October 25, 2010

Presidential Stock Market Cycle

History shows us that there is some correlation between the election cycle and stock market (S&P 500) results.
Typically, the 3rd year of the Presidents term, regardless of party, is the strongest, followed by the 4th, the 1st and the 2nd.  There is a great deal of theory as to why this is so but nothing concrete.  It should be noted that there are huge variances in these results as well. 
Since 1942, the 200 days following the midterm elections have produced an average of 18% gain. 
What does this mean to you?  NOTHING.
If I told you that the first day of the month produces more than average returns (which it seems to), would you go out buy stocks because of that?  I hope not.
Bottom line is that as tempting as it is to time the market, its just simply foolish to try
Stick to buying a very low cost index fund or ETF and adding to it as often as you can and with that simple strategy, you will beat over 95% of investors and over 90% of professional money managers who try.  Why?  Because fees are everything, not timing the market and not which stocks you buy.

October 12, 2010

Leverage

Leverage for the most part is bad, very bad.  Leverage is simply multiplying the effects of what you are buying and it will cost you.

The most common leverage is the use of margin which is basically borrowing money from the brokerage firm who holds your stocks or mutual funds to buy more of the same.  If stocks go up, you multiply the effects and can do very well however, the reverse is also true, and when stocks go down, you will not only have mutiplied that outcome but made it worse because you are paying to borrow money at the going rate, ouch.

Another common use of leverage is real estate and up until recently you needed 10-20% of the cost of the property and then borrowed the rest from the bank paying your mortgage and hoping the price of your house went up.  This worked out well for years until the real estate bust of 2008.  Before then, house prices slowly but surely always increased.  We now know the painful truth that home price increases are not a guarantee and leverage in real estate can cause a terrible outcome.

Leverage can sometimes be great and we all know someone who bought land or real estate or margined stocks and did very well but quite frankly, those are rare instances.  My advice is that leverage is not for everyone and if you can avoid it, do so.  Pay off your house as soon as you can and do not borrow money against your stocks or mutual funds.

October 6, 2010

Mutual Fund Price Wars

To keep up with competitors, Vanguard announced that its Total Stock Market Index Fund, symbol VTSAX has lowered its minimum from 100k to 10k.  This is wonderful news for investors.  Its no secret that I love low fees and because of that, I love the Vanguard series of funds and etf's.
VTI is the Total Stock Market ETF whose fees are .07%.  Now, most investors can buy into the mutual fund version of the same, VTSAX whose fees are likewise .07%.

Check out what low fees mean to you in the long term.  You can access this from the yahoo finance profile of VTSAX here.  Scroll down and look for fees and expenses.  Below is what you will see.  A comparison between VTSAX and the average fund in the category. 

Fees & Expenses

Expense                                VTSAX                        Category Avg
Total Expense Ratio:               0.07%                              1.11%
Max 12b1 Fee:                        N/A                                 N/A
Max Front End Sales Load:      N/A                                5.27%
Max Deferred Sales Load:        N/A                                2.50%
3 Yr Expense Projection*:         $23                                $700
5 Yr Expense Projection*:         $40                                $1,114
10 Yr Expense Projection*:       $90                               $2,224
* Per $10,000 invested

So the question to you is, would you rather pay $90 or $2,224 (for every 10k invested) ?????
And to add insult to injury, most stockbrokers and financial advisors will charge you another 1%-2% on top of that.