How much money do you need in retirement?

It is never too early to plan for retirement. The earlier you start to save, the more years you have to compound earnings and grow that money. Even if you’re right out of college (or even younger), start saving! The amount of money you should have saved for retirement is dependent on factors such as the age you retire, how long you live and how much money you need to live off of. You should assume that you will want to maintain the same level of lifestyle as you did before you retire. Don’t assume it will be easy to start living more lean. One general rule of thumb is to assume in retirement you will need between 70-80% of your income.

For example, if your current salary is $100K, and you put away $15K into a 401K, then your pre-tax income is $85K. You would need to have between $60K to $68K income per year in retirement. If you retire at 65 and live 30 more years, that equates to over $2M is savings needed when retiring.

US News has a good basic calculator that can give you a general ballpark idea of the savings you should have accumulated before retiring:

http://money.usnews.com/money/personal-finance/features/calculator

Be sure to read through all of the explanatory text to understand each input into the calculator. One helpful link mentioned on this site is for calculating your expected social security benefits:

http://www.socialsecurity.gov/OACT/quickcalc/index.html

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MarketRiders Review

MarketRiders.com was one of the first online personal investment management websites. They follow the same model as the other sites in recommending a set of ETFs and providing services to monitor the portfolio.

Their website touts using methods from “Nobel Laureates” and even shows pictures of well-known investment managers such as John Bogle founder of Vanguard, Burton Malkiel of Princeton and Dr. William Sharpe of Stanford. But this is a marketing effort that can give the impression that these leaders are affiliated with MarketRiders. They are not. MarketRiders is simply using the same Modern Portfolio Theory ideas followed by all the other investment service websites which is to have a balanced portfolio in a variety of sectors.

As with other sites they claim to manage $4B in assets. However, there is no way for them to determine if customer portfolios are real or not. I have several dummy portfolios which are not representative of anything I own.

Overview
The overall process with using MarketRiders is fairly straightforward. There is first the typical screen shown in all of these investment websites that asks for some information about your profile and preferences.

Then a recommended allocation is shown based on your responses.

MarketRiders will optimize the ETF selections based on your brokerage to choose selections that your brokerage may waive trading fees on (For example, in Fidelity there is a preference for iShares. Not all iShare ETFs trade for free but many do.) This is a nice feature to ensure you keep trading fees low.

The next step is to make the trades. MarketRiders provides a list of ETFs to buy. Unlike other services, they don’t look at your existing portfolio. So you either buy their recommended portfolio with cash you have available or sell other holdings.

After making the trades, you can either manually enter in actual prices of the purchased shares (Note: the price shown when MarketRiders made the recommendation will likely be slighty off from when you actually made the purchase since none of this is real-time.)

MarketRiders offers a new service where you can select your broker, provide your credentials and MarketRiders will look at your account to confirm the trades rather than you having to enter them in manual. This a great feature that will ensure you don’t make typos (which I have done in the past.)

MarketRiders provides a dashboard that you can use to monitor your performance.

The most important aspect of the service are the rebalance alert emails that indicate when you need to make adjustments to the portfolio to stay within a certain variance of the asset allocation.

Cost
It’s very annoying but they have set up their site to not show pricing until you provide an email address. I dislike this very much. The pricing is $14.95 a month or $149.00 a year.

Bottom Line
I actually have been a MarketRiders subscriber for years and have charter subscription which is substantially less that the current subscriptions rates.

The positive side is that MarketRiders is very easy to use and implement. I like their features including using the most optimal ETFs based on your brokerage and the new confirmation feature to update your MarketRiders portfolio using the actual purchase prices.

The major negative is that their recommendations are very static and not very intelligent like some of the other services. For example, they don’t seem to change their ETF recommendations. Gold ETF is what they recommended in my portfolio for the Commodities asset allocation. But this has been the recommendation for many years. Gold is not the only commodity and has underperformed the market for at least the past year. I am not looking for frequent changes. However, at least every quarter or even once a year, they should revisit their recommendations.

I believe the price of the service is too high for what they are offering. Overall, I feel other services like JemStep are better.

JemStep.com Review

JemStep provides online advisory services geared to help individuals achieve retirement goals. Founded in 2008, the main idea behind JemStep is to connect to your various investment accounts, look at your current holdings, and recommend specific buy/sell actions to optimize your portfolio. JemStep will provide an asset allocation based on your profile, and for a fixed monthly fee give specific buy/sell recommendations in your portfolio (Unless the portfolio is under 25K for which the recommendations are free.)

