Category — Investing

The end of December is rapidly approaching, especially with Christmas coming up this weekend. Luckily though you have until April 15th of 2009 to contribute to an IRA or Roth IRA. Also remember that the limit has been increased to $5000, so if you can swing it that’s more money that you can save and grow tax free.   

They say you’re only young once. Most often that is said as a reason to spend money, but keep in mind that the sooner you start investing the longer the magic of compounding can work. You’re only young once.

If you want to read more about compound interest, check out my post on understanding compound interest.

With financial markets the way they are hoping for capital gains is like a hail mary at the end of the game. In times like these getting solid dividends is the most sound way to move your portfolio forward. If you’re nervous about investing in the stock market, but don’t want to have your money sitting in cash, here are three places to get started. The following are three ideas for getting a yield above a standard money market fund, all with various amounts of risk.

First up is the Vanguard Short-Term Bond ETF (BSV). It is currently yielding 2.7%, lower than most CDs but also more liquid. On the other hand a savings account at ING Direct is paying 2.75%, is fully liquid, and has no minimum investment. While the fund does pose some risk, it also has the potential for capital gains as well. I began investing in this through my brokerage account since we didn’t have enough money to invest in a high-yield money market fund, which typically have minimum requirements of $50k or higher.

The second idea is the iShares Investment Grade Corporate Bond ETF (LQD). The yield is quite a bit higher at 6.16%, but there is also more risk, coming as both credit risk and investment risk. Credit risk is the risk that the some bonds don’t pay, causing a drop in the yield. Investment risk comes from the volatility of the fund. As you can see the fund is down about 11% this year, which would have wiped out the yield altogether. The key to this fund is the investment grade rating. In a turbulent market such as the one we’re in it’s extremely risky to buy non-investment grade bonds, aka junk bonds or high-yield.

Last up is the iShares S&P Preferred Stock Index (PFF). This is the riskiest of the three ideas here, but it is also yielding a hefty 11.52%. Take a look at the top holdings and you will see why this is down. Owning this fund is going to give you a lot of exposure to the financial sector, so if you’re scared of them this probably isn’t the place to be. But if the market turns around this fund will give you some exposure on the upside, while giving you a decent yield while you’re waiting. For those who don’t know preferred stock from livestock (sorry I had to throw that in there), I recommend reading up on preferred stock at wikipedia before investing.

As always I encourage you to do your own research as your risk tolerance may be different than my own.

disclaimer: at the time of this writing I own shares in BSV and LQD

“In the long run, we’re all dead”

John Maynard Keynes

The S&P 500 is at the same level it was in 1997. 11 years of stock market gains have been erased. So when you hear someone say they’re investing for the long term, they mean the really long term. Although I am not happy to see my portfolios lose over 40% of their value, I am happy that it happened to me now at this age instead of happening to me later in life.

Tim Ferriss, author of The Four Hour Workweek, has two interesting posts on investing over at his blog. They’re worth taking the time to read:

Rethinking Investing Part 1

Rethinking Investing Part 2

Whether it’s good or bad, the downturn in this market is really making me rethink my risk tolerance and what it means to “invest.” How have your perceptions changed, if they’ve changed at all?

With stocks down 40-50% this year, many in the financial press are saying that this is a good opportunity to purchase at a discount. They point to evidence that stocks have always gone up in the long run, and that you should continue to invest.

Financial experts have also said that real estate always goes up, and that there has never been a national downturn in real estate in history. But we are now witnessing a new era in real estate that the financial experts never expected. So is it possible that the experts are wrong about “stocks for the long run?”

There are two very big cases against stocks in the coming years. First are interest rates which are at historic lows. As interest rates go up returns on stocks will likely fall. The other factor, and I think this is a big one, is the aging population.

Over the past 20 years the stock market has been the de-facto vehicle for retirement funding. This was great for stocks as people contributed to their 401(k)s and IRAs, driving up valuations. But soon the first wave of baby boomers will begin to retire, selling their stock funds for living expenses, and the cycle will begin to work in reverse creating downward pressure on prices.

I’m not sure how this will affect stocks as a whole, or it will even affect them at all. I am not saying that you should pull all of your money out of stocks now and use only CD’s. I am saying I don’t agree with the idea of investing 100% of your money in stocks because you’re young and have x# of years until retirement.

Here is a portfolio recommendation from David Swensen, the former investment manager of the Yale endowment portfolio. The author of the post also recommends ETF’s to gain exposure to those asset classes. Notice that there is only a 30% exposure to domestic stocks, and only a 50% exposure to stocks overall. The rest of the portfolio is in bonds and REITs.

While REITs are definitely no less risky than stocks, they do offer another way to diversify, and give you exposure to the real estate market if it turns around. Investing in bonds offers less risky returns for your portfolio.

This post is in no way a recommendation on how to balance your portfolio, it’s simply me organizing my thoughts on asset allocation and the “stocks for the long run” hypothesis. If anyone has any thoughts on the matter I would love to hear them in the comments.

Like a lot of people, the recent downturns in the market have really gotten me to rethink how I have my money invested. In Getting Ahead When The Market Isn’t the Wall Street Journal discusses what the recent downturns in the market mean for the average investor.

