Ask the Expert Retirement questions answered
Buying gold as a safe haven
By Walter Updegrave, Money Magazine senior editor
November 5, 2008 5:06 pm
Question: In the midst of the turmoil on Wall Street, I’m thinking of investing in gold, specifically bullion or gold coins. Do you think this is a good idea? —Roderick Gaerlan, Redondo Beach, Calif.
Answer: Ever since the financial markets began going haywire this year, I’ve been getting lots of emails from people who are considering buying gold as a way to weather the crisis.
That, I can understand. Investors have come to see gold as a refuge in a sea of uncertainty and volatility, an investment that will hold its value even as the world collapses around it.
What I can’t fathom, though, is how gold acquired and manages to maintain this reputation as an anchor of stability. It doesn’t make sense.
I mean, just look at a chart that tracks the price of gold so far this year. It started out at about $850 an ounce in January. As oil and gas prices started to climb and pundits began predicting that oil might hit $200 a barrel, gold quickly shot up, spiking as high as $1,011 an ounce in March.
After breaking the thousand-buck barrier, however, gold retreated and began bouncing around in a trading range of $850 to $950 in the spring and early summer. It flirted with its previous high briefly in July, hitting $986 an ounce, but then dipped back below $750 in September. It rallied again to break $900 an ounce in early October, but has since dropped below $800, closing out October at $731 an ounce.
So let’s see, that’s a 19% gain from the beginning of the year to its March peak, then a 26% drop from March to the September low, a 20% rebound to early October and then another 19% decline to the end of the month, putting gold 14% below where it began the year and 28% below its March high.
The point isn’t so much that as of the end of October gold was in the red for the year to date. It’s that if you’re looking to avoid gut-wrenching ups and downs, this isn’t much of an improvement from the stock market. It’s kind of like getting off Six Flags’ Kinga Ka rollercoaster and jumping on Coney Island’s Cyclone. The drops may not be quite as steep, but you’re still in for a white-knuckle ride.
That’s not to say that you can’t make money in gold. You can if you’re able to get in and get out at the right time (although, human nature being what it is, most people are eager to buy when gold is in the news and prices have already jumped, not when it’s unpopular and its price is languishing).
And since gold prices are not highly correlated with stock prices, you can also make a case for investing a small amount of your assets (maybe 5% to 10%) in gold as a way to diversify your portfolio.
I’m not a big advocate of this approach, but if you’re going to do it, I’d say precious metals mutual funds or a gold ETF is a simpler, cleaner and better way to go than buying coins or bullion. (I’d also add that you have to be willing to rebalance your portfolio periodically for this strategy to work.)
I don’t think it’s ever a good idea to move all of your investment stash into any safe haven or, in the case of gold, putative one. As I’ve noted before, the money you’re investing for longer-term goals like retirement should be invested in a blend of stocks and bonds that’s appropriate given your risk tolerance and how long it is until you’ll need the money.
That said, virtually all of us also need to keep some portion of our assets protected from the ups and downs of the financial markets. Here, I’m talking about an emergency fund or, in the case of retirees, an account that holds 12 to 18 months’ worth of living expenses.
But the right place for this segment of your portfolio is a totally liquid and secure investment such as a high-quality money market fund, short-term CDs or savings account, not gold. For, whatever other qualities it may have to offer, stability of principal is not one you can count on from gold.
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Filed under Uncategorized79 Comments Add a Comment
Hey Robin if gold is not a safehaven…what is? The dow? Nasdaq?Good luck, there down nearly 40%, gold down less than 10% year to date….Just watch gold when hyper-inflation takes over.
Posted By Keith S, NY NY: November 16, 2008 2:16 am
Gold as safe a haven is a bogus concept. Here we sit on the verge of the biggest economic disaster since the great depression. With two wars being fought, and gold has dropped from its March 17 high of $1030 to $730 as of todays close. I might not be a financial wizard, but I would venture to say whatever gold might be it is not a safe haven.
Posted By Robin Queens NY: November 11, 2008 6:12 pm
Hey Gaucho420 Great advice! Maybe you shoud put your portfoilio in the U.S. dollar. Like gold it cant be eaten drank or used for protection. however I bet when hyper-inflation kicks into high gear. It will make excellent toilet paper or could be used to start a fire.
Posted By Jerrod Napa Valley CA: November 11, 2008 11:48 am
Yes, excellent Gaucho420, that’s the spirit! Of course you can’t eat or drink gold or expect it to defend you. On the other hand, you can buy things with it, like food, drinks, and guns, when paper is inflated away to nothing. And guess what, you don’t have to leave the country in an economic crisis, but the last place I’d want to live would be L.A. or any other large city when all the have nots decide they want what’s yours! PM’s are a hedge against stupidity and government paper promises, and even if the price drops they are always worth more than paper. Ask anyone in Argentina, or Iceland, if they wish they had gold or silver now. PM’s are universal money, always will be.
Posted By Marc, Toronto, Ontario: November 11, 2008 11:11 am
There is a big disparity between the paper gold price, and the physical metal price by over $130 premium per ounce…Comex price is being manipulated by the Govt. Just like the lie-bor, and the dollar.
Posted By Keith S, NY NY: November 11, 2008 12:37 am
And I’ll add this tidbit…I’ve seen money runs, Argentina…and you know what people really wished? That they lived ELSEWHERE. So if you are one of those waiting for armageddon or a revaluing of currencies, perhaps into DOLEROS, a true foreseer would leave the country, go to one backed by gold or deemed safer and then wait.
Its funny to read these gold freaks, because if they truly beleived the convinctions of their arguments, they’d be packing up and heading out, and not blogging below CNN.com
I’d also advice a security detail, because gold can’t defend you either.
Posted By Gaucho420, Los Angeles CA: November 10, 2008 9:26 pm
Only the idiots and uneducated actually think that gold is somehow the miraculous savior should the Dollar fall…what they don’t realize is if the Dollar falls, so will every other currency, including gold…you can’t live, eat or drink gold, yep people treat it as if you can.
Its only worth what we beleive its worth and does not sustain human life, in the same way the dollar does. They’re many more rare & precious metals out there, but they’re not as pretty, apperently.
In tough times, the crazies come out…that’s one thing that’s been proven right during these times.
By the way, what was the Dollar backed by in the 1930s? How about during WWI? WWII? Funny, where was gold to save us then?
Get educated, not stupid.
Posted By Gaucho420, Los Angeles CA: November 10, 2008 9:18 pm
HAHAHAHAA! What a bloodbath of comments! “Ask the Expert” indeed! The commentators are the experts, with a few idiotic exceptions. Sure gold can get the bum’s rush all the way down to the $100 -$200 range, sure it can get so cheap you can pave your driveway with it, sure the sky is pink!
Boohoo! A little volatility scares the author? What do you think is causing it? Panic selling of paper gold, millions of ounces equivalent, that doesn’t even exist. When the December Comex contracts expire, watch the mad scramble for precious metals, real metals, drive the price back to a decent level. And he suggest investing in more paper assets? Those same assets backed by nothing but a promise?Walter Updegrave’s comments are a perfect example of the pandemic idiocy that pervades the gold debate. He actually only looks at gold’s performance for the last year, instead of, say, the last 5. You can paint any picture to suit your needs on a short enough timeline! Look at gold for the last month! OH MY GOD!! ITS TANKING! BAIL BAIL BAIL!! HAHAHAHAHA! Yes, please sell, I need some more.
Posted By Marc, Toronto, Ontario: November 10, 2008 6:15 pm
When the money creation policy of the Federal reserve brings an end to this deflationary period. As it most certainly will. The United States will see a period of hyperinflation. At this point in time it is reasonable to expect Gold will rise but all commodities will dramaticly increase in dollar denominated price. I say not only buy Gold, but buy silver. And while you are at it load up on can meat, rice and other non perishable food items.
Posted By Dick Stroker Superior WI: November 10, 2008 5:33 pm
Hey Jason in AustinIn a fiat money system, where money is not backed by a physical commodity (i.e.: gold). The only thing that gives the money value is its relative scarcity and the faith placed in it by the people that use it. Thanks to the Federal Reserve there is no scarcity of money, as a matter of fact there is no restrain at all on the amount of money that can be created. This allows unlimited credit creation. Hyper-inflation is the terminal stage of any fiat currency. In hyper-inflation, money looses most of its value practically overnight.The framers of the constitution had the insight to be concerned with the unrestrained creation of currency and all agreed upon limitation on the issuance of money. By backing money with gold a finite substance, as was done periodically through history. We avoid the risk of currency collapse.
Posted By Meg Olson Duluth MN: November 10, 2008 5:11 pm
Robert, you clearly don’t know what you are talking about.
In gold, open interest has fallen from 500,000 to nearly 300,000 over the past several months. Speculators have been told that they are non-economic customers and cannot demand delivery. This activity by the COMEX is clearly unethical and criminal.
Posted By Alex, Washington DC: November 10, 2008 10:43 am
Lets look at another rational: suppose you have 100K in cash to invest somewhere. So you invest that in gold coin when the market price is in your favor and you actually take delivery. Sure the price may fluctuate, but you know with some certainty that the real boogy man is hyperinflation and when that happens, (and we’re well on our way down that road) Gold being actual currency will hold its value and your money will retain its value: but the deal is you never sell it. Its loan collateral: you rcan’t really take your mutual funds to any bank (here or abroad) in times like these and turn that into instant cash. That’s the enduring value of gold.And decades hence, gold will be trading in its revalued price worth thousands per ounce in today’s (old) dollars. Or new Ameros as the case may be. Buy gold. You bet. Case closed.
Posted By Jon Ryan Seattle WA USA: November 9, 2008 9:51 pm
You can lead a horse to water but you can’t make them drink. Walter will be in those long food lines likened to the 1930’s. Too bad.
Posted By Kevin Rathdrum, Idaho: November 9, 2008 4:15 pm
The “expert” should have read the question which was related to gold coins and bullion. Instead, he wrote about paper gold, completely and utterly missing the point. Waste of time article.
Posted By Jim, Redondo Beach, CA: November 9, 2008 10:06 am
Robert, you’re confusing me. You say there’s no physical shortage…and yet dealers can command a premium of several percentages over spot, which also are several percentages less than you can get if you auction your gold coins on ebay. You also say you bought 20 bars (at 100 oz. a bar that’s 2,000 oz. at $455 per ounce that’s $910,000) and you sold the same for $850 per ounce in October. By my calculation that’s a profit of $790,000! If my figures are accurate I nominate you for gold bug of the month!
Posted By chuck, charleston, s.c.: November 8, 2008 7:58 pm
When I graduated from college and started to work 46 years ago, you could buy a house for $20,000 or roughly 600 ounces of gold.
Today, $20,000 will not buy you a house. Six hundred ounces of gold will.
Posted By Anonymous: November 8, 2008 1:45 pm
Like any investment with potential for significant gains, gold has a measure of volatility. Rather then focusing on month to month flucuations. Ride this bull market to the parabolic stage and then jump off. Gold is still incredibly undervalued, and over sold. If you cant handle the price swings maybe this is not the investment for you. However if you have the nerve, and can allocate a portion of your portfolio to gold, you will be generously rewarded.
Posted By R.Olson St.Paul MN: November 8, 2008 10:59 am
NOTHING WRONG WITH PHYSICAL GOLD
There is nothing wrong with holding physical gold, as distinguished from gold funds.
If you want to buy gold, you should buy it from a broker who sells raw gold, like gold coins. But don’t take them home with you. They have a way of “disappearing” when you hire a mover or have your druggie cousins visit overnight.
If you must, store them in a bank vault. Look, if you are in real fear of our financial system demolishing, you should be willing to spend enough to purchase a large bank deposit drawer.
But forget the gold funds. They are no better (or worse) than the regular markets.
sanjosemike
Posted By Mike Rose, San Jose, CA: November 8, 2008 10:54 am
Great responses. The commentators on this article are more knowledgeable and present better arguments than the author.
Posted By Robert F Marley, Wilmington DE: November 7, 2008 5:48 pm
gold is a sell, all the way to 650 oz, short term, maybe even beyond Q2 of 09. i dont think physical gold is the best place to put your money - why stay static? if you want physical gold, sell 600 put options on COME, ~$900 premium collected on a 100oz contract basis FEB 09. either way, the best advice should just be: “ask your financial planner if gold is right for you” followed by the disclaimer that states investing in gold my cause anal leakage, dryness of the mouth, and impodence, etc, etc.
Posted By C, CA: November 7, 2008 12:52 pm
I’ve been trying to buy gold coins (gold eagle etc) and can’t find any available! Where do you actually buy this stuff if you want physical possession?
Posted By Paul - Columbus Ohio: November 7, 2008 11:51 am
The price of gold is linked to the value of the dollar more than the value of the stock market. One can see how the Dollar has roared back against the Euro and the Pound, so it is not surprising that Gold has dropped in US dollars.
Many Precious Metals Mutual Funds are Mutual Funds of Stocks (Gold Miners) rather than of Gold itself. These stocks are not immune to the across-the-board haircut taken by the stock market this year.
But we are now in a time of “change”. Don’t be surprised if things start to move before the end of the year.
Posted By Dan, Columbus, OH: November 7, 2008 10:16 am
Why do these *financial planners* keeping advising us to buy GOLD ETF’s or Mutual Funds when most people seek advise on buying the metal, the actual piece of metal!
Does anyone see the irony in the advice?
Posted By Praveen, Tampa, FL: November 7, 2008 10:03 am
If it all falls apart, the last thing I am going to be looking for is physical gold. I think the discussion is irrelevant, if really bad times were to arrive.
Posted By B, Dallas, TX: November 7, 2008 9:14 am
Ask the Argentinians if they wish they had gold when their currency went down…
Posted By Phil, NC: November 7, 2008 6:39 am
Physical Gold and paper gold have decoupled, leading to a run on physical gold and silver from COMEX which has ONE PER CENT, not 10% to cover its paper, similar to leveraged CDO’s, a disaster in the making this Dececember.
Gold ETF’s and mines have DIVERTED cash from the gold market, since investment there drains interested investors from the “real deal”–lower demand, gold suffers.
And, investors have been selling good investments, like gold mines, to offset bad investments in their “diversified” (meaning shotgun or confused) portfolios.
FIVE TRILLION is US printed dollars alone, is set to cause hyperinflation in about 18 months. The US dollar is about to make US look like Zimbabwe.
It is true gold has declined from $1050 to its current level, the old high of about $750 the year before.
Instead of viewing this successful retest of the old high as the new low, idiots who buy high and sell low, are calling that retracement a trend, when you should be thinking, those miner stocks, and those gold bars, are “ON SALE”.
Buffet says, buy when others panic, sell, when others see the high.
Of course, what do I know, and more importantly, what does he know?
Posted By Bletsu Fatsamatta, Long Island New York: November 7, 2008 4:22 am
Gold, and many other precious metals such as silver are tremendously underinflated right now. Just try to go out and buy the actual gold coins. You are going to pay a premium over the spot price. The value of the stock doesn’t reflect the value of the metal itself. The stock price doesn’t mean anything. You couldnt’ lose with metals right now. Its WAY TOO CHEAP.
Posted By Avi LA CA: November 7, 2008 12:26 am
I am astounded that people consider gold an investment superior to any other, or that the value of the ‘dollar’ or any other currency should be tied to gold.
Gold is a commodity!
Gold is used as a raw material in electronics manufacturing, in art and jewelry.
Sure, it has had a long history as a medium of exchange due to its scarcity and its beauty.
Keeping ‘real gold’ in an investment portfolio should be viewed as keeping a commodity in a portfolio. Or a safe deposit box.
Keeping ‘gold-mining stock’ in an investment portfolio should be viewed the same as any other mining stock.
Ultimately, though, you have to remember you are expecting that you can find a sucker out there to pay you more for your ‘investment’ than you paid for it yourself.
What is interesting is how the price of gold has been sagging along with the drop in stock-market values. Something has changed.
Reading this column and some of the reader responses reminds me of football team analyses, a whole lot of hooey and speculation.
