Daily Gains Letter

mutual funds


When It Comes to Retirement, Investors Need to Focus on This Little Four-Letter Word

By for Daily Gains Letter | Aug 22, 2013

Investors Need to Focus on This Little Four-Letter Word“I think it’s all about taking risk; you have to take more of it—get out of your comfort zone. You can’t just keep doing the same thing and expect different results—it’s that simple.” These were the exact words from my friend, Mr. Speculator, on portfolio management. “I am not looking for just a menial 10% return,” he added. “I am in it for a much bigger gain. To gain more, you have to risk more.”

Mr. Speculator is right about one thing: to gain more you have to risk more.

However, long-term investors who are saving for retirement, their kids’ education, or anything else for that matter, should not follow the lead of Mr. Speculator. Taking high risks can be dangerous, and at times, it’s no different than gambling. Being willing to risk it all is not a good investment management technique.

When it comes to retirement, investors need to have a very strong focus on one four-letter word—“risk”—or else one move in the wrong direction could make a dent in their portfolio—which may cause them to push back their retirement or give up on their plans altogether.

Take a look at the current bond market, for example; clearly, the risks are increasing. Look at the chart of the yield on 10-year U.S. Treasury notes below:

10-Year Treasury Note Chart

Chart courtesy of www.StockCharts.com

The yields have increased roughly 75% since the beginning of May.

Bond investors are fleeing. According to the Investment Company Institute, in June, U.S. long-term bond mutual funds had a net outflow of 60.4 billion—this was the first since August of 2011. In July, they continued to flock to the … Read More


Become a Better Investor by Avoiding These Five Common Mistakes

By for Daily Gains Letter | Aug 12, 2013

Five Common MistakesLet’s face it: investing isn’t easy, and it becomes even more discouraging when investors face losses in their portfolio. To avoid a drawdown in their portfolio, investors should avoid the following five mistakes.

1. Not having an investment plan

Investors should have some sort of plan put together before they even jump into the world of investing and start allocating their portfolio to different investments. Having a plan guides them in what kind of investments they should be making and the risks they should take. An investment plan doesn’t have to be very lengthy; it just needs to explain the investor’s risk appetite, investment horizon, and purpose for investing their funds. Without a plan, an investor may turn into a speculator and take risks that can impact their portfolio significantly.

2. Investing in what you don’t understand

This is a very critical error. Investors need to know how the company operates before they purchase its shares. Keep in mind that this isn’t limited to stocks alone; investors should understand how any investment works before they decide to hold it in their portfolio.

For instance, long-term bonds are more sensitive to interest rates compared to short-term bonds. Investors saving for the long term must consider interest rates before buying bonds.

3. Getting emotionally attached to investments

After the crash in the stock market in 2008 and 2009 and the prior tech boom, one observation should be very apparent: markets tend to swing up and down. Investments that are good for the portfolio now may not be so great in two years. Investors need to realize this and not get emotionally attached … Read More


With Both Bonds and Stocks Declining, What’s a Smart Investor to Do?

By for Daily Gains Letter | Jun 28, 2013

U.S. bondsStarting near the end of 2012 and then going into 2013, there was a significant amount of noise around the concept of the “Great Rotation.”

The idea behind this concept is that low yields on U.S. bonds would cause investors to sell their bonds positions, which would eventually bring bond prices down, driving investors toward stocks. That would send the key stock indices higher.

Now, since the Federal Reserve announced that it might be pulling back on its quantitative easing, the concept of the Great Rotation seems to be gaining some traction once again. And investors are asking if it’s really going to happen.

Looking at the chart below of 10-year U.S. bond yields, it’s very clear that investors don’t like the U.S. bonds—they are selling. The yields on 10-year U.S. bonds have skyrocketed; they are now more than 44% higher than they were at their lowest level in August 2012.

STNX 10 Year Treasury Note Yield INDEX

Chart courtesy of www.StockCharts.com

According to TrimTabs, an investment research company, through to June 24, investors sold $61.7 billion worth of bond mutual funds and exchange-traded funds (ETFs). While this may not sound big, this is the highest sell-off since October 2008, when investors sold $41.8 billion worth of mutual funds and ETFs. (Source: Bhaktavatsalam, S.V., “U.S. Bond Funds Have Record $61.7 Billion in Redemptions,” Bloomberg, June 26, 2013.)

Now that we see investors fleeing the bonds market, shouldn’t they go to the stock market, thereby causing the markets to climb higher?

