by-side to find the right fit for them.

 

How Do I Decide on the Best Fit for Me?

NerdWallet’s new tool allows users to do their research before they invest, so they are made aware of all hidden and unpublished fees upfront to avoid unpleasant surprises later on.  Investors can search among the 74 brokerage accounts in the search tool by price, research, or data tools – whichever matters most to them personally.

 

The takeaway: just like in all personal finance situations, make sure to explore all your options before transferring your money.

Photo credit: Joybot

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A Chart that Frightens Me: Investing 101

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In the past several weeks, I’ve ground my axe on charts that are either misleading or actually say nothing.

Today, let’s counterpoint: I’ll show you a chart that makes sense to me AND fills me with more dread than seeing Aunt Ernestine in a swim suit.

…a rather unflattering swim suit.

I found this chart at FRED, an acronym for Federal Reserve Economic Data. This website is chock-full of charts and graphs direct from the government and financial institutions. And, as a bonus, they’re usually easy to understand.

Bonus!

Here’s the chart I’d like to focus on today, class:

Fred 10 yr 1 1-4 percent treasury inflation-indexed note, due 7 15 2020

 

So, if you aren’t familiar with Treasury Inflation-Indexed Notes, don’t start nodding off on me! I’ll have to send Aunt Ernestine over to sit on your lap.

That woke you up.

Let’s explain what the $%!@ we’re looking at here.

As you can see on the header, this chart shows the yield-to-maturity on a 10-Year Treasury Inflation-Indexed Note.

 

What’s a “Treasury”?

 

Investments that are simply referred to as a Treasury in the U.S. are products of the U.S. Government. They’re sold at an auction. The amount of the note is fixed (you buy in $100 increments), but the interest rate is what they bid on. If nobody bids, the government will have to pay a high return to lure investors. IF lots of people bid, the government is able to sell the debt for a lower price. Initially, this debt was priced at 1-1/4%. That’s a nice win for the U.S. Government.

As an example, if you have great credit, you do this with credit cards. Instead of jumping on the first credit card offer, you examine the interest rate. If it’s higher than you want to pay, you keep searching. Essentially, you’re pitting “investors” (lenders) against each other for the pleasure of holding your debt.

What’s a Note?

 

A note is a ten year bond. Once the bond is issued (this one was issued in July of 2010), it’s paid off ten years later.

Do you have to wait ten years to sell your bond? No. You’re allowed to sell early, but you’ll do it on the open market.

The open market conditions produced this graph.

 

What Does the Graph Show?

 

This graph DOESN’T show you the price of the ten year bond. Instead, it cuts to the chase. If the bond is sold initially for $100 (called the Par Value), and an investor will give you $105 for it, he should already know that he’s only going to receive $100 when the maturity date comes. Therefore, it’s a simple computation: if you over or underpay, what is the true interest rate you’ll receive?

This chart shows the true rate if you purchased this 10 year note today.

In short: the price is so high you’re guaranteed to lose money.

Ouch.

 

Why is this Frightening?

 

If investors are comfortable loaning money to the government, knowing that they’ll lose money, this means that other places to invest money are even uglier.

In short, we can discern:

– There is much constenation about the financial markets now

– Lots of investors feel comfortable losing a little money with the U.S. government

From that I infer that investors think they’ll lose more elsewhere.

 

Is This An Opportunity?

 

Clearly, there is less opportunity in Treasury Inflation-Indexed Notes than there is with Aunt Ernestine. However, some investors may think that this means that the panic has gotten so high that there are obvious opportunities elsewhere.

Maybe.

Remember that the majority of traders have more money than you and I. Professional traders work from platforms that spend more money on research than we spend on our homes. If you’re looking for opportunity, it isn’t apparent in this particular graph. You’ll need to look further.

 

Where Do You Look Next?

 

This chart leads me to want to see past correlations between the 10 Year Treasury Inflation-Indexed Note market and other financial markets. By viewing these, I might be able to better discern if this is simply panic or something bigger.

More on that another day.

For today, know this:

– FRED is a good place to find charts and graphs

– Treasury note graphs can give you clues about the market overall

– You can lose money in government bonds if you buy them on the open market

 

Is there anything I missed here? Let’s chat about this market and investments in the comments, minions.

How I Chose My High Yield Bond Fund

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Last week I described the ultra-thrilling process of how high yield bond funds work. The reason I penned that particular post was simple. I was in the process of buying one.

