WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
More on asset allocation. When considering their portfolio's division between equity and debt, many retirees look at their retirement savings as the only assets which must be considered in arriving at their debt and equity percentages. Many individuals do not look upon their monthly Social Security check as a retirement asset, but it most certainly is. I believe your Social Security benefit should play a part in formulating your portfolio allocation.
AARP, formerly American Association of Retired Persons, recently reported that the average 401 (k) balance for individuals in the 55+ age category had reached $255,000. Let's assume, for the sake of discussion, that by the age of 65, the 401 (k) balance of a person who is retiring today has reached $400,000. This sum constitutes his or her entire retirement savings. The individual retires and transfers that money into an Individual Retirement Account (IRA). Now, how to invest that money? Following the traditional age based allocation rule, 65% of the portfolio ($260,000) would be invested in debt securities, such as US Treasuries, state or municipal obligations and corporate bonds. The balance, $140,000, goes into publicly traded stocks or mutual funds, i.e., equity securities.
However, if you consider your Social Security check as a monthly interest payment you receive on a government debt obligation that you own, those dollar allocations change. The first step is to find the interest rate on a one year US Treasury obligation. This information is available every day in the Wall Street Journal. Assume you receive a monthly benefit of $1,000 from Social Security - $12,000 per year. Assume further that the current interest rate on a one year Treasury is 3% per annum. Your hypothetical treasury obligation generating a 3% return of $12,000 would have a notional principal of $400,000 ($400,000 x 3% = $12,000). In effect, you may now consider that you have an $800,000 retirement portfolio consisting of $400,000 in a hypothetical one year 3% treasury obligation and your actual $400,000 cash IRA. Under your age based allocation, your total portfolio of $800,000 (hypothetical plus cash) should then contain $520,000 of debt securities and $280,000 of equity securities. Given the $400,000 notional value of your Social Security "investment", your cash IRA could then be divided into $120,000 of interest bearing securities and $280,000 of stocks or mutual funds. Under this scenario, your IRA, on a cash basis, could contain twice the equity securities that it would if you did not include the Social Security payment in your allocation decision. Equities have proven in the past to be a much better defense against inflation than debt securities.
Once a year, maybe each January, you should recheck the going interest rate for one year Treasuries, redetermine the present value of your Social Security "investment" based on your monthly checks (which are increased for inflation) and reallocate between debt and equity. As stated in an earlier post, asset allocation is not a one time decision. It should be revisited at least annually. The allocation also changes as you age, resulting in more debt and less equity. The age based reallocation need not be precise, year by year. During your 60s, you might allocate 65% and when you are in your 70s, the debt percentage of the portfolio goes up accordingly.
The age based allocation has been touted for many years by financial advisers;
however, with the extended longevity expected for today's retirees, it
may be necessary to consider an allocation which reflects a larger
portion of equity in your portfolio than called for under the age
formula. This decision depends, however, on your capacity for risk tolerance. Like Mr. Morgan's troubled friend, do your stocks or mutual funds keep you up at night?
Comments are always welcome.
Monday, October 7, 2013
Monday, September 30, 2013
Retirement - Your Second First Job (2)
The old rule of thumb regarding asset allocation calls for a portfolio to consist of a percentage of debt securities equal to your age and the balance invested in equities. At the age of 65, you would have 35% of your retirement funds in equities under the rule. As with all rules of thumb, they should not be followed blindly. Setting your allocation percentages is not a "one and done" decision. You should expect to change your allocation over time as circumstances dictate.There are a couple of other factors to keep in mind.
A retiree must take the present state of the market into account in establishing his or her allocation between debt and equity securities. Is the Market rising, declining or moving sideways? Some consideration of the market is necessary when deciding how to allocate your portfolio. As the Market changes, it is possible that your asset allocation must follow in some fashion. How that occurs must be based in part on your investment mentality.
More important than the state of the market is your mental state. You must honestly determine your risk tolerance. Warren Buffett said that if you could not tolerate a decline of 50% in your portfolio's value without selling out your position, you should probably not invest in individual stocks. Over your remaining years, the Market will rise and fall several times, carrying a portfolio of common stocks with it. If a drop of 50% in value will likely lead you to panic selling, your equity allocation should be smaller than that of an investor who is psychologically able to ride out the decline. It is said that someone once told J.P. Morgan that frequent changes in the value of the individual's portfolio were causing him to lose sleep and asked what he should do about it. Morgan's famous reply was "sell down until you can sleep." Although anecdotal, the advice may be a good way to decide how much you keep in equities. Retirement is supposed to be relaxing, not nerve wracking.
