Category: Investment - PFwise.com

Could Money Market Funds Lose Money?

4/3/2020

Q. Could Money Market Funds lose money?

A. Money market funds are mutual funds that invest in debt securities with short maturities and minimal credit risk. Their prices reflect the net asset value (NAV), which is the total value of all the securities in the portfolio divided by the number of shares outstanding.

If you understand the 3 different types of the money market funds, you will see if money market funds could lose money or not.

1. Treasury and government money market mutual funds
An example:Fidelity Government Money Market Fund (SPAXX), it invests in the highest-quality, lowest-risk securities issued by the US government and repurchase agreements collateralized by government securities. Treasury and government funds are designed to maintain a stable NAV of $1.00 and they do not place restrictions on investors' ability to access their money in the funds. Government money market funds are open to both retail and institutional investors.

2. Prime funds
An example, Fidelity Money Market Fund (SPRXX), it also offers $1.00 NAVs, but it differs from government funds in that they may invest in more types of securities (e.g. short-term instruments issued by corporations, such as commercial paper and certificates of deposit) and may restrict the ability of investors to access their money in times of severe market stress, either by charging fees to redeem shares or by imposing restrictions on redemptions known as gates.

Institutional investors with significant assets may invest in institutional prime money market funds, like Fidelity Investments Money Market Prime Reserves Portfolio—Class I (FDPXX). These funds also may restrict redemptions in times of stress by using liquidity-triggered fees or gates. They differ, however, in that their NAVs do not remain stable at $1.00, but instead may "float" slightly around $1.00.)

3. Municipal money market funds
An example, Fidelity Municipal Money Market Fund (FTEXX), it invests in short-term securities issued by state and local governments are similar to retail prime funds in that they also offer stable $1.00 NAVs but can restrict investors' access to cash during extreme market conditions.

For all these types of funds, the Fed's support of the short-term markets will help to maintain the highly liquid nature of money market funds. Money market fund yields are likely to trend lower following the recent interest rate cut. Yields on money market funds tend to follow short-term rates set by the Fed, although typically with a lag.

What To Do If No Money for Mortgage or Rent?

3/31/2020

Q. What resources are out there if no money for mortgage or rent payment?

A. Assistance is out there, here is what you need to do -

Mortgage payment help
Contact your loan servicer right away if you think you can't make payment. Fannie Mae and Freddie Mac have already said they are suspending foreclosures on mortgages they guarantee for 60 days.

What exactly can you expect?

For loans held by banks, go to aba.com and search "Industry responds to the coronavirus" to see what relief institutions are offering.
For credit unions' responses, go to americascreditunions.org

Rent payment help
Fannie Mae and Freddie Mac will offer multifamily property owners loan deferrals if they promise not to evict tenants.

Although various jurisdictions have temporarily halted evictions, you should call your landlord to explore your options. Keep in mind even if your landlord is able to get a forbearance for their mortgage, you will likely have to catch up on the missed rent payments later.

What Does Bear Market Look Like Historically?

3/30/2020

Like it or not, and most people don't, bear markets are a regular part of investing. Bear markets are commonly defined as a decline of at least 20% from the market's high point (peak) to the low during the selloff. Using the S&P 500 as representative of the market, this has happened 16 times since 1926, an average of about once every 6 years. When a bear market does happen it tends to be fairly dramatic, with an average loss of almost 40%. And it tends to take a while to recover those losses—the average duration is 22 months.

The good news is that in every case markets have come back, and often have made sizable gains in the months immediately following the downturn. The past is no guarantee of future results, but historically even the worst markets have been temporary dips in a general march higher for stocks (see the table below which depicts bear market periods and subsequent returns). Of course, there was significant variability of outcomes around these averages.

Panic Selling Leads to More Losses

3/29/2020

Vanguard created a chart to show what happened to 3 investors who found themselves at the bottom of one of the worst bear markets in history: the Great Recession.

From 2008 to 2009, even balanced portfolios lost almost 30% of value. It was, to say the least, a stressful time to have money in the market.

Each of the investors chose a different course of action:

Investor 1, represented by the blue line in the chart below, decided to stick with her plan. She started with a 50/50 allocation, and didn’t sell out of the equities portion.
Investor 2 couldn’t stand the pain of loss anymore. Although he initially had the same 50/50 portfolio allocation, he decided to sell all his equities to buy into bonds. He sold all of his stocks to buy bonds, feeling this was “safer.”
Investor 3 felt she had to protect the money she had left, and she sold everything to move to cash.

So how did the investors end up?

Investor 1 — who stayed put and stuck to her plan — regained all the lost value in her portfolio by mid 2010. By 2017, her portfolio balance was almost double the other two investors who panicked and couldn’t stick with their investment strategy.
It took Investor 2 almost 8 years just to regain the lost value in his portfolio. And he’s far behind Investor 1, who stayed invested according to her plan.
And Investor 3, who moved to cash to protect her money? Not only did she never make her money back, but she’s also the only one of the investors in this scenario who ended up with a realized loss.

