SMI Visitor's Weblog

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Spiritual money myths

From SMI's audio archive, executive editor Mark Biller explains how Scripture can correct common mistaken ideas about money. Mark was interviewed by host Bob Crittenden on Faith Meeting House, a program produced by Alabama's Faith Radio.

Click the arrow below to listen (30 min.) — or use this link to download (right click/save as).

Why SMI's Upgrading strategy works

You never know when inspiration will strike. I was recently skimming this Morningstar article — which explains how several of the top foreign value managers are drawing opposite conclusions regarding Japan as an investment opportunity — when I realized, "This article is explaining why SMI's Upgrading strategy works!"

The article reports on how six specific foreign large-cap value managers disagree over the prospects for a Japanese stock market recovery. This would normally merit a giant "who cares?" reaction, except for the fact that these particular managers are the absolute elite of their peer group. Six Morningstar Manager of the Year awards between them, and great long-term results from all six funds. And they happen to be split right down the middle in their opinions regarding Japan.

So how does this explain why Upgrading works? Because in this disparity of outlooks, and the resulting differences between these funds portfolios, we see how the Upgrading process can move us between winning ideas even within relatively narrow peer groups, while steering us clear of losing ideas.

If half this group is in Japanese stocks and the other isn't, it stands to reason that half of this group will do well and half will do poorly, regardless of which path Japanese stocks take. And Upgrading will pick up on whichever group is correct and steer us towards those funds.

In other words, we don't have to figure out which group is right and which is wrong (which is good, because I don't have the foggiest idea). Instead, we can simply follow our mechanical guidelines and the correct answer will play itself out in our fund rankings. We get the benefit of whichever group has this issue figured out correctly, even though right now we don't have any idea which side has the winning argument.

This example also helps illustrate why conventional funds go through periods where they put up phenomenal returns, only to stumble badly over the next few years. It's easy to get big-picture predictions like this wrong from time to time, and suffer for a year or two (or three) because the fund's portfolio was positioned incorrectly as a result. Upgrading helps us side-step those periods of poor performance, while steering us towards those managers who were the most accurate in positioning their portfolios to take advantage of the issues that matter most to the market right now.

Naturally, Upgrading isn't perfect and carries its own set of challenges. Nonetheless, it is a strategy that has beaten the market in 10 out of the past 11 years. It works not only because it steers us clear of certain challenges inherent to most "normal" funds, Upgrading actually uses those very challenges as the basis for its success.

A newbie's first look at real couponing

Of all the different ways we've learned to save money, couponing has been low on the list. But of all the different irrational things that scare me, couponing has been high on the list... higher than the fear of Big Foot, stuck crossed-eyes, and breaking someone's back by stepping on a crack — combined.

Why? Because of all the work you hear it takes, the tricks involved, and the learning curve.

I'm more of a good-deal finder or luxury cutter type of a guy. I mean sure, if we're mailed some coupons, we'll thumb through them and keep those we might use. But I'm talking about actively and intentionally using coupons to pocket substantial savings — not just saving $5 off the purchase of two combo dinners at El Restauranto.

Maybe I should change my mindset. Maybe I need to think of couponing as a challenge and not a chore. Besides, according to this piece in the Wall Street Journal, couponing is the newest extreme sport.

[D]iscount devotees have formed vast online communities that collectively unearth and swap digital, mobile-phone and paper coupons. The cleverest shoppers combine dozens of coupons and go from store to store buying items in quantity, getting stuff free of charge.

The piece profiles savers like Erin Libranda of Katy, Texas, who saved more than $1,000 on a midnight shopping trip to two grocery stores. A ... THOUSAND ... DOLLARS!

Of all the different systems out there, the one that kept coming to my attention was The Grocery Game. I first learned about The Grocery Game from SMI friend and frugal guru Mary Hunt.

In a nutshell, you pay a bi-monthly fee to have access to sales lists at various stores. The lists tell you how to combine coupons (which you've either kept from your Sunday paper or clipped online) to buy items at huge discounts, sometimes getting them for free. The idea is to build a stockpile of goods. This can take some time (and space). But once the stockpile is built, you'll have on hand what you need and it takes fewer purchases (which again, will be on sale) in the future to maintain what you keep at home.