I admit that I do not own any gold coin, bullion, or mining stocks, although I have considered such due to the industrial consumption of the metal.
Posted By Jason Stoons, Austin TX: November 6, 2008 11:16 pm
Gold is not volatile the dollar is volatile. Gold is gold but what is a dollar?
The price of a dollar was fixed at 1/35 oz of gold between 1933 and 1971 when Nixon defaulted on the United States’ international gold obligations. Since then the dollar has dropped like a stone, losing about 95% of its value in terms of gold.
Posted By Goldfinger: November 6, 2008 9:53 pm
Gold is a must in protfolio. It is a hedge against the US Dollar, Oil and crisis. There are many critics of gold but as a long term investment it has its merits. In the world of Peak Oil gold will respond. If the dollar starts a reversal gold will perform but the most significant fact remains. If you bought the DOW on 30th September 2002 when it was 7591 and you bought gold on the same day when it was US$323 you would be better off today 6th November 2008. This is despite all the gold selling to cover massive losses by hedge funds , redemptions etc
Posted By Bob Williams Redondo Beach California: November 6, 2008 8:12 pm
That was a very bias and foolish response to someone who is looking for a safe haven. Gold is real money not fiat currency that is worthless. If you could be sued for such stupid comments you wouldn’t be working for CNN.
Posted By Troy King, Tempe, AZ: November 6, 2008 7:52 pm
Most Americans don’t know what it is to live through the collapse of your country’s currency, like Mexico in ‘94, Argentina in ‘02, or Zimbabwe in ‘08. Simply put, if you owned gold or dollars, you didn’t lose your wealth. The Fed’s injection of large amounts of dollars to save the economy has a diluting effect on the real value of the dollar, just like the countries mentioned. You may soon need 2 or 3 dollars to buy a Euro, or 1500 of them to buy an ounce of gold.
Posted By LC, Monterrey, Mexico: November 6, 2008 7:41 pm
You cannot compare gold prices between 1933 and 1971, remember during that time the price of gold was set by the government and ownership was restricted to artists and dentists.
Gold is also subject to vast variations based on available supply. The vast increase in available gold in 1849 led to major inflation. Whilst gold is technically in finite supply, when the price rises, so do new stocks of gold (when it costs $800 to mine a ounze of gold, only a fool would mine it it the price is $300), the point is, as price rises, so do new mining techniques.
Posted By Greg, Atlanta, GA: November 6, 2008 7:05 pm
Robert, you are right we have enough gold. but we have more than enough US dollars and we will print more in the coming years. So based on the supply and demand, do you expect people can use those US green papers to buy physical gold at a cheaper price?
Posted By Jason, LA, CA: November 6, 2008 6:12 pm
Gold is easy to find, just has a high premium due to the panic purchases of October. This whole notion of Comex price dislocating from reality is just more gold bug stupidity. Case in point, as gold trailed down in price in the last 45 days, so has the price of bullion purchases. This is clearly documented via reputable online bullion dealers. If there was such a dislocation and/or shortage of gold, the bullion dealers would NOT have dropped their prices in the last 45 days.
Those thinking that gold contract purchasers will demand delivery and break the COMEX exchange are in for a rude awakening. Just as all these brilliant masters of money think they are draining the exchange by BUYING contracts, they are just taking delivery of those SELLING their bars for profit. I took delivery of 20 bars back in 2005 at an average price of $455 per ounce. Sold 20 contracts this October for $850 ounce and know of many more who are looking to deliver on these December contracts.
Spot premiums, price paid over spot price, will subside in coming months. Don’t believe in shortages, exchange defaults, cartels, cabals, currency collapse and so on. Buy the GLD ETF at best. If the world goes to hell and the currency collapses, these gold bugs will be curled up in the corners of their homes clinging to their precious metal crying that their chat boards have disappeared.
Posted By Robert, Long Island NY: November 6, 2008 5:24 pm
The link to the Precious Metals mutual funds showed them all down over 60%. How is that a market hedge?
Posted By Lancaster, PA: November 6, 2008 5:04 pm
Mike,
What your missing here is the decoupling of physical gold/silver from it’s paper COMEX counterpart. Having $20 US gold coins would bring as much and in my case more than when gold went over $1000. Premiums are anywhere from 25 to 50% over it’s quoted COMEX prices for gold and silver which is usually around 3 to 5% on the buy and sell side. This has been caused by hedge funds selling and shorts on the COMEX by a few major players with evidence of 2 or 3 or these being big banks.
The COMEX game in over in the December contracts when investors will demand their PM’s instead of cash since there’s such a decoupling IMO. The estimates I’ve seen is they have about 10% product to cover on the gold side and 12% on the silver, that’s a big problem. Either the COMEX fails or it comes up to close the gap. Silver isn’t held in any large quantities by governments so it can’t be bailed out like gold where the IMF and Central Banks could sell to keep this afloat this time but not in the future. The real question is how much gold on the books have been leased already and is double booked, many think quite a bit of it .
Posted By Rick,Tulsa OK: November 6, 2008 4:01 pm
Just my two cents worth: Look for sound investments, and don’t get advice from people who are trying to sell you something. For example: when gold prices topped $1000, gold people said “Buy it now before it hits $2000!” When prices crash back down to earth, they say “Buy cheap gold now! Great buying opportunity!” They really have no idea what’s going to happen to the price. The only certain thing is the cash flow they receive from sales premiums.
Posted By Mike, Dayton OH: November 6, 2008 3:06 pm
A lot of comments seem to be missing the point of the article. He doesn’t say that gold shouldn’t be a part of your portfolio. He doesn’t even say that it won’t continue to go up. He’s just saying that gold is also volatile and shouldn’t be considered a safe haven. Heck, it’s the title of the article. A quote from the article, “The point isn’t so much that as of the end of October gold was in the red for the year to date. It’s that if you’re looking to avoid gut-wrenching ups and downs, this isn’t much of an improvement from the stock market.”
Posted By Pat, Las Vegas, NV: November 6, 2008 1:31 pm
Does anyone know why the price of Gold went from $35 an oz in 1971 to $850 an oz in 1975 when OPEC officially priced oil in US Dollars?
Very simple you couldn’t own gold until Nixon signed a bill in 1974 to allow gold to be owned by the general public and was placed on the free market.
Posted By Rick,Tulsa OK: November 6, 2008 1:08 pm
Josh in Denver - you are spot on…
If you can’t figure this out on your own, it’s your own fault.
If you are scared of gold; go buy bank stocks!!!
Posted By Troy - Luther, MI: November 6, 2008 12:51 pm
Wow, not a great article at all. Yeah, gold is volatile, but to bash it because it has dropped so much this year is a little disingenuous considering the drops in the Dow. The Dow was over 14,000 around a year ago and look at it now! Gold has at least held its value since a year ago. The name of the game when it comes to wealth is purchasing power. Your purchasing power has been decimated in the stock market, but preserved in gold despite the volatility.
Posted By J. Kelly Anaheim, CA: November 6, 2008 12:49 pm
The question was about physical gold not paper gold. Physical gold has a wide gap on the paper COMEX quotes. This is an apples to oranges comparsion since a common $20 gold piece is still bring well over a grand and even the bullion coins are selling for $125 over the COMEX spot price. I wonder if he’s following the Dec Comex contract which may bring down the COMEX as people take physical gold for profit.
Posted By Rick,Tulsa OK: November 6, 2008 12:39 pm
Oh that’s funny The guy asked a question about buying physical and the answer was using facts from what paper gold did this year. He needs to get out more he maybe surprised that getting over a grand for any common $20 gold piece is here and now. He should have been using his skills to give real world stats on what the physical PM’s have done and not the COMEX stats where the loss hass occured.
Posted By Anonymous: November 6, 2008 12:20 pm
TIPs are “guaranteed by the US government”. Wow! That’s an iron-clad security blanket, if I ever saw one! What happens if the government goes under? Uh…no guarantee!
Posted By gold bug, Dallas TX: November 6, 2008 12:04 pm
For those bloggers claiming that gains on the sale of gold are taxed at ordinary income rates, or even collectible rates, you are only telling half of the truth. Gold bullion is a capital asset, thus gains are taxed using the capital gains rates. Gold coins may qualify as a collectible, but you need to do some fact checking. Some recently minted coinage is being ruled a capital asset in lieu of a collectible.
Posted By Mike, St. Louis, MO: November 6, 2008 12:03 pm
Picasso,
Art actually has been hoarded in the past as a means of preserving value. However, due to changes in tastes it is more difficult to do than investing in bullion, which we can assume will have similar uses/demand over a certain period.
And yes, We are in the deepest muck you can imagine.
Posted By John, Worcester MA: November 6, 2008 11:58 am
Gold is not an investment, it is life insurance for your money. To collect the maximum, your money must die. All of the “paper gold” is sold as an investment and should be treated as such. As for protection of wealth you may as well buy watermelon futures as “paper gold”. Physical gold is something you keep and don’t tell anyone about. I would not advise anyone to break any laws but there are ways, I am told, to buy gold anonymously with cash. For a total breakdown, silver is required for daily transactions as gold is too valuable to buy dried beans and cornmeal with. One ounce silver rounds and $100 face value of 90% US silver coins will keep you alive when nothing else will.
Posted By Mike Valdosta, GA: November 6, 2008 11:55 am
On Sept 11,2001, gold was around $300 per ounce. Now it’s around $740, at the low end of the recent trading range.
Retirees are about to be put on a roller coaster ride between deflation (thanks to our currently sinking broader economy) and hyperinflation (once investors address the mega-bailouts, and the dollars Ben has been printing and dropping from his helicopter). As with many other things in life, it is all about timing. What we will need to survive this ride are cash during deflation and gold during inflation.
The only thing left holding up the stock market now is the theory of anti-gravity, that is, “things may go down temporarily, but in a short period of time, they must go up again”. That was the last 30 years. What is really happening is a black swan that will be the Mother of all paradigm shifts.
Posted By Wake Up, Burlington, VT: November 6, 2008 11:46 am
Unlike the US Dollar, Gold is limited in quanity. Generally speaking, the less there is of something,the more it is worth…..
Posted By T, Plymouth, VT: November 6, 2008 11:39 am
Does anyone know why the price of Gold went from $35 an oz in 1971 to $850 an oz in 1975 when OPEC officially priced oil in US Dollars?
Posted By Chris Cantwell Bradenton FL: November 6, 2008 11:32 am
Why not invest in Art then?
Posted By Picasso ~ Poughkeepsie, NY: November 6, 2008 11:31 am
TIPS are indexed to government-published inflation figures, which are ridiculous! TIPS are for suckers. Look for the real inflation numbers–try Shadow Government Stats.
Posted By Michael, Charlottesville, VA: November 6, 2008 11:30 am
I agree with all the arguments posted regarding the long-term potential for investing in gold. Could the author please rewrite and recalculate the information regarding the price of gold and compare it with where the price of gold was 10 years ago rather than where the price of gold was at the start of this year?
Posted By Koen, Nasville, TN: November 6, 2008 11:10 am
You guys are all talking about preserving the purchasing power of your money….well im not a financial advisor but there are instruments known as TIPS (treasure inflation protected securities) that are guaranteed by the US government to hold their value.In my opinion, Gold, as the author clearly demonstrates, is just another speculative instrument that is simply fashionable in turbulent times…
Posted By Gabriel Miami Florida: November 6, 2008 11:10 am
You can tell that the author doesn’t know much about gold.
Posted By Joe, Cary, NC: November 6, 2008 11:08 am
I don’t think that the ETFs necessarily have all the gold and silver that they claim to have.
Physical is the only way to go. And get a gun, too.
Posted By Michael, Charlottesville, VA: November 6, 2008 11:07 am
Dave from Atlanta,
You still have to pay tax on gains from the sale of gold, even if it’s less than 10k. Not doing so could subject you to harsh penalties and in extreme circumstances, jail time.
Posted By Kris, Washington, D.C.: November 6, 2008 11:06 am
Gold should viewed as a savings account, but more importantly, as a sound money savings account – not a dollar denominated one.
In other words, the dollar value of your bullion will fluctuate and you won’t of course earn any interest on your bullion, but you are getting something very important in return. Gold is an inflation hedge because it preserves purchasing power over the long-term. Also, gold is a catastrophe hedge because it does not have counterparty risk. That means gold’s value is not dependent upon some bank’s promise and creditworthiness. Both of these attributes of gold are important in the best of times, but they become particularly important when you are saving for that proverbial rainy day. Right now there is a downpour on Wall Street, and this storm is spreading
Posted By John Anderson mahtowa MN.: November 6, 2008 10:46 am
I was one of the few financial planners who recommended adding gold to one’s portfolio to the tune of 10% in 2002-2003. I advised other planners to recommend this to their clients also. Now take the long view of investing - $300 per ounce (share) in 2003 to current $750 per ounce (share). Without even mentioning the money market (.5 to 2% interest rates), what other investments have done this well since 2003? Housing? Stocks? Bonds? Where are the high-quality money market funds and how secure are they? The bias against gold seems to permeate magazines such as Money Magazine (of course, look at their advertisers). The long-term purchasing power of gold versus the Federal Reserve Note monetary unit is the real crux of the argument. I don’t think this article serves its readers well.
Posted By Ken, Waynesboro, Ga.: November 6, 2008 10:39 am
I guess, Gold is the only thing on this planet that can be cashed anytime anywhere in any country. You can’t say dollar is not attached to gold. everytime dollar goes down, gold goes up. Internationally people look at dollar in terms of gold.
Posted By John, Milwaukee WI: November 6, 2008 10:33 am
I bought gold when it was less than $300. I am pretty sure I am going to make money on it. If not, I assume everything else I buy (energy, food, etc) will also be a lot cheaper. I win either way.
I find that when many money experts advocate diversification, they still tend to focus on stocks and bonds. My view is more broad than that and it has served me well. Did you know some savings bonds (series I) are earning over 8% now and have earnings since issue of over 6%?
It is a good idea to diversify, better so if over a truly broad range of instruments, not just what the finance experts say. But be wise and exercise moderation. No beanie babies and the like.
Posted By David, Albany NY: November 6, 2008 10:28 am
You talk about getting in and out at the right time.Trying to time the market isn’t too bright.Just in case you don’t know it, Banks are buying up gold…Go figure.
Posted By G.Stanicki,Penn Forest,PA: November 6, 2008 10:27 am
Dave, selling gold at a profit is taxable, whether or not the proceeds total less than $10,000. Just because it’s easier to cheat on taxes doesn’t mean it’s legal. If the IRS audits you and sees several $7k, $8k, or $9k cash deposits that you can’t explain, you’ll get socked with taxes AND penalties on every nickel. Leave the roulette for Vegas.
Posted By Bill, Rockville, MD: November 6, 2008 10:27 am
I wonder how many of you have actually invested in physical gold. Gold is not a thing like stocks - it’s much more difficult to store and haul around. You are to pay full income taxes - not capital gains tax on gold - regardless of the amount sold - you may not be reported until over $10K but you still owe taxes. Also, when physically investing in gold you pay large spreads (commissions) that can really eat into “profits” along with dealers that may not deal in fair honest pricing. Yes, gold is a great investment if you bought back when it was $238 an ounce in the Clinton age but now is it still a good investment? Now is the time to sell - not buy.
Posted By Michael B, Phoenix AZ: November 6, 2008 10:21 am
Gold has doubled in the past 10 years while the market has done nothing. This of course proves nothing as we are more concerned with what happens in the next ten years then what has occurred in the past. I personally believe 5% to 10% of everyone’s assets should be held in gold.
Posted By mark atlanta ga: November 6, 2008 10:09 am
This is a horrible argument.
If I started to buy DJ Index at 13000 at the begining of the year, where would I be now?
The price of gold is tied into the USD strength. Now, don’t look at the absolute dollar value; look at the purchasing power. In the end, that’s all we care.