What this shows us is that the investors who panicked and sold equities at the bottom of the market would have taken years to break even… or they would have realized their losses and locked them in, to wind up with far less money than they would have had they done nothing and simply stayed the course.

4 Actions Investors Should Take Now

3/27/2020

1. Rebalance
I don’t know where the bottom is but I’m 100% certain that stocks are a much better buy today than they were on Feb. 19. Rebalancing during the dot-com and real estate financial bubbles worked out pretty well. Buying stocks on sale usually works in the long-run and you may need to do it several times since we don’t know when the bottom will come.

2. Tax-loss harvest
By selling losses, you can build up a tax-loss carryforward for use in future years, not to mention the $3,000 that couples can recognize each year. Bad times don’t last forever and markets will move up again. That tax-loss carryforward you build now will be very valuable when you have to sell stocks at gains later on. If stocks/funds haven’t recovered in the 31-day waiting period to avoid a wash sale, you can then go back into that original stocks/funds.

3. Get rid of the dogs
Dogs in the portfolio, of course. That could be a fund that is expensive and/or passing through some capital gains. And, by the way, those funds may pass though gains even in a bear market like this, potentially sharpening investment pain. In addition, dogs could be individual stocks provide uncompensated risk. But if the gains evaporate or become smaller, minimal taxes would need to be paid. Even if there are still gains in these dogs, the tax-loss harvesting previously mentioned may provide losses to offset these gains.

4. Reframe what the stock market is
Vanguard founder Jack Bogle famously said, “Investing is about enjoying the returns earned by businesses. And the stock market is nothing but a giant distraction in that quest to acquire returns that business earns.” Are you buying a stock because you believe the company's business or due to other reasons?

It Is Time To Hunker Down

3/22/2020

The following is a piece from Fidelity's director of global macro, Jurrien Timmer, from Fidelity's Global Asset Allocation Division, specializing in global macro strategy and active asset allocation.

Is the bear market predicting recession?
Not all bear markets have recessions. When they do, the bear market typically starts two months before a recession begins and typically ends four months before the recession ends. That makes sense, given that the market is always trying to discount the future. Something to keep in mind as we will start reading more and more about a recession in the coming weeks.

In my view, the key is to differentiate between a technical recession (i.e., a few quarters of negative growth followed by a return to trend growth), an inventory cycle (the classic recession scenario in which tight monetary policy driven by inflation triggers a recession just as companies spent too much on capital equipment), and a financial crisis (the above plus large financial imbalances that come unglued during the downturn).

Given that COVID-19 is presumably a temporary demand shock, I am assuming that if we get a recession it will be of the technical variety. But it will be important to watch the jobless claims data to make sure that the economy doesn't enter a negative feedback loop of layoffs begetting more layoffs. A robust fiscal response combined with ample liquidity from the Fed will hopefully be able to prevent this from happening.

It's important to remember that every recession is different, as this one will be, should it happen. And not every recession is a financial crisis. The global financial crisis in 2008 was a perfect storm with financial contagion spreading to all corners of the market. The current episode certainly has some of the contagion aspects now that an oil shock has been added to the mix, but the overall degree of leverage in the system seems far less today than 2008. Households are clean, the banks are clean, and most of the leverage in the corporate sector seems to be on the financial engineering side (for acquisitions and share repurchases) as opposed to old-fashioned capital expenditures.

Another important angle to consider when thinking about recessions is that the response function of the Fed and the trend in interest rates and inflation is also important. For example, the 1974 recession produced a 48% bear market in part because the Fed kept on raising rates throughout the entirety of that bear market. Only when it stopped in October 1974 was the market able to recover. It's a far cry from today's situation.

The power of diversification
For most long-term investors who have a properly diversified portfolio, the market storm has been scary but manageable, at least so far. A 60/40 stock/bond portfolio since the valuation peak in January 2018 is still up 5%, even though the drawdown in the S&P 500 from the February high is 27%. This is why it's important to (a) have an all-weather portfolio that is appropriate for an investor's financial situation, risk tolerance, and liquidity horizon (i.e., when the investor needs to draw from it), and (b) sticking with that plan through thick and thin, and (c), rebalance from time to time. At some point, that last one should be the next step for many investors.

For now, as we wait for COVID-19 to peak, for earnings season to kick in, for the policy response to take shape, for the contagion across asset classes to abate, and for the margin calls to be fulfilled, I think it's safe to say that we will see plenty more volatility across all markets. But technically, the market is very oversold now, and hopefully, we reached levels last week from which we can start building a base.

Typically, the market will form a momentum low, followed by many weeks or even months of base building, followed by a retest of sorts, and then finally a new bull market. So, even if last week was the low (unknowable for now), it will take time for the market to regain its health.

So, in the days ahead, stay safe. If you have a plan that's right for you, stick with it. Selling now means locking in losses. If you don't have a plan or are wondering if yours is still right for you, talk to a financial professional. In life and finances, now is a good time to hunker down.