The main points in the article:

• U.S. Stock Markets have lost an entire decade of returns (WOW!). The S&P 500’s annual returns over the past 10 years are negative
• Dollar-cost averaging is still the way to go for steady performance and emotionless investing according to most financial planners
• Most 401(k) plan investors don’t have the desire to actively manage their investment portfolios (a topic we will look at when I review the book Nudge later in the week)
• If you are frustrated by the huge downswing in the market, it’s time to rethink your asset allocation to something less risky. This usually means a higher allocation to bonds and cash and less money in stocks

My thoughts:

I read a book a few years ago called Unexpected Returns by Ed Easterling that says the stock market goes through periods of extended uptrends and downtrends which the author called secular bull markets and secular bear markets respectively. We are currently in a secular bear market, which the author argues we will be in for some time. It’s a book that I plan on revisiting and reviewing soon, but it’s worth checking out if you’re interested in market cycles.

That takes us to asset allocation. In a period where you are expecting stocks to downtrend, such as in a secular bear market, it’s wise to put a larger percentage of your assets in cash and bonds, as the Wall Street Journal suggests. This is tough to do when common ‘wisdom’ tells young people like myself to put a majority of our assets in stocks. If you’re closer to retirement it’s a good idea to keep a larger percentage of your assets in less-risky classes anyway since you will generally have less time to recoup any losses. Imagine if you were planning on retiring next year and had 100% of your assets in stocks. You would have lost about 30-40% of your total assets, and your retirement standard of living would be way down, assuming you could retire at all after losses like that.

I do think dollar cost averaging and market index funds are still the way to go for most investors who want a hands off approach. I think 90% of your returns are going to come from good asset allocation strategies. If you don’t have the stomach to watch your portfolio fall 40% in one month, you had better increase your bond allocation.

Did anyone else reading this lose a large amount of money in the market in October? What are your plans for the future of your portfolio?

After the recent drops in the stock market I thought it might be a good time to take a look at my portfolio to see what has done well and what has not. I also went ahead and rebalanced everything to my original allocations.

The biggest thing I noticed about my portfolio is that my company stock has reached an amazing 38% of the portfolio. My company has done fairly well relative to the rest of the market, which is part of the reason the percentage is so high. The other reason is that my employer match comes in the form of company stock.

This is important for anyone to watch. If you receive your company match as company stock instead of cash you should rebalance your portfolio often to minimize the risk of loss in that stock. What percentage of your portfolio you keep as company stock is up to you, but I prefer to keep a low percentage in my own. If my company does well then I will likely be compensated well at bonus time. If my company does poorly, however, I could loose both a large portion of my portfolio and my job depending on what happens. So for me it’s a matter of risk control to keep the portfolio percentage of my own company stock low.

Here’s a link to my retirement post regarding rebalancing. Have you looked at your portfolio recently? Do you know right now, roughly, how each of the parts of your portfolio have been doing? If not it’s time you take a look.

After the House voted against the bailout today markets have basically blown up. Our retirement portfolios are down over a thousand dollars in one day.

I am not totally sure how I feel about the bailout. On the one hand I don’t want my tax dollars bailing out companies that made poor financial decisions. On the other hand, not helping out those same banks could have terrible ramifications for credit markets in coming years.

If I had to guess, I wouldn’t expect to see a turnaround in the financial markets until at least the end of 2010, if not later. There are too many negative factors facing our economy. The question is how does this affect my investment plans. Common wisdom says to ignore market fluctuations and invest for the long term. But my gut says that there’s a better way to invest than the mutual funds that I’m in. I might have to stop with the passive strategies and take up active investing by picking my own stocks, but I’m not sure I’m ready for the time commitment that will take.

Another concern for me is my job, which is with a major bank. Luckily it’s one of the more stable ones, but then again everyone thought Enron was doing great until they weren’t. Hopefully the news in the coming days is a little better than today’s news.

Fortune magazine’s recent cover article “Now What?” provides advice for investing in a weak U.S. economy. On a side note, I see that the article is completely free on their website, which is making me rethink my subscription.

The advice from Fortune:

1. Watch your investment fees
2. Invest for dividends
3. Buy into beaten-down companies, if you can handle the risk
4. Consider investing in foreign markets
5. Don’t keep to much money in bonds

I would say this is all good advice. Some of it, especially tips like watching your investment fees and investing abroad, are good tips for anytime. Fees can quickly cut into your investment returns, so it’s always important to consider whether your broker is providing enough to justify the cost. And if you’re paying high fees in a mutual fund you really should reconsider switching to low-cost options like those offered by Vanguard. Looking abroad for investments is a great idea, especially when the U.S. economy is sliding. If you use mutual funds, investing abroad is as easy as buying into a fund that invests overseas. Buying individual stocks might be a little more difficult, and is beyond the scope of this post.

One piece of advice that struck me as interesting was to avoid bonds. Typically investors consider bonds to be a safe choice during a recession. But as the article points out, yields on bonds are not in line with the risk you take on, especially considering the amount of inflation. A good choice for bond investors might be TIPS, which protect you from rising inflation (or at least some of it, since inflation numbers seem to be drastically reduced lately. But again, that’s a whole different post).

If you have any money in the markets, it’s worth taking a look at the article to get some ideas for your portfolio.