Posted By Johnny, Humble, TX: November 6, 2008 10:02 am
You tell folds to think long term and then, proffer flawed advice. Over the long term, gold is an excellent store of value. Shorter term, gold is volatile because often it must be sold to cover other positions. But unlike stocks, one can rest assured that it will have some value, even when most other things have gone bus. I recommend holding gold as a long hedge, at about 5% when prices are abnormally high to 15% when prices are far below trend.
Posted By David, Watson, OK: November 6, 2008 9:56 am
You can buy and sell gold coins and bullion through dealers and you don’t pay taxes on them when you sell, unless it’s over 10k….also gold is tied to stability because once upon a time a dollar was backed by a dollar of gold in fort knox, until nixon took us off the gold standard…now a dollar is worth maybe 25 cents of what it was. while gold is valuable in any country, the dollar may not be in the future.
Posted By Dave, Atlanta, Ga.: November 6, 2008 9:52 am
gold is in a downtrend
Posted By skipper x, NJ: November 6, 2008 9:52 am
Look at gold over the long term and you will see that it is a store of value. Over any short haul, though, it can be volatile because it gets sold to cover positions, just like any other holding. Nevertheless, gold should be held as a long hedge, at about 5 per cent of any portfolio at high gold prices and 15 percent when it drops way below trend.
Posted By Anonymous: November 6, 2008 9:51 am
And Josh, I bet you have a good portion of your money sunk into gold, which doesn’t make you any more a viable resource either- or the people you listen to. You can either “listen to opinions of what is best” or be rational and look at the numbers, which this author has done….
Posted By Mike, Cedar Rapids, IA: November 6, 2008 9:49 am
Which is volatile against which - gold against the dollar, or the dollar against gold? Perhaps you should have instead mocked the dollar’s “reputation as an anchor of stability.”
Posted By tanker, new york, ny: November 6, 2008 9:45 am
I love these guys that write for major news outlets such short sided views. Telling someone they should own gold now is like telling someone right before the great depression not to buy gold. Look at the japanesse! We are doing the exact same thing as them, and 20 years later their market hasn’t even closely recovered from the highes. More money will eventually = more inflation with more inflation your current dollars will be worth less. Does anyone actually think the next president will decrease our national debt?
Posted By Nick Smith, Peoria, Il: November 6, 2008 9:39 am
I think the question was more of a hedge against the world economy collapsing. Gold is a very good place to put your money if you have minimal faith in the banking industry or are worried about any type of financial collapse. Gold has always kept its value in accordance with the economy. For example, in 1950 gold was trading at $40 per oz. A good suit cost approx $50 back then. Today a good suit can cost $750. As long as you are taking physical delivery and not playing with futures, investing in gold is a great idea.
Posted By Edward NY, NY: November 6, 2008 9:38 am
Thank you Josh. This guy mentions nothing about physical shortages or trading on the COMEX. Incredibly simple analysis. I hope no one takes it to hear. Besides you want to buy on the dips anyway. I’d say this was a dip. Inflation will reintroduce itself with fervor after all the money pumped into the economy snaps back on us.
Posted By Steve, Toledo Oh: November 6, 2008 9:37 am
Good analysis. Also, keep in mind that gold is taxed as a “collectible” at a much higher tax rate that equities (28%).
Posted By Woeful: November 6, 2008 9:04 am
A recent radio ad predicted gold could hit $2000 an ounce. By my rough calculations if you had bought at the peak around 1980 at $2000 an ounce you would be just breaking even after inflation is taken into account.
Posted By David Freiman, Philadelphia, PA: November 5, 2008 10:27 pm
This seems like a pretty naive short term opinion of gold. Gold has long term value as a form of wealth (which will be here longer Fannie or a Gold Eagle). The reason for the volatility is because it is tied up in the rest of the market. Huge Hedge funds are selling positions and short selling etc. Try to buy physical. YOU CAN’T and if you do manage to find some you are going to pay a hefty premium. Please do more research than simply reading some guy on CNN.com. He’s probably getting paid by the same hedge funds I talked about before.
Posted By Josh, Denver Colorado: November 5, 2008 5:44 pm
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Friday, 28 November 2008
How safe is too safe
Ask the Expert Retirement questions answered
How safe is too safe
By Walter Updegrave,
Money Magazine senior editor
November 10, 2008 5:18 pm
Question: Are stable-value funds a safe investment? —Rexford, Syracuse, New York
Answer: That depends on what you mean by safe.
Stable-value funds, which are available only in 401(k)s (and currently offered by more than half of such plans), invest for the most part in high-grade short- to intermediate-term bonds. The managers of these funds also buy “wrappers” - or contracts from insurance companies and banks - that guarantee principal and accumulated interest against loss.
As a 2007 study shows, the result is an investment that provides long-term returns similar to those you would get with intermediate-term bonds, but with stability comparable to a money-market fund’s.
Would I put stable-value funds in the same category as FDIC-insured bank deposits when it comes to principal protection? No. They’re not federally insured. But given the high quality of the funds’ underlying securities and the fact that they also diversify risk by purchasing wrappers from 10 or so financial institutions on average, I think it’s fair to say that stable-value funds provide a high level of security and adequate protection against losses.
So in that sense I’d say yes, they’re a safe investment.
Playing it too safe
But when it comes to investing for retirement, I believe you should to take a broader view of safety. Specifically, you’ve got to consider whether your investments are safe in the sense that they’re likely to deliver the returns you’ll need to build a nest egg large enough to support you comfortably in retirement.
And that’s where I think people who’ve been flocking to stable-value funds lately - in September alone, 401(k) investors switched $921 million out of stock funds and moved $733 million into stable-value funds - have to be careful.
Understandably everyone is freaked out about declining balances of 401(k)s. Those losses and fears that even more may lie ahead make investments that promise security especially appealing today. But you don’t want to plow too much of your money into investments that offer a refuge from market losses.
There may be few concepts you feel you can count on in the investing world today. But here’s one you can bank on: The more secure an investment is, the lower its long-term returns are likely to be. So by focusing too intently on safety in the short-term, you could jeopardize your long-term retirement security by sacrificing growth potential.
Which is why I think you shouldn’t view stable-value funds as a haven to flee to during periods of market turmoil, but as a core part of a diversified portfolio that also includes stocks and bonds. Basically, you should consider stable-value funds an investment choice for the fixed-income portion of your 401(k), along with bond funds.
As for how much of your 401(k) you should put in stable-value and bond funds, the answer largely comes down to how far along you are in your career and how much risk you’re comfortable taking. I know everyone is wary about investing in stocks right now. But if you’re young and early in your career, you don’t have to be so concerned about falling stock prices. You’ve got decades before you’ll tap your 401(k), so you should focus on getting a competitive long-term return. And that means keeping most of your money in stocks.
Although there’s no assurance stock prices won’t fall even farther from here, history shows that you’re likely to earn the best long-term returns from shares you buy in the wake of major market declines.
As you get closer to retiring, you still need long-term growth - after all, you may spend 30 or more years in retirement - but you also want more stability. You don’t have as much time to recoup losses. So you want to gradually increase the amount going into stable-value funds and bonds as you age.
So if it’s safety you’re looking for, yes, stable-value funds can be a reasonable choice. But make sure they’re part of a long-term investing strategy. Otherwise, the price of feeling safe today could be less retirement security down the road.
-----
Filed under Uncategorized16 Comments Add a Comment
Great article! Don’t worry and don’t to even bother your little head about “timing”. So many selfless professionals are dedicated to your prosperity.
Posted By M, GSO, NC: November 17, 2008 10:13 am
I agree with Charles Shaw in Liverpool NY. One way to restore confidence is for the top leadership of these failing banks and finanancial institutions to not be able to retire with massive golden parachutes, and for the average working person to see that justice really is served. Pauslon is now changing the rules midstream as to where all of our dollars will go. Why not have the wealthiest on Wall Street be forced to retire on “only” $100,000 a year and have the rest of their assets go to help those who were truly hurt by this mortgage crisis. The greed of those at the very top using mortgage debt and leveraging should be punished.
To Jonathan in Seattle: I am not sure who you were referring to in your comments, but it is not the “little guy” who is moving the market up and down these days with “panic selling.”Send your message to the big institutional investors and mutual fund managers who are the main ones moving this market.
Posted By Iris, Rochester NH: November 16, 2008 9:14 am
Inflation and taxes are unavoidable.
I would not invest my money in risky investmnts just to make a higher return. Investing is not about how much you mak, but about how much you keep.
The truth is that unless you make over $250,000 a year for 20 years or more and save at least an average of 10% a year, you are not going to be rich when you retire.
The median income is around $46,000 in America. If a person invests 10% of his gross income and makes around 5% a year, he will not have millions of dollars after 35 years.
The myth of retirement is going to terrorize many Americans in the next 20 years. Many of those who are retired and are too old to make a decent income will suffer. They will have reduced Social Security benfits to look forward to and little savings to live off of.
There is no such thing as playing it too safe. Either you have a lot of money, a little money, or no money. Those that have a lot of money or no money will get by just fine. Those with a little money, the middle class, will be taxed higher and will receive less benefits.
Posted By Yadgyu, Harkyville, TX: November 13, 2008 5:24 pm
I don’t why so call experts always keep on saying keep your money where they are or you’ll end up missing the upswing. If i had not moved my money to the stable fund, i would’ve easily lost 30-40% of my meager 401k fund. But now, I am still getting some returns and I am not throwing away monthly contributions. Wake up so called experts. It would take years for me to recoup the 30-40% I would’ve lost.
Posted By Jun, Brentwood, CA: November 13, 2008 2:53 am
People seem to lose track of the key points in these comments. 1)Stable funds are a fantastic capital preservation tool. 2)To build a 401K to the level needed to support decades of retirement(hopefully)you have to have the return rates that equities provide. There are two ways to do this. 2) a) Buy and hold. Or… 2) b) Market timing. There is a lot of literature that market timing doesn’t work. And yet… there is some evidence that you can sidestep the big drops sometimes. Not always. There have been two big market declines in the past 8 years, and foreseeing them was not very tough, if you are paying attention. The first one I didn’t have the confidence to manage. This time I slowly transitioned to my stable value fund. Always move in modest increments, because you could be wrong! In any case, I’m down 14% this year… that much only because I got over-burdened at work and home and acted later than I intended… however, I would otherwise be down 30-35% as of today. I love my stable value fund!! I’ll buy back equities slowly, maybe 5% per month, starting next year. Equities are still over-valued, given the level by which future earnings are over-stated by wall street. I may miss a few big up days… heck I missed the biggest one ever last week, but guess what? I can now buy at a lower price than before that run up. I have more to gain by misssing the big down days. I now have a 15% head start on the market, my opportunity cost is pretty small, and the beauty of it is I don’t need to ‘time’ to get back into the market. A little DCA does the trick.
Posted By John in Colorado: November 12, 2008 2:48 pm
To the first poster, commenting that he would have been better off in stable value for the last 25 years…The market is up roughly 600% over the last 25 years. How exactly would being in stable value make you better off than “riding the ups and downs” that have you up 600%?
Posted By Jon, Parsippany, NJ: November 12, 2008 9:26 am
People wake UP! There is nothing new under the sun. 8 years ago you were the same people saying we are on the brink of economic collapse. And you were saying the same thing in 1992, and during everyother economic pull back. Do yourselves (and us) a favor and put all of your money into a nice FDIC insured savings account, where you will get a negative return because of inflation. You’ll be poorer by the day but at least those of us who invest in the market won’t have to deal with your panic selling.
Posted By Jonathan Seattle, WA: November 12, 2008 2:45 am
I am not sure why we are still holding to the underlying assumption that we are going to “retire.” It may that this 20th-century invention will have to go the way of quill epns and inkwells.
Posted By Julieanne, Waterbury, CT: November 11, 2008 5:50 pm
You know what I think is safe, keeping my money, or spending it now.Why would I invest into anything in the market, when robber barons can steal my money, like they have this year? These crooks have had not one conviction, not one arrest, when any reasonable person knows this melt down was caused from insider trading and fraud.You want the return of confidence? Then somebody better start talking about the schemes that have lead to the greatest depression since 1929. The people will not feel their money is safe in any investment until we see justice done.Time to fill the jails up with the very well connected in Wall Street and Government who conspired to rob the American Citizen of their savings and retirement.
Posted By Charles L. Shaw, Liverpool, NY: November 11, 2008 4:56 pm
I have to agree with the commentor about the canned answer, but I disagree with the other commentors saying they are better off in stable income. BTW, 4.5% interest after an inflation of 3.5% (US Average) equals 1% real return; basically under the Rule of 72, it will take you 72 years to double your money after inflation.
The big problem is people are taking too much risk for their own good and thereby losing their shirts. Unfortunately people need to do their homework before investing. Face it folks a lot of the brokers out there are paid via commission and therefore may not have your best interests at heart.
I would recommend Bogle Heads Guide to Investing & Automatic Millionaire as good books to do some research about personal finance. You’ll be amazed how easy it is to save and invest after reading these two books. Just set and forget.
Another thing, do your age in bonds. If you are 30 years old, you should have 30% of your assets in bonds and/or stable income.
One other thing about stable income; remember these are insurance contracts, if the insurance company goes insolvant because too many bonds it backed turned to worthless paper, you could end up losing your cash.
Posted By Pat, Albany, NY: November 11, 2008 4:53 pm
i have made a ton on stocks in the past and of course i lost some recently, but the idea that we can only accept the good and have none of the bad will keep you poor and on the side lines, mad at those who succeed.
Posted By URB left coast CA.: November 11, 2008 4:36 pm
I’m done paying attention to all these financial “experts”….who advised me where to put my money the last 35 years. Let’s see …..one year I’ve lost 25%? Where were the experts when everything was melting down? Obviously they were pulling money out of equities while telling those of us in a 401K to “stay the course”!
Posted By Kay, Portland, Oregon: November 11, 2008 4:15 pm
Our financial system is completely broken and you are advising people, who have consistently been deceived by Wall Street, to do what now?
Posted By BxCapricorn, Vegas, NV: November 11, 2008 12:14 pm
In a diversified long-term portfolio, does it make sense to buy insurances against market losses in bonds instead of just investing directly in intermediate-term bonds to take maximum advantage of the benefits of diversification (bonds go up in many scenarios when stocks go down and vice-versa) instead of trying to guarantee a minimum level of return?
Posted By Andy from Miami, FL: November 11, 2008 11:44 am
As far as I am concerned, stable value funds are the ONLY way to go in today’s unstable market. I am 47-YO and THANKFULLY I have 100% of my 401K invested in stable value. While other funds offered in my plan are losing between 20 & 50% in value, I am getting approximately 4.1 to 4.2% return on my stable value fund. In essence, while the rest of the ‘world’ is losing the shirts off their backs, I am making money. It might not equate out to 10, 12, 15% return, but at least I am not LOSING anything that will take YEARS, and I DO MEAN YEARS to make up. Of course, I do have other SAFE Investments as well such as FDIC Insured Certificate of Deposit Accounts.
Posted By Jerry, Hagerstown, MD: November 11, 2008 10:31 am
I feel that the answer provided was too canned and does not take into consideration the historic events of the current economic crisis. Since there is nothing really to compare the current market to, saying that stable funds are “too safe” is very naive. A fund that is down 40 to 50% may take years and years to ever get back to 0, or may never. I have been investing in a 401K for over 20 years(I’m 45) and I may have been better off over those years putting the money in stable funds than riding the ups and downs of the market. Remember, it’s not “return on” any more, but “return of” our investments that we worry about.
Posted By Wesley, Richardson, TX: November 10, 2008 7:42 pm
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« Buying gold as a safe haven
A ‘do over’ on your IRA conversion »
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How safe is too safe
By Walter Updegrave,
Money Magazine senior editor
November 10, 2008 5:18 pm
Question: Are stable-value funds a safe investment? —Rexford, Syracuse, New York
Answer: That depends on what you mean by safe.
Stable-value funds, which are available only in 401(k)s (and currently offered by more than half of such plans), invest for the most part in high-grade short- to intermediate-term bonds. The managers of these funds also buy “wrappers” - or contracts from insurance companies and banks - that guarantee principal and accumulated interest against loss.
