A Gusher of a Bad Idea
A lot of good has come out of the exchange traded fund (ETF) revolution. ETFs have drawn billions of hot money dollars out of ordinary mutual funds, helping longer-term mutual fund investors’ returns by giving the fund manager a more stable asset base. ETFs are more tax-efficient than ordinary mutual funds. Even better, low-cost ETFs have put some pressure on fund fees. ...read the rest of this article»
Ask MAX: Should I Settle for 3%?
Robin asks: 'I am retired and widowed. Since the stock market has been so up and down, should I just put my savings (less than $100,000) in a savings account paying 3%? I feel that I am too old to always be keeping an eye on the stock market.",
The stock market is always up and down. The key is to only invest an amount of money that you can stand to see go up and down. The single biggest mistake investors make is investing too much of their portfolio and panic selling after an ordinary 10% - 20% drop in the market — often right before the market turns around.
Consider putting some of your money in a low fee stock index fund like Vanguard 500 Index (VFINX) — perhaps just 25% if you are nervous about losing money. A larger chunk, say 50%, should be in lower risk investments. A low fee bond index fund like Vanguard Total Bond Index (VBMFX) is a decent choice with limited downside (perhaps 10% in a down market for bonds) and a roughly 5.25% yield. The rest (25%) could be in a virtually no risk investment like a Vanguard money market fund — the Vanguard Prime Money Market Fund, currently yielding just under 5%. Fidelity has an equally good and cheap lineup of similar funds.
Buy these funds through Vanguard to save on commissions that an ordinary broker may charge.
As for earning 3% in savings - shoot higher. I've linked my checking account to HSBC Direct and ING's Orange Savings account (both are “online” savings accounts — FDIC insured with no risk). You can sweep money in anytime and earn over 4% (these are not teaser rates but current rates will change with swings in shorter term interest rates). HSBC Direct currently yields a whooping 5.05%. Your bank branch can't come close to matching these rates on liquid FDIC insured money with no minimum or transfer fees. ...read the rest of this article»
Ask MAX: Payoff Debt or Takeoff in Funds?
Ray and Margaret ask: 'We are a 26-year-old couple getting married and want to invest our wedding money in the best way possible. (We estimate receiving 25k.) My fiancé is still in grad school, and I am paying off student loans. Should we put the money toward paying off our educations? Or should we invest it in a mutual fund?'
As an investment advisor, I should tell you to pay off all debts before investing because it's unlikely you'll earn more investing than the rate on your debts — especially after taxes, commissions, and the like. Plus, it's a lower risk strategy — imagine your investments go sour, you lose your job (the two can be correlated with the economy) AND you still have your debts.
That said, I'd only pay off high interest rate debt like credit cards (and then only if you WON'T rack the debt right back up). Student loan interest is acceptable debt to carry. For one, unless you earn a lot of money ($65,000 per year single filers or $130,000 for joint filers) the interest is deductible on your taxes (thank you Bill Clinton). Credit card interest is not deductible (thank you Ronald Reagan). ...read the rest of this article»
Ask MAX: A dollar saved?
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. ...read the rest of this article»
Small Stake, Big Break
Steve Butler at the Contra Costa Times describes the value of adding a small stake in a high-risk emerging market fund to his conservative portfolio.
Beginning with a quick lesson in calculating a "weighted average return," I will assume that I have a $100 portfolio and that $5 will be invested in an aggressive fund or combination of funds.
If the $5 doubles in value in a two-year period, I will have $5 of earnings.
If the remaining $95 invested conservatively averages 10 percent per year for two years, that portion will earn $9.50 per year for a total of $19. On the entire portfolio, I have earned $24 in two years.
This works out to be $12 per year, or a 12 percent average annual return. (I have ignored compounding because the time is so short.)
Some would argue that investing only 5 percent of a portfolio aggressively is not enough to "move the needle," but this simple example shows that it can be worth it when the high-risk investment is successful.
On the flip side, what happens if the high risk investment on 5 percent of our money drops by 50 percent in two years?
On $5, we just lost $2.50, or $1.25 per year. On the remaining $95 we still made $19, or $9.50 per year. Our total annual earnings on the entire $100 works out to be $8.25 -- or 8.25 percent. We haven't lost everything. We just had two years where our return was about 2 percent less than it otherwise would have been. Overseas funds of all types are being swamped with new money.”
He ended up investing in T. Rowe Price Emerging Markets Stock (PRMSX), to which our newly overhauled Fund-O-Matic gives a MAXrating of 80. The fund with the highest MAXrating in the category is currently the DFA Emerging Markets Value (DFEVX), but with a $1 million minimum that choice might be a little rich for most people's blood. Our top MAXadvisor Favorite Fund in the category is SSgA Emerging Markets I (SSEMX)
Invest in Mutual Funds Like a Hedge Funder
No, not the part where you hand over millions of dollars to (largely unregulated) hedge fund managers who can do pretty much whatever they want with your money. And not the part where you pay them both management AND performance fees. The part where you aren’t allowed to sell for two or three years.