Yes, according to the concept of the Great Rotation, the key stock indices should be climbing higher. Sadly, the reality is the opposite: as the bond prices … Read More


Soaring Bond Yields Suggesting Bigger Sell-Off in the Bond Market Ahead?

By for Daily Gains Letter | Jun 10, 2013

Soaring Bond Yields Suggesting Bigger Sell-Off in the Bond Market Ahead?The U.S. bond market seems to be the topic of discussion among investors these days. The pundits of the financial media are constantly screaming out their stance on where it’s headed next and how it will play out for the investors who are involved.

While the majority seems to be favoring a possible downturn in the U.S. bond market, others are saying we might stay at these levels for some time, and are even suggesting buying on the dips. No matter what their opinion may be, they all seem to have solid reasons for their take.

Aside from this, what we already know is that bond yields are on the rise. I mentioned in these pages not too long ago that May wasn’t a great month for the bond market—the momentum was more towards selling. Yields on 10-year and 30-year U.S. Treasuries have surged significantly over the course of the month.

Remember, rising yields of 10-year and 30-year U.S. Treasuries are important for the entire U.S. bond market, because they act as a benchmark for other types of bonds, such as corporate bonds.

Looking at the selling in the U.S. bond market and the increased talks of downturn, I question how big of an impact a collapse in the bond market could really have on the overall wealth of investors and how much money is on the line.

According to the Securities Industry and Financial Markets Association, the outstanding U.S. bond market debt stood at $38.13 trillion at the end of the fourth quarter of 2012. (Source: “Statistics,” Securities and Financial Markets Association web site, last accessed June 6, 2013.) … Read More


The Ultimate Retirement ETFs for Conservative Investors?

By for Daily Gains Letter | May 23, 2013

Ultimate Retirement ETFs for Conservative InvestorsDo you want to save more or less by the time you reach 65? It might seem like a question with an obvious answer, but…

Back in the 1950s and 1960s, Americans on the cusp of retirement had their defined pension plans to look forward to and didn’t really worry too much about saving for retirement—or running out of money. All of that changed in the 1980s, when many companies rolled their retirement plans over to 401(k) accounts. That one simple act meant a worker’s retirement savings now fluctuated with the ebb and flow of the stock market.

While it’s important to invest in your 401(k), it’s also important to know what your money’s being invested in and where it’s going. Unfortunately, most of us don’t. A recent study that looked at American investing knowledge found there’s a large gap between what we think we know and what we really know.

The study found that “nine out of 10 Americans (92.6%) dramatically underestimated the total 401(k) fees the average household will pay over the course of a lifetime.” When asked how much the average American household with two working adults will pay in 401(k) fees over the course of their lifetime, only 3.3% of respondents answered correctly, at $150,000–$200,000. The largest group (38.1%) was the most off the mark, saying it would cost less than $10,000. (Source: “The Online Investing Knowledge Gap: 2013 Investment Literacy Survey,” NerdWallet, March 18, 2013.)

So if you want to save more money for your retirement, there may be better options out there. If you’re looking to take advantage of the stock market, whether it’s … Read More


Why You Should Consider Ditching Your Mutual Fund Manager

By for Daily Gains Letter | Apr 10, 2013

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More proof has been released that suggests some retirees are better off handling their own wealth management strategies. According to a recent survey, individual investors who paid a mutual fund manager over the last decade would have done better by taking the reins themselves and investing in a passive index fund at a much lower cost. (Source: Pratt, J., “Study: Only 24% of Active Mutual Fund Managers Outperform the Market Index,” NerdWallet, March 27, 2013.)

The survey examined more than 24,000 mutual funds and exchange-traded funds (ETFs) available to U.S. investors for a 10-year period ended December 31, 2012. At the end of 2012, investors had invested more than $7.0 trillion in the 23,000-plus actively managed mutual funds and ETFs. Investors placed just $2.5 trillion in passive funds.

Of those who paid to have their funds managed, only 24% of active fund managers beat the market over the past 10 years. During that time frame, actively managed mutual funds returned just 6.5%, while the passively managed index products averaged 7.3%.

The return statistics for actively managed funds is probably even lower than the reported 6.5%, because the study does not include information on those funds that closed during the 10-year period.

Still, is it really possible that 76% of active fund managers wasted their money getting their Master of Business Administration (MBA) degrees, yet they are no better at finding winning indices than retail investors? This is where it gets fun. There’s even more compelling evidence to consider if you’re waffling between using an actively managed index and doing your own due diligence.

