Message from my Accountant/Financial Advisor

[i_am_the_swammi]

FYI, to those that read my prior post a few weeks ago. I sent him a note back, asking if he'd been inunated with return emails from clients that are not in stocks, and who may be pulling htier hair out...he laughed and said the volume of emails was pretty amazing.

 

"The Good, the Bad, and the Ugly"

 

Good afternoon all:

 

First, the Good – It’s April 15th and I get tomorrow off!

 

Also, we’re solidly over 11,000 on the Dow and a shade over 1,200 on the S&P 500, with the market looking strong. Bear in mind that to investment professionals, 11,000 is no different than 10, 842 or 11,314 – it’s a number and a measure of valuation-nothing more. To the general population, it is a psychological barrier and therefore can and often does lead to investing on emotion so as not to ‘miss the boat’. So, let’s examine some of the reasons we are at this lofty perch: Our esteemed Fed Chairman Ben Bernanke (who has oft been described as Paul Volker’s alter-ego), testified to congress yesterday that he sees interest rates staying low for an “extended period” (in Fedspeak, that’s about 3-6 more months)

 

UPS came out with strong earnings which in and of itself isn’t news; what IS news is that if UPS is doing well, they are carrying more packages. If they are carrying more, that must mean that people are buying more. That’s good for the economy. Other earnings news has been generally OK with notables Intel having a good quarter and Alcoa having a poor one. Keep in mind those earnings comparisons are 2010’s first quarter vs. 2009’s first quarter, which was the worst quarter in recent memory.

 

Which leads us to The Bad - Unemployment data came out today and again rose, this time to a seasonally adjusted 484,000. Economists were looking for a drop this week. Last week, claims rose by 18,000 – this week it’s 24,000 more. I’ve said all along that I don’t see equity prices rising significantly until people have quality jobs paying good wages. By this, I mean seasonally adjusted numbers under 400,000 – consistently. Ideally, under 375,000 and we’d be ready to rock and roll again.

 

Which brings us to The Ugly- This market is looking for reasons to move higher. We’ve broken out of a rather narrow trading range and my fear is that logic goes out the window when greed comes in the front door. To be sure, we’ve done OK. Bonds have been a haven for a relatively stable environment and have garnered profits with low volatility. I expect this will continue until at least the end of 2010, absent a global crisis.

 

Managed portfolio clients have seen a very selective return to equities but by and large, we remain in fixed income, high dividend and natural resources investments. There is simply too much downside should job numbers not start declining steadily. We’re getting there but we are getting there at a snail’s pace despite the billions in stimulus that has been pumped into the economy over the past 15 months.

 

From the flight deck, missed money is always better than lost money so let’s no be too aggressive just yet.

[dmarc117]

good read.

 

side note.....i thought your sig was from his letter for a second!

[Brentastic]

good read.

+1

[Ursa Majoris]

I dunno, if you're in this thing long term I think the boat you should have been on left harbor a year ago.

[Brentastic]

I dunno, if you're in this thing long term I think the boat you should have been on left harbor a year ago.

I think the boat left in the 40s and if you're still hoping for that same boat, you're going to be disappointed. The remains are a patchwork of duct tape, cardboard and super glue which doesn't hold up well in an ocean of credit.

[MikesVikes]

I think the boat left in the 40s and if you're still hoping for that same boat, you're going to be disappointed. The remains are a patchwork of duct tape, cardboard and super glue which doesn't hold up well in an ocean of credit.

 

Sell everything off until we get a Republicant back in the office.

[Ursa Majoris]

I think the boat left in the 40s and if you're still hoping for that same boat, you're going to be disappointed. The remains are a patchwork of duct tape, cardboard and super glue which doesn't hold up well in an ocean of credit.

That's not what my 401k is telling me. That is telling me I bought as much as I could as cheap as I could and now have three times the value as I had 12 months ago (including contributions). That boat was worth embarking on.

[i_am_the_swammi]

That's not what my 401k is telling me. That is telling me I bought as much as I could as cheap as I could and now have three times the value as I had 12 months ago (including contributions). That boat was worth embarking on.

 

If you plan on buying and holding in a 401K for 20+ years and not really care about 1-2 year swings, dollar-cost averaging isn't a bad way to go.

 

if you're an investor trying to take advantage of a market and maximize your investments, I think there are other more profitable ways to go.

[Ursa Majoris]

If you plan on buying and holding in a 401K for 20+ years and not really care about 1-2 year swings, dollar-cost averaging isn't a bad way to go.

 

if you're an investor trying to take advantage of a market and maximize your investments, I think there are other more profitable ways to go.

I have neither the time nor the knowledge to fiddle about with the market so it's DCA for me.

[dmarc117]

That's not what my 401k is telling me. That is telling me I bought as much as I could as cheap as I could and now have three times the value as I had 12 months ago (including contributions). That boat was worth embarking on.

