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Can You Trust A Roboadvisor With Your Money?

The definition of robo-advisor still isn’t fully set in stone, but roughly speaking it’s a software tool which manages your portfolio and gives financial advice and action items without the need to consult (often) an outside human advisor. Because there are so many Americans with similar financial goals, responsibilities and amounts saved it makes sense to offload some of the advisor burden onto an algorithm; unlike in business, often the best move with your finances is just to do exactly what others are doing and have done before. Can You Trust a Roboadvisor? Survey Says… Gallup set out to answer that very question, asking Americans if they would want a single human financial advisor, a roboadvisor, a combination of the two, access to on-call financial advisors… or other/none/not sure. The plurality went to the human advisors: 49% saying they wanted the individual attention of a single advisor, and 18% opted for the stable of on-call advisors. There was a follow-up question as well which really underscored how wary of roboadvisors we still are: 62% of respondents wanted only human help or a majority of human help, while 27% preferred to trust a roboadvisor with a majority of decisions… with humans on call. Only 9% of respondents wanted only digital advice… surely an important datapoint for the large number of Financial Technology companies currently targeting the space! Robots Don’t Have Good Bedside Manner The survey is worth reading in full, but it leads us to bring up a lot of interesting, recurring themes with human experience and automation. Although we’re warming up… at least in part… to the idea of some of our financial advice and investing tips coming from an algorithm, humans still prefer the emotional check of another human to the cold, calculating rationality of a machine. Can you Trust a Roboadvisor? “Take me to your bank account routing number!” (And this comes up over and over again in various fields!) We alluded to the bedside manner of doctors in this section’s heading, which has long been an important field of study , and can certainly help patient outcome . It came up in elevators – where humans resisted user-operated elevators when elevator operators once were supreme – which has echoes today in state laws and policy. And, perhaps at the forefront of public discussion – it comes up in automated cars (ironically, automated automobiles ), where the safety record of robot-operated vehicles is superb compared to our fallible human peers. Perhaps, like so many other things in life, our reluctance to trust a robo-advisor comes at least in part because of psychology. There is a concept where things that look real but not exactly real (a concept known as the uncanny valley ) cause the greatest reactions of disgust amongst humans (So, FinTech… careful about how friendly you make your robo-advisors). A psychological explanation might mean we are wary of robo-advisors for the same reason we’re wary of zombies – we don’t want something to try to be human, we want there to be some human with responsibility at the end of the day. (Even if we lose a few basis points with the human.) What Benefits Will Come if We Trust our Roboadvisors? There are many great theoretical effects that would come to us if we can convince enough of our peers to trust a robo-advisor. First, the cost benefit is incredible . Like all software, the marginal cost of spinning up another instance of a roboadvisor is just-about non-existant. Just as the marginal cost of you reading this webpage is immeasurable (we serve up 100s of thousands of pageviews a month for < $10), automating common financial advice could go a long way to expanding access for those in most need of help. In other words, it can go a long way towards solving that paradox of financial advice – often those who need it the most are the least able to pay. Second, it can automate a lot of the incredible value-adds that are tough to do today. Tax-loss harvesting is the first thing that comes to mind. If you’re unfamiliar, the IRS allows you to write down your income when you sell stocks at a loss, so long as you don’t buy the exact (or substantially similar) asset within a fixed time frame. It’s incredibly tedious work to always be shifting in and out of funds to capture tax benefits and computing the breakeven for when it is worth making the switch – not to mention the reporting requirements for your tax returns. On top of tax-loss harvesting, robo-advisors and algorithmic management can help you find opportunities in account types, tracking eligibility to the dollar in real time as you earn throughout the year. It can help recognize shortfalls and surpluses in checking accounts, automatically moving money to long term savings. With a little advancement, it can even help you plan purchases – finding the best combination of savings vehicle, and maybe even one day the best rewards when you go to pay for whatever you are buying. And that’s just off the top of my head. Surely you can think of some more. Third, it opens up the best financial advisors to more people. Humans are always going to be better at the human element, no matter how much we end up trusting our robo-advisors. However, a move to majority automatic financial advice would mean our best advisors would have more throughput and be able to see more ‘patients’ – either for periodic checks on a long term plan, or to address those corner cases which software wasn’t built to handle. What Will We See Next? Just like the aforementioned driverless cars, expect to see a lot more innovation in the robo-advisor field. As people appear to not mind at least some of their advice coming automatically, expect to see a lot of financial technology firms moving to advisor-guided robo-advisement sessions, or more human staff on call while people have their robo-advisement sessions. The future is undoubtedly bright in the field, and the momentum towards automation is clearly there. Clearly we’re going to see big changes – even innovation that we had no idea was possible or probable – before too long. The only thing we know for certain is that big changes are coming… and people will probably become more and more comfortable with the offerings out there. So, dear reader – could you trust a roboadvisor with your money today? What would it take for you to give a robot control – or at least allow it to guide you? What do you think we’ll see in the next few years?

