Compelling Case for Ripsaw® Wealth Tools

June 2, 2021

In our now decade-long low interest rate environment, current expected returns on asset classes are relatively low compared to prior decades when advisor fees and high expense ratio mutual funds were established.  It may not have felt too uncomfortable paying a 1% advisor fee when yields on US Treasuries were over 10% and stock market expected returns were at 20+%. However, the current 90-day T-bill rate is 0.01% and the 5-year Treasury rate is only 0.88%. After an advisory fee of 1%, you are expected to lose money on that portion of your portfolio yielding less than 1% and even worse when you include the fund expense ratio. Why do want to pay someone to manage your low-risk assets? 

The expected return on the stock market is currently around 8.35% as volatility is near its long-term average. In the table below, expected returns for portfolios with varying stock and bond compositions are provided. All bonds at 1.6% and all stocks at 8.35% with combinations at 40%/60% and 60%/40% stocks/bonds in between. As one would expect, the higher the stock percentage, the higher the expected return and risk. The next line takes a little off for using low-cost exchange traded funds for the stock and bond portfolio as a do-it-yourself (DIY) investor. 

*Total IG bond market index fund: BND ETF 1.6% YTM and .035% expense ratio, total stock market index fund 8.35% expected return: VTI ETF .03% expense ratio.

**Average annual expense ratio of active funds is 0.66% (Source: Annual Morningstar Study June 2020). Average annual financial advisor fee for $1,000,000 AUM is 1.02% in 2020-2021 (Source: AdvisoryHQ). July 27, 2021: 3-Month T-Bill = .01%, 5YR Treasury = 0.88%, 10YR Treasury = 1.63%, 30YR Treasury = 2.30%. Stock market risk premium = 8.34% (Table 5.4 in Bodie, Kane and Marcus, Investments, 12th Edition.

What is your incentive to become a DIY investor/wealth manager? The average advisor fee plus the average actively managed fund expense ratio is 1.68%. Subtracting that from each of the stock/bond portfolio strategy expected returns reduces your net return substantially. In fact, the 100% bond portfolio expected return is -.08%. It is expected to lose money after all expenses, but not before them. That is because the total expenses are 105% of the expected return. Even with the 100% stock portfolio, the total expenses are 20.12% of its expected return. That means a lot less net expected return for the same risk. Gross! 

What is the effect of these expenses on your expected wealth accumulation over time? Here we use a simple example of a 30-year investment horizon to retirement for a 35-year-old with $100,000 plus the commitment to contribute an additional $15,000 per year for the next 30 years. The index fund strategies, net of the fixed low-cost Ripsaw® Wealth Tools subscription service for implementation, has a considerable positive accumulation for all portfolio strategies, including the 100% bond portfolio. Next, we can see the huge drag on wealth accumulation with advisory fees and active expense ratios. Note that this does not even include the strong evidence that the vast majority of active managers underperform their benchmarks with poor investment performance (unnecessary risk to you). 

We can express this drag two ways. Either way it is huge! First, the percentage loss of wealth accumulation from excess expenses ranges from -25.21% to -32.16%. Alternatively, the wealth accumulation gain from moving to DIY wealth management with Ripsaw® Wealth Tools has an improvement that ranges from 33.7% to 47.4%. In the 100% stock case, that is going from $2,162,590 to $3,187,621 or over a million in gain or savings! This result is both from the sum of annual expense savings and the opportunity to reinvest those savings. 

The bulk of the wealth management universe has been able to charge high fees because of their information and technology advantage over their clients. Do-It-Yourself (DIY) investors have lacked the data access and analytics for efficient portfolio management. Ripsaw® Wealth Tools is the first to provide an independent, disciplined wealth management process that combines auto-updated account information, access to risk dimension data and financial analytics in a low-cost subscription service for portfolio construction, monitoring and revision decisions. NOT a percentage of assets under management. The benefits of our approach are enormous in terms of wealth accumulation and the satisfaction of taking control of your financial life.

Financial security, like health security, is a major stress reliever. Ripsaw® Wealth Tools provides flexible custom modeling for the low price of a Netflix subscription. Isn’t your financial security at least as important as a Netflix subscription?

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  DIY, Investing, Ripsaw, Uncategorized, Wealth
Author: Stanley Kon

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Reduce the cost of implementing your financial plan

May 25, 2021

This content is for informational purposes only, you should not construe any such information or other materials as legal, tax, investment, financial, or other advice of any kind.

This content is for informational purposes only, you should not construe any such information or other materials as legal, tax, investment, financial, or other advice of any kind. 

