Trovena Weblog

A Big Step in the Right Direction

This isn't law yet, but it has overwhelmingly passed a vote in an influential House committee.  If this bill passes, and is signed into law, it will restrict 401(k) advice to independent advisers, taking away the ability of commissioned brokers from charging high fees in these plans.  The high fees has long been one of our criticisms of many 401(k) plans.  Unfortunately, they are pitched to employers as plans that will not cost the employer any administrative fees.  Of course, the revenue is then collected from the high cost investment options given to the employees.

To quote the last line of the article, "it's about time that Wall Street stop viewing workers' 401(k) accounts like a gold deposit to mine."

This brings the working/investing public one step closer to having freedom and independence in how their 401(k) assets are invested.  Currently, most plans have a limited set of mutual funds for plan participants to choose from.  In most cases, the investment selection is limited to inadequate due to a number of reasons:

1. The funds offered have high expenses.  Whether this is due to broker related commissions or the high cost of active management varies.  In many cases, it may be both.
2. The breadth of funds is not complete to construct a well diversified portfolio, especially in the small cap, international, international small and emerging markets.
3. The fund choices usually consist of actively managed funds.  There is considerable academic evidence that active management does not add value over a passively managed portfolio, especially over the long term.

We applaude companies such as Northrop Grumman, which offers employees the option to invest their 401(k) assets independently through the Schwab Personal Choice Retirement Account (PCRA).  This option effectively turns the employee's 401(k) assets into a self-directed brokerage account.  Employees may invest in stocks, bonds, no-load mutual funds or hire an independent Investment Adviser to assist them with the investment of these assets.

Here's the complete story in the Investment News:  "House committee approves bill that restricts 401(k) advice to indie advisers"

History Does Repeat Itself

Back in December of 2008, I wrote a paper titled, “Investing for the Rebound.”  The paper is scheduled to be published by the Journal of Financial Planning, sometime this summer.  Unfortunately, for most readers, it will be too late by then.

One of the key points of the paper is that following every major market crash (defined as a 12 month period with losses in the S&P 500 Index of 30% or more) small cap stocks1 lead the recovery by a substantial margin.  In all of the periods observed, small cap stocks had recovered the losses of the S&P 500 within three years of the market bottom.  Some of the missing data points in the paper were the Non-US developed markets and emerging markets.  The recovery from this crash gives us an opportunity to see how those asset classes respond.

As of today, the bottom of this major market crash was March 8th, 2009.  The chart below shows the Quarter to Date and Year to Date returns, as of May 29th, 2009, for a select group of Dimensional Fund Advisors (DFA) mutual funds.  As I have indicated in other posts, I believe that the DFA funds are the best, real life, representation of the major equity assets classes as defined by the Fama-French research.  In looking at past performance it is telling us what has happened; past performance is no indication of future returns.  What past performance does allow us to do is test academic theories and principles.

 

As you can see from the chart, smaller stocks, around the globe, are having better returns than the large cap stocks.  Granted, this is an extremely short period of time.  Additionally, we do not know if we are actually in the recovery or not.  However, these results are consistent with the historical observations and what is expected based on the academic theories.

¹  Small Cap Stocks are defined by the Fama-French Three Factor Model.  It is the bottom 9th and 10th deciles of the market based on each company’s market capitalization.  The Russell 2000 does not meet our standards of a true small cap definition.  The Russell 2000 is the smallest 2,000 out of the largest 3,000 U.S. companies.

Equity markets are way up, but you wouldn't know by listening to the media

With economic pessimism becoming a growth industry, it's interesting to note that the glummest of the glum work in a field with the most potential to influence how everyone else is feeling: the media.

Pollsters Ipsos MORI recently asked the people of Britain to cite the most pressing issue facing their country. Out front by a country mile was 'the economy', with two thirds citing it as the most important challenge.¹

And in terms of occupations, Ipsos found journalists were the most negative, with 96 per cent of that grouping believing the economy would get worse.

"Out of all the audiences we look at—businesses themselves, consumers, employers, the people who are most negative are the journalists," Ipsos managing director Ben Page told the Financial Times.²

Increase in FDIC limit extended through 2013.