In today’s entry, lets look “over my shoulder” to see the method I used to pick my new fund. Many people don’t get to see how someone with 16 years of professional experience chooses an investment in their portfolio. Choosing a high yield mutual fund is a little like exploring through a wasteland of worthless investments (as you’ll soon see), and I think there’s a few crucial basics beginners can learn from my adventure.

Why? Like reading a map, you’re going to be surprised by how straightforward and simple the process is. Buying funds isn’t complicated and you too can find a good mutual fund within minutes while feeling comfortable that you performed adequate due diligence.

The key part of the process is spending some good time with the map first. If you know what you’re looking for, exploring for the fund is the easy part.

Leading up to choosing a fund, I determined the following:

  1. I knew my end goal. I wasn’t just throwing money in the general direction of my problems or praying for high returns. I didn’t use a “more is better” approach. That usually lands investors in an ugly spot, when their greed turns profits to huge losses. I was looking for retirement, and needed to maintain at least a 6 percent return to get there.
  2. I had already determined my asset mix to reach my goal. On our podcast and in previous posts, I’ve discussed finding the appropriate diversified asset mix for your goals. Mine included high yield bonds, mostly because they have a history of achieving my target return.
  3. I knew how much money I needed in high yield bonds to meet my goal. Normally, I’m not a fan of mutual funds. But, because it was a small amount and a manager can oversee the process of avoiding defaults, I decided one mutual fund would do the trick. For more sizable chunks, I’d hire multiple managers or switch from a mutual fund to individual bonds.

Why is it important to determine these three criteria first?

Like deciding which size ice cream cone you’re getting, it’s best to look at your current situation, or waistline, first. Plus, there’s another, overreaching reason:

I’m lazy.

Could you imagine the horror of searching through a gazillion mutual funds in a trillion different asset classes to find the one that fit my needs? Why would I spend countless hours oogling different investments I’ll never buy. I want to narrow the search as much as possible before investing. Why waste all that time I could be watching Cake Boss or Millionaire Matchmaker sorting through countless asset classes that I’ll never use?

I’m not going to waste time searching for investments. I’ll figure out the map first and then choose the right vehicle to get me to my goal.

…and that, class, is how we reached this point: choosing the vehicle.

Let’s begin.

My search began at TD Ameritrade. That’s because the IRA holding the cash I was going to use is housed there. If you’re not familiar with IRA custodians, you have a choice between many different places. Some decide on a bank, others a financial brokerage firm. I chose TD Ameritrade because I’m comfortable choosing investments alone but appreciate their stock and bond tools. They aren’t the cheapest provider, but I’m comfortable with the fee structure.

Fees

 

Just like a trip to the grocery store, every asset search begins with a discussion of “how much is this going to cost.” In many cases, I don’t want a mutual fund at all because they’re expensive, but in the high yield asset class, I want one. I don’t want to guess if one of the companies I own is going to go bankrupt. I also don’t want to do the homework necessary to avoid picking a loser (remember the lazy part above?).

Some mutual funds manage your cash for a reasonable fee, while others might as well be carrying a gun and wearing a mask.

But they’re not the only robbers.

It turns out that TD Ameritrade also is in on the “let’s gouge our customer” game. They’ve forged deals with some fund companies to offer their mutual funds at a lower cost. To tell you just how much lower, I was originally eyeing a Pioneer high yield offering. Imagine my surprise when I found out that I’d have to pay $49 when I bought AND AGAIN when I sold. Ouch.

As an aside, why not just round this ridiculous fee to $50? Wouldn’t anyone dumb enough to pay $49 shrug at a dollar more? If they want to play the psychological game make it $49.99. They’re leaving $10 on the table. I should work for TD Ameritrade…..

 

Screening: Expenses

 

So, armed with the list of funds that are available on my platform, I visit TD Ameritrade’s mutual fund screener site. There are many of these all over the web. The Wall Street Journal has a good one, as do Morningstar, Yahoo and MSN.

I used TD Ameritrade’s own screener for one reason. The first screen for me should be called “funds that avoid the ridiculous fee.” Because that’s too obvious, they named it, “No trading cost fund list.”