5 Essential Lessons Investors Should Learn From Robo-Analysts And Robo-Advisors

3/21/2020

The article below is from Stockcharts.com, its analysis of 5 lessons investors could learn from robo-advisors is excellent -

Robots beat us at chess and are driving our cars now too. FinTech is invading Wall Street and Main Street too. To say that robo-analysts and robo-advisors (think Betterment.com) are stock market disruptors is an understatement on so many levels. Even so, we individual investors still have advantages, but what can we learn from the robo-investing universe?

Before we dig into the seismic insights from the Robo Universe, let's first review ourselves — individual investors. Can we become better by understanding what they're better at? The fact is that investing is messy. Why? Because it involves your money and your emotions. You tell yourself that you'll be disciplined, rational and analytic. But because your emotions are a big part of the equation and because human nature is what it is, you suddenly find yourself slipping between being logically disciplined and irrationally impulsive— and back again.

Herein lies the corrosion that seeps into your portfolio management. The thin threshold between what you know you should do versus what you find yourself actually doing. The constant frustration of how quickly you can abandon the rational for the irrational. In the pursuit of your own sensible equilibrium, you consent to pursue the appeals of your emotions and you fail to follow your self-imposed discipline. Successful investing requires in large part building a firewall between these two spheres. Something at which the Robo Universe excels.

Professional money managers have protections specifically structured into their operational arenas. Follow the system or get fired. Individual investors must implement their own firewall and protections which can take years to achieve. Some never do. With all that in mind, let's explore the powerful lessons we can take away from the Robo Universe.

Lesson 1
A recent Indiana University study analyzed over 75,000 robo-analyst reports, and the insights were jaw-dropping. Whereas traditional human analysts issued buys on 47% of the stocks analyzed, robots were more discriminating and issued only 30% buys. Robots were clearly more selective, and it also turns out they had a better hit ratio. This may sound like a dispiriting conclusion, but don't let it be.

Let's consider the sports world. All professional teams these days assemble their rosters using statistical techniques and algorithmic tools. The increased demands of competition have forced teams to raise their level of analysis. Investing is no different. We individual investors must raise our level of analysis too. For me, that means doing a better job of combining fundamentals and technicals. An appropriate example is the new equity summary page on stockcharts.com that has earnings and revenue data for fundamentals. As to technicals, I myself watch relative strength, volume and money flow most closely. The two arenas together — fundamentals and technicals — are what I call "Rational Analysis". It's been my experience that with these tools and scanning engines, we individual investors can outperform the robots.

Lesson 2
The same Indiana University study also looked at the sell side. Where human analysts issued sell recommendations on 6% of stocks, the robots issued sell recommendations on 25% of the same stocks. Intuitively, this is how it should be. Robots are free of emotional baggage. They are disciplined and consistent —thereby free of bias.

The lesson for individual investors is to be "more like a robot" when it comes to selling. A simple rule is to know your "uncle point" (i.e. your selling price) before you enter the trade. Sell on the facts (charts), not on the fundamentals, the projections or the talking heads' opinions. The charts will never lie to you. They are simply a picture of what buyers and sellers are willing to pay.

Focus on what is happening, not why you think something may or may not happen. The lesson for us humans is to recognize that robots aren't susceptible to paralysis from analysis in the way that we might be.

Lesson 3
Robots don't concern themselves with what their peers think. They don't worry about "sexy" equities, personal relationships or hurting someone's feelings — be they clients or corporate executives. Not so easy if you manage other people's money or as an individual investor who might have to explain their positions to family members or cocktail party friends. Aspiring to be a human being with robotic tendencies is not altogether a bad objective.

Lesson 4
Robots can't do personally appropriate estate plans or sophisticated individualized tax planning. This part of the investing arena is and will always be more a nuanced art than just the science of methodology. Technology is fine for data processing, communications and automation, but it has drawbacks in many areas. Don't be fooled into believing that it's better than humans in all situations. If that were true, some robotic algorithm would own the stock market.

Lesson 5
Finally, robots have no patience or intuition. We individual investors are capable of both. We learn from our mistakes, and we can adjust our future behavior based on nuanced exceptions and dynamic conditions. The best most personally appropriate investing solution may still require human judgement, patience and intuition. Investing (especially our own portfolios) is still more art than science.

Combine Earnings Scenarios and Valuation Scenarios to Predict Market Movements

3/20/2020

Fidelity.com has a great article that discusses market volatility from earnings scenarios and valuation scenarios perspectives, below are some of its highlights -

3 Earnings Scenarios

Our starting point is 2019 earnings per share (EPS) of $163 and 3,379 for the S&P 500 Index (SPX), the ending point is the high in January 2020.

