Are You Dollar Cost Averaging?

Today we are going to discuss dollar cost averaging (DCA) and how it is most likely helping your retirement portfolio.

Dollar Cost Averaging-  The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high.”  1.

Dollar Cost Averaging for Dummies

So to put it more simply, dollar cost averaging is when you are investing in a type of investment that has shares (stocks or mutual funds) and you are putting in new money on a consistent basis.  You are investing the same amount of money each time, but buying a different amount of shares, due to the fluctuation of share price of a stock or mutual fund.

The Benefit of Dollar Cost Averaging

As it works out over time, because you are able to buy more shares in lower prices, the average price you pay is always lower than the average price of the stock/mutual fund.   It is hard to wrap my mind around it, but whether the price is going up, down or both, you will get your stocks at a discount using Dollar Cost Averaging.

Here is a very basic example.  If you put in $100 a month to a mutual fund priced at $10 per share the first month you would buy 10 shares for that price.  Let’s say the price goes up to $20 per share the second month, so your $100 would buy 5 shares.  So with dollar cost averaging you would have 15 shares after 2 months.  At the same average share price of $15, if you invested the same $200 you would only have 13.3 shares.

So most individual investors saving for retirement use DCA as they invest a monthly amount into their retirement account.   This makes sense and is obviously a good way to invest.  Much better than to try and time the market and only put money in when you feel the market is safe or poised to have a big run up.   It is also a way to put investing for retirement on the monthly budget and plan it in instead of having to make room for it.

Is Dollar Cost Averaging ever bad?

There is only one situation in which Dollar Cost Averaging is not the best option.    If you have a lump sum from receiving an inheritance, bonus,  or are just starting to invest, it is almost always best to invest the lump sum rather than putting it in slowly over time.   Let me explain.

Throughout history the market has ALWAYS gone up over the long term, meaning 10, 20 30 years.  There has never been a 20 year period where there has been  a loss in the market.  So the more shares you can buy now, usually the better you are.  If you wait to invest, odds are you are going to be buying at a higher price then you could have earlier.   Going back 88 years, 66 of those years have been up markets.  Going forward there is no way for us to know when the market will be up or down.

So the main reason people would rather use Dollar Cost Averaging over contributing a Lump Sum is FEAR.  They are scared the market will crash or take a big drop, because that is what they say on the news almost every single day.  They have been saying it ever since the market bounced back in 2009.   We should not let fear control our investment decisions.

For the average investor saving for retirement, consistent monthly contributions are the way to go, but if you ever do come across a lump sum of money that you want to invest, don’t wait to invest it.

By Jimmy Hancock

References

1. Investopedia. “Dollar-Cost Averaging (DCA) Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 04 Sept. 2014. <http://www.investopedia.com/terms/d/dollarcostaveraging.asp>.

2. Miller, Steve. “Dollar Cost Averaging EP 265 08192014.” Livestream. Matson Money, 19 Aug. 2014. Web. 04 Sept. 2014. <http://www.livestream.com/markmatson/video?clipId=pla_0a3928e4-319d-4575-9297-eac738bffcd7&utm_source=lslibrary&utm_medium=ui-thumb>.

When is it Safe to Get In the Market?

Perhaps one of the biggest challenges that investors face is determining if “right now” is a safe time to invest (meaning not just the present, but any time). What makes it difficult for investors is a twofold issue: first, is a lack of historical knowledge and perspective, and second, their own emotions. Actually, if one looks back on an historical basis, it would have appeared that there was no safe period in which to invest. Investors are really funny in this regard (actually most advisors are really no better). In 2009 investors were in shell shock coming out of the 2008 financial debacle. By 2013 it was really too good and couldn’t last. Last year the market had been going up for five years and that was just too good to be true and something had to come crashing down soon. And this year, there has been volatility and fear mongers from day 1.  What investors are looking for is something that does not exist—ever—a “Goldilocks” market!

I’m going to take some historical facts and figures to provide some historical context that may enable my clients to feel more comfortable when faced with the ongoing question of “is it safe.”
The first issue that investors must confront is that there is no such thing as a “safe” investment and this applies whether funds are invested in equities, bonds, government fixed income, gold, real estate, your mattress or in a coffee can in the back yard. Your money is always subject to one form of risk or another. For a more complete discussion on this subject read Main Street Money by Mark Matson. If you don’t have a copy let me know and I will get you one.
In this blog, I’ll confine myself to discussing equities and fixed income contained within a diversified portfolio that is periodically rebalanced, with dividends and capital gains reinvested, because that is what we do with our client’s money. Let’s take a decade by decade look at all the challenges investors have faced.

