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Articles, Featured, Investing Basics, Planning

How Much Does a Financial Advisor Cost?

You’ve worked hard, saved wisely and now it’s time to invest your cash. Handing your hard-earned dollars to a financial advisor seems like the next step, but how much does a financial advisor cost? The total price tag may surprise you.

Current Economic Indicators Speaking for the Market

Factors that Go Into Financial Advisor Fees

Let’s assume your financial professional is acting as a fiduciary. Your financial advisor charges you a management fee that is some percent of your account per year. A 25-year-old individual planning to give $40,000 to an advisor annualizing a return of 7.5% until the client is 65 would end up paying the advisor $74,094.43 in fees. You can see a breakdown of this in the first table listed below. Many assumptions are made here, and the total lifetime cost of a financial advisor can vary widely given various assumptions. Here are some other scenarios showing the lifetime cost of a financial advisor:

                       

                       

Some of these scenarios assume larger amounts of initial investments, different investment time frames and alternate rates of return. These calculations do not consider trading fees, account maintenance fees or any other costs to your account. Regardless, you can see the cost of a financial advisor compounds itself just as your account does when growing through investments.

Does this mean financial advisors are not worth the money, and there for your time? Not exactly. The answer is, it depends. It depends on you as an individual and what your objectives are as an investor. To quantify an advisor’s value, Vanguard compiled a study. Vanguard’s conclusion of this study was that the majority of a financial advisor’s value comes in the form of behavioral coaching, or advisor guidance. More than portfolio construction or wealth management, the greatest thing an advisor can do for you is to help regulate potentially harmful monetary decisions.

Finding Affordable Financial Advisors

If you have no desire to self-manage your own portfolio, an investment advisor may be for you. If you feel you can benefit from better financial decision making, a financial advisor may help you get on the right track. For others looking for an alternative to the high cost of a financial professional, you can turn to Hedgehog Investment Research. Our models are back-tested proven strategies to compete with the market while trading less than twice a year on average. Let us help you keep it simple. Sign up today for a 7-day free trial!

3 Economic Indicators the Market May be Getting Ahead of Itself
Market Update, Planning

3 Economic Indicators Proving the Market May be Ahead of Itself

This week the S&P 500 hit a new all-time high. Unfortunately, a large amount of U.S. economic data doesn’t have quite as much to cheer about. Small Business Optimism, New Home Builds and the Conference Board’s leading economic indicators all show little to no rebound since the market’s prior high in September of 2018. A growing divergence between these indicators and stock prices could lead to a sentiment driven bubble.

Current Economic Indicators Speaking for the Market

Small Business Optimism

The NFIB’s Small Business Optimism index helps to gauge domestic plans for employment, inventories, expansion and more. The index stood at a multi-year high of 108.8 at the end of August 2018. We have yet to see any significant uptrend that would suggest a move towards the prior highs. Currently the index reads 101.8

 

Chart depicting small business optimism economic indicators.

New Home Builds

Following trends in the construction of new housing helps to foresee future demand in the housing market as well as certain input goods such as: copper, lumber and other industrious materials. New single unit housing construction has seen no letup in its decline since September 2018. The index is down nearly 15% since its high last year and is currently at the lowest level in over a year. In order to strip out the volatility of this index’s readings, the data below represents a 4-month moving average.

 

Chart depicting new home build data as an economic indicator.

Conference Board LEI

The Conference Board’s leading economic indicator aggregates 10 different indicators to give the public a future perspective of the United States’ economy. The Conference Board’s leading economic indicator is one of the most widely watched indices among financial processionals due to its accuracy and broadness in scope. While we have seen some consolidation with a minor rebound in these leading economic indicators, we are a far shot from our September highs.

 

Chart depicting conference board LEI as an economic indicator.

The Argument: Government & Corporations Unite!

A clear disconnect between expectation and reality exists. Major U.S. equity indices have tested price levels near an all-time high. At the same time, a variety of economic indicators show weakness. However, government and corporations are currently using their influence in the markets on a level that has not been seen before.

Corporate buybacks have been a key player in why stocks bottomed in December 2018. According to J.P Morgan’s chief U.S. equity strategist, Dubravko Lakos-Bujas: “some $800 billion in buybacks are scheduled for 2019”. Given Trump’s one-time allowance of corporate cash repatriation, large corporations continue to look for ways to increase their earnings per share. Stock buybacks don’t seem to be going anywhere just yet and may provide somewhat of a safety net for lower U.S. stock prices.

