Friday, July 28, 2017

You Can Observe A Lot by Watching (or Listening)

As an avid New York Yankees fan, I've come to appreciate the late Yogi Berra's famed "Yogiisms". One of my favorites is the classic line, "You can observe a lot by watching." Over the past few weeks, I've both watched and listened (via the CNBC simulcast on Sirius) to a variety of CNBC's financial programming. In my 2003 book, The Teenage Investor, I was very critical of the financial media and how predisposed they are to hyperbole in an effort to drum up interest and ratings. While I am still very critical of listening to the financial media with any frequency, I began to notice some value in paying attention to the media more - even if it only serves as a reminder of what to ignore on your investing journey.

Case in point: much has been made of the demise of the brick and mortar retailer in the age of Amazon. In June, Moody's put out a report highlighting financially distressed retailers. Among the names were well-known retailers like Sears, Neiman Marcus, Gymboree, and Nine West. Retail stocks have suffered over the past few years as brick and mortar retailers attempt to figure out how to compete with and other trailblazing online retailers. Over the past few months, financial commentators have speculated on which retailer would be the next to file for bankruptcy or otherwise exhibit signs of financial distress. Many of the most well-known retailers who are not yet considered financially distressed have seen steep stock price declines, and financial commentators have also begun to wonder whether the American mall will exist in a few years.

So why am I bringing this up? There is no doubt that Amazon is a force to be reckoned with, not only in retail but in various other areas. However, the same financial press who has declared the death of retail, today questioned whether they had gone too far in that assessment. How did this happen? reported Q2 earnings on Thursday that were weaker than expected, and the stock lost roughly $10 billion in market value. The financial press then began discussing whether their predictions for the "death of retail" were wrong, and if an inflection point had been reached where brick and mortar retailers could happily co-exist with Amazon...all because of a singular weak quarterly earnings report.

I have no thoughts or opinions on the viability of purchasing retail stocks, Amazon stock, or any other individual stock in light of all of this information; that's simply not an area I play in. However, by watching CNBC and other financial media outlets over the past few weeks, my view that it's dangerous to get wrapped up in headlines and financial commentary was reaffirmed. More importantly, I also came to the realization that there is a lot of value in paying occasional attention to the financial media, if only to have it serve as a reminder that everyone has an opinion and a position on any given hot button issue. The only opinions that truly matter in the financial world, however, are from the investors who put their money on the line in support of it - and that's what ultimately moves markets.

Friday, December 9, 2016

The Election Aftermath for Investors

Wednesday marked a month since Donald Trump was elected 45th President of the United States, and if the stock market's performance since then is any indication, much of the concern over a Trump Presidency was overblown. Plenty of policy details remain to be ironed out, many within Trump's first 100 days, but the Dow is up 1,200 points since Election Day and is inching closer to the uncharted territory of 20,000. There is an old Wall Street adage that says "markets climb a wall of worry" which in today's case basically means that the momentum the stock market had prior to the election seems to be continuing, and enhanced by, Trump's investor and business friendly policy positions. Trump's apparent less friendly economic policies (i.e. a 35% tariff on imports) likely won't pass muster with Congress, so Wall Street is taking those with a grain of a salt.

What does all of this mean for investors? For one, the market's performance in the aftermath of the election suggests that to Wall Street, the removal of uncertainty in the marketplace is far more important than almost any other development in the past few weeks. Many investors certainly take comfort in the fact that they can assess the potential impacts of a Trump Presidency on the economy and their own investments and not simply speculate further about what a Trump Presidency means.

My guidance to an individual investor is to avoid any form of market timing; do not attempt to jump into out of investments in order to "ride momentum" or attempt to capture price movement in stocks that some speculate many benefit from a Trump Presidency. If you have any capital losses that you can use to offset gains you may have realized while rebalancing your portfolio as the year winds down, it may be wise to consider doing so. Lastly, consider maxing out your 2016 Roth IRA contributions. The 2016 Roth IRA contribution limit (subject to certain income limitations), is $5,500 or $6,500 if you are 50 or older.

