[quote=Bankrep1]

Sounds like a great argument for the use of a VA with someone's nestegg (IRA), using a GWB rider

[/quote]

Imagine.  A bank broker talking up the only thing he has to offer.

VA's even with a guarantee are rarely if ever an appropriate choice for the customer but always a good idea for a salesman who is behind on his mortgage.

You just stated the markets hacked a portfolio in half for 14 years and implied it could happen again.  Do you really think anybody will stay fully invested over a 14 year decline?

Let's talk about the VA.  Why is it so bad?  I admit there is alot of garbage in the VA world, just like mutual funds some are good some are not.

The VA I use total costs about 1.8% that is with funds, add in a rider your at about 2.25%

Let see, mutual fund 1% + 1% (lot's of people charging more than this) wrap fee = 2% with no guarantee or 2.25% with a guarantee I think most people would pay a .25 for a guarantee.

Why is it bad?  Do you really understand them?  When I started at the wirehouse nobody knew anything about VA's

[quote=bankrep1]

When I started at the wirehouse nobody knew anything about VA's

[/quote]

Nonsense, of course wirehouses know about variable annuities.

And they decided that they are rarely, if ever, an appropriate investment vehicle.

What a dumb thing to conclude that a wirehouse broker is not aware of anything that is available.

I am telling you I worked in an office of 15 guys and none of them got VA's.  They were slowly being introduced by the firm, back then very few guys did mutual funds.  Mostly stocks, UIT's,closed end funds and bonds.

Newbie if you get it, explain to me why they are not a viable option?

[quote=NASD Newbie]

[quote=Bankrep1]

Sounds like a great argument for the use of a VA with someone's nestegg (IRA), using a GWB rider

[/quote]

Imagine.  A bank broker talking up the only thing he has to offer.

VA's even with a guarantee are rarely if ever an appropriate choice for the customer but always a good idea for a salesman who is behind on his mortgage.

[/quote]

Thsi from a self-proclaimed genius who put a widow's entire account into one bond issue and claims that no one knew at the time that a strategy like that could blow up.  (And of course brokers back then were REAL brokers.  Not at all like brokers today.)

2.25% total costs for a VA is very reasonable.

scrim

[quote=Philo Kvetch]

Thsi from a self-proclaimed genius who put a widow's entire account into one bond issue and claims that no one knew at the time that a strategy like that could blow up.  (And of course brokers back then were REAL brokers.  Not at all like brokers today.)

[/quote]

Who was dumb enough to put a widow's entire account into one bond issue?

[quote=scrim67]

2.25% total costs for a VA is very reasonable.

scrim

[/quote]

It depends on what the client's needs whether that is reasonable. Why pay the extra cost if it isn't warranted?

I think he was saying in the VA realm that the costs were reasonable.  I doubt he was comparing it an index fund.

Noggin I am curious what vehicles do you use for your clients and how are you compensated for your craft?

[quote=mikebutler222][quote=babbling looney]

Wow I'm cranky today.    I should go beat up on some golf balls.

[/quote]

A great therapy and pretty inexpensive I use it often. 

[quote=Indyone]

Wow...that's almost an admission of malpractice from my perspective.  I don't know what all you had at your disposal or what this lady would have tolerated risk-wise, but this is an example of something I see alot in local competitor-managed portfolios.  The entire focus is on current income, with no thoughts of inflation hedging, adequate diversification or staggered maturies to protect against interest rate risk.  Edd, why on earth would Jones tell a story like this?  It's certainly not a very flattering picture if you're in the position of recommending such a portfolio.  It sounds almost like the old Boones & Claussens story that American Funds tells to sell being in the market.

[/quote]

Indy, you're a good advisor but, I have to go with NASD on this one. Today we rely on Modern Portfolio Theory to help guide our allocation decisions. Modern Portfolio Theory is just that, modern. I'm one of the non vet vets Newbie refers to, having started in 1983. At that time noone was telling me that putting 100% of one's assets in one maturity was a no no. Asset allocation wasn't around then. The industry was product driven and I for one don't think that's a bad thing. Putting 100% of a client's assets into a porfollio of high quality bonds would be considered a good thing. I think it still is.

Secondly, there were and are client's who want or need all the income a portfolio can deliver. A talk about inflation's effect on buying power falls short when the wolf is at the door. It also falls short today when we look at how the market has done over the past 5 years. With many stock investors still trying to get back to even the concept of the stock market as an inflation hedge has lost some of it's allure. Fact is, the market looks alot better as an inflation hedge on paper than in reality. There are many long stretches, NASD points out one such 14 year period, where the market did nothing but go down and come back to even, or did nothing at all. While the upward trend of the market over time is undeniable, the market as an inflation hedge isn't a sure bet.

