Admittedly, finance is tricky.
I just realized today that I think I made a mistake in my IRA funding where I had intended to have 60/40 split going to stocks and bonds, but I noticed this afternoon that in fact I have been directing 40/60 to stocks & bonds, respectively. This isn't the end of the world, obviously, since I still had money going into both stocks and bonds the past six months. Likewise, it turned out my "mistake" was a smart move since stocks were appreciating and now I can buy in that they have retracted in value quite a bit while moving out of the bonds which have had a steady increase the whole time. Hence the reason I said, "I think I made a mistake." It may have been my original design six months ago, and I didn't remember thinking so strategically in advance. Plus, I'm not used to my short-term strategies actually panning out correctly.
But this reinforces my stubborn belief that no investor of any age should ever be 100% stocks. Stocks and bonds are inversely related, so when one trends upward, in theory, the other is going down. While you're never going to be able to time which direction each will be going in a given day/week/month/year, if you invest wisely in both, it is a relatively good substitute for being omniscient.
I don't look any further than Vanguard STAR Fund to support my belief. When the markets tumbled in March 2000, the Vanguard Total Stock Market Index fund felt the brunt of its impact while the STAR fund staved off its negative effects. When the markets turned around in the following years, the Total Stock Market Index fund never caught up to the STAR fund. Not even close. Why? Because the STAR fund is a balanced fund invested in both stocks and bonds. When the markets tumbled again at the end of 2008, the STAR fund was posting a negative 10-year return. Not as bad as the one on the Total Stock Market Index fund. When the so-called "lost decade" ended (titled as such because the DOW ended the decade at the same level it started it), the Total Stock Market Index fund was posting a -1% return. The STAR fund had a 5% return. It benefited from some profits of the bond market during this time.
Compare the returns of the Total Stock Market Index fund to the STAR fund on Vanguard.com and you can see that the Total Stock Market Index fund beat the STAR fund in the 1-year return with 28.7% to 24.85%. But the 3-, 5-, and 10-year returns favor the STAR fund (3- = -5.1% to -.11%, 5- = .91% to 3.64%, 10- = -.27% to 5.11%, respectively). That extra 4% from Total Stock Market Index fund this past year hardly seems worth pursuing.
I know that I am the only one here with this level of interest in finance, investing, and the markets, but if you have a 401(k) at work now or later and they offer fund selections that include the "Target Retirement Funds" or all-in-one funds, then those options are definitely worth the benefit. They are split between stocks and bonds, AND (in the case of the TRFs) the split between stocks and bonds changes annually as you near retirement.
In other market news, I was checking my IRA because the markets were on pace to close below 10,000 for the first time since November. In fact, the DOW had fallen 150 points below that mark when I started composing this entry yesterday. Then, the market closed and I checked the damage: 10,012, so even despite going as low as 9840.98 during the day, it closed up slightly. Amazing!
Saturday, February 6, 2010
Wednesday, January 13, 2010
CNNFN: Six Biggest Investing Mistakes
By Burton G. Malkiel and Charles D. Ellis
We're both in our seventies. So is Warren Buffett. The main difference between his spectacular results at Berkshire Hathaway and our good results is not the economy and not the market, but the man from Omaha. He is simply a better investor than just about any other in the world. Brilliant, consistently rational, and blessed with a superb mind for business, he has managed to avoid the mistakes that have crushed so many portfolios. Let's look at two examples.
In early 2000, Berkshire Hathaway's portfolio had underperformed funds that enjoyed spectacular returns by loading up on stocks of technology companies and Internet startups. Buffett avoided all tech stocks. He told his investors that he refused to invest in any company whose business he did not fully understand - and he didn't claim to understand the complicated, fast-changing technology business - or where he could not figure out how the business model would sustain a growing stream of earnings. Some said he was passé, a fuddy-duddy. Buffett had the last laugh when Internet-related stocks came crashing back to earth.
In 2005 and 2006, Buffett largely avoided the mortgage-backed securities and derivatives that found their way into many investment portfolios. Again, his view was that they were too complex and opaque. He called them "financial weapons of mass destruction." When they brought down many a financial institution (and ravaged our entire financial system), Berkshire Hathaway avoided the worst of the meltdown.
Avoiding mistakes - such as the mistake of incurring unnecessary risks - is one of the great secrets of investment success. Be alert to these common ones that can prevent you from realizing your goals.
Mistake #1: Overconfidence
At our two favorite universities, Yale and Princeton, psychologists are fond of giving students questionnaires asking how they compare with their classmates. For example, students are asked: "Are you a more skillful driver than your average classmate?" Invariably, the overwhelming majority answer that they are above-average drivers. Even when asked about their athletic ability, where one would think it more difficult to delude oneself, students generally say they're above average. They see themselves as above-average dancers, conservationists, friends, and so on.
And so it is with investing. In recent years, a group of behavioral psychologists and financial economists have created the important new field of behavioral finance. Their research shows that we are not always rational. We tend to be overconfident. If we do make a successful investment, we confuse luck with skill. It was easy in early 2000 to delude yourself that you were an investment genius when your Internet stock doubled and then doubled again.
