Investing Curiouscatblog

Tag: mutual funds

  • Bogle on the Stock Market and Investing

    Bogle on Bankers, Buffett, Obama; an interview of John Bogle, from February 2010.

    Bogle: What happened over the last 10 years were two things, and one of which we have never encountered before. The 17% returns we had over the two previous consecutive decades, the ’80s and the ’90s, were born largely on ascending price-earnings multiples. If the price-to-earnings ratio goes from 8 to 16 in one decade, and then to 32 in the next decade, that accounts for 7% per year of that 17% return. So the market was driven by the revaluation of corporate America and that just can’t keep recurring at those rates. I projected in the original book that the price-earnings multiple might get down below 20, which is exactly what it’s done, so that was fairly predictable.

    But what made the decade quite so bad is that we then had a major recession or light depression at the end of 2008 to 2009 which is still with us. That coming with the market so highly valued meant that earnings growth was much less than what we might have expected. So looking out from here, I think we can look for better earnings growth. And dividend yields are back in decent territory but not great. We started this decade with a 1% dividend yield, and that’s an important part of investment returns, and now the dividend yield is around 2.25%, so a higher dividend yield contributing to future growth. So I think it’s highly likely that stocks will outpace bonds in the decade that just began.
    …
    Are we on the right path now? Has America learned its lesson?
    Bogle: No. Unequivocally not. The long overdue reforms being discussed in Washington do not go nearly far enough, in my opinion. We need protection for consumers. Canada has a financial structure similar to ours except it has a consumer-protection board, which would prevent banks from giving people mortgages if they have no ability to pay them back. To get that done has been very difficult. Also, Senators (John) McCain and (Maria) Cantwell have proposed a return of the Glass-Steagall Act, and that’s gotten nowhere but it is long overdue. We should have banks behave as banks and not as investment banks or hedge-fund managers.
    …
    But let’s suppose the stock market creates a 10% return. And the value of the stock market today is around $13 trillion so 10% is $1.3 trillion. By my numbers, Wall Street and the mutual fund industry take $600 billion a year out of that return. That’s half of the return. So the only way investors are going to get their fair share of the $1.3 trillion is to reduce the costs and get the casinos out.

    As usually John Bogle provides excellent analysis and vision.

    Related: Bogle on the Retirement Crisis – Is Trying to Beat the Market Foolish? – Lazy Portfolios Seven-year Winning Streak – Sneaky Fees

  • Tax Considerations with Mutual Fund Investments

    One problem with investing in mutual funds is potential tax bills. If the fund has invested well and say bought Google at $150 and then Google was at $700 (a few years ago) there is the potential tax liability of the $550 gain per share. So if funds have been successful (which is one reason you may want to invest in them) they often have had a large potential tax liability.

    With an open end mutual fund the price is calculated each day based on the net asset value, which is fair but really the true value if there is a large potential tax liability is less than if there was none. So in reality you had to believe the management would outperform enough to make up for the extra taxes that would be owed.

    Well, the drastic stock market decline over the last few years has turned this upside down and many mutual funds actual have tax losses that they have realized (which can be used to offset future capital gains). Say the fund had realized capital losses of $30,000,000 last year. Then if they have capital gains of $20,000,000 next year they can use the losses from last year and will not report any taxable capital gains. And the next year the first $10,000,000 in capital gains would be not table either. Business Week, had an article on this recently – Big Losers Can Be Big Tax Shelters

    Take Dodge & Cox International. It has a -80% capital-gains exposure, meaning it has a capital loss that covers 80% of assets. So it could have several years of tax-free gains.
    …
    Yet it is Miller’s newer charge, Legg Mason Opportunity, which holds stocks of all sizes and can take short positions, that will prove to be the real tax haven. Morningstar pegs its losses at 285% of its $1.2 billion in assets.
    …
    There are other funds with returns so ugly and losses so large that it may not matter what their trading style is for many years: Fidelity Select Electronics (FSELX), -539%; MFS Core Equity A, -369%; Janus Worldwide (JAWWX), -304%; Vanguard U.S. Growth (VWUSX), -227%.

    How does a fund have over 100% tax losses? The way I can think of is if they have a great deal of redemptions. If the fund shrinks in size from a $3 billion fund to a $300 million fund they could have a 50% realized capital loss (down to $750 million) but then another $450 million in redemptions). Now the $300 million has a $750 million capital loss or 250%.

    Related: Shorting Using Inverse Funds – Lazy Portfolio Results – Does a Declining Stock Market Worry You? – Asset Allocations Make A Big Difference

  • Securities Investor Protection Corporation

    The Securities Investor Protection Corporation restores funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms. The Securities Investor Protection Corporation was not chartered by Congress to combat fraud, but to return funds (with a $500,000 limit for securities and under that a $100,000 cap on cash) that you held in a covered account.

