“There’s Something In The Wind”
Two-Beers, One Napkin and a 401(k)
Two Beers, One Napkin and a 401(k)
What would you do if you found out your investment was earning 1% a year? Would you review your investment and make some changes or would you take a “wait-and-see” position?
The reality is that lots of good folks are sitting idly while their retirement plans wallow. The tragedy is that a good portion of these folks aren’t even aware of just how badly their plans are performing, or even worse, that they have the ability to alter their plans with some basic information.
Here’s a discussion I had in early 2013 with a close friend that proves my point.
Enjoying a couple of beers after a round of golf, my friend, Steve, boasted how much his retirement plan had grown over the past 13 years. Steve said he began with $50,000 in his plan and now his account was over $282,000.
Surprised at those impressive numbers, I inquired how my friend succeeded at his realized gain of $232,000.
Grinning from ear to ear like the Cheshire Cat in Alice in Wonderland, Steve told me, “I bought the Standard and Poor’s 500 Index (S&P500) at the end of 1999 and just left it there. I’m a ‘long term’ investor, you know.”
Being a veteran player in the investment game, Steve’s statement naturally peaked my curiosity. Since 2000 there have been a host of sharp downward movements in the market. From the Asian flu epidemic to the tech bubble, Enron fiasco, 9/11, The Great Recession, the 2009 Economic Recovery that never was, and finally the European Debt Crisis, I was struggling with the notion that my friend could have discovered gold in down markets.
So I grabbed a napkin and a pen and asked Steve if we could demonstrate just how he did it. I told him to write $50,000 in the top left hand corner of the napkin and $282,000 at the bottom right corner. Then I asked, “Steve how much did you add each year in contributions to your retirement plan?”
“$15,000 every year,” he proudly replied.
“For all 13 years?” I inquired.
“Yep.”
I instructed him to multiply $15,000 by 13, and write the total in the center of the napkin.
He jotted down $195,000, thought for a minute and shrieked (and it wasn’t a very manly shriek), “Wait! $195,000 of my ‘gain’ was my own money — from my paycheck? That makes my real gain just a measly $37,000 after adding my own contributions.”
And without my prompting, Steve then divided his $37,000 gain by 13 years, and sheepishly wrote down $2,846.
“Steve, I estimate you’ve earned a little over one percent a year,” I said, feeling kind of sorry that I had initiated this little exercise.
While my friend motioned the bartender over for another beer he looked down and asked, “Roger, there’s no way I can retire if I keep this up, is there?”
“It’s going to be difficult,” I answered. “In hindsight, you would have been better off in a money market account and experienced a lot less volatility.”
“So is there a way I can be smarter about what I buy and when I buy it,” he begged?
“I think there is, Steve,” I answered. “Are you aware that there are two Standard and Poor’s 500 indexes?
I was referring to the investment vehicles that contain the same 500 stocks, but are bundled differently, are traded differently and produce different returns. One is “capitalization weighted” and the other is “equal weighted.”
The S&P 500 Index (SPX) is capitalization weighted in a way that is similar to how the U.S. Congress is weighted. The most populated states have the most representation (Congressmen) and the smallest states have the least. California has more votes than Rhode Island. The capitalization weighted S&P 500 gives most of the votes to the biggest stocks like Exxon Mobil.
Conversely, the equal weighted S&P 500 Index (RSP), gives an equal vote to every stock in the 500, similar to the U.S. Senate. In the Senate every state has two Senators. Rhode Island has just as many as California and Texas. So they have equal votes in the Senate.
Back in 2000 I began to explore exactly how these two markets traded. I ran a calculation called Relative Strength, which basically compared the capitalization weighted S&P 500 (Congress) to the equal weighted S&P 500 (Senate), to determine where to place investment dollars.
For the first time in more than seven years it revealed that the Senate was the place to be. To me this was huge news. But oddly enough, the major business media like Fox News, CNBC, The Wall Street Journal, Investor’s Business Daily never picked up on the story. And still today the business media only talks about the capitalization weighted S&P 500. When this reversal occurred it signaled a major change in our investment posture.
To make Steve even more depressed, I pulled out my iPad and demonstrated that from the beginning of 2000 to the end of 2012, the SPX was down close to 3% while the RSP was up nearly 89%.
“So why didn’t the retirement guy at my company tell me about this?” Steve asked. “Isn’t he supposed to be helping us?”
“Because that guy’s not paying attention,” I explained. “Most investors and their advisors are just riding the train and staring out the window at the pretty scenery. If they were paying attention you’d be in a much better position.”
