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July 2010 Newsletter

Evensky & Katz

Harold Evensky

July 9, 2010

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Dear Everyone,


I don’t know about you, but I’m getting tired of living in interesting times. Unfortunately the market gods don’t much care for my opinion. So, given the reality that the markets have been a tad exciting lately, in addition to my regular meandering tidbits, I’ve included a number of items that I thought might provide a little perspective on the ranting of the financial pornographers.


Hope you enjoy.




I found these stories provided by travel agents:

  • I had someone ask for an aisle seat so that his or her hair wouldn't get messed up by being near the window. (I think I remember sitting next to her).
  • A client called in inquiring about a package to Hawaii. After going over all the cost info; she asked, "Would it be cheaper to fly to California and then take the train to Hawaii?"
  • A man called, furious about a Florida package we did. I asked what was wrong with the vacation in Orlando. He said he was expecting an ocean-view room. I tried to explain that is not possible, since Orlando is in the middle of the state. He replied, "Don't lie to me. I looked on the map and Florida is a very thin state."
  • And, from his equally geographically astute friend – I got a call from a man who asked, "Is it possible to see England from Canada?" I said, "No." He said "But they look so close on the map."

You just can’t make this stuff up.




The excerpt below is from a book titled How to Secure Continuous Security Profits in Modern Markets. The test question is, what is the missing date below marked as xxx.


“As this is written, one of the greatest bull markets in history is in progress. People have been saying for several years that prices … are too high; yet they go increasing. The facts are that in the present phase of this so-called “bull-market”, many stocks – perhaps the majority – have declined in market price. We are witnessing a highly discriminating market in which prices are endeavoring to adjust themselves more closely to intrinsic values than ever before in Wall Street history. In the process, stocks with improving earnings and prospects are rising rapidly; so that the result of these two cross currents this year to date (xxx) has been an almost stationary price level for the general averages. People who deplore the high prices at which gilt edged common stocks are now selling apparently fail to grasp the fundamental distinction between investments in equities of growing companies.”


Send in your guess to me at The first person with a correct answer will win recognition in my next NewsLetter and a $100 contribution to their favorite charity. P.S. – no fair looking this up on the internet.




No pun intended (well, maybe a little bit). According to the New York Daily News via The Week, George Washington owes the New York Society Library $300,000 in overdue fines for The Law of Nations. He took it out on October 5, 1789 and still hasn’t returned it! The library says it will waive the penalty if the book is just returned.




34 U.S. university presidents earn over $1 million.

81 U.S. university football coaches earn over $1 million.




My associate Daniel brought this to my attention. A contribution on a website called The Money Times was titled “Throw This Stock Away.” Miamians may recognize the name.


“…there’s a big difference between an artificial bump and an actual recovery. I’m very cynical about some of the big movers in what is still a very troubled industry, so I’m going to diss one stock (and suggest three replacements for your portfolio). Who gets tossed out this week? Come on down, Lennar.”


“When the economy bounces back – and it will – homebuilders will be the last to benefit. Now is certainly not the time to buy Lennar, even if consolidation will help rid the niche of its weakest developers.”


That was posted on December 12th. How did it fair? Through the end of May when the S&P posted a gain of under 50%, Lennar was up almost 200%. There is obviously no guarantee that black headlines will guarantee a roaring market but they certainly should not be the basis for abandoning it. Making investment decisions by looking in a rearview mirror can be hazardous to your wealth.




I’d asked Daniel to take a look at headlines during the depths of the Great Recession. By the end of February 2009 the S&P’s annual return was -45.2%. Here’s what he found:

  • December 2nd - MSNBC “Damaged investors could slow a recovery….getting U.S. stocks moving higher again – let alone back to their 2007 levels – is going to be a long haul.”
  • February 2nd – Market Watch “When the next bull market is coming….I have pushed my expectations for the next bull market out to next year. Based on simple chart reading it was not a difficult conclusion to reach.[I particularly liked the “not a difficult conclusion”]
  • March 8th - USA Today “Stock market recovery likely will be years in the making.”