The first scenario (U) assumes a modest 5% hit to EPS over the coming 2 quarters, followed by a trend-line growth rate of 8% (the expected growth rate prior to COVID-19). This scenario would see EPS bottom at $156 in Q2 and then rebound to $161 in 2020 and $172 in 2021—a recovery delayed but not canceled.
The second scenario (V) is a one-time hit of 10% over 2 quarters (down to $147 in Q2) followed by a V-shaped recovery to $159 in 2020 and $186 in 2021. Think of it as the earthquake scenario where demand gets hit hard and then comes roaring back.
The third scenario (L) is a one-time hit of 10% over 2 quarters followed by the same moderate trend-like 8% growth rate that was expected. In this scenario, EPS falls to $147 as before, but only rebounds to $152 by the end of 2020 and $163 in 2021 (so, it ends up where it is now).

2 Valuation Scenarios

Best-case scenarios
From here it becomes a matter of applying the appropriate valuation multiple. Let's optimistically assume for now that the market should be valued at 19x trailing earnings, below the recent peak of 20.7x but in line with where interest rates and inflation are.

In the U-shaped scenario, the S&P 500 should decline 13% from the highs, to 2,956. Compared to the low of 2,857 that we saw 2 Fridays ago, the market has already corrected more than it needed to. That suggests that the bottom is in place and the market can build its base before it moves back up (to 3,058 in 2020 and 3,271 in 2021).

In the V-scenario, the S&P 500 would fall to 2,795 from the highs for a total decline of 17% from the highs. That means that the S&P 500 has corrected almost as much as it should have (to the low of 2,857) and has upside to 3,023 in 2020 and 3,537 in 2021.

In the L-scenario, we would also see a decline of 17% from the peak, followed by a slower rebound to 2,891 in 2020 and 3,093 in 2021.

Worse-case scenarios
Now let's take a lower multiple of say 17x, and see where we come out. At a 17x multiple and using the above 3 earnings scenarios, we would get the double-whammy of both an EPS decline and a valuation haircut.

In the U-scenario, we get to a bottom of 2,645 for a decline of 22% from the high (crossing slightly into bear market range), and in the L-scenario, we would get a decline to 2,501. That would be a 26% decline and would put us firmly in bear market territory.

From there we would recover slowly or swiftly, based on the earnings recovery and more importantly the magnitude of multiple-expansion off the lows.

3 Strategies for Long Term Investors to Deal With Market Volatility - Part III

3/18/2020

We introduced strategies 1 and 2 here, now the third strategy for long term investors to deal with market volatility -

Strategy 3. Use Tactical Short Term Shorts

Tactical shorts such as Direxion Daily S&P 500 Bear 1X Shares ETF (SPDN) can reorient a portfolio’s risk exposures quickly without unwinding existing long positions. Such shorts seek investment returns, before fees and expenses, of 100% or more of the inverse of the performance of the S&P 500 Index or other market indexes for a single day.

For many investors, a more tactical short-term hedge is an attractive tool when facing a more volatile market environment. Investors with long-term conviction in their equity holdings but equally strong short-term concerns can tactically add short exposure in order to gain when markets decline.

It is important to note that such funds should not be expected to provide 100% of the inverse of the benchmark’s cumulative returns for periods longer than one day. And investors should understand the risks associated with the use of shorting and are willing to monitor their portfolios frequently.

3 Strategies for Long Term Investors to Deal With Market Volatility - Part II

3/17/2020

In last blogpost, we introduced strategy 1 to deal with market volatility, now strategy 2 -

Strategy 2. Invest in Low Beta Defensive Stocks
If you have a bearish view about near to medium term but still want to maintain a positive exposure to the stock market, you can add defensive stocks to your portfolio. Such stocks could be in sectors that are inherently less sensitive to macro shocks. When the economic outlook deteriorates, defensive stocks are likely to outperform cyclical equities based on historical precedent.
What are defensive stocks? They include utilities, consumer staples, and healthcare stocks that tend to exhibit significantly lower historical betas relative to the broader S&P 500. Historical betas (measure of a stock’s volatility in relation to the overall market) for all sectors shift over time, but more cyclical ones tend to be greater than 1. Overweighting defensive sectors while underweighting cyclicals helps to retain the upside potential of a rising market while mitigating downside risk.

We will discuss strategy 3 in next blogpost.

3 Strategies for Long Term Investors to Deal With Market Volatility - Part I

3/16/2020

Q. I am a long term investor, is there anything I could do to deal with market volatility?

A. For long-term investors, the most damaging potential threat of a major equity market shock is not the volatility itself, but the temptation to abandon the long term strategy out of fear and sell assets at the worst possible time.While volatility gives rise to anxiety, it also creates opportunity. Below are 3 strategies that long-term investors can use to prepare their portfolios for volatility, depending on the investor’s conviction about near-term conditions and longer-term opportunities.

Strategy 1. Invest in Assets with Low Correlations with Equity Markets
Such assets include long term U.S. Treasuries, Gold Bullion, and Utility stocks. Combined, these assets had an average correlation of zero over the past 8 years.

