HAPPY NEW YEAR! The fourth quarter certainly saw to it that investors would have reasons to celebrate!
Last year around this time, I predicted that the markets would post a positive return of less than 10% in 2013. The Dow started the year at 13,105.37, and it set new highs in March 2013 and then topped those highs in November 2013, establishing a new vision of how volatile market corrections are in this era. From falling as low as 6,547 in 2009 to ending 2013 at 16,575, the amount of money moving is topped only by the amount of misconception and misinformation toward conventional wisdoms like "buy & hold" and newfangled mentality of day-trading. Then there's the whole 99% issue, but that is not worth analyzing on this platform (albeit, it is relevant in an full analysis of the volatility in modern market swings).
When predicting market conditions for the forthcoming year, there are only four categories that I recognize: 1) up more than 10%, 2) up less than 10%, 3) down less than 10%, and 4) down more than 10%. Splitting hairs any further is missing the point of investing because it is a long-term event, so any singular year means about the same as any given half-mile of a marathon. In fact, the only reason I make annual predictions is for fun. I rarely (if ever) tweak my investment strategy based on the next 12 months.
That said, I predict another year of returns above 10% in 2014 (although, down from this year). Both the Dow and the S&P 500 were up over 25% in 2013, which leaves virtually nowhere to go but down, but there's a lot of room between 25% returns and negative returns on the year. I doubt that we can see another year of 25% returns (and, in many ways, I hope we will not), but there is no guarantee that the markets will retreat from here in the next 12 months. The bond market seems ready for its long-expected collapse (which, at this point, may only be a retreat) and money markets still pay 0%, so there is still no incentive to invest in stock alternatives. While "dumb money" is not a term that I'm particularly fond of, "never underestimate the predictability of stupidity" is one of my favorite movie quotes (Snatch., 2000). Chasing returns is a common human error. The likelihood of money coming out of precious metals (which were down about 35% this year, including gold) and bonds into stocks is strong, and there is plenty of money left in those investments to move the markets higher.
Consider gold investors who became convinced that the stock market would drop quickly like it did in 2008 (as if the market were directly correlated to the President's approval rating, which I'm convinced some people think is somewhat true). Assume that they do not check their balances regularly and only review year-end reports. They are going to see their portfolio lost 35% of their starting investment this year, and then they will notice that most stock funds returned 20-40% (maybe more). Presumably, they invested in gold because they have a low risk tolerance (case in point, they were talked into investing in gold on the fear that the stock market would tank). Losing a quarter of their investment is not going to be something they can stomach, and their money will come right back into the stock market. The question is how many of these investors are out there.
Incidentally, if the markets returned exactly 10% in 2014, then the Dow will close at 18,234 next year.
Tuesday, December 31, 2013
Sunday, November 17, 2013
Exit Stage Left
I may have said previously that an exit strategy is an important to have prior to investing.
If your investment has a goal, then you would know when your money has achieved its purpose. If you are investing without a purpose, then you are going to be at the mercy of the market. Which is where I find myself today. As the market nears its first 16,000 closing, I expect a retraction to a significant degree (sooner than later). Unfortunately, when I dumped more money into the under-priced market, I did not have a plan for that money. Now that I expect the markets are over-priced, I want to pull the profits out, but I did not have a plan for this point, so I find myself in something of a quandary.
I have considered many options. One, I can open a new fund that hedges against the other fund and allocate between those funds annually. Two, I can take the money (or just the profits from the past 3-5 years and leave the principal) to buy a new vehicle or reinvest in home improvements. Third, I can let it ride and stay at the mercy of the market.
Obviously, the third option is my last preference but it requires the least effort. Effectively, that option signals my choice to not decide.
The second option is strong, but it will effectively be reinvesting the money in myself. I once invested in myself immediately upon graduating from college, and I found out that was a terrible investment, so I have stayed to investing in others with my fair share of the profits. (Granted, that statement does not hold up since I invested in myself by going back to school in 2011.)
