Morningstar Gives DFA’s Disciplined Approach a Top Mark

Here is yet another example of why we prefer to use Dimensional funds in our MarketWise portfolios:

Morningstar recently issued a new Stewardship Grade for DFA. The firm’s overall grade–which considers corporate culture, fund board quality, fund manager incentives, fees, and regulatory history–is an A. 

Like Merriman, Dimensional believes in the efficiency of markets, places a focus on academics and solid research, and doesn’t give in to chasing investment trends. Read Morningstar’s full analysis of the firm’s corporate culture here.

Where are you on the investment continuum?

Before I came to Seattle, I had the pleasure of working for an asset management firm with close ties to lead researchers, Nobel Prize winners and economic powerhouses. One day, a dear friend to many in the company passed away and I was amazed at the outpouring of respect and love. Gordon Murray left a legacy with his co-authored book, The Investment Answer, written during his battle with terminal brain cancer.iStock_000042398948Small

Instead of traveling the world or living out the remainder of his time on a beach or mountain, Gordon gave the world the gift of what he learned over 25 years working on Wall Street and consulting with financial firms. The book is a light read (around 68 pages) and can be very powerful for those beginning their investment journey. It simply outlines key decisions every investor needs to make on their path to investing.

If you view the market as your ally rather than an adversary that you must time and compete against, give the book a quick read. Gordon and his co-author, Dan Goldie, outline five considerations:

  1. Decide whether you’ll do it yourself or hire a professional investment advisor.
  2. Determine what asset allocation between stocks, bonds and cash is best for you.
  3. Evaluate what specific asset classes you’ll include in your portfolio, and in what ratio.
  4. Consider whether you believe you can strategically and consistently outperform the market or whether you believe obtaining the market return is most in your favor.
  5. Create an execution strategy around when you will buy and sell funds from your portfolio. (For example, will you rotate asset classes? Sell based on trend following dynamics? Periodically rebalance on a definite time frame?)

For a little more history on Gordon and why this book was created, check out this NY Times article.

The nuances of rebalancing

iStock_000019901243SmallI recently received a question from a client of mine about an article that referenced rebalancing a portfolio at the same time each year. In theory, an annual rebalance is not a bad way to go. However, there’s quite a bit more to how we manage the rebalancing process than that.

For Merriman clients, we:

  • Avoid unnecessary transaction costs by using cash inflows and outflows as a tool to rebalance a portfolio back to its target allocation. Cash inflows are used to buy underweight asset classes and cash outflows are used to sell overweight asset classes.
  • Allow assets that are performing well to continue to perform – a documented trend called momentum – by placing tolerance bands around our allocations. This also helps avoid excessive rebalancing transaction costs.
  • Favor rebalancing tax-deferred accounts in December to coincide with mutual fund distributions and Required Minimum Distributions (RMDs), again reducing transaction costs.
  • Help defer taxes by rebalancing taxable accounts in January, when appropriate.

Market performance can also have an impact on the need for rebalancing. If returns are flat for a few years, there is less need for rebalancing. In volatile times, more.

In addition there will be one-off cases such as:

  • Tax loss harvesting. If there is a significant downturn in the markets (think 2008), we can use that as an opportunity to harvest losses to be used against future gains. We did this for our clients in 2008 and it is paying dividends today.
  • Introduction or deletion of an asset class can also provide an opportunity to rebalance your portfolio.

Rebalancing your portfolio is an integral step in maintaining a well-balanced portfolio and reducing its risk. But to do it once a year at the same time every year may not be the best solution for you. Depending on your situation, a more customized rebalancing approach may save you significant money in transaction costs and taxes in the long run. As always, check with your advisor to find out what’s right for you.

Stop worrying about rising interest rates

There is practically universal opinion that interest rates will rise in the future, and that bond portfolios will suffer painful losses when this happens. At Merriman, we think the financial news media has blown this story way out of proportion, with inflammatory headlines designed to capture attention. Narratives include “the coming bloodbath for bond holders” and “the imminent bursting of the 30-year bond bubble.”

Our Chief Investment Officer, Dennis Tilley, recently wrote an article detailing three reasons why we’re not worried about rising interest rates. Here’s a quick summary:

1. The Experts and Consensus Are Often Wrong

History provides countless examples of when experts and/or a super-consensus have been wrong about the future of stock and bond movements. This is why we don’t use market predictions to manage client portfolios.

2. A Portfolio Duration of Four to Five Years Is Optimal

The sweet spot duration for Merriman investors holding bonds is in the maturity range of four to five years. This intermediate duration provides a nice compromise of offering overall portfolio stability, market crisis/deflation/recession protection, a long-term real return above inflation and – perhaps most importantly – the ability to quickly adapt to a rising-rate environment. With this duration, we believe our clients don’t have to worry about rising interest rates. The article provides more detail and charts illustrating this point.

3. Rising Rates Signal an Improving Economy

Finally, rising interest rates are likely to coincide with an economy that is improving, which is generally good for stocks. Yes, temporarily, bonds will lose value due to rising yields. However, we expect only single digit losses from our bond portfolio, not the “bloodbath” that some pundits seem to think will happen.

