Schultz Collins Lawson Chambers, Inc. blogs

Your House is on Fire - ETFs and the Financial Press

Sun, 29 Jan 2012 16:01:31 -0800

A number of recent headlines have indicated that there might be hidden risks for investors in Exchange Traded Funds [ETFs]. Indeed, one headline characterized ETFs as ‘Emerging Threat Funds.’

What’s going on? Are these warnings credible, or is this yet another example of sensational headlines designed to lure readers into buying a publication or subscribing to an on-line investment advice service, that upon examination turns out to be unfounded?

We explore this topic in the article below.

Are All Registered Investment Advisory Firms Fiduciaries? — Caveat Emptor

Tue, 17 Jan 2012 00:30:51 -0800

Trustees and legal counsel are sometimes confused regarding the extent to which an investment advisory firm will act in a fiduciary capacity when accepting delegation of investment matters. Although the Investment Advisors Act of 1940 provides that the advisor must act as a fiduciary, it is an unwarranted leap of logic to assume that all advisory firms provide conflict-free services at a level of care skill and caution demanded from a fiduciary. Investment Advisory Services Agreements often contain contractual provisions which opt the parties out of the default prudence standards embodied in state Prudent Investor statutes. This places trustees in a true caveat emptor situation.

SF Chronicle quotes Chambers on Schwab's new indexed 401(k) program

Thu, 12 Jan 2012 10:32:53 -0800

Kathleen Pender quoted SCLC Principal Jon Chambers, head of the firm’s retirement plans consulting practice, in a column published on Thursday January 12, 2012, discussing a new 401(k) product that features index funds and default enrollment into a managed account product.

International Bonds: Scary or Terrifying?

Mon, 12 Dec 2011 19:05:10 -0800

Foreign bonds have been in the news a lot recently. Lots of European countries borrowed too much money, and now they are trying to find a way to get out from under that debt without defaulting on it.

The only question at this point is what sort of haircut the owners of European sovereign debt are going to enjoy. One way or another, they are going to take a haircut. And that threatens the solvency of big European [and American] money-center banks, who own a lot of that sort of debt. This in turn threatens the liquidity of the overall financial system. And we know from 2008 how nasty that sort of thing can be.

Managing Retirement Portfolio Withdrawals in Turbulent Times

Mon, 24 Oct 2011 20:53:28 -0700

Investors currently in or approaching retirement are, of course, correct to be concerned whenever their investment wealth decreases. Less money is not a good thing—especially if there are binding constraints on labor income. Without the financial flexibility of a paycheck, the consequences of assuming investment risk are necessarily magnified.

Given the decline in stock values over the previous quarter, I’d like to inform you of a portfolio-survival-blueprint you may wish to consider. The nature and scope of this blueprint form the main topic of my article published in the Wealth Strategies Journal in 2008. The article “Managing Retirement Portfolio Withdrawals in Turbulent Times: Precautionary Savings, Investment Reserves and Mid-Term Adjustments” can be found in the PDF file below.

Revisiting TIPS

Thu, 20 Oct 2011 16:52:51 -0700

Investment Quarterly for the 3rd Quarter of 2011 looks back at the behavior of U.S. Treasury Inflation Protected Securities over a period of extraordinarily low inflation. How did TIPS perform over that period, which exhibited none of the problems they were designed to ameliorate?

We also briefly examine the question of whether TIPS are a good barometer of future inflation. Finally, we discuss in greater detail the differences between three different ways to gain exposure to the risk/return characteristics of TIPS: a passive exchange-traded fund, a somewhat active open-end mutual fund, and a very active open-end mutual fund.

When Portfolio Risk Control Does More Harm than Good

Mon, 12 Sep 2011 13:06:20 -0700

Should skilled investors use stop-loss trading strategies or derivative instruments to protect a portfolio during periods of market turbulence? Do such protective strategies work? Are they costless?

During a period of downside turbulence capital markets are likely to become tightly coupled. Investment portfolios become more fragile because negative shocks to world markets propagate through capital markets more quickly and pervasively than during bull market periods. Tight coupling often means that assets with low or negative correlation during normal market conditions suddenly exhibit similar downside return patterns. This, of course, may reduce the effectiveness of portfolio diversification as a risk control strategy during severe market declines.

Although diversification — the inclusion of assets with return patterns that tend not to mimic each other — is the classic method of portfolio risk control, a variety of other risk mitigation techniques are available. Given the sequence of volatile equity market returns from the plunge in the technology-heavy NASDAQ stock exchange in 2000 through the global recession and the recent U.S. & European sovereign debt credit rating downgrades, investors wonder if trading or financial engineering techniques can mitigate declines in portfolio values.