As a 2007 study shows, the result is an investment that provides long-term returns similar to those you would get with intermediate-term bonds, but with stability comparable to a money-market fund’s.
Would I put stable-value funds in the same category as FDIC-insured bank deposits when it comes to principal protection? No. They’re not federally insured. But given the high quality of the funds’ underlying securities and the fact that they also diversify risk by purchasing wrappers from 10 or so financial institutions on average, I think it’s fair to say that stable-value funds provide a high level of security and adequate protection against losses.
So in that sense I’d say yes, they’re a safe investment.
Playing it too safe
But when it comes to investing for retirement, I believe you should to take a broader view of safety. Specifically, you’ve got to consider whether your investments are safe in the sense that they’re likely to deliver the returns you’ll need to build a nest egg large enough to support you comfortably in retirement.
And that’s where I think people who’ve been flocking to stable-value funds lately - in September alone, 401(k) investors switched $921 million out of stock funds and moved $733 million into stable-value funds - have to be careful.
Understandably everyone is freaked out about declining balances of 401(k)s. Those losses and fears that even more may lie ahead make investments that promise security especially appealing today. But you don’t want to plow too much of your money into investments that offer a refuge from market losses.
There may be few concepts you feel you can count on in the investing world today. But here’s one you can bank on: The more secure an investment is, the lower its long-term returns are likely to be. So by focusing too intently on safety in the short-term, you could jeopardize your long-term retirement security by sacrificing growth potential.
Which is why I think you shouldn’t view stable-value funds as a haven to flee to during periods of market turmoil, but as a core part of a diversified portfolio that also includes stocks and bonds. Basically, you should consider stable-value funds an investment choice for the fixed-income portion of your 401(k), along with bond funds.
As for how much of your 401(k) you should put in stable-value and bond funds, the answer largely comes down to how far along you are in your career and how much risk you’re comfortable taking. I know everyone is wary about investing in stocks right now. But if you’re young and early in your career, you don’t have to be so concerned about falling stock prices. You’ve got decades before you’ll tap your 401(k), so you should focus on getting a competitive long-term return. And that means keeping most of your money in stocks.
Although there’s no assurance stock prices won’t fall even farther from here, history shows that you’re likely to earn the best long-term returns from shares you buy in the wake of major market declines.
As you get closer to retiring, you still need long-term growth - after all, you may spend 30 or more years in retirement - but you also want more stability. You don’t have as much time to recoup losses. So you want to gradually increase the amount going into stable-value funds and bonds as you age.
So if it’s safety you’re looking for, yes, stable-value funds can be a reasonable choice. But make sure they’re part of a long-term investing strategy. Otherwise, the price of feeling safe today could be less retirement security down the road.
-----
Filed under Uncategorized16 Comments Add a Comment
Great article! Don’t worry and don’t to even bother your little head about “timing”. So many selfless professionals are dedicated to your prosperity.
Posted By M, GSO, NC: November 17, 2008 10:13 am
I agree with Charles Shaw in Liverpool NY. One way to restore confidence is for the top leadership of these failing banks and finanancial institutions to not be able to retire with massive golden parachutes, and for the average working person to see that justice really is served. Pauslon is now changing the rules midstream as to where all of our dollars will go. Why not have the wealthiest on Wall Street be forced to retire on “only” $100,000 a year and have the rest of their assets go to help those who were truly hurt by this mortgage crisis. The greed of those at the very top using mortgage debt and leveraging should be punished.
To Jonathan in Seattle: I am not sure who you were referring to in your comments, but it is not the “little guy” who is moving the market up and down these days with “panic selling.”Send your message to the big institutional investors and mutual fund managers who are the main ones moving this market.
Posted By Iris, Rochester NH: November 16, 2008 9:14 am
Inflation and taxes are unavoidable.
I would not invest my money in risky investmnts just to make a higher return. Investing is not about how much you mak, but about how much you keep.
The truth is that unless you make over $250,000 a year for 20 years or more and save at least an average of 10% a year, you are not going to be rich when you retire.
The median income is around $46,000 in America. If a person invests 10% of his gross income and makes around 5% a year, he will not have millions of dollars after 35 years.
The myth of retirement is going to terrorize many Americans in the next 20 years. Many of those who are retired and are too old to make a decent income will suffer. They will have reduced Social Security benfits to look forward to and little savings to live off of.
There is no such thing as playing it too safe. Either you have a lot of money, a little money, or no money. Those that have a lot of money or no money will get by just fine. Those with a little money, the middle class, will be taxed higher and will receive less benefits.
Posted By Yadgyu, Harkyville, TX: November 13, 2008 5:24 pm
I don’t why so call experts always keep on saying keep your money where they are or you’ll end up missing the upswing. If i had not moved my money to the stable fund, i would’ve easily lost 30-40% of my meager 401k fund. But now, I am still getting some returns and I am not throwing away monthly contributions. Wake up so called experts. It would take years for me to recoup the 30-40% I would’ve lost.
Posted By Jun, Brentwood, CA: November 13, 2008 2:53 am
People seem to lose track of the key points in these comments. 1)Stable funds are a fantastic capital preservation tool. 2)To build a 401K to the level needed to support decades of retirement(hopefully)you have to have the return rates that equities provide. There are two ways to do this. 2) a) Buy and hold. Or… 2) b) Market timing. There is a lot of literature that market timing doesn’t work. And yet… there is some evidence that you can sidestep the big drops sometimes. Not always. There have been two big market declines in the past 8 years, and foreseeing them was not very tough, if you are paying attention. The first one I didn’t have the confidence to manage. This time I slowly transitioned to my stable value fund. Always move in modest increments, because you could be wrong! In any case, I’m down 14% this year… that much only because I got over-burdened at work and home and acted later than I intended… however, I would otherwise be down 30-35% as of today. I love my stable value fund!! I’ll buy back equities slowly, maybe 5% per month, starting next year. Equities are still over-valued, given the level by which future earnings are over-stated by wall street. I may miss a few big up days… heck I missed the biggest one ever last week, but guess what? I can now buy at a lower price than before that run up. I have more to gain by misssing the big down days. I now have a 15% head start on the market, my opportunity cost is pretty small, and the beauty of it is I don’t need to ‘time’ to get back into the market. A little DCA does the trick.
Posted By John in Colorado: November 12, 2008 2:48 pm
To the first poster, commenting that he would have been better off in stable value for the last 25 years…The market is up roughly 600% over the last 25 years. How exactly would being in stable value make you better off than “riding the ups and downs” that have you up 600%?
Posted By Jon, Parsippany, NJ: November 12, 2008 9:26 am
People wake UP! There is nothing new under the sun. 8 years ago you were the same people saying we are on the brink of economic collapse. And you were saying the same thing in 1992, and during everyother economic pull back. Do yourselves (and us) a favor and put all of your money into a nice FDIC insured savings account, where you will get a negative return because of inflation. You’ll be poorer by the day but at least those of us who invest in the market won’t have to deal with your panic selling.
Posted By Jonathan Seattle, WA: November 12, 2008 2:45 am
I am not sure why we are still holding to the underlying assumption that we are going to “retire.” It may that this 20th-century invention will have to go the way of quill epns and inkwells.
Posted By Julieanne, Waterbury, CT: November 11, 2008 5:50 pm
You know what I think is safe, keeping my money, or spending it now.Why would I invest into anything in the market, when robber barons can steal my money, like they have this year? These crooks have had not one conviction, not one arrest, when any reasonable person knows this melt down was caused from insider trading and fraud.You want the return of confidence? Then somebody better start talking about the schemes that have lead to the greatest depression since 1929. The people will not feel their money is safe in any investment until we see justice done.Time to fill the jails up with the very well connected in Wall Street and Government who conspired to rob the American Citizen of their savings and retirement.
Posted By Charles L. Shaw, Liverpool, NY: November 11, 2008 4:56 pm
I have to agree with the commentor about the canned answer, but I disagree with the other commentors saying they are better off in stable income. BTW, 4.5% interest after an inflation of 3.5% (US Average) equals 1% real return; basically under the Rule of 72, it will take you 72 years to double your money after inflation.
The big problem is people are taking too much risk for their own good and thereby losing their shirts. Unfortunately people need to do their homework before investing. Face it folks a lot of the brokers out there are paid via commission and therefore may not have your best interests at heart.
I would recommend Bogle Heads Guide to Investing & Automatic Millionaire as good books to do some research about personal finance. You’ll be amazed how easy it is to save and invest after reading these two books. Just set and forget.
Another thing, do your age in bonds. If you are 30 years old, you should have 30% of your assets in bonds and/or stable income.
One other thing about stable income; remember these are insurance contracts, if the insurance company goes insolvant because too many bonds it backed turned to worthless paper, you could end up losing your cash.
Posted By Pat, Albany, NY: November 11, 2008 4:53 pm
i have made a ton on stocks in the past and of course i lost some recently, but the idea that we can only accept the good and have none of the bad will keep you poor and on the side lines, mad at those who succeed.
Posted By URB left coast CA.: November 11, 2008 4:36 pm
I’m done paying attention to all these financial “experts”….who advised me where to put my money the last 35 years. Let’s see …..one year I’ve lost 25%? Where were the experts when everything was melting down? Obviously they were pulling money out of equities while telling those of us in a 401K to “stay the course”!
Posted By Kay, Portland, Oregon: November 11, 2008 4:15 pm
Our financial system is completely broken and you are advising people, who have consistently been deceived by Wall Street, to do what now?
Posted By BxCapricorn, Vegas, NV: November 11, 2008 12:14 pm
In a diversified long-term portfolio, does it make sense to buy insurances against market losses in bonds instead of just investing directly in intermediate-term bonds to take maximum advantage of the benefits of diversification (bonds go up in many scenarios when stocks go down and vice-versa) instead of trying to guarantee a minimum level of return?
Posted By Andy from Miami, FL: November 11, 2008 11:44 am
As far as I am concerned, stable value funds are the ONLY way to go in today’s unstable market. I am 47-YO and THANKFULLY I have 100% of my 401K invested in stable value. While other funds offered in my plan are losing between 20 & 50% in value, I am getting approximately 4.1 to 4.2% return on my stable value fund. In essence, while the rest of the ‘world’ is losing the shirts off their backs, I am making money. It might not equate out to 10, 12, 15% return, but at least I am not LOSING anything that will take YEARS, and I DO MEAN YEARS to make up. Of course, I do have other SAFE Investments as well such as FDIC Insured Certificate of Deposit Accounts.
Posted By Jerry, Hagerstown, MD: November 11, 2008 10:31 am
I feel that the answer provided was too canned and does not take into consideration the historic events of the current economic crisis. Since there is nothing really to compare the current market to, saying that stable funds are “too safe” is very naive. A fund that is down 40 to 50% may take years and years to ever get back to 0, or may never. I have been investing in a 401K for over 20 years(I’m 45) and I may have been better off over those years putting the money in stable funds than riding the ups and downs of the market. Remember, it’s not “return on” any more, but “return of” our investments that we worry about.
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**4 Lessons from the Financial Crisis
Complete Coverage Ask the Expert Retirement questions answered
4 lessons from the financial crisis
By Walter Updegrave, Money Magazine senior editor
November 17, 2008 5:13 pm
If you can learn from the mistakes of others, now is a great time to be an investor.
Question: I’m inexperienced when it comes to investing, but I want to build a more secure financial future. What tips or suggestions do you have for a young investor like me? —Caleb Bond, Denver
Answer: It’s a great time to be starting out as an investor. Yes, I know that might sound odd, given that the market and the economy are in shambles. But the fact that people are so fearful and the outlook is so uncertain can also have its advantages.
For one thing, much of the excess has been wrung out of stock prices over the past year or so. And while this hardly insures a quick rebound, the money you invest today is much more likely to earn a higher return than if you had invested before the meltdown.
Even more important, though, is that you now have a better sense of the real risks of investing. People who gain their investing experience during bull markets can easily be lulled into a false sense of security. They know that severe downturn occur and maybe could occur again, but the possibility of one happening to them seems remote.
Today, however, all you’ve got to do is look around you to see that risk is real, it can be devastating and it must be respected.
That said, there’s also the danger that someone surveying today’s scene might take away the wrong lessons. Already, some people are concluding that stocks, or financial assets in general, are just too risky. When it comes to important goals like retirement, they say, the experience of the last year or so shows you should stick to the most secure investments, FDIC-insured CDs and the like.
But that’s an overreaction. Risk is a natural part of investing, a part of life, for that matter. Eliminate it and you eliminate opportunity. The key is to understand how much risk you’re taking and manage it.
With that in mind, here are four lessons I think beginning investors should take from the financial crisis and apply to their investing decisions now and in the years ahead. Come to think of it, I think experienced investors should consider them as well.
Financial success isn’t just about investing.
We kind of lost sight of this fact because returns on financial assets had been so good from the early 1980s through the late ‘90s. And even after the dot-com bust we had another five-year bull run in stocks, not to mention heady gains in the real estate market. It became easy to assume that we could achieve financial goals like a secure retirement with a minimum of savings because we could count on the compounding effect of years of high returns.
That was always an unsound strategy, but it’s only now becoming clear how flawed. In fact, as a study by Putnam investments showed a couple of years ago, saving is just as important for building wealth, if not more so. We can’t be sure of the size of the investment gains we’ll earn, and we don’t have nearly as much control over them as we used to think. But we have much more control over how much we save.
And by saving more, we gain two big advantages: we don’t have to invest as aggressively to build a retirement nest egg or reach other financial goals; and, by socking more money away, we’ll have more of a cushion in the event of setbacks in the market.
Simplicity is better than complexity.
If I could ban two words from the vocabulary of investors, it would be these: “sophisticated investing.” I think more harm has been done by investors trying to boost their returns by creating arcane investing strategies or buying complicated investments they don’t understand than all the investment con men and rip-off artists combined.
I don’t want to sound like a Luddite. I’m all for using tools, calculators and software to help you create a retirement plan and an investing strategy. But you’ve also got to maintain a healthy sense of skepticism about how much fancy algorithms and intricate computer simulations can do.
Fact is, the more complicated your investing strategy is, the more things there are that can go wrong, and the harder it will be for you to monitor and maintain it. A simple mix of stock and bond mutual funds may not be the sexiest strategy around. But if you use good common sense in putting that mix together - i.e., you diversify broadly as we recommend in our Asset Allocator tool - it will serve you well over the long term.
Allow for the possibility you may be wrong.
One of the most notable features of the real estate bubble was how sure people felt that prices would continue to go up, up, up. At the peak of the housing mania, I remember getting emails from firms that were inducing individuals to open self-directed IRA accounts so that they could then invest their IRA money in real estate. I wrote a column at the time suggesting that this might be a sign that the real estate market was getting frothy and warning people about staking their retirement on the housing market.
I got a lot of feedback on that column, alas, most of it from people who wanted to know how they could get in touch with those firms that could help them get rental houses into their IRAs. And although I and others pointed out that house prices had gone down in the past and stayed down for quite a while after big run-ups, no one seemed to believe that it could happen again.
Which is why it’s always important when you’re investing to give yourself a reality check. Are your assumptions realistic? Is there something you’re overlooking? Could you be wrong? What would the fallout be if you are? And, perhaps most important, are you interested in this investment because it fits in with your overall strategy or because it’s the investment everyone is talking about? Don’t get too euphoric during upswings or depressed during downturns.
When things are going well and the economy and the markets are on a roll, it’s easy to let the excitement cloud your judgment. After all, everywhere you look - the double-digit gains in the fund listings, the upbeat news in the newspaper’s business section, the cheerful banter on cable TV financial shows - you get positive reinforcement. You almost can’t help but believe that the good times will continue to roll.
So you begin to boost the percentage of stocks in your portfolio and put more money than you should into hot investments that now seem like good bets, such as emerging market stocks. In other words, you begin taking on more risk, although, you probably don’t see it that way. How can investing be risky when it seems the market only goes up?
