Saturday, May 30, 2015

Total Investment Return =

John Bogle has a great formula for describing total investment returns:

Total Return = Dividend Yield + Investment Return + Speculative Return

He defined investment returns as earnings growth/contraction plus dividend yield and speculative returns as the increase/decrease in the respective stock’s P/E ratio. The first two (DY+IR) are direct actions taken or achieved by your investment. The third (SR) is driven purely by the whims of the market. This combination of all three drive both the short and long term returns of your investment portfolio.

To put it in the context of Benjamin Graham’s eponymous phrase, the speculative return is the voting machine while the dividend yield and earnings growth is the weighing machine. Or put in our boxer’s parlance, one happens in the ring and the other outside of it.

We strongly believe our investment selection process that focuses on companies with little/no debt, high free cash flow, high capital returns and deep competitive moats will – over the long term – assure our investment returns. Theoretically, purchasing our investment at a discount to fair value will mitigate risk in the speculative return.

All of this seems quite reasonable until we recognize that a vast majority of our short-term returns and a substantial part of our long-term returns are directly linked to Bogle’s speculative returns. John Maynard Keynes wrote[2], “In one of the greatest investment markets in the world, namely New York, the influence of speculation is enormous. It is rare for an American to ‘invest for income,’ and he will not readily purchase an investment except in the hope of capital appreciation. This is only another way of saying that he is attaching his hopes to a favorable change in the conventional basis of valuation, i.e., that he is a speculator.” Things have changed very little since Keynes penned these words in the throes of the Great Depression.

At Nintai we keep a close watch on both investment returns and speculative returns within our individual holdings and how that impacts the portfolio in total. As seen below, since 2005 over half of our returns have come from speculative returns – meaning over 50% of the returns of the Nintai portfolio have come from P/E expansion rather than dividend rates or earnings growth.

Much like a state of equilibrium in physics, this simply cannot go on in perpetuity. Over the next decade we would expect to see overall returns decrease in scope as P/E ratios return to a more normalized level. As the Nintai portfolio’s average P/E is roughly 28% below the S&P500, we would expect this correction to affect the portfolio significantly less than the general markets thereby leading to outperformance in the long term. We believe the financial strength of our portfolio holdings – in combination with lower P/E ratios – provides us significant protection in the case of a market correction similar to 2000 or 2008/2009.

***

[An "ideal" stock might have all three components.  A decent dividend.  Earnings growth.  And a stock out of favor which would swing back to favor (multiple expansion).  AAPL used to fit the latter two criteria.  Now it fits the first two criteria.]

Tuesday, May 26, 2015

when to sell

Reason No. 5: It keeps you up at night. It is tough to put a dollar value on peace of mind, but if we did, it would be a pretty penny. If you have an investment whose fate has become so uncertain that it now causes you to lose sleep, this could be a great cue to move your dollars elsewhere. We are trying to reduce the stress in our life here, not add to it. We save and invest to improve our quality of life, not to develop ulcers. Adding insult to injury, stressing about a stock might cause you to lose focus and make rash decisions elsewhere in your portfolio. Remember, there’s no trophy or prize for taking on risk in investing. Stick with what you’re comfortable with.

While I am loathe to reference “The Gambler” when discussing our investment philosophy, as the concept could not be farther from what we preach, the Kenny Rodgers line “You’ve got to know when to hold ‘em” fits. If there are reasons to fold ‘em, how do we know when to hold ‘em?

Monday, May 25, 2015

7 Habits of Successful Investors

Christine Benz: As we all know, there are a lot of ways that investors can find success. They can find success through picking individual stocks. They can find success through picking mutual funds. They can find success through using just a simple target-date mutual fund. There are lots of ways to get it done. But when we look across successful investors, we do see some commonalities among their habits, and that's what Adam and I are going to talk about tonight.

We're going to divide and conquer. Adam is going to discuss four habits of successful investors, and I'll discuss the last three. Toward the end of the presentation, I'll also share some model portfolios that we have been working on for Morningstar.com. In a lot of ways, we think these portfolios illustrate some of the habits that we'll go through during the course of this presentation.

