Objective information about financial planning, investments, and retirement plans

5 Reasons Investors Use ETFs

Share

Fidelity recently polled nearly 600 high net worth investors to gain a better understanding of their thinking about the market and where they plan to invest in 2014. Notably, 43% of investors said they are planning to increase their investment in ETFs over the next 12 months.

Fidelity created this graphic that highlights 5 reasons investors use ETFs (or don’t use them).

 5 Reasons Investors Use ETFs

Other key findings of the Fidelity study include:

  • Despite the small gains this year in the DJIA (1.6% as of June 5, 2014), 55% believe it will end the year up 5% or more.
  • When it comes to the U.S. economy, investors continue to feel cautious. The majority (71%) feels it’s headed in the right direction vs. 29% who say it’s stagnant or headed in the wrong direction.
  • 62% of investors also believe a market correction—when a major index declines by at least 10% from a recent high—is likely to happen in 2014.
  • The indicators that would motivate the most investors holding cash to re-invest into the market are a stronger U.S. economy (28%) and higher interest (12%). 25% report holding no cash on the sidelines.
  • Over half (59%) of investors prefer to grow their portfolio by investing in domestic equities vs. 18% in international equities.
  • Over a third (35%) invest in ETFs for broad market exposure (indexes), while 27% of investors don’t invest in ETFs because they need to learn more. 

Advantages of ETFs 

ETFs have several features that are advantageous to investors:

  • ETFs are generally transparent regarding their holdings.
  • ETFs can be bought and sold during the trading day.  This offers additional opportunities for investors.
  • Stop orders can be used to limit the downside movement of your ETFs.
  • ETFs can also be sold short just like stocks.
  • Many index ETFs carry low expense ratios and can be quite cheap to own.
  • Many ETFs are quite tax-efficient.
  • ETFs can provide a low cost, straightforward way to invest in core market indexes.  

Disadvantages of ETFs  

  • ETFs can be bought and sold just like stocks.  In some cases this could serve to promote excessive trading that could prove detrimental to investors.
  • ETF providers have introduced a proliferation of new ETFs in response to their popularity.  Some of these ETFs are excellent, some are not.  Many new ETFs are based on untested benchmarks that have only been back-tested.  Additionally there are a number of leveraged ETFs that multiply the movement of the underlying index by 2 or 3 times up or down.  While there is nothing inherently wrong with these products they can easily be misused by investors who don’t fully understand them.
  • Trading ETFs generally entails paying a transaction fee, though a number of providers have introduced commission-free ETFs in order to gain market share.  

ETFs have proven to be a great innovation for investors.  If used properly they are a great addition to your investing toolkit.  Like any investment make sure you understand what you are investing in (and why) before you invest.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

Peyton Manning and Investing Success

Share

I attended the Envestnet Advisor Summit at the Chicago Hilton this past week.  Excellent conference, Envestnet offers a robust platform for financial advisors.  A colleague urged me to attend and I’m glad I did.

The highlight of the conference was Peyton Manning’s keynote address on Friday morning.  Regular readers here know that I am diehard fan of the Green Bay Packers, but I think all football fans have to respect Manning’s skill and his character.  His address was about leadership and being a game changer.  I felt that several of his remarks and comments have a direct correlation to being a successful investor.

Peyton Manning

Thrive on discomfort 

Manning made this reference in terms of it being a key trait of game changers.  I think this is a key trait of successful investors as well.

The investing landscape has certainly undergone change and disruption since the beginning of this century.  We’ve experienced the bursting of the Dot Com Bubble, the financial crisis of 2008-09, the Flash Crash and many other disruptions.

Successful investors adapt to change and embrace it to their advantage.  In some cases this means knowing when to change their investing style, in others it means knowing when to stay the course.  It also means knowing how and when to use new investing tools like ETFs and others.

Ask questions 

Manning mentioned this as a key trait of leaders in business and something that he does constantly in an effort to guide his team to even greater levels of success.

Investors should always ask questions.  Some key questions include:

  • Would I buy this particular investment today?
  • Is there a better place for my money?
  • What are your conflicts of interest in terms of advising me to make this investment?
  • How does this investment fit into my overall portfolio?  

