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).
Tuesday, November 10, 2009
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).
Thursday, August 27, 2009
CNNFN: Market Watch
Tomorrow will be a very interesting day in the market considering it is going to follow this round of headlines:
- Friday rally lands Dow industrials, S&P, Nasdaq at 2009 highs; oil also ends at '09 high (8/21/09) Hardly a news-worthy story at that time, but it kept the wheels in motion for more interesting headlines.
- Dow industrials' winning streak hits seven as U.S. equity indexes eke out gains (8/26/09) And that verb was on the money! The DOW closed up by a mere 4.23 points, i.e. .04%. "Eked out" indeed.
- U.S. stocks close higher; 8-session Dow winning streak is longest in 28 months (8/27/09) The past longest "winning streak" was in April 2007, and the markets peaked that October. Obviously, there is no way the markets will peak within the next year or two, but at the same time, these are promising signs.
Saturday, August 15, 2009
The Full Motley: 3Q 2009
This week was when I was slated to re-evaluate my allocations, which I somewhat missed but that's not too upsetting because July 2009 was the best single month of the DOW since 2002, so I was probably best off to just let things sit as they were.
But aside from the market boom, Vanguard.com had some restructuring since my last personalized update, so now I can track the progress of my account much easier. Keep in mind that the most important focus of an active portfolio is the asset allocation, so it matters less whether the current balance in the portfolio is $10,000, $100,000, or $1,000,000, than how the 100% is split.
Here are my current allocation:
Vanguard Total Stock Market Index Fund (fund 85) = 44.5%
Vanguard Explorer Fund Investor Shares (fund 24) = 23%
Vanguard Total International Stock Index Fund (fund 113) = 14%
Vanguard High-Yield Corporate Fund (fund 29) = 10.5%
Vanguard Total Bond Market Index Fund (fund 84) = 5.5%
Vanguard GNMA Fund Investor Shares (fund 36) = 2.5%
So, the first step is to compare these real numbers to my current and target allocations:
Fund # - Real / Current / Target
Fund 29 - 10% / 0% / 5%
Fund 84+36 - 5% / 55% / 10%
Fund 24 - 23% / 15% / 25%
Fund 113 - 14% / 5% / 10%
Fund 85 - 45% / 25% / 50%
At this point, I could simply flip 5% from Fund 29 to Fund 84 and another 5% from Fund 113 to Fund 85, and then set my current allocations to my target allocations. This was the goal that I had prepared back in February, and it would make future re-evaluations very simple because any change will reflect the performance of the holdings (unless there is a change in my target allocation).
Alternatively, I could continue to direct a higher percent to Fund 84 and Fund 85 than I have going to Fund 29 and Fund 113, respectively, which is what I am doing now.
I don't think we are going to see a big gain until 4Q ("fourth quarter," i.e. Oct-Dec) in the stock market again, so I believe whatever money I add there may be nullified in the next few months, so I would just as soon keep new money going in than I would be to rearrange my existing amounts. Plus, I have a curiosity to find out how long it will take for me to build up 10% in Fund 84 without dumping new money to it.
But aside from the market boom, Vanguard.com had some restructuring since my last personalized update, so now I can track the progress of my account much easier. Keep in mind that the most important focus of an active portfolio is the asset allocation, so it matters less whether the current balance in the portfolio is $10,000, $100,000, or $1,000,000, than how the 100% is split.
Here are my current allocation:
Vanguard Total Stock Market Index Fund (fund 85) = 44.5%
Vanguard Explorer Fund Investor Shares (fund 24) = 23%
Vanguard Total International Stock Index Fund (fund 113) = 14%
Vanguard High-Yield Corporate Fund (fund 29) = 10.5%
Vanguard Total Bond Market Index Fund (fund 84) = 5.5%
Vanguard GNMA Fund Investor Shares (fund 36) = 2.5%
So, the first step is to compare these real numbers to my current and target allocations:
Fund # - Real / Current / Target
Fund 29 - 10% / 0% / 5%
Fund 84+36 - 5% / 55% / 10%
Fund 24 - 23% / 15% / 25%
Fund 113 - 14% / 5% / 10%
Fund 85 - 45% / 25% / 50%
At this point, I could simply flip 5% from Fund 29 to Fund 84 and another 5% from Fund 113 to Fund 85, and then set my current allocations to my target allocations. This was the goal that I had prepared back in February, and it would make future re-evaluations very simple because any change will reflect the performance of the holdings (unless there is a change in my target allocation).
Alternatively, I could continue to direct a higher percent to Fund 84 and Fund 85 than I have going to Fund 29 and Fund 113, respectively, which is what I am doing now.
I don't think we are going to see a big gain until 4Q ("fourth quarter," i.e. Oct-Dec) in the stock market again, so I believe whatever money I add there may be nullified in the next few months, so I would just as soon keep new money going in than I would be to rearrange my existing amounts. Plus, I have a curiosity to find out how long it will take for me to build up 10% in Fund 84 without dumping new money to it.
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