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Alan Johnson
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Alan Johnson is Managing Member of Johnson Harper LLC, a New Jersey-based Registered Investment Adviser. Johnson Harper LLC manages client portfolios using primarily a mix of index ETFs representative of asset classes having low correlations. The firm also attempts to achieve the long-term... More
My company:
Johnson Harper LLC
My blog:
The Reasoned Investor
  • 8 Reasons Why I Tweet My Daily Performance

    When I transitioned from a career in the chemical industry to investment management in 2007 I was at first surprised, and later appalled, at the lack of attention being paid to performance and continuous process improvement by retail financial professionals.

    Even more astounding to me is the complacency with which investors accept this lack of attention. In what other industry does a consumer buy a product or hire a service provider without first having agreed on performance specifications and/or expectations?

    Look at any mutual fund prospectus. What return (either absolute or relative) is the fund manager trying to obtain in the coming year? Chances are you won't find it. What you will find are lots of historical performance data spanning several time periods, along with a disclaimer that these numbers have absolutely nothing to do with what you can expect in the future. And you'll be given a list of risk factors - things that can go wrong and cause you to lose some or all of the money you invest. No commitments; only risks. Why would anyone buy a mutual fund under these circumstances?

    Part of the answer may be that money managers, brokers, and financial professionals have gotten pretty good at dodging the performance issue over the years. They will explain the vagaries of the capital markets, uncertainty about economic growth due to unpredictable monetary and fiscal policy decisions, unknown global business and political factors, etc. But while all of this is certainly true, the point is that many of these managers aren't even trying to measure and improve upon the effectiveness of their management processes.

    But why not? After all, aren't the uncertainties faced by money managers the same as those faced by manufacturing firms? Yet setting realistic and attainable targets, and responding to competitive forces by continuously improving operational processes, are hallmarks of well-run businesses.

    When I formed Johnson Harper LLC in 2009 I believed then, as I do now, that there is a significant unmet need in the investment management industry for more rigorous processes and continuous improvement activities.

    The task is certainly formidable. There is little published on this topic as it pertains to investment management, and so I have had to develop my own techniques based in part on my experience in the chemical industry. Along the way I have gone down many blind alleys, lost many clients, and ultimately have had to unlearn many of the generally-accepted investment theses I had been 'taught' over the years.

    But I believe the effort remains worthwhile, particularly in the current climate of uncertain pensions, questionable social security retirement benefits, and the resulting need for future retirees (and we all expect to become one someday) to take greater ownership of whatever nest egg they are able to accumulate throughout their working years.

    My latest activity in this ongoing effort is to begin posting on various social websites the daily performance of the investment portfolios that I manage. Because my clients have separately managed accounts, the values I report are Time Weighted Returns (TWR) aggregated across all client accounts and generated by the brokerage firm that I use.

    Given that clients open and close accounts, and add and withdraw funds, time weighted returns provide a way to calculate investment performance by eliminating the impact of these cash flows into and out of the accounts. In this manner it reports performance solely attributed to the portfolio manager's (in this case, me) actions. For more information about TWR, please see this link.

    Each daily post includes the overnight return, the month-to-date return, and the return since I began doing this (inception date of July 1, 2013). The posts look something like this:

    "Johnson Harper LLC consolidated TWR: 18-Oct daily = -1.02% ; MTD = -0.79% ; since 01-Jul-2013 = 6.00%"

    Here are 8 reasons that summarize why I believe such postings can be of value, both to you and for me:

    1. Posting keeps me focused on investment process and performance. A vice-president of one of the chemical companies I worked for once said, "If you want to lose weight, get on the scales every morning." The discipline required to take the daily measurement of your weight reinforces the importance of the task at hand. Conversely, if losing weight is not important to you, then there is little point in weighing yourself each day. My investment process is extremely important to me, and I want to monitor it, and be prepared to adjust it, daily (particularly in these times of heightened uncertainty).

    2. It provides a means by which investment process capability can be determined, thus allowing me to establish performance targets on the basis of this capability. Through the use of statistical quality control and statistical process control (SQC/SPC) charts, one can determine a) if there is a consistent process being employed, b) what the process is capable of producing (by way of an average output and variability around that average), and c) if the process is deviating from its control limits (i.e., is it becoming 'out of control?'). The details as to how this is done, while straightforward, are lengthy and beyond the scope of this article (but I do intend to further elaborate on this in future articles).

    3. Monitoring daily return performance can greatly shorten the time required to evaluate a manager's performance. If you do an Internet search to find the time required to evaluate the performance of investment managers you may find links that discuss time periods such as 3 years, 13 years, and even 40 years -- given these excessively long periods of time it's little wonder that most investors just pick a manager and stay with him or her until forced by circumstance (manager retires; investor's financial situation changes) to find a new one.

