• A cottage industry of asset managers, financial advisors and investment can give you their takes on how to be just like Warren Buffett.

    You can skip the circus of wannabes and hear from the Oracle of Omaha directly in his annual letter to Berkshire Hathaway a shareholder, which was published Saturday.

    In his most recent letter, Buffett praised the virtues of index funds, railed against the steep fees hedge fund managers charge and said "investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well."

    You don't have to be a stock-picking whiz to benefit from his success. Buffett has already detailed three ways to emulate him in your retirement portfolio.

    The two-fund portfolio

    Buffett outlined an investing strategy for ordinary investors in his 2013 annual shareholder letter:

    My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.

    You can buy U.S. Treasurys directly or invest in a low-cost government bond fund. (Vanguard's short-term government bond index fund charges 0.16 percent annually with a $3,000 minimum investment, or 0.07 percent for the exchange-traded fund version.)

    Vanguard offers several S&P funds: a traditional mutual fund that charges 0.16 percent annually with a $3,000 minimum investment or one with a $10,000 minimum and a 0.05 percent annual fee.

    You can also buy a Vanguard 500 ETF that has an expense ratio of 0.05 percent. If you want a rock-bottom price, iShares Core S&P 500 ETF charges 0.04 percent. With ETFs, and unlike with mutual funds, you may have to pay commissions when you trade them.

    "Warren Buffett's investment strategy is a good one for investors and signals that he doesn't believe that most people, including professionals, can beat the market long-term, so just be the market and buy low-cost index funds," said Stephanie Genkin, a certified financial planner in Brooklyn.

    Buffett put his money where his mouth is when it comes to indexing. He bet $1 million for charity that the Vanguard 500 Index Fund Admiral Shares would beat a basket of five hedge funds selected by Protégé Partners, a New York City asset management firm over 10 years starting in 2008.

    The index fund has tripled the performance of the combined returns of five unnamed hedge funds as of the end of 2015. A likely Buffett victory will benefit Girls Inc. of Omaha while Protégé is playing for Ark, an international youth education charity based in the U.K.

    Berkshire Hathaway stock

    You can share in gains of one of the world's greatest capital allocators by owning stock in Berkshire Hathaway directly.

    Buffett's holding company has beaten the total return of the S&P 500 over the past 10 years with an annualized return of 9.1 percent, compared to 7.3 percent for the index.

    Berkshire stock has two share classes. The primary difference between the share classes is the price. Class A stock recently cost more than $255,000 per share while Class B is 1/1,500 of that sum, recently at $170 per share.

    You can convert Class A stock into Baby Berkshire shares, but not the other way around. Class B shares, launched in 1996, also have slightly less voting rights.

    Beyond the lower price, the big advantage of the Class B shares for investors is that they can give them to people without triggering the gift tax, which kicks in for gifts above $14,000 each year.

    With any investment pool, the larger you get, the harder it is to produce outstanding results. Berkshire Hathaway is no different and Buffett addressed this issue in his shareholder letter:

    As for Berkshire, our size precludes a brilliant result: Prospective returns fall as assets increase. Nonetheless, Berkshire's collection of good businesses, along with the company's impregnable financial strength and owner-oriented culture, should deliver decent results. We won't be satisfied with less.

    The Warren Buffett way

    For the adventurous (or foolish), you can try your hand at investing in stocks like the master of value investing himself.

    You don't have to go it alone. Plenty of stock screeners, such as those from the American Association of Individual Investors, Morningstar and ValueWalk, strive to identify stocks of companies with positive free cash flows, good returns on capital and strong competitive advantages (what Buffett calls "moats" as in a castle with a moat). Automated investing service Motif lets you buy a basket of Buffett-like stocks for less than $10 per trade.

    To be sure, it is extremely difficult to generate a record anything close to what Buffett has done just by stock-picking. Public companies represent only a part of Berkshire Hathaway's portfolio holdings, while the rest come from private deals ordinary investors can't access.

    Where most investors lose their way in following in Buffett's legendary footsteps is consistency. Even Buffett stumbles from time to time.

    "The problem that most people would have investing like Buffett is the time frame. Many of his investments can take years to pan out, and the average investor doesn't have that sort of patience," said George Gagliardi, a CFP and founder of Coromandel Wealth Management in Lexington, Massachusetts.