On top of this, the federal reserve has done more than their fair job in safeguarding against a U.S. recession. Some would say they’ve done too much. Federal Reserve chairman, Jerome Powell, has pivoted several times on the issue of interest rate changes depending on the direction of U.S. equities. This stands in stark contrast to prior Fed practices that tended to look after the interest of the economy, not of Wall Street’s. Clearly the Fed’s accommodation to stock prices mixed with their eagerness to appease the hunger of potential economic issues creates yet another pampering barrier to lower equity prices.

Can Economic Indicators Justify the Market’s Moves?

With the Fed’s dovish stance, corporation’s hunger for equity and economic data’s continued decline, we are in for a battle of expectations versus reality. Currently the market is pricing in little to no earnings growth for companies in the S&P 500. All-time highs and a continuation of the bull market rally could breakout if earnings surprise on the upswing. However, remaining at status quo won’t cut it. A lack of improvement in U.S. economic data is likely to have the markets heading back into the prior year’s slump. Want to know when it’s time to move away from stocks? Take a look at our Stock-Bond Rotation Model.

Research on which investment account types to place money.
Articles, Investing Basics

How Do I Start Investing? – Part 2: Active vs. Passive Investing

If you are new to investing, you’ll need to know what type of account to open, who to hold your account with, what to invest in and how to decide on your investments. This article is the second part of a two-part series that aims to answer those questions, active vs. passive investing and more.

Learn which investment account types might be best for you in the first part of “How Do I Start Investing?”.

What Investment Account Types are Available for Me?

Active vs. Passive Investing

Broadly speaking, there are two methods of investment portfolio management. We will take a look at active vs. passive investing. Actively managing an account involves attempting to take advantage of short-term price fluctuations with the goal of outperform a given benchmark; often the market (S&P 500). Active portfolio management often requires detailed analysis of individual stocks, ETFs or bonds. Unfortunately, the vast majority of active managers fail to beat the S&P 500’s performance year after year. However, if you are interested in stock picking, then this is the strategy for you. Go for individual stocks and try to orient yourself as either a growth or value investor.

Passive investing has become quite popular in the last few years. Financial professionals’ underperformance and the low cost of new investable ETFs has led many investors to take matters into their own hands. Passive investing entails limiting the purchases and sales in your portfolio in order to invest for the long haul. These strategies eliminate, or greatly reduce fees relating to investment advice, trading costs, short term taxable gains and portfolio turnover.

Passive investors often choose indexed ETFs, such as SPY or AGG, in order to keep pace with the market. Limitations to this strategy are the same as with active investing. Since indexed funds track their benchmarks, it is not within the nature of the investment to “beat” that benchmark. If this sounds like you, consider taking a look at those indexed ETFs listed above, as well as others, for the funds that most closely resemble your investment interests.

How to Decide Your Investments

Hopefully by now you know whether you are ready to actively, or passively, manage your investment account. Although we at Hedgehog Investment Research provide focused guidance in passive investment portfolio management, our models help both active and passive managers to make smarter, more timely decisions. Following these basic principles of investing should provide a guideline for your ultimate investing style.

Investment Principle #1: Be Invested

This one seems like a gimme. But hear us out! Investors often get so wrapped up in waiting for the right time to buy that they end up watching their stock(s) run away from them. It’s prudent to remember that over large periods of time, the market tends to go up. Unless your prospective investment’s time horizon is short, or has high valuation ratios, your purchase does not require pin point precision in timing.

There are periods of time where the overall market holds a high amount of risk. Lucky for you, our Market Risk Index (MRI) provides a reading of 0 to 100 showing the relative risk in U.S. stocks since 1948.

Market Risk Index investing model.

The table above shows that on average you can expect positive returns for S&P 500 while the MRI is within any range below 80-100. This level of high systematic risk shows times of relative distress in the U.S. economy and is likely to be shown in the market. Unless we see high levels of systematic risk, there is little need to wait on the sidelines. Don’t let the emotions of fear and greed control your investment decisions.

Principle #2: Be Disciplined

It may help to know that it is better to be continuously late rather than continuously early when investing in the broad market. As stated in Principle #1, the broad market tends to go up over large periods of time. Therefore, subjecting yourself to the emotions of fear and greed in investing will only serve to diminish your returns. An investor should only sell when they are as certain as possible that a significant decline is likely to occur. A good example of this principle is shown in the image below.