    But one reason for these very long time periods may be the sampling frequency; if you measure performance once a quarter it will take longer to discern what's going on than if you measure performance once a month. But this is a bit like weighing yourself once a quarter and then saying you must wait 6 years to determine if your dieting regimen is effective. If one assumes that a minimum of, say, 24 data points are needed to determine a statistically significant trend, then you would need 24 years of annual return data, 6 years of quarterly data, 2 years of monthly data, but only 24 market days (a little over a calendar month) of daily return data in order to assess the effectiveness of an investment process.

    Granted, one month is admittedly a very short period of time but, say, 6 months of daily performance numbers would give you a much richer data set (about 125 data points) with which to make an evaluation. Why wouldn't you do this?

    4. Provides another benchmark for comparison. If you overlay the daily performance numbers I provide with the daily changes in your own investment portfolio (whether you manage it or it is managed by others), you can (over time) get a sense of three very important aspects of portfolio management.

    Namely:

    a) How does the volatility of one portfolio compare to the other ('beta')?

    b) Does one portfolio consistently generate a higher excess return than the other ('alpha')?

    c) To what extent are the returns of the two portfolios correlated?

    Quite frankly, if the volatility of your portfolio is lower than mine, and if you're achieving a higher excess return, then there would be no reason to hire me as a money manager... And perhaps even a reason for you to become a money manager (assuming you manage your own investments and have the interest in doing it for others).

    But I'll elaborate on this topic as well in future articles.

    5. The performance adds to (or detracts from) my credibility as a knowledgeable manager. By posting my performance on a daily basis I am, in a manner similar to the legend of Cortez, "burning my ships in the new world." I'm motivated to succeed, because there is no going back. Either I can demonstrate a consistent management process with the potential for continuous improvement, or I can't.

    How many articles, media interviews, investment newsletters, and unsolicited snippets of "free advice" are you exposed to each day? And just how credible are these sources? Do these 'talking heads' actually accept the responsibility and accountability that goes with managing other peoples' money (not as easy as you might think), or are they compensated simply for dispensing ideas, suggestions, and/or "expert opinion?"

    The question I always want to ask is this: Rather than tell me how to become a successful investor, why don't you demonstrate your credibility by reporting your daily performance in addition to the advice you are dispensing?

    6. It sets an example for others to follow and, hopefully, to build upon. At the beginning of this article I criticized other retail financial industry participants for not trying to measure and report the effectiveness of their processes. I can't say for certain at this point where my own efforts will lead, but I do get satisfaction from knowing that I am trying, and that I am willing to report my progress (or lack of it).

    I am part of the baby boomer generation that will soon be faced with the challenge of not outliving their assets. This, in turn, leads to the challenge of understanding the concept of "portfolio drawdown" during retirement, which has as much (if not more) to do with portfolio fluctuations (i.e., volatility) as it does with average return.

    I'd like to be part of a movement that takes a fresh look at these challenges and that can potentially provide investors with a higher degree of confidence in their ability to select investment alternatives that will allow them better control over their assets.

    7. It addresses the question of "what was your return last year?" When I meet people and tell them what I do, I am invariably asked this question. There are both regulatory and ethical reasons for not engaging in a response. The primary reason is this: I do not manage a mutual fund; my clients have separately managed accounts. As such, their individual portfolio assets differ widely in size and, while they largely hold the same investments, they do not hold them in the same proportion as other clients may hold them. Thus, client returns can vary somewhat depending on the asset mixes in their accounts.

    I prefer instead to discuss what I am trying to achieve in aggregate for myself and my clients, then refer them to my daily posts of overall TWR across all of the accounts I manage.

    There are never guarantees, of course. And we are all told repeatedly that past performance is no indicator of future success. But I believe that tracking present performance can provide an indication of the existence, or not, of a process that can show indications of being within appropriate control limits.

    8. Clients, friends, and colleagues can provide referrals with a greater degree of confidence. The social media website LinkedIn now allows members to "endorse" their contacts for various skills. While useful in theory, I find that I receive a lot of "endorsements" from contacts that, frankly, have little or actual knowledge about my skill set.

    I well remember in the early days of LinkedIn one of my contacts saying to me, "Alan, you're a great guy and I like you a lot, but I have no idea how effective you are at managing money." Posting my returns on a consistently updated basis (i.e., daily) begins to address at least a portion of his uncertainty about my skills.

    Those that refer me will have some quantifiable evidence behind their referral (assuming, of course, that such evidence is positive - but were it not, then presumably there would be no reason to give the referral in the first place).

    And the referral need only be something as simple as a weblink to my daily return postings, with the suggestion that their contacts "see for themselves."