Overall, I felt JemStep provided a level of depth in their analysis and recommendations not available from their competitors. At this time, they provide only recommendations and do not execute trades on behalf of online clients. The recommendations are usually simple rebalancing actions once a quarter.

JemStep claims to track more than 2 billion dollars in assets for private clients. I’m usually a little skeptical of these kind of claims. Since they don’t actually manage the money, you could theoretically say you have a portfolio of any size or get advice on a portfolio but not execute the trades. However, this isn’t really relevant for the evaluation of their services which I consider quite good.

Step by step details are provided below about how JemStep works:

Provide Profile and Goals
The first step is to enter some simple profile information most importantly age, target retirement age, salary and yearly retirement savings.

 Figure: Provide basic profile information

Another important component is to enter your self-assessed risk profile. This is the most critical factor JemStep uses in determining your recommendations. All online investment advisory services include risk profiles with around 5 classifications ranging from conservative to aggressive. To help select your profile, each classification is shown with best and worst case scenarios of portfolio performance based on historical patterns. This is a fairly general way to derive a portfolio and obviously doesn’t result in particularly personalized advice but nonetheless even with live advisors, this is the common model as it’s the easiest and cheapest to implement.

Figure: Specify your risk profile and also Mutual Fund and ETF investment type preference

You are given the option to use ETFs or Mutual Funds. Jemstep’s preference is to select from both Mutual Funds and ETFs to pick the best funds. JemStep takes into account fees in making recommendations.

You can also can specify to use actively managed funds but the recommendation is for passive funds.

Connect to Existing Accounts
The next step is to allow JemStep to connect to your investment accounts by providing your user/login credentials. As with other services, the credentials are not stored and the process is secure (this is the claim). Especially, in light of recent online and in-store security breaches, one can never be 100% sure of security. I personally have not overcome my concerns. Therefore an option is provided to enter this information manually. Since JemStep will mostly likely recommend you change most of your existing portfolio, the manual option while tedious is sufficient to move ahead in the process.

 Figure: Either provide credentials to your investment accounts, or enter your portfolio data in manually

JemStep will analyze your current holdings across different accounts to make recommendations.

Determine Asset Allocations
JemStep then runs your input data through its engines to determine the most appropriate asset allocation model for you. I surmise that they likely have a fixed number of models and match each client to the best one. The asset allocation determines the broad categories where you will invest (such as US stocks, international, commodities etc.) and the percentage of your portfolio to invest in each.

Figure: JemStep shows all the steps it goes through in coming up with the asset allocation

Then JemStep shows the asset allocation recommendation compared to your current portfolio.

Figure: Asset allocation showing the difference between your current and recommended target allocations

Recommendations
JemStep then determines what funds to sell completely or in part from your existing portfolio and what to buy instead.

While the asset classes are similar to that of other advisory services, the key part – the actual ETFs and Mutual Fund portfolio components- vary greatly between services. I found that JemStep provides fairly detailed information about their recommendations. For example, JemStep actually looked closely at my current holdings. Instead of taking the simplest approach of selling off all my holdings to purchase their recommendations (like FutureAdvisor), they allowed me to keep some of holdings of a fund but balanced it out with their suggestions.

 Figure: JemStep shows you the steps it undertakes to determine the specific recommended holdings including buy/sell actions for your portfolio

JemStep has its own ranking system for funds. I’m sure this is algorithmic based on their own criteria looking at fund performance and other published factors. It simply wouldn’t scale for them to analyze every fund. The analysis provided seemed decent. They provide good detail about their recommendations, choosing funds that they rank at the top of their list (as opposed to using an third party like Morningstar). The information was fairly detailed about rationale.

I tried MarketRiders portfolio as my existing portfolio to which they suggested improvements – slight ones over MR portfolio US stocks.

 Figure: Action Plan shows specific buy/sell actions with explanations.

For comparison, I went back to the first screen to change my criteria to use ETF and Mutual Funds (as opposed to only ETFs). The results were slightly different. You might want to choose this option if holding the account in a tax-deferred or tax-exempt account.

Figure: Mutual Fund and ETF Recommendations

It’s clear that the guidance provided is computerized and not personalized at a 1-to-1 level. For example, I had one allocation in my current portfolio that was 1% off the target (as shown in the above asset allocation screenshot, my US stocks allocation was 52% vs 51%). The rationale provided was obviously canned – “Based on your financial situation, JemStep’s analysis of your current portfolio shows that it’s weighted too heavily in U.S. equities.”