What happened the following year? >From March 1, 2009 to February 28, 2010 the S&P was up 53.6%.


There is obviously no guarantee that black headlines will guarantee a roaring market but they certainly should not be the basis for abandoning it. Making investment decisions by looking in a rearview mirror can be hazardous to your wealth.




Recently it’s been a bit depressing looking at our international allocations. For the period February through May 2010, EAFE was off a little over 10% versus a more modest couple of percent for the S&P 500. Does that mean everyone should ditch their international exposure? Nope; better to heed the advice in the 2010 Ibbotson SBBI Classic Yearbook, “…an investor who chooses to exclude international investments from his or her portfolio is ignoring over half of the world’s investable assets. I heard the “drop international” story back in 2000 when the “New Era” was all the rage. At the time it seemed “obvious” as from 9/1/1995 – 3/31/2000 the S&P 500 had trounced EAFE by an annualized 26% vs. 16.1%. Of course, subsequent performance from 3/31/2000 to 10/31/2007 saw a major reversal with EAFE annualizing at 23.6% vs. the S&P’s 16.1%.


There is obviously no guarantee that black headlines will guarantee a roaring market but they certainly should not be the basis for abandoning it. Making investment decisions by looking in a rearview mirror can be hazardous to your wealth.




Take a look at It’s a slow motion film of the launch of Apollo 11. The film takes 8 ½ minutes to show 30 seconds of real time. It’s worth the 8 ½ minutes.




The Wall Street Journal May 29th issue trumpeted in bold headlines “DOW’s Worst May Since ’40.” What it didn’t mention was that the return in June of 1940 was 7.7% and the annualized 5 year performance from the beginning of ’41 through ’45 was 12%. And, one more time! There is obviously no guarantee that black headlines will guarantee a roaring market but they certainly should not be the basis for abandoning it. Making investment decisions by looking in a rearview mirror can be hazardous to your wealth.




From our computer guru, Rick, a few “Classic Programming Quotes.”

  • Programming today is a race between software engineers striving to build bigger and better idiot-proof programs, and the Universe trying to produce bigger and better idiots. So far, the Universe is winning.
  • A computer lets you make more mistakes faster than any other invention in human history, with the possible exceptions of handguns and tequila.
  • I love deadlines. I like the whooshing sound they make as they fly by.
  • Two things are infinite: the universe and human stupidity; and I’m not sure about the universe.- Albert Einstein




If you have an iPhone and are desperate for new apps to keep your kids or grandkids entertained, check out: Smack Talk, Angry Birds and Balloonanimals. For serious grownups I recommend Paper Toss and FSS Hockey. Warning, you may never get your phone back after the kids try these out. I know ‘cause my grandchildren won’t let me have my phone back.




If you’re considering a job as a broker, where you want to go depends on how much you can generate a year for the firm. Here’s an idea of compensation at wirehouses from OnWallStreet magazine.





Probably half my readers won’t even know what I’m talking about but CrunchGear just reported that Sony will stop production of floppy disks next March. The 3.5-inch floppy was first rolled out in 1981 and sales peaked in 1995. Hitachi Maxell and Mitsubishi, two other major manufactures, withdrew from floppy disc sales in the spring of last year.




I love this study! Martina forwarded me this story (she knows my age). It seems the result of a large Gallup study (340,000 people) headed by Dr. Stone, a professor of psychology at the State University of New York at Stony Brook, were recently published in the Proceedings of the National Academy of Sciences. Why do I love the study? Look at the results:

  • On the global measure, people start out at age 18 feeling pretty good about themselves, and then, apparently, life begins to throw curve balls. They feel worse and worse until they hit 50. At that point, there is a sharp reversal, and people keep getting happier as they age. By the time they are 85, they are even more satisfied with themselves than they were at 18.
  • The researchers also found that stress declines from age 22 onward, reaching its lowest point at 85. Worry stays fairly steady until 50, then sharply drops off. Anger decreases steadily from 18 on, and sadness rises to a peak at 50, declines to 73, then rises slightly again to 85.
  • Enjoyment and happiness have similar curves: they both decrease gradually until we hit 50, rise steadily for the next 25 years, and then decline very slightly at the end, but they never again reach the low point of our early 50s.

