The valley of fear

The amount of fear in the market lately has been tremendous. That's a significant signal. Analyst Don Hays says the market has reached this level of fear (as indicated by certain tracking indicators) only seven times in the past 24 years! And guess what? Each of those times "produced outstanding investment junctures over the next 6-30 months." In other words, the high level of fear signaled significant buying opportunities.

That may not be the case this time around. No one knows. Perhaps past precedents no longer apply. But that always seems to be the case when fear reaches these levels. It's why seasoned investors regard "It's different this time" as four very dangerous words.

There are two primary ways to invest successfully in the stock market over time. One is to be an extremely nimble trader — which is exceptionally difficult. The other is to be a long-term investor. That's not easy either, but for a different reason.

The reason making money as a long-term investor is tough is that it requires an investor to ignore times of fear such as we're going through right now. You have to stay the course when others panic. Moreover, taking a long-term approach suggests that you should lean into the wind and be a buyer at times like these. No easy task.

Which game are you playing? The short-term trading game? Or the long-term investing game? Like it or not, you can't straddle the line between the two. If the urge to do so is overwhelming, maybe your asset allocation is tilted toward a greater level of risk than your true risk tolerance is willing to permit.

Knowing what it takes to succeed as a long-term investor is what drives me to keep putting money in the market despite current fear and volatility. For all I know, this market may keep going down for awhile. But even in that scenario, I'm still comfortable — okay, that's not the right word — maybe committed? — to a course that says, "This is my long-term risk capital, and I'm going to keep it working in the market."

Sure, I'll occasionally be wrong following this approach. But if history is any guide, I'll be right more than wrong and come out ahead in the end.

Don't yet have a long-term investing plan? Sound Mind Investing can help. Learn how to become an SMI print subscriber and/or web member by clicking the sign-up button below.

Posted by Mark at 8:50 AM | TrackBack
Category(s): Current Market Events
Tag(s): market correction, market volatility

Email this post

Where to put your savings

In these days of low, low interest rates (not to mention a fair amount of bank instability), where is a good place to store your savings?

SMI's executive editor Mark Biller (right) discussed that question with host Chuck Bentley on yesterday's MoneyLife radio program from Crown Financial Ministries.

Click the arrow below to listen (20 min.) — or use this link to download an mp3 (right click/save as).

Posted by Joseph at 10:05 AM
Category(s): Family Finances
Tag(s): Crown Financial Ministries, radio, savings

Email this post

Sometimes you just gotta laugh

I'm not sure why God gave human beings a sense of humor, but having one sure does help.

In doing research on European debt problems — serious problems to be sure — I stumbled across this video clip (transcript here) from Clarke and Dawe, a popular comedy team in Australia:

John Clarke and Bryan Dawe offer up satire segments regularly on the Australian Broadcasting Corporation's news program, The 7:30 Report.

Thanks, guys. I feel better — uh, sort of.

Posted by Joseph at 9:50 AM | TrackBack
Category(s): Economy
Tag(s): financial humor

Email this post

Are mortgage-savings programs a good idea?

My family recently moved and with our new mortgage came some new mortgage product offerings. One such offering is a mortgage-savings program. If you're unfamiliar with these programs, they promise to accelerate your mortgage payoff by taking weekly or bi-weekly prepayments to apply to your mortgage, in turn saving you thousands.

As I was reading over the letter, an unpeaceful, uneasy feeling started to creep up. Here are some highlights from my letter:

• You do not increase your monthly payment
• You can eliminate more than 10 years of payments
• The equity in your home increases faster

These all sound great. Where do I sign up? What?... There's a catch?

Yep, it costs Kentucky residents an enrollment fee of $245.

Yikes, that is a lot. But I'll get a lot more back in saved interest. What... there's more?

Yes, it costs $3.50 per transaction if you're in the bi-weekly program or $1.95 per transaction for the weekly program.

Ouch. Let's see... 3.5 times 26, carry the one, that's another $91 for the bi-weekly and, hold on — $101 for the weekly. Well, I don't like it but since it's the only way to accomplish this... huh... there are other ways?

Do it yourself.

Do it myself? Uh... how?

Open a bank account from which to pay your monthly mortgage payment every month. Into that account, pay half the monthly payment every two weeks. At the end of each year, write a check on this account for an amount equal to your monthly payment and send it to the lender.