It’s over move on after a bad play

Manning cited the uncanny ability of 49ers great Joe Montana to lead his team to a touchdown on the series immediately following his having thrown an interception.

This is a key trait for successful investors to adopt.  I can’t tell you how many investors I’ve spoken to who want to hold a losing position until it breaks even.  The ability to accept an investment loss is critical.  Sometimes it is better to realize a loss and reinvest the proceeds elsewhere.  Even the best investors make bad investing bets.  The successful ones are capable of admitting this and moving on.

Invest in a coach to keep you growing

Manning hired the current Duke Head Football Coach as his offseason coach to help him improve his quarterback skills.  This individual was his offensive coordinator in college at Tennessee.  This is Peyton Manning, 5 time MVP and Super Bowl champion hiring a coach to help him improve his game!

Many investors do a great job of accumulating wealth and managing their investments.  At some point even the most successful ones realize that they might need some outside expertise to take things to the next level.

Perhaps this realization comes as their career and family obligations limit the time they can spend on their investments.  Often this realization comes as retirement approaches.

Hiring a financial advisor is not a sign of weakness; rather it is a sign that you realize the limits of your expertise and the best uses of your time.  If you are at this point here is a guide to choosing a financial advisor that might help you.

Peyton Manning spoke about leadership and did a great job of tying in his experiences as a leader in sports to what financial advisors need to do to lead clients to the successful outcomes they are seeking.  As I listened to him speak I couldn’t help but see the relevance of his message to what I believe it takes to be a successful investor in today’s dynamic investing world.

Please check out our Book Store for books on financial planning, retirement, and related topics as well as any Amazon shopping needs you may have (or just click on the link below).  The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com.  If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. 

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

Photo credit:  Flickr

Enhanced by Zemanta

Investing: Time and Diversification are your Friends

Share

Each quarter Dr. David Kelly and his staff at JP Morgan Asset Management publish their Guide to the Markets.  This is a comprehensive chart book of investment and economic data that I find invaluable.

For the past several quarters the Guide has included this chart which as a long-term investor should be quite important to you.
 


The chart depicts the range of average annual returns for stocks, bonds, and a combination of the two over rolling 1, 5, 10, and 20 year periods from 1950 through 2013.  In my opinion every investor should understand the impact of diversification and time on their investments as depicted on the chart.

Understanding the chart 

The green bar depicts stocks, the light blue bar depicts bonds, and the grey bar depicts a 50-50 mix of the two.

As you can see the greatest volatility of return occurs over rolling 12 month periods.  The range of a 51% gain to a 37% loss in a 12 month period is huge.  The range for bonds is more compact and the range for a 50-50 mx of stock and bonds is slightly more compact.

As you move out to the 5, 10, and 20 year ranges you will note that the ranges from the largest gains to smallest (or a loss) become smaller with the passage of time.

Also of note is that in no 5, 10, or 20 year rolling time frame depicted does a 50-50 mix of stocks and bonds result in a negative return over the holding period.

What does this mean to you as an investor?

Diversification dampens the variability of your returns. As you can see from the chart stocks have a wider range of returns over all of the periods depicted than do bonds.  Combining the two tends to dampen the volatility of your portfolio.  Further enhancing the benefits of diversification is the fact that stocks and bonds are not highly correlated.

Taking this a step further, while an investment in an index mutual fund like the Vanguard 500 Index (VFINX) would have lost money if held over that 10 year period 2000-2009, a portfolio that was diversified to include fixed income, small and mid-cap funds, international equities, and other asset classes would have recorded gains during that same time period.

Time reduces the volatility of returns. I will leave any scientific explanation to those more attuned to this than myself, but certainly part of the reason are the ebbs and flows of market and business cycle factors that have an impact on stocks and bonds.  These might be recessions, interest rate movements, or other factors.

Implications for the future

The performance and characteristics of stocks and bonds might well differ in the future.  Diversification for most investors will likely mean holding more than just Large Cap domestic stocks and Intermediate Bonds as the graph depicts.  A few thoughts for the future, especially in this market environment of record highs for many stock market indexes:

  • Diversification reduces risk.
  • Diversification among assets with low correlations to one another further reduces risk.
  • Diversification is important because we have no way of knowing which investments or asset classes will perform well or poorly or when.
  • A longer holding period will generally serve you well as an investor in terms of smoothing out portfolio volatility. 