To deal with the pernicious effects of overconfidence, think about amateur tennis. The player who steadily returns the ball, with no fancy shots, is usually the player who wins. And the prudent buy-and-hold investor who holds a diversified portfolio through thick and thin is the investor most likely to achieve his long-term goals.
Mistake #2: Following the herd
People feel safety in numbers. Investors tend to get more and more optimistic, and unknowingly take greater and greater risks, during bull markets and periods of euphoria. That is why speculative bubbles feed on themselves.
But any investment that has become a widespread topic of conversation among friends or has been hyped by the media is very likely to be unsuccessful. Throughout history, some of the worst investment mistakes have been made by people who have been swept up in a speculative bubble. Whether with tulip bulbs in Holland during the 1630s, real estate in Japan during the 1980s, or Internet stocks in the United States during the late 1990s, following the herd - believing that "this time it's different" - has led people to make some of the worst investment mistakes.
Just as contagious euphoria leads investors to take greater and greater risks, the same self-destructive behavior leads many to sell at the market's bottom when pessimism is rampant.
More money went into equity mutual funds during the fourth quarter of 1999 and the first quarter of 2000 - the top of the market - than ever before. Most of that money went to high-tech and Internet investments, the ones that turned out to be the most overpriced and then declined the most during the subsequent bear market. And more money went out of the market during the third quarter of 2002 than ever before, as mutual funds were redeemed or liquidated - just at the market trough. Later, during the punishing bear market of 2007-09, new record withdrawals were made by investors who threw in the towel at record lows just before the first, and often best, part of a market recovery.
It's not today's price or even next year's price that matters; it's the price you'll get when you sell. For most investors, that's in retirement - and even at age 60, chances are you will live another 25 years and your spouse may live several years more. So don't let the crowd trick you into either exuberance or distress. Remember the ancient counsel, "This too shall pass."
Mistake #3: Timing the market
Does the timing penalty - the cost of second-guessing the market - make a big difference? You bet it does. The stock market as a whole has delivered an average rate of return of 9.6% over long periods of time.
But that return measures only what a buy-and-hold investor would earn by putting money in at the start of the period and keeping his money invested through thick and thin. The average investor's actual returns are at least two percentage points lower because the money tends to come in at or near the top and out at or near the bottom.
In addition to the timing penalty, there is also a selection penalty. When money poured into equity mutual funds in late 1999 and early 2000, most of it went to the riskier funds - those invested in high tech and Internet stocks. The staid "value" funds, which held stocks selling at low multiples of earnings and with high dividend yields, experienced large withdrawals. During the bear market that followed, these same value funds held up very well while the "growth" funds suffered large price declines. So the gap between overall market returns and an investor's actual returns is even larger than those two percentage points.
Mistake #4: Assuming more control than you have
Psychologists have identified a tendency in people to think they have control over events even when they have none. That can lead investors to overvalue a losing stock in their portfolio. It also can lead them to imagine trends when none exist or believe they can spot a pattern in a stock chart and thus predict the future. In fact, the changes in stock prices are very close to a "random walk": There is no dependable way to predict the future movements of a stock's price from its past wanderings.
The same holds true for supposed seasonal patterns, even if they appear to have worked for decades. Once everyone knows there is a Santa Claus rally in the stock market between Christmas and New Year's Day, the "pattern" will evaporate. Investors will buy one day before Christmas and sell one day before the end of the year to profit from the supposed regularity. But then investors will have to jump the gun even earlier, buying two days before Christmas and selling two days before the end of the year. Soon all the buying will be done well before Christmas and the selling will take place right around Christmas. Any apparent stock market pattern that can be discovered will not last as long as there are people around who will try to exploit it.
Mistake #5: Paying too much in fees
There is one piece of investment advice that, if you follow it, can dependably increase your returns: Minimize your investment costs. We have spent two lifetimes thinking about which mutual fund managers will have the best performance year in and year out. Here's what we now know: It was and is hopeless.
That's because past performance is not a good predictor of future returns. What does predict investment performance are the fees charged by the investment manager. The higher the fees you pay for advice, the lower your return. As our friend Jack Bogle, founder of mutual fund company the Vanguard Group, likes to say, "You get what you don't pay for."
We looked at all equity mutual funds over a 15-year period and measured the rate of return produced for their investors, as well as all the costs charged and the implicit costs of portfolio turnover - the cost of buying and selling portfolio holdings. We then divided the funds into quartiles. The lowest-cost-quartile funds produced the best returns.
If you want to own a mutual fund with top-quartile performance, buy a fund with low costs. If we measure after-tax returns, recognizing that high-turnover funds tend to be tax-inefficient, our conclusion holds with even greater force.
Mistake #6: Trusting stockbrokers
The stockbroker's real job is not to make money for you but to make money from you. Brokers tend to be friendly for one major reason: It gets them more business. The typical broker "talks to" about 75 customers who collectively invest about $40 million. (Think for a moment about how many friends you have and how much time it takes you to develop each of those friendships.) Depending on the deal he has with his firm, your broker gets about 40% of the commissions you pay.
So if he wants a $100,000 income, he needs to gross $250,000 in commissions charged to customers. Now do the math. If he needs to make $200,000, he'll need to gross $500,000. That means he needs to take that money from you and each of his other customers. Your money goes from your pocket to his pocket. That's why being "friends" with a stockbroker can be so expensive. A broker has one priority: getting you to take action, any action.