So, let's get right into the presentation. Let's talk about, first, what is a successful investor? And I think, in lot of ways, it can be helpful to think about what isn't necessarily a successful investor. Investment success isn't necessarily beating the market. It's not beating Warren Buffett. It's not generating returns that are higher than your neighbors or your brothers-in-law. Really, the main thing when you think about investment success is [whether or not you were] able to reach your financial goals. So, for most of us, this will entail achieving a comfortable retirement. Are we on track to achieve a comfortable retirement? If we wanted to fund college for our children or grandchildren or maybe fund some continuing education for ourselves, were we able to achieve that? Or perhaps we have shorter-term financial goals--and many of us do. So, if we wanted to buy a new car or buy a new home or make some home remodeling, were we able to achieve those goals? So, fundamentally, the question of whether or not you were able to achieve your financial goals should be your measure of your own success as an investor.

Along the way, we want to make sure that investors get there through skill and not luck. A successful investor is someone who understands the basics of saving and investing, who understands some of the key habits that tend to lead to investment success, and also avoids some of the big mistakes and some of the bad habits that investors can fall into.

In addition, we also define investment success as whether or not you were able to achieve peace of mind along the way. So, even if you were, in the end, able to reach your financial goals or maybe save and invest a sum that was way more than you expected, were you able to sleep easily at night? Balancing risk with returns is certainly fundamental to investment success as well. So, when we think about investor success, these are some of the key things we think about as defining investment success.

I'm going to just quickly outline the seven habits that Adam and I will spend a little more time on during the course of this presentation.

First of all, successful investors tend to "cheap out." So, they watch their investment costs every step of the way, because those costs can eat into their take-home returns. Adam will outline some of those investment costs and steps you can take to reduce them.

Successful investors also focus on the big picture and tune out the noise. There's lots of information flowing about the markets, and it's important--to the extent that you possibly can--to tune a lot of that out because, ultimately, it doesn't affect your investment success. Instead, successful investors focus on the big picture. 

Successful investors also know themselves. They know the role that behavior can play in financial decision-making, and they take steps to ward against some of those behavioral traps.

Successful investors also build in discipline, and here Adam will talk about some ways that you can, in some respects, put your plan on autopilot to kind of build discipline into your plan.

Successful investors also multitask, and this is something I'll be talking about in the course of my portion of the presentation. How do you juggle competing financial goals? Because most of us, at every life stage, are juggling some competing financial goals. How do you set those priorities and determine the best use of your capital at any given point in time.

Successful investors focus on limiting taxes. Just as they focus on limiting costs in their investments, they also focus on limiting the drag of taxes. And I'll talk about some specific ways that you can do that in your own investment plan.

And, finally, successful investors keep it simple. They avoid overcomplicated strategies. They avoid tactical market-timing strategies. They avoid narrowly focused investment products and, instead, run streamlined investment programs.

[Following are some excerpts from the full presentation.]

The first habit that we're going to be talking about is "cheaping out."  when we talk about investing costs, we're talking about things like fund expenses, the expense ratio that a mutual fund charges to manage your money; brokerage fees, the fees you pay every time you buy and sell shares of stock and any maintenance fees that may be involved; advisor fees, what you pay a financial advisor to manage your money, especially if he or she is not earning their keep; also administrative costs, many plans--401(k) plans, for example--have a layer of administrative costs built into the process that can eat away at your returns--the same thing with, for example, a 529 college-savings plan.

Habit number two: [Successful investors] focus on the big stuff. So, these are some of the most important levers that you have at your disposal that can lead to a successful investing outcome for you. The first one seems obvious, but it's still worth mentioning: saving enough. The amount that you are able to save and sock away probably is going to determine how much you end up with, as much as anything else. One obvious example: How much do you choose to contribute to your 401(k) plan at work?

Another important lever is when you start investing. The earlier you start saving, the more time your money has to grow--as we just saw in our Fund A and Fund B example--and the less pressure you'll be under to catch up later.

Asset allocation is another important lever to use. Stocks, of course, tend to outperform bonds over the long run, albeit with more volatility. So, pick an asset allocation that is appropriate for your time horizon and risk tolerance and capacity.

Habit number three, they know themselves. This, I think, is one of the more interesting elements of investing. It's sort of the psychological or behavioral angle. A few important questions to ask yourself: What has been your experience with money and investing throughout your life? Did you grow up in a household where saving and investing was encouraged? If so, then it may be second nature to you. It may be an obvious thing for you to do. If you didn't grow up with that as part of your experience, then it may seem like a foreign concept--something you don't know much about. You may need to take some extra steps to educate yourself so that you understand how investing works. You may need to try to cultivate some good saving habits within yourself.

