Capital Gains

Thanks to You, You're Making a Difference

admin — Mon, 30 Jun 2008 20:00:00 GMT

By Kennon Grose

I would like to offer my personal thanks to those of you who have become AssetBuilder clients during the past year. We reached our first anniversary at the end of May, and our growth has been nothing short of phenomenal. Thanks to you and your referrals, we have attracted more than 300 clients across 24 states, representing $124 million in invested assets. We are currently adding more than one new client every day.

What’s our secret? YOU, of course.

If you’re like most AssetBuilder clients, you came to us because you were tired of doing business with Wall Street brokers, their high-risk stock pickers and overpriced middlemen. You told us you wanted a simpler way to invest – an alternative. And we listened.

We stripped out the unnecessary costs and risks and built an investment firm that puts you first. We offered a science-based system of diversified index investing designed to capitalize on the market’s long-term growth, rather than playing stock-picking games. We cleared away Wall Street’s smoke and mirrors in favor of an open and honest relationship with our clients – one that respects your intelligence.

And we achieved this with a very low fee structure. In fact, our business model has our professional fees positioned at half the published industry average of one percent.

Together, we are on a journey – a mission to challenge Wall Street’s entrenched system of unnecessary costs, risks and complexity. We’re well on our way.

Word is certainly spreading. AssetBuilder’s Web site – a wealth of valuable information and a repository for Scott’s writings – is averaging more than 1,600 visitors per day. Propelling us well ahead of our competitors.

Scott is continuing his focus on writing, investor education and the research necessary to be our Chief Investment Strategist. Scott will be a busy person while promoting his new book, Spend ‘Til the End, which hit the shelves on June 10. In May and June alone, Scott has appeared on 19 radio broadcasts from coast to coast. In media markets such as New York, Los Angeles, Chicago, Boston, Denver and Seattle.

Thank you again for making all of this possible, through your confidence in us, your loyalty and your referrals. Empowered by your trust, AssetBuilder will continue this journey to make our clients’ investing simple – and their futures smart.

This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing

Dear Valued Customer

admin — Sat, 21 Jun 2008 20:00:00 GMT

By Kennon Grose

We’re sure it isn’t news to you that we’re in a global financial crisis. What we’d like to do is distill some signal out of all the noise.

One thing is very clear: The current global decline is major. It will rank among the very worst. Today, it still isn’t as bad as 1973–1974 or 2000–2002, but it could be before it is over. We simply don’t know. But after talking with clients, we thought we could offer some useful observations.

The first is that we are in this with you. Most of my personal wealth is invested in the markets through the same investment strategies we employ at AssetBuilder. Ditto Scott. We understand the discomfort you are feeling as markets react to one headline after another. We deeply appreciate the confidence you have expressed in AssetBuilder by making us your investment advisor.

The second is that we’re in a period of extreme behavior. Jim Cramer says, “Sell stocks if you need the money within the next 5 years”. At the other extreme the Oracle of Omaha, Warren Buffett, has been committing billions with recent investments in GE, Goldman Sachs, Constellation Energy and others.

Our investment strategy is closer to Buffett than Cramer. We call our strategy “Main Street vs. Wall Street.” We believe investing is a process–over–time, not a decision for a moment–in–time. Like Buffett, we believe the best holding period is “forever.” Because of that, our investment strategy is based on efficient asset class index funds, high diversification, and a tilt toward value stocks and small cap stocks. We take as little risk as possible in the fixed income markets, saving our risk budget for the higher long term payoff of equities. Our shorter term fixed income positions mean you have more low risk access to cash than you would have in portfolios that take longer term fixed income positions.

A third observation is that this market is not unique. We have had periods of excessive credit before this. Recall Michael Milken and the junk bond era. Recall risky lending to REITs in the late 70s. Recall the S&L lending binge of the early 80s.

Like today’s market, what they all share is a sense of doom.

So let’s ask a crucial question. Could you have escaped the misery with clever selling? Answer: Not likely. Good market timing requires two near–perfect decisions. One is when to sell. The other is when to buy. In our experience, the few that get the first decision right never make it to the second decision and miss the recovery.

The risk of not doing so is highlighted in the tables below. They show the growth of a dollar’s investment from January 1980 through August 2008 for four broad indices. You would have realized about half the value if you missed the six best individual months in that period. Keep in mind, six months represents 1.8 percent of the period we are looking at.

1/1980 — 8/2008	Growth of $1 (all months)	Growth of $1 (without best 6 months)
S&P 500 TR	27.11	15.44
MSCI EAFE TR	20.34	11.51
Russell 2000 Val TR	41.42	22.04
DJ Wilshire REIT TR	30.28	16.00

Significant market uncertainty has put “risk” in a personal context … one that every investor has taken measure of. Please review my Capital Gains article on the website; “How to Survive the Market Ride?”

I hope this perspective on the current situation is helpful, but please contact us if you would like additional help. We are here for you!

Kennon S. Grose
President and CEO

Case for Commodities

admin — Fri, 23 May 2008 18:00:00 GMT

By Kennon Grose

In December of 2007, we launched a change in our model portfolios which included a commodity asset class. We use the model portfolios as a way to meet our client’s investment goals for risk, expected return and investment horizon.

The following contributed to our decision making and model changes;

Dimensional closed two funds (DFSVX – small cap value fund, DFSCX – micro cap fund).
We were intrigued by the diversification and reductions in volatility commodities offer the model portfolios.
Annually we review our model portfolios.