    "Remember the derogatory comments about Buffett during the Internet stock boom years? He went from a pariah in 1998 to a genius in 2003," Gagliardi said.

    The key to Buffett's stock-picking success has been his ability to buy when others are fearful.

    "Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines – even panics – that will affect virtually all stocks. No one can tell you when these traumas will occur – not me, not Charlie [Munger], not economists, not the media," Buffett writes in his 2016 letter.

    "During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy."


  • Risk and reward are inextricably intertwined, and therefore, risk is inherent in all financial instruments. As a consequence, wise investors seek to minimize risk as much as possible without diluting the potential rewards. Warren Buffett, a recognized stock market investor, reportedly explained his investment philosophy to a group of Wharton Business School students in 2003: “I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out.”

    Reducing all of the variables affecting a stock investment is difficult, especially the following hidden risks.

    1. Volatility

    Sometimes called “market risk” or “involuntary risk,” volatility refers to fluctuations in price of a security or portfolio over a year period. All securities are subject to market risks that include events beyond an investor’s control. These events affect the overall market, not just a single company or industry.

    They include the following:

    • Geopolitical Events. World economies are connected in a global world, so a recession in China can have dire effects on the economy of the United States. The withdrawal of Great Britain from the European Union or a repudiation of NAFTA by a new U.S. Administration could ignite a trade war among countries with devastating effects on individual economies around the globe.
    • Economic Events. Monetary policies, unforeseen regulations or deregulation, tax revisions, changes in interest rates, or weather affect the gross domestic product (GDP) of countries, as well as the relations between countries. Businesses and industries are also affected.
    • Inflation. Also called “purchasing power risk,” the future value of assets or income may be reduced due to rising costs of goods and services or deliberate government action. Effectively, each unit of currency – $1 in the U.S. – buys less as time passes.

    Volatility does not indicate the direction of a price move (up or down), just the range of price fluctuations over the period. It is expressed as “beta” and is intended to reflect the correlation between a security’s price and the market as a whole, usually the S&P 500:

    • A beta of 1 (low volatility) suggests a stock’s price will move in concert with the market. For example, if the S&P 500 moves 10%, the stock will move 10%.
    • Betas less than 1 (very low volatility) means that the security price fluctuates less than the market – a beta of 0.5 suggests that a 10% move in the market will produce only a 5% move in the security price.
    • A beta greater than 1 (high volatility) means the stock is more volatile than the market as a whole. Theoretically, a security with a beta of 1.3 would be 30% more volatile than the market.

    According to Ted Noon, senior vice president of Acadian Asset Management, implementing low-volatility strategies – for example, choosing investments with low beta – can retain full exposure to equity markets while avoiding painful downside outcomes. However, Joseph Flaherty, chief investment-risk officer of MFS Investment Management, cautions that reducing risk is “less about concentrating on low volatility and more about avoiding high volatility.

    Strategies to Manage Volatility

    Strategies to reduce the impact of volatility include:

    • Investing in Stocks With Consistently Rising Dividends. Legg Mason recently introduced its Low Volatility High Dividend ETF (LVHD) based on an investment strategy of sustainable high dividends and low volatility.
    • Adding Bonds to the Portfolio. John Rafal, founder of Essex Financial Services, claims a 60%-40% stock-bond mix will produce average annual gains equal to 75% of a stock portfolio with half the volatility.
    • Reducing Exposure to High Volatility Securities. Reducing or eliminating high-volatility securities in a portfolio will lower overall market risk. There are mutual funds such as Vanguard Global Minimum Volatility (VMVFX) or exchanged traded funds (ETFs) like PowerShares S&P 500 ex-Rate Low Volatility Portfolio (XRLV) managed especially to reduce volatility.
    • Hedging. Market risk or volatility can be reduced by taking a counter or offsetting position in a related security. For example, an investor with a portfolio of low and moderate volatility stocks might buy an inverse ETF to protect against a market decline. An inverse ETF – sometimes called a “short ETF” or “bear ETF” – is designed to perform the opposite of the index it tracks. In other words, if the S&P 500 index increases 5%, the inverse S&P 500 ETF will simultaneously lose 5% of its value. When combining the portfolio with the inverse ETF, any losses on the portfolio would be offset by gains in the ETF. While theoretically possible, investors should be aware that an exact offset of volatility risk in practice can be difficult to establish.