The most frequent question asked by the soon to be retired individual focuses on how large a portfolio he or she needs. Remember the TV ads with the tag line, "What's your number?" Fred Schwed, in his book Where Are the Customers' Yachts? or A Good Hard Look At Wall Street pointed out an interesting difference between American and British investors as follows:
The British, as a race, have been engaged with the problems of capital investment for a longer period than we have, and accordingly have reached a greater maturity regarding it. Have you noticed that when you ask a Britisher about a man's wealth you get an answer quite different from that an American gives you? The American says, "I wouldn't be surprised if he's worth close to a million dollars." The Englishman says, "I fancy he has five thousand pounds a year." The Englishman's habitual way of speaking and thinking about wealth is of course much closer to the nub of the matter. A man's true wealth is his income, not his bank balance.
The retiree's goal is to manage his or her portfolio in such a fashion that there is enough income to sustain a desired life style. It is up to the individual to do this; the Second First Job. We will continue to look at this issue in the next post.
Excerpt from Where Are the Customer's Yachts? or A Good Hard Look At Wall Street, Fred Schwed, Jr., copyright 1940, republished by John Wiley & Sons, Inc, page 190.
Comments are always welcome.
A retiree must take the present state of the market into account in establishing his or her allocation between debt and equity securities. Is the Market rising, declining or moving sideways? Some consideration of the market is necessary when deciding how to allocate your portfolio. As the Market changes, it is possible that your asset allocation must follow in some fashion. How that occurs must be based in part on your investment mentality.
More important than the state of the market is your mental state. You must honestly determine your risk tolerance. Warren Buffett said that if you could not tolerate a decline of 50% in your portfolio's value without selling out your position, you should probably not invest in individual stocks. Over your remaining years, the Market will rise and fall several times, carrying a portfolio of common stocks with it. If a drop of 50% in value will likely lead you to panic selling, your equity allocation should be smaller than that of an investor who is psychologically able to ride out the decline. It is said that someone once told J.P. Morgan that frequent changes in the value of the individual's portfolio were causing him to lose sleep and asked what he should do about it. Morgan's famous reply was "sell down until you can sleep." Although anecdotal, the advice may be a good way to decide how much you keep in equities. Retirement is supposed to be relaxing, not nerve wracking.
The most frequent question asked by the soon to be retired individual focuses on how large a portfolio he or she needs. Remember the TV ads with the tag line, "What's your number?" Fred Schwed, in his book Where Are the Customers' Yachts? or A Good Hard Look At Wall Street pointed out an interesting difference between American and British investors as follows:
The British, as a race, have been engaged with the problems of capital investment for a longer period than we have, and accordingly have reached a greater maturity regarding it. Have you noticed that when you ask a Britisher about a man's wealth you get an answer quite different from that an American gives you? The American says, "I wouldn't be surprised if he's worth close to a million dollars." The Englishman says, "I fancy he has five thousand pounds a year." The Englishman's habitual way of speaking and thinking about wealth is of course much closer to the nub of the matter. A man's true wealth is his income, not his bank balance.
The retiree's goal is to manage his or her portfolio in such a fashion that there is enough income to sustain a desired life style. It is up to the individual to do this; the Second First Job. We will continue to look at this issue in the next post.
Excerpt from Where Are the Customer's Yachts? or A Good Hard Look At Wall Street, Fred Schwed, Jr., copyright 1940, republished by John Wiley & Sons, Inc, page 190.
Comments are always welcome.
Monday, September 23, 2013
Retirement - Your Second First Job (1)
WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
Congratulations!! You made it to retirement. As the title of this post implies, you now have a new job. During your working career, the majority of your retirement savings have, in all likelihood, been managed by a pension administrator or a 401K plan provider. You may have picked the investment options or opted for the portfolio suggested by the plan provider. In other words, while you were busy with your career, someone else was making most of the investment decisions for your retirement portfolio. Like many others, you will probably choose to receive a lump sum transfer of those retirement proceeds into an Individual Retirement Account (IRA) after you have wrapped up your last days of work.