We published our thoughts in the article post – Changes in 2008(http://assetbuilder.com/blogs/capital_gains/archive/2008
/01/09/changes-in-2008.aspx).

Our decision has landed us in the middle of the pro vs. con battle for using commodities as an asset class. We have already had to ban a known competitor for multiple username registrations and attacking other members on our website.

In many ways, this reminds me of the battle between MS Word and WordPerfect. We can never explain/tell to the satisfaction of someone’s personal bent. It is like trying to explain the merits of MS Word vs. WordPerfect.

The value proposition for commodities;

Commodities tend to be negatively correlated against stocks and bonds.
Based on the study by Gorton and Rouwenhorst there is a definable risk premium benefit. (http://ssrn.com/abstract=560042)
Risk (defined by standard deviation) is similar to that of large cap US stocks.

Risk Premium of Commodity Futures, Stocks and Bonds

Annualized Monthly Returns 1959/7 – 2004/12

	Commodity Futures	Stocks	Bonds
Average	5.23	5.65	2.22
Standard Deviation	12.10	14.85	8.47
t-statistic	2.92	2.57	1.77
Sharpe ratio	0.43	0.38	0.26
% returns > 0	55	57	54

t-statistic — is the confidence that can be placed in judgments made from data samples.

Sharpe ratio — is the measure of return per unit of risk; used to measure the efficiency of a portfolios return.

The entire debate around commodities can be summed up in one statement; “Is there a risk premium benefit?” Risk premium is the reward – additional return – for holding a risky investment rather than a risk-free one. The Pro side believes there “is” and the Con side believes there “is not”.

We are taking a middle of the road approach in this argument, which says; Commodities do not offer a consistent risk premium. The uncontroverted fact is that commodities reduce the risk (volatility) in a portfolio. The problem is without adjustment in the portfolio to accommodate the inconsistent risk premium; the expected return is also affected. Therefore, if there is no risk premium, the expected return of the portfolio will trend down. If there is a risk premium, the expected return of the portfolio will trend up.

Hopefully keeping this at an understandable level – we then dial the expected risk (volatility) up to compensate for the thought that commodities might not have a risk premium. However, now some would say we are trying to “cherry pick” our historical returns because when there is a risk premium, the historical returns look spectacular.

Some would say, “Why even bother if you believe the risk premium is inconsistent?” One other interesting characteristic of commodities is they tend to move in the opposite direction of stocks and bonds. This goes to our thought introduced in Changes in 2008. We want to inoculate our investment strategy with a “tilt” that assumes future inflation.

One additional thought that leads us to believe there might be a risk premium for commodities is the supply side problem. Commodities can’t be mined, grown or drilled quickly to offset the increasing demand.

Once you get over the hurdle of including commodities as an asset class – picking an index is the next challenge. Without driving through the wandering road of all the decisions, we selected the Duetsche Bank Liquid Commodity Index – Optimal Yield. We liked the idea of the mathematical process behind trading the contracts and the limited focus on six commodities.

1/1991 – 12/2007	N Periods	Geometric Mean (%)	Arithmetic Mean (%)	Standard Deviation (%)	Sharpe Ratio
GS Commodity TR	204	6.80	8.66	20.42	0.424
DJ-AIG Commodity TR	204	7.91	8.71	13.27	0.657
S&P Commodity TR	204	5.68	6.70	14.87	0.451
Morningstar Long/Short Commodity TR	204	10.97	11.48	10.68	1.074
Morningstar Long-Only Commodity TR	204	10.76	11.71	14.73	0.795
DB Liquid Commodity Index – Optimum Yield	204	13.25	14.41	16.51	0.873

This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Couch Potato Cook Book

admin — Mon, 21 Apr 2008 20:00:00 GMT

By Kennon Grose

Couch potato investing started in 1987 when Scott wanted to create the idea of an "all weather portfolio" – a portfolio that would be less vulnerable to declines. The All Weather Portfolio morphed into the Couch Potato Portfolios.

As soon as a column on "the Couch Potato Portfolio" appeared, readers called and wrote. "OK", they seemed to be saying, "I’ve done my part. I hit the Mute button. Now will you tell me EXACTLY how to do this?"

In case you missed it, if you had divided your money in half and invested one portion in the Standard and Poors’ 500 Index and the other portion in the Shearson/Lehman Intermediate Bond Index, you would have done very well.

As of Mar 2008:	Last 3 Months (period) Return	Last 1 Year (annual) Return	Last 3 Years (annual) Return	Last 5 Years (annual) Return	Y-T-D (period) Return	Since 1/1/1987 (annual) Return	Since 1/1/1987 Standard Deviation
S&P 500 TR	(9.45)	(5.08)	5.85	11.32	(9.45)	10.83	16.37
LB U.S. IT Gvt TR	4.54	12.01	6.41	4.34	4.54	6.73	3.44
Original Couch Potato	(2.45)	3.39	6.29	8.03	(2.45)	9.10	8.28

The Couch Potato investment strategy is based on three basic concepts;

Control the cost – settled on Vanguard as the lowest cost index fund choice.
Use index funds versus managed funds – index funds will usually outperform actively managed funds.
Use simple diversification techniques – use index funds that provide access to US, international and emerging markets.

"Home Cooking"

Scott published his Couch Potato Portfolios years ago and they have stood the test of time – especially against the many investment options supported by Wall Street. However, since we started AssetBuilder, we have seen many variants of the Couch Potato investment philosophy that have been "good cooking". Therefore, if you choose the do-it-yourself route, don’t be afraid to experiment. The only caveat is the original three basic concepts.