Read the full article here to get more insight.

Seahawks Secrets to Success

12Flag-1024x728Seattle is still reeling with excitement from the Seahawks winning the Super Bowl! Over 700,000 Seattleites celebrated downtown to welcome the champs coming home. No matter where your team allegiance lies, it’s easy to spot the strengths of the Seahawks both on and off the field. These lessons can be applied to multiple areas of life, including your finances.

Here are 12 things everyone can learn from the Seahawks:

1) It’s never too late: Russell Wilson was a third round draft pick but that didn’t determine his performance. No matter when you start saving and investing, there is always opportunity ahead of you.

2) Diversification is key: Every player on a team has a specific job to do, just as every investment in your portfolio has a unique purpose. It’s hard to win with a team full of quarterbacks! Design your portfolio with broad diversification to cover all types of positions.

3) Defense wins championships: There is a saying that “offense wins games and defense wins championships.” Many times it’s the team’s offense that gets all the praise and glory, but without a strong defense to hold back the competition, all of the points scored are for nothing. It’s easy to get caught up in short term performance chasing of stocks, but make sure to manage downside risk with bonds so that your returns won’t disappear in a down market.

4) Find a coach: Every team needs a coach to lead them to victory. Having a financial advisor will keep you on track toward achieving your goals.

5) Don’t compare your strategy to others: Every team has a different approach on how to win games. Your friends and family have their own ideas about investment that may be different from yours, and that’s okay. Stick with the plan you make with your financial advisor – it is unique to you.

6) Break expectations: Seahawks fullback Derrek Coleman is deaf. No one expected him to be able to play in the NFL but he didn’t let other people’s beliefs hold him back. Commit to success and don’t let others get in the way of what you want to accomplish.

7) Take a look back: Teams spend countless hours watching game footage to learn from their mistakes. Look back at historical investments to learn all you can about performance volatility throughout various market conditions.

8) Go all in: The Seahawks have an “All In” sign that they hit on their way to a workout. Often we don’t want to commit to a plan unless we know for sure it will work out…but a plan can’t work unless you commit. Go all in.

9) Never give up: Even when it looks like a team has lost, there is always a chance for a comeback late in the game. Sometimes when a portfolio is down, we are tempted to switch strategies or abandon hope. If you give up too early, you might miss the winning finish.

10)  Have fun: Football is tough work but it is also a lot of fun. Always make time for the activities you enjoy with the people you love. As we say here at Merriman – Invest Wisely, Live Fully.

11)  Give back: In the midst of practice, games, media interviews, and sponsor appearances, Russell Wilson still makes time to visit the patients at Seattle Children’s Hospital. Appreciate the gifts you have in your life and share them with others.

12)  Identify your 12s: Seattle’s fans are known as the 12th man. Even though the fans aren’t on the field, they play an important role in the game. Find fans who will support you through all your wins and losses, and recognize their contribution to your success.

Umbrella insurance

When you hear the term “umbrella insurance,” your first thought might be, “What do umbrellas have to do with insurance? Is this just another product the insurance industry is trying to sell me?” Actually, umbrella insurance has nothing to do with conventional umbrellas.

Umbrella insurance is “extra insurance,” like an umbrella is extra protection against the rain, even though you have a raincoat on. Think of your regular car and homeowners insurance as the raincoat, and the umbrella insurance as the “umbrella” you carry for torrential downpours.

Many people tell me they have liability coverage with their auto and home policies, so why would they want to buy more? A typical individual does in fact have liability coverage on their auto policy and their homeowners policy, usually between $100,000 and $300,000 in coverage. This is indeed a lot of money.

But imagine you are driving your car when it’s wet out and you don’t see a cyclist when you make a turn. You hit the cyclist, who sustains serious injuries. In this situation, you may owe for lost wages, medical bills, and pain and suffering. If this person is the CEO of a large corporation and can’t work for, say, five years, the wages alone might exceed $1,000,000. Medical bills, including physical and occupational therapy, could easily be over $1,000,000. You will have far exceeded the limits of your auto policy.

In situations where losses aren’t covered by your other policies, umbrella insurance can provide the following:

  • Additional lawsuit coverage.
  • Added coverage for defense costs.
  • Liability coverage for some lawsuits not covered by your underlying auto or home insurance (for example, an accident involving a boat you rented on vacation, or a slander lawsuit).

You can also add an “uninsured or underinsured motorist” component to some policies, which can cover damages if you are injured by someone who has no insurance or not enough insurance. For example, you are out jogging and get hit by a car. The motorist’s insurance does not completely cover your medical costs. Your umbrella policy can step in at this point, with the uninsured motorist component, provided that the other motorist was at fault.

The good news is that this is one of the best buys in the insurance business. It typically costs only $150 to $200 per year for the first $1,000,000 in coverage, and then about $100 each for each additional million.

Umbrella insurance can give you peace of mind and help protect against financial ruin. I recommend you pull out those policies, look over the amount of liability coverage you have and schedule an appointment with your financial advisor or insurance agent to see if your coverage has kept pace with your assets and needs.