Archives for September 2009

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TradeKing “$50 Signing Bonus” Promotion

Update: This promotion has now ended.

I don’t often mention promotions on the blog, but I thought I’d share this one because it’s for a company my wife and I actually use: TradeKing. (You can see my TradeKing review here.)

As of now through the end of the month, if you open a TradeKing account and fund it with a minimum of $2,500, you’ll receive a $50 bonus. Obviously, $50 isn’t a huge sum, but if you were already looking to open an IRA or regular brokerage account, a little free money doesn’t hurt. 🙂

Important note: Apparently you have to click on one of the special promotional links in order to get the bonus. (For RSS subscribers: The links are javascript, so you’ll probably have to click through to the post to see them.) Like this one:

Or this one:

Full disclosure: If you click through from one of my links and open an account, I receive a commission. (Though it’s not as big as your $50 bonus. 😉 )

Reasons Not to Roll Over a 401k

As I mentioned recently, after leaving a job, the best route is almost always to roll over your 401(k) into an IRA. There are, however, a few specific situations in which it doesn’t make sense to rollover a 401(k)–or other employer sponsored retirement plan–after leaving your job.

Are You Between Ages 55 and 59½?

If you are “separated from service” (i.e., you quit, were laid off, etc.) at age 55 or later, distributions from your 401(k) will not be subject to the 10% additional tax that normally comes with retirement account distributions before age 59½.

As a result, if:

  • You are 55 or older when you leave your job, and
  • You plan to retire prior to age 59½

…then it may make sense to keep your money in your employer-sponsored plan rather than rolling it over.

Have a Lawsuit in Your Near Future?

From what I’ve read, assets in an employer-sponsored retirement plan receive better protection than assets in an IRA in the event of a civil lawsuit against you. As a result, if you foresee a possible lawsuit in your future, it may be wise to hold off on rolling over your 401(k) until such concerns have passed.

(Full disclosure: I couldn’t be less of an expert on this particular topic, so please be sure to check with someone more qualified than myself–an attorney, for instance.)

Does Your 401(k) Include Employer Stock?

If your 401(k) includes employer stock that has significantly appreciated in value from the time you purchased it, you’d do well to speak with an accountant before rolling over your 401(k). Why? Because the “Net Unrealized Appreciation” rules may allow you to take that stock and move it into a taxable account while rolling the rest of the account into an IRA.

Why would such a maneuver be beneficial? Because if you roll the stock into a taxable account, when you sell it, the gain will be subject to long-term capital gain rates. In contrast, if you roll the stock into an IRA, when you eventually withdraw the money from the IRA, the entire amount will be counted as ordinary income, and will be taxed according to your ordinary income tax bracket at the time of withdrawal.

But In Most Cases…

As you can see, the situations in which it makes sense to not rollover a 401(k) are quite specific. For the overwhelming majority of investors, the answer is “Roll it over, and get it done sooner rather than later.”

Historical Stock Market Returns

A bit of a different post today: I wanted to share a spreadsheet that I maintain, which includes a good deal of data regarding historical stock and bond returns (in the U.S.).

Click here to download the spreadsheet.

Historical Return Data Included:

If, for example, you wanted to know any of the following, you could find it in the spreadsheet:

  1. The return of the U.S. stock market for each calendar year from 1928-2008.
  2. The nominal return for stocks or 10-year T-Bonds for any 3-year, 5-year, 10-year, 25-year, or 30-year period between 1928 and 2008.
  3. The inflation-adjusted version of #2 above.
  4. How you would have fared if you’d been dollar-cost-averaging into the market across any 10-year period from 1928-2008.
  5. The standard deviation of stock or bond market returns over 1-year, 3-year, 5-year, 10-year, 20-year, and 30-year periods from 1928-2008.
  6. Changes in gold prices each year from 1900-2008.

Credits

My thanks go to the following people/organizations for the underlying data:

Other Notes

I’m not perfect, and the data might not be either. If, after downloading the spreadsheet, you have any questions or see any errors in any of my calculations, please let me know.

Lastly, please remember that past performance is exactly that: past performance, not to be confused with future performance.

Enjoy. 🙂

Supply, Demand, and Stocks

In my experience, supply and demand aren’t explicitly discussed very often when talking about investing. But changes in demand for a stock–or, more relevant to index investors, demand for stocks in general–are of tremendous importance.

Over any period, the return from the stock market is determined by three factors:

  1. Changes in the market’s P/E ratio,
  2. Earnings growth, and
  3. Dividend payments.

And the first of those factors–the market’s P/E ratio–can be thought of as a measure of demand for stocks. The more people there are who are interested in owning stocks, the higher the market price for each dollar of earnings.

Supply and Demand Over Short Periods

Over short periods, changes in demand (and thus P/E ratios) are the dominant factor in market movements.