The first option may be the best since it will allow me to keep the money working in the markets while continuously realigning the portfolio to meet my personal goals and needs each year. Unfortunately, this particular money is outside of a tax shelter, so I would create a taxable event every time I reallocated. The second option (and even the third) would minimize that tax impact (or avoid it altogether).
In conclusion, if I had specified an exit strategy before investing as I was supposed to do, then this quandary would have its answer before there was ever a question. Live & learn.
If your investment has a goal, then you would know when your money has achieved its purpose. If you are investing without a purpose, then you are going to be at the mercy of the market. Which is where I find myself today. As the market nears its first 16,000 closing, I expect a retraction to a significant degree (sooner than later). Unfortunately, when I dumped more money into the under-priced market, I did not have a plan for that money. Now that I expect the markets are over-priced, I want to pull the profits out, but I did not have a plan for this point, so I find myself in something of a quandary.
I have considered many options. One, I can open a new fund that hedges against the other fund and allocate between those funds annually. Two, I can take the money (or just the profits from the past 3-5 years and leave the principal) to buy a new vehicle or reinvest in home improvements. Third, I can let it ride and stay at the mercy of the market.
Obviously, the third option is my last preference but it requires the least effort. Effectively, that option signals my choice to not decide.
The second option is strong, but it will effectively be reinvesting the money in myself. I once invested in myself immediately upon graduating from college, and I found out that was a terrible investment, so I have stayed to investing in others with my fair share of the profits. (Granted, that statement does not hold up since I invested in myself by going back to school in 2011.)
The first option may be the best since it will allow me to keep the money working in the markets while continuously realigning the portfolio to meet my personal goals and needs each year. Unfortunately, this particular money is outside of a tax shelter, so I would create a taxable event every time I reallocated. The second option (and even the third) would minimize that tax impact (or avoid it altogether).
In conclusion, if I had specified an exit strategy before investing as I was supposed to do, then this quandary would have its answer before there was ever a question. Live & learn.
Sunday, November 10, 2013
The Full Motley: 4Q 2013
This past Monday (November 4, 2013), I started a new job at an old employer. I thought I was done with the field of finance, but I guess it was not done with me. I am in their legal department, however, so my future consists of my past experience and current position, and my future is now.
Back in October 2000, I got hired by AEtna Financial Services (AFS) through a colleague I had befriended while at SIMMERS Capital Management working as a financial adviser. If you have ever seen the movie Boiler Room, then my job as a financial adviser was like that premise without the illegal activity. Conversely, AFS It was a nice job in a call center for which my qualifications, e.g. Series 6 and Series 63 licenses, applied. Less than a year into the job, AFS was bought by ING (International Netherlands Group) as part of their aggressive placement in the United States financial market. Sometime after the completion of the ING Aetna Financial Services merger, ING announced that they were closing the Phoenix location, which I learned about minutes after parking my car and grumbling, "I wish I worked closer to home."
ING treated us very well during the transition, including a handsome severance packet and a retention (incentive) bonus. Employees were released in three different time frames, and I was selected to stay through the final round, so my incentive bonus was very high (albeit, my work load tripled immediately after the first round employees left). Additionally, ING coordinated with The Vanguard Group to interview the employees, so Vanguard hired me before I even left ING.
During my first tenure with ING, I was not very involved with my retirement plan, but I was pleased to learn that the 6% match has remained in tact. Needless to say, one of my top priorities the first week has been getting my hands on the investment options and setting up a 6% deferral. I have good choices within the plan, and the website had useful tools to simplify investing for the uninitiated or those who are not actively involved with their 401(k). Most importantly, it had a set of Target Retirement funds, which I highly endorse the use of as a default investment for anyone who is not financially savvy. Even I would consider using the option in the ING plan depending on how fees affect my performance.