The Couch Potato Portfolios

The directions for all of the following Couch Potato Portfolios is the same. Select the Couch Potato Portfolio of choice. Then add the funds in equal parts to the portfolio. The result of this simple recipe is the Couch Potato investment strategy of choice.

Couch Potato

1/2 – Vanguard Inflation-Protected Securities (VIPSX)
1/2 – Vanguard Total Stock Mkt Idx (VTSMX)

Margarita

1/3 – Vanguard Inflation-Protected Securities (VIPSX)
1/3 – Vanguard Total Stock Mkt Idx (VTSMX)
1/3 – Vanguard Total Intl Stock Index (VGTSX)

Four Square

1/4 – Vanguard Inflation-Protected Securities (VIPSX)
1/4 – Vanguard Total Stock Mkt Idx (VTSMX)
1/4 – Vanguard Total Intl Stock Index (VGTSX)
1/4 – American Century International Bond (BEGBX)

Five Fold

1/5 – Vanguard Inflation-Protected Securities (VIPSX)
1/5 – Vanguard Total Stock Mkt Idx (VTSMX)
1/5 – Vanguard Total Intl Stock Index (VGTSX)
1/5 – American Century International Bond (BEGBX)
1/5 – Vanguard REIT Index (VGSIX)

Six Ways from Sunday

1/6 – Vanguard Inflation-Protected Securities (VIPSX)
1/6 – Vanguard Total Stock Mkt Idx (VTSMX)
1/6 – Vanguard Total Intl Stock Index (VGTSX)
1/6 – American Century International Bond (BEGBX)
1/6 – Vanguard REIT Index (VGSIX)
1/6 – Vanguard Energy (VGENX)

Seven Value

1/7 – Vanguard Inflation-Protected Securities (VIPSX)
1/7 – Vanguard Total Stock Mkt Idx (VTSMX)
1/7 – Vanguard Total Intl Stock Index (VGTSX)
1/7 – American Century International Bond (BEGBX)
1/7 – Vanguard REIT Index (VGSIX)
1/7 – Vanguard Energy (VGENX)
1/7 – Vanguard Value Index (VIVAX)

Seven Value 2

1/8 – Vanguard Inflation-Protected Securities (VIPSX)
1/8 – Vanguard Total Stock Mkt Idx (VTSMX)
1/8 – Vanguard Total Intl Stock Index (VGTSX)
1/8 – American Century International Bond (BEGBX)
1/8 – Vanguard REIT Index (VGSIX)
1/8 – Vanguard Energy (VGENX)
1/8 – Vanguard Value Index (VIVAX)
1/8 – Vanguard Small Cap Value Index (VISVX)

Nine Emerging

1/9 – Vanguard Inflation-Protected Securities (VIPSX)
1/9 – Vanguard Total Stock Mkt Idx (VTSMX)
1/9 – Vanguard Total Intl Stock Index (VGTSX)
1/9 – American Century International Bond (BEGBX)
1/9 – Vanguard REIT Index (VGSIX)
1/9 – Vanguard Energy (VGENX)
1/9 – Vanguard Value Index (VIVAX)
1/9 – Vanguard Small Cap Value Index (VISVX)
1/9 – Vanguard Emerging Mkts Stock (VEIEX)

10 Speed

1/10 – Vanguard Inflation-Protected Securities (VIPSX)
1/10 – Vanguard Total Stock Mkt Idx (VTSMX)
1/10 – Vanguard Total Intl Stock Index (VGTSX)
1/10 – American Century International Bond (BEGBX)
1/10 – Vanguard REIT Index (VGSIX)
1/10 – Vanguard Energy (VGENX)
1/10 – Vanguard Value Index (VIVAX)
1/10 – Vanguard Small Cap Value Index (VISVX)
1/10 – Vanguard Emerging Mkts Stock (VEIEX)
1/10 – Vanguard International Value (VTRIX)

As of Mar 2008:	Last 3 Months (period) Return	Last 1 Year (annual) Return	Last 3 Years (annual) Return	Last 5 Years (annual) Return	Y-T-D (period) Return	Since 7/1/2000 (annual) Return	Since 7/1/2000 Standard Deviation
Vanguard Inflation-Protected Secs	5.31	14.78	6.71	6.65	5.31	8.50	6.06
Vanguard Total Stock Mkt Idx	(9.50)	(5.79)	6.19	12.27	(9.50)	1.18	14.38
Vanguard Total Intl Stock Index	(8.90)	1.34	15.52	23.18	(8.90)	5.91	15.82
American Century International Bd Inv	9.30	18.91	7.12	9.18	9.30	9.29	9.47
Vanguard REIT Index	2.12	(17.48)	11.64	17.76	2.12	15.09	17.72
Vanguard Energy	(5.75)	25.31	24.97	32.25	(5.75)	21.46	23.77
Vanguard Value Index	(9.02)	(9.75)	6.15	13.98	(9.02)	4.44	14.56
Vanguard Small Cap Value Index	(6.52)	(14.84)	4.37	15.14	(6.52)	10.09	18.36
Vanguard Emerging Mkts Stock Idx	(10.48)	21.69	27.95	34.96	(10.48)	15.37	25.05
Vanguard International Value	(8.29)	0.07	15.45	23.86	(8.29)	7.99	16.24
Couch Potato	(1.68)	5.08	6.90	9.65	(1.68)	5.27	6.68
Margarita	(4.07)	4.03	9.97	14.16	(4.07)	5.77	9.12
Four Square	(0.57)	8.07	9.47	13.01	(0.57)	6.84	7.48
Five Fold	(0.10)	2.46	10.08	14.07	(0.10)	8.65	8.07
Six Ways from Sunday	(1.14)	5.99	12.62	17.14	(1.14)	10.84	9.31
Seven Value	(2.17)	3.81	11.76	16.72	(2.17)	10.00	9.64
Seven Value 2	(2.64)	1.47	10.88	16.55	(2.64)	10.12	10.36
Nine Emerging	(3.64)	3.76	12.80	18.58	(3.64)	10.82	11.53
10 Speed	(4.10)	3.43	13.11	19.12	(4.10)	10.59	11.85