While every investor is different as is every investment environment, diversification and patience can be two of your greatest allies.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

The Chicago Financial Planner is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to Amazon.com. If you click on my Amazon.com links and buy anything, even something other than the product advertised, I earn a small fee, yet you don’t pay any extra. Click on the Amazon banner below to go directly to the main site or check out the financial planning related selections in our Book Store.

Enhanced by Zemanta

New Stock Market Highs: It’s Different This Time Right?

Share

Dow Jones (19-Jul-1987 through 19-Jan-1988).

It seems like every time we hit new highs in the stock market, the pundits tell us that somehow it’s different this time.  In 1999 we didn’t need to worry that many of the high-flying tech stocks had no balance sheet or even a viable business plan behind the company.  We all remember how that turned out.

In 2007 Wall Street couldn’t securitize questionable mortgages fast enough.  Mortgages and real estate were very secure investments.  Again we recall how that turned out.

This year the markets are again reaching record highs.  Both the Dow Jones Industrial Average and the S&P 500 stand at record levels as I write this.  No worries say the experts.  Valuations are reasonable and this isn’t a bubble (translation, it’s different this time).  We don’t know how this will turn out, but hopefully those of you with any degree of common sense will recall and apply the lessons of the past 15 years.

Who’s paying the pundits? 

Day after day there are guests on CNBC and similar programs touting stocks.  The chief investment strategist of a major financial services firm recently dismissed any talk of a bubble in stocks at least in the near term.

These folks may be right; perhaps this almost five year old bull market still has a way to go.  But somewhere in the back of my mind I also have to wonder if they aren’t touting stocks because it is in the financial interests of their firms (and perhaps their annual bonuses) for investors to keep investing in stocks.

So what should investors do in this stock market environment? 

What should you do now? 

If you are a regular reader of this blog nothing that I’m going to say below will surprise you nor will it differ from what I’ve been saying for the 4+ years that I’ve been writing this blog or the almost 15 years that I’ve been providing advice to my clients.  For starters:

  • Step back and review your financial plan.  Where do the recent gains in the stock market put you relative to your goals?
  • Does your portfolio need to be rebalanced back to your intended allocations to stocks, bonds, cash, etc.?
  • Review your asset allocation.  Is it still appropriate for your situation?
  • Review the holdings in your portfolio.  In the case of mutual funds and ETFs, how do they compare to their peer groups (for example if you hold a large cap growth fund compare it against other large cap growth funds)?  Would you buy these holdings today for your portfolio?
  • Ignore the market hype from the media and from financial services ads.

If you don’t have a financial plan in place this is a great time to get this done. 

Remember the lessons learned from the market downturns of 2000-2002 and 2008-2009.  While your portfolio will likely sustain losses in a major market downturn or even a more moderate and normal sell-off, diversification helps.  Diversified portfolios fared far better than those that were overweight in equities during the decade 2000-2009.  Portfolios with a diversified equity allocation generally fared better than those heavily weighted to just large cap domestic stocks that use the S&P 500 as a benchmark.

Of note, bonds have been a great diversifier in the past, especially over the past 30 years with the steady decline in interest rates.  With rates at historically low levels at the very least investors may need to rethink how they use bonds and what types of fixed income products to use in their portfolios.

My point is not to imply that a market correction is imminent or that investors should abandon stocks.  Rather the higher the markets go, the greater the risk of a stock market correction.  Make sure your portfolio is properly allocated in line with your financial goals and your tolerance for risk.  Many of the investors who suffered devastating losses in 2008-2009 were over allocated to stocks.  Tragically many couldn’t stomach the losses and sold out near the bottom, booking losses and in many cases missing out on the current market gains.

Revisit your financial plan and rebalance your portfolio as needed.  Most of all use your good common sense.  It’s not different this time regardless of what the experts may say.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

Photo credit:  Wikipedia

Enhanced by Zemanta

7 Reasons to Consider Selling a Mutual Fund

Share

Investing in mutual funds takes work, even index funds. Whether you own actively managed funds or index funds you still need to monitor your holdings. Here are 7 reasons you might consider selling a mutual fund holding.

