Archives For Investing

April was a decent month for all the indexes followed here at AFM except for gold.

April’s 1.93% total return for the S&P 500 Index was the 40th best for the month of April going back to 1926. The index is up 12.74% year-to-date. Not bad.

Here is the link to the AFM PDF Report: S&P 500, MidCap 400, SmallCap 600, & 1500 Performance (01-2011 – 04-2013)

Uh-Oh! Here We Go Again

April 1, 2013

From this weekend’s WSJ:

The market’s record-breaking spree has raised a new fear in many American households—dread that they are missing out on big gains.

When stock prices collapsed in 2008, the bear market wiped out half of the savings of Lucie White and her husband, both doctors in Houston. Feeling “sucker punched,” she says, they swore off stocks and put their remaining money in a bank.

This week, as the Dow Jones Industrial Average and Standard & Poor’s 500-stock index pushed to record highs, Ms. White and her husband hired a financial adviser and took the plunge back into the market.

“What really tipped our hand was to see our cash not doing anything while the S&P was going up,” says Ms. White, a 39-year-old dermatologist in Houston. “We just didn’t want to be left on the sidelines.”

“We just didn’t want to be left on the sidelines.”

Sounds familiar, doesn’t it?

1. Sell everything after the market crashes.

2. Put it all in the bank (meanwhile the market turns back up again).

3. Time passes and suddenly they’re reading and hearing about the stock market reaching all-time highs.

4. Feel like they’re missing out.

5. Dive back into stocks at an all time high.

It’s the exact opposite of buy low, sell high.

This couple is just now in their late 30s. They should have never have gotten out of stocks completely. Rather, they should have had an allocation plan and should have utilized dollar-cost averaging to take advantage of lower stock prices during 2008 and 2009.

I have a feeling this couple’s going to get burned again.


DJIA TR vs. S and P 500 TR YTD 2012

I wonder how many investors were told that their structured product was safe?

First off, what’s a structured product? According to this article ($) in today’s Wall Street Journal, structured products are…

“…issued by big Wall Street firms, investors can get exposures to commodities, stocks or other investments without actually owning those assets. The products may promise to give investors a portion of any gains in, say, U.S. stocks or Asian currencies while offering some protection from market losses.”

The risk?

Bankruptcy of the issuer!

“When an issuer goes belly up, as Lehman Brothers Holdings Inc. did in September, structured-product investors are generally left standing in line with other creditors and may face a long wait to determine how much, if anything, they’ll be able to recover. Some Lehman structured products now are trading for less than 10 cents on the dollar, according to SecondMarket Inc., a marketplace specializing in illiquid assets, which says it has heard from investors holding more than $2 billion worth of Lehman structured products. In Hong Kong, investors in Lehman-linked structured products have staged protests at numerous bank locations.”

I wonder how many advisors considered the bankruptcy of Lehman Brothers a possibility? I’ll be honest: I didn’t but I also wasn’t selling structured products. I wonder how many brokers rolled their eyes at mom and pop investor because they questioned the soundness and financial backing of these products?

The problem is that Wall Street designs all these complicated products (for an idea of how complicated these products are, read this), which are then sold by brokers who themselves don’t fully understand them and the risks associated with them. And, investors jump at the chance to purchase something that is both “safe” and offers a way to make a little extra dough. The broker’s happy because they make a nice commission, the issuer is happy because they get a nice stream of income, and the investor is happy because they feel “safe.” The only one who gets screwed when these products don’t work out is the investor. You won’t see the broker giving back any of their commissions, nor will you see the issuer offering to help out because they are bankrupt. The investor is left holding this bag of crap.

All of this brings to mind another question:

How safe are insurance products that are backed by the insurer? Maybe someone from the insurance industry can fill us in…

From today’s Wall Street Journal:

The idea of saving for retirement always terrified Zack Teibloom. With the stock market’s big drop this year, it seems even more daunting.

“I don’t even have one K, let alone 401 Ks,” says the 23-year-old Mr. Teibloom, a recent college grad who works as an editor for a small magazine in Chicago. “I’m worried that if I put money away, it won’t even be safe the way the markets are going.”

The saving and investing habits of young workers have long been dismal. Only 49% of eligible workers in their 20s participate in 401(k) plans offered through their employers, according to a 2007 study from Hewitt Associates Inc., a Lincolnshire, Ill., consulting firm. And less than 20% of this group is saving anything at all for retirement.