This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

The Performance Table above is representative of a compilation of the selected funds to achieve a probabilistic return for a measured level of risk. The portfolio was assumed to have been rebalanced every year on March 1. The returns are net of selected fund fees, but don’t include deduction of Advisory Service fees.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing

Easy Chair – Beyond the Couch

admin — Sun, 17 Feb 2008 16:00:00 GMT

by Kennon Grose

Chief Investment Strategist

Before I expand on the evolution of AssetBuilder, let me tell you about our Chief Investment Strategist – Scott Burns. Scott is an amazing person of knowledge and experience. He has been investing, researching and writing for 40 years. His first book on personal finance and investing was published in 1972. His most recent book was published by MIT Press in 2004 and was endorsed by 4 Nobel laureates. In fact, he has been dealing with personal finance and investing longer than many advisors have been alive.

Many of you also know Scott because you have been reading him all these many years. Scott has a unique gift in his ability to give time-stressed readers what they wanted – easy to read stories that didn’t sacrifice depth, context and meaning. You also know him from a personal perspective because he has shared many personal trials and tribulations through the years.

Couch Potato Investing

Couch potato investing started in 1987 when Scott wanted to create the idea of an “all weather portfolio” – a portfolio that would be less vulnerable to declines. The All Weather Portfolio morphed into the Couch Potato Portfolios. The basic drivers were (1) low cost index funds, (2) “naïve” asset allocation, and (3) smart indexing ala Fama/French.

Scott hoped the portfolios would be easy enough to implement that virtually anyone could do it on their own. In a recent article Scott outlines the results of the Couch Potato Portfolios.

The Birth of AssetBuilder

Scott and I share a mission – “Help the weary investor who has been taken advantage of by the legacy financial system”. We spend a considerable amount of time and effort constructing our portfolios to embody our investment strategy, which is also our vision – “Simple Investing, Smart Future”. The foundation started by putting into practice the basic investment principles Scott has been evangelizing since 1988 – low cost, index vs. managed funds, and diversification.

We provide value by constructing portfolios designed to provide the highest return given a measured level of risk. That doesn’t mean we are the only shop to give risk serious attention. It just means that most of the portfolios we see are poorly designed from a risk management perspective. We use a technique called mean variance optimization, which won its creator, Harry Markowitz, a Nobel Prize in 1990. If you want to understand your investment risk, use our portfolio review.

The reason we have such confidence in our models is we didn’t just optimize funds; we optimized the Fama/French research indexes. These research indexes provide us data we could make clear analytical decisions with – not influenced by anomalies; (REITs), survivor bias, etc… We then replaced funds with the indexes we optimized. Tweaked the models again with the actual funds, but were able to have the more complete historical impact beyond the length of the actual funds.

DFA funds are superior to Vanguard funds when you want the best vehicles to pursue the return benefits of small cap investing or value investing because they follow the Fama/French research rigorously. The Vanguard funds primarily follow market capitalization. Follow this link for a return benefit comparison.

We employ a disciplined investment strategy that is a process over time, not a decision for a moment in time. While many people “get it” when it comes to index investing, there are dozens of ways they could miss the boat for putting it to work. We put the idea to work. We make it happen. We take responsibility for all the details. Equally important, we know it will cost far less than the legacy financial system.

Our Business Model

There is the “do-it-yourself” decision versus the “let-the-staff-do-it” decision. Many people choose to manage their own portfolios simply because they don’t want to give up 100 to 200 basis points of annual return to traditional management firms. We think that’s a very reasonable choice. Scott has written about expense reduction for decades – it is the SINGLE most direct act we can take to increase our investment returns. We’ve built our business model with the goal of lowering the cost enough that the ONLY reason you would wander the do-it-yourself path was that you needed a time-consuming hobby. With a fee schedule that ranges from 50 basis points down to 25 basis points, this is half the average Registered Investment Advisor fee schedule of 100 basis points (1%).

Our business model has many in the industry calling us the “low-cost provider”. However, we view ourselves as customer advocates for your financial future. We believe it is possible to declare independence from the expensive legacy financial system, to embrace the idea of indexing, and to make a decision to have someone do it for you at a very reasonable cost. We’re that someone.

As a registered investment advisor we have a fiduciary standard of care for clients, placing their interests first. The standard of care we provide our clients is outlined in our Code of Ethics.

The typical payment scheme in the legacy financial system is based on commission. Commissions foster an “eat what you kill mentality” and is not customer friendly.

Unlike the legacy financial system, everyone at AssetBuilder is an owner in the company and no one is on commission. This makes all employees task and service oriented. We don’t see our customers as the basis for making our fortunes. We see our customers as a way for us to be useful human beings, and that’s a great satisfaction.