1920’s
• 1917-23 Russian Civil War
• 1922 Mussolini takes control of Italy (eliminates private ownership, total government control!! Hmm!)
• 1923 Hyperinflation in Germany
• 1926+27 Chinese Civil War
• 1929 Wall Street Crash
• 1929-39 Great Depression
A horrible period to be invested in the market—manic market followed by the 1929 crash. Yet a fully diversified portfolio had $100,000 growing to $135,000 at the end of the decade.

1930’s
• 1932-33 Holodomor Starvation
• 1933 The Nazi Party come into power
• 1933-45 The Jewish Holocaust
• 1935 US Presidential Candidate Assassinated (Huey Long)
• 1935-1936 Italian/Abyssinian War
• 1936-38 Stalin Purges (including Gulag Death Camps)
• 1936-39 Spanish Civil War
• 1937 The Hindenburg Airship Explodes
• 1939-45 World War II
Talk about a horrific period to begin investing? Probably the worst ten year period, economically we have ever experienced. Yet, $100,000 invested at the beginning of the decade grew to $152,000.

1940’s
• 1933-45 The Jewish Holocaust continued
• 1939-45 World War II continued
• 1945 President Roosevelt dies before the war ends
• 1945 Eastern Europe is dominated by Communist USSR
• 1949-1993 The Cold War
What could be a worse time to begin investing as Word War II was starting, followed by the beginning of the Cold War. Let me interject an investment factoid here. The renown international investor, Sir John Templeton made his initial reputation by borrowing $10,000 and buying 100 shares of every stock on the New Your Stock Exchange selling for less than $1 at the start of the war.
If you had controlled your anxiety, like Sir John, and invested $100,000 at the start of the decade, you would have been amply rewarded by seeing that investment grow to $336,000!

1950’s
• 1949-93 The Cold War continues
• 1950-53 The Korean War
• 1951 Mao Zedong takes power in China
• 1956 Suez Canal Crisis
• 1956 Russian quashing of the Hungarian Revolution
• 1959 The Cuban Revolution
• 1959-75 The Vietnam War
This was supposedly the boring decade under President Eisenhower. However, international events didn’t take a holiday and they continued to swirl about us creating many excuses for avoiding the assumption of any investment risk.
Nevertheless, investors who ignored events and invested $100,000 at the start of the decade had $393,000 in their portfolios at the end of the decade.

1960’s
• 1949-93 The Cold War continues
• 1959-75 The Vietnam War continues
• 1961 The Berlin Wall built
• 1962 The Cuban Missile Crisis
• 1963 JFK Assassinated
• 1964 China explodes its first nuclear bomb
• 1967 Six Day Israeli/Egypt War
• 1968 MLK and RFK assassinated—rioting in major cities
• 1969 Libyan Revolution—Khaddafi comes to power
This was the decade where we got to watch both national and international occurrences in almost “real time” thanks to the expansion of television and global communications. An event filled decade both home and abroad. Plenty of excused could be found as to why it was not safe to invest. Yet again, $100,000 invested at the start of the decade produced a portfolio worth $259,000 by the end of the decade.

1970’s
• 1949-93 The Cold War continues
• 1959-75 The Vietnam War continues
• 1970 The beginning of Terrorism in the world
• 1972 Kidnap and murder of Israeli Athletes at Olympics Games
• 1972 President Nixon resigns
• 1975-79 Khmer Rued in Cambodia (Genocide)
• 1979 Saddam Hussein comes to power
• 1979-1981 Iranian kidnapping of U.S. Embassy and diplomats
This decade begins with Vietnam, followed by the Nixon resignation, then the Iranian Embassy kidnapping, and ends with President Carter’s “malaise.” Gas lines, international problems, national embarrassment and a Russian bear looking more ominous.
Yet somehow if one was courageous enough to invest $100,000 at the beginning of the decade, it would have grown to $271,000.

I could go on with the history lesson, but suffice it to say that the 80’s decade rewarded $100,000 by growing to $453,000. In the 90’s it grew to$338,000.
This last decade, which was sort of known as the “lost decade” because of the dot.com/tech bubble, the real estate bubble. This resulted in two severe bear markets. Still investors were rewarded by having their portfolio vastly outperform the underlying cost of living and inflation.
So the lesson for all is that if one pays attention to events, you can always find a reason why it is not a good time to invest—and historically, you would have always been wrong!! I will not say anything about the world we find ourselves in today because we have always found ourselves in difficult times both domestically and globally—there have always been challenges and there always will—it is just the nature of the species.
As to the basic question: Is it safe? I’ll let you draw your own conclusions!