      2. Timing

    Market pundits claim that the key to stock market riches is obvious: buy low and sell high. Good advice, perhaps, but tough to implement since prices are constantly changing. Anyone who has been investing for a time has experienced the frustration of buying at the highest price of the day, week, or year – or, conversely, selling a stock at its lowest value.

    Trying to predict future prices (“timing the market”) is difficult, if not impossible, especially in the short-term. In other words, it is unlikely that any investor can outperform the market over any significant period. Katherine Roy, chief retirement strategist at J.P. Morgan Asset Management, points out, “You have to guess right twice. You have to guess in advance when the peak will be – or was. And then you have to know when the market is about to turn back up, before the market does that.”

    This difficulty led to the development of the efficient market hypothesis (EMH) and its related random walk theory of stock prices. Developed by Dr. Eugene Fama of the University of Chicago, the hypothesis presumes that financial markets are information efficient so that stock prices reflect all that is known or expected to become known for a particular security. When new data appears, the market price instantly adjusts to the new conditions. As a consequence, there are no “undervalued” or “overvalued” stocks.

    Coping with Timing Risk

    Investors can mollify timing risks in single securities with the following strategies:

    • Dollar-Cost Averaging. Timing risks can be reduced by buying or selling a fixed dollar amount or percentage of a security or portfolio holding on a regular schedule, regardless of stock price. Sometimes called a “constant dollar plan,” dollar-cost averaging results in more shares being purchased when the stock price is low, and fewer when the price is high. As a consequence of the technique, an investor reduces the risk of buying at the top or selling at the bottom. This technique is often used to fund IRA investments when contributions are deducted each payroll period. NASDAQ notes that practicing dollar-cost averaging can protect an investor against market fluctuations and downside risk.
    • Index Fund Investing. In the classic example of “If you can’t beat them, join them,” Fama and his disciple, John Bogle, avoid the specific timing risks of owning individual stocks, preferring to own index funds that reflect the market as a whole. According to The Motley Fool, trying to accurately call the market is beyond the capability of most investors, including the more prominent investment managers. The Motley Fool points out that less than 20% of actively managed diversified large-cap mutual funds have outperformed the S&P over the last 10 years.

      3. Overconfidence

    Many successful people reject the possibility of luck or randomness having any effect on the outcome of an event, whether a career, an athletic contest, or investment. E.B. White, author of Charlotte’s Web and a longtime columnist for The New Yorker, once wrote, “Luck is not something you can mention in the presence of a self-made man.” According to Pew Research, Americans especially reject the idea that forces outside of one’s control (luck) determine one’s success. However, this hubris about being self-made can lead to overconfidence in one’s decisions, carelessness, and assumption of unnecessary risks.

    In October 2013, Tweeter Home Entertainment Group, a consumer electronics company that went bankrupt in 2007, had a stock price increase of more than 1,000%. Share volume was so heavy that FINRA halted trading in the stock. According to CNBC, the reason behind the increase was confusion about Tweeter’s stock symbol (TWTRQ) and the stock symbol for the initial offering of Twitter (TWTR).

    J.J. Kinahan, chief strategist at TD Ameritrade, stated in Forbes, “It’s a perfect example of people not doing any homework whatsoever. Investing can be challenging, so don’t put yourself behind the eight-ball to start.” Even a cursory investigation would have informed potential investors that Twitter was not publicly traded, having its IPO a month later.

    Stock market success is the result of analysis and logic, not emotions. Overconfidence can lead to any of the following:

    • Failure to Recognize Your Biases. Everybody has them, according to CFP Hugh Anderson. Being biased can lead you to follow the herd and give preference to information that confirms your existing viewpoint.
    • Too Much Concentration in a Single Stock or Industry. Being sure you are right can lead to putting all your eggs in a single basket without recognizing the possibility that volatility is always present, especially in the short term.
    • Excessive Leverage. The combination of greed and certainty that your investing decision is right leads to borrowing or trading on margin to maximize your profits. While leverage increases upside potential, it also increases the impact of adverse price movement.
    • Being on the Sidelines. Those who feel the most comfortable in their financial capabilities often believe that they can time the market, picking the optimum times to buy, sell, or be out of the market. However, this can mean you will be out of the market when a major market move occurs. According to the DALBAR 2016 Quantitative Analysis of Investor Behavior, the average investor – moving in and out of the market – has earned almost half of what they would have made for the last 15 years if they had matched the performance of the S&P 500. J.P. Morgan’s Roy notes that if an investor had been out of the market just the 10 best days over the past 20 tears – a span of 7,300 days – the return would be slashed in half.