We urge you not to engage in "gin rummy" behavior. Don't jump from stock to stock or from fund to fund as if you were selecting and discarding cards in a game. You'll run up your commission costs - and probably add to your tax bill as well.
http://money.cnn.com/galleries/2010/moneymag/1001/gallery.investing_mistakes.moneymag/index.html
We're both in our seventies. So is Warren Buffett. The main difference between his spectacular results at Berkshire Hathaway and our good results is not the economy and not the market, but the man from Omaha. He is simply a better investor than just about any other in the world. Brilliant, consistently rational, and blessed with a superb mind for business, he has managed to avoid the mistakes that have crushed so many portfolios. Let's look at two examples.
In early 2000, Berkshire Hathaway's portfolio had underperformed funds that enjoyed spectacular returns by loading up on stocks of technology companies and Internet startups. Buffett avoided all tech stocks. He told his investors that he refused to invest in any company whose business he did not fully understand - and he didn't claim to understand the complicated, fast-changing technology business - or where he could not figure out how the business model would sustain a growing stream of earnings. Some said he was passé, a fuddy-duddy. Buffett had the last laugh when Internet-related stocks came crashing back to earth.
In 2005 and 2006, Buffett largely avoided the mortgage-backed securities and derivatives that found their way into many investment portfolios. Again, his view was that they were too complex and opaque. He called them "financial weapons of mass destruction." When they brought down many a financial institution (and ravaged our entire financial system), Berkshire Hathaway avoided the worst of the meltdown.
Avoiding mistakes - such as the mistake of incurring unnecessary risks - is one of the great secrets of investment success. Be alert to these common ones that can prevent you from realizing your goals.
Mistake #1: Overconfidence
At our two favorite universities, Yale and Princeton, psychologists are fond of giving students questionnaires asking how they compare with their classmates. For example, students are asked: "Are you a more skillful driver than your average classmate?" Invariably, the overwhelming majority answer that they are above-average drivers. Even when asked about their athletic ability, where one would think it more difficult to delude oneself, students generally say they're above average. They see themselves as above-average dancers, conservationists, friends, and so on.
And so it is with investing. In recent years, a group of behavioral psychologists and financial economists have created the important new field of behavioral finance. Their research shows that we are not always rational. We tend to be overconfident. If we do make a successful investment, we confuse luck with skill. It was easy in early 2000 to delude yourself that you were an investment genius when your Internet stock doubled and then doubled again.
To deal with the pernicious effects of overconfidence, think about amateur tennis. The player who steadily returns the ball, with no fancy shots, is usually the player who wins. And the prudent buy-and-hold investor who holds a diversified portfolio through thick and thin is the investor most likely to achieve his long-term goals.
Mistake #2: Following the herd
People feel safety in numbers. Investors tend to get more and more optimistic, and unknowingly take greater and greater risks, during bull markets and periods of euphoria. That is why speculative bubbles feed on themselves.
But any investment that has become a widespread topic of conversation among friends or has been hyped by the media is very likely to be unsuccessful. Throughout history, some of the worst investment mistakes have been made by people who have been swept up in a speculative bubble. Whether with tulip bulbs in Holland during the 1630s, real estate in Japan during the 1980s, or Internet stocks in the United States during the late 1990s, following the herd - believing that "this time it's different" - has led people to make some of the worst investment mistakes.
Just as contagious euphoria leads investors to take greater and greater risks, the same self-destructive behavior leads many to sell at the market's bottom when pessimism is rampant.
More money went into equity mutual funds during the fourth quarter of 1999 and the first quarter of 2000 - the top of the market - than ever before. Most of that money went to high-tech and Internet investments, the ones that turned out to be the most overpriced and then declined the most during the subsequent bear market. And more money went out of the market during the third quarter of 2002 than ever before, as mutual funds were redeemed or liquidated - just at the market trough. Later, during the punishing bear market of 2007-09, new record withdrawals were made by investors who threw in the towel at record lows just before the first, and often best, part of a market recovery.
It's not today's price or even next year's price that matters; it's the price you'll get when you sell. For most investors, that's in retirement - and even at age 60, chances are you will live another 25 years and your spouse may live several years more. So don't let the crowd trick you into either exuberance or distress. Remember the ancient counsel, "This too shall pass."
Mistake #3: Timing the market
Does the timing penalty - the cost of second-guessing the market - make a big difference? You bet it does. The stock market as a whole has delivered an average rate of return of 9.6% over long periods of time.
But that return measures only what a buy-and-hold investor would earn by putting money in at the start of the period and keeping his money invested through thick and thin. The average investor's actual returns are at least two percentage points lower because the money tends to come in at or near the top and out at or near the bottom.
In addition to the timing penalty, there is also a selection penalty. When money poured into equity mutual funds in late 1999 and early 2000, most of it went to the riskier funds - those invested in high tech and Internet stocks. The staid "value" funds, which held stocks selling at low multiples of earnings and with high dividend yields, experienced large withdrawals. During the bear market that followed, these same value funds held up very well while the "growth" funds suffered large price declines. So the gap between overall market returns and an investor's actual returns is even larger than those two percentage points.