Such strategy is probably more acceptable for most investors than the hedging strategy, because a hedging strategy is designed to protect portfolios rather than keeping pace with the market. While it's certainly better to have an insurance policy in place before your house is on fire, investors may find their behavioral biases taking over if hedges are constantly in the red as markets continue to gain.

We will introduce strategy 2 in next blogpost.

How to Avoid Top 5 Private REITs Investment Traps

3/10/2020

1. Manipulating the Timing of Real Estate Sales
Some real estate asset management firms sell their holdings within two or three years. That’s typically too soon to see significant profits, yet flipping the asset will show a high IRR that looks impressive to the unaware investor. Shorter horizons produce higher IRRs, but not wealth. This approach can be not only deceptive, but also risky. A deal laden with short-term, unsecured borrowing—based on hopes for a quick sale—will turn sour if interest rates rise and a sale isn’t possible.

Due Diligence: If real estate asset managers are selling early, they should explain why the business plan has changed. And investors should hold managers accountable for the expected equity multiple—the total return to the investor—rather than the IRR alone.

2. Abusing Subscription Lines of Credit
Borrowing in private equity real estate is often backed not only by the asset, but also by investors’ capital commitments. This is a type of bridge loan, and the real estate asset manager should repay it within a few days of a capital call. If the subscription line extends to 180 or 365 days, the investor is providing collateral without collecting interest in return. It’s also another way of inflating IRR, which doesn’t account for the extended time investors’ capital is committed but not yet put to work.

Due Diligence: Investors can ask real estate fund managers how they use subscription lines, and the average length of their borrowing. The equity multiple also will suffer if subscription lines are abused, since this borrowing produces no added profit.

3. Taking on Higher Financial Leverage
Deals with a loan-to-value (LTV) ratio of 85% or 90% have less investor equity, and thus show healthy return-on-equity numbers. But returns can evaporate quickly if the business plan encounters challenges. Fully leased commercial or multifamily real estate might seem like a safe investment, but depending on its class or condition, it can allow little leeway to raise added revenues for loan payments. In an economic downturn, lenders could force the asset’s sale even as real estate market conditions deteriorate.

Due Diligence: Investors should understand what kind of returns they need to substantiate the level of risk they’re assuming. In the case of leverage, the WACC (Weighted Average Cost of Capital formula) lets them quantify what the return should be to substantiate the risk. They should be wary of LTV ratios above 75%, and make sure the rate of return compensates them fairly for the risk of assuming a higher cost for equity.

4. Refinancing to Pay a Management Team
Once a real estate asset manager creates added value by renovating a property, it’s possible to raise rents, have it reappraised and refinance the property with a bigger loan. If the larger loan proceeds are used to compensate the manager alone, then the investor is left with only the higher risk of the increased debt. Further, many managers are paid through IRR-based hurdles, which incents them to refinance sooner and with larger loans. All of this means more risk for the investor.

Due Diligence: A refinance should benefit both the manager and the investors. Investors should look for investments that are structured with at least three to five years of refinance lockouts.

5. Hiding Ground Leases
Some commercial real estate owners sell the building and keep the land it sits on, and the buyer must assume a payment on the ground lease for the land. The lease payment is basically another form of debt financing. The building is collateral on the lease, and investors could lose the building if the lease payment isn’t made. Such a deal should come with a lower price.

Due Diligence: A ground lease would be a material risk factor in a private equity real estate deal, which should be disclosed to investors. The lease must be considered part of the cost of capital. Watch for short-term ground leases in particular (ones that are less than 50 years), which add even more risk because they become difficult to finance with lenders.

In Summary
Tougher regulations such as the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 have made it much harder to use financial engineering unethically. But it’s still very easy for a prospectus to mislead shareholders or an asset manager to hide deal fundamentals that increase risk. Investors need to understand risk factors fully, quantify their expected returns and consider whether the profits justify the added level of risk.

The Tough Math of Market Losses - Part D

2/23/2020

What's the learning from our discussions in previous blogposts?

There are two key observations in this analysis from which your clients may benefit.

First, the S&P 500 is seldom the correct performance benchmark for most portfolios. If you’ve built a broadly diversified portfolio, it would be most appropriate to use a broadly diversified index.

Second, being invested in a broadly diversified portfolio is relatively boring, but boring doesn’t have to be a negative. Sure, years with performance of 30% or better will seldom, if ever, occur. But diversifying is a steadier approach without the dramatic ups and downs.

And the math of gains and losses will be on your side.

The Tough Math of Market Losses - Part C

2/22/2020

In our last blogpost, we showed you the various asset classes' performances in 2019. Now let's put everything into a 20-year perspective and see if there is any changes.

As shown in “20-year performance” the best-performing index over the past two decades (2000-2019) was real estate (specifically the S&P Global REIT). This REIT index produced an average annualized return of 10.68%, or 462 basis points higher than the S&P 500 return of 6.06%. Interestingly, a broadly diversified 12-index portfolio (equally weighted and annually rebalanced) also outperformed the one-dimensional S&P 500 by 76 basis points.
Not shown in the graph, but worthy of note, is that the 12-index portfolio bested the performance of the S&P 500, and did so with 32% less volatility (as measured by the standard deviation of annual returns).