Screening: Manager

 

The second screen is for manager. If I have a manager at all, I want one who’s a little seasoned, but different than most investors, I also don’t want one who’s crusty. A fund manager nearing retirement might be milking her reputation at this point. Well-known managers such as Bill Gross at PIMCO are going to survive a couple down years with their portfolio if they decide to take a mental vacation at this point in the game. I don’t want that person.

I want them hungry.

There is no “avoid managers who have been around too long” screen, so I’m stuck using one based on minimum tenure. I don’t want one with less than three years in the saddle, personally, so I choose that screen.

Screening: Star Rating

Like I said, I’m lazy. I want Morningstar to do most of the heavy lifting for me. Although I’m smart enough to know that many lower-ranked funds could do well next year, I don’t have the time to search through them all.

In other areas, where I’m looking for more than a consistent dividend check and a fairly stable value, I might screen for more complex areas. In high yield, that’s it.

I press the “search” button.

Examining the List.

Now I feel like a kid in a candy store. Laid out in front of me is a shortened list of candidates for the title of “good enough to examine up-close.”

My attention now turns to fund evaluation company Morningstar, where I’m going to dig into each fund in detail.

I’m particularly interested in:

  • how each fund performed against it’s competitors,
  • what the dividend looks like, and
  • how the fund is managed.

I dig into these areas quickly. Simple internet searches lead me to mines of information. I’m too lazy to waste time flipping through funds, but when I’ve found my potential targets, I dig in like a rib-lover at the barbeque cook-off.

What Did I Choose?

Ultimately, the USAA High Income Fund won the day.

Why?

For an average fee of .90%, the dividend to me approaches 7% (6.93% as of this writing). The fund manager, R. Matthew Freund, has 21 years of experience (with USAA since 1994), so is mature yet not quite at retirement age. There’s been a co-manager named Julianne Bass since 2007, so there is younger blood overseeing day-to-day operations as well.

The fund has beaten the high yield sector over the past five years, but not by a ton. For the most part this fund’s performance has been slightly above or below the index. When it’s missed, it missed well above its asset category. It hasn’t had a major hiccup.

At this point, I like to guess what I’d rank the fund. I’d give it four stars out of five. It’s a winner, but not a thoroughbred. It won’t be the “hot thing” anytime soon. Perfect for this job.

Morningstar agrees, rating the fund four stars out of five. It’s an above average competitor with average fees and solid management.

Perfect. Often five star funds attract scads of assets, forcing me to look elsewhere as the management can’t invest all of the cash it’s attracted. I’m less concerned with the management of the fund over the past five years as I am over the next five. Because this fund isn’t meant to be the “go baby go” part of my portfolio, I’m fine with boring. In fact, I expect it and hope for it. Let’s get my 7% return so I can focus my energy elsewhere.

That’s how I picked the fund.

Complex? Nope.

I’d be willing to bet that this little 1000 word example is more homework than 95 percent of people complete when choosing investments. Even if a professional picks funds for you, there should be a list of screens you use to oversee picks.

It’s your portfolio. Take charge. It isn’t difficult.

(photo credit: Statue, Eusebius, Flickr;

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Budget Spreadsheet on Steroids: A Mint Review

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By now, you should know that I strongly believe it’s great money management systems, not mental strength, that creates wealth.

In earlier pieces on budgeting, we tackled two important topics:

– Many successful people don’t have create time to create or track a budget spreadsheet, so automating the process is important for success:  Forget 5 Steps To Budget Success–How About One.

– Budgeting with a partner is as much about communication asit is about counting pennies. Cheryl and I use this budget to make sure we’re on the same page:  The Twenty-Minute-a-Week Budget: A Busy Couple’s Best Friend.

If you’re a busy person who can’t write down every expense on the fly, it’s important to stay on top of data. You’ve heard me mention a tool called Mint which I use to monitor my financial life.

 

What is Mint? Let’s take a tour.

 

Mint.com is a free website that tracks your money management. For the most part, it does so seamlessly, handling all the budget spreadsheet tasks and more. I get excited whenever I log into my Mint account, because it puts a wealth of information at my fingertips.

With Mint, I know:

– How much I’ve spent this month

– My net worth at a glance

– My investment status

– Opportunities to improve

Of course, just because it’s free doesn’t mean there isn’t a cost. Mint assails you with  partner offers and a myriad of ways that you could do better, using products solicited through the site. Like I mentioned in my review of Upromise, to me this is a small price to pay for a robust tool that saves me from creating a budget spreadsheet and looks for opportunities to save me money.