Sale

A significant outflow of dollars

In my view, mutual fund managers should try to stay fully invested within their investment mandate. If I am investing in mutual fund in the large growth style, I want those dollars invested in large cap growth stocks.  I don’t want an equity fund manager deciding to be in cash, if I want to be in cash I’ll put that portion of the portfolio in a money market fund.   When a mutual fund experiences a high level of redemptions the managers may need to keep more cash on hand to meet these redemptions. This cash is not being invested in the stocks, bonds or other vehicles that the fund should be focused on.  In an up market like this one excess cash can be a drag on returns.

A significant inflow of dollars

Money follows success. Last year’s hot fund will attract more investors hoping to latch on to the fund’s success. Too much new cash in a short time frame can pose a real problem for a fund manager in terms of finding good investment ideas within the fund’s investment style.

This is not as significant for an index fund or a fund that invests in larger cap stocks.  However, for a fund investing in small- or mid-cap stocks this can be a death knell in terms of future success. I really admire mutual fund companies who close popular funds when they become too large.  Two that come to mind are Sequoia Fund (SEQUX) which was closed for over 20 years at one point and recently closed again after reopening for a couple of years (purchases can only be made directly from the fund company last time I checked).  Another is Artisan Funds and their Artisan Mid Cap Value Fund (ARTQX).  The mention of these funds should not be construed as investment advice in any way, shape, form. 

The flip-side is funds that simply allow new money to come in droves.  All too often these once stellar performers become tomorrow’s laggards.  I don’t know if this behavior is born out of stupidity, greed, hubris, or all three.  At the very least a fund taking in a vast amounts of new money should be raise a red flag as you monitor your portfolio. 

 A change in personnel

For an actively managed fund, a manager change is a significant event. Who will be in charge going forward? Will the fund’s investment style stay the same? This can also be an issue for an index product in terms of a change in its indexing methodology.

Personnel issues in the management of the fund company can also be an issue. As an example once high-flying Janus Funds has experienced heavy turnover in the executive suite over the past decade.  There has also been a fair amount of management turnover in many of the company’s mutual funds.  I find it hard to believe that this doesn’t have an impact on day to day operations and the management of the funds.

A change in the fund’s investment style  

I alluded to shifting investment styles above, but it’s worth repeating.  For example I recently suggested to the Committee of 401(k) plan for whom I serve as investment advisor that we remove a mutual fund whose investment style had shifted along with their investment methodology and some of the fund’s personnel.  While there’s nothing wrong with a go-anywhere fund that is style agnostic, if your intent is to invest in a mutual fund that invests in small cap growth stocks you should consider replacing that fund if its investment style changes to say small cap blend or value.

Fund mergers

Mutual fund companies sometimes merge laggard funds into other mutual funds within their families.  There are rules about restating past results for the surviving fund, but nonetheless if this happens to a fund you own, or recently took place in one you are thinking of buying, be sure to dig into the details, holdings and performance of the surviving fund to be sure it still makes sense for you as a part of your portfolio.

The reasons listed above generally warrant selling out of mutual fund entirely.  Here are two additional reasons to consider a total or partial sale that have nothing to do with negative developments with the fund. 

Donating appreciated fund shares 

As year-end approaches many of us look to make contributions to our favorite charities.  If you own shares of a mutual fund that has appreciated in value donating some or all of the shares to the charity is an excellent and tax-efficient way to make this contribution.  By donating appreciated shares owned in a taxable account (as opposed to a tax-deferred account like an IRA) you avoid paying capital gains taxes that would be due if the shares were simply sold.  You also receive a charitable deduction for the full market value of the shares donated.  Many charities have the capacity to receive donations in this fashion. 

Rebalancing your portfolio 

I generally suggest that most people look to rebalance their portfolio back to its intended asset allocation at least once or twice annually.  For example with the solid gains in most equity asset classes this year and the relatively flat to down performance of many fixed income asset classes, it is likely that your portfolio is over allocated to equities.  This potentially exposes you to more risk than your financial plan and your asset allocation calls for.  It is very appropriate in this case to sell off some of your mutual fund (or other investments) holdings where you are over allocated and adding to fund positions in areas of the portfolio that have become under allocated. 