    How to find my posts

    If you are at all intrigued by the concepts raised in this article, there are a number of ways that you can access my daily posts:

    1. As the title suggests, you can follow me on Twitter by following this link (@AlanJohnson_).
    2. I also post on (and contribute articles to) Seeking Alpha. You can follow me here to have access to my daily return postings.
    3. If you prefer LinkedIn, a copy of each post appears on my profile page. You can connect with me via this link.
    4. I also post daily returns on StockTwits. Find me there via this link.
    Oct 21 5:21 PM | Link | Comment!
  • Unless You’re 75, You Don’t Know What It Feels Like To Be 75

    Americans are pretty good at kicking cans down the road.

    Collectively, our elected representatives have been systematically approving extensions to legislation and other delaying measures in the hopes that the U.S. economy will correct itself before the hard decisions on spending have to be made.

    And individually, many Americans are kicking their own cans down the road by adopting a retirement 'strategy' of either working into their 70s or, in some cases, planning to not retire at all.

    These are some of the results published in the May, 2011, 12th Annual Transamerica Retirement Survey. More specifically (page 9):

    • 39% of workers plan to work past age 70 or do not plan to retire
    • 54% of workers plan to continue working when they retire
    • 40% now expect to work longer and retire at an older age since the recession

    Now it's one thing if (like me) these folks love their jobs and want to prolong the satisfaction as long as possible.

    But the survey suggested otherwise:

    • Workers estimate their retirement savings needs at $600,000 (median), but in comparison, fewer than one-third (30%) have currently saved more than $100,000 in all household retirement accounts.
    • Most workers, regardless of age or household income, agree that they could work until age 65 and still not have enough money saved to meet their retirement needs.
    • Of those who plan on working past the traditional retirement age of 65, the most commonly cited reasons are of need versus choice.
    • Many workers (31 percent) anticipate that they will need to provide financial support to family members.

    I can't help but wonder how much thought the respondents gave to their answers, or if they even realized the implications of the questions.

    Undoubtedly many, perhaps even most, suffered a significant devaluation of their retirement nest eggs during the 2008/2009 market decline.

    Perhaps to a rough approximation (especially for those who have an aversion to detailed mathematical models) they concluded that it will take, say, 5 years to get their portfolios back to pre-2008 levels, and maybe throw in another 5 years to factor in notional "corrections" for inflation, reduced pension benefits, reduced social security, or what have you… Under such an approach their targeted retirement age changes from 65 to 75; certainly not desirable, but at least it's a "solution" to their dilemma.

    My guess is that the younger one is, the more tendency there is to think like this, and to discount how one will actually feel at age 75. After all, there are a lot of years between now and then…

    As for me, I'm now a little past the halfway point on the road to being a pentagenarian and I can certainly feel myself slowing down a little each year (although, truthfully, I've been saying this for at least the past 20 years). The 2-week business trip to Europe doesn't have the same allure it had when I was in my twenties. I'm no longer interested in major DIY projects around the house (like tiling the kitchen floor, rebuilding the deck, and crawling around the attic installing ceiling light fixtures).

    I'm forced to conclude that my willingness and ability to continue what I do every day will only decline from this point forward. We call that 'aging.'

    So what's a can-kicker to do??

    Every financial adviser knows that there are fundamentally only four approaches that can be taken to alter one's retirement finances:

    1. Work longer (delay retirement)
    2. Save more prior to retirement
    3. Spend less during retirement
    4. Improve investment results

    Surprisingly the survey placed little emphasis on improving investment results. In fact, the single question (page 28) that respondents were asked about their involvement in managing their retirement savings revealed that:

    "Most workers agree that they do not know as much as they should about retirement investing. Many would like more education from their employers. And half would prefer to rely on outside experts."

    In a society where self-reliance, ingenuity, entrepreneurialism, and independence are so highly valued it is disappointing to me that there is such an unwillingness on the part of individuals to get more involved with managing their savings and investments.

    Although not specifically addressed or measured in this survey, the impression I had was that many would rather work another 10+ years in a job they do not enjoy rather than try to shorten this period by more actively planning and managing retirement outcomes.

    As for me, I firmly believe that investment results can be controlled and, thus, forecasted to a greater extent than "random walk" practitioners would have us think. But like any other business activity, successful investment management requires calculated risk-taking and, more importantly, appropriate controls to manage unexpected and unfavorable outcomes.

    To get a better idea of how I approach this challenge in the management of my own portfolio, I'd like to suggest that you start by reading my 3-part series of articles "Implications of the New Normal for Retirees"

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: retirement
    Apr 08 11:55 AM | Link | Comment!
  • A Survey Of Retirement Calculators And Simulators

    In my forthcoming article Be Careful When Using Retirement Calculators and Simulators I point out the dangers involved in relying too heavily on web-based retirement calculators, simulators, and other planning tools.

    This is because many, if not most, overstate the contribution from investment portfolios, particularly in cases where the user has selected investment rates of return on the higher-end of typical ranges.

    That having been said, and because I spent a rather significant amount of time finding and evaluating these tools, I thought I would share some of what I learned with SA readers.