You are now sitting at the kitchen table on that first morning of your "golden years" wondering where all the time went. At some point you will begin to wonder about how much money you have and will you outlive your savings. Your new job, what I call your Second First Job, is to make sure your money is there for you through the remaining time you have, hopefully a few decades.
When Social Security was created in 1935, the retirement age (when benefits could be received) was set at 65. There were approximately 7.8 million people that age when it was established. Today, a 65 year old enjoying reasonably good health can expect to live at least an additional twenty plus years. Most women have even more time left. Remember, these are averages, and when trying to calculate your remaining life expectancy, you need to factor in family history and your life style. For our purposes, let's assume that, as a 65 year old man or woman, you have another twenty years of life ahead of you. Your money has to last that long if you are single. A couple must make the expectancy calculation based on the prospects for the survivor. Here is a link to the Social Security website with a life expectancy calculator. Another issue to consider is whether you want to leave a legacy for your children, but that is beyond the scope of this post.
The truly organized individual has probably lived within a budget for many years. Many of us have not, thinking that there is always going to be another paycheck. The game has now changed. There will be no more paychecks, unless you intend to keep working in some capacity. If you are not going to continue full time employment, the size of the paycheck will shrink. It is now time for a budget to figure out what you can spend and where that money will come from for the duration of your life. Once a budget is established, your Second First Job begins: how to fund that budget.
A typical retiree will have three sources of income: Social Security, proceeds from an employer's retirement benefit program (pension or 401K plan) and personal retirement savings, usually an Individual Retirement Account (IRA).
As mentioned in an earlier post, there are three certainties in this life: death, taxes and inflation. Of the three, inflation is a retiree's worst financial enemy. The annual inflation rate is low these days, but anyone 65 or older will remember the late 70s and early 80s when annual inflation rates were double digits. There is no reason to believe that this could not happen again in the next twenty or so years. Even low inflation rates, over time, will significantly erode the purchasing power of a retiree's income.
We will continue exploring this topic in the next post.
Comments are always welcome.
Congratulations!! You made it to retirement. As the title of this post implies, you now have a new job. During your working career, the majority of your retirement savings have, in all likelihood, been managed by a pension administrator or a 401K plan provider. You may have picked the investment options or opted for the portfolio suggested by the plan provider. In other words, while you were busy with your career, someone else was making most of the investment decisions for your retirement portfolio. Like many others, you will probably choose to receive a lump sum transfer of those retirement proceeds into an Individual Retirement Account (IRA) after you have wrapped up your last days of work.
You are now sitting at the kitchen table on that first morning of your "golden years" wondering where all the time went. At some point you will begin to wonder about how much money you have and will you outlive your savings. Your new job, what I call your Second First Job, is to make sure your money is there for you through the remaining time you have, hopefully a few decades.
When Social Security was created in 1935, the retirement age (when benefits could be received) was set at 65. There were approximately 7.8 million people that age when it was established. Today, a 65 year old enjoying reasonably good health can expect to live at least an additional twenty plus years. Most women have even more time left. Remember, these are averages, and when trying to calculate your remaining life expectancy, you need to factor in family history and your life style. For our purposes, let's assume that, as a 65 year old man or woman, you have another twenty years of life ahead of you. Your money has to last that long if you are single. A couple must make the expectancy calculation based on the prospects for the survivor. Here is a link to the Social Security website with a life expectancy calculator. Another issue to consider is whether you want to leave a legacy for your children, but that is beyond the scope of this post.
The truly organized individual has probably lived within a budget for many years. Many of us have not, thinking that there is always going to be another paycheck. The game has now changed. There will be no more paychecks, unless you intend to keep working in some capacity. If you are not going to continue full time employment, the size of the paycheck will shrink. It is now time for a budget to figure out what you can spend and where that money will come from for the duration of your life. Once a budget is established, your Second First Job begins: how to fund that budget.
A typical retiree will have three sources of income: Social Security, proceeds from an employer's retirement benefit program (pension or 401K plan) and personal retirement savings, usually an Individual Retirement Account (IRA).
As mentioned in an earlier post, there are three certainties in this life: death, taxes and inflation. Of the three, inflation is a retiree's worst financial enemy. The annual inflation rate is low these days, but anyone 65 or older will remember the late 70s and early 80s when annual inflation rates were double digits. There is no reason to believe that this could not happen again in the next twenty or so years. Even low inflation rates, over time, will significantly erode the purchasing power of a retiree's income.