Source: WSJ – Market Turmoil Frightens Off Young Investors ($)

Isn’t it crazy how we do the exact opposite of what we should be doing? If the stock market was going up, up, UP, people would be jumping in left and right—essentially buying over-priced stocks. Now that the market is on a downswing, people are sitting on the sidelines. The very next paragraph of the article even mentions this:

Declining stock prices actually favor young investors, because it means the shares they buy have more room to grow in the decades before they hit retirement. But anecdotal evidence suggests the rocky stock market is scaring off many young people.

My advice:

1. Remember this quote from Sam Stovall, chief investment strategist at Standard & Poor’s:

“Since 1950 we have had 48 pullbacks – meaning declines of 5 – 10%. We’ve had 18 corrections – meaning 10- 20%, and 8 bear markets. At the worst on average we end up getting back to normal in about 3 1/2 years. But people just don’t want to wait that long and they let fear overtake their emotions.”

2. Take a look at these posts from my archives:

Why the Long-Run is so Important When Investing in Stocks

S&P 500 Rolling-Period Total Real Returns

3. Read Jeremy Siegel’s Stocks for the Long Run*.

4. Finally, if you’re young enough, tell yourself this: “I’m young. I have 30 years until retirement. I’m diversified. Why do I care what the market is doing today? The stock funds I’m buying today are on sale and I’m getting a good deal if I keep them for the long-run.”

Sitting on the sidelines isn’t a good option.

* Affiliate Link

According to the Vanguard website, the Vanguard S&P 500 Index Fund is down 12.07% YTD as of yesterday’s close. To get an idea of what that return would look like if it were to continue for an entire year, you can annualize the YTD return.

It’s a fairly simple calculation to perform as long as you have the following information:

1. Number of days that have elapsed so far this year. This is easy to calculate if you have access to Excel.

2. The YTD return of the investment that you want to annualize.

The formula for annualizing a ROR is pretty straight forward:

[(1 + YTD ROR)1/(#of days/365)] – 1

The YTD ROR should be expressed as a decimal. Plugging in the Vanguard S&P 500 Index Fund information from above, the equation looks like this:

[(1 – .1207)1/(204/365)] – 1

[.87931/(0.55890411)] – 1

[.87931.7892] – 1

0.7944 – 1

-.2056 or -20.56%

So, a 12.07% loss for the first 204 days of the year equates to a 20.56% loss on an annualized basis.

Now let’s say you are down 12.07% but you purchased this fund on December 31, 2006. How do you annualize that return? The only input that changes in the above formula is the number of days, which is now 570.

[(1 – .1207)1/(570/365)] – 1

[.87931/1.5616] – 1

[.87930.640350877] – 1

0.9209 – 1

-.0791 or -7.91%

Had you purchased an investment on December 31, 2006 that is currently down 12.07% since the time of purchase, your annualized rate of return on that investment would be -7.91%. Not much of a return is it? Anyway, now you know how to annualize your returns. Fun stuff!

At the time of this writing, Vanguard’s S&P 500 Index Fund (VFINX) is down 14.04% year-to-date (not including dividends). Where would you be had you dollar-cost averaged into VFINX during the year? To arrive at that answer I assumed a few things:

1. Invested $500 on the 1st and 15th of each month.

2. If the 1st and the 15th fell on a weekend or holiday, I used the price for the trading day preceding the 1st or the 15th.

3. I assumed this was a 401(k) account.

So, here’s where you would stand right now had you invested $500 into VFINX on the 1st and 15th of every month during 2008:

So, you would have invested $7000 during the year and it’s worth $6,509. You’re down 7.01%, right? Not exactly.


Because you weren’t fully invested the entire year. In order to figure out your personal rate of return, you need to add in the purchase dates. The easiest way to do this is with Excel’s XIRR function. I ran the function myself. Here are the results:

So, according to those numbers, you’re personal rate of return is -22.68%, which is an annualized number. Sounds scary but keep in mind that it wouldn’t take much of a rise in the price of VFINX for that number to become positive. I was playing around with the numbers and figured out that if VFINX went up to $125, you would actually have a positive personal ROR even though the fund would still be down over 7.51% for year.

So, even though it stinks to watch your periodic investments drop in value, in the long run, it’s a good thing if you’re dollar-cost averaging.