Turns out, I really am getting “better” even if I’m getting older.


LOOK BEFORE YOU SLEEP shows more than 20,000 videos of 4,000 hotels worldwide. Thank you Readers Digest for the trip tip.




Everyone wants to be in the market when it goes up and out when it goes down. That’s called “market timing.” Why don’t we follow that simple idea? I can make the answer short and sweet with an excerpt from an article I wrote for Financial Advisor.


“Name the ten most successful market timers of all time. How about the top five? The top one? I agree that if an advisor could consistently predict what markets will be up and which down, they would have to be pretty foolish to diversify. Why on earth would I invest in stock if I knew the market was headed down? Had I posed my challenge back in the ’80s, many would have pointed to Joe Granville.


What, you haven’t heard of Joe Granville? Until the late ’80s, he was the market guru. Like many gurus, he had absolute confidence in his crystal ball. According to Robert Shiller in the book Irrational Exuberance, Granville was quoted by Time magazine as saying, "I don't think that I will ever make a serious mistake in the stock market for the rest of my life," and he predicted that he would win the Nobel economics prize [such modesty]. In 1981, when he was grossing $6 million a year for his Newsletter advice, his two-word “sell everything” warning to his subscribers triggered a massive market sell-off with a record number of shares trading. Just before the 1987 crash, he again warned of a market disaster. He was obviously correct on that call and his picture was on the cover of major magazines and papers around the world.


Maybe you haven’t heard of him because, like those of all other market timers, his crystal ball had flaws. A few years ago, the Hulbert Financial Digest reported that the Granville Market Letter "is at the bottom of the rankings for performance over the past 25 years—having produced average losses of more than 20% per year on an annualized basis."


Until someone can name at least a few successful long-time market timers, I remain a skeptic and will continue to “bet” on some form of diversification.




There’s a reason Will Rogers was so famous. Here are a few of his musings about growing older.


  • Eventually you will reach a point when you stop lying about your age and start bragging about it.
  • The older we get, the fewer things seem worth waiting in line for.
  • When you are dissatisfied and would like to go back to youth, think of algebra.
  • Being young is beautiful, but being old is comfortable.
  • Long ago when men cursed and beat the ground with sticks, it was called witchcraft. Today it's called golf.



I recently came across a 40 page special “2010 Investment Outlook” section from the January 4th Bloomberg BusinessWeek that I’d stashed away. In the “Risk Ahead” section I didn’t find Greece highlighted but I did read, “At the end of 2009, though, the markets got a sharp reminder of how volatile currencies can be……with the fragile finances of Britain, Japan, Russia, Spain, Ukraine, and other nations increasing the chance of a scary market event, the dollar’s straight line decline is no longer a given.” They called that one right. Of course that was only a few sentences of the 40 odd pages. But then, Forbes “2010 Guide” (12/14/2009), Fortune’s “Investor Guide 2010” (12/21/2010), Kiplinger’s “Where to Invest in 2010” (1/2010) and Smart Money’s “Where to Invest in 2010” (1/2010) didn’t even allude to Greece or sovereign risk.




Not much trust going around these days. Registered Rep magazine, a publication targeted to wire house brokers, did a survey of its readership asking how they felt about the financial services industry. The answer; not very good. When asked “How trustworthy do you consider each type of firm to be” they gave the following poor rankings for “highest trustworthiness”


Diversified financial services firms


Asset Management firms


Insurance companies


Boutique investment managers


Hedge fund managers




Even if they’re off by a decade this forecast in Money is depressing. Discussing recovery in the housing industry and titled “When is the Rebound Coming,” Florida was ranked among the worst with a projected recovery date of 2031. We only looked good compared to Nevada (2033) and Arizona (2034).




Bloomberg Business Week had a chart labeled “Homes Are Undervalued.” Developed by the St. Louis Fed President, it tracks the S&P/Case-Shiller National Home Price index against GDP and concludes that “homes are the most undervalued in at least two decades.”