Mistake #4: Assuming more control than you have
Psychologists have identified a tendency in people to think they have control over events even when they have none. That can lead investors to overvalue a losing stock in their portfolio. It also can lead them to imagine trends when none exist or believe they can spot a pattern in a stock chart and thus predict the future. In fact, the changes in stock prices are very close to a "random walk": There is no dependable way to predict the future movements of a stock's price from its past wanderings.
The same holds true for supposed seasonal patterns, even if they appear to have worked for decades. Once everyone knows there is a Santa Claus rally in the stock market between Christmas and New Year's Day, the "pattern" will evaporate. Investors will buy one day before Christmas and sell one day before the end of the year to profit from the supposed regularity. But then investors will have to jump the gun even earlier, buying two days before Christmas and selling two days before the end of the year. Soon all the buying will be done well before Christmas and the selling will take place right around Christmas. Any apparent stock market pattern that can be discovered will not last as long as there are people around who will try to exploit it.
Mistake #5: Paying too much in fees
There is one piece of investment advice that, if you follow it, can dependably increase your returns: Minimize your investment costs. We have spent two lifetimes thinking about which mutual fund managers will have the best performance year in and year out. Here's what we now know: It was and is hopeless.
That's because past performance is not a good predictor of future returns. What does predict investment performance are the fees charged by the investment manager. The higher the fees you pay for advice, the lower your return. As our friend Jack Bogle, founder of mutual fund company the Vanguard Group, likes to say, "You get what you don't pay for."
We looked at all equity mutual funds over a 15-year period and measured the rate of return produced for their investors, as well as all the costs charged and the implicit costs of portfolio turnover - the cost of buying and selling portfolio holdings. We then divided the funds into quartiles. The lowest-cost-quartile funds produced the best returns.
If you want to own a mutual fund with top-quartile performance, buy a fund with low costs. If we measure after-tax returns, recognizing that high-turnover funds tend to be tax-inefficient, our conclusion holds with even greater force.
Mistake #6: Trusting stockbrokers
The stockbroker's real job is not to make money for you but to make money from you. Brokers tend to be friendly for one major reason: It gets them more business. The typical broker "talks to" about 75 customers who collectively invest about $40 million. (Think for a moment about how many friends you have and how much time it takes you to develop each of those friendships.) Depending on the deal he has with his firm, your broker gets about 40% of the commissions you pay.
So if he wants a $100,000 income, he needs to gross $250,000 in commissions charged to customers. Now do the math. If he needs to make $200,000, he'll need to gross $500,000. That means he needs to take that money from you and each of his other customers. Your money goes from your pocket to his pocket. That's why being "friends" with a stockbroker can be so expensive. A broker has one priority: getting you to take action, any action.
We urge you not to engage in "gin rummy" behavior. Don't jump from stock to stock or from fund to fund as if you were selecting and discarding cards in a game. You'll run up your commission costs - and probably add to your tax bill as well.
http://money.cnn.com/galleries/2010/moneymag/1001/gallery.investing_mistakes.moneymag/index.html
Tuesday, November 10, 2009
The Full Motley: 4Q 2009 Part 2
It was nine months ago today that I started this blog, and as I recall, I introduced a new fund at that time into my 401(k) assets to help leverage against the receding market. As it turned out, my timing kinda sucked -- if I raised my 401(k) contributions and invested that money solely into the stock market, then my return would be in the ballpark of 50% on that new money. But in the long-run, I am better off with a focus on the overall asset allocation. Plus, I personally never want to get too involved in the market to the point that it becomes a second job or a glorified casino.
There are two things that are inevitable in the market: it's going to rise, and it's going to fall. There will be market booms and there will be other recessions. During either case, every investor will feel the need to do something, during which most novice investors will usually do the wrong thing. Next time the market moves substantially, I can simply adjust my assets across more funds based on this handy chart:
Fund # - Real / Current / Target
Fund 29 - 10% / 5% / 5%
Fund 84 - 10% / 10% / 10%
Fund 24 - 22% / 25% / 25%
Fund 113 - 14% / 10% / 10%
Fund 85 - 44% / 50% / 50%
As you can see, I have changed my current allocations (i.e. direction of new money) to match my target. Now, when the funds in the "real" column (which reflect the actual balance in my portfolio) are skewed, it is because one or more of these five funds is over- or under-performing, which is an indication that I should redistribute the money somewhere else. If a fund is under-performing, then I want to add more money to it to buy at a discount. If a fund is over-performing, then I want to remove money from it to sell at a premium. Bear in mind, this technique works best with indexed mutual funds - and it does not apply to ownership of individual stocks!
Contrariwise to my strategy, what novice investors often do is see that the market is on the rise, so they put all of their money in the greener pastures (no "green" pun intended). There are market horror stories of investors that held off on the tech stock boom of 1995-2000 until the Y2K fears had gone away, at which point they dumped money into the sector. March 2000 is when its bubble popped, so all of that money was practically lost as soon as it went in. (Yes, this is what qualifies as horror in the financial world.)