We will continue exploring this topic in the next post.
Comments are always welcome.
Monday, September 16, 2013
Einstein's Eighth Wonder
WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
One of Albert Einstein's famous quotes dealt with finance, not physics. He said, "Compound Interest is the eighth wonder of the world. He who understands it, earns it...he who doesn't...pays it."
Compound interest is interest on a debt which includes any previously unpaid interest as principal. In other words, interest on interest. The classic example is the credit card. Assume you have a balance of $1,000 on your card which accrues interest at 12% per annum. Therefore, the simple interest on the debt is $120 per year or $10 per month. If you make a payment of $5 one month, the unpaid $5 of accrued interest becomes part of the principal the next month. Next month, your new balance is $1,005 on which the interest rate is again calculated. On a larger scale, think of America's national debt. One of its bonds comes due. To raise the cash to pay off the bond, the federal government issues a new bond which includes the principal of the old bond plus the accrued interest.
Compounding also works in calculating returns on investments using the mathematical Rule of 72. It states that you can determine your annual rate of return on an investment if you know how many years it takes for the investment to double. If you divide the number 72 by the number of years, the result is the rate of return. Conversely, if you know your rate of return on the investment, you can determine how long it will take for your investment to double. Using the same formula, you divide 72 by your rate of return and the result is the approximate number of years it will take for the investment to increase 100%.
All Wall Street professionals advise people to start investing as early as possible, length of time being one of the factors in growing a portfolio. The sooner an individual starts investing, the longer for the portfolio to grow. One simple example (and a suggestion to parents and grandparents). Assume you open an Individual Retirement Account for your child with $2,000 per year starting when he or she is 14 years old. You invest an additional $2,000 each year for four years for a total of $8,000. Neither you nor your child make any further deposits into the account. Assume that amount is invested in an S&P 500 Index fund, which has, despite yearly ups and downs, grown at an average of 8% per annum over the last several decades. If the return is 8% per annum, then the Rule of 72 states that the amount will double every nine years. At that rate of return, the $8,000 will have doubled by the time he or she reaches 27. The $16,000 will become $32,000 by his or her 36th birthday. When your adult child celebrates his or her 45th birthday, the IRA will be worth $64,000. That amount will have grown to $128,000 by age 54. By 65, with one more double, the IRA will be worth $256,000. And this is without putting one more penny into the account! With continued $2,000 investments over and above the initial $8,000 (that's his or her job), the IRA should grow to well over $1 million dollars by the time that former 14 year old reaches retirement.
Compounding is an investor's best friend and a debtor's worst enemy.
Comments are always welcome.
One of Albert Einstein's famous quotes dealt with finance, not physics. He said, "Compound Interest is the eighth wonder of the world. He who understands it, earns it...he who doesn't...pays it."
Compound interest is interest on a debt which includes any previously unpaid interest as principal. In other words, interest on interest. The classic example is the credit card. Assume you have a balance of $1,000 on your card which accrues interest at 12% per annum. Therefore, the simple interest on the debt is $120 per year or $10 per month. If you make a payment of $5 one month, the unpaid $5 of accrued interest becomes part of the principal the next month. Next month, your new balance is $1,005 on which the interest rate is again calculated. On a larger scale, think of America's national debt. One of its bonds comes due. To raise the cash to pay off the bond, the federal government issues a new bond which includes the principal of the old bond plus the accrued interest.
Compounding also works in calculating returns on investments using the mathematical Rule of 72. It states that you can determine your annual rate of return on an investment if you know how many years it takes for the investment to double. If you divide the number 72 by the number of years, the result is the rate of return. Conversely, if you know your rate of return on the investment, you can determine how long it will take for your investment to double. Using the same formula, you divide 72 by your rate of return and the result is the approximate number of years it will take for the investment to increase 100%.