The PIMCO Intermediate Municipal Bond Strategy ETF: Enduring Principals

The fund is managed by a global leader of fixed income assets. The fund diverges from the tracking index, but reduces the ‘duration risk’ by doing so. PIMCO’s bond management experience may prove to be an asset as the Fed prepares to change policy. A unique feature of the once popular game show, Jeopardy , was that the answer was the question and the question was the answer. So for example, you might been confronted with the answer: “Ben Franklin, Mark Twain, Daniel Defoe, Christopher Bullock and Edward Ward” Your answer, in the form of a question of course, would be, “Who have been given credit for first saying, ‘ Nothing is certain except for death and taxes’ ?” Indeed and invariably, that seems to be the case. Each may be unavoidable in the end, but in the meantime, with careful planning an investor can take a breather from taxes without being in jeopardy with the IRS by including a tax exempt municipal bond fund in a portfolio. Oddly, compared to other types of taxable bond funds, there aren’t that many plain vanilla funds to choose from. The choices are further narrowed by the three choices of Long , Intermediate or Short maturity funds. Pacific Investment Management Company , commonly recognized by its acronym, PIMCO , is a global investment management firm, specializing in fixed income assets, with over $1.47 trillion under its care. It should be noted, though, PIMCO manages its assets independently, but it is wholly owned by Allianz (OTC: OTCQX:ALIZF ) PIMCO offers the actively managed PIMCO Intermediate Municipal Bond Strategy (NYSEARCA: MUNI ) . According to PIMCO, the fund is: . .. Designed to be appropriate for investors seeking tax-exempt income, the fund consists of a diversified portfolio of primarily intermediate duration, high credit quality bonds, which carry interest income that is exempt from federal tax and in some cases state tax… PIMCO makes a point of noting that: … Unlike index funds that typically rely solely on a rating agency for credit analysis, PIMCO applies extensive research on each municipal bond we own in the fund… …to avoid what we feel are municipalities of deteriorating credit quality in our efforts to protect investors’ capital… Having that extra level of analysis should provide the investor with an extra measure of risk mitigation. The fund tracks Barclays 1-15 Year Municipal Bond Index (LM17TR) : …which consists of a broad selection of investment grade general obligation and revenue bonds of maturities ranging from one year to 17 years… The fund was incepted on November 30, 2009 and currently holds approximately $235.5 million in net assets. Its daily trading volume is noted to be 37,881 ETF shares; hence there’s sufficient liquidity available to enter a position. Since inception, the fund has traded at par with its NAV and recently has traded at a discount of -0.13% to NAV. It should be noted that being able to purchase a bond fund at a discount gives the investor an extra advantage. That being noted, the fund’s shares have a slight bias to trade at a discount to NAV over its history, hence it may be worth choosing the moment for the best entry point. The funds current estimated ‘yield to maturity’ is 2.28% and a distribution yield of 2.29%, (distributions are monthly). Management fees are below the ETF industry average at 0.35% which, again, is another advantage in the long run. The 30 day SEC yield, i.e., after fees and expenses is 1.67%. Annualized Returns 1 Year 3 Year 5 Year Since Inception 11/30/2009 Fund NAV (after expenses) 1.80% 1.40% 2.73% 3.38% ETF Shares 1.91% 1.43% 2.73% 3.38% Barclay’s Index 2.61% 2.44% 3.49% 3.97% Fund vs Index -0.70% -1.01% -0.76% -0.59% Data from Pimco A word or two needs to be said about a few terms. First, according to Investopedia, Average Effective Maturity is a measure of maturity, taking into account the probability that a bond might be called back to the issuer. At this point it’s worth noting the term embedded option . This is a special condition ‘written into’ a security. For example, a bond might have a ‘ call date ‘: a date on which a bond may be redeemed, or ‘called’, before maturity. For the entire portfolio, which may have a mix of callable and non-callable bonds, the Average Effective Maturity is the weighted average of the maturities taking into account those with a call provision. Another important concept is that of Duration . Without going into a lot of the mathematics of finance, it may be generally understood by an example. Consider a $100,000.00, 3.25%, 15 year fixed rate loan starting today . Looking forward, in a little under 13 years into the loan, the borrower will