    With the recent Madoff fraud case some may wonder about SIPC coverage. What SIPC would cover is cash fraudulently withdrawn from covered account (if I owned 100 shares of Google and they took my shares that is covered – as I understand it). What SIPC does not cover is investment losses. From my understanding Madoff funds suffered both these types of losses.

    And I am not sure how the Ponzi scheme aspects would be seen. For example, I can’t imagine false claims from Mandoff about returns that never existed are covered. Therefore if you put in $100,000 10 years ago and were told it was now worth $400,000, I can’t image you would be covered for the $400,000 they told you it was worth – if that had just been a lie. And if your $100,000 from strictly a investing perspective (not counting money they fraudulently took to pay off other investors) was only worth $50,000 (it had actually lost value) then I think that would be the limit of your coverage. So if they had paid your $50,000 to someone else fraudulently you would be owed that. Figuring out what is covered seems like it could be very messy.
    (more…)

  • Personal Finance Basics: Dollar Cost Averaging

    With the recent turmoil in the financial market this is a good time to look at Dollar cost averaging. The strategy is one that helps you actually benefit from market volatility simply.

    You actually are better off with wild swings in stock prices, when you dollar cost average, than if they just went up .8% every single month (if both ended with stocks at the same price 20 years later). Really the wilder the better (the limit is essentially the limit at which the economy was harmed by the wild swings and people decided they didn’t want to take risk and make investments.

    Here are two examples, if you invest $1,000 in a mutual fund and the price goes up every year (for this example the prices I used over 20 years: 10, 11, 12, 13, 14, 15, 16, 17, 18, 19, 20, 22, 24, 26, 28, 30, 33, 36,39) you would end up with $40,800 and you would have invested $20,000. The mutual fund went from $10 a share to $39 over that period (which is a 7% return compounded annually for the share price). If you have the same final value but instead of the price going up every year the price was volatile (for example: 10, 11, 7, 12, 16, 18, 20, 13, 10, 16, 20, 15, 24,29, 36, 27, 24, 34, 39) you end up with more most often (in this example: $45,900).

    You could actually end up with less if the price shot up well above the final price very early on and then stayed there and then dropped in the last few years. As you get close to retirement (10 years to start paying close attention) you need to adopt a strategy that is very focused on reducing risk of investment declines for your entire portfolio.

    The reason you end up with more money is that when the price is lower you buy more shares. Dollar cost averaging does not guaranty a good return. If the investment does poorly over the entire period you will still suffer. But if the investment does well over the long term the added volatility will add to your return. By buying a consistent amount each year (or month…) you will buy more share when prices are low, you will buy fewer shares when prices are high and the effect will be to add to your total return.

    Now if you could time the market and sell all your shares when prices peaked and buy again when prices were low you could have fantastic returns. The problem is essentially no-one has been able to do so over the long term. Trying to time the market fails over and over for huge numbers of investors. Dollar cost averaging is simple and boring but effective as long as you chose a good long term investment vehicle.

    Investing to your IRA every year is one great way to take advantage of dollar cost averaging. Adding to your 401(k) retirement plan at work is another (and normally this will automatically dollar cost average for you).

    Related: Does a Declining Stock Market Worry You? – Save Some of Each Raise – Starting Retirement Account Allocations for Someone Under 40 – Save an Emergency Fund

  • Lazy Portfolio Results

    Lazy Portfolios update by Paul Farrell provides some examples of how to use index funds to manage your investments:

    These portfolios are virtually “zero maintenance!” Set them and forget them. Plus you can ignore Wall Street’s relentless, misleading chatter about markets and the economy. Seriously. After customizing your own Lazy Portfolio you can ignore the news and focus on what’s really important: your family, loved ones, friends, your career, hobbies, travel — you name it — anything but wasting time tracking and playing the market.

    I think the article is a bit misleading in showing the out-performance of the S&P 500 index (during periods where the S&P 500 index does very well these portfolios will under-perform it). The out-performance shown in the article is largely due to the great performance of international markets recently. Still the strategy is well worth reading about. The strategy is based on using index funds from Vanguard (very well run mutual funds with very low fees). But don’t get tied into Vanguard, if they start to focus on lining their pockets by increasing your fees look for alternatives.

    Overall, I give this concept high marks. Dollar cost average appropriate levels of money into such a strategy and you will give yourself a good chance at positive results.

    My preference would be to include significant levels of international and developing stocks. For aggressive long term investing I like something like:

    40% USA total stock market
    15% Real Estate
    25% international developed stock market index
    20% developing stock market index

    When aiming for more security and preserving capital (over growth) I favor something like:

    30% USA total stock market
    10% Real Estate
    25% international developed stock market index
    10% developing stock market index
    10% short term bond index
    15% money market

    Of course all sorts of personal financial factors need to be considered for any specific person’s allocations.

    Related: Allocating Retirement Account Assets – Why Investing is Safer Overseas – Saving for Retirement – 12 stocks for 10 years – what is a mutual fund?