There’s No Need to Fear Stock Market Corrections

Individual investors react very poorly to stock market corrections. Many individual investors sell when the market declines out of fear it will never come back. The data, which we will present in this post, actually says the opposite. Not only will the market come back, but it will do so a lot sooner than you might think. As you can see from the chart below, over the past 50 years there have been 14 market corrections and 11 bear markets. The industry standard definition of a market correction is a peak-to-trough decline of at least 10% and the definition of a bear market is a peak-to-trough decline of at least 20%. For the purpose of this analysis we rounded up […]

Fees Can Destroy Your Return

In an environment where a diversified portfolio is only expected to return on the order of 6% annually, any fees will have a significant impact on your outcome. In the same way that investing for the long-term takes advantage of the power of compounding, the regular or recurring fees you pay reduces the overall potential of your portfolio. To illustrate the point, here’s an example from the SEC on its own fee fact sheet: If you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would end up with […]

You Can’t Get Access to the Best Alternative Assets

One of the services most frequently touted by private wealth managers is their ability to provide access to outstanding alternative assets like hedge funds. Unfortunately very few private wealth managers have access to the hedge funds that are worth the fees. Of course, that won’t stop them from promising you the best and delivering poor alternatives. That’s why David Swensen, Yale’s Chief Investment Officer and the man most identified with employing alternative assets, essentially says in the introduction to his groundbreaking book Pioneering Portfolio Management, that if you can access premier alternative assets like hedge funds, you should, but it’s highly unlikely that you can, so you shouldn’t. Understanding Risk and Reward As we have explained many times in this blog, […]

The Stock-Pickers’ Market Myth

Earlier this month, Barron’s ran a cover story that made the case that 2015 was likely to be a “stock pickers’ market.” Active portfolio managers were expected to “recapture their lost glory” as interest rates were predicted to rise. Unfortunately, we have heard similar claims at the start of every year. In early 2014 The Wall Street Journal ran an article predicting that 2014 would be a stock pickers’ market as the correlation between the S&P 500® index and its component stocks was declining. Indeed, in every year one can find similar predictions for the year ahead. Money managers have a number of clichés they use to promote their high-priced services, and “stock pickers’ market” is one of their favorites. […]

When Should You Exercise Your Stock Options?

Stock options have value precisely because they are an option. The fact that you have an extended amount of time to decide whether and when to buy your employer’s stock at a fixed price should have tremendous value. That’s why publicly-traded stock options are valued higher than the amount by which the price of the underlying stock exceeds the exercise price (please see Why Employee Stock Options are More Valuable than Exchange-Traded Stock Options for a more detailed explanation). Your stock option loses its option value the moment you exercise because you no longer have flexibility around when and if you should exercise. As a result many people wonder when does it make sense to exercise an option. Tax Rates […]

Has Indexing Become Too Popular?

Indexed investment strategies (passively holding portfolios that simply buy and hold all the securities in a particular market) continue to increase in popularity. Currently more than 35% of investment portfolios use index funds to gain exposure to the U.S. stock market.1 And according to Morningstar Investment Research, more than 55% of the moneys invested in equity mutual funds during 2014 went into index funds — rather than actively-managed funds. Given this success, people often ask whether index funds have become too popular. Could we be entering a period when active portfolio management will become more advantageous? And could the very size of index funds interfere with their ability to produce exceptional results? My answer to both questions is a clear […]

When Should You Consider a SEP-IRA?

If you are a self-employed contract worker or sole-proprietor, there’s a retirement account you may not have heard about that’s worth considering: the Simplified Employee Pension IRA or SEP-IRA for short. The key advantage of the SEP-IRA is the high annual maximum contribution limit, which at $53,000, is much higher than the $5,500 cap associated with a traditional IRA ($6,500 if you’re over 50). What Is a SEP-IRA? The SEP-IRA was created in 1978 to provide a tax-advantaged retirement plan for small businesses. Contributions to the SEP-IRA are made by a small business into an account for the benefit of an individual, typically the sole employee. SEP-IRA accounts are available to small businesses ranging from sole proprietorships, partnerships, LLCs, S-Corporations […]

Choosing Asset Classes Is Another Form of Market Timing

Any reader of our blog will know that we are not fans of market timing. As our CIO Burt Malkiel is fond of pointing out, research consistently proves it’s almost impossible to outperform the market by attempting to time it. Burt has won great acclaim since he first wrote about this phenomenon 40 years ago in A Random Walk Down Wall Street. The lessons of 40 years ago are just as appropriate today, which is why the book is still a best seller and soon to be released in its 11th edition. We have written about many ways to time the market on this blog — choosing individual securities, investing in individual real estate properties, timing when to withdraw from […]

Never Rollover If You Can Transfer

You might have heard the IRS is limiting the frequency with which you can rollover IRA accounts in 2015. Starting January 1st the IRS will limit you to only one IRA rollover per calendar year. You will now face steep penalties if you attempt more than one rollover  per year. However most people don’t realize there exists a superior alternative called an ACATS or electronic transfer. You will still be allowed unlimited transfers per year, but not all investment firms will accept an electronic transfer. A Rollover is Very Different From a Transfer Most investors think a rollover is the only way to transfer an IRA to another brokerage firm. When you request a retirement account rollover, your account’s current […]