In many ways, Mint is like another pair of eyes that can point out strengths and weaknesses.

 

Setting Up the Account

 

When you first log onto Mint, you’ll enter in information about your financial life. It’s going to ask for your brokerage, home, savings, checking, and credit cards. It’ll be helpful to have login information ready at your fingertips.

If you aren’t sold on Mint, give it a quick tour to see how it’ll affect your money management decisions. Put in only one or two accounts at first. You can always add the rest later if you like it.

Sometimes adding information to your Mint account isn’t easy, even though it seems like it should be. I use a small regional bank. Mint had 22 variations of the name, and it took me about 15 minutes to discover which bank was mine. That was a pain.

Besides this issue, though, I was able to quickly put the bulk of my finances into the system. That’s when the magic began.

 

Mint Alerts

 

Forget spending hours on the budget. Mint automates the process so you focus on results.

You’ll be able to set up custom alerts on Mint, but right out of the gate, it informed me that my house payment was due in three days and I had a credit card payment due now. A budget spreadsheet would have never noticed any of these things.

It’s the focused alerts that keep me coming back for more. Who has time to set 20 individual alerts across the financial universe when I can aggregate this information into one convenient spot.

 

The Budget

 

Mint laid out my expenses clearly in a graph format. I can quickly see if my expenses are where they should be, without having to dig through my expense history.

Better yet, I can place constraints around budget categories and ask Mint to notify me if an area of spending is out of control. This feature is awesome for busy people. You’ll know immediately if an area of the budget is compromised without having to go check your stuff.

We just completed a trip to Austin, Texas for the state swim meet. Mint told me that I’d spent far more on dining out than I normally do. For a quick money management update, this is handy information. Even though I was aware of my overage in this case, the reminder from Mint is always welcome.

 

When Mint Doesn’t Work

 

Like any budget, diet or workout schedule, Mint only works if you use it. You have to visit the site frequently or set up alerts to make sure that the information is useable.

I like Mint in combination with our weekly family planning meeting specifically for this reason. By reviewing our Mint budget spreadsheet at every meeting, we make sure that the data we’re collecting helps us make good decisions in the future.

 

Security

 

I’m not a security expert, and it worries me that I’m trusting Mint with my entire money management financial life. Here’s how I justify it: Mint is aligned with nearly every financial institution in the country. Their security experts have to be satisfied that Mint is a safe place for customer information before agreeing to be a part of the network.

Is this a valid argument? Probably not. That said, for me time is money. Mint is a time-proven entity that saves me a ton of hassle and has saved my financial bacon on more than one occasion. There are threats to my financial security all around. I have to trust some sites or I’ll end up at home with my abacus, getting nothing done.

 

What do you use to automate your budget? Do you manually create a budget spreadsheet or have you found a quicker way? If you use Mint, is there an area you like that I didn’t mention? Are there parts of Mint you find frustrating?

(assembly line image credit: Paul Esson, Flickr)

 

Interested in trying Mint? This will take you to the home page: Mint.com

 

Stop Reading About Last Year’s Top Ten Mutual Funds

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Okay, play before work: when theOtherGuy and I were designing the new site last Friday, it was a total nightmare. I wanted to get the Blog Post of the Week! up before midnight (so that Andrea from SoOverDebt.com could get both of our reader’s attention). Running out of time, I just grabbed a pic of my blog-writing friend Cooper. My cat.

Yesterday, my friend Doug—who has a lifetime of tech work behind him–was commenting on the new site layout:

(finally) Doug: …and one more thing, get rid of the cat picture.

me: Ha!

Doug: I know you think I’m joking. I’m not. It’s a deal breaker. Take down the cat.

me: (suddenly miffed for no reason whatsoever): Ha!

So now, completely out of spite, Cooper’s pic is going to stay on the site for the next seven days. Our Alexa site rank will probably plummet. No advertisers will touch us (nothing new there). But because Doug said “deal breaker”, Cooper gets his seven days of near-fame.

Now, on with the show……

SmartMoney.com yesterday published a list of the top 100 funds of the past 5 years. We’re inundated with these types of lists in January. I had a rare opportunity to read USA Today on my way home from Disney last week, and long-time finance writer John Waggoner penned a piece titled Fund Investors Ran in Place in ‘11. The story discussed what we already know: 2011 was a roller coaster year, with the average stock fund, according to Lipper, losing 2.9 percent. Investors are scrambling to find better results.

