It’s tough to look back, almost painful for many. I’d be curious to see detailed data of how people’s wealth was impacted. Of course, with two crashes, there were two chances to bail at a relative bottom, and call it quits. Looking just at the S&P spider index, ticker SPY, we ended the decade at $111.44. This from a 1999 end of $146.88, down just over 24%. Ouch. But when you adjust the 1999 price for 10 years worth of dividends, you get $124.28 down just over 15%, still not great. The Times published yet another beautiful graphic I’d like to share.

It shows that with a mix of stocks and bonds, one would have not only not lost money, but would have come out a bit ahead of inflation. For this comment, I’m referencing the line that ends just over the $100K. Had the investor added funds, dollar cost averaging, the return would have been better still. $250,000 on a total investment of $220,000 even after adjusting for inflation. It was this method that let me leave the decade better than I went in. How did the zeros treat you?

Joe

written by JOE \\ tags: inflation, Investing, stocks

When we talk about frugality, the easy targets come to mind, eating out, buying the $5 latte, spending on clothes, etc. All good places to look to save, but today, I’ll discuss one that’s often overlooked. Investment expenses. The annual expenses for mutual funds run from about .2% to as high as 2% depending on the fund. Think about this. A 2% per year fee adds up to take half your money over a 36 year time span. As many will have a 40 year investing horizon, this puts a sharp edge on these numbers. You toil, but the fund manager skims half your money over your lifetime? ETFs have provided a nice alternative, but with one main issue, as they are traded like a stock, there’s a commission each time you buy or sell shares. Even a $5 cost doesn’t lend itself to a plan to dollar cost average over time.

Now Schwab has announced its Schwab ETFs which it will trade for its customers at no transaction cost. The Broad Market ETF and the Large Cap ETF both Trade for .08%. This multiplies to 2.84% over that same 36 year period. Not bad. Other domestic funds they offer are a still reasonable .15%.In the end, expenses matter.

Disclaimer – This post is my opinion and observation. I happen to be a Schwab client, but I have not received any compensation for this post. I don’t think they read me.

Joe

written by JOE \\ tags: etf, Frugal, Investing, stock

This was the question posed on a Morningstar article a couple weeks back. It begins by offering the fact that the bull market of the eighties set the stage for high expectations, specifically that the market would make you rich even with a small sum invested. It closes with this punchline; “Here’s the reality: Your contributions matter much more than investment returns.” Within the article appears the following chart. It assumes an annual deposit of $10,000 invested monthly over the stated time horizons and given rates of return.

The logic behind the article centers around the ratios calculated above. With an annual return of 6%, (I’ll ignore the 12, as I don’t expect to see 12 long term) you can see that over a ten year period, the value of the account is 73% from deposits, and 27% from growth, the market’s return. Over a 20 year period, with the initial deposits having longer to grow, the ratio is now 48% from gr0wth. This is where the article stops and concludes with the “control what you can” advice. I am 47 years old, and have been working since I’m out of college, 25 years now. Even if I retire early, my money is still invested, so at 62, I’ll have a 40 year investing history, and after retirement a couple more decades, I’d hope. So, why not extend this chart a bit?

Note, I took out the potential 2%/yr loss. It stands to reason that with zero or less return, all of your return is from deposits. I did add a column for 8% and 10% as the long term stock returns fall closer to this range. A thirty year time horizon really starts to change things, doesn’t it? At 30 years you can see that 64% or nearly 2/3 of the ending account value is from growth, and only 1/3 from deposits. The numbers are even more skewed at higher returns or longer time horizons.

What to conclude from this? First, whenever you read anything regarding a long time span, take it with a grain of salt. Second, even a small difference in returns, just 2%, will dramatically affect your returns over a sufficiently long period. Last, and most important, you need to understand your own risk tolerance, I included the 12% column as it was part of the original article, but with reward comes risk, don’t count on that kind or return when you plan your retirement 30 or 40 years hence.

