University at Buffalo Webinar - DIY Wealth Book with Ripsaw Wealth Tools

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 excessive 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. Investment portfolios
have a lot of moving parts with multiple risk dimensions. In this
presentation, I will take you through a disciplined investment
process for wealth portfolio construction, monitoring and
revision involving many accounts and many investments with
overlapping risk dimensions.
Copyright © 2020 Stanley J. Kon. All rights reserved.
Presentation Description

• My Three Careers in Theory and Practice:
• Professor of Finance (25 years)
• Institutional Investment Management (15 years)
• Retirement (6 years)
• Motivation: provide my non-finance career children, family and
friends with concepts and tools to manage their investments
throughout their lifetime, especially when I am gone.

• 30-Something Dual Career Family with 2 Children
• At Least 11 Accounts Plus a House and Mortgage:
• 401K (2)
• Rollover IRA (2)
• 529 Plan (2) and Custodial Accounts (2)
• Joint Brokerage Account
• Joint Checking Account
• Joint Savings Account

• 401K Issues
• Limited Investment Choices
• Overlapping Multiple Risk Exposures
• High Expense Ratio Funds
• Administrative Expenses
• Difficulties in Rollover to an IRA

• Book is for Concepts, but Tools have to be Time Sensitive
and User Friendly (See ripsawwealth.com or ripsaw.co).
• Step 1: Auto-Updated Balance Sheet on Sign-In
• Step 2: Auto-Updated Descriptive, Qualitative and
Quantitative Information on Each Asset and Liability to be
Aggregated into the Wealth Portfolio Dashboard with a Set
of Gauges
• Step 3: Current Market Information Dashboard
• Step 4: Revision Mode: Evaluate “What IF” Investment
Changes Relative to Your Current Portfolio and Benchmark

Part I: Quick Start
1.No-Brainers
2.Who Are You?
3.Investment Opportunities
4.Wealth Portfolio Analysis: A Case Study
5.Portfolio Monitoring and Revisions
Part II: Financial Decisions
6. Investment Discipline
7. Debt and Liquidity: The Good, The Bad, and The Ugly
8. Insurance: The Under and Over
9. Retirement: Planning It and Living It
Part III: Investment Strategies and Evaluation
10. Valuation and Market Information
11. Evaluation of Risk
12. Asset Allocation: Strategic, Tactical and Dynamic
13. Downside Risk Management
14. Risk Management and Performance Attribution
Part IV: Life, Liberty and the Pursuit of Happiness

• IMPORTANT CONCEPTS:
• Opportunity Cost/Savings (i.e., Competitive Forces in a Low
Interest Rate Environment are Reducing Fees: Disruption)
• Most Investment Products can NOT Offer You More Than the
Market Already Does, But After Fees can be Much Less (i.e.,
DIY Annuities)
• Unbundle and Manage Risks (i.e., Bond Market has Interest
Rate, Default and Prepayment Risks)
• Investment Discipline (i.e, Fiduciary/Performance Benchmark)
• Downside Risk Management (i.e., Lock-In a Standard of Living)

• NO-BRAINERS
• Maximize Tax-Deferred Retirement Contributions
• Rollover a Company Tax-deferred Plan to a Traditional IRA at Every
Opportunity
• Lower Overall Taxes by Allocating Higher Dividend Yield Stocks and Bond
Investments to Tax-deferred Accounts
• Reduce Costs with No-Load, Low Expense Ratio Funds and Avoid
Unnecessary Advisor and Administrative Fees
• Avoid Target Date Funds
• Avoid Annuities
• Never Buy Whole Life Insurance

• Wealth Management Involves All Assets and Liabilities in
Unique Family Circumstances Including:
• Primary Home, Vacation Home, Investment Properties
• Mortgage, Auto, Student, Business and Unsecured Loans
• Wage Income, Business Income, Private Investments
• Vested, Unvested and Restricted Stock and Options
• Investment Horizon for Me and My family

