Feb 08 2010

Mutual Fund Monday – Blogosphere Feb 2010 Edition.

It’s Mutual Fund Monday again, and I thought that I’d do something a little different this week. Rather than focus on a single fund or concept about funds, I’m focusing on a topic and sharing some of the interesting posts I’ve found on other blogs recently about that topic. The topic: ETFs.

ETFs, or exchange traded funds, first became available to investors in 1993 and have since evolved from being simple index trackers to being full blown portfolios or hedge funds of their own. There’s much mistaken knowledge about ETFs and much confusion. Hopefully these posts will help set you straight on ETFs. Even if you think you know all about them, there is probably a thing or two you didn’t know. ;-)

How to Choose ETFs for Your Portfolio from Oblivious Investor is a great place to start when beginning to add ETFs to your portfolio. He examines the usual suspects in regards to the important factors of an ETF, like expense ratio and which index it tracks; but he also covers some lesser known or often overlooked factors like the Bid/Ask Spread of the fund.

Not sure about ETFs, or too sure about them? Be sure to check out Ten Myths About ETF Investing from ETFdb before you make another decision about ETFs

Do you think Charles Schwab Might be the Best Choice for Passive Investors? Steadfast Finances does, and he explains why as well as why you should care. Very interesting post..

Lastly in our ETF posts this week is a post by Dividend Tree in which he reminds us of one of the single most important details about Investing in ETFs – Know What You are Investing In. Some of this is related I think to the 10 myths of ETFs from ETFdb above. Many investors think all ETFs are created the same and they invest in what the name suggests, but Dividend Tree shows that this is not always true.


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Feb 04 2010

Life Settlements – Wall Street’s Next Bubble?

Life Settlements -cash offer

Would you sell your life insurance to a stranger? Millions would, and Wall Street wants a piece of the action.

A life settlement is the process by which an individual, usually of senior status or declining health, sells his life insurance policy to a settlement company in exchange for a lump sum. The settlement company then sells the policy or shares of the policy to investors, who then become the beneficiary when the insured senior passes away.

It’s marketed as a win-win because the senior receives an immediate settlement for a life insurance policy he would otherwise never benefit from, and the investor receives the potential for very high returns on his money.

Regardless of what your moral view may be on such a transaction, it is big money and that means Wall Street wants a piece of the action.

Investment banks plan to purchase these life insurance policies, and package them up for resale as bonds to institutional investors – pension plans, hedge funds, etc..

This is very similar to the securitization of sub-prime mortgages in the last decade. The thinking is that the risk of loss (i.e. the original elderly policy holder outlives his policy, and the investors lose money) is spread out among many investors.

As I said, the potential market for this is apparently pretty big. Industry predictions are that the market for these bonds could be a large as $500 billion, and firms like Credit Suisse Group (CS) have been entering the life settlement arena.

Also, Goldman Sachs Group Inc. (GS) has been developing an index of life settlements for trade, effectively allowing investors to bet on whether the insured senior will out live his policy or die sooner than expected.

While the potential for systemic collapse, like that caused by defaults in the sub-prime mortgage business, seems limited there are risks and repercussions involved with life settlement bonds.

For example, the trend of average life span is moving upward suggesting that the odds of the insured outliving the policy rises year after year. Additionally, the fact that the policies are now held by institutions and trusts that have no limit of mortality means that insurance companies will likely being paying out more claims than they would if the policy holder remained the insured. This will likely cause a rise in life insurance rates.

source


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Feb 03 2010

100 Free Trades From Ameritrade.

Listen up, investors!

If you’re looking for free stock trades online, and don’t mind opening an account with discount broker Ameritrade, then this could be the deal you’ve been looking for.

  • Open an account using this link, with an initial deposit of $2,000 and get 100 commision-free Internet equity trades for 60 days.

-OR-

  • Open an account using this link,with an initial deposit of $25,000 and get 100 commission-free Internet equity trades for 60 days PLUS $100 cash bonus.

It’s that simple.

Here are the details:

  • Accounts must be opened and funded from the link above, or by phone using the offer code 154 by 03/15/10.
  • Initial deposit must be received within 30-days of account opening.
  • Commission-free Internet stock trades begin within 24 hours, and the $100 bonus will appear in your account within 2-3 weeks. (if funding with $25,000).
  • If the account you open is a TD AMERITRADE retirement account, cash awards are valid within your IRA only and non-transferable to another existing TD AMERITRADE account.
  • Commission-free Internet equity orders must execute within 60 days of meeting minimum funding requirements.