All Wall Street professionals advise people to start investing as early as possible, length of time being one of the factors in growing a portfolio. The sooner an individual starts investing, the longer for the portfolio to grow. One simple example (and a suggestion to parents and grandparents). Assume you open an Individual Retirement Account for your child with $2,000 per year starting when he or she is 14 years old. You invest an additional $2,000 each year for four years for a total of $8,000. Neither you nor your child make any further deposits into the account. Assume that amount is invested in an S&P 500 Index fund, which has, despite yearly ups and downs, grown at an average of 8% per annum over the last several decades. If the return is 8% per annum, then the Rule of 72 states that the amount will double every nine years. At that rate of return, the $8,000 will have doubled by the time he or she reaches 27. The $16,000 will become $32,000 by his or her 36th birthday. When your adult child celebrates his or her 45th birthday, the IRA will be worth $64,000. That amount will have grown to $128,000 by age 54. By 65, with one more double, the IRA will be worth $256,000. And this is without putting one more penny into the account! With continued $2,000 investments over and above the initial $8,000 (that's his or her job), the IRA should grow to well over $1 million dollars by the time that former 14 year old reaches retirement.
Compounding is an investor's best friend and a debtor's worst enemy.
Comments are always welcome.
Monday, September 9, 2013
Does My Money Need A Passport? (2)
WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
It has been reported that 54% of investment opportunities in the world, based on capitalization, are located in countries other than the US. Of the ten largest car manufacturers in the world, only three of them are American. Similarly, seven of the ten largest companies engaged in telecommunications are in other countries. Half of the ten largest household products manufacturers are located outside the US, but their products are available here. The vast majority of mining operations are found overseas.
If an individual investor has decided that a portion of his or her portfolio should be invested in foreign stocks, there are several alternatives available. International investing can be accomplished with mutual funds, exchange traded funds (ETFs), direct investing in a foreign market and American Depository Receipts (ADRs). The costs, expenses and difficulties of directly buying a stock in a foreign market put this strategy out of the reach of most individuals.
Mutual funds and ETFs come in two varieties. A "Global Fund" invests in companies throughout the world. This means that a portion of the fund will hold stocks in the investor's own country. If the fund is labeled "International" or "Foreign", there will be no stocks from the investor's country in the portfolio.
Some mutual funds and ETFs invest only in developed countries, such as England, France, Japan and Germany. Others focus on emerging markets, less developed countries with prospects for increased rates of growth. In 2003, the investment firm Goldman Sachs identified Brazil, Russia, India and China as the four emerging markets with the greatest potential to become dominant in the global economy. The countries are collectively referred to by the acronym BRIC. Goldman projected that China and India would together lead the world in manufacturing. Russia and Brazil would become leading suppliers of raw materials. These countries are, obviously, not a political bloc. However, if they worked together financially, they could become a very powerful economic force in the global economy by 2050. BRIC could surpass today's economic powers, including the US.
The investment firm JP Morgan introduced ADRs to American investors in 1927. This was one of the first ways to invest internationally in this country. An investment firm purchases and holds large amounts of foreign stocks in safekeeping. It then sells shares or receipts in that portfolio (just like a mutual fund) to US investors. Those receipts are traded on Wall Street in US dollars, just like US stocks. These days, some foreign companies cut out the middle man, the investment firm sponsoring the ADRs, and issue their shares directly into the US markets.
International investing brings added risks. Since foreign companies are not necessarily subject to the disclosure requirements imposed on US companies by the Securities & Exchange Commission, financial information can be difficult to get and may not be entirely reliable. Political instability in emerging countries could detrimentally affect companies in those countries. There are many examples of companies being nationalized by foreign governments. Currency exchange rates fluctuate daily, which can impact the US dollar value of an investment. Inflation rates vary from country to country and could drive down the value of a foreign stock held by an American investor even though the actual business of the company has not changed.
One last thing to keep in mind. US companies are increasingly becoming global in their own right. Approximately half of the companies on the S&P 500 Index break out global sales in their financial reports. Global revenues of the reporting companies represented 46% of their total revenues. Therefore, almost 25% of all S&P 500 revenues came from foreign countries. If you assume that the same percentages hold true for the companies which do not break out their foreign business, it could be that almost 50% of the revenue of the S&P 500 companies is international. If this is the case, an individual investor might safely invest "internationally" by simply buying an S&P 500 Index mutual fund or ETF.
Comments are always welcome.
It has been reported that 54% of investment opportunities in the world, based on capitalization, are located in countries other than the US. Of the ten largest car manufacturers in the world, only three of them are American. Similarly, seven of the ten largest companies engaged in telecommunications are in other countries. Half of the ten largest household products manufacturers are located outside the US, but their products are available here. The vast majority of mining operations are found overseas.