This process kicks into reverse, of course, when the markets and economy change course and begin falling apart. Then the prevailing gloom and doom dominates your thinking. Everywhere you look - the double-digit losses in the fund listings, the downbeat news in the business section, the somber mood and dire pronouncements on the cable TV financial shows - you get negative reinforcement.
You become convinced that the hard times will get even harder. So you sell out of stocks and move into safe-haven investments you sneered at during boom times - bond funds, money-market funds, stable-value funds, even CDs. And you no doubt see this as a move to reduce risk. After all, aren’t you safer getting out of the market when it only seems to keep going down?
But there’s a risk here too: you may be selling at the worst time and positioning yourself to miss the recovery when it occurs.
These feelings and reactions are natural. We’re human. But it’s no news flash that markets and economies move in cycles. That we go through periods of excess on both the upside and downside. We’ve gone through such episodes before and we will again. So ideally you want to set a strategy that factors in such fluctuations, and then avoid the urge to abandon your strategy when your emotions are screaming you to do so.
I can’t guarantee that steering clear of the euphoria that leads to aggressive investing at market peaks and avoiding the despair that causes you to be too conservative after the market falls apart will assure you’ll earn the highest returns or sidestep big losses. But by doing so, you’ll probably be less vulnerable heading into downturns, and better positioned to take advantage of the upswing when it occurs.
Filed under Uncategorized22 Comments Add a Comment
I just want to caution everyone that before jumping back into the market that everyone has their credit cards paid off. Too quickly we forget that one of the lessons out of all of this is that we cannot live beyond our means.
Posted By Matt Malinowski, Lethbridge AB: November 19, 2008 12:04 am
Why would anyone advise someone to invest in the stock market now. In 1929 there was a major down turn in the market. And in the end the stock market DOW dropped over 80%. We are in a worst crisis than in 1929. The dollar is about to slide over a cliff. And the tax base is being eroded away so the government won’t be able to pay the interest on our loans. Next year we won’t be able to have foreigners buy our bonds. Because the feel they would be too risky because of all our debt. The credit rating of the US will be downgraded. With all the spending we are looking at a hyperinflation senario similar to Wienmar Germany. The article is dreamland. Tell the kid to invest in silver/gold. In the depression you could buy a house for a couple of ounces of gold and in Wienmar germany you could buy a house for one quarter ounce of gold.
Posted By Kevin Rathdrum, Idaho: November 18, 2008 11:18 pm
Save at least 10% of everything you earn. Like Buffett says, be greedy when others are fearful and fearful when others are greedy. Learn and follow the Elliot Wave Theory. Read and learn about investing. Develop and strictly adhere to a long term investment plan. Learn and apply the dynamics and psychology of market swings and how they work and learn how to make them work for you. In essence, educate yourself and apply your knowledge on a long term basis.
Posted By Ramundo A, Lincoln, Nebraska: November 18, 2008 9:53 pm
I’ll tell you what, its been black friday for a few weeks now and I’m loading up on these bank stocks. In a few years it’l rebound and I believe what I put in it over the next year will at least double my value. at least. its on sale! citi for example is 75% off!
Posted By Anonymous: November 18, 2008 8:02 pm
Nice article. Sad to see all these people near retirement that had more than half of their stash in stocks and real estate. What’s even sadder is considering the moral hazard of the government now helping “too much.”
Stock Market has some interesting features, not widely advertised, like a real return since 1871 less than 2% on price appreciation alone (most people don’t believe this, but take the SP500 data since it started and calculate it yourself). On the other hand, including dividends, real return is 6.4%. Kind of like a bond, to support the argument of another writer to this post (but a bond with a heckuva a lot of volatility).
It also seems to have a 35 year oscillation in peaks and troughs, and the next trough is 2018. Hopefully past performance doesn’t predict future results!
Posted By Dave, Houston, TX: November 18, 2008 7:26 pm
I think what Walter is trying to say is :
Keep it simple to keep it manageable.
Meanwhile:
There has been a phrase bandied about in the press “too big to fail”.
I think that phrase needs to be changed to “too big for their britches” because “Wall Street” has been demanding “more liquidity” from the Federal Government for years.
I think that was a cover-up for “we gambled and made some bad bets so we need to borrow more money even cheaper so when we win a big one we can pay you back but meanwhile we need to pay ourselves several million dollars because we are such darn smart and clever people.”
So when you do your own investing, don’t get too big for your britches thinking you are smarter than “Wall Street” because they have more OPM than you do.
OPM being “Other People’s Money”
Posted By Jason Stoons, Austin TX: November 18, 2008 7:10 pm
One fundamental problem with our economy and Government is the unhealthly focus on the spenders–we bend over backwards to encourage people to go into debt, while at the same time practically eliminate all incentives to save our money (painfully low savings rates)–America’s problems will continue to worsen as long as we continue to spend beyond our means…and I’m talking about both Government and personal spending.
Posted By Nairb Sreoom, Biloxi, MS: November 18, 2008 5:21 pm
The current economics is really a paradigm shift to some basics, that will really develope into a new reality, a new way of looking at things. The promoters of sliced and diced investment “opportunities” have been found out. The repercussions of this failure are yet to be determined. Your article really tells us that it is back to basics, keep your investment strategy simple and understandable. I think the future will be the best time in our history, but only after a lot of lessons are learned and pain obsorbed. If the government bails us out too much, we won’t have learned anything.
Posted By Don Miner, San Francisco,: November 18, 2008 4:41 pm
It’s a shame that there is no TV show about simple, sensible investing principles: keeping costs low, tax efficiency high, diversification high, and allocation appropriate. Although they are the optimal strategy for nearly everyone, can you imagine watching a show that told you to do the same basic thing every week for years on end? LOL They could call it “Don’t just do something, stand there”!
Posted By John, Phila PA: November 18, 2008 3:56 pm
forgetting reality because you are chasing pie in the sky is a tough one. Any reference librarian can help you look up the long term advantage that large cap stocks have delivered over government bonds — it is only about 5%.
Every time you think you’re going to do significantly better than that 5% [before taxes, too] you have to know that you’re chasing pie in the sky.
Can it be done? sure — by experts. Then you have to ask yourself if you’re an expert. something like 99.95% of us are not.
If you’re not an expert, can you hire an expert? Absolutely — if you have millions to invest. However, for the average family, the expert needs to get paid so much that you can’t afford him or her. That means you’ll get average results. period.
Build your plan as if you’ll get average results. Then start becoming an expert and maybe you’ll be able to do better than your plan.
Posted By Spock_rhp, Miami, FL: November 18, 2008 3:10 pm
Good Points. On the whole we forgot about risk. We forgot that trees DO NOT grow forever into the sky. The signs were there for the Dot Com bust and not the housing/sub-prime bust. We forgot to look both ways before crossing the ’street’ and got blind-sided.
I’m 55 years old and have been investing since the early 1980’s and went through the crash of 1987, but this time I see with different eyes. All of my equities will remain fully invested, and will be left alone “to fend” for themselves…hopefully their value will rebound in the next 10 or 20 years. I was 80/20 stock to bonds…that’s now become 70/30 ratio. I plan to continue to save 21% of my income, but these monies are going into a GIC fixed instrument within my company 401(k). The other thing that I am doing differently, is to get back (sold my house in April 2008)into Real Estate, and make it a larger percent of my investments.
Good luck to all!
Posted By BIZ, Dunedin Florida USA: November 18, 2008 2:11 pm
All this advice is great if you have a pension to fall back on in hard times IN ADDITION to your 401K.If you don’t, you can’t save enough for a comfortatble retirement before turning 70 with all this brutal cycling.
Posted By Pat Savu Maplewood, MN: November 18, 2008 2:10 pm
The present meltdown has also shown us how unethical many of the financial corporations are. From the companies that rated AIG “AAA” to the derivatives that were “invented” for fast profits and big bonuses, we have learned that Wall Street lies, cheats and steals, without penalty.
Posted By kate, boston, MA: November 18, 2008 1:50 pm
The author is wrong about “much of the excess wrung out” - PE ratios are still excessive and there’s more downside to come.
Posted By Jack Thomas, Tucson, AZ: November 18, 2008 12:55 pm
It is well written , it truly is the fact , putting the bad to the past ,thought the worst could not be over yet , you could expect another 20 % lower values in the stock market ,look out for the DOWJONES to come to level of 7000 to 7400 to enter the market and stay in the stock of atleast 6 months .to get real returns , if one can stay invested longer , better returns are expected .the market will come back to its original level in 3 years , there could not be a better time to get in to the market if one has the cash liquidity ,
Posted By mansoor ,moradabad ,india: November 18, 2008 12:30 pm
Excellent article
Posted By Anonymous: November 18, 2008 12:29 pm
Great aticle , the only way i can recover capital losses is by jumping back in and yousing my capital gains as tax write offs , it will take some time im not going to miss the rebound ive lost to much .
Posted By Bernie Blyth , Australia: November 18, 2008 12:28 pm
I think these are all good and positive ideas, but if we continue to think that the stock market will again go upwards like it did in the dot com peak and the housing market boom, we may be in for a surprise. With all of these bailouts and the companies not doing what they are supposed to do with taxpayer’s money, big business has learned nothing from this. All they will do is blow it and then turn to the government for help…AGAIN.
Posted By Lee, Shreveport, La: November 18, 2008 11:18 am
My advisor told me,rich,is when you marry it, inherit it or compound interest. Re invest the dividends back into the stocks. I believe him, and that is what I am doing, but only good stocks,like GE,Bristol Myers, and yes Visa is a great buy right now. As long as you have a cash reserve,buying into the good stocks, remember, the stock market has thrown out the “baby” with the wash. Take advantage of the blue chips.
Posted By Ken Wayne, Boca Raton,Fl: November 18, 2008 11:17 am
I agree with article - thanks
Posted By Terrace, Gulf Breeze, FL: November 18, 2008 10:22 am
all these principles are fine to write about but not practical given the current scenario. there can be only one Warren Buffet and one Bill Gates. while your house is burning you cant read or remember fire prevention rules or bye laws you have to act.Moreover today’s situation is s spill over of years of faulty financial expansionary policies & it will take a long time to reassert fundamentals which are neither so distorted nor flimsy
Posted By Aj missassauga ont.: November 18, 2008 10:09 am
Excellent article. Let’s remember that fear builds on fear and that is exactly what we’re seeing on today’s market. The smart investor today will analyze current fear trends and gradually inject back into the market when the underlying causes for concern have been dealt with.
There is always inherent risk in investment, but personally I’m excited about the opportunities that this is bringing. Also, I hope that a new generation of investors will be more atuned to the risks involved with investment and will be more ethically inclined in the future.
Posted By Mitesh Vashee, Dallas TX.: November 18, 2008 10:00 am
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http://asktheexpert.blogs.money.cnn.com/2008/11/17/4-lessons-from-the-financial-crisis/
4 lessons from the financial crisis
By Walter Updegrave, Money Magazine senior editor
November 17, 2008 5:13 pm
If you can learn from the mistakes of others, now is a great time to be an investor.
Question: I’m inexperienced when it comes to investing, but I want to build a more secure financial future. What tips or suggestions do you have for a young investor like me? —Caleb Bond, Denver
Answer: It’s a great time to be starting out as an investor. Yes, I know that might sound odd, given that the market and the economy are in shambles. But the fact that people are so fearful and the outlook is so uncertain can also have its advantages.
For one thing, much of the excess has been wrung out of stock prices over the past year or so. And while this hardly insures a quick rebound, the money you invest today is much more likely to earn a higher return than if you had invested before the meltdown.
Even more important, though, is that you now have a better sense of the real risks of investing. People who gain their investing experience during bull markets can easily be lulled into a false sense of security. They know that severe downturn occur and maybe could occur again, but the possibility of one happening to them seems remote.
Today, however, all you’ve got to do is look around you to see that risk is real, it can be devastating and it must be respected.
That said, there’s also the danger that someone surveying today’s scene might take away the wrong lessons. Already, some people are concluding that stocks, or financial assets in general, are just too risky. When it comes to important goals like retirement, they say, the experience of the last year or so shows you should stick to the most secure investments, FDIC-insured CDs and the like.
But that’s an overreaction. Risk is a natural part of investing, a part of life, for that matter. Eliminate it and you eliminate opportunity. The key is to understand how much risk you’re taking and manage it.
With that in mind, here are four lessons I think beginning investors should take from the financial crisis and apply to their investing decisions now and in the years ahead. Come to think of it, I think experienced investors should consider them as well.
Financial success isn’t just about investing.
We kind of lost sight of this fact because returns on financial assets had been so good from the early 1980s through the late ‘90s. And even after the dot-com bust we had another five-year bull run in stocks, not to mention heady gains in the real estate market. It became easy to assume that we could achieve financial goals like a secure retirement with a minimum of savings because we could count on the compounding effect of years of high returns.
That was always an unsound strategy, but it’s only now becoming clear how flawed. In fact, as a study by Putnam investments showed a couple of years ago, saving is just as important for building wealth, if not more so. We can’t be sure of the size of the investment gains we’ll earn, and we don’t have nearly as much control over them as we used to think. But we have much more control over how much we save.
And by saving more, we gain two big advantages: we don’t have to invest as aggressively to build a retirement nest egg or reach other financial goals; and, by socking more money away, we’ll have more of a cushion in the event of setbacks in the market.
Simplicity is better than complexity.
If I could ban two words from the vocabulary of investors, it would be these: “sophisticated investing.” I think more harm has been done by investors trying to boost their returns by creating arcane investing strategies or buying complicated investments they don’t understand than all the investment con men and rip-off artists combined.
I don’t want to sound like a Luddite. I’m all for using tools, calculators and software to help you create a retirement plan and an investing strategy. But you’ve also got to maintain a healthy sense of skepticism about how much fancy algorithms and intricate computer simulations can do.
Fact is, the more complicated your investing strategy is, the more things there are that can go wrong, and the harder it will be for you to monitor and maintain it. A simple mix of stock and bond mutual funds may not be the sexiest strategy around. But if you use good common sense in putting that mix together - i.e., you diversify broadly as we recommend in our Asset Allocator tool - it will serve you well over the long term.
Allow for the possibility you may be wrong.
One of the most notable features of the real estate bubble was how sure people felt that prices would continue to go up, up, up. At the peak of the housing mania, I remember getting emails from firms that were inducing individuals to open self-directed IRA accounts so that they could then invest their IRA money in real estate. I wrote a column at the time suggesting that this might be a sign that the real estate market was getting frothy and warning people about staking their retirement on the housing market.
I got a lot of feedback on that column, alas, most of it from people who wanted to know how they could get in touch with those firms that could help them get rental houses into their IRAs. And although I and others pointed out that house prices had gone down in the past and stayed down for quite a while after big run-ups, no one seemed to believe that it could happen again.
Which is why it’s always important when you’re investing to give yourself a reality check. Are your assumptions realistic? Is there something you’re overlooking? Could you be wrong? What would the fallout be if you are? And, perhaps most important, are you interested in this investment because it fits in with your overall strategy or because it’s the investment everyone is talking about? Don’t get too euphoric during upswings or depressed during downturns.
When things are going well and the economy and the markets are on a roll, it’s easy to let the excitement cloud your judgment. After all, everywhere you look - the double-digit gains in the fund listings, the upbeat news in the newspaper’s business section, the cheerful banter on cable TV financial shows - you get positive reinforcement. You almost can’t help but believe that the good times will continue to roll.
So you begin to boost the percentage of stocks in your portfolio and put more money than you should into hot investments that now seem like good bets, such as emerging market stocks. In other words, you begin taking on more risk, although, you probably don’t see it that way. How can investing be risky when it seems the market only goes up?
This process kicks into reverse, of course, when the markets and economy change course and begin falling apart. Then the prevailing gloom and doom dominates your thinking. Everywhere you look - the double-digit losses in the fund listings, the downbeat news in the business section, the somber mood and dire pronouncements on the cable TV financial shows - you get negative reinforcement.