By Jim Hancock

References

Source of returns figures for the various asset classes utilized in the hypothetical portfolio: DFA Returns Software 2.0, Feb. 2011. Past performance is no guarantee of future results. Performance included reinvestment of all dividend and capital gains.

1.Taylor, Fred. “Commentary: Is It Safe?” Message to the author. 6 Aug. 2014. E-mail.

2. Matson Money. But This Time it Really is Different. N.p.: n.p., n.d. PDF. https://www.matsonmoney.com/

Is it Safe?

Perhaps one of the biggest challenges that investors face is determining if “right now” is a SAFE time to invest (meaning not just the present, but any time). What makes it difficult for investors is a twofold issue: first, is a lack of historical knowledge and perspective, and second, their own emotions. Actually, if one looks back on an historical basis, it would have appeared that there was no safe period in which to invest. Investors are really funny in this regard (actually most advisors are really no better). In 2009 investors were in shell shock coming out of the 2008 financial debacle. By 2012 it was really too good and couldn’t last. Last year the market had been going up for four years and that was just too good to be true and something had to come crashing down soon. And this year, with all the election year rhetoric and world events swirling around us, the stock market now appears to be getting more volatile…? What investors are looking for is something that does not exist—ever—a “Goldilocks” market!

I’m going to take some historical facts and figures to provide some historical context that may enable my clients to feel more comfortable when faced with the ongoing question of I “is it safe.”
The first issue that investors must confront is that there is no such thing as a “safe” investment and this applies whether funds are invested in equities, bonds, government fixed income, gold, real estate, your mattress or in a coffee can in the back yard. Your money is always subject to one form of risk or another. For a more complete discussion on this subject read Main Street Money by Mark Matson. If you don’t have a copy let me know and I will get you one.
In this blog, I’ll confine myself to discussing equities and fixed income contained within a diversified portfolio that is periodically rebalanced, with dividends and capital gains reinvested, because that is what we do with our client’s money. Let’s take a decade by decade look at all the challenges investors have faced.

1920’s
• 1917-23 Russian Civil War
• 1922 Mussolini takes control of Italy (eliminates private ownership, total government control!! Hmm!)
• 1923 Hyperinflation in Germany
• 1926+27 Chinese Civil War
• 1929 Wall Street Crash
• 1929-39 Great Depression
A horrible period to be invested in the market—manic market followed by the 1929 crash. Yet a fully diversified portfolio had $100,000 growing to $135,000 at the end of the decade.

1930’s
• 1932-33 Holodomor Starvation
• 1933 The Nazi Party come into power
• 1933-45 The Jewish Holocaust
• 1935 US Presidential Candidate Assassinated (Huey Long)
• 1935-1936 Italian/Abyssinian War
• 1936-38 Stalin Purges (including Gulag Death Camps)
• 1936-39 Spanish Civil War
• 1937 The Hindenburg Airship Explodes
• 1939-45 World War II
Talk about a horrific period to begin investing? Probably the worst ten year period, economically we have ever experienced. Yet, $100,000 invested at the beginning of the decade grew to $152,000.

1940’s
• 1933-45 The Jewish Holocaust continued
• 1939-45 World War II continued
• 1945 President Roosevelt dies before the war ends
• 1945 Eastern Europe is dominated by Communist USSR
• 1949-1993 The Cold War
What could be a worse time to begin investing as Word War II was starting, followed by the beginning of the Cold War. Let me interject an investment factoid here. The renown international investor, Sir John Templeton made his initial reputation by borrowing $10,000 and buying 100 shares of every stock on the New Your Stock Exchange selling for less than $1 at the start of the war.
If you had controlled your anxiety, like Sir John, and invested $100,000 at the start of the decade, you would have been amply rewarded by seeing that investment grow to $336,000!

1950’s
• 1949-93 The Cold War continues
• 1950-53 The Korean War
• 1951 Mao Zedong takes power in China
• 1956 Suez Canal Crisis
• 1956 Russian quashing of the Hungarian Revolution
• 1959 The Cuban Revolution
• 1959-75 The Vietnam War
This was supposedly the boring decade under President Eisenhower. However, international events didn’t take a holiday and they continued to swirl about us creating many excuses for avoiding the assumption of any investment risk.
Nevertheless, investors who ignored events and invested $100,000 at the start of the decade had $393,000 in their portfolios at the end of the decade.