The other side of the coin, of course, is being overconfident--thinking that you know more about what the market is going to do or more about investing than you really do. One thing that it's important to accept, I think, as an investor is this: No matter how much you know about investing, you don't know everything. You don't know everything that's going to happen with the market. Even if you've had a great run--you've bought some stocks low and you've sold them high and you feel like you're really on top of what the market's doing--that's a recipe for potential future disaster if you become overconfident and start making unwise investing decisions. So, it's really important to sort of stay within yourself. Even the best investors don't hit homeruns every time they bat--not by a long shot. There are plenty of strikeouts mixed in also.

Also, think about what kinds of money mistakes you've made in the past. And these don't have to be investing mistakes. These can be just financial mistakes that you've made. Have you fallen for get-rich-quick schemes? Are you subject to impulse buying? Have you taken on more financial risk than you could handle? If the answer is yes to these questions, these may be clues that you really need to watch taking on too much risk as an investor--that you are prone to a certain kind of behavior.

I have, at number four, building in discipline. As Christine mentioned, there are lots of different ways that investors can systemize these good habits that we're talking about. One, for example, is automating your contributions--a set-it-and-forget-it approach.

One of the best benefits of this approach is that the money never makes it into your bank account or into your wallet, so you're never tempted to spend it. It's taken off the top of your salary, and you don't have to worry about that temptation to use it for some other purpose. It also applies dollar-cost averaging, which is a positive behavioral way to invest. Basically, when you are dollar-cost averaging, you are buying a set amount of securities on a consistent basis.

Rebalancing your portfolio is an important piece of investing discipline. This can be automated as well, however; a lot of 401(k) plans will allow you to put in your desired allocation, and the plan will automatically rebalance if the allocation of the account falls too far out of line by whatever percentage you tell it.

Also, with regard to rebalancing, less generally is more. You really don't need to rebalance more than once a year. But if something extremely dramatic were to happen in the market, you might consider doing it more often than that. But studies have shown that rebalancing throughout the year is generally not as beneficial as rebalancing less often.

Avoid the temptation to dip into your nest egg. It can be really tempting when you see this pot of money just sitting in there that you know you can't touch until you retire; you might want to borrow from it or even withdraw some of the money. Statistics show that many people who borrow from 401(k)s do pay the money back, which is great, except there is an opportunity cost. By taking the money out, you are removing its exposure to the market and, therefore, the money is potentially missing out on any gains.

With that, I'll call Christine back up.

Benz: Thank you, Adam. I'm going to go through three additional habits of successful investors. One of them is that they can multi-task: They can walk and chew gum.

Investors, really at any life stage, are juggling competing financial priorities and goals. Think about students just out of college. They might have college debt, and they may also want to start an emergency fund, because they've heard that they should have some money set aside instead of having to resort to credit cards. And they may also want to invest in their 401(k) plan for their first job. Young savers are juggling those priorities.

Whatever our life stage, we've got to figure out, if I've got this set amount of money to invest each month or each year, what's the best use of my capital? How do I deploy that money in the smartest possible way?

When we think about prioritizing those competing financial goals, for most of us need to put our retirement savings at the top of the list. Unless we're one of that shrinking group of people who has a pension to fall back on in retirement that will fully fund all of our in-retirement expenses, most of us need to put our retirement plan at the top of the list. That's why it's so important every step of the way, even if you're a young accumulator in your 20s and 30s, to spend time thinking about whether, given your current savings rate, you are on track to hit what you'll need to have in retirement.

Another key habit of highly successful investors is that just as they might focus on limiting their investment-related costs, they also focus on limiting their tax costs.

I want to quickly run through the tax treatment of some of the key investment accounts that many of you have. With a traditional 401(k) or IRA, typically you make a pre-tax contribution and you enjoy tax-deferred compounding as long as you've got the money inside that account. When it comes time to pull the money out of the account in retirement, you will pay ordinary income tax on your contributions because you didn't pay taxes on them in the first place, and also on any investment earnings.

With Roth IRAs, it's the opposite. Aftertax money is going into the account. You're enjoying tax-free compounding on the investment earnings, and then when it comes time to pull the money out during retirement, that money comes out on a tax-free basis.

For taxable accounts, you will put aftertax dollars into the account. If you are using some sort of a taxable brokerage account, a non-retirement account, aftertax dollars go in. You'll pay taxes on any income or capital gains distributions that come out of the account as long as you hold it, and then when you pull money out--whether you're in retirement or whether it's before retirement--you'll also owe capital gains taxes on the investment appreciation piece.

