I am frequently asked by clients about the Exchange Traded Funds (ETF’s) we use in our portfolio construction. In particular, some clients ask why we hold RSP for broad market exposure instead of the more-well-known SPY. I’d like to explain the difference between the two and why we would use one over the other.
SPY is the first and most well know ETF in U.S. markets. Commonly known as the Spider (SPDR) it was introduced in January, 1993. It corresponds to price movement in the S&P 500. As such, it is a cap-weighted index, meaning that the larger a company is the more weighting or exposure the company has in the index or ETF.
RSP, on the other hand, mirrors the same S&P 500 index but for one major difference; RSP is an equal-dollar-weighted ETF. This means that regardless of the size of a company, each one has an equal weighting in the ETF. In other words: one company, one vote.
When comparing these two ETF’s we look at their relative strength. How do their prices move in relation to each other?
Going back to 1994, if you were to buy and hold SPY you would have a gain of 208.58% not including dividends. If you had bought RSP, your gain would have been 313.85% without dividends. What’s more interesting is, if you followed the relative strength indicators for each of these ETF’s going back 18 years, and made the changes that the indicator recommended, your return would have been over 400%.
As we all know, past performance is no guarantee for future success. However, I feel it is important to pay attention to what the market is telling us and make prudent investment decisions. Following the relative strength indicators over time can help us do just that.
Source: Dorsey Wright & Associates, Inc.
Showing posts with label retirement. Show all posts
Showing posts with label retirement. Show all posts
Tuesday, October 23, 2012
Friday, September 14, 2012
Retiring on Fear
Last week I wrote that we continue to see investors pull money out of equity mutual funds and plow it into bond and hybrid funds. Well, that trend still continues.
In July, the technical indicators I follow had all turned positive. I have been bullish since then and nothing has happened yet to change my view. Unfortunately, many investors don’t have a disciplined approach to investing and end up making snap judgments based on the nightly news or worse…whatever Jim Cramer tells them.
Last week, I read an interesting article in USA today and wanted to share some of the points it with you. Since 2003, investors had approximately $5.9 billion in bank accounts, cash, CD’s and money market accounts; by the beginning of 2012, that figure has ballooned to $9.4 billion. Keep in mind that during this time frame the interest earned on these “safe” investments has continued to fall to record lows.
Why has this happened? To understand this we need to go back in time a few years.
During the go-go years of the 1990’s, we saw investors pile money into dot.com companies with little or no earnings whatsoever. The fear of greed had overtaken the fear of loss. Prudence went out the window along with sound reasoning of what a corporate balance sheet should look like. People were more afraid of losing out on a golden opportunity than losing their hard-earned money. This investing with reckless abandon came to an end when the market corrected in 2000 when a new era of safety at all costs became in vogue. In a period of about 10 years, public perception had changed 180 degrees. This fear was reinforced by the correction of 2008.
One area we are seeing the dramatic effects of this phenomenon is in the 401-k area. Prior to 2000, 401-k participants had about 50% of the account values in equity based funds. That figure has fallen by almost half to 26%. What does this mean to plan participants? Well, they better go back and run their retirement planning calculations again to make sure they will have enough money to retire when they originally planned to. If not, they need to re-assess their risk tolerance or sharply increase the amount of money they put into their plan.
I don’t think people should take on more risk than they are comfortable with, but I do think they need to make sure they have a clear understanding of how much money they will need to retire on and when they plan on retiring. They also need to take into account how long they will live in retirement. Life expectancies continue to increase. As I like to say…60 is the new 50 (and so on). Not only are we living longer, but we are living a more recreational retirement lifestyle filled with cruises and trips. It becomes increasingly important to make sure you don’t outlive your nest egg.
I recently attended a conference at the Anderson School of Management at UCLA where we studied changes in the qualified retirement plan area (401-k’s especially). Many of these changes are being implemented by the Department of Labor and are in response to other legislation like the Pension Protection Act of 2006. We are at a significant crossroads for retirement planning for all Americans. In addition to helping retirees maintain the income level they need, I find myself helping more business owners get a handle on their own retirement plans. Many business owners face challenges to stay complaint with all the recent changes to rules and regulations affecting their plans. Many of these changes come from the Department of Labor. In 2011 alone, the DOL hired about 1,000 new agents with most of them being assigned to enforcement. My goal is to help business owners maintain a “compliant” retirement plan for their business.
Whether you’re currently retired or still accumulating assets for your eventual retirement, you need to have a focused, attainable goal. With that in mind, over the next several months, David Kover & Associates will be working on new tools to help you know what that goal is for you and your family. Stay tuned.
In July, the technical indicators I follow had all turned positive. I have been bullish since then and nothing has happened yet to change my view. Unfortunately, many investors don’t have a disciplined approach to investing and end up making snap judgments based on the nightly news or worse…whatever Jim Cramer tells them.