That wasn’t shocking.

What I found annoying was the story’s partner: “More on Funds, Quarterly, Yearly Results Tables….”. It was pretty much the same story I saw yesterday at SmartMoney. The obvious (unstated) connection I believe readers will make is that they’ll find better fund by reviewing the best ones from last quarter or last year.

USA Today and SmartMoney wouldn’t run stories featuring the top ten mutual funds (or 100….or whatever) if people didn’t search for this information. I don’t fault them at all. It sells. Turning to the USA Today piece, here’s a listing of the 4th quarter’s best and worst, as well as the 12 months’ best and worst funds. One page over I find the list of the top funds over 5 and 10 years.

Yuck.

Stop reading about the Top Ten Mutual Funds.

In his seminal investing book The Truth About Money 4th Edition’ target=_blank>The Truth About Money, financial advisor Ric Edelman discusses this thirst people have to throw money at last year’s winners. We want to own winning funds. Many of us have heard grandpa tell stories about the legendary returns of Fidelity Magellan back in the day, or of that high-flying Janus Twenty fund in the months leading up to the tech wreck. We want those days back. We’d love nothing more than to be invested with some manager who always makes us money. But as Edelman describes, history works against you if you’re trying to find great results this year by reviewing last year’s winners.

Looking at the top ten mutual funds rarely produces winning result.

WHY SHOULDN’T I INVEST IN LAST YEAR’S WINNERS?

  • When everyone clamors to enter a fund, investing millions of new dollars, the fund is doomed to failure. According to this study: Star Power: The Effect of Morningstar Ratings on Mutual Fund Flow, funds with high returns one year and Morningstar rating upgrades nearly immediately experience an unnaturally high gain in assets. These assets must be invested by the manager, who finds it more difficult to spread the investment among quality names. You’ll rarely find a manager can keep up with these huge asset spikes.
  • Often, the top ten mutual funds and ETFs are in specific categories which spiked during that calendar year. In 2010, commodity names like silver and cotton performed handsomely. In other years, real estate, large company stocks, or internet stocks have been big winners. If you invested in silver or cotton in January, 2011 based on 2010 results, you stepped in it. To mis-quote Sarah Palin, “how’s that workin’ for ya’ now?”
  • You may pay handsomely for a top fund. Funds with high expenses which spike may be especially dangerous. One top fund of 2010, Morgan Stanley Focus Growth B (AMOBX) carries an expense ratio of 1.77 percent. This fund competes against the S&P 500. If you’d purchased iShares S&P 500 index exchange traded fund, your expense would have been 0.09 percent, plus any trading costs. Big difference.

Here are some top funds, ETFs and ETNs listed in “best of” 2010 publications and their 2011 results:

Fund Name 2010 Result 2010 S&P 2011 Result 2011 S&P Who Listed
M.S. Focus Growth B AMOBX 25.87 15.06 -6.43 2.11 The Street
Fidelity Growth Co. FDGRX 20.55   0.67   The
Street
Fidelity Contrafund FCNTX 16.93   -0.12   The
Street
Proshares Ultra Silver AGQ 182.44   -47.47   USA Today
iPath DJ-UBS Cotton Index 96.22   -22.71   USA Today

In November of 2010, TheStreet.com listed the top performing funds competing with the S&P 500 here.

In January 2011, USA Today published a chart of the top performing funds of the year, which included ETFs and ETNs.

HOW SHOULD I PICK FUNDS?

(Photo credit: Crosa: Wikimedia Commons)

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Evaluate a Mutual Fund in 10 Minutes

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Part II of our thrilling series, Evaluating Mutual Funds (or How to Cure Insomnia)

I think whatever intern created yesterday’s headline inferring that my mutual fund post would put you to sleep REALLY messed up. Both of our other readers told me it was scintillating discourse. Mom especially liked it. Looks like an intern’s head is going to roll at Average Joe, Inc.

MOST ways to evaluate mutual funds are snorers AND take too much time. THIS method (using Morningstar) is like have a hamburger for dinner and then your spouse surprises the whole family with ice cream for dessert. All in 10 minutes. This saves you time for a beer and pizza. It’s exciting and time-saving without the Tums.