Conversely, when novice investors see that the market is in rapid decline, they pull all of their money from the market into a money market fund (which is on par with a savings account at the bank). This prevents them from losing anything, but when the markets rally back, they miss out on the returns. If they could pull out at the first signs of a massive retreat, such as August 2007 or even October 2008, and then buy in that the first signs of market recovery, such as March 2009, then their portfolio will be awesome!
Unfortunately, there is not enough information to forecast when to move your money. So in reality, novice investors will stomach the losses as long as they can until they finally say, "enough is enough and its time for a change!" Or some variation of that, and they move their money into stable investments right before the market turns around. Having been burned by the fire, they hold off as long as possible before buying into the market again. A common result is to watch them buy in at $10, sell at $6.50, and then buy back at $10.20.
In either case, going "all-in" or "all-out" requires perfect timing. The pitfall stems from the old adage: "what's good for the goose is good for the gander," but in reality the modified adage of "you can have your cake, and eat it too" is more appropriate. When it is time to look at your portfolio, the trick is to hedge the best possible outcome with the worst case scenario. Asset allocation is the most effortless way of doing it.
As well as making the change to incoming assets, what I also want to do for tomorrow is move 5% from my Hi-Yield Corporate Bond Fund #29 to the Total Stock Market Index Fund #85 and move 3% from the International Index Fund #113 to the Explorer Fund #24 (this will put 98% of my portfolio within my target) based on the chart below:
Fund # - Real / Current / Target / Future
Fund 29 - 10% / 5% / 5% / 5%
Fund 84 - 10% / 10% / 10% / 10%
Fund 24 - 22% / 25% / 25% / 25%
Fund 113 - 14% / 10% / 10% / 11%
Fund 85 - 44% / 50% / 50% / 49%
If only courtship & dating were so simple.
DISCLAIMER: Although many of you know that I work in finance, please be aware that I am neither licensed nor permitted to give advice and if you want to get specific recommendations, then you should consult with a financial advisor or reputable financial sources, my favorite website is CNNFN.com and my favorite radio station is KFNN 1510 AM. Many financial plans are at no cost to you (because the advisers are paid by the investments where your money is placed).
There are two things that are inevitable in the market: it's going to rise, and it's going to fall. There will be market booms and there will be other recessions. During either case, every investor will feel the need to do something, during which most novice investors will usually do the wrong thing. Next time the market moves substantially, I can simply adjust my assets across more funds based on this handy chart:
Fund # - Real / Current / Target
Fund 29 - 10% / 5% / 5%
Fund 84 - 10% / 10% / 10%
Fund 24 - 22% / 25% / 25%
Fund 113 - 14% / 10% / 10%
Fund 85 - 44% / 50% / 50%
As you can see, I have changed my current allocations (i.e. direction of new money) to match my target. Now, when the funds in the "real" column (which reflect the actual balance in my portfolio) are skewed, it is because one or more of these five funds is over- or under-performing, which is an indication that I should redistribute the money somewhere else. If a fund is under-performing, then I want to add more money to it to buy at a discount. If a fund is over-performing, then I want to remove money from it to sell at a premium. Bear in mind, this technique works best with indexed mutual funds - and it does not apply to ownership of individual stocks!
Contrariwise to my strategy, what novice investors often do is see that the market is on the rise, so they put all of their money in the greener pastures (no "green" pun intended). There are market horror stories of investors that held off on the tech stock boom of 1995-2000 until the Y2K fears had gone away, at which point they dumped money into the sector. March 2000 is when its bubble popped, so all of that money was practically lost as soon as it went in. (Yes, this is what qualifies as horror in the financial world.)
Conversely, when novice investors see that the market is in rapid decline, they pull all of their money from the market into a money market fund (which is on par with a savings account at the bank). This prevents them from losing anything, but when the markets rally back, they miss out on the returns. If they could pull out at the first signs of a massive retreat, such as August 2007 or even October 2008, and then buy in that the first signs of market recovery, such as March 2009, then their portfolio will be awesome!
Unfortunately, there is not enough information to forecast when to move your money. So in reality, novice investors will stomach the losses as long as they can until they finally say, "enough is enough and its time for a change!" Or some variation of that, and they move their money into stable investments right before the market turns around. Having been burned by the fire, they hold off as long as possible before buying into the market again. A common result is to watch them buy in at $10, sell at $6.50, and then buy back at $10.20.
In either case, going "all-in" or "all-out" requires perfect timing. The pitfall stems from the old adage: "what's good for the goose is good for the gander," but in reality the modified adage of "you can have your cake, and eat it too" is more appropriate. When it is time to look at your portfolio, the trick is to hedge the best possible outcome with the worst case scenario. Asset allocation is the most effortless way of doing it.
As well as making the change to incoming assets, what I also want to do for tomorrow is move 5% from my Hi-Yield Corporate Bond Fund #29 to the Total Stock Market Index Fund #85 and move 3% from the International Index Fund #113 to the Explorer Fund #24 (this will put 98% of my portfolio within my target) based on the chart below:
Fund # - Real / Current / Target / Future
Fund 29 - 10% / 5% / 5% / 5%
Fund 84 - 10% / 10% / 10% / 10%
Fund 24 - 22% / 25% / 25% / 25%
Fund 113 - 14% / 10% / 10% / 11%
Fund 85 - 44% / 50% / 50% / 49%
If only courtship & dating were so simple.