What's even easier is if you add an amount equal to 1/12 the monthly mortgage payment to each monthly mortgage payment. Not only is it easier, you'll pay off the loan a tad earlier than if you pay it bi-weekly.

Well, that's all fine and good, but that requires extra cash flow. This system won't increase my mortgage payment.

That's not entirely true.

It has to be true. Aren't you listening? I already went over this. It's written in this highly-bolded and underlined too-good-to-be-true sounding sales letter: "You do not increase your monthly payment."

It's a shell game. You see, they cut your payment in half, but they are essentially requiring you to pay every 28 days rather than every 30.5. So in total, you're paying more.

I'm confused.

Say your mortgage was $1,000. In a standard payment process, you'd make a $1,000 monthly payment and after a year's time, you'd have paid your lender $12,000, right?

Yes.

Now, instead of $1,000 every month, lets' do $500 every two weeks (ie, bi-weekly). There are 52 weeks in a year, so there are 26 two-week periods (52 / 2 = 26). You with me?

Yep.

So 26 bi-weekly payments of $500 would equal $13,000 after a year's worth of time (26 x $500 = $13,000).

Hey! That's tricky of them... borderline dishonest.

Perhaps. But let me leave you with another piece of info. Does that letter say anything about how the payments are processed?

Actually, it does. How'd you know?

Because I'm your conscience... your gut... your instinct... and when things seem to good to be true, they almost always are. What exactly does it say?

It says, "We process your bi-weekly debits from your checking or savings account, then make your monthly mortgage loan payment when due."

So let's get this straight... they are going to take our bi-weekly payment, but only pay it monthly. So what is that money doing in the meantime?

They're probably getting interest off of it!

That's right... you're catching on. They're getting an interest free loan on roughly 1/12 of a payment each month until they make the 13th payment at the end of a year.

So they're getting an interest free loan, an enrollment fee, and weekly or bi-weekly transaction fees for something we could do without them? What a rip!

Our thoughts exactly.

Posted by Matthew at 9:15 AM | TrackBack
Category(s): Family Finances
Tag(s): bi-weekly mortgage payments

Email this post

Ugly day on Wall Street

There's no good way to dress it up: yesterday was a stinker. The market is now officially in correction territory (down more than 10% from its recent highs). Not insignificantly, the market also ended yesterday below its May 6 "flash crash day" close, as well as below its 200-day moving average, which is often looked at as a determiner of the market's "major" trend (as opposed to its short-term trend).

Before we get overly pessimistic though, it's worth noting that this is the first correction in the 14 months since this bull run began. Lest anyone forget, corrections are a perfectly normal part of stock market investing — this being the 94th official correction in the S&P 500's history.

Fear has definitely exploded again. The VIX, a common measure of market volatility and fear, hit its highest level yesterday since March 2009. Sometimes fear is warranted and the market follows through on those fears. But many times, spiking fear presents great buying opportunities for those who are prepared to act while everyone else is in its grip. Remember the old saying, "Buy when there's blood in the streets."

So what does all this mean? What should you do?

That depends on you. Are you a trader, or an investor? If the latter, you need to be viewing yesterday's action through the lens of the next 5-10 years. Granted, there are no guarantees that that the market won't fall further and stay down for awhile. But that's where having a long-term plan becomes so valuable.

Having a well-thought-out long-term plan allows you to look at the events of this week as a buying opportunity. In effect, stocks are "on sale." That can be a good thing for people like me who still have a long way to go before retirement.

Of course, with the fear in the air, it would be incredibly easy to rationalize why you should wait before buying — after all, prices could fall further. But I'm comfortable investing now because I think there is reasonable possibility that a decade or two down the road, investing at today's prices will seem reasonable in hindsight.

Some of you with shorter investment time-frames than mine may have long-term plans that will prompt you to take some action right now. That's fine. Just don't make emotional decisions here. Those don't usually work out real well.

As much as possible, continue to keep looking long-term. That's an investor's perspective. Leave the short-term implications of yesterday (and today and next week) to the traders.

Don't have a long-term plan? Sound Mind Investing can help you develop one. And our core investment strategies (known as Just-the-Basics and Fund Upgrading) have a track record of beating the market — a key component of helping people reach their long-term goals.

For details on how to become an SMI print subscriber and/or web member, click the sign-up button below.

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

Email this post

June (issue of SMI) is bustin' out all over

No matter what may be going on in stock market on any given day, a personal financial plan that focuses on eliminating debt, building savings, and investing for the long-term will eventually pay off!