Last week, I read an interesting article in USA today and wanted to share some of the points it with you. Since 2003, investors had approximately $5.9 billion in bank accounts, cash, CD’s and money market accounts; by the beginning of 2012, that figure has ballooned to $9.4 billion. Keep in mind that during this time frame the interest earned on these “safe” investments has continued to fall to record lows.
Why has this happened? To understand this we need to go back in time a few years.
During the go-go years of the 1990’s, we saw investors pile money into dot.com companies with little or no earnings whatsoever. The fear of greed had overtaken the fear of loss. Prudence went out the window along with sound reasoning of what a corporate balance sheet should look like. People were more afraid of losing out on a golden opportunity than losing their hard-earned money. This investing with reckless abandon came to an end when the market corrected in 2000 when a new era of safety at all costs became in vogue. In a period of about 10 years, public perception had changed 180 degrees. This fear was reinforced by the correction of 2008.
One area we are seeing the dramatic effects of this phenomenon is in the 401-k area. Prior to 2000, 401-k participants had about 50% of the account values in equity based funds. That figure has fallen by almost half to 26%. What does this mean to plan participants? Well, they better go back and run their retirement planning calculations again to make sure they will have enough money to retire when they originally planned to. If not, they need to re-assess their risk tolerance or sharply increase the amount of money they put into their plan.
I don’t think people should take on more risk than they are comfortable with, but I do think they need to make sure they have a clear understanding of how much money they will need to retire on and when they plan on retiring. They also need to take into account how long they will live in retirement. Life expectancies continue to increase. As I like to say…60 is the new 50 (and so on). Not only are we living longer, but we are living a more recreational retirement lifestyle filled with cruises and trips. It becomes increasingly important to make sure you don’t outlive your nest egg.
I recently attended a conference at the Anderson School of Management at UCLA where we studied changes in the qualified retirement plan area (401-k’s especially). Many of these changes are being implemented by the Department of Labor and are in response to other legislation like the Pension Protection Act of 2006. We are at a significant crossroads for retirement planning for all Americans. In addition to helping retirees maintain the income level they need, I find myself helping more business owners get a handle on their own retirement plans. Many business owners face challenges to stay complaint with all the recent changes to rules and regulations affecting their plans. Many of these changes come from the Department of Labor. In 2011 alone, the DOL hired about 1,000 new agents with most of them being assigned to enforcement. My goal is to help business owners maintain a “compliant” retirement plan for their business.
Whether you’re currently retired or still accumulating assets for your eventual retirement, you need to have a focused, attainable goal. With that in mind, over the next several months, David Kover & Associates will be working on new tools to help you know what that goal is for you and your family. Stay tuned.
Thursday, September 13, 2012
The Tax Man Cometh
The following is a synopsis of a recent Wall Street Journal editorial written in part by Dr. Arthur Laffer. In addition to being president of Laffer Associates, he is a founding member of the Congressional Policy Advisory Board and has worked with the 105th, 106th and 107th U. S. Congress. He was a member of President Reagan’s Economic Advisory Board for both terms and is best known for his belief in supply side economics to foster growth.
Among the numerous tax increases due to hit hard working Americans is the expiration of the temporary 2% payroll tax cut. This reduction was enacted last year and renewed again in January. The reduction applies to the first $110,100 of income and is set to expire on December 31. For a person making $50,000 a year, this results in $83 more a month in take home pay. Interestingly enough, this is the least painful of the many increases we will see beginning in 2013 if congress fails to act.
First on the slate is a huge increase in the estate tax. The current $5 million exemption goes all the way down to $1 million while the top estate tax bracket increases from 35% to 55%. Business owners and people with illiquid assets will be hit the hardest.
The top federal rate on personal income will increase to 39.6% from 35% with an additional 0.9% tacked on the payroll tax to help fund Medicare.
The highest tax rate on dividends will jump to 43.4% from the current maximum of 15%. Capital gains tax rate will go to 23.8% from 15%.
These are a result of the expiration of the Bush tax cuts and new taxes imposed by ObamaCare legislation.
Dr. Laffer points out that these increases will not only generate almost $500 billion a year in newly collected taxes, but will have a drastic affect on an already fragile recovery. He believes the drop in GDP we’ve been seeing for the last couple of years is due to businesses and consumers bracing for the storm. GDP was 4% at the end of 2010 and came in at an annualized rate of 1.5% in the last quarter.
In the end, he states that “…we cannot have a prosperous economy when government is overspending, raising tax rates, printing too much money, over-regulating and restricting the free flow of goods and services across national boundaries.”
Among the numerous tax increases due to hit hard working Americans is the expiration of the temporary 2% payroll tax cut. This reduction was enacted last year and renewed again in January. The reduction applies to the first $110,100 of income and is set to expire on December 31. For a person making $50,000 a year, this results in $83 more a month in take home pay. Interestingly enough, this is the least painful of the many increases we will see beginning in 2013 if congress fails to act.