    Table 1 is a partial listing of some popular (by search engine rankings) and free tools that do not require registration or the divulgence of any other personally identifiable information in order to use them.

    Because each source is hyperlinked directly to the tool, this table can also serve as a convenient "one-stop" source to bookmark for those of you brave enough to try out several as a means of comparing results. (I warn you in advance, however, that the outcomes can vary widely between these tools, leading to the perplexing decision of deciding which one(s) to trust.)

    In considering the tools displayed in Table 1, the first question that may come to mind is the difference between a 'calculator' and a 'simulator.'

    Basically, if the tool only allows the user to input an expected or average rate of return on investments, I have classified it as a 'calculator.' These are generally the least complicated to use, but can overstate the retiree's financial outlook (see my article above).

    If the tool incorporates expected volatility (either based on user input, historical market data, or projections) using a Monte Carlo or other analysis technique, then I have classified it as a 'simulator.' While simulation is arguably a more realistic approach, keep in mind that a simulator is only as good as the assumptions that go into it. In other words, "historical market performance is not a guarantee of future results."

    Some of these tools offer highly detailed user inputs that include, for example, social security, income from a job in retirement, pensions, annuities, tax rate assumptions, home equity valuations, etc.

    The inclusion of additional "bells and whistles" does not necessarily mean, however, that the tool is more fit for purpose, particularly if the underlying investment return engine is flawed.

    I don't want to go on record by recommending any of these tools over the others, primarily because changes and improvements are ongoing. However, if you want to contact me directly I would be willing to pass along some suggestions based on what you are trying to achieve and the level of effort you are willing to make (rough guess or detailed analysis).

    Finally, I am publishing this table as an Instablog on Seeking Alpha because doing so allows me to make "on the fly" updates without having to bother the SA editors for approval of minor changes.

    Because I want to make this a "living" document, I would appreciate any comments or corrections regarding any of these tools, as well as suggestions for additions to the table.

    Table 1
    SourceTypeAdjust Return?Adjust Volatility?Notes
    AARPCalculatorYesNoCan adjust return both before and during retirement.
    AmeripriseCalculatorYesNoCan adjust return both before and during retirement.
    CNN MoneyCalculatorLimitedLimitedCan change asset mix, but returns based on mix averages.
    E*TradeSimulatorLimitedLimitedCan change asset mix, but simulations are based on historical market data.
    FINRACalculatorYesNoOnly one rate of return can be entered.
    flexible Retirement PlannerSimulatorYesYesBoth return and volatility can be independently specified.
    INGCalculatorYesNoCan adjust return both before and during retirement.
    John HancockCalculatorYesNoAllows different rates of return for different account types.
    KiplingerCalculatorLimited?Can only select 1 of 3 rates of return prior to retirement, and 1 of 3 equity allocations during retirement.
    Mass MutualCalculatorYesNoCan adjust return both before and during retirement.
    Merrill LynchCalculatorNoNowebsite states "6% annual effective rate of return adjusted for a 2.5% rate of inflation"
    Morgan StanleyCalculatorYesNoCalculator designed for users in India.
    MSN MoneyCalculatorYesNoCan adjust return both before and during retirement.
    PrudentialCalculatorYesNoCan adjust return both before and during retirement.
    SchwabSimulatorLimitedLimitedUser can select 1 of 5 investment allocations; simulations are based on Schwab long-term market outlook.
    ScottradeSimulatorLimitedLimitedUser can select 1 of 5 investment allocations.
    SmartMoneyCalculatorYesNoOnly one rate of return can be entered.
    StateFarmCalculatorYesNoCan adjust return only for retirement years.
    TD AmeritradeSimulatorLimitedLimitedUser can allocate between equity, fixed, and cash across several account types; simulations are based on historical data.
    T. Rowe PriceSimulatorLimitedLimitedUser can allocate between equity, fixed, and cash both before and during retirement; simulations are based on T. Rowe Price market outlook.
    VanguardSimulatorLimitedLimitedCan change asset mix, but simulations are based on historical market data.
    Tags: Retirement
    Mar 27 3:20 PM | Link | Comment!
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  • Johnson Harper LLC consolidated TWR: 27-Oct daily = 0.52% ; MTD = -2.66% ; Y/Y = 3.3% More info: http://tinyurl.com/lz3vsg7
    Oct 28, 2014
  • Johnson Harper LLC consolidated TWR: 24-Oct daily = 0.03% ; MTD = -3.16% ; Y/Y = 2.5% More info: http://tinyurl.com/lz3vsg7
    Oct 26, 2014
  • Johnson Harper LLC consolidated TWR: 23-Oct daily = -0.67% ; MTD = -3.19% ; Y/Y = 2.7% More info: http://tinyurl.com/lz3vsg7
    Oct 25, 2014
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