I am not an advocate of the frequent buying and selling of mutual funds or any other investment vehicle for that matter.   However, mutual fund investing is not about sending in your money and forgetting about it. Successful mutual fund investors monitor their holdings and make changes when and if needed based upon a number of factors.  

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your financial planning and investing questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

Photo credit:  Flickr

Enhanced by Zemanta

1% a Small Number with Big Implications

Share

Percent Symbols - Best Percentage Growth or In...

The inspiration for this post comes from fellow finance blogger and financial advisor Jim Blankenship and his November is “Add 1% to Your Savings Month” movement.

It’s amazing how a small number like 1% can have such a big impact on your investments and the amount you’ll be able to accumulate for goals like retirement.  Here is a look at the impact of saving 1% on your investment expenses.

Mutual fund expenses matter

Using two share classes of the American Funds EuroPacific Growth fund as an example, the chart below illustrates the impact of 1% in expenses on the growth of your investment.  I was able to find two share classes of this fund whose expense ratios were exactly 1% different.  The B shares (ticker AEGBX) carry an expense ratio of 1.59% and the F-2 shares (ticker AEPFX) which carry and expense ratio of 0.59%.  Using Morningstar’s Advisor Workstation I compared the growth of a hypothetical $10,000 investment in each fund held over three time periods.

5 years ending 10/31/13 

Value of $10,000 investment
B Shares $17,710
F-2 Shares $18,606

 

As you can see varying nothing more than the expense ratio in these otherwise identical mutual funds, investing in the fund with a 1% lower expense ratio resulted in the accumulation of an additional $896 a 5.1% increase over an investment in the B share class.

10 years ending 10/31/13

Value of $10,000 investment
B Shares $22,677
F-2 Shares $24,734

 

Again varying nothing more than the expense ratio in these otherwise identical mutual funds, investing in the fund with a 1% lower expense ratio resulted in the accumulation of an additional $2,057 a 9.1% increase over an investment in the B share class.

From 4/30/84 through 10/31/13 

Value of $10,000 investment
B Shares $205,652
F-2 Shares $260,042

 

Once again varying nothing more than the expense ratio in these otherwise identical mutual funds, investing in the fund with a 1% lower expense ratio resulted in the accumulation of an additional $54,390 a 26.4% increase over an investment in the B share class.

A couple of things about the above comparison:  The assumption is that an investor put $10,000 into each of the funds and held them for the full time period, including the reinvestment of all fund distributions.  Any potential taxes or the expenses of engaging an investment advisor were not considered.  Further B shares are no longer available to new investors and even when they were they would generally convert to the less expensive A shares after a period of time.  None the less this comparison illustrates the impact saving 1% on your investment expenses can have on your returns and the amount you can potentially accumulate over time. 

How to reduce investing expenses 

While you may not always be able to save a full 1%, reducing your investment expenses by even a fraction of 1% can have a significant positive impact.  Here are some ideas that may help:

  • Utilize low cost index mutual funds and ETFs where possible and where they fit your investment strategy.  In many asset classes index funds outperform the majority of actively managed products.  Combine this with low expenses and index funds have a major leg up on most of their competitors.
  • In all cases make sure that you invest in the lowest cost share class of a given mutual fund that is available to you.
  • Avoid sales loads whenever possible.
  • Understand the expenses associated with the investment choices in your company’s 401(k) plan and the plan’s overall expenses.  If they are excessive consider asking your company’s plan administrator to look at some lower cost alternatives.  You might also  consider limiting your contributions to the amount needed to receive the maximum company match (if one is offered) and invest the remainder of your retirement savings elsewhere.
  • If you work with a financial advisor you must fully understand all of the ways in which your advisor makes money from your relationship.  This might include fees (hourly, flat-fee, or a percentage of assets).  In some cases the advisor makes money from the investment and insurance products they sell to you.  This can include up-front sales commissions (loads), deferred loads (B shares which are mostly obsolete), and level loads (C shares).  Additionally the advisor may make money from trialing commissions (12b-1 fees) or surrender charges incurred if your sell out of some mutual funds or annuity products too early.  If you are a regular reader of this blog you know that I am horribly biased in favor of using fee-only advisors (of which and I am one), avoiding the inherent conflict of interest that can arise when an advisor earns money from the sale of financial products. 