1960’s
• 1949-93 The Cold War continues
• 1959-75 The Vietnam War continues
• 1961 The Berlin Wall built
• 1962 The Cuban Missile Crisis
• 1963 JFK Assassinated
• 1964 China explodes its first nuclear bomb
• 1967 Six Day Israeli/Egypt War
• 1968 MLK and RFK assassinated—rioting in major cities
• 1969 Libyan Revolution—Khaddafi comes to power
This was the decade where we got to watch both national and international occurrences in almost “real time” thanks to the expansion of television and global communications. An event filled decade both home and abroad. Plenty of excused could be found as to why it was not safe to invest. Yet again, $100,000 invested at the start of the decade produced a portfolio worth $259,000 by the end of the decade.

1970’s
• 1949-93 The Cold War continues
• 1959-75 The Vietnam War continues
• 1970 The beginning of Terrorism in the world
• 1972 Kidnap and murder of Israeli Athletes at Olympics Games
• 1972 President Nixon resigns
• 1975-79 Khmer Rued in Cambodia (Genocide)
• 1979 Saddam Hussein comes to power
• 1979-1981 Iranian kidnapping of U.S. Embassy and diplomats
This decade begins with Vietnam, followed by the Nixon resignation, then the Iranian Embassy kidnapping, and ends with President Carter’s “malaise.” Gas lines, international problems, national embarrassment and a Russian bear looking more ominous.
Yet somehow if one was courageous enough to invest $100,000 at the beginning of the decade, it would have grown to $271,000.

I could go on with the history lesson, but suffice it to say that the 80’s decade rewarded $100,000 by growing to $453,000. In the 90’s it grew to$338,000.
This last decade, which was sort of known as the “lost decade” because of the dot.com/tech bubble, the real estate bubble. This resulted in two severe bear markets. Still investors were rewarded by having their portfolio vastly outperform the underlying cost of living and inflation.
So the lesson for all is that if one pays attention to events, you can always find a reason why it is not a good time to invest—and historically, you would have always been wrong!! I will not say anything about the world we find ourselves in today because we have always found ourselves in difficult times both domestically and globally—there have always been challenges and there always will—it is just the nature of the species.
As to the basic question: Is it safe? I’ll let you draw your own conclusions!

By Jim Hancock

The blog came from two sources: Matson Money Investor Coaching Series—“But this Time it Really is Different” and Fred Taylor—Matson Coach, Atlanta, GA
Source of returns figures for the various asset classes utilized in the hypothetical portfolio: DFA Returns Software 2.0, Feb. 2011. Past performance is no guarantee of future results. Performance included reinvestment of all dividend and capital gains.

Second Quarter Market Returns

There have actually been complaints in the media and news about how “boring” the stock market has been so far this year.  Boring is bad in sports, but in the stock market it is usually a good thing.  There has been slow but steady growth in every single sector and sub sector of the market year to date.   Matson Money sends quarterly reports to all of our clients and to us.  This is what they have to say about the market after quarter Two.

Quarterly Report: Matson Money

“From stocks to bonds, and developed markets to emerging markets, world financial markets have rallied in unison during the first half of 2014.  The Dow Jones Industrial Average was up over 1.5%, its fourth-straight first half-year rise.  In addition, the MSCI World Index of developed-world equities rose 6.52% and the MSCI Emerging Markets Index was also up 6.32% in the first six months of 2014.  The rallies reflect continued market resilience amid world political and economic unrest.

Following last year’s stellar returns and decent first six-months this year, many undisciplined investors may be swaying in their investment strategy.  A couple of years of gains or losses often turn investors, who have planned on a thirty-year investment time horizon, into investors with only a one or two year time horizon.  When investors see losses, they want out; when they see gains, they want in.  Investors’ tendency to extrapolate recent trends in stock prices is well documented.  There are several different studies over the last few years which provide a good amount of evidence that investors’ risk tolerance increases when equity markets are high (when investors should be rebalancing and shifting money out of equities).  And that individuals are most risk averse when equity markets are low (when investors should be buying more equities).  A 2007 study done by Geoffrey Friesen and Travis Sapp found that investors lose on average 1.56% annually in return, because they tend to pull money out of equity mutual funds following a market decline when it is more favorable to buy more equities (buy low).  Conversely investors increase equity allocations following market increases when you should rebalance out of equities (Sell high).” 1

They go on to list the some of the returns of other sectors of the market.