If an individual investor has decided that a portion of his or her portfolio should be invested in foreign stocks, there are several alternatives available. International investing can be accomplished with mutual funds, exchange traded funds (ETFs), direct investing in a foreign market and American Depository Receipts (ADRs). The costs, expenses and difficulties of directly buying a stock in a foreign market put this strategy out of the reach of most individuals.
Mutual funds and ETFs come in two varieties. A "Global Fund" invests in companies throughout the world. This means that a portion of the fund will hold stocks in the investor's own country. If the fund is labeled "International" or "Foreign", there will be no stocks from the investor's country in the portfolio.
Some mutual funds and ETFs invest only in developed countries, such as England, France, Japan and Germany. Others focus on emerging markets, less developed countries with prospects for increased rates of growth. In 2003, the investment firm Goldman Sachs identified Brazil, Russia, India and China as the four emerging markets with the greatest potential to become dominant in the global economy. The countries are collectively referred to by the acronym BRIC. Goldman projected that China and India would together lead the world in manufacturing. Russia and Brazil would become leading suppliers of raw materials. These countries are, obviously, not a political bloc. However, if they worked together financially, they could become a very powerful economic force in the global economy by 2050. BRIC could surpass today's economic powers, including the US.
The investment firm JP Morgan introduced ADRs to American investors in 1927. This was one of the first ways to invest internationally in this country. An investment firm purchases and holds large amounts of foreign stocks in safekeeping. It then sells shares or receipts in that portfolio (just like a mutual fund) to US investors. Those receipts are traded on Wall Street in US dollars, just like US stocks. These days, some foreign companies cut out the middle man, the investment firm sponsoring the ADRs, and issue their shares directly into the US markets.
International investing brings added risks. Since foreign companies are not necessarily subject to the disclosure requirements imposed on US companies by the Securities & Exchange Commission, financial information can be difficult to get and may not be entirely reliable. Political instability in emerging countries could detrimentally affect companies in those countries. There are many examples of companies being nationalized by foreign governments. Currency exchange rates fluctuate daily, which can impact the US dollar value of an investment. Inflation rates vary from country to country and could drive down the value of a foreign stock held by an American investor even though the actual business of the company has not changed.
One last thing to keep in mind. US companies are increasingly becoming global in their own right. Approximately half of the companies on the S&P 500 Index break out global sales in their financial reports. Global revenues of the reporting companies represented 46% of their total revenues. Therefore, almost 25% of all S&P 500 revenues came from foreign countries. If you assume that the same percentages hold true for the companies which do not break out their foreign business, it could be that almost 50% of the revenue of the S&P 500 companies is international. If this is the case, an individual investor might safely invest "internationally" by simply buying an S&P 500 Index mutual fund or ETF.
Comments are always welcome.
Monday, September 2, 2013
Does My Money Need A Passport? (1)
WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
Once upon a time Corporate America was top dog and paid little attention to the industries of other countries and their products. Then change started to happen in the US. People began driving Volkswagens and Toyotas instead of Chevys and Oldsmobiles. Some bikers bought Honda motorcycles instead of Harleys. Sony televisions became market leaders, pushing aside Zenith and Magnavox. Pasta actually came from Italy. You could find excellent wines from South America at your local liquor store at a reasonable price. Chocolate lovers traded their Baby Ruth bars for Nestle Crunch. Interestingly, Baby Ruth bars are now made by Nestle. Globalization hit with a vengeance and continues to this day.
One of the earliest pioneers in international investing was Sir John Templeton. Born in Tennessee, Templeton ultimately moved to Nassau where he became a naturalized British citizen. He was knighted for his work in several fields, including philanthropy. He formed the Templeton World Fund in 1978, one of the first mutual funds to invest on a global basis. Templeton had a value/contrarian investment strategy. Unlike most of his contemporaries, however, he would look for low priced companies beyond America's shores. He is considered one of the top international investors in the history of Wall Street.
Peter Lynch managed the Fidelity Magellan Fund for thirteen years with an astounding average return of 29% per annum. A little known fact is that a portion of that return was attributable to his foreign investments. In his book, Beating the Street, he revealed what he called his "adventures abroad" as follows:
With the exception of John Templeton, I was the first domestic fund manager to invest heavily in foreign stocks. Templeton's fund was a global version of Magellan. Whereas I might have 10 - 20 percent of the money invested in foreign stocks, Templeton invested most of his money abroad.