What's the key learning out of all these discussions? Read 2 learnings here.

The Tough Math of Market Losses - Part B

2/21/2020

In our last blogpost, we showed you S&P 500's past 50 years' performances. Now let's see what if you have a portfolio that broadens diversification across multiple asset classes? It would create a pattern of performance that can minimize the magnitude and frequency of damaging negative returns.

In “2019 performance” you’ll see the performance of 12 key indexes (equity and fixed income) as well as the overall performance of the 12 indexes combined into a portfolio. The indexes are the following: S&P 500, S&P Midcap 400, S&P Small cap 600, MSCI EAFE Index NR, MSCI EM Index GR, S&P Global REIT, S&P North American Natural Resources, DBLQ Optimum Yield Diversified Commodity Index Excess Return, Barclays U.S. Aggregate Bond, Barclays US Treasury US TIPS, Barclays Global Treasury and the 90-day U.S. Treasury bill.

Not surprisingly, the best performing index in 2019 among these 12 was the S&P 500. The lowest return was achieved by the Treasury bills (or cash) at 2.06%. The equal-weighted combination of all 12 indexes produced a return of 16.57%, which was well below that of the S&P 500.

But what if you put this 12-index portfolio into a 20-year trend chart? You can see it in next blogpost.

The Tough Math of Market Losses - Part A

2/20/2020

2019 was a great run for the S&P 500. Its 12-month total return of 31.49% was over three times higher than its 50-year average annualized return of 10.60%.

So how about this year? There are interesting patterns to note.

Shown below is the graph “S&P 500: past 50 years” - it shows the annual returns of the S&P 500 from 1970 through 2019. Highlighted in purple are those years when the calendar-year return eclipsed 30% (shown by the horizontal black line). It’s worth noting that, since 1970, we don’t see two years in a row with a 30% or higher return. In fact, the average return in the year after a 30%-plus return was 13.4%, including two years in which the following year’s return was negative (1981 and 1990).

Performance adjusting to normal levels suggests smaller positive returns, as well as negative returns for an equity index such as the S&P 500. As we can see from the 50-year graph, there have been 10 years over the past 50 in which the S&P 500 produced a negative annual return (shown by red-colored bars in the graph). The average return in those 10 years was -14.08%.

What if you construct a 12-index portfolio, what will its performance be compared with S&P 500's performances? We will discuss this in next blogpost.

7 Best Salary Information Websites

2/11/2020

7 Best salary information websites

1. Salary.com
The most popular salary-specific job site, Salary.com lists every position in a field with free salary info. Their collection of data includes cost-of-living calculators, comparison tools, and lists of benefits, as well as negotiation tips.

Salary.com doubles as a career site, providing job listings and advice for those on the lookout. Overall, this is probably the best site for salary info.

2. Glassdoor
Glassdoor is known for its extensive company reviews and employee feedback. A salary search provides data for specific jobs at specific companies, rather than a general estimation.

Employees share info on salaries, benefits, interview questions, and more—a great insider resource if you’re starting out at a new company.

3. PayScale
A good resource for new grads, PayScale offers a free salary report based on experience, education, and other factors. Students should check out its College Salary Report for the lowdown on what various majors can expect to earn (and some negotiation tips). The career research section includes a Career Goal Tracker with salary data for the jobs you want.

4. Indeed
The well-known job site aggregator has a salary search tool. Indeed lets you use keywords to search, in addition to job titles. Since Indeed users can access over 50 million job postings from unique sources, there’s a ton of salary data here.

5. SalaryList
All the data on SalaryList comes from official reporting by companies or the United States Department of Labor, so you know you’re getting accurate information. The site provides salary data records for existing jobs by title, company, and state.

6. Salary Expert
With data updated daily, Salary Expert offers not only free salary reports but cost of living analysis and career salary potential. You can also search for jobs by salary, if you’re thinking about switching fields.

7. Bureau of Labor Statistics
The most recent Occupational Outlook handbook from the Bureau of Labor Statistics (available online or in print) provides salary data for thousands of jobs, searchable by field.

It’s also a good idea to investigate any sites specific to your field or career for salary data. These sites may have more info on industry norms, particularly if your field’s a rarer one.

What factors should you consider?

Sites will often allow you to search based on job title, education and experience level, and location. But how does each factor affect the compensation you should ask for?

1. Job title
Titles reflect responsibility and experience. While some companies allow you a little latitude in naming your job, others won’t be so flexible. Make sure you’re clear on the responsibilities of the title offered (or the title you want).

2. Career field
Depending on the profit ratio of your industry, the same title can come with a different salary. Sales representatives, for instance, can work in multiple fields. But sales reps in high-demand fields, like pharmaceuticals, may be able to ask for more than those in other industries.

