Wednesday, April 28, 2010

What Lost Decade?

Much has been made of the so-called "lost decade" of investing during the period of 2000-2010. But what does the "lost decade" mean? Is it true and does it even matter?

The idea behind the lost decade is that investors either made no money or lost money over that period a 10-year period. After all, the point of investing is to make money and build wealth, so if you spend a decade of your life not meeting your objective, then it is a lost decade.

The claims of "the lost decade" are mostly leveled at "stocks", and usually by someone selling something that isn't stocks.

Gold is a shining example, if you'll pardon the pun. It's seems to be pushed as the only safe investment everywhere you turn. But is it really?

I can show you a chart of the price of gold per ounce for the last 5 years and say it's one of the few things to gain money over the past 5 years. In fact, here's the chart:

What lost decade_price of gold_5_year_usd

Looks pretty good, doesn't it? In fact, the price of gold has just about tripled over the past 5 years. But would you want to put your retirement savings in gold?

Here's the price of gold over the past 30 years:

What lost decade_price of gold_30_year_o_b_usd

As you can see, if you had invested a sizeable chunk of your savings in gold around 1980, you would have seen it do just about nothing for over 20 years!

Now, I'm not saying that gold is a bad investment, but it isn't without risk and is therefore not the best place to keep the bulk of your savings.

What about the stock market?

Many gold bugs like to say that you lost money in the stock market over the past decade, while gold tripled in value. But is that true?

Here's a chart of the S&P 500 over the past 10 years:

What lost decade_S&P 500 -10 yr

As you can see, if you simply put your money in an S&P 500 stock fund or index fund, and left it alone you would have lost about 22% (NOTE: This is a chart of the index. Had you invested in an S&P 500 fund, you would have actually lost less than that due to dividends).

But the S&P 500 is only 500 U.S. large cap stocks. What about other stock funds?

If you had invested in the Vanguard Total Stock Market ETF (VTI), you would have gained roughly 27% (with dividends):

What lost decade_vti -10yr

Granted, that's only a 2.7% annualized return with dividends, but it's a lot better than the S&P 500, and not truly a lost decade... just not a hot one.

If you had invested in the Fidelity Small Cap Stock (FSLCX) fund, your money would have grown roughly 100% with dividends - that's an annualized return of 10%:

What lost decade_FSLCX -10 yr

Certainly not a lost decade. In fact, it's just about an "average" post WWII decade for stocks. Granted, the average for small cap is closer to the 20-22% range, but no lost decade here either.

Emerging markets were a hot area for the last decade. If you have put your money in the T. Rowe Price Emerging Markets Stock (PRMSX) fund, you'd have seen it grow 108% with reinvested dividends:

What lost decade_PRMSX -10 yr

Another 10.8% annualized return.

Bonds were another big performer for the opening of the century. The PIMCO Total Return A (PTTAX) fund would have grown your investment by 74% (with dividends), or 7.4% annualized:

What lost decade_PTTAX -10 yr

So, while gold has indeed been the champ over the last decade (returning about 266% over the period from 2000-2010), it is not without risk, and its returns over that time are not indicative of its historic, long-term return. Here's the takeaway:
Performance depends upon the period of time through which you measure it.

Here's a chart that shows the performance of the S&P 500 (without dividends) from 1981-2001 - the period during which the price of gold languished as shown in the 30 year gold chart at the top.

What lost decade_S&P 500 - 1980_2001

So, was 2000-2010 really a lost decade? It depends on where you look. For the S&P500 it certainly was. But for bonds, small cap and no doubt certain individual stocks it really wasn't. Stocks are often touted by financial advisors as being the best place to put your money "for the long term". Is 10 years really long term? Does it even matter? I mean, you can pick just about any 10 year period to match the performance you want to shine a spotlight on. The endpoints are largely psychological and subjective.

For example, I don't plan on retiring until sometime around 2040. Does it really matter what the performance was during 2000-2010? I mean, if that same performance occurred from 2005-2015, or 2008-2018 would anyone be making such a big deal about it?

Tuesday, April 27, 2010

401(K) Roundup, April 2010.

It's been way too long since I've caught up on my blog reading, and as I was doing so I discovered a couple of really good posts about 401(k) plans and retirement that I thought I'd share.

