Helping A Friend & How The Sausage Is Made

A twofer post on basic financial planning and a trade executed for clients today.

A college buddy asked for some input on whether he should ditch his wirehouse broker in favor of owning a couple/few index funds at a firm like Schwab or Ameritrade. The following is most of my answer to him;

> If you are interested in managing your own accounts, then it really boils down to how much time you want to put in to the task. Using a few broad-based index funds is not terribly time intensive. They simply capture the broad market which is a good thing most of the time but every now and then it goes down a lot and that is reasonably uncomfortable but once it is done going down it will turn around and make a new high, it did so after the financial crisis and every other market calamity and will do so the next time around which is to say, don’t worry if you buy a couple of index funds and then the market goes down, it will definitely come back.

> In saying “broad-based index fund” I mean something whose name includes the words “total market” or “S&P 500” as a couple of examples. Narrower funds like for a sector (energy or financials as a couple of examples) or industry funds (like biotechnology being a part of healthcare) or thematic funds (like funds that target things like infrastructure or electronic payments, the list is endless) are all valid but require more time.

> If you transfer your assets to someplace like Charles Schwab or Fidelity or TD Ameritrade there will be no account fees, they all offer a bunch of ETFs that are commission free and even ones that have commissions are only $5-$7 per trade. This is a very effective and efficient way to go. When you get to that point I’d be glad to give you a couple of ideas of what to buy in the realm of broad based index funds. The goal of owning a few funds really just needs to be to capture the market’s long term result which you’ll do even if there is occasionally frustration with any short term volatility, kind of like what is going on now.

> One bit of caution I would give to anyone our age is that you need to realize that soon, things will get more complicated in terms of how and when to take Social Security, how to withdraw from accounts once you have retired and ahead of that time you need to consider spending a lot more time on it or hiring someone at the point, here I am talking 2-3 years before you retire. Being wrong can cost thousands of dollars every year.

Today I bought ProShares Short S&P 500 (SH) for clients in the context of portfolio defense. We owned the Cambria Tail Risk ETF (TAIL) for a short time, sold it last week but the market turned back down. The sausage reference in the title of this post is a reference to the flirtation the SPX has been doing with its 200 DMA. For now I will plan on holding SH to the end of the year regardless of what the SPX does in relation to its 200 DMA. If the market heads lower then SH along with BTAL and PTLC having switched to cash should help reduce the extent to which the overall portfolio looks like the market which hopefully means we avoid the full brunt of any further downdraft or reduce the portfolio's volatility if the SPX just churns around in this same range or act as a small drag if the market goes meaningfully higher--note that we have not sold anything (long equity positions) in a long time so were are still plenty long.

If there is some sort of serious decline in the next few weeks I would consider selling SH for a profit and would consider selling at a loss in the last day or two of the year for tax purposes. In the face of a slow deterioration I would be able to buy TAIL back in a few weeks (wash sale) or could sell some long equity exposure.

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