The 3 Ways to Manage Money 

The complications of investings  when you boil it down only three ways to manage money exist; market timing, security selection and asset class allocation.  All investment products and money managers use one of these three methods and some combine them to implement their investment strategy when managing your money.  To decide what investment product to use to manage your investments you need to understand the advantages and disadvantages of these three different ways to manage money and what type of

IMYERS  Investment Solution

The features offered by mutual funds do not provide the benefits that investors need.  Investors need a solution that provides diversification at the asset class level to achieve higher long-term returns with less risk.

Nobel Prize winning research has indicated that over 90% of investment performance is dictated by asset allocation.  This means that less then 10% is determined by factors such as market timing, security selection or industry weighting.  The most important thing is owning the right mix of asset classes.  Why pay mutual funds to focus on the factors that determine less then 10% of you investment results when someone still has to diversify your investments at the asset class level.

Mutual funds used to make sense because the drawbacks of investing outside of mutual funds; including picking which securities to buy, how much of each security, and possible paying more due to increased transaction fees; outweighed the drawbacks of investing in mutual funds.

ETF's improved the situation by lowering the fees to diversify at the security level by eliminating the wasted expense of security selection and market timing. 

However, investors are still left with the problem of creating a portfolio that is diversified at the asset class level and this decision is going to determine over 90% of their investment results. 

The IMYERS solution is to provide investors with two layers of diversification and eliminate as many overlapping fees as possible. 

To do this we first diversify at the security level, just like mutual funds.  We do this by either creating our own portfolio's of securities or using ETF's.  To create our own portfolio we diversify at the security level by finding the stocks that are the most representative of the asset class we are trying replicate.  Sometimes the costs of doing this ourselves outweigh the benefits and we use the most representative ETF's to diversify at the security level instead.  Either through our own portfolio's or through ETF's we aggregate securities to form portfolios that represent 12 different asset classes.

Once we have diversified at the security level we use the aggregated portfolios that form our asset classes to diversify client's investments at the asset class level.  This is where 90% of your returns are determined.  By doing this we create a portfolio diversified at the asset class level.

In the past the cost of doing this would have been prohibitive and outweighed the benefits.  Now, we are able to do this with very low cost due to two technology improvements; portfolio aggregation and fractional share trading.

Portfolio aggregation is simply the ability to define a group of securities as a unique portfolio and buy or sell them as a predefined group.  This allows us to buy or sell aggregated portfolios representing each asset class in one transaction for multiple clients.  Anytime a predefined portfolio is update every client who has that portfolio in their account has their holding updated simultaneously to reflect the changes.  This allows us to simultaneously manage multiple accounts with individually executing specific trades.

The ability to keep all client's portfolios up-to-date is dependent on fractional share trading.  Fractional share trading is simply the ability to trade part of a share.  For example, we can buy a .65th share of a stock.  This allows us to keep every client's portfolio within an acceptable range of diversification at the portfolio without regard to the size of the account.

By combining aggregated portfolios with fractional share trading we are able to scale our business without incurring incremental additional costs.  After the initial set-up of a client's account with the portfolio's specifically determined to provide a prudent asset allocation for that client their account will update automatically anytime we make an update to a portfolio.  This allows us to scale our business to spend our time servicing our clients and reduces the total costs associated with managing each account.

Because our orders are all aggregated our clients do not pay commissions when a transaction occurs in their accounts.  We make changes to portfolio's on a quarterly basis to rebalance asset allocations and avoid style drift.

Style drift is when particular investments in a portfolio begin to outweigh other investments either do to differences in appreciation or managers preference.  For example, if one asset class doubles and another does not change you now own twice as much of the one that doubled and your style has drifted towards that assets class.  The other example, typically found in mutual funds, is a manager chasing returns starts adding "hot" securities to increase returns but by doing so drifts from their stated objective.  For example a tech fund starts adding oil stocks to improve results.  This can look good for a short time but it is undiversifying the portfolio.  Using the previous example, when oil goes down both the oil and supposed to be tech portion of the portfolio goes down.  Less diversification increases risk.

By eliminating style drift we increase and diversifying at both the security and, more importantly, the asset class level we provide investors with the best opportunity for higher returns with lower fees.  Additionally by eliminating the middle-man (mutual funds) and transaction fees we can provide a better service at a price competitive with most mutual funds and other investment advisory firms.

For more information please contact us at Info@investingmyers.com or
206-251-2721

Mutual Funds

Mutual funds perform two seemingly vital tasks, they provide professional security selection and ownership of many securities, for a relatively small investment.  For these services they charge fees.  What benefits their services provide and the amount of their fees are very unclear.

The number one feature of mutual funds is providing professional security selection.  They try to pick the stocks who's price will increase the most.  This is an extremely difficult task because stock prices are only loosely related to numerous factors and are only actually determined by the supply and demand of people buying or selling the stock.  To really pick which stock is going to go up the most you'd have to determine how many shares are going to be bought versus how many are going to be sold over your holding period.  In the long-run (5 - 10 years), a stock's returns will reflect the company's and overall economy's fundamentals, but this requires forecasting the company's and economy's fundamentals for the next 5-10 years.  The difficulty of this task detracts from their ability to pick better performing stocks, providing little benefit to investors and shifting their focus to market timing; when to buy or sell these stocks.

To correctly market time you must make four correct decisions; 1. what to sell; 2. when to sell it; 3. what to buy; 4. when to buy it.  This requires analysis that no one has proved over time can be done in a manner that outperforms benchmark averages.  The layering of long-term forecasts and market timing creates an environment where only a very few succeed over time. Approximately 80% of mutual funds underperform their benchmarks every year and the one's that outperform change from year-to-year.  The people that succeed in outperforming their benchmarks for long periods are  household names such as Warren Buffet and Peter Lynch.  The only problem is they are far and few between and nobody knows who they are until after they've done it.  This leads to our conclusion that the feature of professional security selection that mutual funds tout has very little benefit for investors.

The second most important feature of mutual funds is diversification.  Since most people can't buy, much less manage, 150 plus stocks so it seems reasonable to rely on mutual funds accomplish this.  However, mutual funds only diversify at the most basic level.  Most mutual funds only diversify at the security level.  This means you may own a bunch of different stocks, but they are all still in the same asset class.  For example, a large-cap growth fund diversifies the stocks they hold, but they are all still large-cap growth stocks.  This diversifies away the risk from a specific stock, but does not diversify away the risk to the whole asset class.  To do this you would need mutual funds representing a minimum of 8 different asset classes and 20 securities in each asset class.  This leads to our conclusion that the feature of diversification that mutual funds tout has very little benefit for investors.

To accomplish proper asset class diversification you could buy enough mutual funds to represent a minimum of 8 asset classes, but then you would have to pay all their fees.  Mutual funds charge fees at different levels depending on the fund, but all have some fees in common.  All mutual funds have recurring management fees, administration fees and "hidden fees".  The management fee pays for security selection, the administration fee pays for pooling customers assets, accounting and legal services, and the "hidden fees" are usually related to the fund's trading activity.  These "hidden fees" are at best only reported in their Statement of Additional Information (SAI) and at worst are completely hidden due to lack of publicly available information.  Additionally some funds have fees for buying or selling and pay brokers or investment advisors to sell their funds to clients.

Our conclusion is that after accounting for their fees and weighing the benefits of their features mutual funds are not worth what you pay for them.  However, this leaves the problem of finding a solution that provides the benefit you really need; diversification at the asset class level.