The new June issue of the Sound Mind Investing newsletter — just posted online — will encourage you in those pursuits! And, of course, we've included some free-access content for those who aren't yet subscribers.

In his monthly editorial, SMI founder Austin Pryor explains that the world's financial problems — e.g., Greek debt, falling currencies, market volatility — are not the biggest threat to most people's financial security. The biggest threat is their own decision-making process. (We can help!)

Also in the June issue:

• Details about a practical, time-tested technique that will help you achieve your savings goals;
• Eye-opening research that reveals seven common qualities among people who successfully build wealth; and,
• Think you can't get into financial trouble if you use a debit card rather than a credit card? Mary Hunt explains why you need to think again.

Not yet an SMI subscriber or web member? Today's a great day to sign up! If you become a web member, you'll gain instant access to all of the helpful and encouraging content in the just-released June issue!

Posted by Joseph at 11:50 AM | TrackBack
Category(s): SMI General Announcements
Tag(s): new issue, Sound Mind Investing newsletter

Email this post

Blissfully ignorant

In September 2008, just before all panic began to break loose in the markets and the economy, the SMI newsletter featured an article titled, Don't Look!: Blissful Ignorance Can Be Your Investing Ally. Key paragraphs:

Unless you just happen to like high levels of stress, it simply doesn't pay to follow the daily movements of your portfolio. Sure, it may seem like daily performance information is helpful, or at least not harmful. But most of us simply aren't wired to process significant swings in our investments without a commensurate swing in our emotions.

Emotional upheaval causes us to want to "do something" in response — something like "get out of the market until things settle down." Unfortunately, that kind of short-term emotional response almost always undermines the long-term appreciation of one's portfolio....

[T]he only time you really need to look at your holdings is when it's time to take a predetermined action that's based on your long-term plan, such as replacing one fund with another (as Upgraders do) or rebalancing your portfolio....

So if watching your portfolio go up and down has you all stressed out, the simple solution is to just look the other way — until your plan tells you it's time to look. When that time comes, check your holdings, take whatever action is needed (based on your plan), then get on with your life.

Chuck Jaffe at MarketWatch is offering similar advice in the wake of recent market volatility, including the early May "flash crash."

Combine too much information with too little confidence and you have a recipe for knee-jerk reactions....

"Our emotions are going to be affected by where our attention is," [said John Nofsinger, a Washington State University professor who studies investor behavior]. "And if our attention is on the minute things — the moment-by-moment or day-by-day — we will have a lot of swings. If our attention is on the big picture, we can breathe normally while the wild swings are going on."...

Experts in behavioral finance note that many investors move to [a day-by-day investing focus] as they age, as their financial recovery time shrinks and as they look out at the future and fear that maybe they will be the person whose retirement is put on hold because of one bad day....

Investors need to use events like [the May 6] meltdown to find the right "psychological distance" from the market — the range of emotions they can live with.

"You don't want to think the sky is falling all the time, but you don't want to ignore things and assume nothing can happen," [said Donald MacGregor of MacGregor-Bates Inc., a Eugene, Ore., firm that researches judgment and decision-making]. "You need to develop the emotional discipline to have a plan and stick with it, but also to recognize that market moves that didn't bother you when you were 25 might bother you a lot when you are 50 or 60."

This is why SMI's approach to investing involves carefully taking into account one's investing temperament and season of life when developing an investing plan. Doing so will help you adopt a plan you can stick with when the short-term news is unsettling.

To borrow a phrase from Ben Franklin (he used it in speaking of marriage): "Keep your eyes wide open before [investing], half-shut afterwards."

Visit our investing strategies page to learn more about investing the SMI way. For details on how to become an SMI print subscriber and/or web member, click the sign-up button below.

Posted by Joseph at 8:50 AM | TrackBack
Category(s): Current Market Events
Tag(s): market volatility

Email this post

Investing in a graduate-level education

Last fall, in an SMI cover story, we asked Is a College Education Still Worth the Investment? Now, Morningstar is taking the question to the next level (literally) in an article titled, "Is Graduate School a Good Investment?"

Excerpts:

Is graduate school worth the cost?... Tuition costs vary widely between programs, but can run from $20,000 to over $40,000 each year, especially for business, law, and medical schools....

