What do bugs and money have in common?

Bank deposits were up 13.5 percent, or $641 billion, in 2009, according to this piece on MoneyRates.com. That's a prudent move. Many Americans were caught short by the recent financial turmoil. Now, we seem to be learning to save again.

But it gets even better. A joint survey by MoneyRates.com and GetRichSlowly.com found that out of the 1,629 people responding to the poll, "30% reported saving 25% or more of their monthly income, and 34% reported saving between 10% and 25%."

Nice. Granted, these are money-minded people frequenting financial websites, so they are likely to be in the over-achiever crowd. Still, it's encouraging.

Sound Mind Investing is a big believer in setting aside emergency funds and building accumulation funds for future purchases. We're just sorry it has taken a national financial nightmare to get some people motivated to save.

One reason we have always encouraged saving is because the Bible encourages preparing for the future. Proverbs 21:20 says, "In the house of the wise are stores of choice food and oil, but a foolish man devours all he has" (emphasis added).

Of course, saving for ourselves must be kept in balance. Yes, God "richly provides us with everything for our enjoyment," we are told in 1 Timothy 6, but we're reminded of that provision in the context of being generous toward others. Furthermore, in James, we're warned against presuming on the future. That provides yet another needed balance to our savings and investment efforts.

But save we should. In fact, the Bible encourages us to save by pointing us to the most humble of insects, the ant. Proverbs 6:6-8 says, "Go to the ant, you sluggard; consider its ways and be wise! It has no commander, no overseer or ruler, yet it stores its provisions in summer and gathers its food at harvest" (emphasis added).

Hmm. Are you and I as smart as a bug? It doesn't take a financial (or natural) disaster to get the ant preparing for the future! God hard-wired it into the ant's DNA. Maybe saving doesn't seem hard-wired into you, but you can learn how to do it. Start saving now!

And before your flick a pesky ant off your picnic blanket, at least stop to admire his preparation and determination in providing for the future. He may be doing a better job than you are.

Posted by Matthew at 8:35 AM | Comments (0) | TrackBack
Category(s): Family Finances

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"Emerging markets" — handle with care

Our cover story on international investing (available to subscribers) in the March issue of the Sound Mind Investing newsletter spent some time discussing "emerging markets."

We mentioned that while there's so no precise definition as to what constitutes an "emerging" market, the term generally refers to nations that are "experiencing significant levels of economic development and reform."

David Callaway of Marketwatch opened a recent column on "eternal emerging markets" this way:

A fund manager at an emerging markets conference I covered more than a decade ago delivered a warning to investors infatuated with those markets that aged well.

"Did anyone ever notice that the emerging markets of the 1990s are the same emerging markets of the 1890s?" he said to a surprised audience.

It's an interesting — and valid — point. For all the chicanery that goes on in our own markets, the corruption and interference in many smaller foreign markets is an order of magnitude worse. Callaway writes that while our markets may be obstacle courses, at least they're not minefields.

In other words, there are good reasons why many of these markets stay perpetually emerging, but never quite emerge.

Emerging markets have been so hot for so long (20%+ returns every year since 2003, with the exception of 2008's big down year) that it's easy to be seduced by the easy returns they seem to offer. And, in fact, investors following our SMI Upgrading strategy have benefited from emerging markets in a significant way through many of the recommended international funds we've recommended in recent years, which often held above average allocations of emerging market stocks.

Just don't lose sight of the risks. The late 1990s offered a crash course in how contagion can spread from one emerging market to the next. And this year, surprisingly, has reminded us that the dollar can pivot quickly and unexpectedly, wreaking havoc with international returns over the short-term.

Emerging markets, for all their potential, are still volatile enough to carry a "handle with care" label. A little can be good, but this is definitely a case where more is not always better.

Not yet an SMI subscriber? Today's a great day to sign up!

Posted by Mark at 1:21 PM | Comments (0) | TrackBack
Category(s): Mutual Funds

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How important are mutual fund expenses really?