Key ways that you can limit the drag of taxes on these various investment accounts: One is, to the extent that you're still accumulating assets for retirement, take advantage of these tax breaks. The government gives us all tax breaks because it wants to encourage our savings for our own retirement. To the extent that you possibly can contribute the maximum allowable amounts, that's a great start.

The final habit of successful investors is that they keep things simple. They don't overcomplicate with tactical trading strategies, market-timing strategies, too many moving parts in their portfolios.

My advice is, if you keep your portfolio streamlined, you keep it simplified, you can get away with a very simplified investment mix without necessarily having to pay someone to manage your portfolio mix for you. Simplicity is definitely your friend.

I have just a few basic tips for keeping your financial plan simple. One is that, at Morningstar, we're big believers in what's called "strategic asset allocation." Basically that means that you set up an investment mix that makes sense for someone at your life stage and then you gradually make it more conservative as the years go by. You don't respond to big changes in the market environment; you don't shift to cash and bonds when things look scary. You don't go full bore with an all-equity portfolio when things are going well, as they have been recently.

Instead you practice only mild changes to your investment mix. You do as Adam advised, regularly rebalance: Periodically scale your winning holdings back and steer them to your losing holdings. But you don't make big shifts based on what you think will happen.

Generally speaking, when we look at the performance of tactical mutual fund managers--those who jockey around and use market-timing maneuvers--what we see is that they're not terribly successful. In fact, most of them don't outperform a very simple 60% equity/40% bond portfolio. My advice is, don't get too fancy in terms of managing your asset allocation mix yourself.

Checking up on your portfolio fewer times per year. Less is definitely more when it comes to this. The market has been really good. I personally have had a little more temptation to crack open my 401(k) and see how I'm doing. But generally speaking, the less you plug into the fluctuations in your portfolio--whether good or bad--the better off you'll be.

Also reducing your own trading. Try to limit your trading to maybe just once a year, where you do that rebalancing. You get in, see how everything is positioned, see if there are changes you need to make in your investment mix. Ideally you'd have parameters for how often you'll check up on your portfolio and how often you'll rebalance specified in some sort of an investment policy statement--a really basic document that says, my asset allocation mix is this. This is how often I'm going to check up on this thing. This is how often I'll make changes. These are the catalysts that I'll use when making changes.

demographics

This week I’m shifting gears to address a topic I think is highly relevant, receives little “ink” but could have major investment implications: demographics.

At Zacks Investment Management, one of the core tenets of our investment decision-making process is the identification of macroeconomic themes that drive stock selection. As we analyze the macro environment, we are constantly asking ourselves: what are the big trends we think will shape the global economy not over the next quarter or two, but over the next several years? And, how can that inform our investment decision-making today and “tomorrow” on a micro level?

In my view, shifting demographics is one of these big, secular trends — and, I think the seismic shift in age distribution will affect spending and technology patterns, as well as create winners and losers along the way.

Demographics are Shifting Rapidly

A look at the data shows us that, in the next 30+ years, we’ll see the shape of the global population’s age distribution change dramatically. The baby boomer generation, or those born between 1945 and 1964, is starting to move into retirement – and fast. About 10,000 new baby boomers retire every day, and Pew Research estimates that 10,000 will cross that threshold every day for the next 19 years. A demographic shift this large has never occurred before and, by 2050, some 20% of U.S. population will be over the age of 65 (up from about 14% today).

Additionally, this shift is not just occurring in the U.S. — Germany, France, the UK, Russia, China, and Japan are all slated to see similar shifts. Over 40% of Japan’s population will be over the age of 65 by 2050, and China’s over-65 population is expected to grow from 9% today to over 25% by 2050. The world is aging.

Using this knowledge, we can ask deeper questions about the economic and investment implications. Questions like: where are these people likely to spend more? What industries and sectors are going to be impacted as a result? Are rapidly aging countries likely to feel a sizable impact to GDP?

A Look at Spending Patterns

Studies show that consumer spending peaks around age 45 and that every sector sees reduction in spending as people age — except for healthcare. Looking at both ends of the spending spectrum, we can reasonably conclude that healthcare companies specializing in medical devices, pharmaceuticals, and insurance could benefit from an aging population that spends more. This could be a formidable reason to think about overweighting healthcare and medical companies in a portfolio.