S&P 500 Index- 7.14%

MSCI World Index (Excluding US) – 5.76%

Index: Barclays Cap. U.S Govt./Credit – 2.25%    1.

Verdict?

As you can see, the stock market is in a peaceful positive state as of right now.  We know it will not always be that way.  We don’t and can’t know when the next big drop in the market is, but we can stay disciplined now and when that time does come.   Stay diversified, rebalanced, and focused on the long term and you will make it through any crash.

by Jimmy Hancock

References

1. Matson Money. “Account Statement.” Letter to James Hancock. 1 Apr. 2014. MS. N.p.

What is a Hedge Fund?

Are you missing out on the supposedly huge amount of profits to be made by investing with a “Guru” in his Hedge Fund?

Hedge funds are like mutual funds, but they are managed by self titled experts who charge an enormous fee to try and beat the market.  Hedge funds and Investing Guru’s are built on the premise that a smarter guy with a faster computer can make miracles possible by uncovering inefficiencies in the market or predicting the future.  They are attractive to so called sophistocated investor who wouldn’t be caught dead investing in “boring” index funds.

Do Hedge Funds Beat the Market?

“According to a report by Goldman Sachs released in May, hedge fund performance lagged the Standard & Poor’s 500-stock index by approximately 10 percentage points this year, although most fund managers still charged enormous fees in exchange for access to their brilliance. As of the end of June, hedge funds had gained just 1.4 percent for 2013 and have fallen behind the MSCI All Country World Index for five of the past seven years, according to data compiled by Bloomberg. This comes as the SEC passed a rule that will allow hedge funds to advertise to the public for the first time in 80 years.” 1

Studies continue to come in showing real data of the horrible returns of hedge funds vs. the whole market.

“Harken back to a decade ago. Your broker recommends an investment in a hedge fund. Your registered investment adviser disagrees. She recommends you invest in an index fund composed of 60 percent stocks and 40 percent bonds. You go with the broker’s recommendation. You don’t want “average” returns. You want your money managed by the best minds in finance.

Fast forward to today. According to a Harvard Business Review blog, a composite index of more than 2,000 hedge funds returned 72 percent over the past decade. The index fund, which took significantly less risk, had a return of about 100 percent, while charging much lower fees.

You would think these dismal returns would have dealt a crippling blow to the hedge fund industry. Not so. Hedge funds remain the darling of many pension plans. According to the same blog, hedge funds that go long and short on stocks and invest in equity derivatives managed a mere $865 billion a decade ago. Having demonstrated their lack of investment skill, these fund managers now manage more than $2.4 trillion. Go figure.” 2

Takeaway

Hedge funds are flashy and somehow popular, but if you want long term growth in your retirement accounts you should stay as far away from them as possible.   Instead, invest in a diversified portfolio,  and find an investment coach who will educate you especially in down markets.

by Jimmy Hancock

References

1. Kolhatkar, Sheelah. “Hedge Funds Are for Suckers.” Bloomberg Business Week. Bloomberg, 11 July 2013. Web. 14 July 2014. <http://www.businessweek.com/articles/2013-07-11/why-hedge-funds-glory-days-may-be-gone-for-good>

2. Solin, Dan. “The Fleecing of Investors Continues.” The Huffington Post. TheHuffingtonPost.com, 17 June 2014. Web. 17 July 2014. <http://www.huffingtonpost.com/dan-solin/the-fleecing-of-investors_1_b_5487788.html>.

Retirement Planning Basics: Investment Accounts

Planning your investments to build a retirement fund can be a dizzying prospect. The various questions and options and details and accounts and amounts are enough to make anyone’s head spin. Wouldn’t it be nice if there was a generic recipe for success? A nice neat list of step by step instructions on how to make the best decisions on where, when and how much when it comes to investing for your retirement. Unfortunately, this list of steps is incredibly dependent upon each individual and their current situation and future plans, so a sure fire success route doesn’t exist.

But before you stop reading, there are a few broad steps that most financial professionals agree will most likely lead you down the right path. By investing your money in retirement accounts by the priority of which will give you the most return, you can take advantage of what each has to offer. Here’s the order that is suggested for the majority of people in terms of retirement accounts.