Impacting the Legacy Financial System

AssetBuilder is gaining traction. While we may be a start-up company we have very strong institutional connections. Schwab is the custodian for all assets and we are using Dimensional Fund Advisors for funds. With Schwab, our customers have access to all the tools and conveniences offered by Schwab. We think this is a very nice mix of brick and mortar offices and electronic convenience.

Thanks to you, our web exposure has also grown very rapidly. Six months ago our www.alexa.com rating was over 500,000. As of last week we are at 251,240. This is leagues ahead of similar registered investment advisors. We are also in the ballpark with the institutions of the legacy financial system.

Our low pricing dictates we have a lot of assets under management. We have already grown larger than the average registered investment advisor. The key is using the internet as a way to gain customers who are interested in our common sense approach to investing.

This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Changes in 2008

admin — Wed, 09 Jan 2008 19:40:00 GMT

by Kennon Grose

The AssetBuilder investment strategy is represented by our nine Model Portfolios. We match client investment goals for risk, expected return and investment horizon with these portfolios.

We are not market timers. We believe deeply in our index investing strategy. However, we want to inoculate our investment strategy with a “tilt” that assumes future inflation. The inflation tilt we are going to give our Model Portfolios is a weighting in commodities. This will add an additional asset class to our already highly diversified Model Portfolios.

In a recent article (http://assetbuilder.com/blogs/scott_burns/archive/2007/12/14/the-art-and-benefit-of-the-steady-eddy-portfolio.aspx), Scott outlined some of our thoughts about the value of commodities in an investment strategy. We have been intrigued by the increased diversification. More important, we like the reduction in volatility commodities offer the Model Portfolios.

Why No Treasury Inflation Protection Securities (TIPS)

We use mean variance optimization to construct our Model Portfolios. Under the simple construction of the Couch Potato Portfolios, TIPS act as a hedge against expected future inflation. But when you are developing optimized portfolios there are good reasons to exclude TIPS.

In our optimized portfolio construction our "glue" -- the stuff that influences how we put portfolios together -- is the level of risk in any given asset class. Because of the long average maturity of the TIPS indexes (including DFA), they provide relatively little return for the amount of risk taken. The risk factor argues for short fixed income maturities, not long maturities. That’s why our portfolios tend to hold one, two and five-year fixed income funds.

Putting our fixed income dollars at that maturity level allows us to "buy" more portfolio return by holding a variety of equity asset classes that have higher standard deviations--- but disproportionately higher expected returns.

This works to benefit portfolios in rising markets. But it looks rather lame in this particular down market. Since the equity markets rise more than they fall, holding short-term fixed income so we can own more equity will continue to be a better long term strategy.

Why No Energy Sector

Energy is an equity sector. It is not an asset class. When you start making “sector bets”, over and underweighting them in a portfolio, you are stepping on a slippery slope. This action will reverse the level of engineering that went into the construction of our Model Portfolios.

Scott introduced energy in his Six Ways from Sunday couch potato portfolio as a currency and inflation hedge. Without dredging up the long history, he realizes, in order to apply the "rocket science" to the modeling process we had to engineer the portfolios with asset classes and exclude sector indexes.

Because energy has been such a hot sector recently, the Six Ways from Sunday portfolio has done very well. However, the better way to get at the advantages of energy without investing in companies is to use commodities.

Commodity as a New Asset Class

There are three major indexes which track the commodities market. The S&P Goldman Sachs commodity index (S&P GSCI), the Dow Jones-AIG commodity index (Dow Jones - AIG) and the Deutsche Bank Liquid Commodity Index (DBLCI). In our analysis, DBLCI was the most effective index. It has the following characteristics;

Comprised of six commodities: West Texas Intermediate (WTI) crude oil, heating oil, aluminum, gold, corn and wheat.
Constant weighting which reflect world production and inventory, providing a diverse and balanced commodity exposure.
A rule-based and transparent calculation methodology. Energy contracts are rolled monthly, metal and grain contracts annually.
Historically measured from December 1, 1988.

The security which tracks this benchmark is the Powershares DB Commodity Index Tracking Fund (DBC). The downside is the lack of history associated with this exchange-traded-fund -- started in March 2006. However, with the history of DBLCI, we can garner the necessary data to make prudent inclusion of the asset in the Model Portfolios.

An in-depth discussion of commodity indices can be found on the Deutsche Bank website - http://dbfunds.db.com/Pdfs/dbindexguide2007.pdf.

How Do Commodities Help our Investment Strategy/Model Portfolios?

We don’t want to time the market. We don’t want to take a “the sky is falling” approach. But our investment strategy will assume higher inflation in the future--- higher than we are living with today. Because commodity prices usually rise when inflation is accelerating, commodities offer protection from the effects of inflation.

Adding commodities--- particular DBLCI--- increased diversification. More important, it reduced volatility in the Model Portfolios.The diversification comes from another asset class. It avoids overweighting an equity sector. The reduction in portfolio volatility is the result of the low correlation of commodities to equity. Commodities tend to move in the opposite direction as equity.

New vs. Old Model Portfolios

One of the key modeling principles we apply in our portfolios is based on the incremental return benefits of small cap and value, per the Fama/French research. In 2007, the subprime shakeout negatively affected the value and REIT market, which ultimately affected our investment strategy.