Here's the statement from the FDIC:

On May 20, 2009, President Barack Obama signed the Helping Families Save Their Homes Act, which extends the temporary increase in the standard maximum deposit insurance amount (SMDIA) to $250,000 per depositor through December 31, 2013. This extension of the temporary $250,000 coverage limit became effective immediately upon the President's signature. The legislation provides that the SMDIA will return to $100,000 on January 1, 2014.

To see the full press release, visit the FDIC web site.

Back in Black

Are we in the early stages of a prolonged bear market?  I certainly do not know.  What I am sure of however, is that the past two months, ending April 30, 2009, have been some of the best months in recent history.  It is hard to believe that less then 60 days ago most of the “experts” were predicting that the latest market bottom on March 9th was “just the beginning.”  They got one part correct, it was the beginning, but not of the continued major market slide they were predicting.

Below are the results for the two months ending April 2009 for all of Dimensional Funds Advisor’s equity mutual funds with fifteen years or more of data.  (I have selected to show their live results since they are one of the best, if not the best, measures of performance for different asset classes around the globe.  I believe Dimensional’s performance is a better proxy to investors’ experience then using the outdated index concept.)  For ten of the thirteen funds, total returns for the most recent two-month period was the highest among all two-month time periods since each fund’s respective inception.

Two Month Returns as of April 30, 2009 vs. Rolling Two-Month Returns since Inception

 

¹ Rank of the latest two-month return against all two month periods in the portfolio's history.  Past performance is no guarantee of future results.

Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown.  All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed.

Check out our Solar System!

In acknowledgement of Earth Day, I wanted to recognize the contribution that the solar panels on the roof of our office has made to our company and the environment. 

As you may or may not know, I recently went solar—not only does it feel great to go green, but it's an amazing experience to actually see my solar system producing clean energy!

My SolarGuard account shows me exactly how much solar energy my system is producing, and continually calculates all of my financial and environment savings. As you can see, the numbers are really starting to rack up!

View my Solar Production

First Quarter Market Commentary

March Madness

It is the time of year when half court buzzer beaters turn unknown players from small schools into instant, if momentary, heroes.  The NCAA Men's Basketball Tournament, also known as March Madness, is legendary for great upsets, heart stopping finishes, and underdog "bracket busters."  This year, pre-season favorite, North Carolina, advanced through the field, winning every game by 12 points or more en route to the championship.
 
This March, the madness was not on the road to the "final four," it was on a road called Wall Street.

Scott Leonard Calls the Market Bottom … Again

I don’t want to jinx this, but it looks like we hit the market bottom back on March 9th.  From March 9th through March 23rd, price changes for the following indices are as follows:

Dow Jones Industrials          18.77%

S&P 500 Index                       21.64%

Russell 2000 Index               26.35%

NASDAQ Composite              22.63%

KBW Bank Index                   65.84%

Actually, I am not looking into my crystal ball and predicting that March 9th was the bottom.  It may be, but I really don’t know.  The point of sharing this is to express how completely volatile the market is, in both directions.

NBC Nightly News Features Scott Leonard

A Homeowner and Economic Stimulus Package That Will Work

While there are many problems with the different stimulus packages proposed, the two biggest are, 1) complexity and 2) congress is selecting winners and losers.  As can be expected, the more complex packages will have a higher likelihood of failure.  In addition, when congress selects winners and losers, the loser will feel cheated and there is a real risk that congress will select the wrong winners, or least effective winners, to solve the problem.

Solving the home mortgage and banking crisis requires a simple plan; and I have such a plan!

The U.S. Government should allow everyone to refinance his or her real estate loan at 4.25%, for up to 30 years, interest only.  In addition, all new purchases with an acceptable down payment could also receive the 4.25% interest rate.  This plan should be available to all owners and buyers of real estate except large commercial properties.

Advantage 1: It does not cost the taxpayer money!  The current 30-year U.S. Treasury rate is 3.56%.  That means the government borrows for 3.56% and lends for 4.25%.  The government makes money!