One of the axioms of rational choice is that, holding everything else constant, individuals prefer more wealth to less. Therefore, once you have a portfolio strategy selected, implementing it at the lowest cost will make you better off.

Never purchase a fund with a load (sales) charge. The load is payment to a middle person (i.e., broker) for helping you pick a good fund. What incentive does the broker have to act in your best interest when their compensation increases with the sales charge? Front-end load charges are typically in the range of 3%-8.5%. That means you have to make up this charge just to break-even. This is an unnecessary expense when there are equivalent funds in terms of investment exposures and performance which have no load. Beware of backend loads that disguise the charge by having you pay the same load over time and in an exit fee. 

Do you really want to pay marketing, advertising and distribution costs (12b-1 fees) for the fund to get other clients? I don’t think so!

The easiest way to screen for cost is the fund’s expense ratio. The industry average is approximately 1.5%. The compounding effect over many years is substantial. When interest rates were high (over 8%), investors didn’t pay much attention to an expense ratio of 1%. Now that the 10-year Treasury rate is near 2%, an expense ratio of 1% can reduce total return by 50% on an intermediate government bond fund. Have you noticed that until recently money market returns to investors have been near zero for years! That is because the yields on most of the assets in the fund are below the expense ratio, but they can’t charge the full expenses without breaking the buck (constant $1.00 price).

It is no surprise that index funds have had the largest investor growth rate in recent years. Their expense ratios range from 0.02% to 0.25%. The low expenses are available because the cost of active management is eliminated. One might think that active management leads to more than enough additional value to offset the higher expenses. But many empirical studies show that active managers as a whole underperform index funds and very very few have consistent superior performance over time to justify their fees. High performing managers tend to leave the fund to become hedge fund managers with higher compensation for their skills. That leaves investors with the risk of management turnover. Even worse, is the extreme under performance that some active managers generate. This occurs because their incentives are to take big bets for better compensation. This swinging for the fences is not in your best interest, but in theirs. Index funds eliminate managerial risk. Essentially, with index funds, you get the return for the exposures you select at minimal cost. No more. No less. You are in control! What we will provide in this book is how to select the exposures that are right for you.

Reduce the impact of fees on your wealth accumulation.

Don’t let high costs eat away your returns! You can use Ripsaw‘s investment screener to keep fees low, see your fees clearly, and pay a low subscription instead of a % of your money. High fees diminish wealth accumulation significantly. That is why we made Ripsaw’s subscription low, affordable, and with tools to reduce fees over your lifetime.

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  DIY Wealth Tips, Investing, Ripsaw, Uncategorized
Author: Stanley Kon

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Tax Minimization Strategies

May 20, 2021

This content is for informational purposes only, you should not construe any such information or other materials as legal, tax, investment, financial, or other advice of any kind. 

After an overall asset allocation is determined, minimize the impact of taxation on your investments by locating more tax-efficient holdings (low dividend, high capital gain, tax exempt and index funds) in your taxable accounts and least tax-efficient (high dividend and high interest bearing) holdings in your tax-deferred accounts. For example, if your overall asset allocation were 50% bonds and 50% stock, you would consider having your IRA hold all the bonds and your taxable brokerage account hold all the stocks. Since most people do not have equal amounts in each account and all stock strategies are not equivalent, it is not that easy. You will see the principle will be useful in efficiently allocating across investment vehicles.

Rebalancing your portfolio can also result in tax consequences. If a trade would result in a capital gain, executing it in your tax-deferred account will not have an immediate tax event. Taking losses in your taxable account will create immediate tax deductions. Paying attention to where you trade will result in substantial tax savings over the life of your investment portfolio.

Maximize your tax-deferred retirement contributions

The goal of wealth management is to achieve a preferred standard of living through time. We invest in education to generate higher future earnings (a better life for you and your family). We promise some of our future earnings in a home mortgage so we can have a higher standard of living today (smoothing consumption over time). Saving for retirement is giving up some spending today to supplement a lifestyle after we retire, and our labor income is unavailable. 