DISCLAIMER: Although many of you know that I work in finance, please be aware that I am neither licensed nor permitted to give advice and if you want to get specific recommendations, then you should consult with a financial advisor or reputable financial sources, my favorite website is CNNFN.com and my favorite radio station is KFNN 1510 AM. Many financial plans are at no cost to you (because the advisers are paid by the investments where your money is placed).
Tuesday, November 3, 2009
The Full Motley: 4Q 2009 Part 1
Ok, it is getting time for my 4Q review, and things are looking good!
The other day or so, I heard on the radio how this market recovery has outpaced experts' opinions, which is good because it has definitely outpaced everything I've said. I expected it to raise above 10,000 by the end of the year, and it did that a few weeks ago. I also expected it to retreat below 9,000, and it blew right into 10,000, and then retreated down to 9,750, but I don't think it's been back to even 9,500, so that is really a lot better than I expected.
There are a couple thoughts I have about that: one being that all these minor retreats that we have not been seeing will compound into one massive retreat for February or March (or based on how far off my expectations have been thusfar, maybe it will happen in early January instead). Alternatively, I think it could be that many people are holding large portions of cash, and they're reinvesting more and more cash each time we hit these major benchmarks. It would be a great strategy honestly, albeit the ideal would have been for them to dump it all into the markets in March when the DOW was scaling down to 6,500.
Regardless, I can change my allocations from my current to my target since my Total Bond Market holdings are nearing 10% now, but I still have a few days to consider it.
Fund # - Current / Target
Fund 29 - 0% / 5%
Fund 84 - 55% / 10%
Fund 24 - 15% / 25%
Fund 113 - 5% / 10%
Fund 85 - 25% / 50%
The other day or so, I heard on the radio how this market recovery has outpaced experts' opinions, which is good because it has definitely outpaced everything I've said. I expected it to raise above 10,000 by the end of the year, and it did that a few weeks ago. I also expected it to retreat below 9,000, and it blew right into 10,000, and then retreated down to 9,750, but I don't think it's been back to even 9,500, so that is really a lot better than I expected.
There are a couple thoughts I have about that: one being that all these minor retreats that we have not been seeing will compound into one massive retreat for February or March (or based on how far off my expectations have been thusfar, maybe it will happen in early January instead). Alternatively, I think it could be that many people are holding large portions of cash, and they're reinvesting more and more cash each time we hit these major benchmarks. It would be a great strategy honestly, albeit the ideal would have been for them to dump it all into the markets in March when the DOW was scaling down to 6,500.
Regardless, I can change my allocations from my current to my target since my Total Bond Market holdings are nearing 10% now, but I still have a few days to consider it.
Fund # - Current / Target
Fund 29 - 0% / 5%
Fund 84 - 55% / 10%
Fund 24 - 15% / 25%
Fund 113 - 5% / 10%
Fund 85 - 25% / 50%
Tuesday, October 27, 2009
CNNFN: Best Time to Invest? Now!
The best time to invest in a 401(k)? Now
Don't try to time your retirement contributions based on market swings. Contribute as much as you can until you retire.
-By Walter Updegrave, Money Magazine senior editor
NEW YORK (Money) -- Question: I'm 47-years-old and would like to begin participating in my company's 401(k) plan. But I don't know if this is the right time to do so. Do you think I should start now or wait until the economy gets better? --Frank, Brighton, Mass.
Answer: Most issues in personal finance aren't digital -- yes or no, do this or that. There's usually more gray than pure black or white. Which means I don't often get a chance to be totally unequivocal. So I'm going to take full advantage of this opportunity:
Don't wait, Frank! Start contributing to your 401(k) pronto. Do the max if you can. Throw in catch-up contributions once you reach 50 if you can manage it. And don't stop until you retire.
I know that the events of the past year have rattled plenty of retirement investors. Even some people who have been participating in their 401(k) for years have begun to wonder whether it makes sense to hold off for a while and see how things play out.
But contributing to a 401(k) -- or any other retirement savings plan -- is a long-term discipline that you should adhere to throughout your career regardless of what's going on in the economy and the financial markets at any given moment. It's not an activity that you turn on and off in hopes of capitalizing on a soaring market or avoiding a bad one.
Why? Well, even though we know that the financial markets will have their ups and downs, we can't predict when they'll occur with enough precision for us to time our 401(k) contributions to exploit them.
Just look at this past year. Back in March, stock prices had hit a 12-year low and many people were worried that the wheels were coming off our economic and financial system. By your rationale, that would have been a terrible time to put money into your 401(k), since no one knew when, or for that matter if, the economy would get better.
But if you had followed your gut then -- which, come to think of it, you probably did, since you're still not participating in your 401(k) -- you would have missed out on the 50%-plus surge in stock prices that's occurred over the last eight months.
Fact is, when the economy is going through one of its periodic convulsions, it's impossible to tell when it will get back on track. And if you hold off investing during economic downturns and wait until you're absolutely positively sure that the economy is on the mend, you're going to miss the opportunity to do a lot of saving.