However, looking at tuition cost in isolation under-represents the true cost of attending. It's not just a matter of paying tuition at face value — other costs of attending, including books and room and board, can tack on thousands of extra dollars. Going back to school also involves an opportunity cost: You're giving up years of income while you're in school....

Your return on your education investment depends on how much debt you take on, the salary you sacrifice to go to school, what job you come out with, and the trajectory of your upward-mobility after your first position.

The article offers seven steps aimed at helping people make a wise decision about grad school. Here are a few of them:

• Don't jump in. Think about your career goals before returning to school and figure out if more education is the only way to get where you want to be. It's a bad idea to take on debt without a clear goal of what you're trying to achieve.
• Analyze graduate school debt versus job prospects.... This calculator from Kiplinger can help you evaluate how debt plus a higher paying job compares to your existing salary.
• Minimize costs where possible.... Consider getting a roommate and living somewhere inexpensive for a few years.
• Check with your employer if you're in a career that aligns with your educational goals. Some employers with help you pay for part-time programs if you continue working full time, while others will pay for full-time programs if you agree to certain conditions, such as working for the company for a number of years after you graduate.

In a sense, the decision about whether or not to invest in a graduate level education (or even an undergraduate education) is like every other investing decision. Going to grad school involves giving up something now — namely time and immediate income potential — in hopes of having a payoff later in terms of career satisfaction and higher income.

If you're wrestling with a decision about graduate school, we suggest you follow SMI's four guidelines for determining the "right" thing to do when making investing decisions:

1. The right investing decision is one consistent with a specific, biblically sound long-term strategy you've adopted.
2. The right decision is one you have taken time to pray over and about which you have sought experienced Christian counsel.
3. The right investing decision is one where you understand what you're doing, why you're doing it, and how you expect it to improve matters.
4. The right investing decision is one that is prudent under the circumstances.

One more guideline: As you wrestle through your decision, trust God to work all things together for good.

Posted by Joseph at 9:20 AM | TrackBack
Category(s): College
Tag(s): paying for college

Email this post

Fund investing: How the mighty have fallen — but that's OK

When a certain mutual fund does especially well for you during a particular market season, it's easy to fall in love and hold on to that fund forever (or at least much longer than you otherwise would, absent the initial success). That can be a big mistake.

One of the primary virtues of SMI's Fund Upgrading strategy is it helps keep us from getting enamored with the "winners of the last war."

I was reminded of this yesterday while reviewing our monthly "white pages." These are the data sheets we create each month that serve as the basis for our fund recommendations for SMI Upgraders.

In my review, two funds that performed exceptionally well during the past two "market seasons," respectively, caught my eye. One (a large-company value fund) was a leader during the 2007-2009 bear market; the other (a large-company growth fund) was an outperformer in the years before that. The reason they caught my eye is that each one is currently ranked dead last in its particular category.

Are these bad funds? Absolutely not. On the contrary, these are great funds. I say that because I believe these are two out of a relatively small handful of funds that an investor actually could buy and hold through multiple market cycles and do pretty well over time.

Despite that, we find them terribly out of synch with the market during this stretch, to the point where it is probably quite difficult for many investors in these funds to stay the course and continue to hold them. If you can't hold on through the worst periods for a particular fund or strategy, that's a recipe for trouble, because you're likely going to bail at the worst possible time — right before that strategy/fund starts to make up for that under-performance with a stretch of great returns.

To be sure, Upgrading occasionally gets out of synch with the market, typically at market turning points. But it's unusual for Upgrading to stay out of synch for an extended period of time. That would require the market switching back and forth between bullish and bearish conditions multiple times in a relatively short span of time. Possible, but rare.

Most of the time, Upgrading moves with the market's trend, grabbing an extra percentage point of performance here and an extra point there, in good markets and bad. While we occasionally wish Upgrading would have done better over some recent stretch, we rarely ever have to wonder if Upgrading has completely lost its way or stopped working as a result of it performing poorly relative to the broader market.

Another advantage of Upgrading is that we are able to own great funds (such as the two referenced above) when those funds are in their sweet spot. That's largely what helps Upgrading outpace the market over time. When these funds go into their slumps, Upgrading forces us to sell these old favorites (often kicking and screaming) and moves us to new recommendations that are performing more in synch with the market (and hopefully leading it) during that new market season.

This consistent buying/selling discipline is why Upgrading has beaten the market in 10 out of the past 11 years.