It turns out that a large number … Read More


Risk Alert: Business Cycles About to Collide

By for Daily Gains Letter | Apr 9, 2013

090413_DL_clark

It’s time for all stock market investors to re-evaluate their portfolio risk.

If a new bull market happens to develop, it’s easy to jump on the bandwagon. But with so much uncertainty and risk out there—risk that is 100% beyond your control—equity investors need to be safe.

There is always room for speculation with play money, but when it comes to money being used to save for retirement or dividend income being used while in retirement, capital preservation is absolutely key.

Utility stocks immediately come to mind when I think about capital preservation and the stock market. This is a sector that is often used to generate income for those who are in retirement.

Surprisingly, some utility stocks have actually been very good wealth creators in terms of capital appreciation. Like always, which individual companies you own matters. This is why the returns from mutual funds can be so mediocre. Diversification works, but always has a cost.

Looking at utility stocks, trends are important—trends in population growth, migration, or in things like power usage from industrial customers. Just look up a utility stock index and the stock market charts of those companies. You can see which companies are the standout players, and why they are because of migration trends in demand.

Another stock market sector that offers some safety and the opportunity for capital gains and decent dividends is energy. But in the oil and gas business, size counts.

A company like Chevron Corporation (NYSE/CVX) has proven to be a reliable stock market performer and dividend payer. It is an ideal retirement stock. And even with the amazing growth taking … Read More


Top Tax-Deferred Savings Tips for Retirees

By for Daily Gains Letter | Mar 18, 2013

180313_DL_whitefootRetirement isn’t the finish line when it comes to retirement savings; it’s just another stage, and it’s one that retirees need to adjust to. After decades of contributing to tax-deferred retirement savings plans that reduce taxes, you’re now withdrawing from those accounts and paying taxes at the regular rate.

For those on the cusp of retirement, there’s more to making smart financial decisions than just making money. At this stage, there are a number of unique tax-planning opportunities that can help you save money over the long run.

What’s next for your 401(k)? Workers about to retire should do everything they can do increase or max out their contributions to tax-deferred retirement plans, like individual retirement accounts (IRAs), 401(k)s, or 403(b)s. In 2013, you can contribute a maximum of $17,500, or $23,000 if you’re over age 50.

Depending on your tax bracket, every dollar deposited into a 401(k) could save you anywhere between $0.10 and $0.40 in income taxes for the year in which the contributions are made. For example, if you contribute $5,000 to a 401(k) the year before you retire, it would be taxed at 35%. Withdrawn in retirement, the funds are taxed at 15%, meaning the 20% difference in tax rates translates into a savings of $1,000.

Should You Delay Claiming Social Security?

For those already retired, you can consider delaying your Social Security checks. One benefit of waiting to collect Social Security until you’re older is that your checks will be larger. Even though you can start collecting Social Security any time between 62 and 70 years old, for every year you wait, your check will … Read More


For Retirement Fund Growth, Think Like a Contrarian

By for Daily Gains Letter | Mar 13, 2013

130313_DL_whitefootWhen it comes to thinking about retirement planning, the “out-of-sight, out-of-mind” mantra seems to be a favorite amongst individual investors. How else can you explain the miniscule 14% of baby boomers who are “very confident” they will have enough money to live comfortably when they retire and the 23% who say they are “not at all” confident? (Source: “The 2012 Retirement Confidence Survey; Job Insecurity, Debt Weight on Retirement Confidence, Savings,” Employee Benefit Research Institute web site, March 2012, last accessed March 12, 2013.)

Granted, the Great Recession that began in 2008 has made retirement planning that much more difficult. Unemployment is high, gross domestic product (GDP) growth is abysmal, wages are flat, and household debt is stubbornly high at $12.8 trillion, while public debt sits at $17.0 trillion. Those who are already retired and those who are nearing retirement have a reasonable explanation for not being able to find enough disposable income to pad their retirement funds. (Source: “Household Sector: Liabilities: Household Credit Market Debt Outstanding,” Federal Reserve Bank of St. Louis web site, March 7, 2013.)

What I do find odd, however, is the reason as to why so many are plunking their hard-earned dollars into underperforming assets with terrible returns, like banks at 0.5% and bonds at a paltry 3.1%. Even jumbo five-year certificates of deposit (CDs) offer a pathetic return of about 1.5%. (Source: “National High Yield Rates for CDs,” Bankrate, Inc. web site, last accessed March 11, 2013.)