Let's take the last recession as an example. According to the National Bureau of Economic Research, the group that dates economic contractions and expansions, the recession before this one lasted eight months, starting in March of 2001 and ending in November of that same year.
But NBER didn't determine that the recession had ended and officially announce it was over until July of 2003, fully 19 months after the recovery had already begun.
It doesn't always take that long to get the official nod that the economy is in recovery mode again. But my point is that by the time you get hard evidence that the economy has turned a corner, the rebound will likely have already been well underway. And chances are the financial markets will be even further along since they typically lead the turnaround. Which means you'll probably miss opportunities to buy investments in your 401(k) while they're selling at attractive "pre-recovery" prices.
The other reason you don't want to focus on the short-term ebbs and flows of the economy is that such an approach is antithetical to retirement planning. Only by saving and investing regularly throughout our working years will most of us accumulate a nest egg large enough to maintain our pre-retirement standard of living. The 401(k) makes that sort of regular saving and investing possible in large part because of the ease and convenience of payroll deductions (the tax breaks don't hurt either).
Yes, your 401(k) balance will fluctuate as the financial markets go through their inevitable gyrations. But hanging in there and contributing regularly gives you your best shot at boosting the value of your account over the long term.
A recent study of 401(k) plans by the Employee Benefit Research Institute bears this out. EBRI found that the balances of workers who participated consistently in their 401(k) plans from 2003 through 2008 dropped 24.3% on average in 2008 due to the market rout.
But the study also showed that because of a combination of employee and employer contributions and investment gains before the crash, the average account balances of these consistent participants actually increased at an annual rate of 7.2% over that time period, even after factoring in the market crash.
Clearly, there are no guarantees of how much you or anyone else will eventually end up with by saving and investing through a 401(k). But the sooner you get started, the more sensibly you diversify and invest and the longer you stick with your 401(k) saving and investing regimen regardless of what's happening in the economy and financial markets, the better your chances of accumulating enough dough to support you in retirement.
http://money.cnn.com/2009/10/26/pf/expert/401k_contributions.moneymag/index.htm?postversion=2009102711
I wanted to reprint this article, because (A) Walter Updegrave is one of my favorite financial reporters in terms of his philosophies, and (B) his philosophy in this article reminded me of exactly what I wrote in my June 15th entry: But (I remembered) one of the clichés that I would tell callers when the younger people would inquire "when is the best time to start investing?" My answer was always "Now," with the explanation that "once you start investing, you can change things around and learn what you don't know as you play, but if you're sitting on the sidelines the whole time and hoping to learn everything before you begin, then you can miss the whole game."
The markets may do a lot of unpredictable things, but this truth is one that you can always fall back on as a standard. If you can afford to invest, then you cannot afford to not invest.
Don't try to time your retirement contributions based on market swings. Contribute as much as you can until you retire.
-By Walter Updegrave, Money Magazine senior editor
NEW YORK (Money) -- Question: I'm 47-years-old and would like to begin participating in my company's 401(k) plan. But I don't know if this is the right time to do so. Do you think I should start now or wait until the economy gets better? --Frank, Brighton, Mass.
Answer: Most issues in personal finance aren't digital -- yes or no, do this or that. There's usually more gray than pure black or white. Which means I don't often get a chance to be totally unequivocal. So I'm going to take full advantage of this opportunity:
Don't wait, Frank! Start contributing to your 401(k) pronto. Do the max if you can. Throw in catch-up contributions once you reach 50 if you can manage it. And don't stop until you retire.
I know that the events of the past year have rattled plenty of retirement investors. Even some people who have been participating in their 401(k) for years have begun to wonder whether it makes sense to hold off for a while and see how things play out.
But contributing to a 401(k) -- or any other retirement savings plan -- is a long-term discipline that you should adhere to throughout your career regardless of what's going on in the economy and the financial markets at any given moment. It's not an activity that you turn on and off in hopes of capitalizing on a soaring market or avoiding a bad one.
Why? Well, even though we know that the financial markets will have their ups and downs, we can't predict when they'll occur with enough precision for us to time our 401(k) contributions to exploit them.
Just look at this past year. Back in March, stock prices had hit a 12-year low and many people were worried that the wheels were coming off our economic and financial system. By your rationale, that would have been a terrible time to put money into your 401(k), since no one knew when, or for that matter if, the economy would get better.
But if you had followed your gut then -- which, come to think of it, you probably did, since you're still not participating in your 401(k) -- you would have missed out on the 50%-plus surge in stock prices that's occurred over the last eight months.
Fact is, when the economy is going through one of its periodic convulsions, it's impossible to tell when it will get back on track. And if you hold off investing during economic downturns and wait until you're absolutely positively sure that the economy is on the mend, you're going to miss the opportunity to do a lot of saving.
Let's take the last recession as an example. According to the National Bureau of Economic Research, the group that dates economic contractions and expansions, the recession before this one lasted eight months, starting in March of 2001 and ending in November of that same year.
But NBER didn't determine that the recession had ended and officially announce it was over until July of 2003, fully 19 months after the recovery had already begun.