Retirement Income & the 4% Rule

Thu, 20 Oct 2011 16:50:00 -0700

Is it prudent to set a withdrawal rate of 4% from a portfolio that is intended to support retirement income? For many years, 4% has been the “rule of thumb” in the financial planning community. But the 4% rule is controversial, and there are strong opinions on both sides. After all, there is always a risk that any schedule of regular portfolio withdrawals might interact viciously with adverse markets, causing the portfolio to crash and burn before the retirement is successfully completed.

Our latest Investment Quarterly reviews the discourse on the subject among academic economists and financial planning practitioners. We examine two sets of studies of the question, with two different ways of approaching it: empirical analysis, or modeling. Each has its strengths and weaknesses; their findings disagree.

The SCLC Risk/Return Continuum in 2000 & 2010

Mon, 18 Jul 2011 13:12:00 -0700

The main article of the first Investment Quarterly of 2011 compares the 2000 and 2010 editions of an SCLC diagnostic instrument, the Risk/Return Continuum. Since our firm’s founding in 1995, we have been using the Continuum to help clients understand investment risk, so that they can decide how much of it they want to tolerate. Updated annually, the Continuum looks back at investment history over the last 50+ years, and shows how it would have treated six different portfolios of differing degrees of risk.

In this issue of IQ, we compare the Continuum of 2000 to its counterpart of 2010, to see how a decade of turmoil, war, political controversy, and market crashes might have affected risks and returns of different portfolios and their elements.

Banking Law Journal publishes 2 part article by Patrick Collins

Wed, 23 Feb 2011 18:13:08 -0800

In its February and March issues, the Banking Law Journal, one of the pre-eminent trade journals for lawyers and bankers, has published a two-part article written by Patrick Collins. The title: Trustee Asset Management Elections: Portfolio Performance Evaluation and Preferencing Criteria. It is available here

Demand to Hold Life Insurance

Thu, 24 Feb 2011 11:36:19 -0800

Patrick Collins and Huy D. Lam have written a paper together that addresses the demand to hold life insurance in retirement where the investor makes the decision to retain or surrender coverage concurrently with the asset allocation decision. It is in the process of being reviewed for publication. The article as submitted is available here

The Morningstar 401(k) Plan

Wed, 27 Apr 2011 17:49:50 -0700

Investment Quarterly this period examines the fund choices Morningstar, Inc. has made for its own 401(k) Plan fund menu. Morningstar is one of the largest purveyors of financial information on the planet, and their core business from the very beginning was rating mutual funds. Arguably, Morningstar as an organization knows more about American mutual funds than any other entity on Earth. Presumably, the history of their fund choices can tell us something about what Morningstar thinks is important in a fund that is going to be playing a role in a diversified portfolio intended to accumulate resources to finance retirement income.

More Likely Than Not

Wed, 27 Apr 2011 17:51:00 -0700

Investment Quarterly focuses this issue on the famous Capital Asset Pricing Model (CAPM) that formed the foundation of Modern Portfolio Theory, and that still informs much investment management today. We explain the basic outlines of the theory, and then examine how the CAPM fared in the real world. We look at how a broadly diversified hypothetical portfolio allocated 70% to equities and 30% to fixed income performed over three different periods, each with wildly different patterns of returns: 1995 through 2009, 2000 through 2009, and 2005 through 2009.

These were some pretty grim periods. The nineties were generally a positive time to own stock, but the ten years that will end this December have already come to be called the “Lost Decade.” It has been an extremely rough ten years:

SF Chronicle quotes Chambers on new fee transparency rules

Thu, 28 Apr 2011 18:49:36 -0700

Kathleen Pender quoted SCLC Principal Jon Chambers, head of the firm’s retirement plans consulting practice, in an article that appeared on Friday October 15, 2010, on new regulations requiring standard disclosure of fees, investment performance and other relevant information to participants in 401(k) and other similar retiement plans.

DOL Issues Participant Fee Transparency Rules

Thu, 14 Oct 2010 15:03:13 -0700

Earlier today, the DOL issued a Final Rule to Improve Transparency of Fees and Expenses to Workers in 401(k)-Type Retirement Plans.

The rule will be published in the Federal Register on October 20, 2010, will become effective beginning on December 20, 2010, and become applicable to covered individual account plans for plan years beginning on or after November 1, 2011. For calendar year plans, compliance will be required on January 1, 2012.

If you are interested, you can read the entire 142 page rule, or you can review the (much shorter) DOL Fact Sheet.