• Wealth Portfolio Analysis: A Case Study on June 30, 2016
• Eleanor Recently Sold Her Business
• Current Income is in the 20% Marginal Income Tax Bracket
• Single Mom (57), 2 Children with 529 Plans
• Homeowner and a Retirement Plan in 5-8 Years
• Advisor Accounts with 1.15% AUM Fee Structure
• Traditional IRA: $677,502.39
• Investment Account: $205,158.37

• Notes From Statements:
• $10,150/Year Advisor Fee Opportunity Cost: Save and Invest.
• No. of Funds in IRA (35) and Brokerage (16). Unnecessary Complexity?
• No Indication of Fund Expense Ratios. Transparency?
• Is 75% Stocks in Managed Accounts Appropriate?
• High Yield Bonds Overstate Expected Yields and are Highly Correlated
with Stocks.
• Why are Municipal Bond Funds in the Portfolio?
• Eleanor’s Marginal Tax Rate is 20%, Not 39.6%
• Losing Money: SEC Yield is 1.17% < [1.15% Fee + .44% Exp Ratio]

• Notes From Statements (Continued)
• Losing Money on Cash in All Funds
• 3 Mo. T-Bill Rate is 0.26% < [1.15% Fee + Exp Ratio]
• Why Pay an Advisor to Manage Your Cash?
• Investments Among Accounts are Not Tax Efficient.
• Significant Managerial Risk in Fund Investments and Advisor.
• Company Tax-Deferred Account is All in a Balanced Fund.
• Not Balanced: 85% Stock, BB Bond Average
• 1.14% Expense Ratio plus a 0.72% Net Asset Fee

• ESTABLISH A BENCHMARK (Investment Discipline)
• Step 1: Define a Low Cost, Well-Diversified, Investable Set
of Market Proxies for Cash, Bond and Stock Benchmark
Portfolios
• Step 2: Define a Strategic Asset Allocation by Selecting
the Percentage Invested in the Cash, Bond and Stock
Benchmark Portfolios Consistent with Investor Objectives
(i.e., Risk Tolerance)

57.18

(June 30, 2016)

Balance Sheet Net Worth:
(Book Value)
Dashboard
What Is
Causing The
Discrepancy?

OVER UNDER
UNDER OVER

• 3-Part Analysis:
• Mortgage Decision
• Company IRA Revision
• Evaluating and Revising Managed Investments

• Mortgage Decision
• Original 15YR $554,000 Loan @ 5.375% Fixed Rate
• $349,708.23 Remaining Balance after 7 Years
• Current Market Refinance Rate for Remaining 8 Years is 3.5%
• PV of the Rate Difference (1.875%) is $25,764.04
• Earning 0.05% in Savings Account on $465,911.50
• Prepay Mortgage from Savings Account
• Increase Wealth Portfolio by $25,764.04
• Increase Wealth Portfolio Yield by $20,025.55
• Take Out a Home Equity Line of Credit for Liquidity

Mortgage Pay Down Decision (No Brainer?)
Mortgage Payoff

OVER
UNDER

Company IRA Decision: Reduce Expense Ratio from
1.14% to 0.57% with only available index strategy

Not BalancedExcess Cash
OVEROVER UNDER

Eleanor’s IRA
79% Stock Allocation
Expense Ratios > 1
Fund Cash Allocation > 20%
High Account Expenses

Eleanor’s Brokerage Account
High Account Expenses

• Asset Allocation Decisions:
• Step 1: Liquidate Current IRA and Brokerage Accounts
and Move Cash to Vanguard Rollover IRA and Brokerage
Accounts, Respectively.
• Step 2: Eleanor’s Benchmark Cash Allocation is near
$40,000 and She Only Requires $20,000 in Ready Cash.
Move $103,000 from Savings Account to Vanguard
Brokerage Account.
• Step 3: Investment Portfolio Revisions.