You've probably seen articles explaining that mutual fund investors pay higher costs than they realize due to funds incurring "hidden" costs that aren't reflected in the published "expense ratio." Such articles (here's a recent example from Morningstar) usually disparage funds that do a lot of trading because they tend to incur higher levels of these "hidden" costs.

The argument is true to a point: Any investor who selects funds primarily based on their stated expense ratios probably isn't aware of potentially expensive trading costs or 12b-1 fees (i.e., marketing expenses) that aren't reflected in those ratios.

But is that the best way to select funds in the first place?

At Sound Mind Investing, we take a different approach to the issue of expenses. Brace yourself — we're not all that concerned about them. It's not that they don't matter — they certainly do. It's just that we're much more concerned about overall performance. If we wind up paying higher expenses as part of the price of obtaining better overall performance, that's a trade we're willing to make.

The types of articles mentioned above usually don't present it that way. They argue that if Fund A has high trading costs, Fund B has a high 12b-1 fee, and Fund C has neither, then you should invest in Fund C. That would be true if A, B, and C all generated the same performance. But if A and B strongly outperform C — so that you come out ahead even after expenses are subtracted — then, relatively speaking, the expense levels of A and B weren't all that important.

Fundamentally, this issue boils down to two competing belief systems. On one side, you have those who say it's virtually impossible to determine in advance which funds will outperform in the future. Therefore, the only approach that makes sense is to diversify and minimize expenses. This is the basic essential argument for indexing.

On the other side, there are people like us who say you can predict which funds will outperform in the future. Not every time. And trying to do so doesn't afford you the luxury of buying a fund and holding it for years or decades at a time. But over time, we do believe it's possible to get a market-beating result if you're willing to stick rigorously to a specific discipline of buying and selling funds. We call this discipline our Fund Upgrading strategy.

So how can you know in advance that A and B will perform better than C? You can't know for sure, not on any single fund choice. But research has shown that recent mutual fund performance tends to persist into the short-term future. In other words, superior recent performance tends to translate into superior near-term future performance. That's the basis of Upgrading.

It certainly doesn't work on every single fund selection. That's why we have to follow a vigorous selling discipline as well, to cut our losing trades short. But over time, the Upgrading process steers us towards enough funds that outperform their peer group.

That's how our Upgrading has been able to beat the market in 10 out of the past 11 years (in the graph below the light-shaded bars represent the performance of the overall market as measured by the Wilshire 5000; the dark-shaded bars represent Upgrading's performance).

Further, as noted in the current issue of SMI, Upgrading is a strategy that works remarkably well even when implemented on limited scale.

At the end of the day, our emphasis is not on expenses and costs, but rather on the final returns a fund produces after already accounting for all the costs of ownership. It's not that we don't care about expenses, it's that all of a fund's costs are already baked into the performance numbers we use as the basis of Upgrading. So if a fund can outperform in spite of higher costs, we're willing to overlook them.

Posted by Mark at 10:10 AM
Category(s): Investing Principles, Mutual Funds, SMI Model Portfolios

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What do your finances look like?

If you had to visualize what your finances looked like, what would come to mind?

• Water down the drain? (It's slippery, moves fast, and it's almost impossible to hold in place.)
• Maybe one of those barrels of peanuts at a restaurant? (A few shelled peanuts in a pile, a handful "reserves" still in the shell, but mostly lot of remnants of what use to be — i.e., not at lot there that's worth much.)
• Perhaps Rich Uncle Pennybags from Monopoly? (Financial life is good, you have money to throw around, and plenty more where that came from!)

            

Before you answer, maybe you should visualize it on a calendar, like Matt did from Steadfast Finances. Matt had the great insight to look at how long he works to pay for his different obligations and then plotted the findings on a calendar (this is similar to Tax Freedom Day, but rather than freedom from taxes, this is from your stuff... perhaps a "tax" in its own right). Here is what he found:

Here's what he learned:

1. I bought way too much house on a single income.
2. I was two paychecks away from defaulting on a loan (if I couldn't borrow money from family).
3. I wasn't living beyond my means, but I was very close!