  • When investors get scared, demand for stocks drops. The (relatively) modest positive return from dividends and earnings growth gets absolutely crushed by the effect of the P/E decline.
  • When stocks become trendy/sexy (think late 90s), demand increases, causing market returns far beyond the fundamental return earned by the underlying companies.

Supply and Demand Over Long Periods

Shifts in demand can play a significant role in determining long-term market returns as well. (It is worth noting, however, that their significance relative to dividends and earnings growth is far smaller over long periods than over short periods.)

For example, as Frank from Bad Money Advice recently reminded us, the mainstream acceptance of stocks as a worthwhile investment coupled with the rise of the mutual fund fueled an increase in demand that resulted in fantastic market returns from the 60s through the 90s. He notes,

“The stock market of today is not the same as the market of fifty years ago. It’s role in the economy and in our culture has massively increased. That change brought on a secular rise in the valuation of the market. And that rise is unlikely to be repeated over the next fifty years.”

Demand for Stocks in the Future

For the last several years, many people have been predicting that the market’s returns will be suppressed over the next few decades as the Baby Boom generation moves through retirement, slowly but steadily selling off their assets (and decreasing aggregate demand for stocks in the process).

Others–like Jeremy Siegel in The Future for Investors–argue that increasing investment demand from developing economies (particularly China and India) will make up for the reduced demand from U.S. investors.

How You Can Benefit

It’s only natural to try and surmise a way to benefit from such demand shifts. But I’d caution against getting too clever.

Unless you can foresee a big demographic/demand shift prior to the rest of the market figuring it out, there’s really not much you can do. As with other attempts to beat the market based on any particular piece of data: If it’s obvious, it’s worthless.

Investing Made Simple Now Available on Amazon

As of today, Investing Made Simple is available on Amazon. Of course, as promised, it will still be available as a free download through the end of the month.

A Favor to Ask:

If you downloaded the book and found it to be helpful, I’d be super appreciative if you took 3-4 minutes to click over to Amazon and write a short, 2-sentence review explaining what you liked about it.

Of course, there’s no obligation to do this. The idea was to release the book free, not “free with a catch.”

The Best Mutual Funds

“What is the best mutual fund?”

To financial advisors and experienced investors, it’s a silly question. But it’s one that I’ve been asked–very much in earnest–by young people on several occasions. (Actually, it’s usually more along the lines of “So, like…what’s the best mutual fund?”)

For the sake of any investors asking Google that very question, I thought it might be beneficial to take a few moments to provide an answer here. (My apologies to any readers looking for more sophisticated fare.)

It Depends on Your Goals

The most important thing to know when choosing investments–mutual funds or otherwise–is that what’s best for you isn’t necessarily what’s best for me. We have different goals, and we need different investments to meet them.

If you’re saving to buy a house in 3 years, the best mutual fund is one that’s unlikely to decline in value in any given year–even if that fund only provides a modest rate of growth. If, on the other hand, you’re saving for retirement 40 years from now, it’s OK to use a fund that declines in value from time to time as long as you have reason to believe it will earn a satisfactory long-term return.

Generally, the biggest factor in determining a fund’s long-term return as well as its year-to-year volatility is the fund’s asset allocation.

What’s Asset Allocation?

Asset allocation refers to how much of a fund’s portfolio is invested in each asset class (cash, bonds, U.S. stocks, international stocks, etc.). When saving for most goals, you’ll want a mix of asset classes. And rather than looking for “the best fund,” you’ll usually want to create a portfolio of a few different funds.

For the most part, the more volatile an asset class is, the higher its long-term returns have tended to be. As a result, if you’re saving for a short-term goal, you’ll want a portfolio made up primarily of funds that invest in low-volatility, low-expected return asset classes (cash, bonds). And if you’re saving for a long-term goal, you can afford to put more money into funds that invest in higher-volatility, higher-expected return asset classes (stocks).

Look for Low Costs

Studies have found that within a given category of funds (U.S. stock funds, for instance), costs are the best predictor of performance. The lower a fund’s expenses, the better it’s likely to perform. (Not exactly surprising, is it?) When examining a fund’s costs, there are two things to look for:

  • A low expense ratio, and
  • Low portfolio turnover.

Expense ratio is simply what it costs the fund company to run the fund, and portfolio turnover refers to how frequently the fund buys and sells investments within its portfolio. Because each transaction comes with a cost, higher portfolio turnover means higher costs–costs that aren’t included in the fund’s published expense ratio.

A fund’s expense ratio and portfolio turnover can be found by either reading the fund’s prospectus or by simply doing a Google search for the fund’s name.

Almost without exception, the funds with the lowest costs and lowest portfolio turnover are index funds–mutual funds that simply seek to match the market’s return rather than attempting (and failing) to beat it.

“The Best Mutual Fund (Portfolio)”

In short, for most investors, the answer to “What is the best mutual fund?” is really “A portfolio of low-cost index funds with an appropriate asset allocation for your goals.”

Thrilling, isn’t it?

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