The option exists to roll my old 401(k) over to my new plan; however, I am not considering it because the investment options are more robust at my old plan. Often times, this choice may be less of an option and more of a *very good* idea, especially if the account balance in a previous 401(k) is below a specified amount (varies by plan) where they can cash out of your account. At that point, you can roll over the balance to a new 401(k) or a traditional IRA, or to a checking account where you will owe an early withdrawal penalty. Truthfully, there are not many good reasons for an old 401(k). The best alternative would be to roll an old 401(k) into a traditional IRA. The strongest reason is that the assets inside a 401(k) are owned by the employer, so you may need to acquire a signature from a past employer in order to withdrawal the assets. Additionally, your investment choices in an IRA are generally superior to most 401(k) plans.
In fact, my investment in the PRIMECAP Fund in my 401(k) has been the main reason I kept this portfolio where it is (plus, I like having that portion of my retirement segregated to rebalance periodically), which was what brought me here today. It is time to rebalance again! The markets have hit new all-time highs this week (which seems to be oddly in sync with my breaking up with a particular girl; since we broke up in March 2013 before the market set new highs). I expect my stock funds will be where my money will be pulled this quarter, which is a good thing because, even if the market continues to rise, it will retract eventually, and it is good to periodically draw earnings from these funds to place them in lagging funds.
That strategy is both how rebalancing works, and why it works. Since I endorsed Target Retirement funds earlier in this article, I will reiterate the purpose of these funds is to rebalance your investment daily, as well as modify your allocation to become less aggressive as you near retirement. Conversely, keeping old 401(k) accounts open to rebalance while starting new 401(k) accounts can get confusing. I may share my experiences with it as that plays out in the near future as I attempt it between my old employer and new employer. My investment strategy and allocations are largely mirroring each other despite the vastly different investment options.
Vanguard Explorer Fund 25.2% / -0.2% / 25%
Vanguard High-Yield Corporate Fund 4.9% / 0.1% / 5%
Vanguard Total Stock Market Fund 24.9% / 0.1% / 25%
Vanguard PRIMECAP Fund 25.5% / -0.5% / 25%
Vanguard Total Bond Market Fund 9.5% / 0.5% / 10%
Vanguard Total Int'l Stock Fund 10% / x / 10%
Unfortunately, Vanguard.com was down for maintenance when I wrote this article, so I was unaware what moves would be taking place. When I got the information, I learned that the Vanguard Total Stock Market Fund.was lagging behind the Vanguard Explorer Fund and the Vanguard PRIMECAP Fund. Although all three funds have gone up in the past three months, the Explorer fund is an aggressive stock fund, so its performance is usually more pronounced than the market, i.e. when the markets are up, this fund is up higher and when the markets are down, this fund is down more. Conversely, the PRIMECAP fund is actively managed, which means they have a team of professionals selecting stocks in order to beat the market returns. Actively managed funds often get a bad wrap because (A) their goal to outperform the benchmark requires investing in undervalued stocks, which as often as not have just turned bad and do not recover, and (B) higher returns are often erased by the funds' fees before investors ever capture a benefit from them. Both reasons are strong enough to warrant moving out excess returns (that is, returns above my target allocation) as soon as possible.
This entry effectively concludes another fiscal year for me. My next change will be in February 2014, which will not only be a new calendar year but also, because I started this blog in February 2009, it will begin a new year for me. I hope to find time to share my thoughts on projecting the 2014 markets in the next month or two, but it is somewhat obvious: "what goes up, must come down."
Back in October 2000, I got hired by AEtna Financial Services (AFS) through a colleague I had befriended while at SIMMERS Capital Management working as a financial adviser. If you have ever seen the movie Boiler Room, then my job as a financial adviser was like that premise without the illegal activity. Conversely, AFS It was a nice job in a call center for which my qualifications, e.g. Series 6 and Series 63 licenses, applied. Less than a year into the job, AFS was bought by ING (International Netherlands Group) as part of their aggressive placement in the United States financial market. Sometime after the completion of the ING Aetna Financial Services merger, ING announced that they were closing the Phoenix location, which I learned about minutes after parking my car and grumbling, "I wish I worked closer to home."
ING treated us very well during the transition, including a handsome severance packet and a retention (incentive) bonus. Employees were released in three different time frames, and I was selected to stay through the final round, so my incentive bonus was very high (albeit, my work load tripled immediately after the first round employees left). Additionally, ING coordinated with The Vanguard Group to interview the employees, so Vanguard hired me before I even left ING.