On the other end, we also know that older individuals spend much less on apparel, services, housing and education over time. As we look at companies in those sub-sectors, we consider the long-term challenge they face when it comes to targeting demand: they either recalibrate their offerings to cater to the older crowd, or they look for underserved but fast-growth markets outside the U.S. As asset managers, we want to identify companies that will do both, and avoid the ones who fail to respond to shifting trends.

Other sectors that could come into focus are asset managers, insurance companies, travel and technology companies that address the needs of boomers. From wearable devices that help people track health needs, to a company like Harley Davidson, which cites that its largest customer base comes from the aged 50 – 65 crowd. Companies that can properly position themselves for an ongoing windfall of new customers would be viable long-term plays.

The Bottom Line for Investors

This isn’t to say that shifting demographics should be the single driving force behind portfolio construction and decision-making, but there is a material case for understanding how the companies you buy are strategically levered to serve (and sell to) such a large growing population segment. Finding companies whose growth rates will move alongside the shift could be a key part of a long-term winning strategy.

-- Mitch Zacks, Market Insights, Zacks Investment Management

Friday, May 22, 2015

lost $15 billion in 30 minutes

In the history of sudden wealth loss, Li Hejun may have set a new record.

Li, who was China's richest man until this week, saw his fortune drop by as much as $15 billion in a half-hour as the stock in his company, Hanergy Thin Film Power Group, fell by nearly half. Trading in the shares was halted Wednesday and Li didn't attend the company's annual meeting.

While plenty of billionaires have seen their fortunes cut in half over time, few if any have seen $15 billion wiped out in a half-hour. Li's total fortune was around $30 billion before the stock plunged.

Prior to the drop, the company's shares had risen by more than fivefold since September, baffling analysts. Reuters reports that Hong Kong regulators are looking at alleged market manipulation with the stock.

[so he's still up]

In a similar wealth decline, Hong Kong property and electronics magnate Pan Sutong has lost more than $11 billion this week as shares of two listed companies, Goldin Financial and Goldin Property, both closed down more than 40 percent.

Pan owns around 65 percent of Goldin Property and more than 70 percent of Goldin Financial, according to filings. His fortune was listed at more than $28 billion, making him Hong Kong's second-richest man.

That means that the two men have lost more in one day that the total net worth of Carl Icahn, Steve Ballmer or Michael Dell.

narrow trading

The biggest story in the stock market this year has been, well, no story at all.

That's because, according to one top technician, the Dow Jones industrial average is on track to see its tightest trading range for the first half of the year ever.

"If you look at the high-to-low range for the Dow Jones industrial average for the first half of this year, as of now it's just over 6 percent," technical analyst Jonathan Krinsky said Thursday on CNBC's "Futures Now."

If this trend holds till the end of the quarter, Krinsky says it would mark the "narrowest first-half trading range in the history of the Dow," which dates back to 1896.

But while the lack of volatility may scare some market participants, according to Krinsky's work, it could be a positive development for stocks, at least if history is any indication.

"Since 1896 there's been 19 times that the Dow has traded in a range of less than 10 percent high to low," said Krinsky, chief market technician at MKM Partners. "Thirteen of those 19 times the Dow went on to gains in the second half of the year, and only three times of those 19, the Dow closed negative." The average year-to-date return of those 19 occurrences is positive 8.25 percent.

Krinsky added that there could be some increased selling pressure coming in the next few weeks, as seasonally the beginning of summer tends to be a tough time for the market.

"Everyone talks about sell in May and go away, but June is actually the worst month for the market over the last 10 years," he said. "If we do see any weakness it could happen [in the next few weeks], but that would probably set up a buying opportunity over the back half of the year."

Thursday, May 21, 2015

the best performing accounts

Not long ago, BlackRock did a study on how various asset classes performed over the 20 years from the beginning of 1992 to the end of 2011, and the findings were rather shocking.

It turns out that the average investor underperformed every single asset class, from oil to gold to inflation, earning an average of just 2.1 percent annually compared to the 7.8 percent for stocks.

[The updated study shows the average investor is now up to 2.5%, ahead of inflation's 2.3%.]

Not such a good track record.

Why the underperformance, especially considering that most investors are buying the very asset classes that outperformed them, including stocks, bonds, oil, and gold?

That's where it gets interesting.  According to a famous study by Fidelity Investments, it could very well come down to trading - or more precisely, not trading.