If you haven’t read yesterday’s post, I’ll implore you to start there, because iin that magical discussion I showed you how to get to the page we’re going to explore today. If you don’t want to read yesterday’s piece, just click this link to open a Mutual Shares page on Morningstar.com and follow along.

This lesson will be oh-so-awesome with that little bit ‘o background.

So….when we last left our hero, he’d pulled up ING Franklin Mutual Shares, Portfolio I and was staring at the page. You should be doing the same now. Today I’m going to show you my secret 5 point program to quickly decide if this fund is worthy of your money or not. Before we start, I’ll remind you, this isn’t the place to start! You should be already hunting for a specific type of fund based on your financial plan. Once you know what you’re shopping for, Morningstar will help weed out ugly ducklings. In investing the ugly ones don’t turn out to be pretty swans. They just become ugly ducks.

1) Purchase Info.

I don’t like to go into the store until I’m ready to buy. It’s the same concept here. We don’t want to waste our time evaluating a fund if we can’t buy it. Click the tab that says “Purchase” just below the name of the fund.

– First’, we’ll find out the minimum investment. Across the left column are statistics about how much it’ll take to buy this fund. Thankfully, it’s zero. I can afford that.

– Second, let’s make sure it’s open to new investors. The last two lines of this same column tell me that, no, it isn’t closed. Bonus.

– Third, I’ll see if it’s available where I have my money. I’m in luck. I do all of my investing through Matrix Financial Solutions. If I had used a bigger, more well-known firm like E*Trade, TDAmeritrade or another, I wouldn’t be able to use this fund. (No, this isn’t an advertisement for Matrix, and no, my funds really aren’t there….sometimes my readers are so very literal….).

So what, Joe? – We probably can’t buy this fund. That saves us a ton of work. We’re going to keep going for the sake of comparison, but there’s a reason I started here. Over the years I’ve wasted a ton of time evaluating funds that I can’t invest in….only to find out a half-hour into the exercise. There is good news if you like Mutual Shares. This fund has other classes available for purchase if you have money and like it. Search “Mutual Shares” and you’ll find several other versions of this same fund with a different cost structure.

…which brings us to the last point. Costs. The Morningstar front page on this fund listed the costs as “below average.” Click the “expenses” page to get a better idea. Expenses are such a big deal, that we’ll do a more in-depth look another day.

2) Management

I don’t want to evaluate a fund and find out there’s a new captain at the helm. So, quickly, we’ll click on the Management tab and take a look. Yup, all three managers have been there from the beginning. I may do more in-depth research on these people later, but for now, I’m satisfied.

3) Category

To compare a fund against it’s true competitors, let’s begin by verifying exactly what  type of fund this is. To the right of NAV (the share price), you’ll find the header “Category”. It lists this fund as a “large value” fund. Further right, the header “Investment Style” shows a graphic Morningstar calls a “style box.” This box, which resembles a Rubic’s Cube, represents nine possible types of investment (This particular box is for stock-based funds. Bond based funds have a different style box.).

As you can see, the stock style box has nine sections. The top row of boxes represent large company investments, while the bottom depicts small companies. Guess what the middle is? You’re so smart! You’re right. It’s mid-sized investments. You’ll see that Mutual Shares is a large company fund. It invests in large firms.

The three columns represent value investing on the left, considered more conservative by many investors, a blend in the middle, and growth-oriented funds on the right. This fund trades in the value column.

Put these two criteria together and you’ll find that Mutual Shares is a fund which invests in large, value oriented stocks.

So what, Joe? – There’s a BIG “so what” here. Funds sometimes drift from what they say they’re going to do. Some analysts call it “cheating.” If I’m starting with my goal in mind and I think that a large, value oriented fund is the way to go, I may look toward Mutual Shares. But what if I looked at the style box and it showed up in the blend or growth column? – or the fund really bought more mid-sized companies? It might be a good fund, but not right for my goals.

4) Risk

Evaluating risk is something I love to do, especially since we had that fireworks fight in 6th grade and I nearly had my eye blown out. risk Long story….but let’s just say two things: I’ve never been particularly excited about looking like a pirate and I’ve become passionate about weighing risk before participating in any activity.

To find out how risky this fund is, let’s maneuver over to the “Risk” tab and click to that page.

You’ve seen how “those damned kids” know all the right buttons to press with their video games and whatnot. (That was a poor imitation of my dad, btw.) If you’re going to play the mutual fund game, it’s important to know the right buttons to press. These risk statistics look difficult, but it’s important to gain a basic understanding if you’re going to be a skilled investor.