The first post is from Kyle at Amateur Asset Allocator titled, 401k Rollover Options:
A rollover of 401k funds from an account held by a former employer is almost always a good idea. There are several rollover choices available. The sensible rollover choice is not a one-size-fits-all option – estimated retirement age, marginal tax rates, ability to pay some taxes upfront, and earnings are all factors that must be considered.

He then outlines 4 broad types of 401(k) rollover types available to employees:

  • Rollover the funds to a Traditional IRA

  • Rollover the funds to a Roth IRA

  • Rollover the funds to your current employer’s 401k

  • Rollover the funds to a pension-type plan

Definitely worth a read if you have a collection of 401(k) plans from previous jobs, or if you're in the position I'm in and your employer has discontinued the employer match on contributions and you're wondering if 401(k) plans better than IRAs if there is no match?

Next up, JLP from All Financial Matters shares how he and his wife are
Taking a Look at Our Retirement:
This week I have been trying to take a long-term look at our finances by peering into the abyss that is retirement when we are 65-years old. It’s a scary undertaking because there are so many unknowns.

He gives a great breakdown of the figures he's using and the considerations in determining how much they will need vs. how much they have and whether it's possible to live the kind of retirement they want.

Can You Have a 401k and an IRA at the Same Time? is the question Madison answers at My Dollar Plan:
A few people that I’ve talked to recently thought that because they had a 401k at work, they couldn’t open an IRA. Not true! Let’s take a closer look at investing in both an IRA and a 401k at the same time.

And lastly, Jeremy at Gen X Finance would like to make sure you Don’t Treat Your 401(k) Like a Savings Account:
As a Chartered Retirement Planning Counselor and someone who deals specifically with retirement issues I spend a lot of time helping participants with their retirement plans. One of the most common reasons participants would meet with me is because they say need money and they are looking to take it out of their retirement plan.


I hate to say it, but it doesn't surprise me that people think this way. After all, how many studies have we seen stating that most people cash out their 401(k) plans when they switch jobs?

Monday, April 26, 2010

Beware The Hidden Risk Of Prepaid 529 Plans.

Many people are familiar with the standard 529 plans as a means for saving for college tuition. They are much like a 401(k) plan in that the account holder can contribute money today and have it grow tax free - provided it is used for qualifying educational expenses. But there's a less well known cousin to these kinds of plans.

Known as the Prepaid 529 plan, it allows the account holder to purchase tuition credits at today's prices. Those credits are then exchanged for money to offset tuition costs when junior heads off to higher education. The parent buys a year's worth of tuition credits today, in exchange for a year of tuition being paid for when junior goes to college.

The problem is that the states are supposed to invest that money so they can offset the future cost of tuition, only most states spend more money than they take in and many are teetering on the brink of bankruptcy.

For example:

Alabama's Prepaid Affordable College Tuition plan, or PACT, has received most of the attention in headlines. According to BusinessWeek, administrators said that due to shortfalls, the plan can only pay tuition though fall 2011.

This kind of thing certainly makes me feel a little better about having chosen a traditional 529 plan for my kids college savings. I'd much rather handle the risk of the market, since I can choose what type of funds to invest the money in, rather than rely on politicians to be fiscally responsible with my child's college savings.

Read the Morningstar article for the complete story and some ideas of what you may encounter if your plan is in a bankrupt state.

Thursday, April 22, 2010

An Unlikely Undervalued Energy Stock (VIDEO).

Exxon may fit the bill. He thinks ExxonMobile looks like a good deal despite the fact that it seems to have missed out on the recent rally.

Watch the video to see Paul explain it in his own words.

It's an interesting idea when you consider:

  • Energy is only going to go up as the world economy expands

  • Much of the profit from any green energy technology will likely end up in the hands of uber-big energy companies, and ExxonMobile is the big fish in that pond.

  • The stocks that have done the best in the recent rally are of companies that carry more risk than the general market, and ExxonMobile is in no danger of defaulting or going out of business.

8 US Stocks With International Exposure.

Investment pros recommend that US based investors should have anywhere from 20-45% of their stock holdings in foreign companies. It's not the geographic location of the company that's important to the asset allocation, but the diversification of economies.

This is because foreign economies usually do not move in parallel with the US economy, but that has lessened over the years as the world has become more connected and less diverse.

