Seven Rules for Beating the Market

Posted on August 29, 2014 | Investor Update

Last week, I discussed how beating the market is hard to do. I wrote the commentary to provoke an awareness of the challenge that faces anyone pursuing an active strategy. Bluntly put, if you try to handpick investments without a disciplined, rational, well-thought-out plan for doing so, (barring really good luck) you will underperform.

A task that is hard is not one that is impossible. Individual investors can do better than the S&P 500. Today, I’m going to give guidance on how. It will be guidance that applies to a wide variety of specific approaches, including value, growth and technical analysis. I’m going to intentionally keep the guidance broad for an important reason: Regardless of the investing style you like to follow, the overarching rules for success don’t change.

Rule 1: The optimal strategy is not one that maximizes return, but rather one that helps you stick to your long-term investing plan and achieve your goals. Big returns always sound enticing. Pitched by someone with a charismatic personality, a high-return strategy sounds even better. But if you can’t stick to the strategy because of its complexity, the volatility it incurs, the time commitment it requires, the number of transactions associated with it, your interest level or any other reason, then it’s not an optimal strategy for you. If you are unwilling to or can’t stick with a strategy, don’t use it.

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Achieving Financial Security by Conquering Personal Debt

Posted on August 29, 2014 | Financial Planning

Overloading on debt is expensive. In addition, credit can be an important lifeline in the event of a crisis, and if you have used all your credit, you have removed a valuable cushion of security.

Debt is a major hindrance to achieving financial security for many Americans. Here are some tips on how to conquer debt.

Reduce Use of Credit Cards

Nearly three quarters of the people who use credit cards leave unpaid balances from month to month. Compounding monthly the unpaid balance on a credit card means you’re effectively paying an even higher interest rate than that stated.

If you need a credit card for convenience, pay it off each month. If you can’t control your charging, cut up your cards.

Debt experts find that people who pay cash instead of charging not only eliminate expensive interest charges, but also typically spend 25% to 30% less in the first place. The only tough part about spending cash is that it is more difficult to track when drawing up a spending diary.

Reduce Current Debt

If you currently are heavily burdened with debt, there are several steps to consider. First, of course, is to start paying off your debt, and two approaches are possible: You can pay off the highest-interest debt first, which would save you the most money; or you could pay off the lowest balance first.

You may want to consider consolidating your loans. Home equity loans, whose interest rates can be reasonable and whose interest payments are usually tax-deductible, are a popular avenue. But you may be putting your home at risk to pay off, say, a car loan, when in fact it might be better to sell the car and buy a cheaper one. Remember, too, to be cost-effective the interest rate on the consolidation loan needs to be less than the interest rate you were paying before on the multiple loans, or the payoff time needs to be stretched out to lower monthly payments. Also, if you consolidate your loans, but then spend the savings, you’re not coming out ahead.

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The S&P 500 Is No Longer Far Away From 2,500

Posted on August 29, 2014 | Dividend Investing

The S&P 500 index hit a new milestone this week, crossing above 2,000 for the first time in its history. The new record high wasn’t actually any more special than any previous record high, other than for its number. Big, round numbers catch attention and 2,000 is a big, round number.

What’s always missing in the conversation are considerations of inflation, economic growth and math. If stock prices rise in reaction to inflation, then they should rise over time. Similarly, if stock prices are influenced by economic growth, then they rise as the economy expands. History shows that over the long term, stock prices reflect earnings growth, which in turn are impacted by both inflation and economic expansion. Therefore, the major stock indexes have set and risen above record levels and are expected to continue to do so in the future (with periodic interruptions along the way).

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Heading Into September, Plus the September Monthly Report

Posted on August 29, 2014 | Stock Superstars Report

The September SSR Monthly Report is now available. There is one new portfolio deletion and one new portfolio addition to announce.

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Posted on August 28, 2014 | Weekly Features


This week’s AAII Weekly Features has been updated.
View this week’s Top AAII Articles, Featured Stock Screen and Member Question.

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AAII Sentiment Survey: More Than 50% of Individual Investors Are Bullish

Posted on August 28, 2014 | AAII Survey

Bullish sentiment topped 50% for the first time since December 26, 2013, in the latest AAII Sentiment Survey. Bearish sentiment, meanwhile, continued to drop, falling below 20% for the first time this year.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 5.8 percentage points to 51.9%. This is only the fourth time optimism has exceeded 50% since February 2011. It is also the first time bullish sentiment has exceeded its historical average of 39.0% for three consecutive weeks or more since March 2014.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 1.4 percentage points to 28.8%. This is the lowest neutral sentiment has been since January 2, 2014.