(If the link to Morningstar doesn’t function, the article is available from Invesco Aim)

Joe

written by JOE \\ tags: Finance, Investing, stock returns

Last week as the Dow crossed 10,000 again, I saw some serious chatter about this milestone, the press celebrating and even the traders on Wall Street wearing Dow 10,000 2.0 caps on their heads. A number of people pointed out that this number gets far more attention than it deserves. Will you do anything different now that Dow broke 10,000? Will you buy more stock, sell your stock? Remember, the Dow peaked at over 14,000 in October, 2007. So what does 10,000 really mean? Nothing at all.

What I really want to discuss is the odd nature of the index itself. It completely ignores the dividends of the underlying stocks. In real life, you just can’t ignore those dividends. By going to Yahoo Finance and looking at pricing on DIA (the Dow Jones ETF), we find that 10 years ago, on Oct 15, 1999 the closing price was 100.00. (equal to a Dow 10,000), but you can see the adjusted close of 82.14 tells a slightly different story. This means that over these 10 years, the Dow stocks are not exactly flat, but have gained 21.74% over this period. Before you dismiss this as trivial, consider that on a million dollar retirement portfolio, this is nearly $20,000 per year on average from these dividends. $20,000 you don’t need to draw from your original principal. If you are still working and in the ‘saving for retirement mode,’ you gain from the benefit of dollar cost averaging, as well as from reinvesting these dividends.

What I’ve ignored in this discussion is the benefit that you’d see from rebalancing your portfolio each year, keeping the stock/bond ratio in a certain proportion in line with your risk tolerance. The subject of a future post.

Joe

written by JOE \\ tags: dow 10000, dow stocks, Investing, stock index, stocks

This past March, I wrote an article titled ETF’ed, in which I discuss an inverse EFT, one supposed to rise when the index it tracks, falls. I observed how for RTN, the double inverse ETF tracking the financial spider, in a time when the underlying index fell 50%, the etf was barely up 10%, far worse than simply shorting the XLF itself, and certainly nowhere need twice its inverse.

Now it seems others have jumped on the bandwagon. Financial Planning magazine reports Class-Action Suit Filed Against ProShares Leveraged ETF. The suit cites a spectacular tracking error. ProShares UltraShort Real Estate seeks to deliver twice the opposite of the daily performance of the Dow Jones U.S. Real Estate Index.Last year, the index fell 39%, whereas the fund fell 48%. Spectacular indeed. Buyer beware.

Note – Most ETFs do not suffer from such wide tracking errors. SPY has an expense ratio of .09% ($9 per $1000 invested, compared to $100+ for a managed mutual fund.) and aside from this expense, virtually zero tracking error. Look at the details of the ETF you intend to buy, and compare it to its underlying index, and decide if it’s right for you.

Joe

written by JOE \\ tags: class action suit, inverse etf, leveraged etf, xlf

I often recommend ETFs as being a low cost alternative to stock index mutual funds. Low expenses, and a liquid market (for popular ETFs) that trades during the day, not just the day’s closing price are among the features that EFTs offer.

Given the recent pullback in the price of many commodities, there’s interest in the best way to invest in them. Over the past few months, CNBC aired a commercial promoting the purchase of gold coins, 1/10 oz. ones, given their advertised price, $115 per. Separate from my views on gold as an investment, I’d suggest that buying something at $115 which is only worth about $90 they day you get it, is not my idea of investing.

Back to ETFs. Investments in commodities (and Therefore ETF which invest in them) are not taxed as are stocks. Stock gains are long term if held over a year. The gain from a commodity sale is treated as though 60% of the gain is long term and 40% short term. Simple, I suppose, but something you must know if you are trading USO (an oil ETF).

Yet a different twist if you trade GLD (the SPDR gold ETF) or SLV (the iShare silver ETF). The IRS treats these as collectibles, and offers to take a 28% cut for long term gains, not the 15% you’d expect. Again, the math is simple, as long as you know.

Joe

written by JOE \\ tags: EFTs, GLD, SLV, SPDR, USO