What an eye-opening experience this was for him and would be for most of us should we take the time to do it. You just might find out that Rich Uncle Pennybags better plug the drain or he won't be worth peanuts.

Posted by Matthew at 9:05 AM | Comments (0) | TrackBack
Category(s): Family Finances

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Springtime is here — so is new April issue of SMI!

Spring isn't just about enjoying fresh breezes, blooming flowers, and spring training games. It's also the season to do your income taxes (ugh!) and to think about how to cut your tax bill in the future (hmm).

Accordingly, the just-released April issue of Sound Mind Investing focuses heavily on tax-advantaged savings vehicles. We compare IRAs and 401(k)s and weigh both "traditional" versions and Roth plans. (One thing you'll learn is that the upside of the Roth 401(k) — relative to traditional 401(k) — isn't quite as strong as many people think.)

This is information that can help you minimize your taxes and maximize your retirement savings — and you can gain access to the April issue by subscribing now!

As always, the web version of our latest issue include some free-access content for folks who aren't yet subscribers. This month, check out "A SMarT Way To Boost Your Saving" (yes, the capitalization is strange for a reason). The article focuses a plan developed by two "behavioral economists" that has proved successful in helping people save for retirement.

Also in the April issue:

• Advice on cutting car costs;
• Information on Christian-based credit unions; and
• A special Easter meditation from a classic book.

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 April issue!

Posted by Joseph at 9:15 AM | Comments (0) | TrackBack

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Revisiting "The Coming Economic Earthquake"

Echoing concerns raised by Larry Burkett in his 1994 book, The Coming Economic Earthquake, SMI Assistant Editor Joseph Slife recently wrote a "déjà vu all over again" post about runaway government spending and debt. (Back in the day, Joseph did some of the research for the Earthquake book and produced a radio special based on it.)

To listen to a conversation with Joseph about these issues — from last Monday's Faith Meeting House program on Alabama's Faith Radio — click the arrow on the audio player below, or use this link to download an mp3 file (17 minutes—right click/save as).

In the interview, host Bob Crittenden mentions the radio special based on the Earthquake book. Use the audio player below to hear an excerpt from that 1994 program (13 minutes).

Posted by Matthew at 8:55 AM | Comments (0) | TrackBack
Category(s): Economy
Tag(s): radio

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60 Minutes: Inside the collapse

One writer that Austin and I really enjoy is Michael Lewis. Some know him as the author of the book, The Blindside (the film adaptation of which recently earned Sandra Bullock an Oscar), but he's written a bunch of other excellent books over the years, many dealing with financial topics.

My first exposure to Lewis came way back in college when one of my finance professors gave me a copy of Liar's Poker to read, a book which went a long way toward convincing me I didn't want to become a stock broker.

Several months ago, I learned that Lewis was writing a book investigating the causes of the recent financial collapse, and I immediately put it on our book order list to get as soon as it was released. Last Sunday night, I happened to catch the beginning of 60 Minutes (as the NCAA tournament selection show was ending) and was pleased to see that the opening two segments were interviews with Lewis profiling his new book.

I found them to be very interesting. Lewis has a great way of distilling what is going on and making it understandable, while also weaving in interesting stories that make it all much more pleasant than financial content often is.

If you're interested and have a few minutes, the videos are below — they run roughly 16 and 8 minutes, respectively. Or you can read this transcript instead.

Posted by Mark at 1:05 PM | Comments (0) | TrackBack
Category(s): Economy

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It's a guy thing: Study finds men more likely to sell at market lows

Okay, guys. Show some backbone. Or some patience. Or stop being so overconfident.