We invite you to learn more about Upgrading and SMI's other time-tested strategies. For details on how to become an SMI print subscriber and/or web member, click the sign-up button below.

Posted by Mark at 10:35 AM | TrackBack
Category(s): SMI Model Portfolios
Tag(s): fund upgrading, investing principles

Email this post

Market correction, we barely knew ye

The most common definition of a stock market "correction" is when the market declines by at least 10%. Situations like last week illustrate why common definitions can get a little tricky in practice.

Using the closing prices of the market indexes, we still have not had an official correction since the bull market began in March 2009. By that measure, the market fell just 8.4% in the recent weeks through last Thursday, May 6.

But if you use intra-day prices, from the high on April 23 to the low on Thursday, the market fell 12.6% — enough to qualify as an official correction. Given the unprecedented nature of last week's drop and the fear that accompanied it, I expect most investors will think of this as an official correction.

In recapping this "correction or not" situation, MarketWatch editor Nick Godt points out some interesting parallels between the news/market action of the past week and that of September 2008–March 2009:

If it felt in recent weeks like we were thrown back in time somewhere between the collapse of Lehman Brothers in 2008, the credit market freeze and the deep global recession that followed, it wasn't just a bad dream.

Exactly what I was thinking (I should have written it faster!). Last week's rapidly building fear about "contagion" spreading from the Greek debt crisis, the partial seizing up of the debt markets and quickly following plunge in the stock market — all of it felt very similar to the period in September–October 2008.

Thankfully, it was relatively short-lived, in part because of Monday morning's announcement that Europe had agreed on their own version of "Le TARP" — a stimulus and debt-relief package equivalent to nearly $1 trillion. How in the world they are ever going to pay for that is beyond me, but it can't help but remind us of the U.S. government's response in March 2009 when we passed our own stimulus bill and the markets roared back to life.

Make no mistake, this is merely "kicking the can down the road," much like our own stimulus package. The hope is that an organic recovery can take hold that will allow these monstrous debt commitments to be repaid over time. Whether events will play out that way remains to be seen.

While the long-term implications of this approach is unknown, it's worth noting what the U.S. financial stimulus did to the investment markets. They took off and didn't look back for a year.

That's not to say it was the right thing to do — there are more important considerations than the short-term boosting of the financial markets, and I think most of us have serious reservations about the price to be paid for all this in the future. But for the present, as investors, it would probably be foolish to ignore the potential implications of this second gush of liquidity into the system. If there's anything we've learned from the past 10-15 years, it's how responsive financial assets have tended to be to monetary stimulus and liquidity.

Some are pessimistic about the immediate impact Europe's problems are going to have on the U.S. markets. But it seems to me that this is yet another round of ammunition for a "great next 12-18 months, then watch out" scenario. Time will tell.

As always, attend to your immediate priorities (debt, savings) and don't take more risk than necessary in pursuit of your investing goals. That's one bit of certain financial instruction we can offer in these "interesting times."

Posted by Mark at 8:35 AM | TrackBack
Category(s): Current Market Events
Tag(s): current market events, investing principles, market correction

Email this post

Do you need it — or just want it? [UPDATE]

[NOTE: Do not attempt without the express approval of a supportive, loving spouse who is willing to go along with your tech-loving cost-cutting split personality!]

Back in February, I challenged myself (and hopefully you as well) to question needs vs. wants, especially keeping in mind technology and digital services. With companies constantly releasing "must-have" devices and services, both the upfront costs and the monthly fees that accompany such products can make living within your budget especially challenging.

First up, our cell phone. More specifically, texting. I had said:

Unfortunately, there's only one family plan and the individual plans wouldn't cover our average monthly texting. However, I'm experimenting with apps like textPlus which allows free texting to other textPlus users.

My first impression of textplus was less than favorable. Now admittedly, I haven't played around with it enough to give a comprehensive review, but to date, we haven't switched over. So no money saved there.

Next up, if you'll recall, was getting a credit for incorrect cable billing.

... Secondly, there was a package I NEVER signed up for (and never use) but was being charged $8/month for. I promptly canceled that one too and asked for a refund... The rep was friendly but said she couldn't do that... So I called back the next day, spoke with [another] rep, and then that rep's supervisor. I'm still waiting for a call from the supervisor's supervisor.