Sounds doable. Hey, it's even called a "game." I like games. So right now we're in our 4-week free trial period. I'll report back to update you on my savings.

And what kind of savings can I expect? I have a friend whose been doing The Grocery Game for more than six years. He said to me, "If I don't save 40-50% off my groceries, I feel like a failure."

Combine savings like that and The Grocery Game's supposed ease of use and, by comparison, Sasquatch just got a little scarier.

Will gold keep rising against major currencies?

The answer, of course, is "no one knows." But the prospects for gold seem good — or, put another way, the prospects for currencies appear to be not-so good.

Reporter Tom Sullivan offers details in Barron's.

The dollar is not as good as gold. Neither are 22 other currencies.

A recent study by GoldMoney.com, which enables online cross-border transactions using gold as a currency, found that from 2000 through 2009, gold rose an average 10.1% a year versus the Swiss franc...14.9% against the U.S. dollar... [and] 20.0% for the Sri Lankan rupee.

"Gold isn't going up, currencies are going down," says James Turk, GoldMoney.com's founder. "The purchasing power of gold remains basically unchanged against commodities. In contrast, the purchasing power of national currencies is being constantly eroded."...

That's because governments are debasing currencies, he says, destroying their citizens' purchasing power by spending beyond their means and using debt to stay afloat. The U.S., as one example, is trying to goose its economic recovery through massive deficit spending, but it may worsen the situation should the dollar tank, Turk asserts.

As always, there are those who see things a different way. The Barron's article quotes Ashraf Laidi, chief strategist at CMC Markets, who predicts gold will fall against the dollar.

Laidi could be right. But for any weaker gold/stronger dollar scenario to extend to the longer term would require the reversal of a pronounced nearly decade-long trend (see table).

A more extensive version of the table is here (PDF).

Double your market-anniversary pleasure

Expect to see a deluge of stock market "anniversary" stories in the coming days. We've got not just one, but two major anniversaries: today marks the one-year anniversary of the current bull market (i.e., the market bottomed last year on March 9), and the 10-year anniversary of the 2000 market top is coming up within a week or so as well (though that one depends a little on which index you use to pick out the exact top).

Here are a couple of interesting factoids I saw yesterday perusing a few of the early versions of these stories:

Marketwatch's "Riding the Rally" tries to answer the question of what to expect in year two of a bull market. Lots of historical patterns to be found here.

During the second year, historically, stocks keep rising — though not as powerfully, said Sam Stovall, chief investment strategist at S&P Equity Research.

Small-cap and midcap stocks continue to outperform both large-caps and the S&P 500, which still do all right themselves, and higher-quality issues with stable and growing earnings trump low-quality names. Since 1949, Stovall said, small-caps have returned 22% on average in the second year of a rally, while large-caps rose 15%.

Ironically, as great as the past year has been for stocks (with the S&P up roughly 66% from the year-ago lows), that really isn't all that spectacular for first-year bull markets, at least relative to the size of the bear market that preceded it.

Stovall is upbeat about the broad U.S. market's chances for a sustained advance.

"First-year bulls tend to recover an average of 84% of what they lost in the entire bear market," he said, noting that this bull run has retraced about half of the loss. "So you could say that on a recovery basis, we have more room to go."

Moreover, since 1949 none of the 10 prior U.S. bull markets has ended in its second year — the shortest was 26 months beginning in 1966. Since 1932, the median length of a bull market has been 50 months, according to S&P. That said, between 1932 and 1947, four of the five bulls fizzled in two years or less.

CNBC is echoing the "Bull Market Survival Rate Increases After One Year" theme:

History shows that by simply passing that 12-month threshold, it will make it that much more rare for the advance to suddenly end.

The 13 bull markets since 1930 that have lasted more than a year have averaged, a total gain of 153% and a total length of 4.4 years, according to data from Bespoke Investment Group.

"Bull markets that pass the one year mark have almost always lasted two years or more," wrote Bespoke's analysts, in a note to clients on Friday. "The one bull that lasted more than a year and ended after 393 days was in 1948, and that bull only saw a gain of 24 percent, so it's nothing like the current one."