Saving 1% might seem like a trivial endeavor, but as you can see it can have big ramifications for investors.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your financial planning and investing questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

Photo credit:  Flickr

Enhanced by Zemanta

Are Best Mutual Fund Lists a Good Investing Tool?

Share

Money (magazine)

We all like to read lists that rank things.  Top colleges, top new cars, best and worst dressed and the like are just a few lists we see periodically.  Mutual rankings have been around for awhile.  Many top personal finance publications such as Money Magazine, Kiplinger’s, and U.S. News (for whom I am a contributing blogger) publish such lists that rank mutual funds based upon performance.  Are these Best Mutual Fund lists useful to you as an investor?

Best compared to what? 

In order for any mutual fund ranking tool to be useful the comparison needs to be apples-to-apples.  Comparing a large cap domestic stock fund to a fund that invests in gold mining companies is a pretty useless exercise.  Make sure that you understand what is being compared and the basis for the rankings.

Past performance is not an indication of future performance 

This is a pretty common disclaimer in the investment industry and it is one that should be heeded.  Last year’s top mutual fund might finish on top again this year or it might end up at the bottom of the pack.  This is especially true for actively managed mutual funds where results can often depend upon the manager’s investment style.

Who’s in charge? 

It is not uncommon for a top mutual fund manager to be wooed by a rival fund company or for them to go off and start their own mutual fund.  This is not such a big deal with index funds, but when looking at any actively managed fund be sure to understand whether or not the manager(s) who compiled the enviable track record are still in place.

What period of time is being used? 

Make sure that you understand the time period used in the rankings.  Returns over a single year can vary much more than returns compiled over a three, five, or ten year time period.  Additionally understand that one or two outstanding years can skew longer-term rankings.  Longer periods of time tend to smooth out these blips in performance.

Why didn’t you tell me about this fund a year ago? 

I recall looking at many of these lists over the years and wondering why the publication didn’t write about how wonderful the fund was a year ago before it chalked up this large gain.  Well the answer is that this isn’t the job of the publication and they and most of us can’t really predict this.

Is looking at performance worthless? 

No it isn’t but you need to look at performance in context.  As a financial advisor I look at performance over varying time periods and always in relation to the fund’s peers.  Among the things we look at:

  • Risk adjusted performance
  • Performance in up and down markets
  • Performance over rolling periods of time
  • Adherence to the fund’s stated style
  • Costs and expenses
  • Consistency of relative performance
  • Changes in the level of assets in the fund

In short selecting and monitoring mutual funds is about more than looking for the top performers of the past.  Like any other investment vehicle mutual funds need to be viewed in terms of potential future performance and in terms of how they fit into your overall investment strategy and your financial plan.

Please contact me at 847-506-9827 for a free 30-minute consultation to review your mutual fund holdings and to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.    

Check out Morningstar to evaluate your current mutual funds or any that you may be considering.  I use both their basic website and one of their advisor workstation programs every day.


Morningstar Stock Fund Investment Research

Photo credit:  Wikipedia

Enhanced by Zemanta

Stock Market Highs, Bond Market Woes, and Some Finance Links

Share
stock market

As I write this the Dow Jones Industrial Average and the S&P 500 stand in record territory.  In fact yesterday the S&P finished above 1,700 for the first time ever.  Bonds on the other hand have started to fizzle with virtually all bond categories suffering a loss during the second quarter.

As an investor what now?  Here are a few thoughts:

Tune out the media 

If you watch CNBC or similar shows the bulk of the guests are encouraging investors to get into stocks even at these high levels.  I’m not saying that new money invested in stocks will turn into losses, but I am saying that record market levels are not a reason to suddenly become euphoric about stocks.

Review your asset allocation

As you review your statements look at your portfolio’s current asset allocation to see if the gains in stocks have gotten you away from your target allocation.  Certainly market highs are a good time to look at rebalancing your portfolio.

Additionally this might also be a good time to review your target allocation in the context of your financial planning goals.  Have the gains in the stock market put you ahead of schedule in terms of reaching financial goals such as retirement and college funding?  Perhaps it’s time to take some risk off of the table and adjust your allocation to stocks a bit lower.  In any event this is a great to review your financial plan if you have one or to get one in place if you don’t.