It doesn't always take that long to get the official nod that the economy is in recovery mode again. But my point is that by the time you get hard evidence that the economy has turned a corner, the rebound will likely have already been well underway. And chances are the financial markets will be even further along since they typically lead the turnaround. Which means you'll probably miss opportunities to buy investments in your 401(k) while they're selling at attractive "pre-recovery" prices.
The other reason you don't want to focus on the short-term ebbs and flows of the economy is that such an approach is antithetical to retirement planning. Only by saving and investing regularly throughout our working years will most of us accumulate a nest egg large enough to maintain our pre-retirement standard of living. The 401(k) makes that sort of regular saving and investing possible in large part because of the ease and convenience of payroll deductions (the tax breaks don't hurt either).
Yes, your 401(k) balance will fluctuate as the financial markets go through their inevitable gyrations. But hanging in there and contributing regularly gives you your best shot at boosting the value of your account over the long term.
A recent study of 401(k) plans by the Employee Benefit Research Institute bears this out. EBRI found that the balances of workers who participated consistently in their 401(k) plans from 2003 through 2008 dropped 24.3% on average in 2008 due to the market rout.
But the study also showed that because of a combination of employee and employer contributions and investment gains before the crash, the average account balances of these consistent participants actually increased at an annual rate of 7.2% over that time period, even after factoring in the market crash.
Clearly, there are no guarantees of how much you or anyone else will eventually end up with by saving and investing through a 401(k). But the sooner you get started, the more sensibly you diversify and invest and the longer you stick with your 401(k) saving and investing regimen regardless of what's happening in the economy and financial markets, the better your chances of accumulating enough dough to support you in retirement.
http://money.cnn.com/2009/10/26/pf/expert/401k_contributions.moneymag/index.htm?postversion=2009102711
I wanted to reprint this article, because (A) Walter Updegrave is one of my favorite financial reporters in terms of his philosophies, and (B) his philosophy in this article reminded me of exactly what I wrote in my June 15th entry: But (I remembered) one of the clichés that I would tell callers when the younger people would inquire "when is the best time to start investing?" My answer was always "Now," with the explanation that "once you start investing, you can change things around and learn what you don't know as you play, but if you're sitting on the sidelines the whole time and hoping to learn everything before you begin, then you can miss the whole game."
The markets may do a lot of unpredictable things, but this truth is one that you can always fall back on as a standard. If you can afford to invest, then you cannot afford to not invest.
Friday, September 18, 2009
Dow Breakpoint
The DOW closed this week above another breakpoint: 9,800. Just for sake of history, the first time the DJIA (a.k.a. "The DOW") closed above 9,800 was March 1999 (in fact, it started shy of 9,700 and it closed at 10,006.78 that month) and I believe it closed below 9,800 most recently on October 6, 2008, so depending on your definition of "recovery," the recovery of the aforementioned Lehman Brothers bankruptcy only took one year (the financial definition of "recovery" is technically when we set a new high, but I think that's a misnomer because it assumes that the market is never over-inflated, and everybody knows that is possible).
Monday, September 14, 2009
CNNFN: Events That Broke Wall Street
The events that broke Wall Street: A shocking series of events that forever changed the financial markets
http://money.cnn.com/galleries/2008/news/0809/gallery.week_that_broke_wall_street/
A year ago, the collapse of Lehman Brothers set off a series of stunning events from which Wall Street is still recovering.
Seemingly every day for about month, a different legendary financial company teetered on collapse. Stocks recorded some of their most dramatic drops in history, including the Dow's epic 778-point drop on Sept. 29 -- the biggest ever single-day slide. And lawmakers worked overtime in an effort to stem off a failure of the financial system.
The solution: a series of unprecedented and expensive bailouts to save systemically significant institutions from failing and to loosen the tight grip on credit.
Today is the one-year anniversary of the biggest event to shake Wall Street to its core in the most recent market downturn: the bankruptcy of the Lehman Brothers. The DOW tumbled as far down as 6500 in March 2009 before it has made a steady recovery (although most analysts feel as though the "recovery" has been backtracking lost ground because the investors in large over-reacted to the news). Regardless, this 33-date timeline from the above link is interesting from a historical perspective (granted, it's no fall of ENRON but somewhat interesting nonetheless).
http://money.cnn.com/galleries/2008/news/0809/gallery.week_that_broke_wall_street/
A year ago, the collapse of Lehman Brothers set off a series of stunning events from which Wall Street is still recovering.
Seemingly every day for about month, a different legendary financial company teetered on collapse. Stocks recorded some of their most dramatic drops in history, including the Dow's epic 778-point drop on Sept. 29 -- the biggest ever single-day slide. And lawmakers worked overtime in an effort to stem off a failure of the financial system.
The solution: a series of unprecedented and expensive bailouts to save systemically significant institutions from failing and to loosen the tight grip on credit.
Today is the one-year anniversary of the biggest event to shake Wall Street to its core in the most recent market downturn: the bankruptcy of the Lehman Brothers. The DOW tumbled as far down as 6500 in March 2009 before it has made a steady recovery (although most analysts feel as though the "recovery" has been backtracking lost ground because the investors in large over-reacted to the news). Regardless, this 33-date timeline from the above link is interesting from a historical perspective (granted, it's no fall of ENRON but somewhat interesting nonetheless).
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