In the study, Fidelity conducted a review of its best-performing accounts - not its best-performing funds, but the actual performance of Fidelity account holders.

The finding? The best-performing accounts were dead. In other words, the best-performing accounts belonged to investors who didn't trade at all because they forgot they even had Fidelity accounts!

-- Bill Spetrino, The Dividend Machine, June 2015

Sunday, May 17, 2015

prepare for a correction

35 months. That’s about how long it’s been since the market pulled back at least 10%, which is an eyebrow-raising stretch of time. Take a look at the market each year going back to 1980 and you’ll find that the S&P 500 has averaged an intra-year drop of a little over 14%. Yet, here we are approaching three full years of a largely uninterrupted climb.

Is history telling us the stock market is due for a correction?

Be Prepared, Not Concerned

I’d classify the market’s behavior as uncommon or maybe even a little curious, but certainly not “concerning.” There have been a few periods like this one where the market charged higher and went years before pausing to pullback somewhere in the 10 – 15% range. The mid-90’s were a good example, and the market even went about three years in the 2002 – 2007 bull market without dipping more than 10%. Corrections, by definition, follow no clear pattern, are unpredictable, and pretty much come and go as they please. To say that a correction is around the corner — on the basis that we haven’t had one in years — is just as likely to be wrong as it is right.

But, history tells us we should at least be prepared as we've experienced a sharp pullback each year from 2010 – 2012, with the market resuming its upward course after only a few months.

2010 – a sharp dip of around -16% from April to June, with the market ultimately finishing about 13% higher for the year.

2011 – roughly -19% correction from May to mid-August, with the market finishing flat on the year.

2012 – the market pulled back approximately 10% from April to June, but recovered to finish up about 13%.

2014 – a decline in the neighborhood of 7% over a month in the fall, with the market posting an 11% gain on the year.

Since 2012, the closest thing to a correction we’ve seen was last year when the market fell about 7%, but it was so light few people even remember it.

If we omit 2014 from the conversation (since it wasn’t a real correction), it appears that this bull market has had a preference for pulling back in the summer months. With summer approaching, you may start to hear pundits calling for the ‘overdue’ pause. Don’t get too stirred if you do. Remember, as I said before, corrections by nature are unpredictable and don’t announce their arrival, so anyone calling for one has little basis for which to do so.

3 Lessons to Remember About Corrections

1) Corrections are Short, Sharp, and Sometimes Scary – this makes them noticeable, and can cause many investors to wonder if a 10% decline will turn into a 30% bear market that lasts years. That means emotion can enter into the decision-making process, for which investors have to be careful. A sharp pullback is often times just a normal – even healthy – part of a bull market. The key is having confidence in your longer-term outlook for stocks.

2) Trying to Time a Correction is Risky – the corrections in 2010, 2011 and 2012 each lasted about 3-4 months which, in terms of most investor’s time horizons, is an extremely small window of time. Remember too that many investors will sell after stocks have already fallen 10%, when fear sets in. That’s usually around the time when the market swiftly recovers, which can adversely impact that investor’s long-term returns – in addition to potentially racking up transaction costs.

3) Corrections, by Definition, Exist in Bull Markets – this may seem like I’m stating the obvious, but if there’s one thing we actually know about corrections it’s that they are going to happen. We just don’t know when and for how long. In many cases, simply acknowledging that corrections “come with the territory” of equity investing will help you apply patience and a steady hand when they do arrive.

Bottom Line for Investors

My outlook for stocks remains positive for the year, meaning that if we were to see a few months of downside volatility I think it would just be temporary — a correction. That is not to say I think a pullback will happen this summer or even this year. There is simply no way to know that. I would just encourage investors to think about the medium to longer term trajectory of stocks if/when some bumpiness hits, especially given the fact we haven’t seen a real correction in three years. It might not feel so familiar given the recent strong performance of the market, but being unfamiliar doesn’t make it unprecedented.

So as you consider a possible market correction, it may also be a great time to re-examine and optimize your portfolio choices to prepare for any upcoming surprises.

-- by Mitch Zacks, Market Insights, Zacks Investment Management

Saturday, May 16, 2015

Financial Milestones for Baby Boomers

Age is something to celebrate when you remember these key dates.

While you may think you’ve passed most of life’s major milestones by the time you reach your 50s, think again. From 55 on, there are a number of key dates you can’t afford to ignore. Miss them and you’ll not only miss some of the perks that come with getting older, but you may also be penalized.

