Trovena Weblog

What Would Sleeping Beauty Think?

In late September of 2009, Sleeping Beauty is awakened after a long 13 month slumber.  As a modern woman who has been left in charge of her family’s investment portfolio, among other responsibilities, she contacts her fee-only wealth manger, Trovena, to see how her investments have performed in the past year.

“Scott, I am sorry that I have not returned your calls over last year, but I was bewitched, again” Sleeping said, a little embarrassed.  “I am now back awake, and wanted to get an idea as to the value of my investments.”

To which Scott replied, “It is so great to hear from you, Sleeping.   We do not have the exact month end calculations yet, but it looks like your portfolio has gained about 3% in value while you were asleep.”

“Only 3%,” she replied, a little concerned.  “What happened since I have been asleep?”

“Not sure you are going to believe me, but here are the highlights,” said Scott. “As you may remember, before you went to sleep there was the beginning of some trouble around loans made to many homeowners, and there was talk of a recession.”

Shoot First, Ask Questions Later; and other common investment mistakes.

 

The following link is to a 20 minute presentation that looks at the reasons why so many individuals have terrible investment experiences.

Behavioral Biases

Description: Research indicates that humans are not naturally wired for prudent, long-term investing. Scott Bosworth, Vice President and Regional Director of Dimensional Fund Advisers, describes common forms of behavioral bias and discusses how these biases influence investment decision making. He also explains how knowledge and discipline can help investors control their instincts for a better investment outcome.

"Expert" Advice is Costly

Q:  How do you end up owing the stock market $6,000 after one of the best market rallies ever?

A:  You start with $10,000 and follow the advice of Citigroup or Bank of America.

The following link is to an article from Bloomberg titled, "Talking Wall Street Advice in Rally Means Owing $6,000."  At least when the crooks do things like this they go to jail.

Bloomberg Article

Why the Great Recession was not the Great Depression

The link below is to a great podcast from NPR Planet Money. It talks about the current Great Recession, the Federal Reserve’s role and looks back to the monetary policies in the 1920’s that caused the Great Depression.  It is about 20 min., so wait until you have time as you will want to listen to the entire program.  (I use the iPhone app Stitcher to listen to many of the different NPR programs.)

NPR Planet Money

- Scott

A Big Step in the Right Direction

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

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

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

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

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

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

History Does Repeat Itself

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

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

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

 

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

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

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

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

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

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

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

Increase in FDIC limit extended through 2013.

Here's the statement from the FDIC:

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

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

Back in Black

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

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

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

 

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

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

Check out our Solar System!

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

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

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

View my Solar Production