have paid back $100,000.00 in combined principal and interest. In other words the lending bank breaks even at a little under 13 years. Now start again but fast forward ahead 5 years from the beginning. The borrower has made interest and principal payments amounting to $28093.00; ($5989.00 of that is principal). However, the lender considers those previous five years of payments, amounting to $28093.00, as paid and ‘off the table’. There’s still $94011.00 of principal left to pay. Since the original five years of ‘cash flow’ is off the table, the lender recalculates and figures out that breakeven on the future interest and principal payments occurs in just over 8.5 years. If the recalculation is done after every payment is made and off the table, the ‘breakeven’ will continue to gradually decrease to 0 years, (maturity). Just one more detail is needed: if the loan had a floating rate and interest rates declined, it will take longer to reach that breakeven point. Conversely, if rates increased, breakeven will be attained more quickly . That’s essentially Duration. It’s a way to measure how long it would take for full repayment of the original price of a bond, at the current interest rate via future cash flow and specified in years. If interest rates go up, it takes longer; if interest rates go down, it’s quicker. These calculations are of great importance to fund managers since they often open and close positions before maturity . So why should a retail investor care? The U.S. Federal Reserve sets the benchmark when it comes to interest rates. Recently, the Fed has indicated that, most likely, it will increase the benchmark ‘Fed Funds’ rate by the end of the year. The Fed usually moves in 25 basis point (1/4 point) increments. So if an investor had to choose from bond funds of equal quality holdings, the smart move would be to choose the one with the shortest duration as it would be least impacted by rising interest rates. Analysts like to look at these metrics in different ways or even ‘fine tune’ existing metrics. Indeed, this is the case with bonds. For example, Effective Duration takes into account both callable and non-callable bonds and determines the ‘probable duration’ of the entire portfolio as interest rates fluctuate. Now, having a reasonably good idea of what Duration is, the fund’s Effective Duration is currently 5.07 years. (click to enlarge) The fund’s home page Performance and Risk tab includes an interesting ‘ Key rate Durations ‘, summarized below. It’s an at-a-glance way to see how sensitive a fixed maturity is to a 1% change in market interest rates. Data from Pimco It should be noted that the greatest sensitivity occurs in the 5 to 10 year maturity range, which is 55% of the funds maturity composition. The pie charts below demonstrate the fund’s ‘Maturity Allocation’ as well as the ‘Quality Allocation’ of the fund. (click to enlarge) Just over 47% of total holdings are top quality AA- to AAA. Just over 28% are medium quality A- to A+ and almost 10% are lower quality but investment grade, BBB- to BBB+. Lastly ‘NR’ or ‘Not Rated’ means that, according to the summary prospectus , PIMCO has determined the holding is ‘of comparable quality’ with other bond rating agency grades. It’s also worth noting the fund’s maturity distribution compared with the tracking index. The chart demonstrates that the fund diverges from the index composition significantly; however this does result in a lower duration by just over 31.8%: 5.42 years vs 7.95 year. It should be noted that that the fund does weight strongly the 5 to 10 year maturity range. Those are the maturities with the highest sensitivity to interest rate variations and it does so much heavier than does the index. (click to enlarge) Data from PIMCO The fund charts its sector allocation in an interesting way, both in terms of percentage of total market value as well as percent of total duration. (click to enlarge) Data from PIMCO The holdings include a couple of ‘arcane’ instruments. First are the ‘ Pre-Refunded ‘ holdings. According to the MSRB’s glossary of Municipal Securities Terms: … a refunding in which the refunded issue remains outstanding for a period of more than 90 days after the issuance of the refunding issue… …such refunded bonds are secured solely by an escrow funded with the proceeds of the refunding bonds… …The proceeds of the refunding issue are generally invested in Treasury Securities…. … to pay principal and interest… …on the refunded issue… To put is simply, Pre-Refunded or Advanced Refunded occurs when there’s an overlap in the refunding of an existing issue. The ‘existing issue’ must still meet its obligation, and this is ‘covered’ by the refunding issue’s