1. Fulfill Your Company’s Match Program: The exact amount of this will differ for each individual depending on the company that they work with, but whether you have a 401K or a 403b, the best place for your money is in those accounts reaping the assistance of your employer. Match programs offer a two for one that is too valuable to turn down. Before you invest anywhere else, make sure you are investing enough in your 401k or 403b to get your full match.

2. IRA to the Max: There has been a long standing battle between the Traditional IRA’s and the Roth IRA’s. When it comes to your retirement planning, your Roth IRA should win this battle. There are a few different reasons why you should make this move. Investing in a Roth allows you to pay taxes on your income now, and avoid the higher tax rate as it grows in your retirement. Also, investing in an IRA gives you more choices and flexibility than is offered in many 401k plans. You can decide where you want to open your account based on your personal preference or individual situation. This step of maxing out a Roth IRA can change based on the individual though, as some people cannot open a Roth IRA because of their income level.

3. 401k or 403b to the Max: After you have reached your company’s matching level and have maxed out your Roth IRA, turn your funds back to the 401k or 403b until they are maxed out as well. Having both your Roth IRA and your 401k/403b maxed out gives you some variety in your portfolio in terms of how the investments are taxed. This variety gives you something of a safety net in terms of how taxes and other investments change over time and the affect they will have on your funds. As a side note, when you plan to max out your 401k or 403b, keep your eye on the ever changing contribution limits which vary each year.

4. Open Taxable (Non-Qualified) Accounts: If you have filled in the previous three steps, you will find yourself at the final, and most open ended step of the journey. If you are married this could be a joint account, and for the singles it is a personal account. You can use this account as an emergency fund since there are no age requirements to when you can take the money out without penalty.
This plan is not something to jump into without doing your homework. Like mentioned before, there is a reason that no one has created a perfect plan that fits everyone. Depending on your personal income, you might not be eligible for certain funds, like a Roth IRA, or you might be eligible for some accounts that could take higher priority, such as a SEP IRA. But, for most people, looking for a general order of priority for their retirement investments, these four steps are a great place to start.

Authored by Financial Social Media (financialsocialmedia.com) and Jimmy Hancock

Equities in the Last 30 Years: A Retrospective

Looking at a chart http://bit.ly/qSHuve covering the performance of the Dow Jones Industrial Average over the last century is a lot like looking at a chart of profitable business earnings at a cartoon enterprise meeting–it’s almost a caricature of itself, a steady upward slope punctuated by regular but far-between drops, always ending higher than it was before.

When an economy is in the thick of a recession, it’s hard to look at something like this and see anything positive, but now that the U.S. has been steadily creeping its way out of those lows it’s easier to see not only how markets react over the long-term, but also at how we’ve always reacted to the crises. In the short term a financial crisis always seems like the end of the world, but, as looking at the data would suggest, much like broken bones they always heal up stronger than ever. The following is a look back at the last three decades, and all of the crises and triumphs contained within. As The Economist noted in 2009, despite the criticism of advisors who used the past to predict the future during the economic downturn of the 2000s, there’s still some merit to taking a look at historical data once in a while to try and anticipate how markets will fare in the future.

The 2000s: The early 2000s recession and the Global Financial Crisis of 2007-2008.

The 2000s have been a tumultuous decade at best, between the turn of the century drops in 2000 and 2001 (April 14th, 5.7% and September 17th, 7.1%, respectively) and the abysmal 2008 performance of the Dow Jones, the drops were big and hit hard. Yet, it’s just as important to note that the U.S. economy was working with more money than ever before, and while that also means the drops were larger, it’s to be expected when working with such a large economy. The economy and markets have been on a steady mend since.

The 1990s: The Recession of 1990-1992.

Following on the heels of ‘Black Monday’ in the 1980s, the recession of 1990-1992 was almost more of an aftershock of the global recession than an isolated incident; arguably the 1990s recession was all but unavoidable after the U.S. escaped Black Monday relatively unscathed. The recession of the early 1990s was the “largest recession since that of the early 1980s” (http://bit.ly/PRlZjK), something that in the long view seems to imply a trend to recessions, equities markets, and economies on a whole.

The 1980s: The early 1980s recession and Black Monday.

The early 1980s, much like the early 1990s were hit hard by a bit of continued fallout from the global recession of the late 1970s, contributing to the savings and loan crisis, the recession itself lasted from July of 1981 to November 1982 (http://nyti.ms/lwDonQ). The early 1980s recession was similarly an influencing factor of Black Monday in 1987, where the global markets crashed and the Dow Jones declined by a remarkable 22.61% (http://on.wsj.com/12xHlhN). Needless to say this recession fed into the following decline in the early 1990s.