A note to financial gurus reading this page….remember our audience. This is the 101 version. I won’t be covering all the stats and I’m probably going to do a quick fly-over only. Put your protractors away and let’s begin.

The area we’re going to focus on is the MPT statistics box in the center of the page. It isn’t important for our discussion what MPT means (although, to fill you with the soothing knowledge that your teacher has mad fly skillz, I’ll tell you that it’s Modern Portfolio Theory. Happy?)

Notice that you can tab between 3-year, 5-year and 10-year statistics. That should be the first clue that it’s impossible to know what risks the fund is going to take tomorrow. We can only evaluate the historical track record over time. There are two basic measures: against the S&P 500 and against the “best fit” index. Without getting into another diatribe, we don’t care about the S&P 500 here. We want to know how this fund compares with others it competes against in the “Large Value” sector we identified above.

On the 3-year record, you’ll see that Mutual Shares has a beta of 0.87 and an alpha of – 2.68. What the heck do these numbers mean?

It isn’t easy, and I didn’t learn it in a day, so you won’t either. But here’s the training-wheels version:

A beta below 1.0 means the fund has had a history of producing less volatility than the index it’s compared against. A fund above 1.0 takes more risk. So, if funds have betas of .5, .8, 1.1 and 1.6, the one with a beta of 1.6 is the hot tamale while the one with a .5 takes the least risk. A beta of 1.0, by the way, would mean that the fund takes the same amount of risk as the comparison index. Got it? So, with a beta of .87, this fund has taken less risk than it’s competitors.

So what, Joe? – If you’re looking for a large company value fund that takes big risks, this ain’t it.

The alpha number rates the manager of the fund. If the fund has a positive alpha, that means that the manager’s picks have added value to the fund. If the alpha is negative, the manager is taking away value. With a low beta, I’d expect this manager to also have a negative alpha when compared to the index. Why? A fund that’s geared to take less risk is going to make more conservative plays, resulting usually in correspondingly low results.

…and what do you know? The alpha IS negative….

So what, Joe? – We’re finding that this management team takes less risk and provides less value than some competitors. A fund with a low beta and high alpha (obviously) is my favorite type of fund. You’ll find those, unicorns and four leaf clovers in the same place.

5) Performance

Left of the Ratings & Risk tab, you’ll find the “Performance” tab. Click that.

This page opens onto a chart which shows the growth of $10,000 over time. Let’s look at the data below the chart. I want to focus on one line: “% Rank in Category.” This measurement tells us how well the fund has performed competitively against others during that year. in 2008, it’s rank was 61, meaning that 61 percent of all funds in it’s class beat it’s performance. It wasn’t much better in later years. Although in 2009 the fund was in the top 30 percent, it declined to be only top 72 percent in ‘10.

Let’s play a little Sherlock Holmes here. I’d bet that in 2009 the market was lower and in ‘08 and ‘10 the market was a little better. Why? This fund, according to the beta we evaluated above, should hold onto money better during poor years. True in this case?

Not at all.

Surprisingly, the fund actually beat the market in 2009 and was trounced in 2008 when the market was horrible and in 2010 when the market had a pretty average year.

So what, Joe? – You can see what we’re getting at here. This fund has been a mixed bag in terms of results, but on a daily basis takes less risk.  This means there is still more for me to know. This fund is apparently doing something else with money to keep the beta low. It seems to be a fund that walks to it’s own drum. This could be good or bad. All it really means is that I need to know more. The good news? I know roughly what I’m looking for.

In 10 Money-Making Minutes we’ve learned:

10-minutes – The costs of the fund are low, and I can only get it at one firm.

– The current management is responsible for the results I’m evaluating.

– Mutual Shares bills itself as a Large Value fund and it’s investment style reflects the same.

– The fund takes less risk and produces lower results than the average fund it competes against.

– The fund doesn’t seem to uniformly win in an up or down market.

– It might pay to dig into the management philosophy more so I’ll have a better idea of what to expect.

Clients used to pay me to show them how to quickly evaluate a fund. Today you got the same treatment for free. Yes, I am a heck of a guy.

– Joe

Okay, minions. Here’s a question for us to play with: What other criteria make your “10 Minute Fund Evaluation” list?