Following complex strategies requires some stability in assets, so hedge funds -- which have a limited number of investors -- don't allow willy-nilly trading. Instead, most operate with a "lock-up," a time period when the investor agrees to stay put. Most often, the lock-up period is 12 months, although some funds are now going out for two and three years. When the lock opens, a hedge fund investor either agrees to another year, or pulls out.
It's the lock-up that ordinary fund investors should lock down and make part of their investment criteria. The lock-up requires the investor to answer one basic question: "Do I like this fund enough to be locked into it for another year or two?"
More than 5 percent of all hedge funds have been liquidated each year for several years, with the attrition owing to investors deciding that they don't want to lock their cash up with the same fund again. A hedge fund manager who sees a bunch of shareholders making a no-confidence vote when it's time to re-up for another year may simply pull the plug before most of the cash heads for the exits.
Mutual funds not only have no lock-up, they practically encourage inertia and mediocrity. With no pressure to make a hold or sell decision -- and with management free from worry that investors will rush the exits -- shareholders often settle for mediocrity.”
Fund Supermarket Gets a Little Less Super
We new it was coming. Discount broker Firstrade recently notified us that they are changing their mutual fund policy.
Starting February 15th (or March 15th if you have an account), Firstrade moves to a more traditional commission structure for buying and selling mutual funds in brokerage accounts – a.k.a. mutual fund supermarkets.
Customers will now have to pay to buy and sell no-load funds unless those funds kick back 12b-1 fees to the broker to be on the brokers “no transaction fee” (NTF) list.
In an effort to land new accounts, Firstrade had allowed buying and selling of ANY fund on their list of thousands for no fee - even cheapo funds like Vanguard 500 (VFINX), so long as investors didn’t sell for 180 days.
Low fee funds don’t skim enough fees from shareholders to pay a kickback and are usually not on NTF lists. This loss leader was a boon to fund investors who want the convenience of owning all of their funds in one place, yet the costs of buying funds directly from fund companies.
We’ve been recommending Firstrade as the best choice for fund investors because of this deal –though we knew it had to end someday. The last broker we recommended for the same deal (Scottrade) eventually stopped offering free fund trading as well.
Like Scottrade, those who loaded up on Vanguard and other low fee funds (like say, me) for no transaction fee, will soon have to pay a transaction fee to sell. (Why the FTC isn’t cracking down on this is a mystery – what if they started charging $5,000 to sell after you got in on “free trades”?)
That said, Firstrade’s new fee structure - $9.95 to buy or sell a non-NTF fund is still lower than anybody else – Scottrade charges $17, E*Trade $20, Schwab – you don’t even want to know… Plus Firstrade shortened the short-term redemption fee period to 90 days and now has over 10,000 funds available.
Free Fund Trading?
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. ...read the rest of this article»
Better Than a Dartboard… But Worse Than An Index
Picking mutual funds is tricky business. That’s why most individual fund investors underperform the S&P 500 index. But in theory it should be easier than choosing stocks. The expert fund managers are doing the difficult work of picking the stocks to buy and sell. Investors just have to pick the right pickers.
There are dozens of reasons a mutual fund that had been a top performer can suddenly stop performing well. Professional fund analysts exist to look beyond the mere data and do actual fund manager interviews and additional research. Morningstar, the world’s premier mutual fund research company, has a sea of analysts keeping tabs on the growing (and growing….) list of funds. The job of these analysts is to choose the cream of the fund crop.
Morningstar recently updated the performance of their fund analyst picks. At first blush, the results look quite good.
As their director of mutual fund research concluded, “I'm pleased to see that our picks delivered superior returns.” The test was relatively simple: “Basically, we compare each fund with its peer group and ask whether it outperformed its peer group during the time when it was a pick.” In other words, if a fund analyst picks Super Duper Large Cap Value Fund as a large-cap value fund pick, does it beat the returns of most of the large-cap value funds going forward?
“For the trailing five years, it's 65%.” Not bad. That is, until you compare Morningstar analysts’ performance to some alternatives. ...read the rest of this article»
Dow Nears Record High
Part of our job at MAXfunds is to get you excited about investing when everybody else is not, and fearful of investing when everybody else is excited.
To us, “everybody” refers to mutual fund investors. The tens of millions of fund investors have a nasty habit of getting most excited about investing close to the top of market cycles, and getting negative at exactly the worst time – when stocks are close to bottoming out.
As you’ve been reminded every few minutes by the financial news media, or just every few hours by regular news channels, or every day by newspapers, stocks (or rather the Dow Jones Industrial Average) are always within spitting distance of an “all time” high.
While the bear market ended in late 2002, to some the market is not “over” the bubble era until the stock indexes pass their old highs. Today, many stock indexes are way past their old highs – larger-cap and tech indexes are the only ones still below the high water mark. These were the areas fund investors over-loved in the past – the higher they rise, the harder they fall. ...read the rest of this article»