With the pile of cash I now had to invest, I was almost forced to turn to foreign stocks, particularly in Europe. With a big fund, I needed to find big companies that would make big moves, and Europe has a higher percentage of big companies than we do.
So, what does this mean for the individual investor? Investment possibilities are now global. Many Wall Street professionals advise their clients to diversify a portion of their portfolios with the stocks of foreign companies.
We will explore the world of global investing further in the next post.
Excerpts from Beating the Market by Peter Lynch with John Rothchild, copyright 1993, published by Simon & Schuster, pages 122-123
Comments are always welcome.
Once upon a time Corporate America was top dog and paid little attention to the industries of other countries and their products. Then change started to happen in the US. People began driving Volkswagens and Toyotas instead of Chevys and Oldsmobiles. Some bikers bought Honda motorcycles instead of Harleys. Sony televisions became market leaders, pushing aside Zenith and Magnavox. Pasta actually came from Italy. You could find excellent wines from South America at your local liquor store at a reasonable price. Chocolate lovers traded their Baby Ruth bars for Nestle Crunch. Interestingly, Baby Ruth bars are now made by Nestle. Globalization hit with a vengeance and continues to this day.
One of the earliest pioneers in international investing was Sir John Templeton. Born in Tennessee, Templeton ultimately moved to Nassau where he became a naturalized British citizen. He was knighted for his work in several fields, including philanthropy. He formed the Templeton World Fund in 1978, one of the first mutual funds to invest on a global basis. Templeton had a value/contrarian investment strategy. Unlike most of his contemporaries, however, he would look for low priced companies beyond America's shores. He is considered one of the top international investors in the history of Wall Street.
Peter Lynch managed the Fidelity Magellan Fund for thirteen years with an astounding average return of 29% per annum. A little known fact is that a portion of that return was attributable to his foreign investments. In his book, Beating the Street, he revealed what he called his "adventures abroad" as follows:
With the exception of John Templeton, I was the first domestic fund manager to invest heavily in foreign stocks. Templeton's fund was a global version of Magellan. Whereas I might have 10 - 20 percent of the money invested in foreign stocks, Templeton invested most of his money abroad.
With the pile of cash I now had to invest, I was almost forced to turn to foreign stocks, particularly in Europe. With a big fund, I needed to find big companies that would make big moves, and Europe has a higher percentage of big companies than we do.
So, what does this mean for the individual investor? Investment possibilities are now global. Many Wall Street professionals advise their clients to diversify a portion of their portfolios with the stocks of foreign companies.
We will explore the world of global investing further in the next post.
Excerpts from Beating the Market by Peter Lynch with John Rothchild, copyright 1993, published by Simon & Schuster, pages 122-123
Comments are always welcome.
Monday, August 26, 2013
Thank You, Mr. Dow
WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK. FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON
We have looked at equity mutual funds and their constant struggle to beat the stock market. What, exactly, is that market? The short answer would be that the market can be whatever you want it to be. Stock markets are composed of thousands of publicly traded companies and can be measured in various ways. The goal of a stock market index is to compile a group of stocks that reflect the general movement of all of the stocks traded in a particular market. Today, the three most recognizable stock market indices are the S&P 500, the NASDAQ and the grandaddy of them all, the Dow Jones Industrial Average (DJIA). When people ask, "How did the market do?", they generally expect to hear what happened to the DJIA that day.
Charles Dow, Edward Jones and Charles Bergstresser formed Dow Jones & Company in 1882. Their original publication was the Customer's Afternoon Letter, which later became the Wall Street Journal. In 1884, Dow published his first stock average, which highlighted growth stocks of the time. His first benchmark average included nine railroads (probably seen as high tech then), a steamship company and Western Union. In May, 1896 Dow converted these original stocks into his Transportation Average and created his first Industrial Average, based on twelve companies. One of the original industrial companies still remains as part of the average to this day, General Electric, which was organized by Thomas Edison in 1890. Although the companies changed over the years, the DJIA included only twelve stocks until 1916 when it was increased to twenty companies. The number increased to thirty in January, 1929, where it has stayed ever since. The 1929 average included some companies still recognized today, but no longer in the average, such as General Motors, Goodrich, Sears Roebuck, Westinghouse and US Steel.
