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"

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

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.

Bear markets favor active management, right?

Following every major bear market, it seems that the active managers and market timers come out in full force.

"We got out of the market before the crash."
"Our sector rotation strategies allow us to remain nimble enough to avoid big losses."
"Buy and Hold is dead.  Active trading is the only way to make money in this market."

It sure sounds attractive.  After all, the markets have likely just delivered a major blow to your portfolio.  Surely, someone out there must have been able to help me avoid the losses.  And, of course, they will also be the same firm that will get me the upside of the market.

Well, I have good news.  There are, indeed, funds that outperform the market averages.  But here comes the bad news.  Odds are likely that you won't pick the right ones.  Or at least not at the right time.

Why do I say this?  Two reasons:

1. The study by Dalbar, Inc. that found that mutual fund investors typically experienced returns worse than the funds in which they invested due to poor timing of their investment dollars.  The right time, by the way, is before they go on a run that beats the market, not after.
2. The study by Standard & Poors (of S&P 500 fame) which compares the performance of actively managed mutual funds to the passive S&P indices.

It is the results of the second reason that I explore below.

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.

Kicking Cramer While He's Down

I'm taking a page out of Jon Stewart's playbook here.  I was Googling financial news and blogs from around March 9, 2009, aka The Bear Market Bottom (at least for now).  The point was to find some sucker who put themselves and their opinion out there for the public to scrutinize and, well, rip apart.  Basically, cherry pick some quote that turned out to be wrong or just sounds crazy with the perspective of time.

Well, as luck would have it, the highest profile of suckers with no shortage of opinions has a gem of a quote.  This is from his Mad Money Blog:

The potential for a second Great Depression is real, Cramer said, so long as Obama pushes forward with his plans. Nonbelievers should just look to the stock averages, which have plummeted since Jan. 20 and are now forecasting the worst economic decline since the first Great Depression.

This quote appeared on March 9, 2009.  Now, I will agree that the stock market is forward looking relative to the economy.  But let's be realistic about short term movements.  He was using a 6 1/2 week market drop as a forcast a second Great Depression.  Let's at least hope the second Great Depression won't be referred to in caps.

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.

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!

Reading charts... same chart, different story

Technical analysis continues to fascinate me.  In case you don't know, technical analysis is the practice of studying stock price data, generally through historical charts, to make a prediction about the future direction of stock prices.  I'm sure the technical "analysts" will say that there's more to it than that, but that's my take.

Most of the respected members of the financial industry reject technical analysis as "reading the tea leaves".  In other words, it is a false practice in which success is more a matter of luck than any sort of learned skill.  The academic community, in particular, derides technical analysis as more of a pseudoscience than a legitimate discipline.

Nonetheless, I like to hear what the chart readers have to say.  Much of technical analysis centers around the idea that markets are highly cyclical, and the charts give you insight as to when we have reached a top or bottom of any cycle.  Knowing this, of course, means you simply plow your money in when a bottom has been identified, and the opposite at a top.  There are two forms of cycles, the normal 3-5 year business cycle, and another longer cycle, commonly referred to a secular market cycle.

It is this last type of cycle that I want to discuss.  I recently found a site that posted two charts that attempted to analyze the secular market cycle, and provide some insight as to where in the cycle we currently are.  The charts are below.

Eric Toya Quoted in Money Magazine

It's funny, I have been a fan of the Money Magazine Millionaire in the Making series since they started it several years ago.  Now, they're quoting me in it!  How cool.  Here's the link.

This was an interesting case, that I wish I had more time to really understand the whole picture.  Ultimately, what happened was the writer, Paul Keegan, needed my input and a fairly large amount of numbers crunched, and was under a tight deadline.  I was happy to provide the information that he was looking for, and at the end of the day, I'm comfortable with the numbers based on the information that I was given.

If I was given more time, there are a bunch of things that I would have done differently.  I suppose I should now find the time to really do it right.  Okay, I'll make no promises, but look for a new post on this article in a few weeks.