When Benjamin Franklin said, “An investment in knowledge pays the best interest,” he may have been anticipating the low to zero interest rates savers and investors have been contending with for years.
Now it seems that rates have finally begun to rise, and contrary to conventional wisdom, that won’t necessarily be bad news for stocks.
Since the end of January, the S&P 500 has returned a positive 7.1 percent, while the price of bonds has declined and the 10-year Treasury yield has risen 0.6 percent. Investors have been busy selling bonds in anticipation of the inevitable (and much-anticipated) hike by the Federal Reserve Board while economists and pundits handicap the date of the upcoming rate increase. June? September? 2016?
Click here for the rest of the column: The Arizona Republic
The age-old maxim —”sell in May and go away,” is often quoted by traders as a sure-fire strategy. And, for seemingly good reason.
According to Yardeni Research, since 1928, the S&P 500 has risen an average of 1.9 percent from May to October but an impressive 5.2 percent from November to April. Yet since the beginning of this bull run the old adage has not held true. If you had sold in May during this cycle you would have underperformed the overall market by a cumulative 70 percent. Since 1926, the stock market has generated positive annual returns more than 70 percent of the time, so it turns out that despite market tradition, being out of stocks is often riskier than remaining invested.
So what strategy should an investor follow—if exiting is either too risky, or at the very least, undesirable—when convinced that the market is becoming fully, or overvalued? One of my tried-and-true investment rules? Buy stocks like you buy toilet paper — focus on price and yield.
For the remainder of the column, click here: The Arizona Republic
I am asked frequently if stocks can continue to go up. Would that I knew. Bespoke Investment Group recently provided some insight as to where the current bull market ranks historically. Six years into it, this rally qualifies as the fourth-longest of the 33 Dow Jones industrial average bull markets since 1900.
Since the 2009 low, the Dow Jones industrial average has risen approximately 175 percent — the fifth-largest gain since 1900. That is a nice run, but Bespoke also notes that in the 1990s bull market, the Dow rose 400 percent. All the more impressive since interest rates were a good deal higher then
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Active money managers are having a tough time beating their benchmarks again this year. In fact, fewer than 15 percent of money managers were exceeding the market by the end of November.
You might say active management has hit a rough patch. According to Ben Levisohn of Barron’s, who cites the University of Chicago’s Center for Research in Security Prices, “From June 1983 to June 2014, the median fund underperformed the market by more than 80 percentage points.” That’s 30 long years of underperformance. Ouch.
If you invest in mutual funds, this information should be important to you. In addition to the high fees most funds charge, the majority have underperformed yet again in 2014.
What is an investor to do? Read the rest here: The Arizona Repbulic
Lower prices are often synonymous with value. Surprisingly, the same is true when selecting investments. Look for the lowest-priced, diversified exchange-traded funds (ETFs), the cheapest mutual fund or any investment vehicle or manager that ranks among those with the lowest costs. For top long-term returns, be more focused on the cost of your investments than in seeking the top-performing fund.
How can I make such a definitive statement? Because the research supports it.
Morningstar reports that the average actively managed stock mutual fund sports an annual expense ratio of more than 1.4 percent. (Compare that to the average ETF fund fee of 0.2 percent.) If we assume a long-term return on stocks of approximately 9 percent and an average annual inflation rate of 3 percent, we obtain a real rate of return of 5.8 percent annually. Before accounting for the compounding of the expense ratio — yes, fees compound and erode total return just as dividends and interest compound and increase total return — you can see that an average annual fee of 1.4 percent consumes a significant portion of the average annual real total return of stocks of 5.8 percent.
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The Arizona Republic
Recency effect is the tendency to remember a more recent experience better than a previous experience.
Behavioral economists call this recency effect “availability” and it is programmed into our DNA: I touch a hot stove — ouch!; I learn not to touch a hot stove again. Eventually I use the contained flame to my advantage, to prepare meals for my nourishment. But the result of touching the stove and getting burned is still stored in my memory, inspiring me to use a hot pad and keep my hands well away from the heat.
For investors, recency effect can bias investing decisions based on recent market performance. Whether up or down, we tend to extrapolate the recent event into the future. If the market is going up, we are more likely to act on expectations of a rising market. The converse is also true. Both tendencies can be dangerous.
The Arizona Republic
Most of us won’t have 97 years to save and invest. But Stephanie Mucha, who recently was featured in Barron’s, has. Ninety-seven long and productive years. And she has made the very most of each one.
Mucha’s peak annual earnings of $23,000 were modest even in 1994, when she retired. Still, she has managed to grow her assets to more than $5.5 million. Mucha has given $3 million to charity and retains $2.5 million — still percolating — in her portfolio. Her goal: to donate $6 million before she dies.
Mucha is obviously blessed with longevity, an enviable work ethic and a high financial IQ. But she doesn’t have any unusual advantages. She reads financial publications and uses good sense and, incredibly, does not even own a computer. Still she has succeeded. Fabulously.
Read the rest of Stephanie Mucha’s story here: The Arizona Republic
My last two columns have dealt with the question of saving. Because, of course, we must save before we can invest. Below are the last two entries. I hope you enjoy them.
The Arizona Republic–today’s column which delves into the concept of saving and shares a reader’s story.
The Arizona Republic–last week’s column which focuses on the difference in return when we invest rather than simply save.
More soon. Loved seeing many of you at Rakestraw Books. Thank you for your support and enthusiasm for the subject of women and investing.
I hope you will read my current column in the The Arizona Republic. I discuss the disconnect between most individuals when asked about their readiness for retirement (the majority admit they are not ready) and how they plan to spend their retirement (in luxury!). And what to do about it.
My book: The Women’s Guide to Successful Investing is about to be released. You can pre-order on Amazon.com whose editors just named the book a: “Best Business and Investing Book of the Month!”
Years ago, my husband and I worked for the same global-investment-management firm in the same West Coast office. One day, the decision was made to close that office and move our team across country to New York City.
We didn’t want to move but because we both worked for the same firm, we didn’t exactly have a choice. Had we diversified our employment and, therefore, our primary source of income, we would have put ourselves in a much stronger position to make the best decision for our family.
We ignored the cardinal rule of investing: diversify, diversify, diversify.
But rarely do investors understand what it means to be truly diversified. Simply owning shares in various companies will not provide real diversification if, for example, those companies are all in the same industry or economic sector. Diversification is actually about how different investments perform in various economic scenarios. Or to put it another way: Selecting investments is not so different from how we select our friends.
Each one of my friends exhibits an overriding attribute. Some are great in a crisis. Others are fun to be around when times are good. I have friends who like to exercise and those who prefer the theater. Supportive friends and the kind who are scarce in times of difficulty. Like you, I have different friends who shine in different seasons. The same is true of stocks — certain stocks do well when the economy is thriving and others outperform when the economy is soft.
Read more here: The Arizona Republic