I wish everyone a healthy and prosperous 2017.

Saturday, October 29, 2016

Don't Let Election Jitters Cloud Long-Term Focus

With the U.S. Presidential election only 10 days away, much uncertainty lingers amongst investors, especially in light of yesterday's FBI announcement regarding the investigation into Hillary Clinton's emails. Such October surprises are common in Presidential politics, but that doesn't mean they rattle investors any less. As soon as the FBI announcement was made public, the Dow dropped substantially and the Mexican peso declined sharply versus the U.S. dollar. Thus, political and economic news can substantially move markets, and also, investor's expectations. Wall Street has differing views on what a Hillary Clinton or Donald Trump Presidency means for stocks and the economy, but the nervousness that Wall Street watchers may exhibit over the Presidential outcome shouldn't cloud individual investor's judgement.

A key argument in favor of staying calm despite highly uncertain times comes from the recent decision by British citizens to vote in favor of the United Kingdom exiting the European Union (EU). While public opinion polls up until the day of the vote seemed to indicate that British citizens would vote to remain in the EU, the news of Brexit was met with dire predictions of economic calamity and misfortune (i.e. reduced free trade, labor and people movements, etc.) that would befall the U.K. should it choose to leave the economic and trade connections with the EU. While we are dealing with a relatively small sample size, the U.K. economy actually grew more than expected (+0.5%) post-Brexit. While much could change in the future, this is one recent example of the doom and gloom that pundits and media often predict failing to come to fruition. 

The Brexit discussion, in turn, brings me back to the jitters investors are exhibiting regarding our Presidential election. While emerging economies like China and India will no doubt play a larger and more important role in the world in the coming decades, the United States still remains the world's pre-eminent economic superpower. Many analysts argue that we could lose that role to China or some other emerging players in the future, but we must focus on the here and now and improving American economic competitiveness on the world stage. The media likes to use loaded, attention grabbing headlines to influence public opinion and drive viewership. A key consequence of this is that the editorializing that we see from both political viewpoints leads to uncertainty. This uncertainty often manifests itself in spikes in the VIX, a key indicator of volatility in the marketplace. If there is one thing investors hate, it is uncertainty. Markets tend to perform better when the future is easily mapped out and understood. If I could make one recommendation for the next few weeks, it would be to avoid focusing too much on the electoral headlines and the doom and gloom that the media may push regarding either outcome. Despite what many pundits would have you believe, we will likely be just fine either way. Remember, the United States has endured two World Wars, depressions, recessions, terror attacks, and countless other calamities that we recovered from economically. Stay invested in the market, dollar cost average into your positions, and keep your eyes on the prize: building wealth over the long-term, slowly but surely. 

Saturday, October 22, 2016

The Hidden 401(k) Fee Trap: Administration Fees

My employer offers a 401(k) plan through Fidelity which offers different tiers of investment options. I can choose from a variety of actively and passively managed mutual funds, "target retirement" funds, as well as individual stocks if I choose. Most millennial investors hear the same story from the financial press about 401(k)'s: contribute up until your employer match. It is indeed good advice because it's never a good idea to leave free money on the table. After all, if you earn $50,000 in a year and contribute 5% to your 401(k) with a dollar for dollar employer match, you will have $5,000 in your 401(k) at year end instead of $2,500; nothing beats doubling your money without any additional work! However, I wanted to take some time to focus on something that many millennial investors may overlook but can be equally dangerous as passing up free money: hidden fees in the 401(k) plan.

The U.S. Department of Labor has published a good guide that examines the variety of fees and expenses within 401(k) plans. Remember, all fees and expenses reduce investment returns, and therefore the long-term returns your 401(k) may earn. The Dept. of Labor guide discusses a scenario where a 1% increase in fees reduces a retirement account balance by 28% at retirement...that's a huge hit! 

The hidden 401(k) fee trap that I mention in the post title refers to the fact that while many people are familiar with the fees and expenses charged by mutual funds (i.e. sales charges and management fees), your 401(k) plan administrator may actually charge a plan administration fee, among other fees. Generally these fees are charged at the plan level and some percentage may also get passed on to individual employees. This blog post will be the first in a series of posts discussing these different fees.