    Strategies to Stay Grounded

    Strategies to reduce the impact of overconfidence include:

    • Spread Your Risk. While not a guarantee against loss, diversification protects against losing everything at once. Jim Cramer of TV’s Mad Money recommends a minimum of 10 stocks and a maximum of 15 in a portfolio. Less than 10 is too much concentration, and more than 15 is too difficult for the average investor to follow. Cramer also recommends investing in five different industries or sectors. Investors should note that one benefit of mutual funds and ETFs is automatic diversification.
    • Buy and Hold. Warren Buffett is perhaps the most famous and ardent proponent of the buy and hold strategy today. In a 2016 interview with CNBC’s On the Money, Buffett advised, “The money is made in investments by investing, and by owning good companies for long periods of time. If they [investors] buy good companies, buy them over time, they’re going to do fine 10, 20, 30 years from now.”
    • Avoid Borrowing. Leverage is when you borrow money to invest.  And while leverage can magnify profits, it can also amplifies losses. It increases the psychological pressure to sell stock positions during market downturns. If you tend to borrow to invest (to pay for your lifestyle), you would do well to remember the advice of popular financial gurus such as Dave Ramsey, who warns, “Debt is dumb. Cash is king.” Or Warren Buffett, who claims, “I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.”

    Final Word

    “It’s not what you make, it’s what you keep that matters.” The source of this widely recognized quote is uncertain, but it can be found in almost every list of famous quotes about the stock market. The saying illustrates the need to reduce risk as much as possible when investing. Achieving significant stock market gains, only to lose them when a disastrous event occurs, is devastating – and often unnecessary.

    Robert Arnott, founder of the Research Affiliates asset management firm, identified the dilemma in the relationship between risk and return: “In investing, what is comfortable is rarely profitable.” By employing some of these strategies, such as dollar-cost averaging, reducing portfolio volatility, and diversification, you can protect your wealth and sleep better at night.

    Are you concerned about the risks in the stock market? What steps do you take to reduce your exposure to negative events?


  • What does 'financial institution' exactly refer to?

    There is no cut-and-dry answer. For many years, banks have been absorbed by others or merged with other banks, making the definition hard to delineate. It all depends on the technical nature of the company's personality as it is registered at the FCA.

    Some difficulties, therefore, arise – for instance:

    If you save money in the Bank of Scotland, Halifax and BM Savings, which belong to one group, the covered amount is also considered as one. Hence, you get only £85,000.

    If you save money in the Royal Bank of Scotland, Ulster and NatWest, which all belong to the giant RBS conglomerate; you get £85,000 protection for every one of three banks where you have put money.

    Which banks are linked?

    You may visit websites to help you find out if your bank shares its savings protection.

    Or you may check the FCA registration number on your bank's website. If the institution is not among those listed, it does not necessarily mean it has no protected. Their last complete update of list was on April 2017.

    What about bank takeovers?

    In the even that your bank has been taken over, the actual protection on your money can depend on the date you opened your savings account. A merger-by-merger guide is given below:

    • Santander (Alliance & Leicester and Bradford & Bingley)
    • Lloyds Banking Group, Halifax and TSB
    • Barclays and ING Direct
    • Virgin Money and Northern Rock
    • AA Savings and Bank of Ireland UK
    • Marfin Laiki Bank and Bank of Cyprus UK

    What happens when my building society has merged with another?

    As a result of a financial crisis in the past, several building society takeovers flooded the news. At the start of such an occurrence, the Government acted to cover savings in two different building societies that merged; however, that applied only until December 2010.

    Hence, if you have savings in several of the institutions listed under the groups listed below, you only stand to receive £85,000 cover within that group:

    • Co-operative Bank and Britannia
    • Yorkshire, Chelsea, Barnsley, Norwich & Peterborough building societies, plus Egg
    • Nottingham and Shepshed building societies, trading as Nottingham BS

    Nationwide previously shared its protection with Derbyshire, Cheshire, and Dunfermline Building Societies, but all products under the three minor building societies are now branded as Nationwide. This also goes for Coventry BS and Stroud & Swindon BS – all previous accounts with S&S are now branded as Coventry.