According to Bloomberg, the average pay of the 16 female chief executives of S&P 500 companies was 43% higher than the average for their male counterparts. Of course, that’s 16 out of 500.




The other day I saw an ad for a firm touting the experience of its employees so I got curious about what we might look like at E&K. Here’s what I came up with for those working directly with clients.


Years of College Education - 71

Years Experience in Financial Services- 161

Credentials – 13 CFPs; 4 AIFs; 2 CFAs and a CPA, PhD, CRC, NCAA and LHD




It seemed tasteless to have a Broadway musical called Enron when you think of the pain of the thousands of employees and investors affected by that disaster, so I can’t say I felt bad when Businessweek reported that the show that cost $4 million to produce was panned in New York and closed after a three week run.




The Wall Street Journal reports that Formula 1 driver Fernando Alonso’s thumbs are insured for $13.4 million each.




Actually, it might even be a bit pricey for Fernando but if you have a rich uncle who you have trouble finding the perfect gift for, consider a Bugatti’s 1935 57SC Atlantic Coupe. Only problem is only three were produced so it may be a tad difficult to find. Best bet would be to check with the winner of a recent California auction. His (or her) winning bid was a bit over $30 million. I don’t know how fuel efficient the car is but I doubt the owner really cares.




The GED or General Education Development Exam (not the “General Equivalency Degree” that most people equate it with) was introduced in 1942 to give returning WWII veterans who hadn’t finished high school a chance to earn a high school equivalent degree. In 1960 there were about 50,000 taking the GED, today there are annually more than 1,000,000. The GED now represents 12 percent of all high school graduate credentials. Thanks to Bloomberg Businessweek for the info.




As financial planners, everything we do is centered on our clients’ goals. Did you ever make a list of your goals? Ever wonder how yours compares to everyone else? Well Robot-Coop (, a privately held start-up based in Seattle and funded by set up a web site 43Things ( and invited everyone to list their personal goals. With tens of thousands of responses, here are some of the results:



Lose weight (until #2 becomes #1, I can forget it)


Stop procrastinating (I plan on it, mañana)


Write a book (Having done a number, fair warning; it’s fun but takes a LONG time and LOTS of work)


Fall in love (Deena Boone, definitely my #1)


Be happy


Get a tattoo (A whole lot easier than writing a book)


Learn Spanish (I had trouble with Latin)


Learn French


Learn Japanese


Become Financially Independent (Needless to say, as a financial planner I think this should move way up)


Learn how to drive stick-shift (I think I still remember)


Win the lottery (Guess I’d have to buy a ticket first)


Send a message in a bottle (Did that years ago; no response yet)


Go on a road trip (wonder if it matters where?)




Remembering passwords for web sites is a daunting task so many people default to one easily remembered password. Security vendor Trusteer found that 73% of logins to bank account sites were also used for other sites. Not a good idea. PCWorld reports that at a minimum Trusteer recommends using three separate log-ins: one for financial sites, one for any other site holding sensitive info and a third for sites that hold nothing of value.




From an article my associate Josh forwarded me:


Tax Unit Income

Approx Percentile of the Population

Share of Income Taxes Paid

< $30k



$30 – 50K












Money Magazine did a “By the Numbers” on the Sandwich Generation (i.e., those caring for children AND aging parents). They found the average annual cost of supporting an aging parent was $5,534 and supporting adult children $7,660. The silver lining was that 76% said they enjoy helping a relative.




Although it often suggests opportunistic investment ideas, some of the best advice in Money may be in its warnings. For example, the June issue had an article “Can Financial Stocks Keep Climbing?” The first examples were Legg Mason’s Capital Management Opportunity managed by Bill Miller, Money reported it up 123% over the prior 12 months and Fairholme up 64%. The article went on to say, “Such numbers are awfully tempting…. So should you get into one of these funds?” Money’s answer, “Take a deep breath first.”


Good advice. In the following 30 days Management Opportunity was off almost 20% and Fairholme down about 14%. I wonder how many investors hopped into these funds near the peak. If history is any indication; lots.