Lastly, modern portfolio theory was developed over the nineties and refined from there. It was and is used, and abused as a reason to collect fees in managed programs. It's based on risk/allocation theory that back dates data over a long period of time. Unfortunately, for investors and advisors who have bought into it hook, line and sinker, it's only a theory. The reality is that those who bought MPT as the defense against getting thwacked (NASD, Is thwacked a word?) by the market found out the hard way in 01-03, with their hard earned money, that it does nothing to protect them. Instead of losing money in just one investment, they lost money in a wide variety of investments. Ironically, the only people who didn't lose were those with all their assets in the bond market, even those in just a single maturity of the bond market. Many of the mpt investors wish they could get a do over to buy "dumb old bonds." Who knows were this group will be in 10 years. For now, many are still trying to get back to even. Even tougher when they're paying 1 to 2%  a year off the top for advise that cost them 30 to 70% of their assets.

The market as an inflation hedge seems on it's face to make sense. Yet for the client who needs max income, it's not always the answer.

[quote=tjc45]

 Unfortunately, for investors and advisors who have bought into it hook, line and sinker, it's only a theory. The reality is that those who bought MPT as the defense against getting thwacked (NASD, Is thwacked a word?) by the market found out the hard way in 01-03, with their hard earned money, that it does nothing to protect them. Instead of losing money in just one investment, they lost money in a wide variety of investments. Ironically, the only people who didn't lose were those with all their assets in the bond market, even those in just a single maturity of the bond market.

[/quote]

Tjc45, I have great respect for your postings and I agree with most everything you'd said in this post, but I have to quibble with the above. I agree MPT is a theory, and anyone who thinks using it means you never have a period where portfolio values decline is a fool, but the bit about 01-03, if applied to even a marginally well balanced MPT model isn't correct. <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Fixed Income well out performed every equity component in 2001 and 2002, but it lagged behind greatly in 2003. A balanced MPT portfolio lost a modest amount in 2001 (3-4%) and larger amount in 2002 (8-9%) but had a massive 24-25% positive return in 2003. Balanced MPT portfolios (and granted, the term “balanced” is very open to interpretation) not only did better than single equity and fixed income indexes in relative terms in those years, they did well in absolute terms.

None of the above contradicts your over-all point, which I completely agree with.

[quote=mikebutler222]

[quote=tjc45]

 Unfortunately, for investors and advisors who have bought into it hook, line and sinker, it's only a theory. The reality is that those who bought MPT as the defense against getting thwacked (NASD, Is thwacked a word?) by the market found out the hard way in 01-03, with their hard earned money, that it does nothing to protect them. Instead of losing money in just one investment, they lost money in a wide variety of investments. Ironically, the only people who didn't lose were those with all their assets in the bond market, even those in just a single maturity of the bond market.

[/quote]

Tjc45, I have great respect for your postings and I agree with most everything you'd said in this post, but I have to quibble with the above. I agree MPT is a theory, and anyone who thinks using it means you never have a period where portfolio values decline is a fool, but the bit about 01-03, if applied to even a marginally well balanced MPT model isn't correct. <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Fixed Income well out performed every equity component in 2001 and 2002, but it lagged behind greatly in 2003. A balanced MPT portfolio lost a modest amount in 2001 (3-4%) and larger amount in 2002 (8-9%) but had a massive 24-25% positive return in 2003. Balanced MPT portfolios (and granted, the term “balanced” is very open to interpretation) not only did better than single equity and fixed income indexes in relative terms in those years, they did well in absolute terms.

None of the above contradicts your over-all point, which I completely agree with.

[quote=tjc45][quote=Indyone]

Wow...that's almost an admission of malpractice from my perspective.  I don't know what all you had at your disposal or what this lady would have tolerated risk-wise, but this is an example of something I see alot in local competitor-managed portfolios.  The entire focus is on current income, with no thoughts of inflation hedging, adequate diversification or staggered maturies to protect against interest rate risk.  Edd, why on earth would Jones tell a story like this?  It's certainly not a very flattering picture if you're in the position of recommending such a portfolio.  It sounds almost like the old Boones & Claussens story that American Funds tells to sell being in the market.

[/quote]

Indy, you're a good advisor but, I have to go with NASD on this one. Today we rely on Modern Portfolio Theory to help guide our allocation decisions. Modern Portfolio Theory is just that, modern. I'm one of the non vet vets Newbie refers to, having started in 1983. At that time noone was telling me that putting 100% of one's assets in one maturity was a no no. Asset allocation wasn't around then. The industry was product driven and I for one don't think that's a bad thing. Putting 100% of a client's assets into a porfollio of high quality bonds would be considered a good thing. I think it still is.