So before you declare that you’ll never acknowledge another birthday, at least put these ages on your mental calendar.

Age 55 - Possible penalty-free early 401(k) distribution
If you’re 55 or older and lose or leave your job, you can take a distribution from your 401(k) without paying a 10% early withdrawal penalty under what’s called “separation from service.” If you do this, remember that you will still have to pay income taxes on the distribution.

AGE 59½ - Penalty-free withdrawals from any of your retirement accounts
Whatever type of retirement account you have—IRA, 401(k), 403(b), SEP, SIMPLE, you name it—you can begin making withdrawals penalty-free at age 59½. However, you’ll pay income taxes on the earnings and any contributions that were tax-deductible. In the case of a Roth IRA, contributions and earnings can be withdrawn tax- and penaltyfree if you’ve held the account for at least five years.

AGE 62 - Early Social Security benefits
This is the earliest you can begin collecting Social Security (unless you’re disabled). However, this may not be the wisest choice because it triggers a permanent reduction in your benefit of approximately 25%. Plus, your benefits will be further diminished if you’re still working and earn beyond a certain limit. Visit the Social Security Administration’s website or stop by your local Social Security office if you need help determining the best time to start collecting benefits.

AGE 65 - Eligible for Medicare
If you’re already receiving Social Security, you’ll be automatically enrolled in Medicare parts A and B at 65. If you’re not collecting Social Security benefits yet, you’ll need to apply for Medicare. Ideally, you should apply for Medicare three months before the month you turn 65. You can visit your local Social Security office, call them at 800-772-1213, or apply online.

AGE 66–67 - Full retirement age
You can begin collecting full retirement benefits when you reach what the IRS designates as “full retirement age” (FRA). For Boomers and younger, FRA ranges between 66 and 67, depending on when you were born. At your FRA, you get full benefits even if you continue to work. However, if you delay filing, your benefits will increase by 8% each year until age 70.

AGE 70 - No further increase in Social Security benefits
If you delay collecting Social Security, the 8% annual increase stops when you reach age 70. There’s no reason to further delay taking benefits— you’ve earned them!

AGE 70½ - Required minimum distributions (RMDs)
At this age, you’re required to begin taking withdrawals from your tax-advantaged retirement accounts, with two exceptions:
• You can delay RMDs on your 401(k) if you’re still working.
• You’re never required to take distributions from a Roth IRA if you’re the original account owner or if you inherited the account from your spouse and treat it as your own. RMDs are determined by a formula based on life expectancy and the amount you have in tax-advantaged accounts. Schwab can calculate and distribute your RMDs for you, or you can use our online calculator to do it yourself. Your RMDs must be taken by December 31 each year, with the exception of your first RMD, which can be delayed until April 1 of the year after you turn 70½. Be aware that if you delay your first RMD until the following year, you must still take your second RMD by December 31 of that year. Taking your first and second RMD in the same year could increase your annual income enough to bump you into a higher tax bracket.

- By Carrie Schwab-Pomerantz, Charles Schwab, OnInvesting, Spring 2013

Tuesday, May 12, 2015

Jim Cramer, two times

CNBC's Jim Cramer is off the market.

The "Mad Money" host tweeted that he's getting married again.

YES I AM GETTING MARRIED AND I NEVER USE ALL CAPS!!!!!

Thursday, May 07, 2015

the unvirtuous cycle of impatience

In a fantastic speech in 2010, Andy Haldane, Executive Director, Financial Stability at the Bank of England wrote:

If preferences evolve over time, this gives rise to the possibility of self-reinforcing patterns of behaviour. Such evolutionary trends have been extensively studied by sociologists, psychologists and even some economists. These studies confirm the old aphorism: virtue is its own reward. Specifically, patience is capable of setting in train a cycle of self-improving behaviour in individuals, economic and social systems. Take happiness. Studies have shown that happy people save more and spend less. Happy people also take longer to make decisions and expect a longer life. In short, they are patient. These patterns of behaviour are connected and reinforcing. Expecting a longer life, happy people defer immediate gratification and save. In consequence, they enjoy a more prosperous tomorrow as they harvest the fruits of their investment. In these models, happiness is not just fulfilling; it is self-fulfilling”.

The Unvirtuous Cycle
Unfortunately the majority of Wall Street marketing, incentives, and models are based on an unvirtuous cycle of impatience – rapid trading, 24 hour news coverage, instant transactional capabilities, etc. As investors participate to a greater extent in this system, the more reinforced these habits become. In essence, Wall Street is incentivized for impatience while investors are penalized.