While this seems to be all doom and gloom, in this instance the negatives highlight the positive aspects of all of these recessions. The economy has always rebounded, stronger than ever. Much like the gradual upward spiking of Dow Jones over the last century, there will always be mountains and valleys, and it’s important to remind ourselves not to panic when sitting in one of these valleys.

Authored by Financial Social Media (financialsocialmedia.com)

http://stockcharts.com/freecharts/historical/djia1900.html

http://online.wsj.com/article/SB119239926667758592.html?mod=mkts_main_news_hs_h

http://www.huffingtonpost.com/2011/08/05/dow-jones-biggest-drops-falls_n_919216.html#s323026&title=7_April_14th

http://bancroft.berkeley.edu/ROHO/projects/debt/1990srecession.html

http://www.economist.com/blogs/freeexchange/2009/09/does_the_past_predict_the_futu

Should you Buy Gold as an Investment?

We have all seen the advertisements and headlines that keep telling us that investors need to flee to safety and buy gold.  They will tell us that the stock market is going to crash worse than last time, and that investors need a hedge to inflation with gold.  They will say it with charisma and inflict fear upon us as investors.  Even I have found myself looking into gold as an investment.

I have put in the research, and gold as an investment does not make sense for most investors, especially long term investors.

Show me the Data

1″Gold peaked just shy of $700 an ounce in 1980, then fell and did not again hit that level for 27 years. It started this year at $1,657, and has fallen about 18% to around $1,355, while the Standard & Poor’s 500 Index has gained about 18%.

The cause of these ups and downs is always open to debate. When the price of steel rises or falls, the reason can usually be found in the pace of world economic growth. Grain prices are heavily influenced by the weather. But gold rides waves of emotion.

Because of inflation, a dollar acquired in 1802 would have been worth just 5.2 cents at the end of 2011. A dollar put into Treasury bills at the same time would have grown to $282, or to $1,632 had it gone into long-term bonds. Held in gold, it would have grown to $4.50. True, that’s a gain even with inflation taken into account. But the same dollar put into a basket of stocks reflecting the broad market would have grown to an astounding $706,199.

As a compromise, investors can buy stocks in gold mining companies, says Allen. These stocks give shareholders the right to share in cash flows, and they tend to benefit when gold rises”

Let’s look at Gold’s return over the last 35 years.   I chose 35 years because that is about the number of years that investors should be invested while saving for retirement.

2“over the past 35 years, the average annual real (inflation–adjusted) rate of return on gold was 1.56 percent.”   That is nowhere near the returns that were received over those years in equities.

Gold as a hedge against inflation

3″From 1836 to 2011, the average real rate of price change for gold in the United States is 1.1% per year and the standard deviation is 13.1%”  This means that there is only a 68% chance that the 1 year price change on gold will be between -12% and 14.2%, and a 32% chance it will be even more volatile.  In Layman’s terms, gold prices have had large swings in price instead of giving constant steady growth.

Final Say

Past performance is no guarantee of future results, but in my opinion gold is not a good hedge against inflation, and it is not a good long term investment.  Invest in a globally diversified portfolio filled with equities and short term fixed income.

-By Jimmy Hancock

References

1. “Investing in Gold: Does It Stack Up? – Knowledge@Wharton.” KnowledgeWharton Investing in Gold Does It Stack Up Comments. Wharton School of the University of Pennsylvania, 22 May 2013. Web. 15 Apr. 2014. <https://knowledge.wharton.upenn.edu/article/investing-in-gold-does-it-stack-up/>.

2. Villarreal, Pamela. “The Return(s) To Gold.” The Return(s) to Gold. NCPA, 16 June 2011. Web. 15 Apr. 2014. <http://www.ncpa.org/pub/ba747>.

3. Barro, Robert J., and Sanja P. Misra. “Gold Returns.” NBER. National Bureau of Economic Research, 1 Feb. 2013. Web. 15 Apr. 2014. <http://www.nber.org/papers/w18759>.

Is the Stock Market Rigged?

Investors everywhere are panicking and fearful after a very interesting topic on 60 minutes this past Sunday. The headlines read, “The Stock Market is Rigged, and you are the victim”. So I am going to break down exactly why they are saying that the stock market is rigged, and whether you should panic or not. Here is a short summary from an article I read.

1″Lewis, discussing his new book about computer-driven stock trading titled Flash Boys, said the U.S. stock market is rigged by a combination of insiders — stock exchanges, big Wall Street banks and high-frequency traders — who can move faster than other investors.”