    What of foreign-bank savings?

    Numerous banks originating from overseas operate in Britain, such as Santander, Yorkshire Bank and ICICI. Unless they are not technically “offshore” accounts, the parent bank does not matter.

    If the bank is UK-regulated, you will receive the same £85,000 coverage for every individual. However, there is a grayish area:

    In the event that a bank falls into difficulties, a bailout might cover your savings, providing protection for your money (although there is no full guarantee to that effect). This happened not only to UK-owned Northern Rock and Bradford & Bingley, but also to Iceland-owned (but UK-regulated) Kaupthing Edge.

    As much as possible, limit your savings under the £85,000 limit, since the protection is a goal but not a guaranteed promise in case of a bank run. Nevertheless, this is specifically applicable to non-European banks, as this has not been proven in reality so far (and we are hoping it will never happen!).

    Not all European banks are UK protected

    A bank could be operating in the UK with the FCA's complete approval; but the FSCS may not provide protection for the money you put into them. Be more careful then about European-owned banks than those owned by overseas companies.

    The reason behind this caveat is that banks from the European Economic Area may choose to have a protection that is slightly variant, referred to as the 'passport' scheme, meaning you would have to claim compensation for your money from the compensation program in the bank's originating country.

    Overseas banks are not allowed to do this in Europe; hence, they have to provide complete UK compensation if they operate in UK.

    Remember, if you save with one of those banks owned by overseas companies, the safety of your savings will depend on the foreign nation’s stability and solvency or their authorized financial regulator.

    Certainly, there are some countries that have greater financially stability than the UK; however, you will then rely on a government upon which you do not have complete trust to protect your savings.

    But on the bright side, beginning in 2010, every European nation has been required to set a compensation cap of €100,000 (which is equivalent to £85,000 in UK, which does not use the euro).

    In case you have savings in a European bank that is presently protected by the FSCS at the maximum limit and it converts to the 'passport' scheme, the bank should inform you of the change.

    Finally, a European bank may also operate in the UK while applying its own home-compensation program that may be below the UK limit, giving you protection only for that lower amount. Under this arrangement, the overseas bank will not be FCA-regulated but remains regulated by its government's own protection program.

    Nevertheless, accounts with these banks sometimes provide higher rates compared to UK-protected banks.

    Remember then that dealing with non-UK regulated banks may result in difficulty of getting back your money in the event of a bank failure.


  • How to Secure Your Savings (Part 1)

    The collapse of Northern Rock, Bradford & Bingley, and Icelandic banks caused a lot of panic several years back, leading people to wonder whether their savings are safe at all. What steps can we take to secure our savings from such a terrifying and real threat?

    We will provide a detailed safety checklist as well as what safeguards you can apply in case of averse economic scenarios.

    The essential facts you need to know

    At least 6 facts will let you prepare for worst-case scenarios, namely:

    • Increased protection limit. At present, your savings now gets £85,000 protection based on UK-regulated financial institution instead of the former £75,000 only

    Every UK-regulated savings and current account as well as cash ISAs in banks, credit unions and building societies are protected by the Financial Services Compensation Scheme (FSCS).

    From £75,000, the cover was raised to £85,000 on 30 January 2017 after the pound's post-Brexit fall led to a review by the Bank of England. However, the amount of £85,000 is not given for each account but for each financial institution. Hence, if the bank runs, you receive £85,000 for each person, for each financial institution. Most savers will get the amount within seven days.

    • You get a temporary £1-million-protection after 'life events'

    Based on rules established in July 2015, savings of up to £1m may be protected for a six-month period in case your bank fails.

    The increase will cover such life events as selling your home (but not when you buy-to-let or a second home), redundancy, inheritances, and insurance or compensation payouts that could result to you holding a temporarily-high savings amount.

    The additional protection will apply starting from the day on which the money is transferred into the account, or the day on which the depositor becomes eligible to have the amount, whichever comes later. You have to provide documents to show where the funds came from in case you file a claim for the amount. It might take at most 3 months for any release of cash above £85,000.

