The high price of cash

Since the beginning of January, many investors have sold their holdings in the stock market and are sitting on the sidelines in cash. Is it too late to sell, or would selling out be a wise move? Well over $7 billion was sold from U.S. stock funds thus far in January. In December, $48 billion exited stock funds. In hindsight, anyone who sold at the end of last year would presumably be sitting pretty, but that’s not the case at all. There’s an old saying “I’d rather be out of the market wishing I were in, than in the market wishing I were out.” Those are words that surely resonate with most investors right now. And as the financial markets worldwide continue to oscillate up and down a percent or more each day, more “long-term” investors are finding themselves on the threshold of selling everything. This is not a new phenomenon. In 2011, 2012 and even in 2013, I have had many discussions with clients and readers who were convinced that “this time” the sell-off would be equal to the carnage we experienced back in 2008-2009. And every one of those so-called investors who sold out not only incurred real losses (usually at, or close to the bottom of the markets). They then sat for weeks or even months in cash, only to finally put their money back in the market ten, fifteen or even twenty percent higher from where they sold. The truth is, going to cash is much harder than it looks. The big issue you have is that you have to be right twice. Take today’s...

The financial media may be your worst enemy

The business of financial news reporting has achieved a high level of sophistication and timeliness. Almost anything noteworthy that happens around the world is instantaneously transmitted to you from a variety of sources. The question is should an investor act on that news? The short answer is no, not unless the event is truly catastrophic—nuclear war, end of the world type stuff. Achieving your financial goals and objectives requires a well-thought out approach and an investment process, which is by its nature long-term. That process will almost always be at cross purposes with those of the news media. Why? It begins with the media’s time horizon and business model. A media organization’s goal is to bring you breaking news first. By its very definition, it is largely short-term in nature. “Turkey shoots down Russian jet invading its airspace,” is a recent example of breaking news. That story will have legs to run for a while or be bumped aside by the next newsworthy event, depending on developments. In the meantime, the stock markets in Europe and the U.S. sold off in reaction to this event, fearing that the situation might escalate. What should you do? Ask yourself if this is truly an event that should disrupt your long-term plans to save for retirement. Most reasonable investors would answer no. Why is breaking news so important to the media? Most news organizations’ source of revenue and profits is generated by advertising dollars. How advertisers decide on who gets what of their budget depends on market share, especially in electronic media where most of us get our news. The more market...

Tiny houses gain appeal

In this era of tight credit, high-priced McMansions and rapid life-style changes, the American Housing Dream may no longer be defined as a three-bedroom homestead on half an acre. For many Americans of all ages, there is a movement afoot to downsize their living space dramatically. The typical American house is around 2,600 square feet. Until recently, builders were taking the “barbell approach” by building bigger and bigger homes at one extreme and smaller and smaller apartments on the other. This trend, I suspect, largely reflected the growing disparity towards higher income inequality in this country.   The rich builders reasoned, wanted and could afford the sprawling monstrosity with the private drive and manicured lawns, while the poor were happy to have a roof over their head. But more and more Americans are “going tiny” for a variety of reasons. No question that buying a typical small house or even a trailer that measures 100-400 square feet is decidedly cheaper than a regular home. Most of us spend 1/3 to ½ of our income over a minimum of 15 years paying off the house. In contrast, over 68% of those who own tiny houses have no mortgage. As a result, over half of tiny house people accumulate more savings than other Americans. Homes also require a lot of time and effort to maintain. It is one of the main reasons that retirees are “downsizing” but that is not the only reason. Aside from the on-going expense, environmental concerns, such as fuel consumption, also play a part in that decision. More than 80% of greenhouse gas emissions during a home’s 70-year...

Robo-Advisors have landed

Skynet, move over. The dawn of intelligent portfolio services is rising across the globe. Depending upon your individual circumstances, this trend could be an answer to many investors’ problems. Exactly what is robo-investing? The dozen or so firms offering this service use computer algorithms, rather than humans, to manage your investments. They do so at a considerable cost savings to you, the retail investor. They offer a substantial discount in the fees they charge, compared to more traditional financial service advisors. Until recently, many investors had two choices when deciding how to manage your retirement savings such as an IRA or inheritance, for example. You could do-it-yourself (DIY). Pick some mutual funds, stocks or exchange traded funds your cousin or your fishing buddy suggests and invest for the “long-term.” That works fairly well as long as markets continue to gain year after year, but fails miserably when the markets turn, as they did during the financial crisis of 2008-2009. Most individuals (and professional investors) held on throughout that decline only to sell at the bottom. Twenty-five years or more of savings were wiped out in 18 months. Many retail investors have stayed in cash ever since, missing a 100%-plus gain. Those who held on have made up most, if not all of, their losses, but it has taken over five years to do so. The other option is to hire a financial advisor. Unfortunately, they normally have a minimum asset requirement of $250,000-$500,000 or larger. These advisors will charge you 1-2% annually and many also make additional fees through commission arrangements or “revenue sharing” deals with mutual fund managers....

Should you be worried about October?

A common perception on Wall Street is that October is the worst month of the year for the market. It is true that the month has historically failed to provide stellar returns, but it is actually September that deserves the title of the worst market month of all.             The good news is that September is over. Does that mean we can look forward to better times ahead? Well not quite; we still have to deal with October, which like March, is usually a month that begins like a lion and ends like a lamb as far as selloffs are concerned. So what makes investors so fearful of October? It might be because October has ushered in some auspicious dates of calamity beginning with a 12.8% plunge in the Dow on October 29, 1929. In today’s markets, a 12 % plunge doesn’t feel like a big deal but back then it was substantial and it didn’t stop there. The market went on to lose 90% of its value and usher in the Great Depression. Then there was the stock market crash of October 19, 1987. That was my first of many encounters with stock market meltdowns throughout the world.  Fortunately, it was a short, sharp decline and the U.S. markets recovered quickly. And how could we forget October, 2008? It was the worst month for the S&P 500 Index, NASDAQ and the Dow in 21 years. Global equities lost $9.5 trillion that month and it was the most volatile 30 days in the S&P 500’s eighty year history. We registered the most down days in a single month since...

The Retail Investor Jumps Ship

“The ES_F can’t get above the vwap and high volume node.” “SPY –a perfect symmetrical triangle on the one minute.” “Obama jobs report baked in. I’m short until tomorrow’s real report then we get a fluff rally.” The above comments were lifted from a daily internet trading service peopled by day traders and other speculators. There are hundreds of them. Their comments make little or no sense to most readers, nor should they. Yet, in order to compete in today’s stock markets as an individual investor, this kind of investing behavior is required. Is it any wonder that individual investors are abandoning the stock market in droves as the reality of how the markets have changed hits home? Even before the so-called ‘flash crash’ on May 6, 2010, the retail investor was, at best, risk adverse when it came to the stock market. Burnt badly in 2008 when individuals lost as much as $20 trillion of their net worth, retail investors continued to withdraw money from stocks in 2009, despite a 69% rally in the stock market. By late spring of 2010 that trend had just begun to reverse. Investors channeled $13 billion into U.S. mutual funds in March and almost $7 billion in early April. I started to get excited and mentioned it in my columns. But by the third week in May, the retail crowd sold almost $30 billion in stock funds and is once again on the sidelines. What happened? The debt problems in Greece, which have since spread to the rest of Europe, are partially to blame. Skittish investors who have yet to make back...