I’m assuming you’ve seen Captain Kirk (Shatner) in his silly Priceline NEGOTIATOR ad. Well you may be laughing at him, but he doesn’t mind; his shares in the internet travel site are now worth $582 million!




I had a client who put all of his 401K funds in small cap stock. “I don’t understand. From peak to trough small caps were down about 50%. Subsequently they’re up almost 75% and I should be ahead by 25% but my statement says I’m still down almost 10%.”


Unfortunately the math of gains and losses is a tad counter intuitive. In order to get back to even after a 50% loss, an investor will need a 100% return! Think about it. If you start with $1,000 and lose 50%, you are left with $500. Follow that with a 50% gain and what’s your balance? $750; far short of the original $1,000. You need to double the $500 (i.e., a 100% gain) in order to get back to even. Below is a table showing how painful a big loss may be. That’s why we focus so much on managing volatility, not just absolute returns.



Back to Even






















Have you read Jason Zweig’s Wall Street Journal Intelligent Invest column lately? If not, you should. In fact if you only read Jason’s column you’ll be well served. A good example is his “Watch Out for Hidden Tax Traps Inside ETFs.” Although ETFs are generally very tax efficient (one of the reasons we like them so much), Jason warns, “… the mad dash in ETFs lately has been into "alternative assets" like currencies and commodities. The investment researchers at Morningstar track 108 such ETFs … These funds are taxed so differently and at such higher rates than traditional investments, that many investors now wish they had looked before they leaped. ”In fact, “Wells Fargo Advisors has estimated that commodity ETFs can be taxed in six different ways and currency ETFs in eight.” That could keep a room full of CPAs awake all night (and give investors a nasty surprise come tax time).




A pretty picture from InvestmentNews



Compared to the $500,000,000 dollar bill I have on my desk (worth 4 cents), the $50 Trillion at about $3,000 isn’t pocket change (at least that was the value not long ago, could be 4 cents by now).




A thoughtful client shared this item from NPR. “Just heard ‘If the estate tax is not reinstated retroactively by November, if I was grandma, I would not show up at Thanksgiving Dinner without a food taster.’”




Speaking of eating, I read in InvestmentNews a report from Pew International that 33% of American teenagers send more than 100 text messages a day, or more than 3,000 a month. Half of all teens send 50 or more a day.




My associate Josh introduced me to this terrific site. If you like to listen to books on tape (as I do), is a site you must visit. It is, as self described, “Your source for free audio books. Download one in mp3 or iTunes format today.” There are hundreds (maybe even thousands, I didn’t count) books available including a staggering selection of classics. Below are a few examples:


Classics – Serious and Otherwise

On Liberty, John Stuart Mill

Yes, Virginia, There Is a Santa Claus, Francis Pharcellus Church

The History of the Decline and Fall of the Roman Empire Vol. IV, Edward Gibbon

The Sayings of Confucius, Confucius

The Story of My Life, Helen Keller

Theodore Roosevelt: an Autobiography, Theodore Roosevelt

Life on the Mississippi, Mark Twain

A Study in Scarlet, Sir Arthur Conan Doyle

The Mystery of Edwin Drood, Charles Dickens

The Master of the World, Jules Verne

The Strange Case of Dr. Jekyll and Mr. Hyde, Robert Louis Stevenson

My Man Jeeves, P. G. Wodehouse


Children’s Classics

Peter Pan, J. M. Barrie

The Wonderful Wizard of Oz, L. Frank Baum

Black Beauty: The Autobiography of a Horse, Anna Sewell

The Adventures of Pinocchio, Carlo Collodi




I’ve been writing articles* and doing talks about the survival of Modern Portfolio Theory so I was pleased to read Professor Ibbotson’s comment in Investment Advisor.


“While many investors and advisors believe that asset allocation and diversification failed during the markets and economic crisis of 2008-2009, Roger Ibbotson begs to differ… Ibbotson said that in ‘newspaper-speak, the short answer is yes.’ Ibbotson noted that in 2008, about 25% of U.S. listed stock lost at least 75% of their value, ‘but only four of the more than 6,600 unlevered open-end mutual funds available for sale lost more than 75% in 2008 – so diversification does work!’”


