A Guest Poster Who Has Worn Out His Welcome?

The blog Free Money Finance has a recurring guest blogger usually identified as Marotta Asset Management. In fact, Marotta posts often enough and has been doing so for long enough that the designation of "guest" seems a little strained. I assume that this is one of those mutually beneficial barter arrangements that make the blogosphere go. FMF gets free content and Marotta gets free advertising for their business. (They are a financial planning firm in Charlottesville, VA.)

The only flaw in this swap scheme is that the posts aren’t very good. I mean that both in the sense that the content falls short of what you would hope to see from an actual working financial advisor (not "just a blogger") and in the sense that the posts are not written as well as I would like. Indeed, on more than one occasion I have aborted plans to write about them here because in parts I am not sure what they are saying. And that makes it hard to argue that a post is wrong, even when I am pretty sure that it is.

In February there was Safeguard #4: Buy Investments That Trend Upward, a post which, as best I can tell, advised buying things that have gone up in price in the past. I think.

March brought Safeguard #6: Recognize and Avoid Financial Hooks, which was a criticism of loaded mutual funds combined with a poorly informed warning away from private equity and hedge funds, as if the FMF readers might otherwise invest in such things.

Then a few weeks ago there was the post titled Roth Segregation Accounts. It was about a relatively aggressive maneuver in which you convert your traditional IRA into several Roths, invest them differently, and then recharacterize some of them back to traditional based on investment performance. Somewhat oddly, this is actually a sound scheme, in the sense that it is very likely to be profitable, but Marotta grossly overstates how profitable. And the post is so confusingly written that it took me, a guy particularly interested in this topic, a few tries to understand it.

That is also the post in which Marotta tells us that "After 2010, counting all the tax changes, top marginal tax rates will probably rise from 44.6% to 62.4%." Two weeks later and I am still trying to figure out where either of those numbers came from.

And this past week brought Investment Strategies Part 1: Rebalance into Stable Investments in an Appreciating Market, which is about asset allocation. In it is the statement that stocks and bonds "have the largest negative correlation". If this means that the returns of stocks and bonds are significantly negatively correlated, then it is wrong.

Stocks and bonds are positively correlated, although to a lesser degree than are, say, large cap stocks and small cap stocks. Using the returns of the Vanguard S&P 500 fund and the Vanguard Total Bond fund as proxies for stock and bond returns, I find that since 1990 the monthly returns are correlated at +0.15. Put in less geeky terms, the two funds went the same way (both up or both down) in a little more than 60% of the months, including, it should be pointed out, in 11 of the last 12 months.

This may seem like a trivial point, but the fact that stocks and bonds are modestly positively correlated is an important one. To a degree, just about all investments are correlated. They are, after all, competing for the same investment dollars and will have a general tendency to move up and down in value as the supply of those dollars increases and contracts.

Moreover, telling investors that stocks and bonds are negatively correlated, that they have a tendency to move in opposite directions, sets unrealistic expectations of the benefits of diversification. Not only should a person not expect bonds to be up whenever stocks are down, the truth is that it is even a little worse than random. If asked to guess if, in a given period, bonds went up or down and told only that stocks went down in that period, the wise person would guess that bonds went down also.

By and large, I like Free Money Finance and I am sure that the folks at Marotta Asset Management are honest and well meaning. For all I know they are great financial planners, just not such great bloggers. But, and I know I am sounding like a broken record here, personal finance blogs are an important source of information and education for people trying to understand important things. We all need to do better.

[Photo: Michael Maggs]

Investing, PF Blogs, Taxes | Frank Curmudgeon | June 3, 2009 9:00 am

15 Comments

By ObliviousInvestor, June 3, 2009 @ 9:34 am

“With a Roth IRA, you pay tax on the acorn. With a traditional IRA, you pay tax on the oak.”

That quote made me stop reading the first time. While I suppose it’s true, it’s rather misleading in that it seems to suggest that Roth IRAs are always superior to traditional IRAs.

I wonder how often he uses that line with clients.
By Brandon, June 3, 2009 @ 9:42 am

Marotta was one of the reasons I stopped reading FMF. The other interestingly is that I thought FMF posted TOO MANY articles and it was onerous to keep up with good articles I was interested in between all the other stuff I do not care about, if I did not check it everyday.

As a result, dumping Marotta would have solved both problems.

Also, there was a particularly heated discussion in the comments of a Marotta post one time about how everyone hated ‘his’ columns. FMF was overly protective I think in this string of comments.
By Rob Bennett, June 3, 2009 @ 9:53 am

I applaud you for pointing out what you see as deficiencies in the content of the guest blogger’s blog entries.

I find the wording in the title of your blog entry a turn-off, however. If the guy is posting good stuff, that’s an obvious good. If the guy is posting bad stuff, that gives all the rest of us a chance to explore what is bad in his stuff and thereby to learn about the subject matter. So I wouldn’t say that the fellow has worn out his welcome. I welcome him continuing to post so long as we are able to learn from his doing so (one way or the other).