Originally, the average was calculated each day by adding up the stock prices of the Dow components and then dividing that by the number of stocks in the average. This provided an accurate average only so long as none of the companies announced a stock split or issued a stock dividend to it shareholders. As that occurred over the years, the divisor had to be recalculated. The Dow divisor today is 0.14452124. The DJIA is a price-weighted method of calculation. Most of the other stock indexes today are based on the weighted market capitalization of the component companies.
In January, 1900 the smaller average (12 stocks) was 68.13. It took until 1920 for the DJIA to first break 100. It peaked at 307.01 in January,1929 (then thirty stocks) before plunging after the stock market crash and subsequent depression to a low of 41.22 in 1932. The average remained in the 100s from 1934 until December, 1949 when it closed over 200. It did not break 1,000 until 1972, but seesawed thereafter until the beginning of the roughly eighteen year bull market in 1982. The Dow went on to surpass 2,000 in 1987 and 3,000 in 1991. The bull market continued with the DJIA breaking 4,000 in February, 1995 and 5,000 nine months later. It went above 6,000 in 1996 and crossed the 11,000 mark in 1999. The subsequent market drop, starting in 2001, lowered the average and it did not recover to its previous high until 2006. Subsequent market increases and falls continued until May, 2013 when the DJIA crossed 15,000.
The Dow's reaching each benchmark of 1,000 points piques the interest of the public and garners media attention. However, most experienced investors recognize that it is just that, interesting but not really significant from a financial standpoint.
Comments are always welcome.
We have looked at equity mutual funds and their constant struggle to beat the stock market. What, exactly, is that market? The short answer would be that the market can be whatever you want it to be. Stock markets are composed of thousands of publicly traded companies and can be measured in various ways. The goal of a stock market index is to compile a group of stocks that reflect the general movement of all of the stocks traded in a particular market. Today, the three most recognizable stock market indices are the S&P 500, the NASDAQ and the grandaddy of them all, the Dow Jones Industrial Average (DJIA). When people ask, "How did the market do?", they generally expect to hear what happened to the DJIA that day.
Charles Dow, Edward Jones and Charles Bergstresser formed Dow Jones & Company in 1882. Their original publication was the Customer's Afternoon Letter, which later became the Wall Street Journal. In 1884, Dow published his first stock average, which highlighted growth stocks of the time. His first benchmark average included nine railroads (probably seen as high tech then), a steamship company and Western Union. In May, 1896 Dow converted these original stocks into his Transportation Average and created his first Industrial Average, based on twelve companies. One of the original industrial companies still remains as part of the average to this day, General Electric, which was organized by Thomas Edison in 1890. Although the companies changed over the years, the DJIA included only twelve stocks until 1916 when it was increased to twenty companies. The number increased to thirty in January, 1929, where it has stayed ever since. The 1929 average included some companies still recognized today, but no longer in the average, such as General Motors, Goodrich, Sears Roebuck, Westinghouse and US Steel.
Originally, the average was calculated each day by adding up the stock prices of the Dow components and then dividing that by the number of stocks in the average. This provided an accurate average only so long as none of the companies announced a stock split or issued a stock dividend to it shareholders. As that occurred over the years, the divisor had to be recalculated. The Dow divisor today is 0.14452124. The DJIA is a price-weighted method of calculation. Most of the other stock indexes today are based on the weighted market capitalization of the component companies.
In January, 1900 the smaller average (12 stocks) was 68.13. It took until 1920 for the DJIA to first break 100. It peaked at 307.01 in January,1929 (then thirty stocks) before plunging after the stock market crash and subsequent depression to a low of 41.22 in 1932. The average remained in the 100s from 1934 until December, 1949 when it closed over 200. It did not break 1,000 until 1972, but seesawed thereafter until the beginning of the roughly eighteen year bull market in 1982. The Dow went on to surpass 2,000 in 1987 and 3,000 in 1991. The bull market continued with the DJIA breaking 4,000 in February, 1995 and 5,000 nine months later. It went above 6,000 in 1996 and crossed the 11,000 mark in 1999. The subsequent market drop, starting in 2001, lowered the average and it did not recover to its previous high until 2006. Subsequent market increases and falls continued until May, 2013 when the DJIA crossed 15,000.
The Dow's reaching each benchmark of 1,000 points piques the interest of the public and garners media attention. However, most experienced investors recognize that it is just that, interesting but not really significant from a financial standpoint.
Comments are always welcome.
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