Those unfamiliar with TD AMERITRADE can take comfort in the fact that they are a member of FINRA/SIPC, so deposits and equities are as safe as they can be (meaning that value/return on investments is NOT guaranteed, but you would not lose those investments in the event that the broker went out of business.)

Accounts must be opened either online using this link, or by phone at (866)834-2539 using offer code 154.

Thanks for stopping by, and happy investing!


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Feb 02 2010

Investing Term Tuesday – January Effect.

In honor of just closing the books on January, I thought it might be nice to examine the January Effect.

The January Effect is an investing term that refers to a general increase in the stock market during the month of January. This effect is typically attributed to an increase in buying caused by the addition of employees yearly bonuses being contributed to their 401(k) plans, and also due to investors getting back into the market after having sold in the previous December for tax purposes.

It is said that the January Effect affects small caps more than mid or large cap stocks, though this has been less pronounced in recent years as investors learn about and anticipate the January Effect.

It is also considered less important as there is less cause to sell laggard stocks for tax purposes, but that may change as taxes increase on investments and investment income.

Let’s hope it’s not a hard fast rule when we look at the S&P’s performance for this past January:

S&P 500 Jan 2010

… and there IS hope: Check out this MarketWatch article on why January’s loss doesn’t automatically doom the rest of the year.


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Feb 01 2010

Mutual Fund Monday – Tips For Mutual Fund Investment.

With thousands of mutual funds to choose from, picking the “right one” can be a daunting task. Most investors know not to fall for a short term hot streak – one or two years isn’t a long enough track record to show superior skill of the management team over sheer luck – but where should you start?

Step 1.  Figure out what you really need.

To be a successful investor, be it in mutual funds, hedge funds or whatever, you need to determine what your objectives really are and what asset allocation you’ll need to meet those objectives. And sorry to tell you this, but “to get rich” is not an objective. ;-)

Objective.

For your objective to be meaningful and achievable, it needs to be specific. If you can determine exact numbers, then you’re off to a great start. But even if the numbers are not exact or may even be unknowable, you can still use that as an objective.

For example, if your objective is to have $25,000 in 5 – 7 years for a new car, then you have a defined timeframe, and target amount. From that you can then figure out how much you can invest over that time  frame and see how much return on your money you’ll need to get there. (There are calculators for this kind of thing).

Even if your objective is a bit less knowable, say saving for retirement, you can use ballpark figures for determine the “best guess” for what you’ll need 15, 20, even 30 years out from today. The key is knowing that this is just a guess, based on current trends. In the case of retirement planning you reevaluate your goals and assumptions on a regular basis, every 5 -10 years for example.

The Takeaway. The point to take away from all of this is that your objective (amount and time frame) will be a key component in determining your risk level and asset allocation. You can (and should) invest more heavily in stocks for retirement which is decades away than for the objective that’s 5-7 years away.

Asset Allocation.

Put simply, an asset allocation is which types of investments you choose to put your money in, and in what proportions.

Different types, or classes of investments carry with them different levels of risk and average return. Bonds, for instance, are typically less risky than stocks, though that is a generalization since there are subclasses of stocks and bonds that can be very similar in terms of risk and reward.

Key points of concern are correlation (how much one investment be behaves like another), volatility, and risk.

The Takeaway. Some studies have shown that asset allocation alone is responsible for up to 90% of your total return, so be sure to study up on this stage and know what you’re doing.

Step 2. Picking mutual funds.

Since this article is about mutual funds, I will focus on that aspect of an asset allocation. But remember – if your investment goals are short term, then mutual funds may not be right for you.

Searching for a mutual fund.

If you have an idea of what type of fund you’re looking for, say a small cap stock fund, and you’d like to see what mutual funds fit that category, you can use Kiplinger’s Fund Finder. This tool allows you to select broad categories (like small cap stock funds) and narrow the results by a host of criteria, including:

  • 1,3 or 5 year return.
  • Morningstar rating.
  • Return in a down market (i.e. worst loss).
  • Expense ratio.
  • Turnover ratio.
  • Length of time the current management team has been in place.

And much more. It’s very handy for gathering a list of mutual funds to choose from, but you still need to do some comparison work, but more on that in a minute.