Despite this, I still found a lot of the information helpful. There is a lot of data and algorithms to back their suggestions. They also provide useful charts such as simulating the average and worst case scenarios of portfolio performance. This kind of data is nothing to act on but it’s still good to have perspective on the content of your portfolio and for your own education to understand the rationale behind it.

Pricing
JemStep has tiered pricing based on the size of your portfolio. If the portfolio is under 25K, the service is free and you can get the specific buy/sell recommendations. The next tier is 17.99 a month for a 100K portfolio. There is a promotion for first 3 months for 17.99. Then 17.99 a month thereafter. This amounts in $215 a year which I think is reasonable.

For all size portfolios, you can get a free evaluation of your current portfolio that will tell general things like where you are over or underexposed or not covered, but it doesn’t show any recommendations unless you pay. The asset allocation suggestions are not actually very useful. You need the specific funds. They follow very standard asset allocation models which can be found with free tools from most brokerages.

Positives
JemStep’s interface is well designed and easy to follow. Their recommendations are more detailed than other services out there. For example, they take into consideration different factors like taxable and non-taxable account.

While they don’t offer trade execution, the trading actions require rebalancing only once a quarter. Furthermore, JemStep will tell you exactly what actions to take and when.

I also like that they are cautious to check if how long you’ve held a position before selling it to ensure you don’t incur penalties.

Negatives
The main negative is that unlike other services like MarketRiders, they do not provide recommendations specific to brokerages. Therefore, you are likely to incur more trading fees if your brokerage charges for certain funds. For example, JemStep provides many Vanguard recommendations. It’s free to buy Vanguard funds in a Vanguard account but not Fidelity. But on the flip side, buy and sell actions occur only 4 times a year.

The fact that they don’t execute trades could be a negative for some. However I will gladly forgo that option in lieu of lower cost. Following asset allocation models to does not require frequent trading.

Some additional insights would be appreciated in terms of what to expect in the future would have been nice. For example, do they adjust the holdings as market conditions change or stick to the same holdings

They do say they will make adjustments in allocation and risk based on your age. This I would expect. But it’s not clear if they would make more significant changes in portfolio based on market drivers. I suspect like the other tools, that they follow a simple asset allocation model based on Modern Portfolio Theory.

Bottom Line
I like JemStep. It’s the most comprehensive of its direct competitors. It’s reasonably priced. Information is detailed but what I like is that the management process is still easy. The details aren’t essential to self-management. If you want the details behind their rationale, it’s available.

FutureAdvisor Review

FutureAdvisor.com offers ETF asset allocation portfolio recommendations for free. For a fee, they will also manage your portfolio, making needed trades on your behalf (and sending you notices beforehand to review). This site will examine all of your holdings in various brokerage accounts and provide recommendations of what to do in each portfolio to achieve a target portfolio based on your age and self-assessed risk profile.

You have to sign up with the website to get started. This is simply a matter of providing an email address and setting up a password. There is no charge for this. After registering, you specify two input parameters to determine your portfolio: age and your self-assessed risk tolerance.

You then have the option to manually enter all your holdings from one or more brokerage accounts. Or more simply, you can enter your login credentials to your various brokerage accounts in order to import information about your holdings automatically. FutureAdvisor indicates that they use “Bank-level 256-bit encryption” and that credentials are not stored. When I signed out and signed back into FutureAdvisor, my portfolio was resynced from the brokerage without me re-entering  my brokerage credentials. So it seems as though some credentials  were stored or cached.

   

Screenshot: Enter account credentials for one or more brokerages or manually enter that information. Note: private information is obscured in screenshot.

FutureAdvisor appears to cover all brokerages even smaller ones  from some individual banks in addition to the big names like Vanguard and Fidelity. While the site appears to keep your login credentials to the brokerage, it seems that none of the account information about what you own is stored with FutureAdvisor. They login in real-time to your various brokerage accounts to show your portfolio status.

Once you provide your brokerage account credentials. FutureAdvisor  securely imports data from all brokerages you specified. They then assess your current portfolio against what I assume are their models and associated benchmarks. They rate things such as performance of the portfolio, fee-efficiency, and tax-efficiency. Performance rating is a bit arbitrary because they are not evaluating the portfolio over its history, they are simply specifying performance assuming you owned that exact portfolio for the time period shown. For fees and tax-efficiency, this is usually very simply looking for expense ratios under 1%. Tax-efficiency is likely looking at whether you own ETF or Mutual Funds in your portfolio and turnover of the portfolio (see my article on ETFs. Vs Mutual Funds.) For diversification, they are looking to see how your holdings are varied across different asset classes.

Screenshot: Performance of current portfolio shown. Note: private information is obscured in screenshot.