Average CAGR

This table shows the annualized rate of return you would have enjoyed had you bought and sold “X” months before or after major market peaks and troughs. You can see that our late column outperforms our early column in every iteration besides the 12-month scenario. This shows that you can be 6 months, or later, in selling after market tops and buying after market bottoms, and still be better off than those who solidify their convictions before the market’s path is certain. Want to know when to buy and sell your stocks and bonds? See our bread and butter: Stock Bond Rotation Model (SBRM).

Principle #3: Avoid Large Losses

Although we prefer to be late rather than early, it is still important to mitigate the potential risks to your portfolio. Since 1960, more than two-thirds of a bear market’s price decline has come in the second half of that bear market’s life (see table below). Further giving respect to the fact that an investor can still outperform the market without trying to time the market.

Bear Market

Massive losses can set back a portfolio back for years. Consider a portfolio of $100 that can either gain, or lose, $50. A $50 loss would leave an investor requiring a 100% gain in order to come back to their initial investment of $100. On the other hand, an investor that gains $50 now only needs a 33% decline in order to reach their initial investment value. This principle is also illustrated in a concept known as sequence of returns risk. This concept suggests that the worst time to experience a large loss is at the beginning or the end of an investors holding period. Our Equity Warning Signal (EWS) gives investors warning that significant market volatility may be ahead. Investors subscribing to the EWS model would have lost -7.32% in the 2008 financial crisis.

Learn How Financial Investment Models Will Help You Get Started

Throughout this two-part composition we have led you from start to finish on how you can start investing. By now you should understand what type of investment account is right for you, what brokerage firm to choose, active vs. passive investing styles and the major investment principles that can lead to more intelligent investment decisions. If there is anything we did not cover that you have questions about, contact us!

Articles, Investing Basics

How Do I Start Investing? – Part 1: Investment Account Types

If you are new to investing, you’ll need to know what type of account to open, who to hold your account with, what to invest in and how to decide on your investments. This article is the first part of a two-part series that aims to answer what investment account types are available and where to invest your money.

PART 1: What type of investment account do I open and what brokerage firm do I choose?

A few different types of accounts exist. At its core, investment options include either retirement or non-retirement accounts. Depending on your financial goals, either will help you achieve long-term or short-term gain.

Choosing Between Retirement and Non-Retirement Investment Account Types

When opening an investment account you can choose between a retirement account or a non-retirement accounts. Typically, you cannot spend money out of a retirement account until you are 59 ½ years old. However, there are exceptions to this rule. Two of the most common types of retirement accounts are the IRA account and the 401k account. There are also 403b and 457 accounts, as well as others, but those are often used by public education organizations and governmental employers in the United States. For now, let’s keep it basic.

IRA vs. 401k Retirement Accounts

The primary difference between an IRA and a 401k is that a 401k must be established by an employer. Employers have no tie and little involvement to IRA account types. Employers who offer a 401k may also offer a matching incentive. This means that they will contribute money into your plan based on a percentage of your total contribution. If you are a full-time employee and your company offers a 401k plan, it would be wise to participate in the program and allocate your assets among different investment options. If your company does not offer a 401k plan and you would like to contribute towards your retirement, think about opening an IRA account.

Taxation on Retirement Accounts

Contributing to a 401k or IRA gives you a tax deduction.  Once you are of age to withdraw your funds they are taxed at your highest marginal tax bracket. Both the 401k and the IRA also have the potential option of being a ROTH account as well. The label of a ROTH account refers to how the account will be taxed by the IRS.

In a ROTH 401k or ROTH IRA your contributions to the account will be taxed up front and the remainder will be put into the account . Once you are of age to withdraw the funds, your contributions and growth in the account are generally considered completely tax free. ROTH accounts are particularly beneficial for individuals who believe that their current tax rate is lower than what their future tax rate will be when they withdraw from their retirement account.

Non-RetirementAccounts

If you’d prefer access to your money in the short term, a non-retirement account is for you. There are several different investment account types for a non-retirement, or brokerage, account. You can hold a brokerage account as an individual or register yourself and one or more people as a joint account.