Bearish sentiment, expectations that stock prices will fall over the next six months, dropped by 4.4 points to 19.2%. Pessimism was last lower on December 26, 2013 (18.5%). The drop keeps bearish sentiment below its historical average of 30.5% for the 39th time in the past 46 weeks.

At current levels, optimism is unusually high and pessimism is unusually low (more than one standard deviation away from their respective historical averages). Since our survey began in 1987, the
S&P 500 has typically experienced weaker than normal returns whenever bullish sentiment is unusually high or bearish sentiment is unusually low. The median six-month returns for the large-cap index have been 3.8% following unusually high optimism and 4.5% following unusually low pessimism. The median six-month return over the survey’s entire history is 5.2%.

Bullish sentiment has risen by a cumulative 21.0 percentage points over the past two weeks, while bearish sentiment has dropped by a cumulative 19.0 percentage points. The reversal comes as the S&P 500 rebounded off of its short-term lows and broke above 2,000. This rebound has also alleviated fears among some individual investors about a possible correction having started earlier this month. Other factors contributing to the optimistic stance are second-quarter earnings, sustained economic growth and the Federal Reserve’s tapering of bond purchases. Keeping some individual investors pessimistic are prevailing valuations, the failure of the S&P 500 to set new highs, events in the Middle East and Ukraine, the pace of economic growth and Washington politics.

This week’s AAII Sentiment Survey results:

  • Bullish: 51.9%, up 5.8 percentage points
  • Neutral: 28.8%, down 1.4 percentage points
  • Bearish: 19.2%, down 4.4 percentage points

Historical averages:

  • Bullish: 39.0%
  • Neutral: 30.5%
  • Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat, or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.) The survey and its results are available online at:

The Bull Market’s Age Is Having a Varied Impact on Investor Attitudes

Posted on August 28, 2014 | AAII Survey

This week’s AAII Sentiment Survey special question asked AAII members how, if at all, the current bull market is impacting their attitude towards U.S. stocks. Answers were varied. About 36% of respondents said the current length of the bull market is having no impact. Some of these respondents said they were more focused on valuation measures, some are more focused on Federal Reserve policy and others simply said they are focused on the long term. About 18% of respondents indicated they are more optimistic because of the bull market’s resiliency, while 12% said they are more pessimistic because of it.

Here is a sampling of the responses:

  • “Not much, because I invest for the long term.”
  • “I am more optimistic that the market has more upside before hitting a correction.”
  • “I’m cautiously optimistic, but will be paying close attention to the Federal Reserve and interest rates.”
  • “I’m definitely more cautious; waiting on pullbacks and analyzing stocks more thoroughly.”
  • “It’s harder to pick undervalued stocks.”
  • “I think we’re due for a correction, but the long-term outlook still seems positive.”
  • “It’s making retirement a lot easier.”

How to Safely Navigate Through Crowded ETF Waters

Posted on August 28, 2014 | AAII Journal

I once interviewed a successful exchange-traded fund (ETF) sponsor and had the temerity to offer some suggestions where some ETFs were needed.

The response from this person was: “Look, we’re not interested in filling needs as much as we are in building a business.” This made an important point: Investors must align their investments to match their needs versus the business interests of sponsors.

The market for exchange-traded funds has never been more robust and expansionary. The most prominent activity for sponsors is similar to a game of Battleship in which the winner fills all the slots before the next guy. Why? Because the “first mover advantage” to a sector and index cements their brand as “the go-to shop.”

The most important activity for investors remains focusing on those ETFs that work and matter to them versus any sponsor’s marketing campaign.

It’s hard to imagine that in 2005 we published an essay in our newsletter, the ETF Digest, entitled “The ETF Tsunami” that discussed the then-impending flood of new ETF issues about to hit the markets. Obviously, it seemed even then the sector was undergoing explosive growth, but with today’s level of issuance “tsunami” seems an understatement.

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Sell OF THE WEEK 8/27/2014

Posted on August 27, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Burger King Worldwide (BKW) is his “Sell of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Sell of the week

BUY OF THE WEEK 8/26/2014

Posted on August 26, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Strattec Security (STRT) is his “Buy of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Buy of the week

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