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 Keyboard a-Michael Maggs 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]

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