The Downsides of 401(k) Plans
Posted on May 2, 2013 | Investor Update
A recent episode of the PBS program Frontline focused on 401(k) plans. Entitled “The Retirement Gamble,” the program discussed both the risks and the costs of retirement saving plans.
A 401(k) plan is a defined-contribution plan: employers can choose to contribute a specified amount to the employee’s savings. In contrast, a pension is a defined-benefit plan: employers agree to provide a specified level of income throughout an employee’s retirement.
Why I Don’t Use Stop Orders
Posted on April 25, 2013 | Investor Update
I don’t use stop orders. (Most commonly, these are standing orders to sell a stock if it falls below a specified price.) My avoidance of them has nothing to do with my investing style, but rather because of the influence that software code has on intraday moves of the market. Tuesday’s events give an example of why I think human intervention should remain a critical part of any buy or sell decision.
As you may have heard, hackers hijacked The Associated Press’ Twitter account. The hackers then sent out a tweet at 1:07 ET Tuesday afternoon reporting an explosion at the White House and an injury to President Barack Obama. The reaction in the market was swift, with the S&P 500 falling by nearly 1% over the next three minutes following the tweet.
The AAII Portfolios
Posted on April 18, 2013 | Investor Update
I am often asked about our model portfolios. Specifically, what are the differences among them and how does an investor go about following them? I’ll provide a brief overview in this week’s newsletter.
AAII developed a number of model portfolios to educate our members on how to construct and manage stock and mutual fund portfolios. We currently operate four model portfolios: the Model Shadow Stock Portfolio, the Model Fund Portfolio, the Stock Superstars Report and AAII Dividend Investing. All of the AAII portfolios are tracked with real-money investments made through a discount brokerage firm. The performance we report is net of all transaction costs.
The Shrinking Dividend Yield
Posted on April 11, 2013 | Investor Update
One consequence of the market’s ongoing rally has been shrinking dividend yields. The Dow Jones U.S. Index (IYY), an exchange-traded fund that tracks the largest 1,200 domestic stocks, yielded just 1.9% at the end of last week. Within the slightly broader S&P Supercomposite 1500 index, just 263 members traded with yields above 3.0%.
Taxes, Portfolio Management and Emotional Pain
Posted on April 4, 2013 | Investor Update
Loss aversion may cause some investors to make portfolio decisions based primarily on the tax consequences instead of on strategies intended to provide a long-term benefit. The short-term pain of tax payment is felt more than the future pain of the increased volatility stemming from a portfolio that is not properly allocated. This is a conclusion I’m reaching from reading some of the comments to the articles about rebalancing in the April AAII Journal and what I’ve been learning about behavioral finance.
Annuities Sometimes Make Sense
Posted on March 28, 2013 | Investor Update
A friend asked for my opinion about annuities during dinner Monday night. He is nearing retirement and he followed his adviser’s suggestion to move some of his savings to annuities, but was curious to hear my opinion. I responded that under the right circumstances, annuities do make sense.
Protecting Your Portfolio from Dementia
Posted on March 21, 2013 | Investor Update
Approximately one in seven Americans age 71 or older have dementia, according to an updated analysis published this week by the Alzheimer’s Association. The analysis also estimates that one-third of Americans age 85 or older have Alzheimer’s disease. Though research shows a higher prevalence among women than men, this difference seems to be attributable to the simple fact that women have longer life spans than men.
The Market’s Unsustainable Pace
Posted on March 14, 2013 | Investor Update
Many headlines have focused on the Dow Jones industrial average’s record high and its 10-day winning streak. Less noticed is the S&P 500’s attempt at its own closing record. The large-cap index ended today just two points shy of its 1,565.15 closing high set on October 9, 2007.
Does Growth Matter?
Posted on March 7, 2013 | Investor Update
Is growth important to a rising stock price? My guess is that if I were to ask this to a random set of investors, the answer would absolutely be yes.
Growth makes a good story. Winners are preferred to losers and, when it comes to companies, winning is associated with growth. A company that is growing profits, or is expected to achieve strong earnings growth in the future, is often a company that attracts attention. Growth can put a stock in the news and it can attract investors. Growth can even lead to higher valuations.
Two Strategies for Limiting Investing Mistakes
Posted on February 28, 2013 | Investor Update
Too often the focus of investing is picking the absolute best security for today, rather than avoiding the common mistakes that hurt portfolio returns year after year. Failing to have a system in place to avoid behavioral errors can adversely impact your returns. This is particularly important when it comes to hand-picking stocks and bonds because the ability to think differently and limit mistakes is what will lead to market-beating performance.