Review your fixed income strategy 

Bonds and bond funds have operated in a favorable environment for the past 30 years.  This changed in the second quarter, though things have recovered a bit in July.  None the less at some point we will see interest rates rise.  This is a good time to look at your bond and bond fund holdings with and eye towards perhaps shortening up on duration.

It’s been a few weeks since I’ve given recognition to the many excellent investing articles and blog posts out there so here are a few links to some excellent reading:

Mike Piper offers A Look Inside Vanguard’s International Bond Funds at Oblivious Investor.

Ken Faulkenberry explains the difference between Geometric Average vs. Arithmetic Average For Investment Returns? at AAAMP Blog.

Morningstar’s Christine Benz walks us through A Bucket Portfolio Stress Test.

Market Watch’s Brett Arends comments on The return of ‘Dow 36,000’.

Jon  shares Stock Basics: The P/E Ratio at Novel Investor.

Please feel free to contact me at 847-506-9827 for a free 30-minute consultation to discuss your investing and financial planning questions. All services are offered on a fee-only basis, no financial product sales, no commissions. 

Please check out our Mutual Fund Investing page for links to additional posts about mutual fund investing.

Photo credit:  Flickr

 

Enhanced by Zemanta

5 Investing Lessons Learned So Far in 2013

Share
English: Markowitz-Portfolio Theory, Investmen...

The first half of 2013 is in the books.  It’s been a good year in terms of the domestic stock market; other areas of the markets have been mixed.  The second quarter saw declines in most fixed income categories, real estate, and in many international stock categories including emerging markets.  Commodities and precious metals have also suffered setbacks of late.  As an investor this is a good time to take stock of your investments and more importantly any implications for your financial planning goals.

When reviewing your portfolio keep these 5 investing lessons learned (and relearned) in the first half of 2013 in mind.

Components of a diversified portfolio can lose money 

Diversification and balance are generally good characteristics for an investment portfolio.  However it is not uncommon for some components of a well-balanced portfolio to lose money over a quarter or longer.  Case in point during the second quarter of 2013 virtually all fixed income categories lost money.  Of the major bond investment styles high yield led the way with a loss of 1.4% for the quarter while TIPs suffered the worst loss at 7.0%.  The fact that some components of a diversified portfolio might suffer a loss at various times should not come as a surprise as one of the goals of diversification is to include some asset classes with a low correlation to other portfolio holdings.

Gold doesn’t always glitter 

Gold, touted by many as the ultimate safe haven investment really took it on the chin during the second quarter.  The main Gold ETF (ticker GLD) lost 22.89% in the second quarter and is down 26.48% for the first six months of 2013.  This brings the five year trailing return of the ETF down to 5.44% compared to 6.92% for the S&P 500 ETF (ticker SPY).  Gold may ultimately stage a major comeback but these results fly in the face of the doom and gloom folks who tout Gold and other hard assets as the ultimate investment solution.  A college economics professor once told the class that investors in Gold had not progressed past Freud’s anal stage of development.  That may or may not be true but like anything else a portfolio that is top-heavy in Gold and precious metals may not be the answer.

The stock market can go up even if Apple doesn’t 

Apple, the largest component of the S&P 500 index, lost 24.42% over the first six months of 2013.  However the index still gained 13.82% over the same period of time.  Apple is also a large holding for many large cap mutual funds and ETFs.

The rally in bonds may be over, or maybe it isn’t 

As I mentioned above, the second quarter was dismal for bonds of all types.  Bonds and bond mutual funds have enjoyed 30 years of mostly continuous gains, in large part due to a favorable interest rate environment.  Some say the favorable period for bonds may be over, but others say investors who have yanked $ billions from bond funds may be overreacting.  Time will tell.  One thing is certain to me is that this is a good time to evaluate your fixed income investments and to look at the duration risk that you are taking.

Investors are enthusiastic when things “feel good” in the markets 

As typified by an infuriating commercial for John Hancock showing several couples saying they need to get back into the markets now, more investors have been finally feeling good about getting back into the markets after the market drop of 2008-09.  It’s easy to invest when things feel good; it’s profitable to invest when they don’t.  If you are an investor just getting back into stocks now you need both a good financial plan and a financial advisor who knows what he or she is doing.