Researching Mutual Funds (or How to Cure Insomnia)

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Part I – Introduction to an Investment Analysis Tool: Morningstar

 I’ve become a tool deviant. I feel like Tool Man Tim when I walk into Home Depot. My wife had to nudge me to stop grunting in the paint aisle last week; Cheryl is convinced I’m thinking about leaving her for a Wagner Paint Sprayer.

Unfair, unfounded and not true. I just grunted. It could happen to anybody.

My tool obsession began with financial planning tools. The good news is, if you like to carry a tax table in your pocket and wear tape around your glasses like I do, financial calculators are every bit as hot as any U joint in aisle 7 at Lowes. Financial geeks like me drool over an HP 12-C calculating 30 year mortgage payments at six percent interest.

Morningstar

In one of my favorite recurring dreams, I’m on a deserted island with an investment analysis web tool called Morningstar. This website, found at www.morningstar.com, is the single best place to find third-party mutual fund advice. Period. There aren’t any others nearly as robust available to the general public for free.

That doesn’t mean Morningstar is perfect, but I’ll show you what to avoid.

Morningstar is to mutual funds what Consumer Reports is to toasters. If you’re pretty anal about your toaster (and really, who isn’t?), Consumer Reports will point you to the absolutely best model at the lowest cost. Similarly, Morningstar divides funds into categories and then ranks competing funds against each other. Each fund has it’s own pages, displaying the inner-workings and past performance of the product.

In financial geek circles, it’s awesome.

Different than Consumer Reports, Morningstar can’t predict the future of the fund. This is an important distinction. People think a fund that’s highly rated is going to perform in the future. Don’t make this mistake. It’s become a cliché in the money management industry, but it’s true: past performance is no indicator of future results. Where your highly-rated toaster should rock-n-roll all over your bagels, a top-rated mutual fund could lose significant money tomorrow.

Using the Site: Front Page

Before you reach the front page, you’ll be presented with an advertisement. You may click “direct to Morningstar.com” to leave the ad at any time. This is the price you pay for solid advice. Morningstar is littered with advertising and not every link will work (some force you to sign up and others are only for paying members). Although you don’t need to ever register to use Morningstar, significant benefits are available for people who choose the free membership option. As a recovering money manager, I’ll recommend that you avoid the premium sections. These are generally sections that give you Morningstar’s feelings and advice about investments (there are some nifty tools also, but none that you can’t live without). I’d rather you learned how to evaluate funds on your own before paying for someone’s advice.

Morningstar’s front page covers many types of investments. The Chicago-based company has expanded over the years to also deliver ratings and advice on stocks, bonds, exchange traded funds, and closed-end funds. Although I’ll use this site as a secondary place to review my investments in these other areas, there are many competitors who offer similar services. In my opinion, Morningstar still shines brightest in the area where they began: mutual fund research.

From the front page, click on the “funds” tab to see the mutual fund front page. You’ll notice top stories in the middle, analysis tools on the left, and Morningstar favorites on the right. Only paid members can access most of the buttons on the right and several on the left.

Using the Site: Search Function

If you know the name or ticker symbol of the fund you’re hoping to evaluate, there is no reason to click the mutual fund tab. Nearly every page of the site allows you to type either the name or ticker symbol into the “Search” box at the top of the page. Find your fund on a drop-down menu that appears. Click on the link to bring up a page about your fund.

About Star RankingsSea_Star

On the fund page, next to the fund’s name is most user’s favorite tool: the Morningstar star ranking. Morningstar ranks funds the way Zagat’s categorizes top restaurants.  They use a five star system with five stars being the highest rank and one star being a near-sure sign to stay away.

A word of warning: don’t pick a fund based solely on the star ranking. Do you often disagree with movie critics? You’ll find that, much as critics pick top films based on criteria different from your own, it’s better to know how to review the fund on your own. Choose a fund for your money based on goals and evaluation of the fund management. A fund with a five-star ranking is likely to become bloated with lots of cash over the near future because dollars rush in when funds achieve a high score ranking. A fund managing lots of cash often has trouble investing it all, creating mediocre returns.

Tomorrow we’ll continue the tour of Morningstar. For our purposes, we’ll evaluate ticker symbol IFMIX, ING Franklin Mutual Shares Portfolio I. If you want to practice, find this fund page for tomorrow’s exercise.

I’d love to stay and chat longer, but I’m headed out to oogle alternative minimum tax criteria. Sexy!