During my first tenure with ING, I was not very involved with my retirement plan, but I was pleased to learn that the 6% match has remained in tact. Needless to say, one of my top priorities the first week has been getting my hands on the investment options and setting up a 6% deferral. I have good choices within the plan, and the website had useful tools to simplify investing for the uninitiated or those who are not actively involved with their 401(k). Most importantly, it had a set of Target Retirement funds, which I highly endorse the use of as a default investment for anyone who is not financially savvy. Even I would consider using the option in the ING plan depending on how fees affect my performance.
The option exists to roll my old 401(k) over to my new plan; however, I am not considering it because the investment options are more robust at my old plan. Often times, this choice may be less of an option and more of a *very good* idea, especially if the account balance in a previous 401(k) is below a specified amount (varies by plan) where they can cash out of your account. At that point, you can roll over the balance to a new 401(k) or a traditional IRA, or to a checking account where you will owe an early withdrawal penalty. Truthfully, there are not many good reasons for an old 401(k). The best alternative would be to roll an old 401(k) into a traditional IRA. The strongest reason is that the assets inside a 401(k) are owned by the employer, so you may need to acquire a signature from a past employer in order to withdrawal the assets. Additionally, your investment choices in an IRA are generally superior to most 401(k) plans.
In fact, my investment in the PRIMECAP Fund in my 401(k) has been the main reason I kept this portfolio where it is (plus, I like having that portion of my retirement segregated to rebalance periodically), which was what brought me here today. It is time to rebalance again! The markets have hit new all-time highs this week (which seems to be oddly in sync with my breaking up with a particular girl; since we broke up in March 2013 before the market set new highs). I expect my stock funds will be where my money will be pulled this quarter, which is a good thing because, even if the market continues to rise, it will retract eventually, and it is good to periodically draw earnings from these funds to place them in lagging funds.
That strategy is both how rebalancing works, and why it works. Since I endorsed Target Retirement funds earlier in this article, I will reiterate the purpose of these funds is to rebalance your investment daily, as well as modify your allocation to become less aggressive as you near retirement. Conversely, keeping old 401(k) accounts open to rebalance while starting new 401(k) accounts can get confusing. I may share my experiences with it as that plays out in the near future as I attempt it between my old employer and new employer. My investment strategy and allocations are largely mirroring each other despite the vastly different investment options.
Vanguard Explorer Fund 25.2% / -0.2% / 25%
Vanguard High-Yield Corporate Fund 4.9% / 0.1% / 5%
Vanguard Total Stock Market Fund 24.9% / 0.1% / 25%
Vanguard PRIMECAP Fund 25.5% / -0.5% / 25%
Vanguard Total Bond Market Fund 9.5% / 0.5% / 10%
Vanguard Total Int'l Stock Fund 10% / x / 10%
Unfortunately, Vanguard.com was down for maintenance when I wrote this article, so I was unaware what moves would be taking place. When I got the information, I learned that the Vanguard Total Stock Market Fund.was lagging behind the Vanguard Explorer Fund and the Vanguard PRIMECAP Fund. Although all three funds have gone up in the past three months, the Explorer fund is an aggressive stock fund, so its performance is usually more pronounced than the market, i.e. when the markets are up, this fund is up higher and when the markets are down, this fund is down more. Conversely, the PRIMECAP fund is actively managed, which means they have a team of professionals selecting stocks in order to beat the market returns. Actively managed funds often get a bad wrap because (A) their goal to outperform the benchmark requires investing in undervalued stocks, which as often as not have just turned bad and do not recover, and (B) higher returns are often erased by the funds' fees before investors ever capture a benefit from them. Both reasons are strong enough to warrant moving out excess returns (that is, returns above my target allocation) as soon as possible.