    This development is beneficial as it provides the saver time to prepare on how to utilize the money. Moreover, you can maximise savings by adding more money into higher interest-paying accounts instead of the usual lower-paying accounts.

    • Not every UK savings account is UK-regulated

    Majority of banks, also foreign-owned ones such as Spain's Santander, are regulated by the UK government. But certain EU-owned banks prefer to use the 'passport scheme' where protection only comes from their HOME government. Examples are Fidor, RCI Bank and others.

    Joint accounts count as doubly protected

    Since cash in joint accounts are considered as half each, it gets a £170,000 protection.

    If you also have a personal account with the same bank, half of your joint savings stands as your total exposure; hence, and any additional amount above £85,000 is not protected.

    An institution is a distinct entity from a bank

    Remember, the protection is for every institution, not for every individual account. Therefore, having 4 accounts with a single bank only entitles you to only £85,000. The meaning of the word 'institution' depends on a particular bank's license and huge banking conglomerates complicate the meaning.

    For instance, Halifax and Bank of Scotland are sister-banks and their accounts are covered for only £85,000, for one institution. RBS and NatWest, also sister-banks, however, have separate limits.

    Distribute your savings to protect them

    To achieve fail-proof safety, save at the most £83,000 in every institution (which gives you a safety allowance of £2,000 for interest growth). Doing so will spread your money in perfect safety even if you stay below the £85,000 mark; hence, in case your bank fails, your money will not be inaccessible for a certain period. Having two accounts will reduce such a risk.

    What the FSCS protects

    The Financial Services Compensation Scheme (FSCS) only covers organisations under the auspices of the Financial Conduct Authority (FCA). This led to the tragic failure of the Christmas savings scheme Farepak, which had no protection at all. Thus, when the scheme went caput, all the money disappeared.

    The primary types of protected savings include the following:

    • Bank and building society accounts

    FSCS covers all UK bank, credit unions, or building society current and savings accounts; and it also partially covers small business accounts.

    Some forms of protected equity bonds, which are 'deposit accounts' whose interest growth relies on the stock market's performance, may likewise qualify for 'savings' protection.

    • Any savings within a SIPP pension

    For those who have a self-invested personal pension scheme and saved cash money there (in contrast to investment funds), FSCS provides complete protection for their money, separate from any other investment protection.

    SIPP service-providers will help you determine the banks holding your money; hence, you can find out if it is linked to others you where you also have savings.

    Any cash ISA (includes Help to Buy ISAs)

    These refer to simple tax-free savings accounts, provided with FSCS protection like other savings accounts. Among those under this coverage is the cash ISA's forerunner, the Tessa-Only ISA (Toisa). Moreover, the ISA money does not lose its tax-free status in case the institution holding it fails.

    Ask yourself these questions: Do I have protection for my investment in a company? Does my insurance have protection in case the company fails?

    How protection works

    FSCS covers all UK-regulated deposits – including money saved and accrued interests – that you have put into a bank or a building society savings instrument.

    An independent government-sponsored fund regulated by the FCA, FSCS protects some of your money in the event of a bank collapse, although you will lose temporarily any access to your money during the period of compensation.

    As long as the bank is UK-regulated, the following rule applies to all, whether children or adults, or wherever they may reside, as stipulated thus:

    100% of the first £85,000 in your savings, for each financial institution, is covered.

    You may ask: What is considered an institution and what is a UK-regulated institution? And other issues to consider, such as the following:

    • A joint account has a limit that is doubled
    • Rates were different prior to February 2017
    • Savings are not considered along with debts
    • Interests are part of the threshold
    • Compensation will take time for release
    • Offshore accounts are not often protected

  • According to David Fabian, “A vital part of Investment success depends upon one’s ability to compare historical returns with an index or benchmark.

    Doing so will let you measure if your approach meets the performance expectations or evaluate the efficiency of somebody else’s recommendation prior to hiring them. Although is may be very common in the entire industry, many investors still make knee-jerk conclusions based on unreliable or biased information.

    Two primary conditions that must be satisfied when determining the viability of any investment approach are discussed below:

    A proper standard of evaluation

    We now lay down the reasons why these concepts are essential to your decision process.

    Let us talk about time.

    In reality, time is a commodity that has lost its overarching value in the fast-evolving dynamics of our daily existence. People so often fall prey to the temptation of immediate gratification provided by modern technology that they totally overlook how much time is required to accumulate wealth through the process of compounding.