3. Location
If you live in a location where housing, transit, food and other essentials cost more than the national average—like a large city, a coastal city, or a tourist destination—you should earn more. A Cost of Living Analysis (COLA) comparison, offered on many of the sites above, lets you know what to expect in your region.

4. Experience
Work experience in your field can increase your value and your salary. Internships may count in your favor, depending on your responsibilities there.

5. Education
Having a degree, period—an associate’s, a bachelor’s, or an advanced degree—should boost your salary expectations. Having a degree in your field is even better.

6. Where you went to college can sometimes make a difference, too.
PayScale has a College ROI (Return on Investment) report that analyzes how degrees from different colleges can affect your salary.

If you didn’t go to the Ivy League or a “top” school, don’t count yourself out! Education’s one of many factors that employers consider when setting compensation, and the more experience you get, the less it typically matters.

7. Special skills
Whether it’s a software program, a type of design, or a foreign language, special skills can be lucrative in the job market. Try doing a keyword search for a unique skill, and see which employers are willing to pay more for it.

The key is supply and demand. Workers in more in-demand fields, like nursing or computer science, tend to have more negotiating room. But, as you can see, there are plenty of factors that determine the “right” compensation for your job. And there are variables you can’t control. Racial and gender wage gaps, for instance, still persist. Industries in decline, or going through a temporary financial slump, may not have as much money to offer.

Tips for the salary negotiation

Have a range in mind, rather than a number. This gives you and the company more flexibility, and you’re likely to end up within the middle to high end of the range.
At the same time, know the lowest salary number you can live with. It’s better to have a floor than a ceiling.
Requesting benefit—such as employer-paid health insurance, retirement contributions, and achievement-based bonuses—if your company’s less willing to negotiate on salary. Benefits may end up saving you more in the long run.

Yield Curve 101

2/10/2020

Q. What is Yield Curve?

A. Basically, the yield curve is a visualization of the interest rates you get from bonds of different durations, from one month up to 30 years.

If everything always worked out logically, the longer-term bonds would yield way more than the shorter-term bonds. After all, you're tying up your money for longer, so you'd expect to earn a higher rate to help offset any risks that may develop while your money is in that bond.

Well, just like stocks, a bond's yield is a function of both the payout and the price -- which fluctuates in the open market. So, in a volatile market, weird things can happen to the yield curve.

Below you'll see a more normal Treasury yield curve from May 2018 (the gray line), in which yields gradually get larger for longer-term vs. shorter-term Treasury bonds.

However, in the current yield curve (red line), the short-term bonds actually yield MORE than some of the longer-term bonds, including the 10-year:

What's the implication of an inverted yield curve?
If short-term yields are higher, it's because bond investors fled from short-term to long-term Treasuries -- so they must not be feeling too confident near term.

Also, the banks don't love this scenario. Remember, a bank works by paying interest on your deposits and collecting interest on your loans. Those loans are based on bonds with longer durations -- so when the yield curve inverts, it hurts the big banks' profitability.

Add it all up and, economists say, it's a bad omen.

A Comparison of Robo Advisors

2/3/2020

The best robo-advisors offer an affordable alternative to picking stocks or mutual funds on your own or shelling over a lot of money to a wealth manager to invest your money for you. They’re a responsible way to take hold of your financial situation without needing to understand the ins and outs of stocks, bonds, ETFs, and more.

Here is a comparison of some of the most popular robo advisors and what they are best for:

Acorns: good for beginner savers and investors
Ally Invest: easy application process
Betterment: simple platform, competitive pricing
FutureAdvisor: free investing resources
M1 Finance: automated and/or hands-on investing
Personal Capital: good for high net-worth, access to human advisors
Vanguard: good for mutual fund investors
Wealthfront: strong financial planning component

5 Financial Things to Review Annually

1/31/2020

An annual financial checkup can take place at any time during the year and can help you better understand the "big picture" of your overall financial planning efforts. You can stop and think about your family's financial goals, such as saving for retirement, a house, or a child's education. You can consider reducing taxes on your investments, protecting your income, or building a financial cushion.

Here are 5 questions to ask when you do an annual financial review.

1. Is my investment strategy on track?
You probably have several savings goals and accounts. Your annual financial review should revisit each of your priorities and your strategy for reaching them. If your situation has changed, make adjustments as necessary. At least once a year, check your target asset mix to ensure that it continues to meet your time frame, risk tolerance, needs, and preferences, and to perform any rebalancing that might be necessary in light of the past year's market performance.

2. Am I saving tax-efficiently?
Beyond applying diversification strategies broadly to your overall portfolio, what approaches are you exploring to help defer, reduce, or more efficiently manage taxes on your investments? Basic rule of thumb: Consider putting certain investments which generate taxable income—for example taxable bonds and real estate investment trusts—in tax-deferred accounts like 401(k)s and IRAs. For those investments which are more "tax-efficient"—like stocks and ETFs held for more than a year—place them in taxable accounts.