A plan administration fee may be taken directly from your investment returns (a silent killer!), or you may pay it yearly, sometimes as a flat fee deducted from your account at the end of the year. There are multiple arrangements, but this fee is levied to pay for administrative services such as accounting, records keeping, and possibly even for additional service and support that your employer may have contracted for. Some employers automatically enroll employees in financial advice/planning programs, or offer other services that you ultimately pay for. Since many large corporations have so many employees enrolled in 401(k)'s, the overall administration fee burden on employees may be smaller, and in turn, larger for employees who work for smaller businesses. 

In July 2012, the Dept. of Labor enacted a rule to ensure that plan administrators mail you a fee disclosure so you can see exactly what fees and expenses you may be subjected to while enrolled in your 401(k). Most investors likely just discard this notice, but you should pay special attention to it. You can also log into your 401(k) account, or request this information from your HR or Benefits Dept. where you work. 

What can you do? Some employers may allow you to opt out of additional services that are paid for by the administration fee, so you may be able to lessen your fee burden that way. As the Dept. of Labor says, "generally the more services provided, the higher the fees." You should question whether you really use or even need the extra services that are being offered. This is particularly relevant when you are charged a yearly fee that is deducted directly from your account balance and not paid out of plan assets, because you will see the fee deduction at the end of every year.

Why is this all important? Consider the following. If you have a $10,000 401(k) account balance and are charged a 1% yearly administration fee, that's $100 that is taken away and won't contribute to long-term compounded investment returns. Assuming your 401(k) balance never changes (it will as the market moves up and down and as you invest more during your career), that yearly $100 charge turns into $3,000 over a 30 year career! With a 7% annual return, that $3,000 alone would become $22,836 over a 30 year career. The silent killer indeed!

Saturday, October 15, 2016

Dividend Reinvestment for Millennials

It only took 5 years between my last post and the post before it, so a 6 month gap shouldn't be considered too bad! I hope to be able to post more in the coming weeks as time permits, but today I would like to focus on a very important topic that many millennial investors tend to ignore in favor of flashier strategies: income investing through dividend reinvestment.

While readers know I am a big advocate of index funds, I also think high dividend yield stocks can play an important role in millennials' investment portfolios, especially when the dividends are reinvested. I have covered the topic of dividend reinvestment before, but basically it means that whenever a company pays its quarterly dividend, those dividends will go towards purchasing more shares of stock in the company instead of being routed to your account's cash balance. The tax implications are exactly the same whether the dividend is paid out in cash, or if it's reinvested; most millennial investors will pay a 15% tax on qualified dividends. 

The reason income investing is enticing is that it can basically set an investor up for a large pot of passive income later in life. For example, if you buy 100 shares of Verizon Communications (VZ), you will receive $56.50 in dividend income every quarter ($0.565 quarterly dividend x 100 shares). As of 10/14/16, Verizon stock was trading at $50.28, so by reinvesting dividends, you are basically acquiring an additional share of stock every quarter - which in turn will earn more dividends - and this acts as an attractive source of compounding. The website buyupside features an easy to use dividend reinvestment calculator which helps to explain how dividend reinvestment increases long-term investment returns. As an example, assuming a 30 year investment horizon and 5% annual dividend and stock price growth rates, a $50 stock paying $2.00/year in dividends will result in 324.34 shares at the end of 30 years, and a total value of $70,088 versus $35,561 without reinvestment. This equates to a 30 year annualized return of 9.2% versus 6.76% without reinvestment. This is particularly beneficial later in life, because once an investor hits retirement, he or she can stop reinvestment and allow the dividends to be paid in cash to be used for whatever the heart desires. 

For investors who tend to shy away from individual stocks, the same benefits can be had by reinvesting the dividends paid by your mutual funds. Most bond funds distribute interest payments monthly, and most actively and passively managed funds pay distributions quarterly. 