You become convinced that the hard times will get even harder. So you sell out of stocks and move into safe-haven investments you sneered at during boom times - bond funds, money-market funds, stable-value funds, even CDs. And you no doubt see this as a move to reduce risk. After all, aren’t you safer getting out of the market when it only seems to keep going down?
But there’s a risk here too: you may be selling at the worst time and positioning yourself to miss the recovery when it occurs.
These feelings and reactions are natural. We’re human. But it’s no news flash that markets and economies move in cycles. That we go through periods of excess on both the upside and downside. We’ve gone through such episodes before and we will again. So ideally you want to set a strategy that factors in such fluctuations, and then avoid the urge to abandon your strategy when your emotions are screaming you to do so.
I can’t guarantee that steering clear of the euphoria that leads to aggressive investing at market peaks and avoiding the despair that causes you to be too conservative after the market falls apart will assure you’ll earn the highest returns or sidestep big losses. But by doing so, you’ll probably be less vulnerable heading into downturns, and better positioned to take advantage of the upswing when it occurs.
Filed under Uncategorized22 Comments Add a Comment
I just want to caution everyone that before jumping back into the market that everyone has their credit cards paid off. Too quickly we forget that one of the lessons out of all of this is that we cannot live beyond our means.
Posted By Matt Malinowski, Lethbridge AB: November 19, 2008 12:04 am
Why would anyone advise someone to invest in the stock market now. In 1929 there was a major down turn in the market. And in the end the stock market DOW dropped over 80%. We are in a worst crisis than in 1929. The dollar is about to slide over a cliff. And the tax base is being eroded away so the government won’t be able to pay the interest on our loans. Next year we won’t be able to have foreigners buy our bonds. Because the feel they would be too risky because of all our debt. The credit rating of the US will be downgraded. With all the spending we are looking at a hyperinflation senario similar to Wienmar Germany. The article is dreamland. Tell the kid to invest in silver/gold. In the depression you could buy a house for a couple of ounces of gold and in Wienmar germany you could buy a house for one quarter ounce of gold.
Posted By Kevin Rathdrum, Idaho: November 18, 2008 11:18 pm
Save at least 10% of everything you earn. Like Buffett says, be greedy when others are fearful and fearful when others are greedy. Learn and follow the Elliot Wave Theory. Read and learn about investing. Develop and strictly adhere to a long term investment plan. Learn and apply the dynamics and psychology of market swings and how they work and learn how to make them work for you. In essence, educate yourself and apply your knowledge on a long term basis.
Posted By Ramundo A, Lincoln, Nebraska: November 18, 2008 9:53 pm
I’ll tell you what, its been black friday for a few weeks now and I’m loading up on these bank stocks. In a few years it’l rebound and I believe what I put in it over the next year will at least double my value. at least. its on sale! citi for example is 75% off!
Posted By Anonymous: November 18, 2008 8:02 pm
Nice article. Sad to see all these people near retirement that had more than half of their stash in stocks and real estate. What’s even sadder is considering the moral hazard of the government now helping “too much.”
Stock Market has some interesting features, not widely advertised, like a real return since 1871 less than 2% on price appreciation alone (most people don’t believe this, but take the SP500 data since it started and calculate it yourself). On the other hand, including dividends, real return is 6.4%. Kind of like a bond, to support the argument of another writer to this post (but a bond with a heckuva a lot of volatility).
It also seems to have a 35 year oscillation in peaks and troughs, and the next trough is 2018. Hopefully past performance doesn’t predict future results!
Posted By Dave, Houston, TX: November 18, 2008 7:26 pm
I think what Walter is trying to say is :
Keep it simple to keep it manageable.
Meanwhile:
There has been a phrase bandied about in the press “too big to fail”.
I think that phrase needs to be changed to “too big for their britches” because “Wall Street” has been demanding “more liquidity” from the Federal Government for years.
I think that was a cover-up for “we gambled and made some bad bets so we need to borrow more money even cheaper so when we win a big one we can pay you back but meanwhile we need to pay ourselves several million dollars because we are such darn smart and clever people.”
So when you do your own investing, don’t get too big for your britches thinking you are smarter than “Wall Street” because they have more OPM than you do.
OPM being “Other People’s Money”
Posted By Jason Stoons, Austin TX: November 18, 2008 7:10 pm
One fundamental problem with our economy and Government is the unhealthly focus on the spenders–we bend over backwards to encourage people to go into debt, while at the same time practically eliminate all incentives to save our money (painfully low savings rates)–America’s problems will continue to worsen as long as we continue to spend beyond our means…and I’m talking about both Government and personal spending.
Posted By Nairb Sreoom, Biloxi, MS: November 18, 2008 5:21 pm
The current economics is really a paradigm shift to some basics, that will really develope into a new reality, a new way of looking at things. The promoters of sliced and diced investment “opportunities” have been found out. The repercussions of this failure are yet to be determined. Your article really tells us that it is back to basics, keep your investment strategy simple and understandable. I think the future will be the best time in our history, but only after a lot of lessons are learned and pain obsorbed. If the government bails us out too much, we won’t have learned anything.
Posted By Don Miner, San Francisco,: November 18, 2008 4:41 pm
It’s a shame that there is no TV show about simple, sensible investing principles: keeping costs low, tax efficiency high, diversification high, and allocation appropriate. Although they are the optimal strategy for nearly everyone, can you imagine watching a show that told you to do the same basic thing every week for years on end? LOL They could call it “Don’t just do something, stand there”!
Posted By John, Phila PA: November 18, 2008 3:56 pm
forgetting reality because you are chasing pie in the sky is a tough one. Any reference librarian can help you look up the long term advantage that large cap stocks have delivered over government bonds — it is only about 5%.
Every time you think you’re going to do significantly better than that 5% [before taxes, too] you have to know that you’re chasing pie in the sky.
Can it be done? sure — by experts. Then you have to ask yourself if you’re an expert. something like 99.95% of us are not.
If you’re not an expert, can you hire an expert? Absolutely — if you have millions to invest. However, for the average family, the expert needs to get paid so much that you can’t afford him or her. That means you’ll get average results. period.
Build your plan as if you’ll get average results. Then start becoming an expert and maybe you’ll be able to do better than your plan.
Posted By Spock_rhp, Miami, FL: November 18, 2008 3:10 pm
Good Points. On the whole we forgot about risk. We forgot that trees DO NOT grow forever into the sky. The signs were there for the Dot Com bust and not the housing/sub-prime bust. We forgot to look both ways before crossing the ’street’ and got blind-sided.
I’m 55 years old and have been investing since the early 1980’s and went through the crash of 1987, but this time I see with different eyes. All of my equities will remain fully invested, and will be left alone “to fend” for themselves…hopefully their value will rebound in the next 10 or 20 years. I was 80/20 stock to bonds…that’s now become 70/30 ratio. I plan to continue to save 21% of my income, but these monies are going into a GIC fixed instrument within my company 401(k). The other thing that I am doing differently, is to get back (sold my house in April 2008)into Real Estate, and make it a larger percent of my investments.
Good luck to all!
Posted By BIZ, Dunedin Florida USA: November 18, 2008 2:11 pm
All this advice is great if you have a pension to fall back on in hard times IN ADDITION to your 401K.If you don’t, you can’t save enough for a comfortatble retirement before turning 70 with all this brutal cycling.
Posted By Pat Savu Maplewood, MN: November 18, 2008 2:10 pm
The present meltdown has also shown us how unethical many of the financial corporations are. From the companies that rated AIG “AAA” to the derivatives that were “invented” for fast profits and big bonuses, we have learned that Wall Street lies, cheats and steals, without penalty.
Posted By kate, boston, MA: November 18, 2008 1:50 pm
The author is wrong about “much of the excess wrung out” - PE ratios are still excessive and there’s more downside to come.
Posted By Jack Thomas, Tucson, AZ: November 18, 2008 12:55 pm
It is well written , it truly is the fact , putting the bad to the past ,thought the worst could not be over yet , you could expect another 20 % lower values in the stock market ,look out for the DOWJONES to come to level of 7000 to 7400 to enter the market and stay in the stock of atleast 6 months .to get real returns , if one can stay invested longer , better returns are expected .the market will come back to its original level in 3 years , there could not be a better time to get in to the market if one has the cash liquidity ,
Posted By mansoor ,moradabad ,india: November 18, 2008 12:30 pm
Excellent article
Posted By Anonymous: November 18, 2008 12:29 pm
Great aticle , the only way i can recover capital losses is by jumping back in and yousing my capital gains as tax write offs , it will take some time im not going to miss the rebound ive lost to much .
Posted By Bernie Blyth , Australia: November 18, 2008 12:28 pm
I think these are all good and positive ideas, but if we continue to think that the stock market will again go upwards like it did in the dot com peak and the housing market boom, we may be in for a surprise. With all of these bailouts and the companies not doing what they are supposed to do with taxpayer’s money, big business has learned nothing from this. All they will do is blow it and then turn to the government for help…AGAIN.
Posted By Lee, Shreveport, La: November 18, 2008 11:18 am
My advisor told me,rich,is when you marry it, inherit it or compound interest. Re invest the dividends back into the stocks. I believe him, and that is what I am doing, but only good stocks,like GE,Bristol Myers, and yes Visa is a great buy right now. As long as you have a cash reserve,buying into the good stocks, remember, the stock market has thrown out the “baby” with the wash. Take advantage of the blue chips.
Posted By Ken Wayne, Boca Raton,Fl: November 18, 2008 11:17 am
I agree with article - thanks
Posted By Terrace, Gulf Breeze, FL: November 18, 2008 10:22 am
all these principles are fine to write about but not practical given the current scenario. there can be only one Warren Buffet and one Bill Gates. while your house is burning you cant read or remember fire prevention rules or bye laws you have to act.Moreover today’s situation is s spill over of years of faulty financial expansionary policies & it will take a long time to reassert fundamentals which are neither so distorted nor flimsy
Posted By Aj missassauga ont.: November 18, 2008 10:09 am
Excellent article. Let’s remember that fear builds on fear and that is exactly what we’re seeing on today’s market. The smart investor today will analyze current fear trends and gradually inject back into the market when the underlying causes for concern have been dealt with.
There is always inherent risk in investment, but personally I’m excited about the opportunities that this is bringing. Also, I hope that a new generation of investors will be more atuned to the risks involved with investment and will be more ethically inclined in the future.
Posted By Mitesh Vashee, Dallas TX.: November 18, 2008 10:00 am
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Help for Mounting Losses
Help for Mounting 401(k) Losses
by Walter Updegrave
Thursday, November 27, 2008
Question: I'm retired and my 401(k) has lost approximately 35% over the past year. My financial adviser tells me to stay the course, but the losses keep mounting. What should I do? -Dale Marcos, Lafayette, Indiana
Answer: For starters, you should demand a better answer from your financial adviser. Just telling someone to "stay the course" isn't an adequate answer any time an investor expresses doubt or confusion about an investing or planning strategy, and it's certainly not an acceptable reply given the virtually unprecedented turmoil and uncertainty we're experiencing today.
More from CNNMoney.com: • How to Bet on Emerging Markets • 4 Lessons From the Financial Crisis • Whatever You Do, Don't Buy Sears
You can't blame your adviser for not foreseeing the severity of this downturn before it occurred. Nobody's crystal ball is that clear. But an adviser, or at least a good one, is supposed to help you create an investing strategy and retirement plan that can see you through a variety of economic and market scenarios.
Your adviser can't immunize you against losses altogether. That would be unrealistic if you also want your retirement savings to grow and support you for the rest of your life. But the plan should balance upside potential with some measure of downside protection that makes sense given your age, risk tolerance and your financial resources.
Most important, your adviser should be willing to get together with you in times like these to go over the plan, see if it's working as expected and discuss whether or not it needs to be revised.
On the face of it, a 35% decline over the past 12 months seems a bit much for someone who's retired. Given that stocks are down about 40% over that period and the broad bond market is flat to slightly up, that suggests a stock allocation somewhere between 80% and 90%. That strikes me as pretty risky for a retiree. But without more information about your overall finances - like whether the decline you cite includes withdrawals, what other investments you own and how heavily you'll be relying on your 401(k) for living expenses - I can't say for sure whether your 401(k) is invested too aggressively.
Ask for More Transparency
Whatever the particulars of your situation, this much is clear: You are upset about the performance of your account and you aren't getting enough feedback from your adviser to know whether the path he wants you to stay on is the right one.
Here's what I recommend. Go back to your adviser and explain that you need to know what course it is exactly that you are on and why you should stick to it. I'd ask to see how my portfolio is divvied up between stocks and bonds (as well as among different types of stocks and bonds) and I'd want an explanation of why that allocation makes sense given today's conditions.
I'd also want to see some sort of analysis that shows how much income I can reasonably expect throughout retirement from my investments, Social Security and pensions, if any, and how that income compares to my projected living expenses.
Move On
If your adviser can't or won't do this, you have two choices. You can take this kind of comprehensive look at your retirement finances on your own by revving up an online tool like Fidelity's Retirement Income Planner or T. Rowe Price's Retirement Income Calculator.
Or you can switch to an adviser who is willing to do this type of assessment for you. If you do move on to another adviser, be careful. There are lots of people with impressive-sounding credentials who really operate more as a salesman than financial adviser, looking to take advantage of fearful investors in uncertain times like these. To find a reputable adviser, search the Financial Planning Association Web site or the Garrett Planning Network.
Who knows, maybe your adviser has already revisited the advice he or she gave to you and other clients and crunched the numbers again. Perhaps that's why your adviser can so confidently tell you to stay the course. But if I were as worried as you seem to be, I'd want more convincing (and maybe a look at some alternatives) before I went along.
E-mail Updegrave at wupdegrave@moneymail.com.
Copyrighted, CNNMoney. All Rights Reserved.
http://finance.yahoo.com/focus-retirement/article/106216/Help-for-Mounting-401(k)-Losses;_ylt=ApmNvqTpXRlKoIp6cJnk1T67YWsA?mod=retirement-401k
by Walter Updegrave
Thursday, November 27, 2008
Question: I'm retired and my 401(k) has lost approximately 35% over the past year. My financial adviser tells me to stay the course, but the losses keep mounting. What should I do? -Dale Marcos, Lafayette, Indiana
Answer: For starters, you should demand a better answer from your financial adviser. Just telling someone to "stay the course" isn't an adequate answer any time an investor expresses doubt or confusion about an investing or planning strategy, and it's certainly not an acceptable reply given the virtually unprecedented turmoil and uncertainty we're experiencing today.
More from CNNMoney.com: • How to Bet on Emerging Markets • 4 Lessons From the Financial Crisis • Whatever You Do, Don't Buy Sears
You can't blame your adviser for not foreseeing the severity of this downturn before it occurred. Nobody's crystal ball is that clear. But an adviser, or at least a good one, is supposed to help you create an investing strategy and retirement plan that can see you through a variety of economic and market scenarios.
Your adviser can't immunize you against losses altogether. That would be unrealistic if you also want your retirement savings to grow and support you for the rest of your life. But the plan should balance upside potential with some measure of downside protection that makes sense given your age, risk tolerance and your financial resources.
Most important, your adviser should be willing to get together with you in times like these to go over the plan, see if it's working as expected and discuss whether or not it needs to be revised.
On the face of it, a 35% decline over the past 12 months seems a bit much for someone who's retired. Given that stocks are down about 40% over that period and the broad bond market is flat to slightly up, that suggests a stock allocation somewhere between 80% and 90%. That strikes me as pretty risky for a retiree. But without more information about your overall finances - like whether the decline you cite includes withdrawals, what other investments you own and how heavily you'll be relying on your 401(k) for living expenses - I can't say for sure whether your 401(k) is invested too aggressively.
Ask for More Transparency
Whatever the particulars of your situation, this much is clear: You are upset about the performance of your account and you aren't getting enough feedback from your adviser to know whether the path he wants you to stay on is the right one.
Here's what I recommend. Go back to your adviser and explain that you need to know what course it is exactly that you are on and why you should stick to it. I'd ask to see how my portfolio is divvied up between stocks and bonds (as well as among different types of stocks and bonds) and I'd want an explanation of why that allocation makes sense given today's conditions.
