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The Glass Ceiling

The big story lately is the incredible earnings growth of corporate America. As earnings are the core to long-term stock market returns, this is good news – certainly a better foundation of investment than boundless revenue growth or market share growth or user growth or even that “potential future maybe revenue growth” that was driving stocks a few years ago. 

Free Fund Trading?

10/19/06 -

It was bound to happen sooner or later. With Google buying startup YouTube from a couple of twenty-somethings for almost two billion smackers, other dot-com era ideas had to be in the pipeline.

On Wednesday Bank of America announced free trading for their Banc of America brokerage customers. The stocks of competitors like E*Trade (ET), TD Ameritrade (AMTD), and Charles Schwab (SCHW) fell sharply on the news. Is a price war brewing?

This bold, dot-com era move (it’s been tried before) is noteworthy to mutual fund investors because today there are so many other ETF (exchange traded fund) choices. ETFs trade on exchanges like stocks, and therefore, the same zero-commission offer would apply.

September 2006 performance review

Small cap stocks are now noticeably lagging these larger-cap-weighted indexes. The Russell 2000 index of smaller cap stocks gained just 0.83% in September, and is up just 0.44% over the last three months. Foreign stocks have been flat recently as well.

Beware (investing) Truths that are self-evident

Now that the stock market is past record highs again we are seeing resurgence in investor enthusiasm. Investors appear to be subscribing to the same pattern of investment idea generation that got the major indexes so ridiculously overpriced in the first place: letting backward-looking information and scenarios guide your current investment decisions. Call it what-ifs, woulda-coulda-shoulda strategies, or just investment soul searching.

The 'F' Word: Foreclosure

09/29/06 -

After years of steady double-digit gains in prices, real estate seems like a can't-lose way to get rich. Unlike tech stocks (which seemed like a can't-lose way to get rich six years ago), home prices seem like they don't go down. Better still, you can buy in with somebody else's money, and keep all the gains for yourself.

Besides the history of positive returns, another reassuring factor some home buyers consider is that, worst-case scenario, they'll just give the keys to the bank and walk away. Heads, I win (home prices go up); tails, you lose (home prices go down).

I've heard this “logic” from home buyers entering the market at prices they know are a little stretched, I've read it in the paper, and I've heard it from economists and other experts. Even the doomsayers — warning of rising interest rates leading to banks taking over properties from adjustable-rate-mortgage-fueled home buyers — seem to think the worst-case scenario is handing over the keys to the bank. If only that were so.

Ask MAX: Should I Listen to my Neighbor?

09/22/06 -

Robin from Vermont asks:

'My neighbor's son is going into his second year of college. She told me that the best way they saved up for tuition [was] by concentrating on a single stock or sector. Do you think that's the right way to go? Or should I build a diverse portfolio with a stock/bond mix?'

Your neighbor is dispensing some pretty lousy advice. If you had a neighbor who didn't save for their son's college tuition, but had a very lucky weekend in Las Vegas (where they parlayed $1,000 into room and board for a four-year private college), would you listen to them if they said the best way to save up for college was to get lucky at gambling?

While you have a shot at bigger winnings the more concentrated your investment — one stock being at the far extreme of concentrated portfolios — you have an equally good shot of having no money at all for school.

While Warren Buffet, the great investor, pokes fun at diversification, the drag of diversification also leads to more predictable returns.

august 2006 performance review

August was a surprisingly good month on Wall Street. A solid chunk of the losses incurred in the stock market from earlier in the year was erased. Factor in gains posted so far in September and the media is once again back to reminding us how close we are to an all time high in the Dow. Interest rates continued lower, and are now almost back to where they were before the big scary move up in rates started – the one that spelled housing market crash from rising mortgage rates. Now we’re back to worrying about why longer term rates are so much lower than short term rates – one warning sign of a possible looming recession. 

Ask MAX: A dollar saved?

09/10/06 -

Lana from Indianapolis asks: They say a dollar saved today is much more valuable than a dollar saved 10 years from now. So if that's true, if I manage to save only a small amount between now and the time my child is ready for college, will she have to borrow that much less for tuition?

The short answer is yes — saving now makes paying for anything later easier because time works to your advantage when saving. Save $1 today, and in ten years you'll have about $2.

The above math is a bit simplistic, because in ten years a dollar will only be worth about $0.78 because of inflation. It will be about as easy to come up with $1.28 in ten years as it will be to put aside $1 today — inflation means you'll be earning about 28% more in ten years without getting promoted. So why not wait to save? Problem is, college tuition will also be 28% more expensive in ten years — if not more than 28% given recent trends.

Funds, Bonds, Feds, Meds

As we've noted before, early this year fund investors were plowing tens of billions into funds – right before the market caved in. Now that market is rebounding, and inflows have improved again. This sort of buy high/sell low/buy back high is exactly why fund investors typically underperform the market, and why we try to do the opposite of what most investors do.

Ask MAX: What should I do with my old 401(k)

CW asks: 'A while back you helped me with my 401(k). Although it's only been a short time I was very satisfied with your services. I have since moved on to another company and I hope once again you can assist me with my new 401(k) options. Do you have any advice on what I should do with my old 401(k)?'

Would you leave your personal belongings in your old desk? Take your retirement money, along with the pictures of the kids, when you move on to bigger and better things.

The best choice for your old 401(k) is to roll it over into a low-fee broker like Firstrade where you can buy any number of funds, or to a fund family like Vanguard with a wide selection of low-fee funds.

Moving your old 401(k) plan – or 403(b) – is better than leaving your 401(k) at your old employer with their limited selection of often high-fee funds or even moving the old plan to your new employer’s plan, as the new plan will likely have the same shortcomings.

While you can't combine this old 401(k) with a ROTH, you can combine it with other traditional IRAs and maintain the account’s tax-deferred status. The downside of combining it with other accounts is that you can’t move it back to a 401(k) at a later date – it’s been sullied by the other money, so to speak.