3. Am I protecting my income?
You've worked hard and want to protect your income. So it's wise to evaluate your family's total insurance needs annually to make sure you have the right amount and type of insurance to cover unforeseen circumstances that can derail a financial plan. Life insurance may be a good place to start. If your family is growing, you might want to increase the amount of your life insurance to protect your loved ones.

4. Am I preserving my assets?
Use your annual review to make sure you have an estate plan, and that it continues to reflect your family status and financial situation. Ensure that it helps make the best use of the latest estate and tax laws, and that key individuals know where to find relevant documents and information.

5. How does my financial plan affect my family?
It's not just your retirement or financial future that you are planning for, especially as you age. You are likely researching and cultivating strategies to provide financial assistance to a number of people that you care deeply for, including parents, children, or even grandchildren. Beyond college, a lot of parents are helping to launch their millennial children into the world of fully independent living. Meanwhile, many have aging parents who can no longer live on their own or manage their own financial and personal affairs. Will caring for others affect your financial goals, priorities, and outcomes?

4 Areas To Look For Stock Ideas For 2020

1/30/2020

If you are looking for stock ideas for 2020, Fidelity has an article that shows you 4 areas you could look for them by utilizing Fidelity's stock screen:

Low PEG
High earnings growth
High stock analyst recommendation
Combination of the above

4 Ways to Hedge Your Investment In a Risky Market

1/26/2020

Q. I think the market is too high and I want to hedge my gains, what options should I consider?

A. You can consider 4 hedging strategies for your stock portfolios:

1. Hedge the Market
Buy ETFs that invests in derivatives and other financial instruments that have inverse returns of S&P 500 and Russell 2000. For example, Proshares Short S&P500 (SH) and Proshares Ultra-short Russell 2000 (TWM).

2. Buy Funds That Sell Short
Some funds invest in stocks that they believe will fall. For example, Grizzly Short (GRZZX).

3. Invest in Bonds
Bonds usually have very low or negative correlations with stocks, add bond funds to your investment portfolio. For example, Vanguard Core Bond (VCORX) and Fidelity Intermediate Bond (FTHRX).

4. Add Gold to Portfolio
Gold usually has no correlation with S&P 500. The easiest way is to buy Gold ETFs, for example IShares Gold Trust (IAU) and SPDR Gold Shares (GLD), or buy Gold Mining stocks, for example, Barrick Gold (GOLD).

One Retirement Risk Many People Have Overlooked - Part C

1/15/2020

In our last blogpost, we used two examples to illustrate the risk of sequence of returns. Now we will discuss two ways about how to protect yourself from the sequence of returns risk.

Use the right tools for the right job. For income, do not put money into a vehicle like the stock market where the sequence of returns plays a big part. Instead, put it into an investment that will guarantee you a payout for life, like an annuity. By guaranteeing your living and lifestyle expenses are covered, you can put your other assets into investments that you won’t be pulling money from on a consistent basis, such as ETFs and bonds.
Separate your assets into buckets that work for you differently. For example, secure liquid funds needed for large purchases in the beginning years of retirement in a stable vehicle in one bucket of assets, such as a bank account, money market account or CDs. In the next bucket, supplement your Social Security with other products that provide lifetime income, such as annuities. In a third bucket, determine your probable long term care costs and put money in a hybrid long term care product that does not have ongoing costs. That way you will have your long-term care needs covered down the road. All of your remaining assets should be put into an investment vehicle like ETFs, equities, bonds and mutual funds for future growth to keep up with inflation and taxes.

One Retirement Risk Many People Have Overlooked - Part B

1/14/2020

In our last blogpost, we introduced the sequence of returns risk for retirees. Now we will use two hypothetical examples to illustrate this risk.

The following two people having $100,000 in the market during a 10-year period and withdrawing 5% each year. You will see that the order of the returns of the market plays a big role in the final outcome.

Example 1.

Example 2.

If you look back, you will see both people started with $100,000, however, one ran out of money after 15 years, withdrawing a total of $77,593, while another has withdrawn $95,000 over the same amount of time and still has $58,043 left in her account.

In our next blogpost, we will discuss how to protect yourself from the sequence of returns risk.

One Retirement Risk Many People Have Overlooked - Part A

1/13/2020

You have been saving diligently for your retirement, but one retirement risk you may have not considered - the sequence of returns, or the order of the returns in your portfolio.

During your accumulation years (while you’re working), you are not subject to this risk because you are not withdrawing money. But when you retire (during your distribution phase) you will be.

Sequence of returns risk is a result of the timing of withdrawals from a retirement account that can have a negative impact on the overall rate of return on the investment. This may seriously hurt a retiree who depends on the income stream from a lifetime of investing.

In our next blogpost, we will use two examples to illustrate this risk.

Copyright © 2013 - 2018 PFWise.com, All Rights Reserved.
IMPORTANT DISCLOSURES
PFwise.com does not provide investment, tax, or legal advice. The information presented here is not specific to any individual's personal circumstances.

To the extent that any material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

About Us | Contact Us
中文