First on the slate is a huge increase in the estate tax. The current $5 million exemption goes all the way down to $1 million while the top estate tax bracket increases from 35% to 55%. Business owners and people with illiquid assets will be hit the hardest.
The top federal rate on personal income will increase to 39.6% from 35% with an additional 0.9% tacked on the payroll tax to help fund Medicare.
The highest tax rate on dividends will jump to 43.4% from the current maximum of 15%. Capital gains tax rate will go to 23.8% from 15%.
These are a result of the expiration of the Bush tax cuts and new taxes imposed by ObamaCare legislation.
Dr. Laffer points out that these increases will not only generate almost $500 billion a year in newly collected taxes, but will have a drastic affect on an already fragile recovery. He believes the drop in GDP we’ve been seeing for the last couple of years is due to businesses and consumers bracing for the storm. GDP was 4% at the end of 2010 and came in at an annualized rate of 1.5% in the last quarter.
In the end, he states that “…we cannot have a prosperous economy when government is overspending, raising tax rates, printing too much money, over-regulating and restricting the free flow of goods and services across national boundaries.”
The Money Market Fund Controversy
Almost everyone knows of money markets; those readily available low-yielding funds that come with all brokerage and advisory accounts. However, not many investors really know how money market funds work.
Prior to the financial crisis of 2008, no one paid much attention to money market funds. Then, with the collapse of Lehman Brothers, a handful of investors learned a painful lesson.
A money market fund is a pool of investor money that is used to purchase short-term government and corporate debt. Historically, it has always kept its Net Asset Value (NAV) at $1.00; even though the debt in the portfolio fluctuates, the issuing firm assumes the short-term debt will mature at par or the typical $1,000 face value. So, no one loses, right? Well, not so fast.
The Reserve Primary Fund, a money market fund with decades of experience in managing short-term debt instruments had a position so large in Lehman Brothers debt (1.2% of its $63 billion size) that it officially “broke the buck”; a term meaning that the net asset value fell below the stated $1.00 a share.
While the fund only lost a few cents a share (it posted a value of 0.97) it was enough to cause a run on money market funds. In September of 2008 $310 billion or about 15% of all money market funds saw redemptions. To help stave off a continued run on funds, the government stepped in to shore up investor confidence by guaranteeing the assets of the remaining money market funds that remained and in 2010 the SEC imposed stringent new rules that restricted the kind of investments that money markets could hold as well as the amount of cash they need to have on hand to meet investor redemptions.
Recently, SEC chairwoman Mary Schapiro has been pushing for even more rules and regulations on money market funds. One of her main components was requiring investors to only receive a portion of their money in the event of someone cashing out completely. The balance would be paid in 30 days. Schapiro offered a second option in that the sacred $1.00 share value would have to fluctuate to show the value of the holdings in the portfolio. Neither one was well received by the industry. It obviously wasn’t well received by her own 5-member commission panel. They voted down her recommendations and stressed that more needs to be done to understand the possible ramifications of any significant changes.
Prior to the financial crisis of 2008, no one paid much attention to money market funds. Then, with the collapse of Lehman Brothers, a handful of investors learned a painful lesson.
A money market fund is a pool of investor money that is used to purchase short-term government and corporate debt. Historically, it has always kept its Net Asset Value (NAV) at $1.00; even though the debt in the portfolio fluctuates, the issuing firm assumes the short-term debt will mature at par or the typical $1,000 face value. So, no one loses, right? Well, not so fast.
The Reserve Primary Fund, a money market fund with decades of experience in managing short-term debt instruments had a position so large in Lehman Brothers debt (1.2% of its $63 billion size) that it officially “broke the buck”; a term meaning that the net asset value fell below the stated $1.00 a share.
While the fund only lost a few cents a share (it posted a value of 0.97) it was enough to cause a run on money market funds. In September of 2008 $310 billion or about 15% of all money market funds saw redemptions. To help stave off a continued run on funds, the government stepped in to shore up investor confidence by guaranteeing the assets of the remaining money market funds that remained and in 2010 the SEC imposed stringent new rules that restricted the kind of investments that money markets could hold as well as the amount of cash they need to have on hand to meet investor redemptions.
Recently, SEC chairwoman Mary Schapiro has been pushing for even more rules and regulations on money market funds. One of her main components was requiring investors to only receive a portion of their money in the event of someone cashing out completely. The balance would be paid in 30 days. Schapiro offered a second option in that the sacred $1.00 share value would have to fluctuate to show the value of the holdings in the portfolio. Neither one was well received by the industry. It obviously wasn’t well received by her own 5-member commission panel. They voted down her recommendations and stressed that more needs to be done to understand the possible ramifications of any significant changes.
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