Gathering information on a specific fund.

Once you have a list of funds, or maybe you’re looking for details about a specific fund in your 401(k), you can use FINRA’s Fund Analyzer to get the specifics about a fund.

These results include average return of a given investment amount over a specified period of time, and the total expenses. It also provides a breakdown of the allocation within the fund, investment style of the fund (i.e. growth, vs value, etc..) the Morningstar rating and much more.

Some thoughts on past performance not guaranteeing future results…

By now I’m sure you’ve heard that familiar phrase of investment marketing: “Past performance is not a guarantee of future return”, or something similar. It’s usually uttered as a means of protecting themselves from costly liability in court situations, but it is also a significant thing to bear in mind when picking a fund.

The thing to remember is that just because a fund had a rip-roaring 3 years does not mean it’s going to continue to rip and roar its way up the charts for the next 3 years. Maybe it was a small cap stock fund and the economy has just come out of a recession. If that’s the case, then you can expect those returns to level off a bit as the economic cycle matures and investors seek blue chip companies over small cap.

But long term performance can be a good indicator of a fund’s quality. Look for good for funds with good performance over a 5-10 year period.

Some thoughts on volatility…

Volatility is simple a measure of how much the fund’s price jumps around; it’s a measure of how much of a roller coaster ride the fund is. The lower the volatility, the smoother the ride, but not necessarily the higher return. The thing to keep in mind with volatility is that it doesn’t matter how bumpy the ride is if you don’t need the money for another 20 years. In other words, volatility is less important for long term investments.

Some thoughts on Managers…

Things you’ll want to know about the fund’s manager include:

  • Does the manager admit mistakes?
  • Does the manager respect the investors?
  • Does the manager sound too greedy?
  • Does the manager know what he’s talking about?
  • Is the manager personally invested in the fund? (that’s a good thing)
  • Does the manager stick to his stated strategy?

One last thought about fees…

Not all funds are created equal, and one of the biggest defining characteristics of a fund may be its fees. All other things being equally, higher fee funds will perform worse than lower fee funds. But things are rarely equally and the thing you need to find out is whether the higher fee fund significantly outperforms its peers over an extended period. In other words, is it worth the extra money? If it’s just doing the same as an index fund, it’s not worth the money.

source


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Jan 28 2010

A Tale of 4 High Income Bond Funds.

Bonds have gotten a lot of attention over the past year and it’s easy to see why when you look at this chart.

A Tale of 4 High Income Bond Funds_chart

What you’re looking at is a relatively smooth ride up until the world collapsed in October of 2008. The investorspeak for that smooth ride is “low volatility”, and it’s one of the main traits of bonds in general, when compared to stocks. But 2008 was anything but usual, and once panic hit the markets bonds collapsed just like stocks. It was a sensible panic in many ways. After all, no one was really sure what the true debt picture was and bonds are nothing more than debt that the debtor has agreed to pay back in a timely, and consistent fashion with interest. But what if the debtor suddenly wasn’t as financially stable as you were led to believe? What if the bond ratings were smoke and mirrors, and your bond wasn’t worth the proverbial paper is was once printed on?

The good and the bad.

So, you see around October, 2008 the steep drop in the prices of these bond funds.

So far, so good. That’s the unusually bad angle. The unusually good side of the picture comes in the months after the market bottomed, around March, 2009.

  • BJBHX saw a return of approximately 45% from its March 2009 lows.
  • FRHIX saw a return of approximately 15% from its March 2009 lows.
  • PRHYX saw a return of approximately 40% from its March 2009 lows.
  • DODIX saw a return of approximately 13% from its March 2009 lows.

(More on the individual returns below.)

Bond funds don’t usually produce these kinds of returns, unless they’re junk bonds but they’re (usually) much riskier.

Are bonds still a good buy?

In a sense, all that stellar return was simple the market realizing the world was not coming to an end, and returning back to the norm. The chart above bears this out rather nicely.

So, it would seem that the major upside potential for bonds has played itself out and we have returned to something at least resembling normalcy. But that doesn’t mean that you should avoid bonds. You just shouldn’t be expecting the kinds of return seen in bonds over the past 8 months or so.

Meet the bond funds.

These bond funds come from 3 different categories, which in part explains their diverse returns. These categories are Municipal, High-yield (A.K.A. Junk), and Corporate bonds.