A word of caution, however. Not all high dividend yield stocks are created equal. Many are master limited partnerships (MLP) which have run into trouble lately, others are companies with high yields due to poor financial position (yield goes up as a stock price goes down provided the dividend isn't cut), and some simply don't generate enough free cash flow to fund the dividend. Companies with strong free cash flow and payout ratios (dividend per share/earnings per share) in the 0.50 range may be attractive income investment candidates. Never purchase a stock on yield alone without doing more research into the sustainability of the dividend. It's important to consider the long-term dividend payout track record, as well as the cyclicality of the industry the company is in, among other factors.

Friday, April 1, 2016

After a Brief Hiatus, I'm Back

The old saying goes that "life is what happens while you're busy making other plans." So here I write this post, nearly 5 years removed from my last. As you may imagine, a lot has certainly happened since then. My last post was made on October 4, 2011 when I had just graduated from college and began my first job. Since then, I have gotten married to the love of my life, been a member of the workforce for 4 1/2 years, and went to business school at nights while working full-time in order to earn an MBA. The cliche that time flies couldn't be more accurate.

What those 5 years have given me is valuable perspective (life experience, anyone?) that accompany entering adulthood. It's one thing to write about financial management and investing for those just entering the real world, but it's another to actually live it on a daily basis. I'm happy to note that the very investing ideas that I was discussing nearly 5 years ago are the same ones that I implement in my life now. My 401(k) asset allocation is balanced yearly between 3 funds and it's a basic allocation that should work for most young investors:

55% - broad, total stock market index fund
35% - total international index fund
10% - bond index fund of choice

The last option - the bond fund - is not a necessity for most investors under 30, and it may very well be your preference to remain 100% invested in equities. After all, as interest rates rise, the price of bonds go down in an inverse relationship. Since the Federal Reserve raised its target fed funds rate (i.e. 'raised interest rates') in December 2015 for the first time since 2008, many economists expect a pattern of tightening may continue over the next year or so depending upon economic conditions. As the Fed continues to raise rates, bond prices are likely to fall which may hurt bond investor's returns. This doesn't matter much to the long-term Generation WI$E investor, but it's important to note. However, having some exposure to bonds gives you the added benefit of extra income and diversification. If you own the bond fund in your 401(k), you will receive tax-deferred monthly income from the bond fund that can be reinvested to buy more shares in order to leverage the benefits of compounding.

There will certainly be much more to discuss over the coming weeks and months as both the world and financial information flow has changed dramatically in the 5 years since I last posted. I'm looking forward to sharing more of my real world financial journey with you as I continue my goal to make us all members of Generation WI$E.

Tuesday, October 4, 2011

It's Time for Some Inaction!

Like most people, I'm finding it very hard to distance myself from the grim news that has dominated the financial headlines over the past few months. Everyday seems to bring another story of a European bank or country on the brink of failure, the U.S federal government's fiscal issues leading the country to the verge of financial meltdown and more and more bad news on the economic front. It's safe to say that all of this is leading to heartburn for many investors, particularly those who are most exposed to equity markets and have thus received the brunt of the market's move to the downside. 

We will thus hear the requisite talking heads on CNBC and other financial news networks extolling the virtues of "buying aggressively" or from the opposite end of the spectrum "moving assets into cash, Treasuries, precious metals and other safe havens". My advice to you is relatively simple and may seem to go against the grain but it's battle tested and makes sense: simply stay the course, continue with your investment plan and let the market work its issues out. 

As soon as we become reactionary and allow market movements severely dictate how we invest in the here and now, we have let our emotions get the best of us. This is not to say that we shouldn't put some more funds to work since stock prices are low - in that case, it may make sense to buy some more shares of your index funds to better dollar cost average - but avoid any actions that run contrary to what your investment plan is. If, for example, you contribute 10% of your pre-tax pay to your 401(k), it may make sense to up that percentage to 15% or so if you can afford to do that. However, slashing that rate to 0 or upping it to 30% simply doesn't make much sense. Believe me, that type of reaction to current market gyrations occurs a lot more frequently than you realize! As the legendary John Bogle noted, "Don't do something. Just stand there."