    For instance, if you start saving and investing starting at your mid-20’s and then you retire in your mid-60’s; it would have taken you 40 years to accumulate your wealth. But it does not end there. You need to sustain your wealth’s security for another 20 years through managing and conserving your investable assets. The growth period alone will take 480 months or 40 years, while the distribution or income period could last for 240 months or 20 years more. You need enough patience to see it through.

    You cannot simply compare returns over very short time-durations. That is why you can hear people cry: My portfolio has been stagnant in four months! I’m below the benchmark on a 6-month rack record! Alas, my portfolio is 250 basis points lagging from the S&P 500 this year – I am done for!

    The truth is that even the most efficient investment method will suffer some setbacks through underperformance. It may take some months or even last for a couple of years or more at a time. The best step to take during such doubt-filled or self-pitying moments is to recall why you chose this strategy in the first place.

    Is your investment strategy still consistent with your risk tolerance level?

    Could there be an intervening and temporary factor that is causing the adverse conditions?

    Can you do something to manage this factor in order to enhance your long-term returns?

    Have you really considered the risks of shifting to another approach in mid-stream?

    Experts would advise that you analyze the performance of any investment method over a period of 3 to 5 years, enough time to determine the strengths and weaknesses over several conditions of the markets (bear, bull, transitional, and others).

    The bond or stock markets can proceed for a few years along a particular direction. While that may favor some investors, it can also hurt others. Not that either side is bad investing; it all has to do with each group being exposed to different risks.

    Creating and protecting your wealth is not a 100-meter dash -- a short-distance race, so to speak. Rather, it is a marathon -- a sustained race where risk conditions must be considered at close-range and behavioral principles applied with accuracy. Great patience is, therefore, of utmost importance in order to succeed as an investor. There are no short-cuts in this industry.

    A Suitable Benchmark

    A common pitfall among investors is the tendency to compare apples and oranges.

    A prime example is that of a company whose primary approach is to have a mix of bonds and stocks allocated through ETFs that are adjusted according to meticulously-developed strategies. As such, it has a total of 20 to 40% stocks and 50 to 70% bonds in the Strategic Income Portfolio at any particular period.

    However, the most common feedback the company derives when evaluating performance is how its portfolio stacks up against the S&P 500 Index. It seems that people are programmed to think that the S&P is the singular reliable benchmark available, such that it has become the darling standard of many index lovers throughout the world.

    Obviously, there is no basic logic to comparing the returns of a 100% stock portfolio (the S&P 500) versus a multi-asset portfolio that contains less than 50% exposure in stocks. A better and more suitable benchmark for such a type of investing method would be the 40/60 allocation in the iShares Core Moderate Allocation ETF (AOM). That is where the data will exhibit a clearer picture of actual performance.

    In a similar manner, comparing the 0 to 60 mph rate of starting acceleration of a Porsche in a few seconds to that of a Suburban would not make sense either, would it? Although that is an accepted truth, in general, only a few investors consistently apply that universal principle in their investment practices.

    It is vital to appreciate that fundamental concept in the process of accurately measuring risks or comparing similar approaches.

    Never compare investing in bonds and stocks to the revenues of a CD or a money market account.

    Never relate a portfolio of technology stocks to closed-end funds.

    And never compare hedge-fund revenues to that of a bunch of ETFs.

    We can continue down the line. . . .

    Perhaps, the most difficult hurdle to making this logical conclusion is the fact that most investors do not know the suitable benchmark for comparison objectives or where to locate them. They merely gravitate to the S&P 500, the NASDAQ Composite or the Dow Jones Industrial Average because they see them flashed on the news or on the web daily.

    In the end, every particular asset type or investment instrument should be weighed or evaluated by a similar group of equals. ETFs have made that process less difficult for many years now; however, you must always undertake the task of finding an appropriate index to serve as a benchmark. Ask a professional analyst how and where to find a good benchmark as a reliable yardstick.

    The Ultimate Goal

    Investing involves a lot of psychology and comprehension of the relationship of certain facts and information. This article hopes to develop a new perspective not considered previously or to strengthen an existing point-of-view. It is hoped that either way, the reader will attain a more reliable and more solid frame of reference for evaluating a portfolio’s performance in the future.