Secondly, there were and are client's who want or need all the income a portfolio can deliver. A talk about inflation's effect on buying power falls short when the wolf is at the door. It also falls short today when we look at how the market has done over the past 5 years. With many stock investors still trying to get back to even the concept of the stock market as an inflation hedge has lost some of it's allure. Fact is, the market looks alot better as an inflation hedge on paper than in reality. There are many long stretches, NASD points out one such 14 year period, where the market did nothing but go down and come back to even, or did nothing at all. While the upward trend of the market over time is undeniable, the market as an inflation hedge isn't a sure bet.

Lastly, modern portfolio theory was developed over the nineties and refined from there. It was and is used, and abused as a reason to collect fees in managed programs. It's based on risk/allocation theory that back dates data over a long period of time. Unfortunately, for investors and advisors who have bought into it hook, line and sinker, it's only a theory. The reality is that those who bought MPT as the defense against getting thwacked (NASD, Is thwacked a word?) by the market found out the hard way in 01-03, with their hard earned money, that it does nothing to protect them. Instead of losing money in just one investment, they lost money in a wide variety of investments. Ironically, the only people who didn't lose were those with all their assets in the bond market, even those in just a single maturity of the bond market. Many of the mpt investors wish they could get a do over to buy "dumb old bonds." Who knows were this group will be in 10 years. For now, many are still trying to get back to even. Even tougher when they're paying 1 to 2%  a year off the top for advise that cost them 30 to 70% of their assets.

The market as an inflation hedge seems on it's face to make sense. Yet for the client who needs max income, it's not always the answer.

[quote=Revealer][quote=tjc45][quote=Indyone]

Wow...that's almost an admission of malpractice from my perspective.  I don't know what all you had at your disposal or what this lady would have tolerated risk-wise, but this is an example of something I see alot in local competitor-managed portfolios.  The entire focus is on current income, with no thoughts of inflation hedging, adequate diversification or staggered maturies to protect against interest rate risk.  Edd, why on earth would Jones tell a story like this?  It's certainly not a very flattering picture if you're in the position of recommending such a portfolio.  It sounds almost like the old Boones & Claussens story that American Funds tells to sell being in the market.

[/quote]

Indy, you're a good advisor but, I have to go with NASD on this one. Today we rely on Modern Portfolio Theory to help guide our allocation decisions. Modern Portfolio Theory is just that, modern. I'm one of the non vet vets Newbie refers to, having started in 1983. At that time noone was telling me that putting 100% of one's assets in one maturity was a no no. Asset allocation wasn't around then. The industry was product driven and I for one don't think that's a bad thing. Putting 100% of a client's assets into a porfollio of high quality bonds would be considered a good thing. I think it still is.

Secondly, there were and are client's who want or need all the income a portfolio can deliver. A talk about inflation's effect on buying power falls short when the wolf is at the door. It also falls short today when we look at how the market has done over the past 5 years. With many stock investors still trying to get back to even the concept of the stock market as an inflation hedge has lost some of it's allure. Fact is, the market looks alot better as an inflation hedge on paper than in reality. There are many long stretches, NASD points out one such 14 year period, where the market did nothing but go down and come back to even, or did nothing at all. While the upward trend of the market over time is undeniable, the market as an inflation hedge isn't a sure bet.

Lastly, modern portfolio theory was developed over the nineties and refined from there. It was and is used, and abused as a reason to collect fees in managed programs. It's based on risk/allocation theory that back dates data over a long period of time. Unfortunately, for investors and advisors who have bought into it hook, line and sinker, it's only a theory. The reality is that those who bought MPT as the defense against getting thwacked (NASD, Is thwacked a word?) by the market found out the hard way in 01-03, with their hard earned money, that it does nothing to protect them. Instead of losing money in just one investment, they lost money in a wide variety of investments. Ironically, the only people who didn't lose were those with all their assets in the bond market, even those in just a single maturity of the bond market. Many of the mpt investors wish they could get a do over to buy "dumb old bonds." Who knows were this group will be in 10 years. For now, many are still trying to get back to even. Even tougher when they're paying 1 to 2%  a year off the top for advise that cost them 30 to 70% of their assets.

The market as an inflation hedge seems on it's face to make sense. Yet for the client who needs max income, it's not always the answer.

[/quote] Sorry guys. "Modern" Portfolio Theory is NOT modern. Doctoral thesis by Harry Markowitz U. of Chicago early 1950's. [/quote]

You're right that MPT began with Markowitz's 1953 (I think) paper, but that was the cornerstone. I don't think anyone would tell you that paper gave investment professionals a process they could institute. There was a great deal of work to be done on that first paper by Marokwitz and other Nobel winners before it was ready for prime time.

[quote=tjc45][quote=Indyone]

Wow...that's almost an admission of malpractice from my perspective.  I don't know what all you had at your disposal or what this lady would have tolerated risk-wise, but this is an example of something I see alot in local competitor-managed portfolios.  The entire focus is on current income, with no thoughts of inflation hedging, adequate diversification or staggered maturies to protect against interest rate risk.  Edd, why on earth would Jones tell a story like this?  It's certainly not a very flattering picture if you're in the position of recommending such a portfolio.  It sounds almost like the old Boones & Claussens story that American Funds tells to sell being in the market.