So what they are saying is these HFT’s (High-Frequency Traders) are building computer and network connections that are faster than yours so that when you say you want to buy a stock, they hurry and buy it before you and sell it back to you at a 1 cent increase. As they do this thousands of times each day it adds up quickly for them.

The question that we need to focus on is, “is this effecting my long term investments?”

These high frequency traders are hurting the actively managed investors. Investors that want to stock pick and market time are being eaten up by these HFT’s. Long term prudent investors that are not actively buying and selling are not losing much in this deal.

Another thing to think about is the affect HFT’s have had on lowering the bid ask spread cost that is involved in every trade. The bid ask spread is the difference between what you could buy the stock for and what you could sell it for. It is how Wall Street makes its money. The bid ask spread price as a whole in the market has dropped by quite a bit over the last few years. It has dropped by more than the price you pay to the HFT’s, and is partly due to the HFT’s and the efficiency that they bring to the market.

Whether or not these HFT’s get regulated and eliminated or not, your safe as long as you are prudently investing for the long term.

-by Jimmy Hancock

References
1. Snider, Mike. “Traders Dispute Lewis’ Rigged Markets Claim.” USA Today. Gannett, 01 Apr. 2014. Web. 02 Apr. 2014. <http://www.usatoday.com/story/money/markets/2014/04/01/high-frequency-trading-responses/7154347/>.

2. “Stock Market Not A Scam EP 245 04012014.” Matson Money Live. 01 Apr. 2014. Livestream. Web. 02 Apr. 2014. <http://www.livestream.com/markmatson/video?clipId=pla_2a0df638-8b31-49ff-9ae9-dfe47a74822c&utm_source=lslibrary&utm_medium=ui-thumb>.

When Stockpickers Realize Their Flaw

Stock Picking is and has been a very popular topic for years. We look at examples like Warren Buffet and see how much success he had “stock picking”. Well I learned today that Warren Buffet doesn’t believe that stock picking works. Here are pieces of a great article called, “Why the World’s Greatest Stock Picker Stopped Picking Stocks, and Why You Should Too”

The most dangerous investment advice is often that which seems most sensible, which is why the worst investing counsel you will likely ever receive is that you should try to pick “good” stocks and sell “bad” ones. You will get this advice in one form or another from innumerable sources, including (some) investment advisers, friends, colleagues, Wall Street, and the investment media. You should ignore it.

Since the dawn of investment time, great stock pickers (there are some) have been revered, and even most novices can proudly recite picks that have produced mountainous returns. (“I bought Google at $85!”) Unfortunately, what is smart (or lucky) on occasion often proves dumb over time, and, in the end, most stock pickers do worse than if they had never tried to pick stocks at all. Despite snagging the occasional ten bagger, for example, even professional mutual-fund stock pickers still have depressingly poor odds of beating the market once their losers and costs are taken into account (between 1-in-4 and 1-in-40, depending on how you measure performance). If you pursue a stock-picking strategy, you are almost certain to lag the market.

The problem for investors is that even though stock-picking usually hurts returns, it’s extremely interesting and fun. If you are ever to wean yourself of this bad habit, therefore, the first step is to understand why it’s so rarely successful. The short answer is that the overall market provides most investment returns, not particular stock picks, so most stock pickers get credit for gains that came merely from being invested in stocks generally. Second, competition among stock pickers is so intense that it is extraordinarily difficult for any one competitor to get a consistent edge. Third, although it is relatively easy to pick stocks that beat the market before costs (all else being equal, you have about even odds of doing this), it is much harder to do so after costs. Even if you pick stocks well enough to boost your pre-cost return by a couple of points, the expenses you rack up along the way (research, trading, taxes, etc.) will usually more than offset your gain.

Most stock pickers believe that they are among the tiny minority of investors who can beat the market after costs, and, for inspiration and encouragement, they point to legends such as Warren Buffett and Benjamin Graham. What such investors often don’t know is that even Buffett has said that the best strategy for most investors is to buy low-cost index funds and that the great Benjamin Graham eventually changed his mind about the wisdom of traditional stock-picking.

Blodget, Henry. “Why the World’s Greatest Stock Picker Stopped Picking Stocks.” Slate Magazine. N.p., 22 Jan. 2007. Web. 04 Mar. 2014. http://www.slate.com/articles/arts/bad_advice/2007/01/stop_picking_stocksimmediately.html.