Well, after some kind-but-forceful persistence, the supervisor's supervisor did indeed issue us a credit of a couple hundred dollars. Just goes to show the importance of checking your bills and keeping companies accountable for their mistakes.

Third item — our home phone. I wrote:

With our home phone getting used less and less, I've been wanting to get rid of it (and its $26/month fee) for quite a while. I nagged my wife to death and she finally relented. So I ordered an Ooma. In a nutshell, Ooma is a device that connects to your high-speed Internet and your home phone and allows you to make calls at no charge...

We recently moved, so I figured I'd wait and set up the Ooma at the new house. So last week I did just that. I'm VERY happy to report that we now have a "free" home phone service. Setup took a little longer than advertised, but otherwise, it does everything it says it does and does them well.

We could add the extra features of Ooma Premier if we wanted to pay $10 a month, but we're going to pass. But I might pair it with my wife's cell phone/Google Voice so that whenever someone calls her, our home phone rings as well and she won't use her cell phone minutes. But in the meantime, we're content with saving the $26/month we were spending on a home phone.

But we weren't finished quite yet. You know that move I mentioned? We decided that would be an ideal time to cut cable TV altogether. Yeah, I said it... no TV. Not only does it save money ($50/month), it saves time. Admittedly, this may not stick as we like college basketball and football. So we'll see how it goes. If we get desperate, we could resort to watching TV on the computer. And we could always get a digital antenna and pickup signals the old fashioned way. Until then, we will keep our bare bones Netflix plan and/or use the nearby Redbox for our moving watching endeavors.

The point of all this is to get you evaluating true needs from wants. For the record, I'm not opposed to satisfying some wants if they're within your budget. Just be honest with yourself about the motivation for the product or service. You might be surprised at how few needs there really are.

Posted by Matthew at 8:50 AM | TrackBack
Category(s): Family Finances
Tag(s): christian financial, family finances, money saving tips

Email this post

Austin Pryor returns to national radio in triumph   :-)

Well, that was interesting. Last night, I went along with son Andrew (SMI's esteemed webmaster) to visit with friend Hugh Hewitt, who was in town (Louisville, Ky.) doing his talk show for the evening. Hugh usually broadcasts from Southern California, and has (according to Talkers magazine) an audience estimated to be about 1.75+ million listeners who tune in at some point during the average week.

Hugh was in town for personal reasons, and was broadcasting from the studios of his local Salem Radio Network affiliate. The drawing card for us was not only a chance to visit with Hugh again, but to also connect with some Young Life friends who head up the YL outreaches in the UK — Tom and Ninie Hammon.

Andrew and I and our wives are friends and financial supporters of the Hammons, and always enjoy our visits to learn the latest about their efforts in England, Scotland, Ireland, and Wales. Hugh had invited them to be interviewed on his program last night.

It was really Andrew's deal, but at the last minute he invited me to tag along. Thought it would be fun to see everyone, and also be in a radio studio again. As many of you may know, I was a regular guest on Larry Burkett's call-in program throughout the 1990s, and continued on with Howard Dayton for a few years after Larry went home to heaven.

The last thing I was expecting was to be on the air, speaking off the cuff, to a national audience. But that's what happened. On something of an impulse, Hugh asked if I would be willing to do a segment and talk a little about SMI as well as the market's wild behavior yesterday. No prep time, but being the seasoned veteran that I am, I foolishly agreed.

It was fun, went by quickly, and it wasn't until this morning that I began thinking of how I might have expressed myself better. So I decided to give myself something of a "do-over" and write all about it in the upcoming June issue of the Sound Mind Investing newsletter. Look for my editorial "What I Should Have Said" (working title).

If you'd like to hear what, in fact, I did say, you can listen to that below. The first two segments contain Hugh's interview with Tom Hammon. I believe you'll find it very interesting — Hugh, Andrew, and I sure did. Then I come along in segment three. Those segments cover a total of about 25 minutes.

Posted by Austin at 4:00 PM | TrackBack
Category(s): Christian Interest, Current Market Events
Tag(s): christian investing, missions, radio

Email this post

Market autopsy

There aren't many convincing answers available at this point regarding what actually caused yesterday's mini-panic, but one thing is clear regarding yesterday's crazy day: there was some serious weird stuff going on. Here's a brief recap.

