03/19/13

In the over 30 years I have been reading The Wall Street Journal, I have never cut out six articles from a single days issue! But that is what happened last Wednesday. Part 2

This week I will summarize the second three of the six articles I cut out of the March 6, 2013 edition of The Wall Street Journal.  I hope this will put some perspective on the market and the crazy media coverage generated:

“On Wall Street, Investors Plot Next Move”  This article is very interesting in that it looks at the so-called record high in the perspective of taking out inflation from the results.  Once you take out inflation, then the Dow hasn’t been in real record territory in more than 13 years.  “The last nominal Dow record, in October 2007, wasn’t a record at all once inflation is removed.  The last real, or inflation-adjusted, record was on January 14, 2000.”

Economists and some analysts state that investors should take inflation more seriously, according to Richard Sylla, a professor at NYU, “people could be fooled if they don’t pay attention to inflation.”  While inflation’s effects are small over the short-term, they can have a significant effect over the long-term.  Professor Sylla stated, “the Dow appears to be roughly 140 times its level of 100 years ago, an enormous gain.  But removing price increases and counting only real gains, the Dow is roughly seven times its level of 100 years ago, a good gain but far from what it appears.”

Even over the past 13 years, the story is very different once inflation is taken out.  “In nominal terms, the Dow today appears to have risen 22% from the record it hit in January 2000.  But taking inflation into account, it still is more than 10% below that record.”  In fact, if you wanted to match the inflation adjusted “record high” the Dow would need to hit 16,052.22 in today’s nominal terms.

“Keeping Up With the Dow Joneses”  This article is more for geeks than regular investors in that it discusses the difference between price based indexes like the Dow vs. market capitalization of a broader index like the S&P 500.  The bottom line is that a single index does not make a diversified portfolio.

 “Latest Bull Run Is More Of A Jog”  Because the effects of inflation, this rise in the Dow is not that significant due to the time it has taken to rise.  The average bull market gained 102.85% over 887 calendar days, or about 2 ½ years.  This bull run gained 117.7% over 1,457 calendar days.  This means that this was a slow rise, not a robust move.

 

Turn down volume

Emotions of Investing and the Articles Discussed Above:  

While the past few weeks saw record highs for the Dow and S&P, it was also a record for me in the record number of clients calling and emailing me about how this record high was effecting their investments.

There is a very interesting area of study in Finance called Behavioral Finance.  It is the convergence of both psychology and finance.  Meaning, it studies the impact of emotions on the so-called rational behavior of investors.  One of the most important roles you have hired me to assist with is to remove the emotion from your investing decisions.  It is therefore my job to turn down the volume of the media hype surrounding any news in the market including the so-called record highs in market indexes.

So when I am asked the question, “how do the record highs affect my portfolio?”  My initial blunt answer is that they don’t!  Why don’t the stories about any single record high affect your portfolio?  Simple, first is that you can’t fully invest in any single index.  Every index fund tries to get close to matching an index, but it can never match it 100% due to purchasing into the mix of companies in an index and the fees the index charges.  Second, the real key question is why would you want to invest just in an index?

If you try to invest in a single index does it match your risk tolerances?  Does it fully diversify your assets?  But most importantly, how does a single index help you achieve any life goal you desire to achieve?

The most important long-term annual study on the behavior of average investors vs. institutional investors is the Dalbar Study.  This annual study looks at the returns of average investors.  As the below chart shows, the “average investor” does very poorly when compared to a static index.  Over the past 20 years the average investor earned only 3.49% return while the S&P 500 Index earned 7.81%.  Why is this?  Simply put, the average investor is subject to media hype and the roller coaster impact of short-term news and ups and downs in the market.  An institution has a very long-term focus, but an average investor is concerned with a much shorter time horizon.

Here are the results of the 2012 Dalbar Study:

Dalbar Chart with numbers

I hope this weeks article as well as last weeks have helped you put into perspective the media hype surrounding the so-called record highs in the market

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

 

 

 

03/12/13

In the over 30 years I have been reading The Wall Street Journal, I have never cut out six articles from a single days issue! But that is what happened last Wednesday. Part 1

This week I will summarize the first three of the six articles I cut out of last Wednesday’s Wall Street Journal.  I hope this will put some perspective on the market and the crazy media coverage generated.  These six articles all came from the Wednesday, March 6, 2013 edition of The Wall Street Journal:

“Five Stocks Handled the Heavy Lifting”  This article discusses that of the 7,706.72 gain in the Dow, five stocks, IBM, Caterpillar, 3M, Chevron and United Technologies accounted for 2,800 points of the gain.  The Dow Jones Industrial Average is only made up of 30 Blue Chip stocks based on share price not company market value.  This means that a 1% move in the price of IBM on any given day would move the Dow about 16 points.  By comparison, a 1% move in Alcoa would move the average less than 1 point.

This article also points out that just because a stock has rallied sharply doesn’t necessarily mean it has played a big role in the Dow’s four year surge.  For example, Bank of America traded below $4 in March 2009.  The stock finished at $11.55 on Tuesday.  Yet despite the stock’s more than 200% bounce, it only contributed 62.74 points to the Dow in that time frame.  That makes it the sixth smallest contribution among Dow components.  Now compare this to the negative effect it had on the Dow on the way down.  BofA shares fell from the low $50’s in October 2007 to $4 in 2009.  The bank alone lopped 388 points off the Dow during that drop.  This was the fifth-biggest drag on the index.