Municipal Bond fund.
My pick for municipal bond fund is the Franklin High Yield Tax-Free Income fund (FRHIX). This fund current yields about the same as 9.4% in a taxable fund (assuming a 35% federal income tax bracket). Tax free municipal bond funds don’t usually see a return of 15%, so this fund has definitely been a winner for those looking for tax free income because they’ve also gotten a very nice return on their investment along with the income.

High-yield bond fund.

Often times, bonds in this category are less than affectionately known as “junk”, but the Artio Global High Income (BJBHX) fund is far from junk. It boasts a 5 star Morningstar rating, and should be viewed more as a speculative, or higher risk bond fund than as junk. It currently sports a 7.4% yield, 1.00% expense ration and it delivered an eye popping (for a bond fund) 45% return from its March 2009 lows.

Another very good high yield bond fund is the T. Rowe Price High-Yield fund (PRHYX), which has a 4-star rating and a yield of 8.5%. It also delivered an eye popping return since its March 2009 lows – 40%. It has a 0.80% expense ratio, which isn’t bad considering its category.

Corporate bond fund.

My choice for corporate bond fund is the 5-star Dodge & Cox Income fund (DODIX). This fund has a 5.22% yield, 0.43% expense ratio and produced a relatively small 13% return. But remember – 13% is usually the realm of high-yield/junk bonds, but this fund is a corporate bond fund that targets only those rated A or better by either Standard & Poor’s Ratings Group or Moody’s.

Conclusion.

It would seem that the wild ride in bonds is over, at least for a while. So you shouldn’t expect such remarkable returns from these bond funds in the foreseeable future, but they are at the top of their class and should still provide a stable income in the years to come.


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Jan 27 2010

Is Apple Worth its iPad Tablet Hype?

Apple Inc has generated a lot of buzz recently with the hype over its latest geek-chic techno status symbol – the Tablet.
Is Apple Worth its Tablet Hype_mac_tablet_mockup_001_perspective

But is that hype really over-hype? Is Apple, and more important for investors – apple stock, going to benefit from this new gadget?

I personally don’t think so, and neither does Jeremy Glaser at Morningstar.com.

Apple stock looks overheated. Sure the loyal Apple fans will run out and buy the tablet because their social status depends upon it, but are they likely to have more demand than that? In this greatest of recessions, are people going to not only shell out big bucks to purchase the tablet but then pay to read book and newspaper content they can currently get online for free?

This just seems like another Kindle – another attempt to produce a new piece of technology to revolutionize our lives. But the technology that truly revolutionizes how we do things is typically never planned to do so, but rather happens by serendipity.

Besides, the tablet has been hyped for so long now, it’s already priced into the stock so the upside is limited.

Mr. Glaser goes on to argue that the market in general is over valued anyway, and so Apple is already close to fair market value and hence carries limited upside potential. Of course, that’s a value-oriented approach and many investors in the market today are focused on growth, so in the short term Apple may get a bit of a pop.


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Jan 26 2010

The 6 Biggest Investing Mistakes Warren Buffett Avoids – and You Should Too!

According to Burton G. Malkiel, a Princeton economics professor, and Charles D. Ellis, author of ‘Winning the Loser’s Game,’ Danger-keep awaythe only difference between them and Warren Buffet is that Warren Buffet hasn’t made these mistakes.

Of course, it’s more than that but since you and I (or Malkiel and Ellis for that matter) don’t have any chance of acquiring Buffet’s DNA, we’ll focus on this list – in the spirit of accepting what cannot be change, and having the courage to change the things that can be changed. ;-)

6 investing mistakes to avoid:

  • Overconfidence
  • Following the Herd
  • Timing the Market
  • Assuming More Control Than You Have
  • Paying Too Much in Fees
  • Trusting Stockbrokers

By way of proof of Buffet’s unique investment acumen and, more importantly, his ability to focus and remain true to his core investment philosophy, Malkiel and Ellis cite two prime cases when Buffet was tested by the markets and prevailing “common knowledge”.

Case number One was when Buffett avoided the dot com bust of 2000, simply because tech stocks fit neither his investment style, or his philosophy. But he held firm to his approach, even when it was called outdated by the rest of the investment world. As a result, his portfolio avoided much of the carnage that befell those more “enlightened” investors.