Who's responsible for this historical pattern? You are! (Or, perhaps your neighbors.)

But why is one year the magical milestone? Perhaps it is because it takes more than a year for a bull market to prove its mettle with the often stubborn and less nimble retail investor, which has sat out most of these gains in bonds. Once they are convinced, their money comes flowing in and provides at least another 12-month lift to stocks.

Of course, it could all be different this time. But the longer this advance goes on, and the more the economy steps away from the brink of what has been a brutal recession, the better the chances that this bull market holds its gains.

No, it's not all sunshine and rainbows out there. But things sure look a lot brighter than they did a year ago!

Making progress by dollar-cost averaging

Lots of number crunching has been going on since early January, as fund companies and related organizations compile data for the decade just ended. (SMI is no different: you can find our recently released 2000-2009 performance data here.)

Fidelity, the top provider of employer-based retirement plans, has completed an analysis of the 10-year experience of 11 million investors who have Fidelity 401(k) accounts. Here are the overall results (from a Fidelity news release):

Even during a decade that included unprecedented volatility coupled with two of the worst market downturns in history, analysis of employed participants with a Fidelity 401(k) plan for the past 10 years ([2000] to 2009) showed their account balance increased nearly 150 percent to $163,900 at the end of 2009 from $65,800 at the end of 1999.

The increase in balance was due to continued participant and employer contributions, dollar cost averaging and market returns. The analysis also showed that these continuous participants had a median age of 51 years with a deferral rate of 10.4 percent.

The New York Times' Bucks Blog digs a bit deeper:

While [results differ] for every employee, about three-quarters of [the increase reported by Fidelity] was from worker and employer contributions. And roughly one-quarter could be attributed to market returns and what's known as dollar-cost averaging (when investors make regular investments over time, thereby evening out their chances of buying at market highs and lows).

In other words, over the decade most workers just kept plugging away at making contributions to their retirement accounts. Sometimes stock prices were high (e.g. September 2007), sometimes they were low (February 2009 anyone?). Regardless, most 401(k) investors stuck with their plan.

Looking back now, it is clear that these workers — despite one of the worst market decades ever — made substantial progress toward their retirement goals simply by being diligent to the task of setting aside about 10% of their income, paycheck after paycheck.

Sure, a worker who 1) pulled out of the market before each downturn and 2) got back in at the bottoms would have come out much better, but who can know when such drops begin and end? They're easy to see in hindsight but almost impossible to spot, at least consistently, in the present.

The moral of the story: slow and steady wins the race — or at least it's a solid strategy for moving you toward where you want to go. For more, here's a 2007 SMI article on dollar-cost averaging.

Advantages of using a credit card

Be it the unintended consequences of the CARD Act signed into law last year making things worse for consumers not better, the controversial safety and hidden fee issues, or the oft-recited studies showing you spend typically 10-30% more when paying with plastic rather than cash, credit cards are getting a lot of bad press these days.

And all this may be fine and true, but there are some "free" upsides to credit cards. One of my favorites is Purchase Protection:

What it does: If something you bought with your credit card is damaged or stolen within 90 days, you can receive a refund of the purchase price.

The catch: This protection has many exclusions, including items that are lost without any evidence of a wrongful act or are stolen because of a lack of due diligence. Used, antique and collectible items generally are not covered.

Value: Refunds limited to $300 (American Express), $500 (Visa) or $1,000 (MasterCard) per item. American Express has an additional program with refunds of up to $1,000 on certain types of items, including clothing and electronic equipment. Caps on the total refunds received by cardholders also apply (e.g., a total of $25,000 per cardholder with MasterCard or $50,000 annually with American Express).

Now this reason alone might not be enough to get the cash-only crowd interested, but when combined with other perks like free roadside assistance, lost-luggage reimbursement, and extended warranties, there is a case to be made for using credit cards in moderation for specific purchases. But don't even consider this if you struggle to exercise financial self-discipline. The best perks in the world aren't worth it if the trade off is a load of debt.

Study: Average investors often trail average fund performance

Newly published data (PDF) from Morningstar reveal the fund categories in which the average investor is trailing average fund performance. For example, large-cap growth funds: Morningstar found that over the three years ending 12/31/2009, the average fund in that class lost 2.9%, yet the average investor in large-cap growth funds lost 3.6%.