This entry effectively concludes another fiscal year for me. My next change will be in February 2014, which will not only be a new calendar year but also, because I started this blog in February 2009, it will begin a new year for me. I hope to find time to share my thoughts on projecting the 2014 markets in the next month or two, but it is somewhat obvious: "what goes up, must come down."
Saturday, August 10, 2013
The Full Motley: 3Q 2013
I have to admit; quarterly reinvesting may not be the most productive method of account management. Unless you're one of those obsessive types. So, count me in! Regardless, it is that time of quarter again (almost the mid-point, actually) where I have historically re-balanced my portfolio. Not surprising, there was not much movement. The overall balance in my stock-heavy portfolio had increased with the market, and I was surprised that last quarter's lagging fund was not lagging after the most recent three months. In fact, it was the actively-managed PRIMECAP Fund that was lagging of the three biggest stock funds. Only the Explorer Fund and the Total Stock Market Index Fund were up beyond their target allocation, which does not mean the other funds had lost money; it only means that those two fund earned at a greater percentage than the other funds.
Here is the basic breakdown:
Here is the basic breakdown:
| Fund | Current | Target | Change |
| Explorer | 27.4% | 25% | -2% |
| High-Yield | 4.5% | 5% | 0.5% |
| PRIMECAP | 24.5% | 25% | 0.5% |
| Total Bond | 7.3% | 8% | 0.7% |
| Total Int'l | 9.5% | 10% | 0.5% |
| Total Stock | 26.2% | 25% | -1.2% |
Regardless, it is a great time to be in the market. It is also a fun time to be a financial blogger. If only I had more time to comment on all the stories I have read in the recent past. The most intriguing story was about a survey released by McDonalds indicating how employees could easily start saving for retirement. Two elements that captured headlines; the spreadsheet required a second job and there was no expense for gasoline. Also, the numbers used in their example were severely under-stated to current times.
Since that article, there have been several others, largely based around the protests of minimum wage earners and their sporadic protests. The most well-organized one has been in NYC. The cause is noble, but the dream is fantasy. The sad truth is that America lost its ability to offer a modest living within its national minimum wage when the world's economy became globalized. The simple truth is that Americans are competing for jobs on a worldwide scale now. If America takes it upon itself to modify its national minimum wage, then it loses its place in the global economy because its assets and liabilities will be higher.
The paradigm has shifted.
Friday, May 10, 2013
The Full Motley: 2Q 2013
Although this post has been documented on May 10, 2013, it was July 1, 2013 (the start of the third quarter), by the time I got around to documenting these changes. Ordinarily, I would have posted this update sooner. Extraordinary factors called life delayed it from happening. Regardless, I did manage to reinvest my portfolio at the right time, but the moves were so minor that they hardly warranted putting into words accompanying thoughts surrounding them. As the markets flatten out, especially without new money coming in, there is not a lot of impact to my quarterly changes.
Most professional advisers would recommend rebalancing a portfolio like mine once a year. That is sound advice. The reason I do not follow it is that advice is intended for a target audience who is less involved in their investments than I am. If you're reading financial blogs like this one in your spare time, rebalancing quarterly may be a better idea than sitting on the sidelines for 12 months. Conversely, if you think about your 401(k) once a year, say tax time for example, then rebalancing once a year is probably more suitable. Also, why are you reading this?
Vanguard Explorer Fund* 24% / -1% / 25%
Vanguard High-Yield Corporate Fund* 5% / x / 5%
Vanguard Total Stock Market Fund* 25% / x / 25%
Vanguard PRIMECAP Fund* 26% / +1% / 25%
Vanguard Total Bond Market Fund* 10% / x / 10%
Vanguard Total Int'l Stock Fund* 10% / x / 10%
* - the information listed above is from a prior blog post; apparently, I never captured the actual numbers for this period, but the concept for rebalancing remains the same every quarter, so the minor shifts are irrelevant. My analysis (which was written timely) provides more detail.
The most surprising changes this quarter were that the Total Stock Market Index fund was lagging its percentage. Meanwhile, the actively-managed PRIMECAP Fund was way ahead. Even further ahead than the aggressively-minded Explorer fund. The least surprising change was that the majority of assets being removed this quarter (all amounting to less than 1% of the portfolio) went into the Total Bond Market Index fund. We expect that fund to lag this year, and in fact, the further it retreats, the stronger it may get in coming years.