In fact, the shrinking world has become so small (economically speaking) that you don't even have to buy stock in foreign companies to benefit from a foreign economy. Here are 8 US based companies that benefit strongly from overseas sales.

Coca-Cola (KO).

It has long been known that Coca-Cola sells more soft drinks overseas than at home, and it's also one of Warren Buffet's darling stocks. The company recently reported sagging sales in North America, but still increased it's income by 69 cents per share.

Caterpillar (CAT).

Caterpillar exports more big (I mean, huge - 400 ton!) mining trucks than it sells in the US. It makes sense when you consider all the places in the world that have yet to be developed.

Colgate-Palmolive (CL).

Colgate-Palmolive is your quintessential medicine cabinet stock. They're the maker of toothpaste, mouthwash, dental floss, pharmaceutical products for dentists, deodorant, detergents, etc. They also sell more of these products in Latin America than in the US.

Estee Lauder Cos (EL).

Estee Lauder is the maker of makeup brands Clinique and M.A.C. and they're tapping into the growing Chinese middle class and have a solid hold in Japan. They also have higher profit margins in Asia than in the US.

Baxter International (BAX).

Baxter makes medical supply and health care products. It derives about 60% of its revenue from non-US sales, with most of it being from Europe. They are also branching out into emerging markets as well.

Expeditors International of Washington Inc. (EXPD)

Expeditors is one of the world's largest freight forwarders. Expeditors doesn't own planes, trains or ships because it serves as a kind of travel agent for the cargo that rides on other company's planes, trains and ships. They handle the logistics of shipping, and derive 80% of their sales from overseas and 60% of that from the BRIC counties.

Marvell Technology (MRVL).

After laying off 15% of its workforce and losing nearly all of its sales during the recession, Marvell saw its profit jump to more than the previous two years combined and its sales have risen 10%. Marvell is in the semiconductor business and that's a global growth business.

Illinois Tool Works (ITW).

Illinois Tool Works makes products for everything from cars to computers to six-packs! (they make those plastic rings that hold the cans together.) Illinois Tool Works gets almost 58% of their revenue from overseas - mainly China and India.

As you can see, there are a number of blue chip US companies that allow the investor to gain exposure to various slices of the global economy. Want some of the gains from Latin America? Check out Estee Lauder. Interested in some exposure to China, but don't want to worry about investing in a shady foreign fund? Look into Illinois Tool Works. It's a good way to invest in America, but hedge your bets on global growth.


Wednesday, April 21, 2010

Why Is The Stock Market Going Up?

Unemployment is still around 10%, foreclosures are rising and inflation, taxes and interest rates have nowhere to go but up. So why is the S&P 500 up almost 75% and the Nasdaq nearly 90% from a year ago?

I've wondered this for quite a while, and it seems to be the topic du jour on wall street these days too - has the market overshot the fundamentals?

Don't take my word for it. Here's a quote from a recent NYT article:
Some analysts see ample reason for caution in equities, with many economists, including those at the Federal Reserve, forecasting tepid growth in the near term.

"The market is as overvalued now as it was undervalued a year ago," said David A. Rosenberg, chief economist and strategist for Gluskin Sheff, an investment firm. "There's a very high degree of complacency."

My take: There are few times in history when you can call when the stock market is due for a swing. Regardless of the direction the market is currently headed in, it makes sense to keep a sharp eye on things because they could be due for a drop in the near future.

Monday, April 19, 2010

ING's Sharebuilder Eliminates Large Order Surcharge.

Effective April 15th, ING has removed their "Large Order Surcharge" on trades through Sharebuilder.

I just got the email last week and my first thought was, "What the hell is the large order surcharge and how does this affect me?"

Well, it doesn't affect me, but it may affect you, so here goes...

The large order surcharge was applied to orders of over 1,000 shares. It was $0.025 for each share traded, over 1,000 shares and capped at 2.5% of the principal amount of the trade.

That's the good news. The bad news is that they're adding a fee. Specifically a low-priced security surcharge. Here's how that breaks down:

  • The Low-Priced Security Surcharge applies to all stocks and ETFs executed at a price below $1.00 per share.

  • The charge will be $0.007 per share.

  • It is capped at 15% of the total principal amount for real-time trades, but no less than the base commission.

So, basically if you're a high volume trader of securities other than penny stocks, you got a bonus. If you're like me, and don't trade more than 1,000 shares at a time and stay away from penny stocks, then there's no change.