Likewise, over the past three years average investors underperformed overall returns for mid-cap growth, large value, and mid-cap value funds, and also fell behind the average fund performance in sectors such as natural resources, utilities, and heath-care funds. (On the other side, average investors did better than average fund performance in small-cap growth and small-cap value funds.)

Morningstar's Russel Kinnel explains what's behind the numbers:

The gap between investor returns and total returns shows...how well investors timed their purchases and sales. (For all the details on the calculation, you can check out the two-page fact sheet here or the 10-page methodology document here.)...

A couple of years ago, doing this revealed that the average investor often did better than the average fund because, while their timing was off, they often picked bigger lower-cost funds. However, the whipsaw of the past two years has meant that, in most categories and in the aggregate, investors have done worse than the average fund....

The grand total for the average investor in all funds in the [period from 2000-2009] was a 1.68% annualized return, compared with 3.18% for the average fund.... In U.S. equities, the average investor earned a scant 0.22% annualized, compared with 1.59% for the average fund.

All that is interesting, but just how are investors supposed to do a better job of "tim[ing] their purchases and sales"? Only in hindsight can an investor see that it would have been wise to sell a particular fund earlier or hold it longer.

Trying to improve buy/sell timing decisions on a case-by-case basis, rather than simply following clearly defined decision-making parameters, is a good way to tie yourself in emotional knots!

This is why SMI's successful Upgrading strategy relies on non-emotional, mechanical signals for buying and selling. Upgrading works (as evidenced by the table at left) — and it's relatively easy on both the brain and the stomach!

Sure, once in awhile the mechanical signals mislead us. No system is perfect. But more often than not, the signals prove to be correct. That's why Upgrading has outperformed the market in 10 out of the past 11 years.

New month, new SMI issue

After another race to the deadline, the March 2010 issue of Sound Mind Investing is finished and is online (and the print version is on its way to mailboxes around the nation).

Our March cover story looks at a long-term trend that's sure to have a large impact on your investing future: an increasing share of the best growth opportunities are coming from foreign markets. We explain what's happening — and how to take advantage of it in Funds Across the Water: A Primer on International Investing.

The latest issue of SMI also includes:

• What you need to know to earn higher yields from foreign bonds;
• A simple strategy for getting better returns in your 401(k), even if you only have a small number of funds to which to choose;
• A conversation with Ronald Blue & Co.'s top income-tax guru about recent tax changes that may yield a few pleasant surprises when April 15 rolls around;
• Our reviews of popular personal-finance apps for smartphones.

Also in the current issue: SMI members following our Fund Upgrading strategy will learn about an important fund change, as we say "goodbye" to a fund that has served us well since the fall of 2008 and "hello" to a current strong performer.

Not an SMI web member yet? Today's a great day to join and instantly gain access to all of the content from the new March issue!

Can't have it both ways

This report on the "state of the postal service" is a great microcosm of the choices we are going to have to increasingly make over the coming years.

There's a big financial problem:

The U.S. Postal Service estimates $238 billion in losses in the next 10 years if lawmakers, postal regulators and unions don't give the mail agency more flexibility in setting delivery schedules, price increases and labor costs.

There are some reasonable steps that could at least help fix the problem:

In an effort to offset some of the losses, the agency is pushing anew for a dramatic reshaping of how Americans get and send their letters and packages. [Postmaster General John E.] Potter is seeking more flexibility in the coming year to set delivery schedules, prices and labor costs. The changes could mean an end to Saturday mail deliveries, longer delivery times for letters and packages, increases in postage-stamp prices that exceed the rate of inflation, and — possibly — future layoffs.

But nobody seems willing to allow their services to be cut:

The agency's call last year to consolidate about 3,000 post offices drew a firestorm of protest from the public and lawmakers.

We're going to have to grow up if we're ever going to seriously address our government's financial issues. Those lawmakers referenced above aren't going to do it unless we start forcing them to.

It's been a long time since American voters have heard the government say, "Sorry, we just can't afford it." Let's hope we start hearing it sooner rather than later.

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