Retirement income can be generated from multiple sources. Liquidating real assets (i.e., selling, downsizing, or taking equity out of a home), principal and income from after-tax investments and pre-tax retirement plans (401K, 403b, IRA, etc.). These qualified pre-tax retirement plans have a unique set of incentives. If there were a set of commandments for investing, maximizing qualified tax-deferred retirement contributions would be number one.  Some of the reasons are:

  • Instantaneous high rate of return: If your 401K maximum contribution is $15,000 and you are in a 35% marginal federal, state and local tax bracket, you save $5,250 in taxes. You may also think of investing this $5,250 tax saving in a taxable account. Now you have instantly turned $15,000 into $20,250 of investment wealth in two accounts.
  • Future tax avoidance options: Note that you will owe ordinary income taxes on your 401K withdrawals in retirement, but you can strategically take withdrawals in the future. Timing options include managing to a lower tax bracket via drawing from multiple after-tax sources at the same time, have offsetting losses, tax credits, borrowing from the account, direct charitable contributions and a bequest. In the meantime, earnings in the fund are accumulating tax-free.  The taxable investment ($5,250), however, will only have tax liability on interest, dividends and capital gains/losses as they realized.

I should note that I am not a fan of Roth plans. It isn’t a no-brainer. One might think it makes sense when you are in a low tax bracket and the immediate tax savings of a tax-deferred plan is negligible. The benefit is that many years later the accumulation will be tax free. That makes some sense, especially for disciplined savings.  However, if you are in that low a tax bracket, taxes on dividends and capital gains will be initially negligible. Why deal with the constraint of waiting until retirement to access the accumulation when it will be more likely that you will need the money sooner for a down payment on a house, education expenses or a business venture. The latter two motivations will add human capital and increase income faster. In this case, accumulating wealth sooner and having a bigger tax problem is a good thing! In a high tax bracket, a traditional tax-deferred plan with the immediate tax saving generally dominates the Roth alternatives. Paying the tax now and investing in a Roth plan is forgoing both the current tax savings and future tax options of managing to lower rates or never paying the tax at all. Examples of never paying the income tax include charitable contributions directly out of the plan that also count toward your required minimum distribution; using the plan to pay tax-deductible medical expenses when they are likely to be high; outliving your plan to be rolled over into your heirs plan and when the investment ends up worth less in the future. This last possibility is more likely for those converting to a Roth near or in retirement. Paying taxes in advance on a gain at the ordinary rate really hurts when the reinvestment ends up in a loss. Like all options, the tax option is worth more alive than dead!

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  DIY Wealth Tips, Investing
Author: Stanley Kon

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Welcome to the DIY Wealth Blog presented by Ripsaw®

Ripsaw News: We have an iOS APP!

May 19, 2021

Mange your wealth from anywhere!

Ripsaw® is pleased to announce that we now have an app on the Apple App Store! 

Monitor your wealth from anywhere! Never miss an opportunity with the power of Ripsaw® bringing the full portfolio monitoring toolset to your iPhone®. If dashboard indicators show a need to rebalance your portfolio, revise with the full featured Ripsaw® Wealth Tools on your computer or iPad®.

Download on the App Store


Ripsaw® on your iPhone® has:
Balance Sheet
Full featured Holdings and drill in details about investments
Wealth Portfolio Dashboard
Crucial Market Data
1-Day Return Breakdown Comparison
Profile, settings, deviation indicator thresholds

Ripsaw® on iPad® is fully functional Ripsaw Wealth Tools!
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Want to manage your own wealth? We have an app for that!
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  Investing, Ripsaw, Uncategorized, Wealth
Author: user

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Welcome to the DIY Wealth Blog presented by Ripsaw®

Welcome to the DIY Wealth Blog presented by Ripsaw®

May 19, 2021
Stanley J. Kon, our Co-Founder and Chairman has recently written a book that thoroughly explains his approach to wealth management. This DIY finance guide is a great companion to Ripsaw® Wealth Tools! This is the companion blog to Ripsaw® Wealth Tools and Do-It-Yourself Wealth Management.

The task of personal and family wealth management seems like it requires so many interrelated complex decisions with multiple risk dimensions that most people feel overwhelmed. However, we are all our own wealth managers, regardless of who you pay for advice and trade execution. Given the potential conflicts of interest, managerial risk and high fees, it is not difficult to do better for yourself than what most professionals can do for you. Even if you choose to pay a professional, it is still your responsibility to monitor them concerning suitable strategies and performance net of fees. In this book, the author (Stanley J. Kon, PhD) with long careers as a professor of finance and in the practice of institutional investment management, will take you through a disciplined “Do-It-Yourself” investment process for wealth portfolio construction, monitoring and revision involving many accounts and many investments with overlapping risk dimensions. This is the companion blog to Do-It-Yourself Wealth Management and Ripsaw® Wealth Tools

  
  DIY, Ripsaw, Wealth
Author: Stanley Kon

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Welcome to the DIY Wealth Blog presented by Ripsaw®

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