New Model Portfolios

As of Dec 2007:	Last 3 Months (period) Return	Last 1 Year (annual) Return	Last 3 Years (annual) Return	Last 5 Years (annual) Return	Y-T-D (period) Return
AB Model Portfolio 06	0.42	7.24	8.40	10.42	7.24
AB Model Portfolio 07	0.08	7.80	9.70	12.50	7.80
AB Model Portfolio 08	(0.41)	8.13	10.93	14.49	8.13
AB Model Portfolio 09	(0.90)	8.50	12.20	16.58	8.50
AB Model Portfolio 10	(0.95)	9.80	13.98	19.21	9.80
AB Model Portfolio 11	(1.23)	9.81	14.50	20.13	9.81
AB Model Portfolio 12	(1.26)	11.16	16.31	22.71	11.16
AB Model Portfolio 13	(1.51)	11.23	16.87	23.59	11.23
AB Model Portfolio 14	(1.76)	11.76	17.86	25.03	11.76

Old Model Portfolios

As of Dec 2007:	Last 3 Months (period) Return	Last 1 Year (annual) Return	Last 3 Years (annual) Return	Last 5 Years (annual) Return	Y-T-D (period) Return
AB BB 06	(0.77)	5.20	7.94	10.20	5.20
AB BB 07	(1.05)	5.74	9.21	12.34	5.74
AB BB 08	(2.05)	5.22	10.13	14.10	5.22
AB BB 09	(2.87)	4.98	11.23	16.09	4.98
AB BB 10	(3.14)	5.44	12.19	17.53	5.44
AB BB 11	(3.69)	5.39	13.22	19.27	5.39
AB BB 12	(4.12)	5.65	14.24	21.11	5.65
AB BB 13	(4.43)	5.92	15.16	22.60	5.92
AB BB 14	(4.66)	6.39	16.04	24.08	6.39

Individual Security Performance

As of Dec 2007:	Last 3 Months (period) Return	Last 1 Year (annual) Return	Last 3 Years (annual) Return	Last 5 Years (annual) Return	Y-T-D (period) Return
DFA One-Year Fixed-Income I	1.26	5.19	4.08	2.94	5.19
DFA Five-Year Government I	1.18	4.95	3.39	3.12	4.95
DFA Intermediate Govt Fixed-Income I	4.36	9.53	4.87	4.26	9.53
DFA Two-Year Global Fixed-Income I	1.38	5.25	3.86	2.84	5.25
DFA U.S. Large Company I	(3.35)	5.44	8.55	12.72	5.44
DFA U.S. Large Cap Value I	(5.39)	(2.76)	8.81	15.41	(2.76)
DFA U.S. Small Cap Value I	(8.81)	(10.75)	5.35	18.51	(10.75)
DFA U.S. Micro Cap I	(6.91)	(5.22)	5.18	17.23	(5.22)
DFA U.S. Targeted Value I	(7.95)	(8.19)	6.29	18.19	(8.19)
DFA Real Estate Securities I	(14.50)	(18.67)	7.57	17.39	(18.67)
DBC new (fictional security)	15.78	31.35	20.11	21.94	31.35
DFA Intl Value I	(3.69)	10.24	19.46	26.91	10.24
DFA Intl Small Cap Value I	(7.49)	2.95	17.66	29.59	2.95
DFA Emerging Markets Value I	2.71	45.64	37.99	45.23	45.64
DFA Emerging Markets Small Cap I	0.06	38.02	33.57	39.63	38.02

Our new Model Portfolios can be accessed by the following links;

Model Portfolio 06
Model Portfolio 07
Model Portfolio 08
Model Portfolio 09
Model Portfolio 10
Model Portfolio 11
Model Portfolio 12
Model Portfolio 13
Model Portfolio 14

The AssetBuilder (AB) constructed portfolios - Model Portfolios - have been developed based on historical performance of the standard asset classes (stocks, bonds and cash) and of representative market index fund measures. Since this is a Model Portfolio (fiction), there can be no assurance that an AB client would have achieved similar rates of return over the time frame. In addition, since the time period in question is a historical one, there can be no assurance that future results achieved by AB clients will in any way resemble those represented by the model portfolio.

The Performance Table above is representative of a compilation of the selected funds to achieve a probabilistic return for a measured level of risk. The portfolio was assumed to have been rebalanced every year on March 1. The returns are net of selected fund fees, but don’t include deduction of AB’s Advisory Service fees. The commodity measure represented in the Model Portfolio is the PowerShares DBC security (net of fund fees) from March 2006. To gain additional history, DBLCI was appended back in time net of fund fees ( .83%, 83 basis points per year).

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing

Buying a Tax Liability

admin — Thu, 06 Dec 2007 21:00:00 GMT

by Kennon Grose

The warning label on most mutual funds at this time of year should read – be careful about “buying a tax liability” with late year distributions. Mutual funds periodically distribute to the fund’s shareholders any gains or losses the fund achieves from buying and selling stock. These are called dividends or distributions, and the shareholder must pay taxes on this gain.

Distributions are in the form of dividends, short-term capital gains and long-term capital gains. Both dividends and short-term capital gains are taxed at ordinary income tax rates. Long-term capital gains are currently taxed at 15 percent.

Most experts point to the use of either tax-managed funds or index funds as a way to minimize taxes – tax friendly. Index funds don’t trade much which helps keep capital gain distributions in check. Tax managed funds are run with an eye to after-tax returns. Unlike tax friendly funds, most mutual funds are managed without regard to taxes.

Tax friendly funds play a pivotal role in enhancing your wealth through tax mitigation. For example, if you invest $20,000 in a fund that produced a 10% pre-tax annual return for 20 years; with an after tax return of 7 percent you would have $77,394. However, if the after tax return had been 9 percent, then you would end up with $112,088.