I'd also want to see some sort of analysis that shows how much income I can reasonably expect throughout retirement from my investments, Social Security and pensions, if any, and how that income compares to my projected living expenses.
Move On
If your adviser can't or won't do this, you have two choices. You can take this kind of comprehensive look at your retirement finances on your own by revving up an online tool like Fidelity's Retirement Income Planner or T. Rowe Price's Retirement Income Calculator.
Or you can switch to an adviser who is willing to do this type of assessment for you. If you do move on to another adviser, be careful. There are lots of people with impressive-sounding credentials who really operate more as a salesman than financial adviser, looking to take advantage of fearful investors in uncertain times like these. To find a reputable adviser, search the Financial Planning Association Web site or the Garrett Planning Network.
Who knows, maybe your adviser has already revisited the advice he or she gave to you and other clients and crunched the numbers again. Perhaps that's why your adviser can so confidently tell you to stay the course. But if I were as worried as you seem to be, I'd want more convincing (and maybe a look at some alternatives) before I went along.
E-mail Updegrave at wupdegrave@moneymail.com.
Copyrighted, CNNMoney. All Rights Reserved.
http://finance.yahoo.com/focus-retirement/article/106216/Help-for-Mounting-401(k)-Losses;_ylt=ApmNvqTpXRlKoIp6cJnk1T67YWsA?mod=retirement-401k
Thursday, 27 November 2008
**Understanding the Power of Compounding
Understanding the Power of Compounding
Compounding in Action
The investment rate assumes a return net of taxes and fees.
The effect of inflation on the purchasing power of the FV can be offset by increasing your annual contributions by a like percentage. As your income increases, so too should your investment contributions.
-----
The Future Value of investing $1,000 per annum, when compounded by the annual rate of 6% for the number of years are as shown below:
Rate 6%
Years... FV
10 years 13,181
20 years 36,786
30 years 70,058
40 years 154,762
50 years 290,336
The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:
Years... Initial once-only lump sum
10 years 7,360
20 years 11,470
30 years 13,765
40 years 15,046
50 years 15,762
A lump sum of $7360 invested for 10 years at 6 percent will produce the same FV ($13,181) as $1000 a year for 10 years.
-----
The Future Value of investing $1,000 per annum, when compounded by the annual rate of 8% for the number of years are as shown below:
Rate 8%
Years... FV
10 years 14,487
20 years 45,762
30 years 113,283
40 years 259,057
50 years 573,770
The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:
Years... Initial once-only lump sum
10 years 6,710
20 years 9,818
30 years 11,258
40 years 11,925
50 years 12,233
A lump sum of $6,710 invested for 10 years at 8 percent will produce the same FV ($14,487) as $1000 a year for 10 years.
-----
The Future Value of investing $1,000 per annum, when compounded by the annual rate of 10% for the number of years are as shown below:
Rate 10%
Years... FV
10 years 15,937
20 years 57,275
30 years 164,494
40 years 442,593
50 years 1,163,909
The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:
Years... Initial once-only lump sum
10 years 6,145
20 years 8,514
30 years 9,427
40 years 9,779
50 years 9.915
A lump sum of $6,145 invested for 10 years at 10 percent will produce the same FV ($15,937) as $1000 a year for 10 years.
-----
The Future Value of investing $1,000 per annum, when compounded by the annual rate of 12% for the number of years are as shown below:
Rate 12%
Years... FV
10 years 17,549
20 years 72,052
30 years 241,333
40 years 767,091
50 years 2,400,018
The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:
Years... Initial once-only lump sum
10 years 5,650
20 years 7,469
30 years 8,055
40 years 8,244
50 years 8,304
A lump sum of $5,650 invested for 10 years at 15 percent will produce the same FV ($17,549) as $1000 a year for 10 years.
-----
The Future Value of investing $1,000 per annum, when compounded by the annual rate of 15% for the number of years are as shown below:
Rate 15%
Years... FV
10 years 20,304
20 years 102,444
30 years 434,745
40 years 1,779,090
50 years 7,217,716
The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:
Years... Initial once-only lump sum
10 years 5,019
20 years 6,259
30 years 6,566
40 years 6,642
50 years 6,661
A lump sum of $5,019 invested for 10 years at 15 percent will produce the same FV ($20,304) as $1000 a year for 10 years.
-----
Note:
It is not so much the increase in FV over the early 10-year periods of the savings plan, but the increase over the final 10-year period that yields the big bucks.
For instance, if we reference the compounding at 10 percent, FV increased by $41,338 between years 10 and 20, while the increase between years 40 and 50 was $721,316.
Thereafter, if you start your investment plan at age 30 rather than 20, the $1,000 a year you spent before that rather than invested will have cost you $721,316.
The greatest deterrent to an investment plan is not so much the fortitude to put aside a small percentage of income, but the willpower not to steal from the fund until your regular employment income ceases. Anyone can become rich if they start an investment plan early in life.
Of course, the more you love your work, the longer you will be employed and the more savings you will accumulate. If you find the thought of working until you are 70 abhorrent, then the thought of working at 30 or 40 years of age will be even less attractive; in which case, investing is probably irrelevant because you’re going to have a miserable or unfulfilled life anyway. People who hate working are more likely to become welfare dependent.
Lump sum investing
A lump sum of $7,360 invested for 10 years at 6 percent will produce the same FV ($13,181) as $1,000 a year for 10 years.
A lump sum of $9,779 invested for 40 years at 10 percent will produce the same FV ($442,593) as $1,000 a year for 40 years.
If the same lump sum were invested 10 years earlier – that is, allowed to compound for 50 years, rather than 40 – the nest egg will be boosted by a further $705,372 to $1,147,965.
Have you ever thought about putting something aside for your kids that they can’t touch for 50 years?
Sentiment and moral gratification usually centre on diminishing their incentive to achieve their own sense of self-satisfaction by helping them when they get married or want to buy a house.
If they are like 98 percent of people, the time they really need financial help is after they have lived the good life and have limited savings and no career income.
Material assets are not so important when you have the greatest asset of all: youth.
Related readings:
Oriental Holdings Bhd: The Buy-Hold Advantage
http://www.horizon.my/2008/11/oriental-holdings-bhd-the-buy-hold-advantage/
Oriental Holdings Berhad - What if You had Bought and Held? I happened to be reading the Annual Report of Oriental Holdings Berhad (ORIENT) the other day and came across a statement by Chairman Dato Loh Cheng Yean:
“A holding of 1,000 stocks in Oriental when it was listed in 1964 would translate into 40,255 Oriental stocks worth RM263,670, based on the share price of RM6.55 at the end of 2007. In addition the stocks would have earned a total gross dividend of RM137,660. The gross dividends received and the appreciation in value is equivalent to a remarkable average rate of return of 14.60% for each of the 44 years.”
This sounds pretty good… see once again we’re talking 40 years. I find Oriental Holdings to be quite “remarkable” because it is such a diverse collection of different businesses which include auto assembly, auto parts manufacturing, oil palm, hotels, property etc. But 85% of its RM498 million Operating Profit is from auto and oil palm.
The Story of Anne Scheiber
http://www.horizon.my/2008/11/the-story-of-anne-scheiber/
Maxwell recounts the story of Anne Scheiber, an elderly and thrifty lady who lived in New York and worked for the Inland Revenue Service. When Scheiber retired at age fifty-one, she was only making $3,150 a year. She was treated poorly by her employer and was never promoted. Yet when Anne Scheiber died in 1995 at the age of 101, it was discovered that she left an estate to Yeshiva University worth US$22 million!
How did a public service worker with minimal salary accumulate such a staggering wealth?
Comments by: banking88 on November 25th, 2008 12:13 pm
yes, the key is to invest for the long-term…your wealth would multiply with componding returns…now it’s a good time to enter the market using the dollar cost averaging method…
Compounding in Action
The investment rate assumes a return net of taxes and fees.
The effect of inflation on the purchasing power of the FV can be offset by increasing your annual contributions by a like percentage. As your income increases, so too should your investment contributions.
-----
The Future Value of investing $1,000 per annum, when compounded by the annual rate of 6% for the number of years are as shown below:
Rate 6%
Years... FV
10 years 13,181
20 years 36,786
30 years 70,058
40 years 154,762
50 years 290,336
The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:
Years... Initial once-only lump sum
10 years 7,360
20 years 11,470
30 years 13,765
40 years 15,046
50 years 15,762
A lump sum of $7360 invested for 10 years at 6 percent will produce the same FV ($13,181) as $1000 a year for 10 years.
-----
The Future Value of investing $1,000 per annum, when compounded by the annual rate of 8% for the number of years are as shown below:
Rate 8%
Years... FV
10 years 14,487
20 years 45,762
30 years 113,283
40 years 259,057
50 years 573,770
The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:
Years... Initial once-only lump sum
10 years 6,710
20 years 9,818
30 years 11,258
40 years 11,925
50 years 12,233
A lump sum of $6,710 invested for 10 years at 8 percent will produce the same FV ($14,487) as $1000 a year for 10 years.
-----
The Future Value of investing $1,000 per annum, when compounded by the annual rate of 10% for the number of years are as shown below:
Rate 10%
Years... FV
10 years 15,937
20 years 57,275
30 years 164,494
40 years 442,593
50 years 1,163,909
The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:
Years... Initial once-only lump sum
10 years 6,145
20 years 8,514
30 years 9,427
40 years 9,779
50 years 9.915
A lump sum of $6,145 invested for 10 years at 10 percent will produce the same FV ($15,937) as $1000 a year for 10 years.
-----
The Future Value of investing $1,000 per annum, when compounded by the annual rate of 12% for the number of years are as shown below:
Rate 12%
Years... FV
10 years 17,549
20 years 72,052
30 years 241,333
40 years 767,091
50 years 2,400,018
The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:
Years... Initial once-only lump sum
10 years 5,650
20 years 7,469
30 years 8,055
40 years 8,244
50 years 8,304
A lump sum of $5,650 invested for 10 years at 15 percent will produce the same FV ($17,549) as $1000 a year for 10 years.
-----
The Future Value of investing $1,000 per annum, when compounded by the annual rate of 15% for the number of years are as shown below:
Rate 15%
Years... FV
10 years 20,304
20 years 102,444
30 years 434,745
40 years 1,779,090
50 years 7,217,716
The once-only lump sum invested at the same annual rate for the years to provide the same FV as the corresponding sum are as shown here:
Years... Initial once-only lump sum
10 years 5,019
20 years 6,259
30 years 6,566
40 years 6,642
50 years 6,661
A lump sum of $5,019 invested for 10 years at 15 percent will produce the same FV ($20,304) as $1000 a year for 10 years.
-----
Note:
It is not so much the increase in FV over the early 10-year periods of the savings plan, but the increase over the final 10-year period that yields the big bucks.
For instance, if we reference the compounding at 10 percent, FV increased by $41,338 between years 10 and 20, while the increase between years 40 and 50 was $721,316.
Thereafter, if you start your investment plan at age 30 rather than 20, the $1,000 a year you spent before that rather than invested will have cost you $721,316.
The greatest deterrent to an investment plan is not so much the fortitude to put aside a small percentage of income, but the willpower not to steal from the fund until your regular employment income ceases. Anyone can become rich if they start an investment plan early in life.
Of course, the more you love your work, the longer you will be employed and the more savings you will accumulate. If you find the thought of working until you are 70 abhorrent, then the thought of working at 30 or 40 years of age will be even less attractive; in which case, investing is probably irrelevant because you’re going to have a miserable or unfulfilled life anyway. People who hate working are more likely to become welfare dependent.
Lump sum investing
A lump sum of $7,360 invested for 10 years at 6 percent will produce the same FV ($13,181) as $1,000 a year for 10 years.
A lump sum of $9,779 invested for 40 years at 10 percent will produce the same FV ($442,593) as $1,000 a year for 40 years.
If the same lump sum were invested 10 years earlier – that is, allowed to compound for 50 years, rather than 40 – the nest egg will be boosted by a further $705,372 to $1,147,965.
Have you ever thought about putting something aside for your kids that they can’t touch for 50 years?
Sentiment and moral gratification usually centre on diminishing their incentive to achieve their own sense of self-satisfaction by helping them when they get married or want to buy a house.
If they are like 98 percent of people, the time they really need financial help is after they have lived the good life and have limited savings and no career income.
Material assets are not so important when you have the greatest asset of all: youth.
Related readings:
Oriental Holdings Bhd: The Buy-Hold Advantage
http://www.horizon.my/2008/11/oriental-holdings-bhd-the-buy-hold-advantage/
Oriental Holdings Berhad - What if You had Bought and Held? I happened to be reading the Annual Report of Oriental Holdings Berhad (ORIENT) the other day and came across a statement by Chairman Dato Loh Cheng Yean:
“A holding of 1,000 stocks in Oriental when it was listed in 1964 would translate into 40,255 Oriental stocks worth RM263,670, based on the share price of RM6.55 at the end of 2007. In addition the stocks would have earned a total gross dividend of RM137,660. The gross dividends received and the appreciation in value is equivalent to a remarkable average rate of return of 14.60% for each of the 44 years.”
This sounds pretty good… see once again we’re talking 40 years. I find Oriental Holdings to be quite “remarkable” because it is such a diverse collection of different businesses which include auto assembly, auto parts manufacturing, oil palm, hotels, property etc. But 85% of its RM498 million Operating Profit is from auto and oil palm.
The Story of Anne Scheiber
http://www.horizon.my/2008/11/the-story-of-anne-scheiber/
Maxwell recounts the story of Anne Scheiber, an elderly and thrifty lady who lived in New York and worked for the Inland Revenue Service. When Scheiber retired at age fifty-one, she was only making $3,150 a year. She was treated poorly by her employer and was never promoted. Yet when Anne Scheiber died in 1995 at the age of 101, it was discovered that she left an estate to Yeshiva University worth US$22 million!
How did a public service worker with minimal salary accumulate such a staggering wealth?
Comments by: banking88 on November 25th, 2008 12:13 pm
yes, the key is to invest for the long-term…your wealth would multiply with componding returns…now it’s a good time to enter the market using the dollar cost averaging method…
To Upgrade the Quality of Your Portfolio
To upgrade the quality of your portfolio
For those who already hold a portfolio of stocks that may have been selected without reference to value, a culling approach to upgrade the quality of your portfolio by replacing overpriced stocks with those offering better value, would be suggested.
Although it is probable that you hold some stocks that should be sold immediately, in making that determination you must be sure of what you are doing and not act with undue haste.
Solicit advice and input from others you respect, but keep your own counsel and do not be influenced by those whose knowledge is unlikely to be superior to your own.
Let’s also consider some basic selling issues:
Tax
Let’s say you buy a stock for $5 and it rises to $15 when its value is $11. If you sell it for $15 and the $10 profit was subject to 40 percent tax, you would be left with $11. If you consider that $11 would be a good price at which to buy the stock, there is not much point in selling at the same net price.
Management
Great businesses with sound corporate management are quite rare. If you are invested in such a company, selling and attempting to find a replacement with similar management qualities is likely to be difficult. Buffett says he is wary of the risk in switching allegiance to people less well known to him.
Fear of not being able to buy back at a better price.
For those who already hold a portfolio of stocks that may have been selected without reference to value, a culling approach to upgrade the quality of your portfolio by replacing overpriced stocks with those offering better value, would be suggested.
Although it is probable that you hold some stocks that should be sold immediately, in making that determination you must be sure of what you are doing and not act with undue haste.
Solicit advice and input from others you respect, but keep your own counsel and do not be influenced by those whose knowledge is unlikely to be superior to your own.
Let’s also consider some basic selling issues:
Tax
Let’s say you buy a stock for $5 and it rises to $15 when its value is $11. If you sell it for $15 and the $10 profit was subject to 40 percent tax, you would be left with $11. If you consider that $11 would be a good price at which to buy the stock, there is not much point in selling at the same net price.