*If you’d like a copy of “Maybe MPT Isn’t Dead”, let me know (




It may be hard to believe but I was not among the 100 top football recruits in my senior year of high school. But I’ve just learned that of the 2005 top high school recruits only 16% were later drafted by the NFL. Not only that, the average NFL salary in the NFL is only $1.1 million compared to $5.3 for the NBA. I feel better.




I realized it’s been awhile since I shared some “words of the day,” so here are a few of my recent favorites.

  • Nidifugous; nye-DIFF-yuh-gus: leaving the nest soon after hatching.
  • Callithump; KAL-uh-thump : a noisy boisterous band or parade.
  • Sisyphean; sis-ee-FEE-uhn; endlessly laborious and fruitless.
  • And, just in case you’re dying to tell me that I goofed in my introduction by using bimonthly to represent every two months instead of twice a month, surprise (at least it was to me). Bimonthly means both.



1. Happening every two months.

2. Happening twice a month; semimonthly.


Seems strange to me but that’s what the dictionaries say.


Feel smarter now? If you like this sort of stuff, check out “A Word a Day” at Wordsmith ( and


M-W's Word of the Day (




I received an email the other day with the above headline in the “Subject” line. I thought I remembered the paper and looked in my research file and sure enough, there it was – “How Active Is Your Fund Manager? A New Measure that Predicts Performance,” 1/15/2007. The paper’s abstract said “We also find that active management predicts fund performance: the funds with the highest active share significantly outperform their benchmark indexes both before and after expenses…” Well, I figured it’s been over three years since the study was published so why not take a look. As I was limited to the few specific names in the 56 page report (mostly chock full of statistical tables based on active quintiles; i.e., funds lumped together) I selected the two specific very active managers referenced in the report. The results (below) were interesting.





$300 million for a 15 year lease on an 89,000 square foot space on Fifth Avenue (a record) for the Japanese clothier Uniqlo. I just looked at their website assuming they had to be selling zillion dollar garments. Instead I saw women’s tailored shirt jackets for $39.50, women’s mini skirts for $19.50 and men’s jeans for $29.50. Out of 2,033 items, the most expensive was $189.50. How do they do it?




Nearly ½ of teenage girls polled admit they are likely to speed more than 10 mph over the limit versus only 36% of boys. It must be true; I read it in the Journal.




RegisteredRep magazine published a list of the 2010 Worst Managed University Endowments. The Ivy League didn’t fare so well. The list was headed by Harvard immediately followed by Yale. Brown was 4th and my Alma Mater, Cornell, was 7th. The three best were, in order, Washington State, Virginia Tech and the University of Utah.




From the Journal of Financial Planning:

  • 54% of Americans do not have a retirement plan; they do not know how much income they will need or where the money will be coming from. - Depressing
  • 10,000 – The number of baby boomers becoming eligible for Medicare and Social Security each day for the next two decades. – Amazing
  • $13,700 – The average cost of family healthcare coverage per year for a small firm – Depressing
  • 1.86% - The median annual return increase for employees who use the 401(k) financial guidelines offered by their advisor above those who don’t. – Cool; professional advice helps.



OK, I can’t resist. I’m going to wrap up with a bit of bragging. Investment Advisor just published “Thirty for Thirty”, its list of the 30 most influential individuals in and around the planning profession over the last three decades. The 30 names included John Bogel, Steve Jobs, Chuck Schwab, Alan Greenspan, Ronald Regan, Franklin Roosevelt, AND Deena Katz and Harold Evensky. See why I couldn’t resist?




I hope you’ve enjoyed this issue; I enjoyed putting it together. As always, if you’re short of night time reading, you can find prior issues on our web site at and if you know someone who would like to be added to our NewsLetter email list drop a note to or have them sign up at Finally, if you have items that you think might be appropriate for the next (or any) issue, please send it to me at


Cordially yours,

Harold Evensky, CFP®, AIF®


(c) Evensky & Katz









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