Case number two was when Buffett avoided mortgage-backed securities and derivatives in 2005-2006, because he found them too complex and “opaque”. As a result, he avoided the worst of the damage caused by the economic collapse that ensued.

In regards to the list above, you can see how Buffett’s sense of humility, and discipline have kept him from making many of the mistakes out lined in more detail in Malkiel and Ellis’ original article.

Burton G. Malkiel, Princeton economics professor and author of ‘A Random Walk Down Wall Street,’ and Charles D. Ellis, author of ‘Winning the Loser’s Game,’ have teamed up to write ‘The Elements of Investing.’


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Jan 25 2010

Mutual Fund Monday – How to Compare Funds.

The Mutual Fund Monday post this week is a highlight of a recent post from Kyle over at Amateur Asset Allocator .

Millions of Americans own mutual funds in their 401(k) plans, and many others own them in their IRA’s or even in a taxable, non-retirement account. But many people don’t have any idea of how to really compare the funds that are available to them. Here’s a hint – it goes beyond simply finding the highest return for a given time period (Ex: 1, 3,5 or ten years).

Kyle’s post is a great explanation of how to compare mutual funds, and their associated indexes. He explains how to compare apples to apples, and not apple to oranges (all mutual funds are not created equal!). He also explains the basics of knowing which index to compare a fund’s performance to, and why. And lastly, he explains how to compare two mutual funds – and more important, how not to.

So what are you waiting for? Head on over and give him a read. ;-)


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Jan 21 2010

3 Tips to Make Your 401(k) Work for You.

Morningstar has a terrific article (available to free members) titled Three Tips to Make Your 401(k) Work for You and I love it! Here’s a brief sample of why:

It’s surprising there aren’t many calls in the press to ditch the automobile. After all, think of all the dumb things people do with them. They drive much too quickly and sometimes after drinking lots of alcohol. They even drive while sending text messages, putting on makeup, and reading the newspaper. The consequences can be dire: More than 40,000 Americans die in auto-related deaths each year, with nearly 3 million suffering injuries of some kind.

Few things in the financial media annoy me more than the recent calls to 86 the 401(k) plan. And the above paragraph illustrates the absurdity of the move to end 401(k) plans quite nicely.

The article goes into greater detail about the push to eliminate the plan, but it also offers some real actions that investors can take to help get their 401(k) balances back on track, or to keep them on track so that they will function as intended – as a means to save for retirement, not get rich in the stock market (as too many seem to think).

Tip #1. Save More.

Yeah, I know, this sounds trite but it’s important not to simply gloss over it. My 401(k) balance dropped by about 30-35% from its 2008 high by the time the market bottomed in March of 2009 – and this was also at a time when my company canceled 401(k) matches! Things looked not so good, to say the least. But I didn’t get discouraged and start blaming the system. Partly because I have over 20 years left until I need that money, and partly because I know the stock market ebbs and flows. True, the market doesn’t usually drop by as much as it did by early 2009, but that also meant that there was near unprecedented opportunity for big returns in the coming months.

So, I looked at what I could do to change my situation and decided to increase my contributions. I knew that this would maximize my ability to buy more stock at those low levels, and also help offset my employers decision to break their promised benefit to me (i.e. contribution match).

I saved more. And the result was that my balance was over its pre-crash value in September, 2009.

Tip #2. Invest Wisely.

Most 401(k) plans are quite limited in the options open to investors, but that doesn’t keep them from screwing it up! For example, some employees “play it safe” and put all of their money in the money market equivalent. That’s stupid, unless you’re looking at retiring in the next 2 year, but even then you shouldn’t have all of your money in cash equivalents because you’re not going to suddenly withdraw all of your saving upon retirement. You need to keep some of it in stocks for long term growth so you don’t run pout of money in retirement.

So, basically, examine the options open to you in your plan, and diversify properly according your time away from retirement and other factors such as other assets available upon retirement – ex: home equity, pension plan, etc..

Tip #3. Be Flexible.

The best laid plans can often fall short due to factors beyond your control, so while it’s important to have a plan and stick to it, it’s also important to remain flexible and be ready to adapt to new realities as the economy (both U.S. and global) enter uncharted territory. This may mean working longer than you originally thought, or working part time jobs in retirement. Regardless, don’t get caught up in the way you think things ought to be and lose sight of the way things are.


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