[/quote]

Indy, you're a good advisor but, I have to go with NASD on this one. Today we rely on Modern Portfolio Theory to help guide our allocation decisions. Modern Portfolio Theory is just that, modern. I'm one of the non vet vets Newbie refers to, having started in 1983. At that time noone was telling me that putting 100% of one's assets in one maturity was a no no. Asset allocation wasn't around then. The industry was product driven and I for one don't think that's a bad thing. Putting 100% of a client's assets into a porfollio of high quality bonds would be considered a good thing. I think it still is.

Secondly, there were and are client's who want or need all the income a portfolio can deliver. A talk about inflation's effect on buying power falls short when the wolf is at the door. It also falls short today when we look at how the market has done over the past 5 years. With many stock investors still trying to get back to even the concept of the stock market as an inflation hedge has lost some of it's allure. Fact is, the market looks alot better as an inflation hedge on paper than in reality. There are many long stretches, NASD points out one such 14 year period, where the market did nothing but go down and come back to even, or did nothing at all. While the upward trend of the market over time is undeniable, the market as an inflation hedge isn't a sure bet.

Lastly, modern portfolio theory was developed over the nineties and refined from there. It was and is used, and abused as a reason to collect fees in managed programs. It's based on risk/allocation theory that back dates data over a long period of time. Unfortunately, for investors and advisors who have bought into it hook, line and sinker, it's only a theory. The reality is that those who bought MPT as the defense against getting thwacked (NASD, Is thwacked a word?) by the market found out the hard way in 01-03, with their hard earned money, that it does nothing to protect them. Instead of losing money in just one investment, they lost money in a wide variety of investments. Ironically, the only people who didn't lose were those with all their assets in the bond market, even those in just a single maturity of the bond market. Many of the mpt investors wish they could get a do over to buy "dumb old bonds." Who knows were this group will be in 10 years. For now, many are still trying to get back to even. Even tougher when they're paying 1 to 2%  a year off the top for advise that cost them 30 to 70% of their assets.

The market as an inflation hedge seems on it's face to make sense. Yet for the client who needs max income, it's not always the answer.

[/quote]

Damn tjc, great post.  A breath of fresh air to have someone articulately address the MPT scam that's going on (using it as an excuse to collect asset management fees).........Now Mikey, hold on there as I know the beast is about to be unleashed.....I'm not saying that MPT IS a scam. O.K.?  I think we all know where you and I stand on this issue so let's let a dead horse lie.

I am so proud that a thread I started has four or five pages of responses and that several of them are long well considered discussions.

It's almost as if I was as effective as Put Trader at getting things rolling.

I hope Put is doing well, wherever he is.

Points well taken from all above.  I guess it's just a matter of perspective and how you learned the trade.  I started in the late 80's managing investments for a regional bank trust department and was raised on bond ladders and diversified stock portfolios, consisting of mostly blue chips.  These were far from new concepts for my employer, as I recall seeing statements that were 20-30 years old with bond ladders and diversified portfolios of blue chip stocks.  Some of the accounts I managed had positions that originated in the 60's and 70's, and in fact, one of the thorniest issues we dealt with in the late 80's was reducing/eliminating concentrations without committing tax suicide, due to the huge embedded gains in some of the star performers.  Generally, we reduced position concentrations over a period of years, unless we had compelling evidence that a given position was ready to implode.

My point is, not everyone thought that the bond portfolio, as described in NASD's original post, was a good idea...even in the early 70's, although it's become painfully obvious that plenty of advisors invested in a similar manner, at least before the interest rate disaster of the late 70's/early 80's.  From the feedback to my original post, it appears that trust departments (or at least the one I worked for), invested in a markedly different manner than retail advisors back when the bond portfolio in question was created, and there's not a doubt in my mind that my mentor would have, at the very least, staggered the bond maturities for the widow in question.

...and yes, I do believe that he would have labled the portfolio as described as malpractice.  He was much like our friend NASD...you did it his way, or you did it wrong.

I appreciate the civil discussion, even if our opinions aren't all in lockstep...

[quote=Indyone]

...and yes, I do believe that he would have labled the portfolio as described as malpractice.

[/quote]

He would not have been capable of carrying the briefcases of the guys who cut their teeth in the 1970s.

The buy side has always been a bunch of simpering whiners quick to claim credit for success while more than happy to blame their losing choices on their brokers.

If they weren't necessary as clients most brokers wouldn't walk across the street to piss on a bank portfolio manager if he were on fire.

Just my opinion of course--the only one I am allowed to give.