Paranoia versus “Set it and forget it” December 19, 2011
Posted by forwardfinancialplanning1 in Investing-General.1 comment so far
Geoff Davey of Finametrica (we’re fond of Finametrica’s risk assessment tools) has produced an interesting analysis that may help us tolerate the emotional roller coaster called investing. Davey looked at market movements over the last 40 years and monitored the gyrations of two different portfolios–a 70% stocks portfolio and a 30% stocks portfolio. There were some interesting similarities as well as a few differences. In either case, there are implications for controlling one’s emotions as they apply to investing.
Davey observed that if one looked at the monthly historical performance of the 70% stocks portfolio, it would show the portfolio value to be falling 33% of the time, recovering from a recent low 41% of the time and rising from a recent high 26% of the time. Surprisingly, the 30% stocks portfolio didn’t vary greatly from the 70% stocks portfolio, as it showed roughly a 1/3-1/3-1/3 behavior as well. The primary difference between the two allocations was found in the magnitude of the fluctuations, not in the direction.
However, extending the evaluation period from monthly to yearly paints a much different picture. When examining historical results on a yearly basis, Davey found that the 70% stocks portfolio was rising 63% of the time, recovering 19% of the time and falling only 18% of the time. The time period difference was even more dramatic for the 30% stocks portfolio as it was rising 84% of the time, recovering 8% of the time and falling only 8% of the time.
The moral of this story? As investors, we become our own worst enemies if we react to the day by day fluctuations of the market. That supposition most likely plays out in spades if one reacts to the second by second market movements espoused by day traders. For all but a few, “slow and steady” is definitely the better way to build wealth when participating in the financial markets.
Are others becoming fearful???? December 14, 2011
Posted by forwardfinancialplanning1 in Bond Mutual Funds, Equity Mutual Funds, Investing-General.add a comment
Super investor Warren Buffet has offered the investing world a great deal of wisdom over the years, with one of his most famous quotes being, “Be fearful when others are greedy and be greedy when others are fearful.” This, of course summarizes his ever contrarian views on buying and selling stocks. With the equity markets displaying minimal net gains during this millenium, some recent statistics suggest that many may becoming “fearful.”
Strategic Insights reports that inflows into stock and bond mutual funds are declining rapidly. The first eleven months of 2011 saw only $80 billion flowing into these investment vehicles. This is in sharp contrast to inflows of $246 billion in 2010 and $374 billion in 2009. Strategic Insights surmises that this is due to accelerated withdrawals from US equity funds, lower inflows into international equity funds, growing disenchantment with bond funds and general aversion to the market volatility we’ve seen of late. They also note that commercial banks have largely been the beneficiaries of this trend with bank deposits up $2 trillion over the past few years. While these deposits are yielding virtually zero, they generally enjoy FDIC insurance (within limits).
The real answers may be more nuanced as the Strategic Insights cash flow data does not include ETF’s, variable annuity sub-accounts and collective trusts etc. However, it does cause one to wonder, “Is the investing public becoming fearful?” Buffet himself has been very active, having invested $23.9 billion in a range of industries in the third quarter, his biggest quarterly buying spree in at least 15 years.
You can’t believe everything you read in the paper… December 9, 2011
Posted by forwardfinancialplanning1 in Bond Mutual Funds, Equity Mutual Funds, Federal Income Taxes, Income Taxes, State Income Taxes.add a comment
Many of our readers reside in the Bloomington-Normal, Illinois area and subsequently subscribe to the local newspaper, The Pantagraph. An article in the December 8, 2011 “Money & Markets” column of the Money section is entitled “December is tax time”——not surprising given the time of year. However, the authors, AP writers Mark Jewel, and Jenni Sohn might want to double-check their sources as the article contains several inaccurate statements.
Their article is based on the annual mutual fund practice (required by law) of distributing to shareholders the pro-rata share of realized capital gains that have resulted within the mutual fund portfolio. The authors suggest that due to poor 2011 equity market returns, “many stock funds won’t have capital gains to pass on.” They continue with, “Some may even have losses that investors can use to offset gains on other investments.” While their first statement may eventually prove to be true, there’s no doubt about the second statement—it is incorrect. Mutual funds do not pass through the pro-rata share of net realized portfolio losses to shareholders. Rather, residual realized portfolio losses must be “carried forward” by the fund into future years.
The authors later state that capital gains are not a concern for a tax-free municipal bond fund. This supposition is also incorrect since only municipal bond interest payments (and not capital gains) escape the reach of the tax man.
The moral of the story??? It’s prudent to obtain guidance from a professional in the field. Jewel and Sohn do provide some good advice in that regard as they suggest that the complexity of the tax laws makes it wise to, “Consider consulting an accountant or other tax advisor about your strategy.” Perhaps they should heed some of their own advice……………!!!