First, here are the lowlights of how it unfolded:

• 2:00 p.m., Dow was down 155 points
• 2:40 p.m., down 415 points
• 2:47 p.m., down 988 points
• 2:57 p.m., down 388 points
• 4:00 p.m., down 347 points

So what happened? Investigators are poring over the details today, I'm sure. Among the oddities uncovered so far, the Wall Street Journal reports:

Multiple stocks, ranging from Accenture PLC to Boston Beer Co., momentarily lost nearly 100% of their value, changing hands for just one penny. Exchange-traded funds, which are index funds that trade like stocks on exchanges, were also temporarily vaporized. The $9.5 billion iShares Russell 1000 Value Index Fund went from $59 to around 8 cents in the blink of an eye.

At least six stocks went to zero, and at least one (Sotheby's) went from around $30 to $100,000 momentarily. Some traders report seeing others experience this kind of crazy behavior.

Most of what I'm reading this morning indicates that an errant trade — I've seen a couple reports that one Proctor & Gamble trade was entered with a billion rather than the intended million — sent the computer algorithms into a spasm.

Computer trading is the only one way I can imagine how a giant ETF trading at $59 gets executed at 8 cents a share moments later. Automated algorithms account for a huge percentage of the daily volume in the markets, and that's not all bad — it's one of the forces responsible for typically narrowing the bid/ask spread to a single penny in recent years (many of you likely remember the old fractional system when 1/8 — 12.5 cents — was the narrowest spread available).

The only problem is computers don't have "common sense" to recognize something is totally out of whack in conditions like that seven-minute window yesterday. They just keep following their rules and driving things further and further out of whack.

Expect some serious questions to be asked about these systems and how to better protect the whole market system in the future. In a way, given that things didn't melt down into total chaos yesterday, it may have been a helpful wake up call that can strengthen the system for the future.

And frankly, as scary as it is to realize the system has flaws like these, it's comforting in a way that the cause of the meltdown was likely mechanical rather than a genuine fear-based selling panic. Mechanical flaws can be addressed more easily than market psychology.

Posted by Mark at 11:45 AM | TrackBack
Category(s): Current Market Events
Tag(s): current market events

Email this post

Panic flashback

Whew! What a wild wide today on Wall Street — apparently driven by concerns that a debt-driven contagion could take hold in Europe and spread around the world. The Dow Jones Industrial Average was down almost 1,000 points (9.2%) before recovering to a 348-point loss (3.2%).

Here's a gut-wrenching summary from the Wall Street Journal:

Stocks plummeted in a flashback to the panicked trading of 2008 as investors registered deep fears about the European debt crisis. Selling accelerated late in the day due to a wave of automated sell orders that turned an ugly drop into full-blown market washout.... The velocity of the plunge in stocks was breath-taking.

Fears of contagion from Greece's debt crisis grew during the day and stocks were lower for most of the session. But many were at a loss to explain why stocks suddenly made such a staggering move.

A near 1,000-point drop is "people jumping out of windows" territory, said Gerard Cassidy, an analyst with RBC Capital Markets.

As losses piled up, the Dow went into freefall, tumbling through 10000, before dropping as much as 998 points, or 9.2%. The biggest closing point drop in the Dow's history occured on Sept. 29, 2008, at the height of the financial crisis, when the Dow ended the day down 777.68 points, or 6.98 percent.

One observer suggested to the WSJ that photos and video of street protests in Greece played a significant role in today's market turmoil.

"To tell you the truth, people are seeing what's going on in Athens on CNBC and it's not helping the market at all," [said Joe Benanti, managing director at Rosenblatt Securities]. "You're just watching things sort of melt away."

As much as anything, this could simply be an overreaction on the part of extremely jumpy investors, following a year of huge market gains without any significant corrections. The Greece situation and potential it seems to have to spread and roil the debt markets just looks too familiar to what happened 18 months ago. Sometimes when the market has run up too far, too fast, just about anything will do as an excuse for a fall (though they aren't usually as dramatic as today).

There's another key ingredient here: fear. The old saying is that the stock market "climbs a wall of worry." Worry is out there all the time, as investor fret about this and that. But some days that worry, given the right spark, explodes into full-blown fear. The WSJ's MarketBeat blog reports the market's "fear index" (also known as the VIX) is "currently hovering around 40, a level we haven’t seen since April last year."

It's difficult to know precisely what to make of this. Most fears are unfounded — as noted in our our February 2008 cover story, The High Cost of Fear (subscriber link). Or at least things we're fearful of don't turn out nearly as bad as first assumed.