Taxation on Non-Retirement Accounts

Taxation for non-retirement accounts is simple. You are only taxed on the gains in your account once a position has been sold at a profit, or if you receive dividends. Even if you decide to reinvest your dividends, you will still be taxed for receiving them. If you hold your investments longer than 12 months, then you may be eligible for capital gains. Capital gains provides a reduced tax rate on your investment gain. Some dividends may also be qualified dividends which allows for a reduced tax rate on your dividends.

Types of brokers

Now that you know what type of account to open, it’s time to choose a brokerage firm. Choosing a firm to open a brokerage account with involves many questions. In general, there are three types you can choose from: full service broker, online broker and robo-advisor.

Chart providing different types of investment brokers.

If you subscribe to Hedgehog Investment Research, you are most likely interested in utilizing an Online Broker to transact your trades. Brokerage firms like Charles Schwab, Robinhood and TD Ameritrade tend to have the lowest trade cost if you are a fee conscious investor. See our short guide for the fee conscious investor. Online brokers may have different trading costs, incentives, services and account minimums that should be researched further before a final decision is made.

Once you find an acceptable brokerage firm it’s time to apply to open an account. After the joys of paperwork have swept through your life, you’re finally ready to choose what investments go into your account! How Do I Start Investing: Part 2 is available for you to learn what to invest in and how to decide on your investment strategy.

Articles, Investing Basics

A Short Guide for the Fee Conscious Investor

OVERVIEW               

One of the most prolific changes in the investment world over the last decade is the amount of downward pressure the investment community has put on fees of all types. Brokerage fees, commissions, management fees, expense ratios have all come under fire as competition becomes increasingly stiff. Retail investors often prefer funds with lower expense ratios, while apps like Robinhood have become popular for their no fee trading platform. With all these changes, it’s hard for active managers and other investment professionals to justify the fees they charge if their performance is anything less than stellar. So how can retail investors maximize the utility of the tools at their disposal while attempting to seek low cost investment instruments? Well, you have questions and we have answers.

 

INVESTMENT TOOLS

So how can we find low fee investment tools to execute these types of strategies. Looking for low cost ETF’s such as those offered by Vanguard and iShares is a great place to start. Each company has S&P 500 ETF’s that are extremely low cost. As mentioned earlier, Robinhood offers free trading to purchase your ETF’s and other investments. Between these financial services companies, and others, the average investor has a multitude of tools to execute their strategies. However, investors beware. Most all offers, whether in the financial industry or not, come with risk and reward ingredients to them. Seeking investments with a priority of low expense will most likely lead you to a portfolio consisting solely of domestic U.S. equities. Funds including bonds, foreign equities and other securities are often more expensive, but can diversify one’s portfolio and smooth returns. A properly diversified portfolio is critical in maintaining proper risk reward. Further, Robinhood can offer zero trading fees for several reasons pertaining to their business model, but these trades are often not executed by Robinhood in the same manner of urgency or timeliness as those executed by more traditional Broker Dealers who levy trading costs on client transactions.

 

IMPLEMENTATION

When taking a long-term approach to investing there are times to row and there are times to sail. All to say that there are times when actively trading a portfolio can result in increased performance and there are times when it is best to play off market momentum and frequent trading can lead you chasing the market for returns. Allow us to use one of Hedgehog Investment Research’s proprietary models to illustrate the power of this point. Hedgehog’s Stock-Bond Rotation Model (SBRM) provides a trading strategy that has provided exceptional risk adjusted returns when back tested as far back as 1976. The model has produced 22 signals cueing a shift in asset allocation from stocks to bonds, or vice versa, since then and up to 2019. According to this strategy you would have made a trade in the account slightly less often than once every six months. The model only assumes investments in the S&P500 and the Barclays Aggregate Bond Index; meaning that outperformance to the S&P 500 is rather difficult during bull markets, but an appropriately timed shift to bonds when expecting a market downturn can yield phenomenal outperformance if significant declines in equities are avoided. Active trading in an account is only necessary when the market changes courses. Whether the adjustments taking place are from stocks to bonds, growth to value, or between market cap sizes, restructuring of a portfolio should be done utilizing a long-term perspective even if an investor’s time horizon is short.

 

SUMMARY

Technology, competition and innovation continue to drive the progress of innovation forward in all industries. The changes allow individuals access to products and services never previously considered only a decade ago. It is up to each unique investor to determine the right course of action in their portfolio. Along this arduous journey we hope Hedgehog Investment Research can be a guide to your investment strategy.