Management
Great businesses with sound corporate management are quite rare. If you are invested in such a company, selling and attempting to find a replacement with similar management qualities is likely to be difficult. Buffett says he is wary of the risk in switching allegiance to people less well known to him.
Fear of not being able to buy back at a better price.
Think Availability of Opportunities
Think Availability of Opportunities; Not Diversification or Acting Contrary to the Market
Portfolio Diversification
Towards the end of a bull market, when selling presents more opportunities than buying, the cash and interest-bearing securities will be quite high. In the tail-end of a bear market, when opportunities are more plentiful, the cash and interest-bearing securities might be close to zero.
The amount of cash and interest-bearing securities you carry will depend on several factors, not the least important of which is your comfort level with the price volatility of equities.
Think of the Availability of Opportunities
Conventional wisdom tells us a portfolio should be spread over a diversified range of industries on the premise that a downturn in one sector of the economy will only affect a portion of your portfolio. A contrarian would argue that you should only buy into an industry that is suffering a downturn because prices will be cheap.
However, think not in terms of diversification or acting contrary to the market, but of the availability of opportunities.
Remember Mae West’s words: “Too much of a good thing can be wonderful”. Mae, however, was a woman of experience with the ability to know a good thing. Lacking that same experience, or the necessary time to acquire it, it’s easier to recognize and avoid what is not a good thing.
This approach will not guarantee that every selection will be wonderful. It may even eliminate a few stocks that may have turned out to be wonderful, but in eliminating most of what is likely to be a lot less than wonderful, it should deliver above-average results.
Portfolio Diversification
There can be no hard and fast rules about diversifying. However, a portfolio should contain a certain amount of cash and interest-bearing securities. These should be weighted towards
- higher yielding secure preference shares that have no downside price risk on conversion and
- property trusts or REITS that have low profit and price volatility.
Towards the end of a bull market, when selling presents more opportunities than buying, the cash and interest-bearing securities will be quite high. In the tail-end of a bear market, when opportunities are more plentiful, the cash and interest-bearing securities might be close to zero.
The amount of cash and interest-bearing securities you carry will depend on several factors, not the least important of which is your comfort level with the price volatility of equities.
Think of the Availability of Opportunities
Conventional wisdom tells us a portfolio should be spread over a diversified range of industries on the premise that a downturn in one sector of the economy will only affect a portion of your portfolio. A contrarian would argue that you should only buy into an industry that is suffering a downturn because prices will be cheap.
However, think not in terms of diversification or acting contrary to the market, but of the availability of opportunities.
Remember Mae West’s words: “Too much of a good thing can be wonderful”. Mae, however, was a woman of experience with the ability to know a good thing. Lacking that same experience, or the necessary time to acquire it, it’s easier to recognize and avoid what is not a good thing.
This approach will not guarantee that every selection will be wonderful. It may even eliminate a few stocks that may have turned out to be wonderful, but in eliminating most of what is likely to be a lot less than wonderful, it should deliver above-average results.
How many stocks should you hold?
How many stocks should you hold?
The proprietor or manager of a business is likely to have only one investment, his or her business – nothing wrong with that.
Most equity funds hold many stocks – nothing wrong with that either. In recognizing its limitations, management is minimizing the impact of mistakes. The last thing you want if someone who doesn’t know what he or she is doing investing your money in a handful of stocks.
As an individual investor, having a few hundred dollars in each of very many stocks is obviously not economical in terms of brokerage fees, administration and time devoted to following each stock. Availability of worthwhile opportunities, aversion to risk, size of portfolio and level of expertise all contribute to the number of stocks you should hold.
If you know what you are doing and have the time to do research, as a rough guide, the maximum stocks to be held should be the lesser of 15 or the square root (to the nearest whole number) of the collective market prices of the portfolio divided by 1000. So a portfolio priced at $9000 would contain 3 stocks. (Square root of 9000/1000 = square root of 9 = 3)
For example:
Value of portfolio…. Maximum Number of stocks
$4000……..2
$9000……..3
$16,000…….4
$25,000…….5
$36,000…….6
$49,000…....7
$64,000…....8
$81,000…....9
$100,000…..10
$121,000…..11
$144,000…..12
$169,000…..13
$196,000…..14
$225,000+…..15 (Maximum)
The proprietor or manager of a business is likely to have only one investment, his or her business – nothing wrong with that.
Most equity funds hold many stocks – nothing wrong with that either. In recognizing its limitations, management is minimizing the impact of mistakes. The last thing you want if someone who doesn’t know what he or she is doing investing your money in a handful of stocks.
As an individual investor, having a few hundred dollars in each of very many stocks is obviously not economical in terms of brokerage fees, administration and time devoted to following each stock. Availability of worthwhile opportunities, aversion to risk, size of portfolio and level of expertise all contribute to the number of stocks you should hold.
If you know what you are doing and have the time to do research, as a rough guide, the maximum stocks to be held should be the lesser of 15 or the square root (to the nearest whole number) of the collective market prices of the portfolio divided by 1000. So a portfolio priced at $9000 would contain 3 stocks. (Square root of 9000/1000 = square root of 9 = 3)
For example:
Value of portfolio…. Maximum Number of stocks
$4000……..2
$9000……..3
$16,000…….4
$25,000…….5
$36,000…….6
$49,000…....7
$64,000…....8
$81,000…....9
$100,000…..10
$121,000…..11
$144,000…..12
$169,000…..13
$196,000…..14
$225,000+…..15 (Maximum)
Wednesday, 26 November 2008
Dollar cost averaging investor
By investing equal amounts of cash each year, fewer stocks will be acquired when prices are higher and more when prices are lower. It is therefore an ideal way of investing for those with a regular savings plan.
In disaster years when the market was down, the price value of the investor's holding bottomed, but it was the additional units bought in these disaster years when prices were low that enabled a positive overall return. A particular year that was considered to be a great year for the stock market, was also the worst year for our dollar cost averaging investor.
By investing a portion of annual income once a year in good businesses, young investors need not care what happens to the price. Rather than cause for gloom, market crashes are a reason for celebration.
In disaster years when the market was down, the price value of the investor's holding bottomed, but it was the additional units bought in these disaster years when prices were low that enabled a positive overall return. A particular year that was considered to be a great year for the stock market, was also the worst year for our dollar cost averaging investor.
By investing a portion of annual income once a year in good businesses, young investors need not care what happens to the price. Rather than cause for gloom, market crashes are a reason for celebration.
Slow consistent accumulation through the power of compounding
Investing is not about making a quick kill, but slow and consistent accumulation through the power of compounding.
Sometimes, exceptional results will occur through the catch-up process of buying underpriced stocks or excessive market pricing, but unless you really know what you are doing, never gamble on chasing quick returns by being enticed to buy on margin.
Most individuals trading in highly leveraged futures are eventually wiped out by their lack of staying power when exceptional price volatility extinguishes their small percentage of equity. Losing a bet in which you can be 100 percent right with your choice but 1 percent wrong with the timing doesn't seem very good odds. Making money is nice, but peace of mind is much more valuable.
Sometimes, exceptional results will occur through the catch-up process of buying underpriced stocks or excessive market pricing, but unless you really know what you are doing, never gamble on chasing quick returns by being enticed to buy on margin.
Most individuals trading in highly leveraged futures are eventually wiped out by their lack of staying power when exceptional price volatility extinguishes their small percentage of equity. Losing a bet in which you can be 100 percent right with your choice but 1 percent wrong with the timing doesn't seem very good odds. Making money is nice, but peace of mind is much more valuable.
Best companies to invest in
Positive attributes to look for
So long as ROE is not overly leveraged by too much interest-bearing debt, the best companies in which to invest have a high ROE and a proven ability to reinvest a good proportion of profits without negatively affecting their ROE.
A company with a high ROE that distributes all, or close to all, profits is telling you that while it's a good business, it lacks the opportunity to grow. For instance, the sole local newspaper might be highly profitable by virtue of its monopoly, but opportunities to start a new paper or to buy an existing paper at a favourable price are likely to be rare. Profit growth is therefore limited to circulation growth. Such companies have the investment characteristics of an interest-bearing security - yield, but little or no growth - and must be valued accordingly.
Businesses that have historically long-term high ROEs with a high reinvestment rate have a sustainable competitive advantage that is difficult to duplicate. They have established brand-name products or services, patent rights, an established market niche or an innovative business model.
Although businesses with these qualities will not be selling at bargain prices, we can afford to pay a premium for a great business and still achieve a high return in the long term. The club of great businesses is not a closed shop, so watch out for new additions among smaller, less recognized companies that display these attributes.
So long as ROE is not overly leveraged by too much interest-bearing debt, the best companies in which to invest have a high ROE and a proven ability to reinvest a good proportion of profits without negatively affecting their ROE.
A company with a high ROE that distributes all, or close to all, profits is telling you that while it's a good business, it lacks the opportunity to grow. For instance, the sole local newspaper might be highly profitable by virtue of its monopoly, but opportunities to start a new paper or to buy an existing paper at a favourable price are likely to be rare. Profit growth is therefore limited to circulation growth. Such companies have the investment characteristics of an interest-bearing security - yield, but little or no growth - and must be valued accordingly.
Businesses that have historically long-term high ROEs with a high reinvestment rate have a sustainable competitive advantage that is difficult to duplicate. They have established brand-name products or services, patent rights, an established market niche or an innovative business model.
Although businesses with these qualities will not be selling at bargain prices, we can afford to pay a premium for a great business and still achieve a high return in the long term. The club of great businesses is not a closed shop, so watch out for new additions among smaller, less recognized companies that display these attributes.
Tuesday, 25 November 2008
Ben Graham Checklist for Finding Undervalued Stocks
In addition to identifying and quantifying important value components, Graham left us with an assortment of general stock selection rules. He created a number of checklists at different times in his career to serve different investment objectives and portfolio strategies. The checklists review different aspects of a company's financial strength, intrinsic value, and the realtionship with price.
Here is a
Ben Graham Checklist for Finding Undervalued Stocks
Criterias
Risk
1. Earnings to price (the inverse of P/E) is double the high-grade corporate bond yield. If the high-grade bond yields 7%, then earnings to price should be 14%.
2. P/E ratio that is 0.4 times the highest average P/E achieved in the last 5 years.
3. Dividend yield is 2/3 the high-grade bond yield.
4. Stock price of 2/3 the tangible book value per share.
5. Stock price of 2/3 the net current asset value.
Financial strength
6. Total debt is lower than tangible book value.
7. Current ratio (current assets/current liabilities) is greater than 2.
8. Total debt is no more than liquidation value.
Earnings stability
9. Earnings have doubled in most recent 10 years.
10. Earnings have declined no more than 5% in 2 of the past 10 years.
If a stock meets 7 of the 10 criteria, it is probably a good value, according to Graham.
If you're income oriented, Graham recommended paying special attention to items 1 through 7.
If you're concerned about growth and safety, items 1 through 5 and 9 and 10 are important.
If you're concerned with aggressive growth, ignore item 3, reduce the emphasis on 4 through 6, and weigh 9 and 10 heavily.
Again, these checklists are a guideline and example, not a cookbook recipe you should follow precisely. They are a way of thinking and an example of how you may construct your own value investing system.
The criteria mentioned above are probably more focussed on dividends and safety than even today's value investors choose to be. But today's value investing practice owes an immense debt to this type of financial and investment analysis.
Spreadsheet for finding Undervalue Stocks
http://spreadsheets.google.com/pub?key=tZGNWHLD2d2nTgCcxSKyoCA&output=html
Reference: 20.11.2008 - KLSE MARKET PE
Here is a
Ben Graham Checklist for Finding Undervalued Stocks
Criterias
Risk
1. Earnings to price (the inverse of P/E) is double the high-grade corporate bond yield. If the high-grade bond yields 7%, then earnings to price should be 14%.
2. P/E ratio that is 0.4 times the highest average P/E achieved in the last 5 years.
3. Dividend yield is 2/3 the high-grade bond yield.
4. Stock price of 2/3 the tangible book value per share.
5. Stock price of 2/3 the net current asset value.
Financial strength
6. Total debt is lower than tangible book value.
7. Current ratio (current assets/current liabilities) is greater than 2.
8. Total debt is no more than liquidation value.
Earnings stability
9. Earnings have doubled in most recent 10 years.
10. Earnings have declined no more than 5% in 2 of the past 10 years.
If a stock meets 7 of the 10 criteria, it is probably a good value, according to Graham.
If you're income oriented, Graham recommended paying special attention to items 1 through 7.
If you're concerned about growth and safety, items 1 through 5 and 9 and 10 are important.
If you're concerned with aggressive growth, ignore item 3, reduce the emphasis on 4 through 6, and weigh 9 and 10 heavily.
Again, these checklists are a guideline and example, not a cookbook recipe you should follow precisely. They are a way of thinking and an example of how you may construct your own value investing system.
The criteria mentioned above are probably more focussed on dividends and safety than even today's value investors choose to be. But today's value investing practice owes an immense debt to this type of financial and investment analysis.
Spreadsheet for finding Undervalue Stocks
http://spreadsheets.google.com/pub?key=tZGNWHLD2d2nTgCcxSKyoCA&output=html
Reference: 20.11.2008 - KLSE MARKET PE
Impact of Interest Rates on Stock Prices
Impact of Interest Rates on Stock Prices
Warren Buffett highlighted the impact of interest rates on the Dow in a speech he gave on the stock market in July 1999. To demonstrate the correlation between interest rates and stock prices, with the exception of the inflation figures, he provided the data below which depicts two 17-year periods, between 1964 and 1981, and 1981 to 1998.
31st December
Gain in GNP over each 17 year period (%)
1964 – 1981…..373
1981 – 1998…..177
DJIA
1964—874
1981-- 875
1998--9181
Interest on long term government bonds (%)
1964-- 4.20
1981-- 13.65
1998-- 5.09
Increase in consumer price index over each 17 year period (%)
1964 – 1981…..201
1981 – 1998……74
Note:
The inflationary effect on asset values together with retained profits and new capital issues would have significantly increased the book values of the companies comprising the Dow during the first period 1964 – 1981. Yet, in spite of the huge increase in GNP, the 1964 index figure was basically the same 17 years later. Prices had been subdued by a more than threefold increase in interest rates.
In the second 17-year period from 1981 to 1998, in spite of GNP growth and inflation being less than 50 percent of the first period, the Dow increased by 949 percent. The driving factor was declining interest rates that diverted money out of interest-bearing securities into equities.
Interest rates increase at times of high inflation partly to offset the diminishing value of money and the government’s desire to curb demand in what is seen to be, as measured by GNP, a fast-growing economy. Conversely, when inflation subsided in the second 17-year period, interest rates declined.
Warren Buffett highlighted the impact of interest rates on the Dow in a speech he gave on the stock market in July 1999. To demonstrate the correlation between interest rates and stock prices, with the exception of the inflation figures, he provided the data below which depicts two 17-year periods, between 1964 and 1981, and 1981 to 1998.
31st December
Gain in GNP over each 17 year period (%)
1964 – 1981…..373
1981 – 1998…..177
DJIA
1964—874
1981-- 875
1998--9181
Interest on long term government bonds (%)
1964-- 4.20
1981-- 13.65
1998-- 5.09
Increase in consumer price index over each 17 year period (%)
1964 – 1981…..201
1981 – 1998……74
Note:
The inflationary effect on asset values together with retained profits and new capital issues would have significantly increased the book values of the companies comprising the Dow during the first period 1964 – 1981. Yet, in spite of the huge increase in GNP, the 1964 index figure was basically the same 17 years later. Prices had been subdued by a more than threefold increase in interest rates.
In the second 17-year period from 1981 to 1998, in spite of GNP growth and inflation being less than 50 percent of the first period, the Dow increased by 949 percent. The driving factor was declining interest rates that diverted money out of interest-bearing securities into equities.
Interest rates increase at times of high inflation partly to offset the diminishing value of money and the government’s desire to curb demand in what is seen to be, as measured by GNP, a fast-growing economy. Conversely, when inflation subsided in the second 17-year period, interest rates declined.
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