“Dow Leaps to Record”  The opening paragraph of the article states: “The Dow Jones Industrial Average jumped to a record Tuesday, marking a key milestone in the long slog to recovery from the financial crisis.”  The key words in this opening paragraph are “long slog to recovery.”  The facts discussed in the six articles I cut out show that while the nominal Dow may have recovered, we are nowhere near a recovery after inflation is taken into account, or in terms of job recovery (true unemployment stands at over 14%!).  In fact, most of the economists and traders quoted in the articles I have included all point out that this is a Fed created recovery, not a corporate profit and stock price driven recovery.

In terms of the Dow Jones Industrial Average as a non-inflation adjusted number, its wild ride over the past 5 1/2 years show that on:

  • October 9, 2007 the Dow stood at 14164.53
  • March 9, 2009 the Dow stood at 6547.05 a loss of 7617.48 points
  • March 5, 2013 the Dow stood at 14253.77 a gain of 7706.72 or a net gain of only 89.24 points over a period of 5 ½ years or an average of 16.23 points per year.

“History Lesson:  Buying High, Selling Low”  There is a common saying that to win in the stock market game, you need to buy low and sell high.  Of course, what do most average investors do?  They buy high and sell low.  Not a great strategy, even if you do it in volume.  (That was a joke!) That is why I am so interested in the field of finance called Behavioral Finance.  It explores the emotional component of investing.  In this article mutual fund firms have reported that average retail investors have been pouring money into the stock market over the past couple of weeks as media coverage of the frenzy of hitting an all-time record high approach.  So what are these average investors doing?  Buying High and will probably sell low in a few months or years.

Emotions of Investing and the Articles Discussed Above:  While this past week was a record high for the Dow Jones Industrial Average, it was also a record for me in the record number of clients calling and emailing me about how this record high was effecting their investments.

Turn down volumeThere is a very interesting area of study in Finance called Behavioral Finance.  It is the convergence of both psychology and finance.  Meaning, it studies the impact of emotions on the so-called rational behavior of investors.  One of the most important roles you have hired me to assist with is to remove the emotion from your investing decisions.  It is therefore my job to turn down the volume of the media hype surrounding any news in the market including the so-called record highs in market indexes.

So when I am asked the question, “how do the record highs affect my portfolio?”  My initial blunt answer is that they don’t!  Why don’t the stories about any single record high affect your portfolio?  Simple, first is that you can’t fully invest in any single index.  Every index fund tries to get close to matching an index, but it can never match it 100% due to purchasing into the mix of companies in an index and the fees the index charges.  Second, the real key question is why would you want to invest just in an index?

If you try to invest in a single index does it match your risk tolerances?  Does it fully diversify your assets?  But most importantly, how does a single index help you achieve any life goal you desire to achieve?

The most important long-term annual study on the behavior of average investors vs. institutional investors is the Dalbar Study.  This annual study looks at the returns of average investors.  As the below chart shows, the “average investor” does very poorly when compared to a static index.  Over the past 20 years the average investor earned only 3.49% return while the S&P 500 Index earned 7.81%.  Why is this?  Simply put, the average investor is subject to media hype and the roller coaster impact of short-term news and ups and downs in the market.  An institution has a very long-term focus, but an average investor is concerned with a much shorter time horizon.

Here are the results of the 2012 Dalbar Study:

 

Dalbar Chart with numbers

Next week I will further discuss the niche of Behavioral Finance and discuss the other three articles.

 

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

 

03/4/13

Halfway There: National survey finds about half of Americans have goals & savings plans

 

Piggy Bank with HeartAmericans are split pretty neatly into good savers and bad savers, according to a national survey released as part of America Saves Week.

The survey, conducted by Opinion Research Corp. International for the Consumer Federation of America and the American Savings Education Council, which is managed by the Employee Benefit Research Institute, polled more than 1,000 investors by phone in February.

About half of respondents reported good savings habits, the study found. Fifty-four percent said they had specific goals and 43% said they had a spending plan that included saving part of their money. Forty-one percent regularly transfer money from their checking accounts to savings accounts by automatic transfers, and 49% said they knew their net worth.

The survey found a similar divide in retirement saving habits. Fifty percent of workers said they were contributing to a retirement plan and 49% said they were saving enough to have a “desirable standard of living” when they retire.

“According to the EBRI Retirement Security Projection Model, more than half of baby boomers and Gen-Xers will be able to retire with enough money to cover the cost of basic retirement needs as well as uninsured health care costs, assuming they retire at age 65 and retain any net housing equity in retirement until other financial resources are depleted,” Dallas Salisbury, chairman of ASEC and president and CEO of the Employee Benefit Research Institute, said in a statement. Still, “a significant number are simulated to be at risk of running short of money in retirement. They know they need to save more.”

Investors’ savings habits haven’t gotten any worse over the last 12 months, but they haven’t gotten any better, either. In 2012, 66% of respondents said they were spending less than they were saving or had enough cash saved for emergencies. Both categories were down one percentage point in 2013 to 65%.

“The recession still has not ended for millions of American families,” Stephen Brobeck, executive director of the Consumer Federation of America, said in a statement. “Many working families are still suffering from high unemployment rates, stagnant incomes and a housing market that is just beginning to recover.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®