The biggest news from this quarter was that the Dow reached new highs, even breaking the elusive 15,000 benchmark for the first time ever on May 7, 2013. That's where bullish wisdom says to put all your money in the market and bearish wisdom says to pull all your money out of it. Conventional wisdom (in terms of investing) says to maintain your original strategy. Think of it this way: it is your portfolio, so why would outside factors change your goals? Despite the fact that the market is rooted in "high risks equate to high rewards" principles, thrill seekers typically make bad investors. It is far from thrilling most of the time. Successful investing is strictly a discipline. Its reward is enlightenment to see through the excitement, which includes the media frenzy after setting new highs.
Most professional advisers would recommend rebalancing a portfolio like mine once a year. That is sound advice. The reason I do not follow it is that advice is intended for a target audience who is less involved in their investments than I am. If you're reading financial blogs like this one in your spare time, rebalancing quarterly may be a better idea than sitting on the sidelines for 12 months. Conversely, if you think about your 401(k) once a year, say tax time for example, then rebalancing once a year is probably more suitable. Also, why are you reading this?
Vanguard Explorer Fund* 24% / -1% / 25%
Vanguard High-Yield Corporate Fund* 5% / x / 5%
Vanguard Total Stock Market Fund* 25% / x / 25%
Vanguard PRIMECAP Fund* 26% / +1% / 25%
Vanguard Total Bond Market Fund* 10% / x / 10%
Vanguard Total Int'l Stock Fund* 10% / x / 10%
* - the information listed above is from a prior blog post; apparently, I never captured the actual numbers for this period, but the concept for rebalancing remains the same every quarter, so the minor shifts are irrelevant. My analysis (which was written timely) provides more detail.
The most surprising changes this quarter were that the Total Stock Market Index fund was lagging its percentage. Meanwhile, the actively-managed PRIMECAP Fund was way ahead. Even further ahead than the aggressively-minded Explorer fund. The least surprising change was that the majority of assets being removed this quarter (all amounting to less than 1% of the portfolio) went into the Total Bond Market Index fund. We expect that fund to lag this year, and in fact, the further it retreats, the stronger it may get in coming years.
The biggest news from this quarter was that the Dow reached new highs, even breaking the elusive 15,000 benchmark for the first time ever on May 7, 2013. That's where bullish wisdom says to put all your money in the market and bearish wisdom says to pull all your money out of it. Conventional wisdom (in terms of investing) says to maintain your original strategy. Think of it this way: it is your portfolio, so why would outside factors change your goals? Despite the fact that the market is rooted in "high risks equate to high rewards" principles, thrill seekers typically make bad investors. It is far from thrilling most of the time. Successful investing is strictly a discipline. Its reward is enlightenment to see through the excitement, which includes the media frenzy after setting new highs.
Monday, February 11, 2013
The Full Motley: 1Q, 2013
Today marks the fifth anniversary of my blog. I started it in February 2009, when the market was at its obscene low point as a tool for measuring my own progress and giving myself a place to refer back to the past market trends and my thoughts on them at the time.
Almost no one would have said that my fifth anniversary post would note that the market was almost at its all-time high, having just broken across 14,000 this week (although it closed the week just under that benchmark).
While the majority of my investments are in stocks, it will be interesting to see (going forward) which types of stocks are leading and lagging.
If anything, this year has been extra normal. As such, I decided* to forgo my re-balance this quarter.
* - pronounced as "did not have time"
Almost no one would have said that my fifth anniversary post would note that the market was almost at its all-time high, having just broken across 14,000 this week (although it closed the week just under that benchmark).
While the majority of my investments are in stocks, it will be interesting to see (going forward) which types of stocks are leading and lagging.
If anything, this year has been extra normal. As such, I decided* to forgo my re-balance this quarter.
* - pronounced as "did not have time"
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