A study from Vanguard (released late in 2009 but picked up last week in the New York Times) shows that during the market downturn of '08 and early '09, men were much more likely than women to sell their shares at stock market lows, rather than patiently waiting for a rebound.

John Ameriks, head of Vanguard Investment Counseling and Research and a co-author of the study (PDF), ascribes the disparity to male overconfidence. "There's been a lot of academic research suggesting that men think they know what they're doing, even when they really don't know what they're doing," he told the Times.

Maybe. Or perhaps guys just tend to be more impatient than women. Or maybe they're more apt to track their investments closely, and therefore more apt to respond to the short-term direction of the market.

Here's more from the Times article, "How Men's Overconfidence Hurts Them as Investors":

Staying the course and minimizing costs...are the classic characteristics of good long-term...investors. But during the financial crisis, the Vanguard study showed, men were more likely than women to trade — and to do so at the wrong times.

That fits the patterns found in path-breaking research by Brad M. Barber of the University of California, Davis, and Terrance Odean, now at the University of California, Berkeley.

In a 2001 study titled, "Boys Will Be Boys: Gender, Overconfidence and Common Stock Investment" (PDF), they analyzed the investing behavior of more than 35,000 [investors who had accounts with] a large discount brokerage firm. [The accounts were segregated into those opened by women and those opened by men.] All else being equal, men traded stocks nearly 50 percent more often than women. This added trading drove up the men's costs and lowered their returns....

Short-term financial news often amounts to little more than meaningless "noise," [Professor Barber said in a telephone interview with the Times]. Far more than women, men try to make sense out of this noise, and to no avail.

Of course, like all social science research projects, the studies mentioned above may not have taken into account all the factors that could affect outcomes. But these studies — and others that have shown correlations between testosterone and risk-taking— certainly should cause us guys to think twice before taking action.

Indeed, the best approach is to keep emotion (and, yes, testosterone) out of the investment decision-making process entirely. Either of SMI's two core strategies, Just-the-Basics and Fund Upgrading, will do just that — with positive results for both men and women.

Posted by Joseph at 10:18 AM | Comments (0) | TrackBack
Category(s): Current Market Events

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Re-thinking higher education

"Is a college education still worth the investment?" That was the question we asked in an SMI cover story five months ago. Here's a quick summary:

In recent decades, going off to college has become the de facto expectation for students graduating from high school. A college degree is often seen as the key to launching a successful career.

But the exploding costs (and related debt) associated with getting a Bachelor's degree, along with relatively fewer attractive new jobs for college grads, should prompt parents and students to reconsider whether four (or more) years of college is the best approach to post high-school education.

If you haven't read the full piece, I'd encourage you to do so (or at least listen to the interview posted below). The article will give you plenty of questions to ask yourself and your student, and some of the financial statistics might shock you. For instance, did you know that it takes 14 years of work before the typical B.A. recipient reaches net-pay parity with a high-school-only graduate?

So given our view that it's healthy to at least question the true value of a college education, we were interested to see an article on the same topic in today's USA Today. The piece — What If a College Education Just Isn't For Everyone? — looks at some of the same pros, cons, and concerns.

One sentence in particular that caught my attention, "[W]hat's still getting lost, some argue, is that too many students are going to college not because they want to, but because they think they have to" (emphasis added).

All of this hits especially close to home for me. My wife and I recently discussed these same topics with our 18-year-old college freshman. He wasn't motivated, had no real direction, and was amassing debt (he's responsible for paying for his own college education). So he was paying for a degree he didn't care that much about because on some level — be it peer pressure, perceived family pressure, societal norms, whatever — he felt he had to go to college.

But it wasn't working. What did interest him, however, was an internship that recently opened up at a church plant in our area.

College will always be there, but this internship (and the doors it may open) won't be. So we all felt that it would be better right now for him to withdraw from the local university, expand his part-time Chick-fil-A job to full-time, and go to work part-time for this church.