proceeds and held in escrow. This may partly explain the 4.08% of total holdings as being short term U.S. Treasury Notes. Another interesting holding are the ‘Tobacco Municipal Bonds’. These are bonds issued by a state and funded by a future payment or cash flow due as a result of a settlement or successful lawsuit against a tobacco company. It’s worth noting that tobacco bonds comprise about 2.5% of the municipal bond market. For more on Tobacco Bonds the reader is referred to PIMCO, ” Municipal Tobacco Settlement Bonds: Seeking Value in the Ashes “. MUNI is comparable in returns to the two other funds filtered by the Seeking Alpha ETF Hub . The Fed has indicated that its policy shift will be slow and gradual. This will, no doubt, have some impact on Duration , but when the tax advantage is considered and at the same time having the fund actively managed by the industry leader, it should all add up to make this intermediate municipal bond fund worth holding. Annualized Returns 1 Year 3 Year 5 Year Since Inception 11/30/2009 Fund NAV (after expenses) 1.80% 1.40% 2.73% 3.38% ETF Shares 1.91% 1.43% 2.73% 3.38% Barclay’s Index 2.61% 2.44% 3.49% 3.97% Fund vs Index -0.70% -1.01% -0.76% -0.59% Data from PIMCO

9 Simple College Savings Tricks

Summary Why is saving for college so hard? How to co-opt your kid and work together to save all you need. Demand an adequate ROI and decide if it is really worth it. Why is saving for college so hard? How can I pay for my kids’ college? Like everywhere else, where the government has entered into a market as a massive, price-insensitive third-party payer, it has completely distorted the price system. If you have ever heard a politician say “_________ is not a privilege, but a right”, then it is probably a subject with significant malinvestment. Here is what has happened with some of the most distorted markets over the course of my lifetime: So that is the world we face when paying for college. Here are ten simple tricks for facing this daunting task. Long-term Goal While I want to have everything organized as efficiently and rationally as possible for my kids, my long-term goal is to nurture independent adults. I have a reminder on my Microsoft (NASDAQ: MSFT ) Outlook calendar to have the locksmith come to change the locks when the youngest kid turns eighteen. After that, I expect them to succeed under their own power. One: co-opt your kids First, co-opt your kids as active participants in the process of saving for college. Whenever they want to spend money, make sure that they denominate that expense in the length of time that it will take them to earn that money. Two of my favorite places for them to save include Toronto-Dominion Bank (NYSE: TD ) and MainStreet Bank. Each kid can make $10 per year at TD. TD offers a summer reading program in which kids can earn $10 each for reading 10 books. You can get the form here . In addition, our TD branch has a coin deposit machine. As it accepts only U.S. dollars, the rejects slot typically contains a few dollars’ worth of Canadian and other foreign coins for the kids to collect. Each kid can make $40 per year in interest from MainStreet Bank. Kids can each earn $40 per year in interest in a Junior Airsavings account . These accounts offer an annual percentage yield/APY of 4% for accounts up to $1,000 owned by depositors under eighteen years old. Each kid can make $50 per year from DFCU Financial. Deposits age 0-17 get $50 in cash per $100 account. If you have an account at DFCU or if you can open one (either via a family relationship or living in their region of Michigan), it might be worth getting your kids set up with accounts too. If you live in a state that offers refunds on beverage container deposits, kids can help collect bottles. My final step in co-opting each of my kids in this effort is to offer them $0.50 on the $1.00 for any merit or athletic scholarship (or any other kind they can find) that they earn. There is a ton of money out there and I want them to have the mentality of constantly looking for such opportunities to exploit. “Never, ever, think about something else when you should be thinking about the power of incentives.” – Charlie Munger Two: start them on credit cards Kids can make an average of $272 each year from Fidelity. The best credit card deal available is the Fidelity Investment Rewards American Express (NYSE: AXP ) Card. There is no age limit. You can co-sign the agreement, get cards in your kids’ names and start building their credit history. The average American kid’s expenses are $13,611 per year. With the 2% cash back on this card, that comes to a rebate of $272 each year. Once the kids are legitimately earning income from