Banks, bonds, and CDs are not the retirement fund-fueling workhorses that investors need right now. To build a strong retirement fund, an investor needs to make their … Read More


Protect Yourself—Dow Jones Industrials Very Vulnerable

By for Daily Gains Letter | Mar 12, 2013

120313_DL_clarkA lot of good news is priced into the stock market right now. Fourth-quarter earnings season is on the horizon, and it will have to be a good one for stocks to keep appreciating.

There still aren’t a lot of reasons to be a buyer in this stock market. Even just looking at a five-year chart of the S&P 500, the market seems pretty stretched and is due for a correction.

Ben Bernanke and Alan Greenspan have been so accommodative to Wall Street and the stock market. But it’s true that it does not pay to fight the Federal Reserve, even if you don’t agree with the central bank’s policy actions. I just don’t see an end to the cycle of money supply growth.

Price inflation already exists in this economy, though I’d say it’s really more like four percent compared to what is reported. Everything is going up in price, so it is absolutely critical that after-tax incomes go up as well—and that’s going to be a continuing problem going forward.

I think we have the makings of a substantial stock market correction that could happen very soon, even if we don’t get any particularly negative data. The market has been ticking higher fairly consistently for four years now, and we’re due for some downside.

First-quarter earnings expectations have flattened right out, and that makes sense; but large corporations are still being highly cautious with their outlooks, and they’ve been very good at beating consensus, typically on either revenues or earnings—though not both in most cases. Some consensus data collectors are now reporting increased earnings expectations for the bottom … Read More


The Final Countdown: The Stock Market’s on Its Final Leg to Recovery

By for Daily Gains Letter | Mar 7, 2013

070313_DL_clarkSkepticism is very high among individual investors. Institutional investors who run buy-and-hold mutual funds don’t need to be as worried; they get paid to buy stocks. The stock market’s run makes total sense in that the Federal Reserve continues to promise low interest rates and continues to increase the money supply, while revenues and earnings from corporations are growing modestly.

Other than real estate, there is no other place for an investor to put his or her money to generate income above the inflation rate. So the stock market is likely to keep ticking higher over the near-term. Now, all the power is with corporations.

I believe we’re on the final leg of the bull market recovery from the March 2009 low. All investors want to see is revenue growth and they will keep buying stocks. Growth is the name of the game as corporations have actually done a great job keeping a lid on costs. I expect more new announcements regarding share buybacks and rising dividends this upcoming earnings season.

The toughest problem facing the Main Street economy is employment conditions. But even though the Federal Reserve has catered an extravagant menu of stimulus to Wall Street and corporations, large companies just don’t want to invest in new plant, equipment, or employees. The cash hoarding will continue; the beneficiaries are stock market investors, not workers.

In the final leg of this stock market recovery, there are some attractive buys out there. One particular investment theme that I believe in is that corporations will begin to open their wallets, but the cash won’t be spent on new employees; it will … Read More


Dividend Paying Stocks with Big Capital Gains

By for Daily Gains Letter | Feb 22, 2013

220213_DL_clarkThe strength we’ve seen in the stock market over the last several years has been a boon to large-cap dividend paying stocks. An investor no longer needs to take the high investment risk of speculating on micro-cap companies; big-cap companies are moving just as fast and furious on good news.

Most investors with a stock market portfolio typically have a mix of holdings that would include individual stocks, mutual funds, and perhaps some exchange-traded funds (ETFs). For individual stocks, it definitely pays to be diversified, not only among industry groups but among the market capitalization of companies as well. A handful of large-cap dividend paying stocks can go a long way toward normalizing your investment returns over time.

Among the dividend paying stocks that I like, Johnson & Johnson (NYSE/JNJ) takes the cake in terms of stability, consistency, and earnings growth. I think a well-balanced stock market portfolio should have a pharmaceutical company as a component. Pharmaceuticals are such a large part of the economy now, and pharmaceutical companies are very good at making money for shareholders. Johnson & Johnson’s long-term stock chart is below:

 

dg_02222013image001Chart courtesy of www.StockCharts.com

This company has been very consistent in terms of its earnings growth over the years, and among dividend paying stocks, it’s been one of the best. It is true that large-cap companies can experience long periods of no capital gains; but then again, that’s what the quarterly dividends are for.

And what a company like Johnson & Johnson represents in a portfolio isn’t just about capital gains. It’s a benchmark holding that grows its earnings and dividends over time, providing … Read More