Six months into any year is a good point to review your investments and your progress against your financial plan.  Given the wide variations in performance among various asset classes this is an especially good point to review your situation.

Please feel free to contact me with your investing and financial planning questions.  Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.  

For you do-it-yourselfers, check out Morningstar.com to analyze your investments and to get a free trial for their premium services.  Please check out our Resources page for links to some additional tools and services that might be beneficial to you.

Photo credit: Wikipedia

Enhanced by Zemanta

Trading vs. Investing – Which Do You Do?

Share
Better in the Dark

This is a guest post from Robert Farrington at The College Investor.  He seeks to help young adults and college students get started investing, and has a great Investing 101 resource.  Though Robert’s audience is a bit younger than many of the readers of this blog his insights are useful to investors of all ages and experience levels in my opinion. 

When you describe yourself and your financial future, do you see yourself as a trader or an investor?  Did you know there was a difference? It’s true, they are often used interchangeably, but they are quite different.   And knowing yourself and the difference between the two can help you understand where you’ll be successful in the future.

Trading is Different From Investing 

Trading and investing have a major difference, and that difference has to do with time. If you are trying to multiply your money over the course of 30 or 40 years, then you are most likely investing. If, however, you are interested in buying a stock today and selling it tomorrow if it jumps a point or two, then you are almost certainly a trader, and not an investor. Trading is often a very short term action, while investing is performed over the long term.

While the terms are quite different, one can perform a trade while still being an investor. For instance, if you have a 401(k) account that isn’t performing as well as you’d like, you might decide to change your overall investment strategy and you would do this by making some trades. You would sell off the shares that no longer matched your investment plan and then you would purchase some new ones that do. With this, you would be trading in order to fulfill the long-range goals of your overall investment plan.

Give Into Temptation 

I think there’s a little piece in all of us that is intrigued by risk and excitement. This is why some people like to skydive and others like to swim with sharks. Still others love the thrill of a short-term trade built mostly on speculation.

We all have our investments, but you know what? Nobody talks about them. Why is that? Because they’re boring. What would we say? Something like, “My portfolio increased by 5.6% last year…” And that would most likely be the end of the conversation. But, what if you decided to make some trades and possibly make some short term cash? You story would turn into, “I evaluated the economy and I realized that this particular stock was undervalued, so I bought 100 shares and they just skyrocketed! I made $1,000 in just a couple of days.”

Because there’s a little need for risk and adventure in all of us, I say give into your temptation….in moderation. You definitely should not risk your entire investment portfolio, but feel free to use a small portion (something like 5%) and trade it as you wish. This will ensure that 95% of your portfolio stays safe within your planned strategy, but yet you can still have some fun with the 5% by making trades and taking a few risks here and there.

Making Trades

If you do decide to take a little risk and make some trades, there are a few basics you should know. First of all, most every trade carries a fee. So, if you sell a stock to make $5, but the trading fees were $10, then you actually just lost money.

Secondly, decide which trading method is right for you. Are you a fundamentalist or a technical trader? Meaning, do you trade based on the movement of the share price or are you making trades because of a certain ratio (like the debt-to-equity ratio, etc.)? Find out what makes sense for you and have a good time.

If you plan on trading at all, you need a strategy, and you need to stick to it.  Just like investing!  Invest in what you know, but also trade in what you know as well.  If you are interested in trading in a certain area of the market, say currencies, but aren’t knowledgeable step back, take an investing course, read up, and maybe use a practice account before you go for it with real money.

Final Thoughts

For some people, trading can be fun, but it’s just too much uncertainty and risk.  Just know that it’s not for everyone. If you aren’t comfortable with it, then don’t do it. But, if you feel like it won’t take over your life then maybe you want to give it a shot. Happy investing!

This was a guest post from Robert Farrington, from The College Investor.  He seeks to help young adults and college students get started investing, and has a great Investing 101 resource.  

Please feel free to contact me with your investing and financial planning questions.  Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.   

Please check out our Resources page for links to some additional tools and services that might be beneficial to you.  

 Photo credit:  Wikipedia

Enhanced by Zemanta