Don't get me wrong. I know that college can be an incredibly useful tool, an essential one for many professions. But so can working full-time out in the "real" world while exploring options of particular interest.

It remains to be seen if our son will go back to college. Our primary concern isn't that he finishes, but that he is obedient to what God puts on his heart. After all, higher education isn't confined to a classroom.

Not long ago, SMI assistant editor Joseph Slife, author of our October cover story, talked about these issues with host Chuck Bentley on Crown Financial Ministries' MoneyLife program. To listen, use the audio player below — or use this link to download (right click/save as).

Posted by Matthew at 11:10 AM | Comments (0) | TrackBack
Category(s): College

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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).

Posted by Joseph at 8:45 AM | Comments (0) | TrackBack
Category(s): Investing Principles
Tag(s): radio

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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.

Posted by Mark at 9:10 AM | Comments (0) | TrackBack
Category(s): SMI Model Portfolios

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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.

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.

Posted by Matthew at 8:12 AM | Comments (0) | TrackBack
Category(s): Family Finances

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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).

Posted by Joseph at 8:35 AM | Comments (0) | TrackBack
Category(s): Inflation Watch, SMI Model Portfolios

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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!

Posted by Mark at 9:10 AM | Comments (0) | TrackBack
Category(s): Current Market Events

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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.

Posted by Joseph at 9:05 AM | Comments (0) | TrackBack
Category(s): Investing Principles

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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.

Posted by Matthew at 9:33 AM | Comments (0) | TrackBack
Category(s): Family Finances

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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.

Posted by Joseph at 9:00 AM | Comments (0) | TrackBack
Category(s): Mutual Funds

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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!

Posted by Joseph at 11:55 AM | Comments (0) | TrackBack

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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.

Posted by Mark at 10:21 AM | Comments (0) | TrackBack

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Encouraging news for long-term investors

In January of 2009, with the market still mired deep in the clutches of the bear market, I blogged about an article that claimed stocks were farther below their long-term price trend than they had been at any time in the past 200 years. The authors concluded that stocks had gotten so far below trend that it was very likely they would "revert back towards the mean" before much longer.

It took another six agonizing weeks for that bear market to find bottom, but their claim turned out to be true. The stock market shot up roughly 70% after that.

Anybody curious what that indicator is showing today?

Me too. And thankfully, the authors recently published a new article detailing that information.

As the chart shows, despite the huge rebound in the market over the past year, stocks are still 27.9% below their 200-year trend. That's obviously not as far below as the 43.1% they reached at the market bottom last March, but still significantly below the long-term trend shown by the red line.

What does this mean exactly? Unlike a year ago, the predictive value of this over the short-term is probably relatively limited. Past experience indicates that the market can stay below (or above) trend for an extended period of time. So unfortunately, we can't really look at this and conclude that a strong rally back towards the trend line is imminent.

However, for long-term investors, the chart has an encouraging message. Simply put, the 200-year track record of the chart says that stocks are likely to produce better returns than their historical long-term average until they "catch up" to the trend line. Maybe not this year, or next, or for the next 5-10 years even. But time after time those two lines have separated and then converged, and it's likely to happen again before too long. It could take a decade, but long-term investors have time on their side.

I recognize that this is difficult to accept for many people who look at the long-term challenges facing our economy and our country. But keep in mind that all of the problems we see are already known and factored into the stock market's current valuation. The stock market is a forward-looking discounting mechanism that has all that known bad news already "baked in."

That forward-looking discounting, coupled with the tendency shown in the chart for the market to revert to the mean, causes the market to continually deliver the exact opposite of what most investors expect.

That's why (in hindsight) a time like 1999 and early 2000 can be a poor time to invest, despite the fact that the external conditions seem to look great. And it's also why hindsight may well show the current period to be a good time for long-term investors to invest, despite external conditions seeming to look poor.

Posted by Mark at 9:20 AM | Comments (0) | TrackBack
Category(s): Current Market Events

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