I've been a account holder of Sharebuilder since before it was owned by the ING group and I've been very pleased with their service and quality throughout my time as a customer. I am also not compensated in any way by ING.

Thursday, April 15, 2010

Beware These 10 Investment Scams.

There are the two times when investment scams are most prominent: the best of times and the worst of times. At the heart of an investment scam is one person taking advantage of another, so it's not surprising that scammers focus on the desperate and the greedy - both have a strong emotional motivation for the scam artist to tap into.

CNBC recently posted their list of the top 10 investment scams over the past two years.

Here's the list, and what I think of it:

10. Leveraged Exchange-Traded Funds (ETFs).

I'm not sure I'd call these a scam. A leveraged ETF is highly volatile, and focuses on exotic financial instruments, options, derivatives and generally the sort of "toxic assets" that brought down the titans of investment banking. They're fairly dangerous for the independent investor, but I don't know that they are a scam.

9. Speculative Inventions and New Products

This investment is easily abused, so it makes sense to be on the list. Venture capitalists make big profits here, but they're not suitable for retirement savings.

8. Short-Term Commercial Promissory Notes

These notes are usually 9 months or less in duration, and are often promoted as being "insured" by companies outside the U.S. that are not licensed for business in the U.S..

7. Entertainment Investments

This category includes movies, infomercials, and internet sites. They unregulated and risky.

6. Real Estate Investment Schemes

It's no surprise to see these on the list. With record foreclosures, scammers are out in full force offering to save people's homes, or fix their mortgages. The flip side is the scammer that sells information or classes promising people that they can make large sums by buying foreclosed property and flipping it for more than the foreclosure value.

5. Private Placement Offerings

Another case where existing regulations are misused and abused by con artists.

4. Life Settlements

life settlements are another gray area which invites scammers and con artists.

3. Natural Resource Investments

As the global economy rebounds and the need for energy increases again, expect these investments to become a favorite of scam artists.

2. Gold Bullion and Currency Scams

I can't read a post in an investing or finance forum without crossing some troll posting a link to his gold or forex site promising to cashing in on the coming apocalypse. 'Nuff said.

1. Ponzi Schemes

Every heard of Bernard Madoff?

How to avoid investment scams

The cardinal rule of investing will keep you out of most of these traps - know what you're investing in. If you don't understand it, stay away. Beyond that, if you're not sure the investment or the guy selling it is legit, you can check your state securities regulator on and contact him with the name of the person that asked you to invest and give them the name of the offering.

Also, if it sounds too good to be true, it probably is. Unusually high and "guaranteed" rates of return are definite red flags.

Wednesday, April 14, 2010

Time To Check Your Stop-Loss Trigger Points!

As this article from MarketWatch points out, optimism about the U.S. economy is on the rise.

That's a good thing, right?

Not if you're a contrarian investor. If look to be greedy when others are fearful and pull back when others are greedy, you may want to take note of this optimism. The stock market has been on a tear for the past year or so, and many analysts think it may have gone a little further than the fundamentals warrant.

I happen to agree with them, but popular sentiment usually overshoots the fundamentals and momentum often carries the market higher or lower than it should otherwise be.

The bottom line as I see it is that we may be heading into the "borrowed time" phase of the bull market, and things may correct soon.

Let's face it - the market will correct sometime in the near future. Is it today? Will it be tomorrow? or 6 months from now?

No one knows for sure, and I don't personally care.

I use stop loss orders to be sure I don't ride the market all the way down, and I'm re-evaluating my trigger points for those orders and nudging them up. That way, when the market does correct I'll keep a little more of my profits. :)

Thursday, April 8, 2010

Does A Roth Conversion Make Sense?

2010 has been heralded as "the year of the Roth" in numerous investment publications. It's easy to see why - the tax laws that govern income limits on Roth investments were modified so that the limitations were removed at the start of 2010.Does A Roth Conversion Make Sense_qmark

Prior to that change, Roth IRA accounts were off limits to individuals earning more than $120,000 and married couples earning more than $176,000. But now, anyone can open a Roth IRA, so it's no wonder that the financial media is awash in articles extolling the virtues of converting your traditional IRA into a Roth IRA, but does that really make sense?