Step 1 & 2: Liquidate Managed Portfolios and Move Cash

• Step 3: Criteria to Build an Efficient Portfolio
• Use Low Cost Index Funds for Specific Factor Exposures with
Diversification and No Manager Risk. Preference for ETFs Over
Mutual Funds
• Allocate Higher Dividend Yield Stocks and Bonds to Tax-Deferred
Accounts
• In an Extremely Low Interest Rate Environment, Emphasize Short to
Intermediate Term Bonds
• Stay Up-In-Quality (Investment Grade) Corporate Bonds: Insufficient
High-Yield Default Risk Premium and Correlation with Stock Market
• Add Mortgage-Backed Securities for Diversification and
Compensation

Vanguard Brokerage Account
Investment Choices: Market Diversification and Tax Efficient in 2 Accounts
with 6 Transparent Funds
Vanguard Rollover IRA Account

Initial Asset Allocation: 60% Bond/40% Stock in IRA

Initial Asset Allocation: Investment Portfolio Dashboard
STOCK PORTFOLIO WEIGHT IS OK, BUT IT’S COMPOSITION IS NOT!
UNDER UNDER OVEROVER

Initial Asset Allocation: Investment Portfolio Dashboard
UP IN
CREDIT
QUALITY

Preferred Asset Allocation and Stock Portfolio Composition
+ 2.5% - 6% + 1.75%
+ 4.5% - 2%- 2.5%

Preferred Asset Allocation and Stock Portfolio Composition
STOCK PORTFOLIO WEIGHT AND IT’S COMPOSITION ARE GOOD!

Preferred Bond Portfolio Composition
UNDERWEIGHT
BBB IS AN UP
IN CREDIT
QUALITY
TACTICAL
DECISION

Eleanor’s Preferred Wealth Portfolio
• Wealth Portfolio Meets Eleanor’s Investment Objectives (Risk Tolerance and
Cash Flow)
• Significantly Less Bond Default and Interest Rate Risks
• Eliminated Losers: Municipals and Funds with Excess Cash
• Stock and Bond Portfolios Obtain Risk Exposure and Diversification Objectives

Eleanor’s Preferred Wealth Portfolio
• Yield Up $24,060 + Expenses Down $13,639 = $37,699 Gain
• Improved After-Tax Returns with IRA versus Brokerage Allocation
• Eliminated Advisor and Fund Managerial Risk and Replaced with Full
Transparency
• Monitoring and Revision are Ongoing

Portfolio Monitoring and Revision Process
✓ Review investment objectives. What are your relevant life changes that may affect your risk tolerance, health,
income, family goals and obligations?
✓ Adjust your benchmark strategic asset allocation accordingly.
✓ Review the market environment. How has it changed? Start with the Treasury yield curve. What are the risks and
compensation available in the major sectors of the bond and stock markets? Any change in your real assets, loans
and private business opportunities?
✓ Compare your current wealth portfolio allocation to your benchmark and consider revision alternatives that are
consistent with your objectives and the current market environment. Review overall and detailed allocations:
✓ Stock, Bond, Cash and Real Asset Allocation
✓ Stock Portfolio Composition
✓ US, Non-Us, and Emerging Markets (diversification)
✓ Large, Mid and Small Capitalization (factor tilt or not)
✓ Value, Blend and Growth (factor tilt or not)
✓ Stock Sector Distribution (diversification)
✓ Bond Portfolio Composition
✓ US, Non-US and Emerging Markets (diversification)
✓ Rating Distribution (default risk)
✓ Maturity Distribution (interest rate risk)
✓ Bond Sector Distribution (diversification)
✓ Implement revisions.

Component Replication of the Investment Grade Bond Market
(BND Benchmark)
Prepayment Risk Credit (Default) Risk
Interest Rate Risk
In All, But Managed
With Treasuries

Replication of Credit, Interest Rate and Sector Risks
OVER OVER

Bond Portfolio with Corporate and MBS Over-Weights
10% Over Weights

OVEROVER
OVEROVER
UNDER
UNDER
CREDIT (DEFAULT) RISK
SECTOR RISK

OVERUNDERUNDER
HOW IS INTEREST RATE RISK UNCHANGED ?

Three Fund Replication of the Total U.S. Stock Market
(VTI Benchmark)

Small Capitalization Stock Tilt in US Stock Market
+12% in Small Cap -10% in Large Cap -2% in Mid Cap
UNDER OVER

Do-It-Yourself Wealth Management
book available on amazon.com

University at Buffalo Webinar - DIY Wealth Book with Ripsaw Wealth Tools

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