I strongly agree with you that blogs are an important source of information and that we all need to do better and to push others to do better. I think you do important work when you do that.

Rob
By Dave C., June 3, 2009 @ 10:51 am

Ouch, I kind of feel bad for the guy.

But still, I think there is probably a certain market-type effect with blogs. If you post bad or irrelevant information, eventually people will realize this, your reputation will decline and and your reader-base with it, right?

Markets fix everything! :p
By Frank Curmudgeon, June 3, 2009 @ 1:00 pm

OI: Agree on the acorn/oak thing, much as I am attracted to folksy analogies. Perhaps “you can give Uncle Sam one of your four acorns now, or one of your four oak trees later”?

Brandon: As a blogger who can barely manage five posts a week, I’ve always been in awe of FMF’s output. You make a good point that as a reader you’d actually prefer fewer and better posts.

Rob: I thought the title was mildy clever. I guess you didn’t. I need to try harder.

Dave C.: I feel bad for the guy (guys?) in a way too. I’m sure he/they mean well. But that’s not really enough, is it?

And although I am a great believer in markets, it’s pretty clear to me that in the world of personal finance advice popularity and quality are only vaguely related. Perhaps jerks like me are part of the market mechanism?
By Jim, June 3, 2009 @ 4:19 pm

I’ve been a reader of FMF for a while now despite Marotta. Marottas posts in the past have used numbers that he has no source for and which differ greatly from data from reliable sources. He then makes claims and bases his arguments on those questionable numbers. Marotta also often displays a political bias in his arguments.

I’ve actually seen him get better over the past year. Less questionable numbers and less obvious bias or unsubstantiated claims.
His series on when to claim social security seemed pretty good to me.
By Steve, June 3, 2009 @ 6:26 pm

Is “Roth Segregation” a real strategy? The only search hits for it link to Marotta’s article(s).
By IndependentOperator, June 3, 2009 @ 8:01 pm

@Frank,

What would inflation do to your calculations of correlation, since you are doing the calculation in dollars? Would that not tend to make it seem more correlated than it is?

(Technically, I realize I am mis-speaking and correlation due to a third variable is still correlation. I’m simply not sure how else to phrase the question, and I’m pretty sure you understand what I am getting at.)
By abdpbt personal finance, June 3, 2009 @ 8:14 pm

Dammit, Frank, now I have to go over there and read. But after reading your take:

“That is also the post in which Marotta tells us that “After 2010, counting all the tax changes, top marginal tax rates will probably rise from 44.6% to 62.4%.” Two weeks later and I am still trying to figure out where either of those numbers came from.”

I’m sure it will be worth it.
By ObliviousInvestor, June 3, 2009 @ 8:16 pm

“Perhaps ‘you can give Uncle Sam one of your four acorns now, or one of your four oak trees later’?”

Haha, perfect!

IndependentOperator: I don’t have monthly figures in a spreadsheet, but according to my data, after-inflation returns of stocks vs bonds for annual periods 1929-2008 is 0.107.

Conclusion: Still (slightly) positively correlated.
By Frank Curmudgeon, June 3, 2009 @ 8:37 pm

Steve: I’m researching that now. I think what Marotta is saying would work, at least as I understand it. I can’t find anybody else describing it on the web. If anybody else can please send me a link.

IO: I’m much too lazy to actually run the numbers, but I wouldn’t expect that putting the returns in real rather than nominal dollars would make much of a difference. Eliminating a common factor from a pair of variables generally will reduce their correlation, but I don’t think that inflation explains much of these two fund’s returns, particularly over this time period.
By GPR, June 4, 2009 @ 2:05 pm

This post just seems so intramural. I’m starting to feel like a significant portion of traffic to these PF sites is just other PF bloggers.

It may also be because I, myself, do not have a PF blog. Or any blog, actually, and I just feel left out.
By Chris, June 4, 2009 @ 3:12 pm

Unfortunately I always take what a financial advisory company has to say with a grain of salt. The unfortunate thing about most “retail” financial professionals, is that they are salespeople first, and capital market and financial service experts second (sometimes third or not at all).

I sold fixed income securities to large insurance companies, banks and hedge funds in the late 90′s and let me tell you, those guys are not sales people but boy did they know financial products.

Sometimes that doctor who has no bedside manner is also the best surgeon in the whole hospital. He doesn’t have to be a good salesperson, his skills speak for themselves.
By Frank Curmudgeon, June 4, 2009 @ 4:53 pm

GPR: At least this blog is explicitly about the advice of others, so being intramural is a little more excusable.

And where is your blog already?
By GPR, June 4, 2009 @ 10:33 pm

“And where is your blog already?”

I could be all smug and say I get paid for my writings. But then you’d likely be all superior and point out that, even though currently unemployed, your career earning average dwarfs mine, and career averages are the way you get in the hall of fame.

And then I’d be like all “so what!” and most likely sulk off to drink. Which is a journalistic cliche, and since you are a very good writer you would know I hate cliche, so let’s just save the whole drama shall we?