But, on the other hand, sometimes fear can help protect us from genuine threats. And, make no mistake, genuine threats are out there, as we have noted many times here on the blog and in our monthly newsletter.

The best approach is to review your long-term plan, reflect as calmly as possible on current events, and keep away from emotional decision making.

As noted in our January 2009 cover story, How to Avoid Panic and Reduce Fear (subscriber link), "[i]nvestors are biologically induced into short-term thinking by the stress hormones released during episodes of acute fear. Fear has the effect of inducing concrete short-term thinking with poor flexibility in judgment."

Remember our SMI bedrock verse: "For God has not given us the spirit of fear, but of...a sound mind" (2 Timothy 1:7).

Posted by Joseph at 4:30 PM | TrackBack
Category(s): Current Market Events
Tag(s): investing principles, stock market

Email this post

Steady investing in an unstable economy

In the midst of high unemployment and growing concern about federal spending, the stock market (despite yesterday's sharp loss) has been moving along very nicely, thank you.

Why? SMI's executive editor Mark Biller (right) discusses that question — and explains why it's so important to have a long-term investing plan — on today's MoneyLife radio program. Mark talks with host Chuck Bentley of Crown Financial Ministries.

Click the arrow below to listen (20 min.) — or use this link to download an mp3 (right click/save as).

Posted by Joseph at 11:35 AM | TrackBack
Category(s): Economy, Investing Principles
Tag(s): Crown Financial Ministries, investing principles, radio

Email this post

Investment forecasters and horse-race gamblers

A huge audience tuned in to a sporting event that took place in my hometown over the weekend: the Kentucky Derby. In addition to the tens of millions who watched on television, almost 156,000 crowded into Churchill Downs on a rainy day to experience the tradition, wagering, and cheering firsthand.

Before the race, a "vote" was taken as to which horse would win. Participants voted with their pocketbooks by placing their bets, and the horse on which the most money was wagered became the favorite. Rarely do the fans in any sport spend more time studying data, reading commentary, or listening to experts before reaching a decision.

The eventual favorite reflected the collective wisdom of the racing world. Given this, you'd expect the favorites in this race to have a record of success. Surprisingly, you'd be wrong — very wrong.

Over the past 30 years (including this past Saturday when pre-race favorite "Lookin At Lucky" came in sixth), the favorite has made it into the winner's circle only twice. That's a failure rate of 94%!

Based on their extensive knowledge of the horses' recent histories, people "in the know" make educated judgments about how the horses will perform on a given day. But actually, they're just guessing. No one knows for sure.

In a sense, the financial markets aren't much different. When an investing professional offers stock, bond, and mutual fund recommendations, he doesn't know where the markets are going any more than you do.

He knows where they've been, of course; that is, he knows how they've behaved in the past under similar economic circumstances. Based on that knowledge, he forms opinions as to how the markets will behave in the near future. But reality isn't that simple.

There are two difficulties in making accurate forecasts. The first is that one or more of the governing assumptions will turn out to be wrong. The forecasters don't know which ones, so they can't fix them. The other is that the underlying assumptions are incomplete. But the forecasters don't know which factors have been left out, so they can't include them.

Despite this, publishers of the leading financial magazines and web sites regularly offer bold headlines such as "Where to put your money now" or "Eight stocks to buy today."

This incorrectly conveys a sense of predictability concerning the economy and markets, and downplays the reality of risk. (Frankly, financial magazines have a mediocre track record when it comes to their specific investment recommendations.)

Sound Mind Investing typically doesn't make forecasts as to what the future holds for the markets. We're willing to admit we're clueless about that. It's our belief, however, that it is impossible to self-destruct financially if your decision-making is pointed in the direction of God's glory.

One characteristic of investing that glorifies God is that it respects His wisdom, not man's. If it's your desire to have confidence in managing your finances rather than relying on the guesswork of others, ask God to help you learn the essential basics you need to become a faithful and effective steward. In tandem with your praying, begin your education by reading our recent Financial Literacy 101 series.

And here's something to keep in mind: Asking for the Lord's help is not a gamble. It's a sure thing. "If any of you lacks wisdom, he should ask God, who gives generously to all without finding fault, and it will be given to him" (James 1:5).

Posted by Austin at 10:10 AM | TrackBack
Category(s): Investing Principles
Tag(s): christian investing, investing principles

Email this post