chores, they can start funding their IRAs with this card. Three: set up a family bank Kids can make about $109,565/ each year with a family bank. According to the IRS, the long-term adjusted Applicable Federal Rate/ AFR is currently 2.3%. In order to qualify as a loan, parents need to charge that amount of interest to each kid. However, parents can also gift the interest rate payment up to $28k . So, one can loan up to $1,217,391 from each couple to each of their kids per year without it costing them any net interest. If they can compound at 9% per year, that will come to just under $110k per year per kid. Four: Max out your 529 You can contribute $370,000 to each kid’s Nevada 529. Here is why I think Nevada’s is the best one. If you fail to max out any tax-advantaged saving and investing opportunity, you are stealing from yourself. Five: Odd Lots Throw around your (lack of) weight. With my kids, we focus on how small scale can be an edge. One tactic is to exploit odd lot opportunities. These have proved to be lucrative – a great relationship between risk and reward with a limited downside. For kids’ accounts with under a million dollars in them, they can be among the best opportunities. The question of how to make $10,000 out of $5,000 is very different than making $1 billion out of $500 million. You might as well take advantage of all of the quirky opportunities strewn around the capital markets to make money at small scales. However, due to capacity constraints, I am keeping all of my best odd lot opportunities here . Six: Dividends I do not expect much of a tailwind from the U.S. equity market over the next few decades based on the market multiples discussed here . So a substantial part of the total returns that one may expect will come from dividends. One example of a high dividend payer worth considering is Digirad (NASDAQ: DRAD ): While it has returned over 20% since it was first disclosed on Sifting the World, it remains an attractive opportunity. You can read more about their recent acquisition in M&A Daily . Seven: hire world-class asset allocators… for free There is only a small number of world-class asset allocators running publicly traded companies. Berkshire Hathaway’s ((NYSE: BRK.A )/(NYSE: BRK.B )) is the most famous. Whenever you can get them at a discount to their net asset value, it is as if you are hiring one of the greats for free. For example, from time to time, you can get the Tisch family for free by buying Loews (NYSE: L ) at a discount to NAV. Today, you can get John Malone for free when you buy Liberty Media (NASDAQ: LMCA ). Seize such opportunities. In investing, you get what you don’t pay for. Eight: demand a strong return on investment This formula doesn’t just work for your money, but works well for any constrained resource including your time, energy, and focus. Demand a strong ROI on everything that you do. “I don’t get out of bed for less than $10,000 a day.” – Linda Evangelista Well I don’t get out of bed for less than a 10% ROI. Some of the top ROI for undergraduate schools include Stanford, MIT, and Princeton. Many of the best educational ROIs are degrees in computer science, medicine, business, engineering, and law. While there are many subjects that may be intrinsically interesting, one should ask if it is worth piling up mountains of debt for them, especially if they are subjects that you can pursue on your own. Generally, hard subjects pay off. If you learn something quantitative, data-based, and difficult, you can probably pick up the qualitative, subjective, and easy stuff on your own later. However, if you slide through school working on easy subjects, then the hard stuff will torture you later in life. Nine: no one has to go to college Fayetteville State University notable alumni “Junkyard Dog” If your kid gets accepted to MIT and wants nothing more than to pursue computer programming, it is probably a worthwhile endeavor. But there are also many schools and many degrees that have substantially negative ROIs. If your best bet for college is Fayetteville State University or you want to study mime, then the annual return over the subsequent twenty years will probably be quite negative. Consider skipping college altogether. You can apply here for a $100,000 Thiel Fellowship to skip college and build new things. Some people, including some extremely wealthy people, cannot afford college. Even if they have the tuition bill in their petty cash drawer, they cannot afford college because the opportunity cost is too high for people with ideas worth acting on right away. Four years is a long time, especially if you have a great idea worth pursuing. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.