I'm not going to offer a fancy calculator to show you how much money you could save by converting your IRA to a Roth - you can find many on the web. I just want to share some of the thoughts I've been turning over in my mind and maybe get you to think about the process a little more than before you read this.

Converting your traditional IRA to a Roth IRA account does make sense - for wall street.

I'm not running for office any time soon, so I'm not going to vilify Wall Street. Suffice it to say, every transaction on the stock market is making someone on Wall Street some money... usually many someones. All of that money is coming out of your IRA savings. I'm not saying that this is reason alone for skipping a Roth conversion, but it's something to consider.

Converting to a Roth can be taxing.

The simple difference between a tradition IRA and a Roth IRA is taxes - with a traditional IRA, you pay taxes when you take the money out; with a Roth IRA, you pay taxes on the money before you contribute it to your Roth account but the money you withdrawal in retirement is tax free. It's simplification as there are other differences, but it really boils down to paying taxes now vs. when you retire.

But when you convert your tradition IRA to a Roth, you are in essence transforming that money from pre-tax contributions (traditional IRA) to after tax contributions (Roth IRA), so you have to pay taxes on the amount you are converting.

But it's worse than that - the conversion amount is treated as income! For example, if you make $50,000 a year and you're converting a $100,000 IRA, then your income for tax purposes is effectively $150,000 for that year.

Traditional IRA accounts and Roth IRA accounts are not mutually exclusive.

What I mean by this is that you don't have to choose one of the other - you can have both!

These 3 factors have led me to conclude that IRA conversions are not worth doing.

What does make sense.

I still believe that a Roth IRA account is worth having. I don't see any way that tax rates will be less 20 years from now, and the tax free withdrawals of a Roth will be a big benefit by then. Couple that with the fact that you don't simply withdraw all your retirement savings upon retirement - you take a little bit at a time, leaving the rest to grow - and I think it makes sense to have both a traditional IRA and a Roth IRA.

The traditional IRA should be depleted first, since that gives the Roth even more time to grow tax-free. Also, a Roth IRA can be left to your beneficiaries, so if you pass away before you can tap the Roth, there's more left for your heirs.

I don't expect too many financial pros who make a living off of the commissions and fees generated by a Roth conversion to be espousing this idea, but I am surprised that I haven't seen this in any of the finance media like Morningstar, Kiplinger, Money, etc... it makes me wonder if I'm not missing something big with the whole concept.

Wednesday, April 7, 2010

The Danger of Short-Term Performance.

Every investor ought to have the phrase “past performance is no guarantee of future results” tattooed backwards on their forehead - backwards so they see every morning when they look in the mirror. But sadly, that doesn't happen. And perhaps because of this fact, it's one of the most ignored pieces of investment advice around.The Danger of Short-Term Performance_chart

I personally believe it's ignored (or forgotten about) so much simply because it's so ubiquitous. It's like your mom telling you to tie your shoes when you were a kid - sure it was advice you should heed, but since failing to do so rarely resulted in any calamity, you felt it was little more than noise.

Well, if 2008-2009 showed us anything, it's that sometimes that ubiquitous noise is worth listening to.

Here's another bit of  ubiquitous noise worth listening to: Beware of One-Year Returns.

This is the advice of Steven Goldberg, one of contributing columnists. His point is that some funds can put up seemingly stellar returns over the short-term, but those returns often come at a price.

He spotlights Birmiwal Oasis fund which is up 224% since March, 2009 but that fund has a 999% turnover during that period and a volatility that's 2.5 times the S&P 500.

That's a bumpy ride.

That's also an extreme case, I think. But I also think that it's more important now not to be taken in by such astronomically “good” returns.

When you compare the past 12 months to the 12 months of stock market Armageddon of 2008-2009, most funds should have a really good looking return.

I remember when I first became interested in the stock market. It was around the end of  2004, and the funds I was looking at all had returns in the 40-50% range and I thought, “No wonder people get rich in the stock market. What was I thinking not investing before?”

Of course, I later learned that those great looking returns came from the cratering of stock prices in the dot-com bubble burst.

The moral of this post is that context is everything. You need to take the return as part of the bigger picture, and consider the time frame involved. Any funds 1 year performance can only be indicative of the fund's general performance over the type of market during that year.

For example, if a fund did markedly better than its peers during the 2008-2009 period, then that says something about the fund's management during that kind of market upheaval.