While it is subject to change, it is a pretty good indication that you can buy now without stepping into a “tax cow-pie”.

DFA Tax Distribution Schedule

The following table provides an estimate for the distribution in December of DFA funds.

Record Date: 12/18/2007 – The date on which DFA looks at its record to see which shareholders will receive a distribution.
Ex-Date: 12/19/2007 – On this date the DFA funds trade at the price minus the distributions.
Pay Date: 12/24/2007 – The date DFA will make the distributions to the shareholders account.

Ticker	Description	Shares	Estimated Income/Share	Total Estimated Income	Estimated Short-Term Gains/Share	Total Estimated Short Term Gain	Estimated Long-Term Gains/Share	Total Estimated Long-Term Gains
DFIHX	Dimensional 1 Yr Fxd Inc	1	0.137	$0.14	-	$-	-	$-
DFFGX	Dimensional Five Year Govt	1	0.157	$0.16	-	$-	-	$-
DFIGX	Intm Govt Fixed Income	1	0.179	$0.18	-	$-	0.001	$0.00
DFGFX	2 Yr Glbl Fixed Inc Port	1	0.062	$0.06	-	$-	-	$-
DFLCX	US Large Co	1	0.274	$0.27	-	$-	-	$-
DFLVX	US L/C Value Portfolio	1	0.128	$0.13	0.001	$0.00	1.103	$1.10
DFSVX	US Small Cap Value	1	0.193	$0.19	0.047	$0.05	2.358	$2.36
DFSCX	US Micro Cap	1	0.176	$0.18	0.041	$0.04	1.158	$1.16
DFREX	Real Estate	1	0.311	$0.31	0.037	$0.04	1.343	$1.34
DFIVX	Intl Large Cap Value	1	0.152	$0.15	0.001	$0.00	0.462	$0.46
DISVX	Intl Small Cap Value PT	1	0.131	$0.13	0.158	$0.16	1.425	$1.43
DFEVX	Emerging Markets Value	1	0.194	$0.19	0.009	$0.01	1.000	$1.00
DEMSX	Emerging Markets Small	1	0.077	$0.08	0.109	$0.11	1.076	$1.08
	Total Estimated Taxable Income			$2.17		$0.40		$9.93
			Est. Tax Rate				Est. Tax Rate
	Total Estimated Tax Due		35%	$0.76		$0.14	15%	$1.49
	Total Estimated Tax Due	$2.39

This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Investment or a Heart Attack

admin — Mon, 26 Nov 2007 21:00:00 GMT

by Kennon Grose

What is sold using fear tactics and pays the maximum benefit upon death?

The VARIABLE ANNUITY – a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you. There is no other investment description on the Securities and Exchange Commission website (http://www.sec.gov/investor/pubs/varannty.htm) that has a highlighted warning label.

Caution!

- "Other investment vehicles, such as IRAs and employer-sponsored 401(k) plans, also may provide you with tax-deferred growth and other tax advantages. For most investors, it will be advantageous to make the maximum allowable contributions to IRAs and 401(k) plans before investing in a variable annuity.

In addition, if you are investing in a variable annuity through a tax-advantaged retirement plan (such as a 401(k) plan or IRA), you will get no additional tax advantage from the variable annuity."

Scott has written a number of very good articles about the variable annuity and normally, I would not feel the need to add one. (http://assetbuilder.com/blogs/scott_burns/archive/2005/07/12/Answering-the-Variable-Annuity-Industry.aspx) However, in conducting our many portfolio assessments, we are encountering a lot of investment holdings with variable annuities. The story is always the same; the weary investor was sold through misleading sales techniques and inadequate disclosure.

Therefore, we have chosen to take a closer look at the variable annuity as an investment. One of the big selling points used to entice our client was the quality of the underlying mutual funds. (NOTE: it might be helpful to read the article, “The Ingredients of the Portfolio Assessment”, to understand definitions. http://assetbuilder.com/blogs/capital_gains/archive/2007/10/29/the-ingredients-of-the-portfolio-assessment.aspx)

Variable Annuity

The Director Plus – The Hartford
Current Value - $433,557.46
Surrender Charges

Year	1	2	3	4	5	6	7	8	9
Charge	8%	8%	8%	8%	7%	6%	5%	4%	0%

Annual Insurance Charge – 1.60%
Front-end Load (Commission) – 5% to 7%

The Assessment
The following funds are the underlying investment for The Director Plus.

Description	12b-1 Fee	Gross Exp Ratio	Allocation	Value		Morningstar Overall Star Rating
Hartford Intl Opportunities - IB	0.25%	0.98%	21.01%	91,090.41	Foreign Large Blend	4
Hartford Capital Appreciation - IB	0.25%	0.88%	19.71%	85,457.33	Large Blend	5
Hartford Stock - IB	0.25%	0.72%	13.02%	56,440.05	Large Blend	3
Hartford Value Opportunity - IB	0.25%	0.89%	4.34%	18,832.81	Large Value	5
Hartford Growth Opportunity - IB	0.25%	0.88%	5.58%	24,185.31	Mid-Cap Growth	5
Hartford MidCap Value - IB	0.25%	1.02%	16.87%	73,145.39	Mid-Cap Value	4
Hartford Small Company - IB	0.25%	0.95%	19.47%	84,406.16	Small Growth	5
Total		0.92%	100.00%	433,557.46

Observations:

The front end load – sales commission – five to seven percent. This represents a pretty good pay day for the Broker ($20,000 – $28,000) assuming $400,000 initial investment.