 

 

If you plan on buying and holding in a 401K for 20+ years and not really care about 1-2 year swings, dollar-cost averaging isn't a bad way to go.

 

if you're an investor trying to take advantage of a market and maximize your investments, I think there are other more profitable ways to go.

 

 

imo and from what ive read, the days of buy and hold are over.

[MikesVikes]

Big market swings and routine contributions into your 401k is all you need for the dollar cost averaging to work in your favor.

[i_am_the_swammi]

Big market swings and routine contributions into your 401k is all you need for the dollar cost averaging to work in your favor.

 

How would a big swing down help dollar coast averaging? Your existing portfolio is losing money, and you are the sucker buying while the market is falling.

[MikesVikes]

How would a big swing down help dollar coast averaging? Your existing portfolio is losing money, and you are the sucker buying while the market is falling.

 

Market swing as in both upwards and downwards. This is what it's been doing lately. If the market only goes in one direction (Down), not much will help you.

 

On the flipside, if the market never moves up or down, there wouldn't be any dollar cost averaging since the market would be the same each time new money goes in.

[Brentastic]

imo and from what ive read, the days of buy and hold are over.

At least for the next decade (maybe longer) they are. See Japan's last 20 years.

[muck]

How would a big swing down help dollar coast averaging? Your existing portfolio is losing money, and you are the sucker buying while the market is falling.

 

DCA works to your advantage most if (i) the market ends up higher 20yrs from now than it is today, (ii) the market goes straight down and stays there for the bulk of the time you're plowing money into your DCA investment portfolio and (iii) the day before you cash out, it skyrockets to the higher point.

 

Using theoretical numbers to make my point:

 

Which one is better for the DCA investor? Market price series 1 or 2 (using starting prices and year-end prices for 10yrs)?

 

Series 1:

1000 Starting

1100 Yr 1

1000 Yr 2

800 Yr 3

900 YR 4

700 YR 5

800 YR 6

700 YR 7

600 YR 8

800 YR 9

1100 Yr 10

 

TOTAL MARKET RETURN OVER THE PERIOD = 10% (i.e., about 0.9% / yr)

 

...or...

 

Series 1:

1000 Starting

1010 Yr 1

1020 Yr 2

1030 Yr 3

1040 YR 4

1050 YR 5

1060 YR 6

1070 YR 7

1080 YR 8

1090 YR 9

1100 Yr 10

 

TOTAL MARKET RETURN OVER THE PERIOD = 10% (i.e., about 0.9% / yr)

 

********************************

 

You make tons more money in situation #1 than you do in situation #2 ... that's why DCA investors who aren't expecting to see a payout for years/decades like seeing the market falling in the near term ... they buy more of what they were going to be buying anyhow at cheaper prices ...

 

Again, though, all of this presumes that prices are higher years/decades from now. If that doesn't work out, then neither situation (DCA (which is nothing more than passive market timing) vs. aggressive market timing) works out very well...

Edited April 16, 2010 by muck

[Brentastic]

That's not what my 401k is telling me. That is telling me I bought as much as I could as cheap as I could and now have three times the value as I had 12 months ago (including contributions). That boat was worth embarking on.

It's a mirage, you're buying at the top. But still, the only justification for embarking on that boat is if you convert your earnings to cash while there is still a profit. If you cash out now and make money, the investment was profitable. However if the market does not sustain growth as it has over the last several decades and there are losses when you need (retirement etc...) to convert to cash, then you lose. So many Americans have been suckered into the belief that our economy will never sustain decades of losses - I don't believe that is anywhere near being absolute.

[bpwallace49]

It's a mirage, you're buying at the top. But still, the only justification for embarking on that boat is if you convert your earnings to cash while there is still a profit. If you cash out now and make money, the investment was profitable. However if the market does not sustain growth as it has over the last several decades and there are losses when you need (retirement etc...) to convert to cash, then you lose. So many Americans have been suckered into the belief that our economy will never sustain decades of losses - I don't believe that is anywhere near being absolute.

 

But if the value of that cash drops like a rock too . . . what good will converting to cash do?

[Brentastic]

But if the value of that cash drops like a rock too . . . what good will converting to cash do?

So you're talking about some kind of hyper-inflation? If that's the case, your devalued cash is still better than devalued equities, no? I think the next 3-5 years will be deflationary, and therefore the surviving dollars will rise in value.

[bpwallace49]

So you're talking about some kind of hyper-inflation? If that's the case, your devalued cash is still better than devalued equities, no? I think the next 3-5 years will be deflationary, and therefore the surviving dollars will rise in value.

 

I really dont get too involved with the financial debates you guys have, but hasnt there been several threads that advise buying gold and silver because the value of the dollar will drop precipitously? So wouldnt that value dropping be somewhat equivalent to a drop in equities?