A Mixed Week for the Markets

Posted on June 27, 2014 | Stock Superstars Report

The government released information showing that new home sales rose more than 18% in May. The Conference Board’s index of consumer confidence increased to 85.2 in May from 82.2 in April, suggesting that consumers remain optimistic. Unfortunately, this optimism wasn’t enough to lift the market. The Dow Jones industrial average ended the day down 0.7%—the biggest one-day percentage decrease for the index in over a month.

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Wheeling and Dealing

Posted on June 27, 2014 | Dividend Investing

Mergers and acquisitions seem to be the market theme this year. Corporations flush with cash are opening their wallets in hopes of gaining market share and enhancing their competitive position. According to Forbes, global mergers and acquisitions activity deals have surpassed $1.75 trillion year-to-date, the highest level since the first half of 2007, before the Great Recession.

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10 Ways to Ensure Your Retirement Savings Last

Posted on June 26, 2014 | Investor Update

A big financial challenge retirees face is ensuring their savings last the rest of their lives. It’s a daunting task for those making the transition into retirement as well as for those already in retirement. While saving as much as possible during your working years is important, the decisions you make in retirement are also very important. Fortunately, there are steps you can take to improve your odds of financial success. Here are 10 of them.

1. Withdraw a Safe Amount—Limiting the size of withdrawals from your retirement savings is critical for ensuring your portfolio lasts throughout your lifetime. William Bengen calculated a 4% withdrawal rate, adjusted upward annually to account for inflation, as having a very high probability of ensuring a retiree will not run out of money. You may be able to sustain a higher withdrawal rate, but the risks of running out of money will increase as well. Even bumping the withdrawal rate to 5% comes with some increased risks, though going above this level significantly increases the risk of a shortfall.

2. Allow for Variability in Your Spending—The 4% withdrawal rate is a good benchmark for determining how much to withdraw, but it’s just a benchmark. During good years for the market, you may be able to withdraw much more from your retirement savings; during bad years, much less. You will also have years when your spending is elevated (vacations, home repairs, medical bills, etc.) and years when your spending is lower. By allowing for variability in your spending, you can help to offset the blow taken from the years with bad market conditions or high spending.

3. Be Cognizant of Longevity Risk—Longevity risk is the probability of outliving your savings. The Social Security Administration estimates a 25% chance of a person turning 65 today living past age 90 and a 10% chance of living past age 95. (The average life expectancy is 84 for a man and 86 for a woman.) These numbers mean a person retiring today could potentially be looking at living off of his or her retirement savings for at least 25 or 30 years.

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AAII Sentiment Survey: Pessimism Falls to a Six-Month Low

Posted on June 26, 2014 | AAII Survey

Pessimism among individual investors is now at a six-month low, according to the latest AAII Sentiment Survey. Neutral sentiment remains at an unusually high level, while optimism is slightly below its historical average.

Bullish sentiment, expectations that stock prices will rise over the next six months, rose 2.0 percentage points to 37.2%. The rebound is not big enough to keep optimism from being below its historical average of 39.0% for the 13th time in the past 15 weeks, however.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, edged up 1.0 percentage points to 41.7%. This is the seventh time in nine weeks that neutral sentiment is above 40%. Neutral sentiment is also above its historical average of 30.5% for the 25th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 3.0 percentage points to 21.1%. This is the lowest level of pessimism registered in our survey since December 26, 2013 (18.5%). The decline keeps bearish sentiment below its historical average of 30.5% for the 10th straight week and the 33rd out of the last 37 weeks.

Despite hitting a six-month low, bearish sentiment remains within its typical range. It is near the bottom of the typical range, however. Historically, unusually low levels of bearish sentiment have been followed by only slightly weaker-than-average market performance (an average 26-week return of 4.0% for the S&P 500 versus 4.4% for all weeks since September 1987).

Neutral sentiment is above its typical range (more than one standard deviation above average) for the second consecutive week. Historically, unusually high levels of neutral sentiment have been followed by better-than-average S&P 500 returns (an average six-month gain of 7.2%). The historical results of unusually high and low AAII Sentiment readings can found in this month’s AAII Journal.

The ongoing streak of 25 consecutive weeks with neutral sentiment readings above 30.5% is the fourth-longest in the survey’s history. The only longer such streaks were an 82-week stretch in 1987 and 1988, a 65-week stretch in 1997 and 1998 and a 28-week stretch in 1993.

This week’s AAII Sentiment Survey results:

  • Bullish: 37.2%, up 2.0 percentage points
  • Neutral: 41.7%, up 1.0 percentage points
  • Bearish: 21.1%, down 3.0 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: http://www.aaii.com/sentimentsurvey

Biggests Influences on Sentiment: The Economy and the Markets

Posted on June 26, 2014 | AAII Survey

This week’s AAII Sentiment Survey special question asked AAII members what factors are most influencing their six-month outlook for stocks. Several members listed more than one factor. The economy topped the list, named by 28% of respondents. Many of them (17% of all respondents) cited sustained growth or expectations for continued growth. The market was a very close second, named by slightly more than 27% of all respondents. About 9% of all respondents said valuations were high, though there were others who were encouraged by the market’s resiliency and upward momentum. The geopolitical picture, especially Iraq and Russia, was cited by just fewer than 17% of all respondents. Frustration with politics also remained a common refrain, with 13% of respondents expressing displeasure with either political infighting or the president’s policies.

Valuation Ratios: The PEG Ratio

Posted on June 25, 2014 | AAII Journal

The PEG ratio factors in a company’s growth into its valuation, allowing investors to compare companies with different rates of growth.

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Sell OF THE WEEK 6/25/2014

Posted on June 25, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Lululemon Athletica (LULU) 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 6/24/2014

Posted on June 24, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Suncor Energy (SU) 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

Rule #1

Posted on June 24, 2014 | Stock Screens

Based off Warren Buffett’s number-one rule, “Don’t lose money,” this screen seeks to buy stocks of a solid business at an attractive price.

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Investment Knowledge Boosts Portfolio Returns

Posted on June 23, 2014 | AAII Journal

Investing knowledge enhances risk-adjusted returns by at least 1.3 percentage points annually. Over a 30-year investment span, the improved portfolio performance leads to 25% greater wealth. This was the finding of a study, possibly for the first time, linking results from a test of financial knowledge to actual portfolio performance. The researchers believe their conclusion may understate the actual return differential.

A key driver of the return differential is a willingness to invest in stocks. The most knowledgeable investors had a 66% allocation to stocks, whereas the least knowledgeable held about 49% of their retirement assets in stocks. The larger stock allocation did lead to more volatility, but also higher risk-adjusted performance.

Researchers with the Pension Research Council at the University of Pennsylvania’s Wharton School gained access to the retirement plan of a large financial institution with 22,000 employees. The defined-contribution [401(k)] plan offered 16 funds. The plan’s offerings included stock funds, bond funds and a real estate investment trust (REIT) index fund. The study’s authors used this data to analyze account balances, returns and volatility.

Employees were also invited to take an online survey. The survey measured the ability to do a simple interest rate calculation, tested respondents on their understanding of inflation, looked to see how well respondents knew the difference between a stock and a mutual fund and how well they understood risk diversification, determined their understanding of the impact of tax incentives for saving and measured knowledge of employer match incentives.

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