The 12b-1 fee will be used to further compensate all of the “servicing” agents.

Per the representation of the Broker, these funds have good Morningstar Overall Star Ratings.

The estimated portfolio gross operating expense is below the average and therefore is a plus for this portfolio.

The comparative AssetBuilder Building Block Portfolio 13.

Description	12b-1 Fee	Gross Exp Ratio	Allocation	Value
DFA 1 yr Fixed Income	0.0%	0.18%	3.00%	13,006.72
DFA 2 Yr Global Fixed Income	0.0%	0.19%	10.00%	43,355.75
DFA US Large Co	0.0%	0.19%	8.00%	34,684.60
DFA US Lg Cap Value	0.0%	0.28%	9.00%	39,020.17
DFA US Sm Cap Value	0.0%	0.53%	8.00%	34,684.60
DFA US Micro Cap	0.0%	0.53%	6.00%	26,013.45
DFA Real Estate	0.0%	0.33%	16.00%	69,369.19
DFA Intl Lg Cap Value	0.0%	0.44%	10.00%	43,355.75
DFA Intl Sm Cap Value	0.0%	0.70%	10.00%	43,355.75
DFA Emerg Mrkts Value	0.0%	0.63%	10.00%	43,355.75
DFA Emerg Mrkts Small Cap	0.0%	0.81%	10.00%	43,355.75
Total		0.45%	100.00%	433,557.46

Projecting performance of this Broker recommended variable annuity back in time to 12/2003 provides the following historical results

12/2003 - 9/2007	N Periods	Geometric Mean (%)	Arithmetic Mean (%)	Standard Deviation (%)
Hartford Director Plus 2 Intl Opportunities IB	46	20.80	21.48	13.02
Hartford Director Plus 2 Capital Appreciation IB	46	18.32	18.99	12.77
Hartford Director Plus 2 Stock IB	46	10.14	10.49	8.94
Hartford Director Plus 2 Value Opportunities IB	46	13.38	13.88	10.81
Hartford Director Plus 2 Growth Opportunities IB	46	17.53	18.35	14.07
Hartford Director Plus 2 MidCap Value IB	46	14.32	14.96	12.23
Hartford Director Plus 2 Small Company IB	46	14.84	15.86	15.52
Hartford Director Plus	46	16.23	16.81	11.71

Definitions:

Geometric mean – represents the real growth of your dollar. For example, if a stock fell 50 percent in the first year, and rose 50 percent in the second year, then it would be incorrect to report its “average” increase per year over this two year period as the arithmetic mean (-50% + 50%)/2 = 0%. According to this measure, you would still have your dollar. The correct calculation is the geometric mean which yields an average loss per year of 13.4 percent. Correctly reflecting the true value of your dollar at 75 cents.

Standard deviation – is a measure used to determine how much something fluctuates. The S&P 500 Index has a standard deviation of 19.6 percent. This means that it will provide its long-term average return, about 10 percent, in any year plus or minus 19.6 percent. It will do this two-thirds of the time. So it will return somewhere between 30.6 percent and minus 9.6 percent (10% +/- 19.6%) in most years. The return will be greater, or smaller, the remaining one third of the time. The greater the standard deviation of an asset, the greater our risk.

N Periods – number of months we can go back in time to review historical returns and standard deviation. From 1/1999 to 9/2007 is 105 months.

The comparative AssetBuilder Building Block 13.

12/2003 - 9/2007	N Periods	Geometric Mean (%)	Arithmetic Mean (%)	Standard Deviation (%)
DFA One-Year Fixed-Income	46	3.19	3.19	0.73
DFA Two-Year Global Fixed-Income	46	2.97	2.97	1.01
DFA Intermediate Government Fixed-Income	46	4.02	4.11	4.30
DFA Five-Year Government	46	3.27	3.31	2.68
DFA Five-Year Global Fixed-Income	46	3.45	3.48	2.68
DFA U.S. Large Company	46	11.96	12.27	8.45
DFA U.S. Large Cap Value	46	15.20	15.72	11.08
DFA U.S. Small Cap Value	46	14.74	15.78	15.78
DFA U.S. Micro Cap	46	11.56	12.55	15.19
DFA Real Estate Securities	46	19.49	21.25	20.70
DFA Intl Value	46	26.34	26.96	12.76
DFA Intl Small Cap Value	46	27.30	28.02	13.76
DFA Emerging Markets Value	46	43.56	45.63	24.76
DFA Emerging Markets Small Cap	46	37.34	39.08	22.15
AB BB 06	46	9.15	9.24	4.42
AB BB 07	46	11.08	11.21	5.55
AB BB 08	46	12.73	12.91	6.58
AB BB 09	46	14.64	14.90	7.80
AB BB 10	46	16.02	16.33	8.53
AB BB 11	46	17.73	18.11	9.54
AB BB 12	46	19.37	19.83	10.61
AB BB 13	46	20.77	21.30	11.42
AB BB 14	46	22.05	22.64	12.23

The historical result is AssetBuilder Building Block 13 delivers 4.54 percent per year additional return with less risk. Adding the annual insurance premium further reduces the investor’s return.

Even with “good” funds, the high costs of the compensation schemes, fees and expenses make the variable annuity a “poor” investment choice.

This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.

AssetBuilder Inc. is an investment advisor registered with the Securities and Exchange Commission. Consider the investment objectives, risks, and expenses carefully before investing