Then FutureAdvisor provides your recommended portfolio and buy/sell actions to take in your portfolio to achieve this recommendation.

It appears that they use ETF recommendations and have some standard models. In a nutshell, the analysis of your current portfolio  and “personalized” recommended action is basically to sell all or most of your positions and buy their recommended portfolio (unless of course you owned their recommended funds or similar ones already).  Also, you only specify two personal criteria – age and risk-appetite. To me this is fairly lightweight analysis and not particularly personalized advice.

There is a ‘Why’ column to indicate why they recommend to buy or sell the position. The information is somewhat generic.  If I owned a different fund in a category of their portfolio than their recommended fund, I got the explanation: “Making this trade will enable other trades in this account, bringing you closer to your target portfolio.” If I didn’t own a fund in a category, I received a message that I was underexposed in that category.

There are different recommendations for tax and tax-deferred or non-taxable accounts. I like this as it demonstrates some forethought in knowing that these accounts are treated differently and therefore should be managed differently. See my blog post on the topic of taxable and tax-deferred accounts.

Screenshot: Recommendations to improve each brokerage portfolio with buy/sell actions specified and rationale behind recommendation. Note: private information is obscured in screenshot.

 Fees:

It’s free to get the recommended actions in your portfolio. However, you don’t get any automated services to rebalance your portfolio when needed. It’s a one time service. However, you could conceivably manually login periodically to get the recommended actions and make changes manually.

It costs .5% of the portfolio value for them to manage the portfolio for you, specially to make the needed buy/sell trades and monitor the portfolio and make future trades as needed. They indicated this is a good deal as the fee is  half of the typical 1% fee charged by financial advisors. For a $100K portfolio, the fee would be $500. $250K portfolio would cost $1250 to manage.

Note that you’re getting the same advice and same service regardless of how much  money you have. This is the major negative for me. To some degree, the higher your portfolio value, the more you are charged for the same amount of work. Since the models are simplistic ETF models with fees scaling up based on the size of the portfolio, I’m not sold on this company.  Remember, in these types of asset allocation portfolios, you should not be trading very frequently anyway. FutureAdvisor  will be making very few trades per year. Most of the trades will be commission-free based on their recommendation. So you’re potentially paying a lot of money to have someone make a few trades for you. You are better off checking every month or quarter to see if changes need to be made and making those trades yourself. It’s not worth paying more that $150 for this type of ETF-based asset-allocation portfolio management.

Bottom-line:  FutureAdvisor’s free portfolio recommendation is  basically the same as what you get for free from your brokerage. ETF asset-allocation models are very common and easy to find and follow. So there is no highly specialized investment advice. Their recommendations are fairly obvious: usually the low-cost or free ETFs for a brokerage and a standard asset allocation model. However, there is added value in that they do look at all your holding across multiple brokerages. In my opinion, the for-fee management service is too expensive for the service being offered. It’s easy to make trades yourself and since ETF models don’t change that frequently, you won’t have to trade often. I would have preferred another pricing option to receive email alerts for a small subscription fee (under $150 per year) and making the trades myself.

-mariamtariq

Investment Portfolio Management Websites

Financial investment websites have been popping up left and right over the last couple of years. I will be reviewing these sites in a series of blog entries. These types of websites capture some profile data about you and then provide a recommended portfolio of funds to own. For most of these sites, the recommendations are low-fee or no-fee ETFs. The portfolio follows an asset allocation model where funds are owned across different asset classes. The percentage of the fund in each class varies based on the sector or asset class.

In addition to the initial recommendations, these services will send alerts when your portfolio is out of balance with the recommended buy/sell actions and depending on the services offered will also execute trades on your behalf.

Note that most brokerages offer a free ETF portfolio tool that will give you similar recommendations. What they are missing is the active monitoring of the portfolio and also alerts to ensure you stay in balance. However, you could simply recheck your portfolio manually with these tools every month or even every quarter and make adjustments as needed. However, I will admit that most average investors won’t remember to do this. So paying a small fee per year is worth it to get the alerts and actions sent to you.

I will review these sites and provide an overview of each offering and respective fees.

Why are mutual fund real returns not close to stated returns?

One very tricky aspect to evaluating mutual funds is that the stated performance of the fund is higher than the actual return you will see. This is because the mutual funds tend to tout the performance of the fund before taxes and expenses are considered. Taxes will affect you even if you don’t sell the mutual fund as any taxes resulting from selling of stocks owned in the fund will generate taxes that are distributed to all the fund owners. So when evaluating mutual fund performance, be sure to look at the numbers after consideration of taxes and expenses.