We can see a clear demonstration of this impatience in the average equity holding period since 1950. At that time the average was roughly 6.5 years. By 1990 this had dropped to less than 2 years (1 year 10 months). By 2000 it was 11 months and by 2010 was 6.8 months. In technology stocks this bottomed in 2000-2001 with an average of less than 30 days for nearly 50% of the Nasdaq 100. Clearly that is not patience.

Another way to look at this problem is the change in investor returns. In 1990 we estimate that investors in US equity funds captured roughly 95% of total returns. Put another way investor decisions and fees cost them roughly 5% of their return. By 2010 – with turnover at an all time high – investors were capturing roughly 88% of market returns. Impatience costs you money.

Saturday, May 02, 2015

high growth or low growth?

When you ask most investors for their favorite stocks, you'll rarely hear them share blue chip names like Johnson & Johnson, Kraft Foods or WalMart. Instead they will tell you about some amazing growth stock that will be the next Google, Microsoft or Apple.

These investors believe that by simply buying stocks with the greatest earnings growth potential that they will make money. Sadly our research clearly shows this not be true...not even close.

Unfortunately our research details, beyond a shadow of a doubt, the vast underperformance of most growth stocks over the past decade. Here are the results:


*The study had a 4-week rebalancing of stocks between 4/2005 and 3/2015

Stocks with the lowest projected growth rates actually generated the highest return of +9.0% per year. Each level of additional earnings growth came with decreasing levels of profits for investors. As we look at the most aggressive stocks, with 30%+ expected earnings growth, we find an embarrassing loss of -1.2%. This begs an obvious question:

Why Don't Most Growth Stocks Pan Out?
The early investors in growth stocks usually do quite well. They take the early risk when almost no one has heard of the company. As the company bangs out earnings surprise after earnings surprise it gains more investor attention and a much higher share price.

However, at some point the company will be "priced for perfection". Meaning that the PE gets too inflated as people are so sure that the good times will just keep rolling (think of a mini version of the late 1990s tech bubble).

Unfortunately the exceptional growth rarely holds up over time. At some point, as the company tries to expand so rapidly, it will stumble. Even if that just means going from a 40% growth rate to a 30% growth rate. On the surface, 30% still sounds great...but not to the investors who expected 40%+ and paid up for that premium. So naturally the stock will tank. And tank fast.

I'm sure you've had a few of these stocks in your portfolio over the years. So I don't have to remind you how quickly the losses add up. That, in a nutshell, is the danger of investing in growth stocks.

investor return

I read a stunning Morningstar article the other day. Ken Heebner's CGM Focus Fund returned an outstanding 17.84% annualized return over the last 10 years. While the market as a whole went down, CGM Focus would have multiplied your money by 5.2 times. Wow!

That's assuming, of course, that you bought the fund and held on during all the ups and downs of both the market and the CGM Focus Fund. The return that Heebner's actual investors received (as calculated by Morningstar)? Negative 16.82% annualized!

You might look at those numbers incredulously and wonder how on earth the fund could provide 17.84% returns while investors lost 16.82% annualized.

It relates to the title of this blog. As Shakespeare put it in Julius Caesar, "The fault, dear Brutus, is not in our stars, But in ourselves." The reason investors get lousy returns is not due to fate, but because they shoot themselves in the foot.

How can a fund go up 17.84% annualized, but investors get -16.82% returns? Investors chase volatile performance. They buy after a fund had done well, only to find it top and roll over. After it tanks, they give up and sell, only to find it race back up again. Rinse and repeat.

Research clearly shows investors are their own worst enemy. Instead of formulating a plan and sticking to it through bumpy markets, they try to game the system. That's why Dalbar studies have consistently shown investors get 1/4 of the return of the mutual funds they invest in--they chase performance!

This lesson is counter-intuitive to most people, but vitally important to investment success. Markets move in fits and starts. Trying to time the market is a fool's errand. The people who succeed over the long run stick to a disciplined and proven approach. Judging investment records by short term performance, even 3 to 5 years, isn't enough. If a disciplined approach doesn't look like it's working, stay the course or--even better--put more money to work in it. Focus on the long term, even when it's extremely hard to do, or hire someone who can do that for you.

Or, as Warren Buffett puts it, "be greedy when others are fearful and fearful when others are greedy."