The importance of dividends

There are companies that still pay dividends to stockholders based on performance of the company. The dividends can greatly improve the performance of your portfolio. If you own mutual funds or ETFs, it is likely that companies that comprise the fund, pay out dividends. When you purchase a stock or fund, the brokerage will give you an option to reinvest the dividends instead of taking the cash. Reinvesting the dividends is a nice way to dollar cost average the purchase of additional shares. Remember that either way, the dividends will show up your 1099 and have to be reported to Uncle Sam at tax time yearly for taxable accounts.

Irrationality of CNBC and Jim Cramer

It’s easy to get intimidated about investing from the incessant commentary on CNBC and other networks offering second-by-second  live reporting on the stock market  movements. Listening to the day-long programming on the stock market ups and downs,  the opinions of ‘experts’,  and news about the economy, can make one feel like if you’re not taking frequent action on your investment portfolio, you must be missing out on something.

Especially annoying for me are the stock tips from Jim Cramer. The recommendations for stock picks never come with accompanying sell recommendations. Of course, the track records of every recommendation are not discussed. This is hype TV, purely entertainment. If you’re the average investor, do not get lured into following the advice unless you’re willing to continue the analysis of the stock and truly understand the fundamentals of the business you are investing in. Quite frankly, this is not behavior of the average investor. The average investor would buy and hold forever or until the money is needed.

Remember, Jim Cramer as well as many other “professional stock pickers” have been wrong and have lost investors a lot of money. Of course, there will be winners amongst recommendations but knowing which will be a winner  is impossible. Also keep in mind that when a stock is hyped and investors follow the herd, the price can get driven up only to allow those already invested to pull out and make a profit at your expense.

The truth about Morningstar ratings

Morningstar has long been the go-to resource to evaluate mutual funds. We’re led to believe that a 5 star fund is supposed to be a good one. But many times,  the 5 star fund of today is the dog fund of tomorrow.  As an example, I bought Janus Oversees Fund (JAOSX) in 2007. It was labeled a risky fund but had a stellar year with a 47% return in 2006 and hence was a 5 star fund.

In 2008, the fund performance was *negative* 52 %! I lost over half my investment. The fund became one of the worst in it’s category and a 2 star fund not long after I purchased it. It went from #1 in it’s category of Foreign Blend fund to #90 in just 1 year.   6 years after  purchasing it, I still haven’t recovered my initial investment. Moral of the story: few funds stay 5 star funds for extended periods

It’s fine to use Morningstar and read their reports. However, keep in mind that the evaluation is a snapshot of *today* not of a few months, a year or years down the line. Most of us buy mutual funds as part of a long term strategy. So keep in mind that you can’t simply take Morningstar ratings at face value.

In addition, you should not compare the rating one fund with another unless the funds are in the same category of investment type.  For example, a bond fund will be measured for performance against other similar bond funds. A  European stock fund will be measured against other European stock fund. You can not compare ratings of a domestic fund to an emerging markets stock fund to pick the best investment for your portfolio.

Bottom line:  Morningstar ratings help you compare funds in the same category and rank funds. However, ratings can change so don’t choose to invest in a fund solely because of it’s rating.

Taxable vs. Tax-Deferred Accounts

It’s important to consider the types of investments you make in your taxable and tax-deferred accounts. Tax-deferred accounts include retirement portfolios such as 401ks and IRAs. Everything else is generally a taxable account. The difference between taxable and  tax-deferred accounts is that you can defer or avoid all together paying taxes (in the case of Roth IRAs)  until you are ready to withdraw the money at retirement. This means you can freely defer taxes on any profits. This is advantageous because you can reinvest the money you would have otherwise paid taxes on and therefore grow your investments even more. For some (not all), your tax rate at retirement will be lower assuming you are withdrawing less from your IRA than what you made when you were salaried.

Tax-deferred account are an ideal account to hold mutual funds that tend to generate a lot of distributions. As an example, funds that have a lot of turnover (changing of stocks that comprise the fund), will generate distributions when selling the existing positions in the fund. As a result, even if you personally don’t sell the mutual fund, you will be required to pay taxes on the distributions since the distributions are shared amongst all investors in the fund. For example, REIT funds tend to have high turnover. So personally, I own all my REITS in my IRA accounts and not in my taxable account. Furthermore, it’s preferable to own ETFs in your taxable accounts over equivalent mutual funds since ETFs are treated like regular stocks where you only pay taxes when *you*  sell and have a gain (as opposed to being taxed on distributions in the mutual fund even when you don’t sell the fund).