The moral to this sad story is that you shouldn’t assume the company guy or your advisor is keeping an eye on your investments. The moral to this sad story is that you shouldn’t assume the company guy is keeping an eye on your investments. You’re the best person for that task. You see, investors with advisors who pay attention to their investments generally are the ones who make out a little better.
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Roger S. Balser is the Managing Partner and Chief Investment Officer of Balser Wealth Management, LLC with more than twenty-five years experience. He works one on one with individuals to help regain control of their investment and retirement portfolio(s). Roger’s addressed a host of professional organizations nationwide and weekly give his two cents on the popular “Two-Minute-Tuesday.” If you have any questions about the particulars of your investment portfolio or retirement plan at work, or would like to discuss potential opportunities within the equity market, please contact Balser Wealth Management, LLC, 36873 Harriman Trail Avon, OH 44011, 440-610-3012, roger@balserwealth.com, www.balserwealth.com
Roger S. Balser
Ways to Sabotage Your Portfolio
Psst! Want to lose a lot of money?
While there are no foolproof ways to accurately predict the market, there are several foolish ways in which investors can successfully subvert their portfolios and reap big losses. Here are several examples of how unknowing investors can unwittingly sabotage an investment portfolio.
Neglect the Driving Force Behind Any Business: Supply and Demand
Business success (or lack thereof) boils down to two simple words — Supply and Demand. It’s that simple. It doesn’t matter whether you are talking about the oil market, iPods, golf courses, lemonade stands, or the stock market. Simply put, if there are more buyers in a particular security than there are sellers willing to sell, the price will rise. Conversely, if there are more sellers in a particular security than there are buyers willing to buy, then the price will decline. If buying and selling are equal, the price will remain the same. This is the irrefutable law of supply and demand. The same reasons that cause price fluctuations in produce such as potatoes, corn and asparagus cause price fluctuations on Wall Street. The “Point & Figure” methodology I use is just a logical, sensible organized way of recording that supply and demand relationship. It simply arranges the information in a way that makes sense to me. A telephone number is no different; it is just a way of organizing 10 digits in a way that makes sense to us and the AT&T network. A Point & Figure chart is just a way of organizing a series of prices into a pattern that makes more sense.
Attempting to Play the Game Without Knowing What Team is on the Field
Think about your favorite football team for a moment. If they play offense 100 percent of the time, they are going to be marginal at best and at times downright awful. There’s a time to have the offensive team on the field and a time to have the defensive team on the field. The problem with most investors is they don’t know what stadium the game is being played in much less which team has the ball. Before deciding on any strategy, you must know whether you’re in a wealth accumulation mode or a wealth preservation mode.
Arrogance. The Market is Easy to Figure Out — But Only if You Listen
The market teaches humility. The sooner you acknowledge the fact the market is going to do what it’s going to do, and forget about trying to tell the market why it must do something because the economic numbers came out a certain way, the better off you’ll be. A quick look at the sector bell curve from different time periods can provide you a clear picture of what the risk in the overall market is. In October 2011 the world was facing down a financial crisis in Europe, Occupy Wall Street protesters, and a war in Libya, none of which were positive indicators. It was a hard time to invest, but if you stopped coming up with reasons why the market shouldn’t do this or shouldn’t do that long enough, you could have heard clearly what the market was telling you. It was saying risk was low and money should be put to work. Case in point: The S&P 500 gained more than 17 percent from October 10, 2011 through March 29, 2012.
Making Stock Selection Decisions on Fundamentals Alone
General Electric (GE) is a company that has their hands into everything, from industrial manufacturing, aircraft engines, nuclear power, loans (GE Capital), land management/acquisition, and more. GE basically has a hand in the honeypot of pretty much everything you can dream of. For a while, the stock price tracked the earnings in a general sense, but then in the year 2000 that correlation ended. The earnings continued to head higher, and meanwhile the stock price was cut in half. As of this writing, GE is still more than 65 percent below its high, while earnings have more than doubled.
Buying a Stock Simply Because It is a Good “Value”
There are two problems with buying on value alone. First, the stock can remain a great value and not move. Second, the stock can become an even better value by continuing to move lower. I believe it’s great to buy value stocks, but only when demand starts to come back to the stock. The pharmaceutical companies Eli Lilly (LLY) and Bristol Myers Squibb (BMY) are stocks that many regarded as good value investments before their sheer sell-offs in 2000. They have become even better “values” as they have continued their downward decline.
Being Afraid to Buy Strong Stocks
Sir Isaac Newton said, “Things in motion tend to stay in motion.” There’s an old stock market cliché that says the first stocks to double in a bull market usually double again. This mentality would have kept you out of Apple (APPL), which was up 201 percent between January 2009 and August 2010, and rose another 137 percent by the end of March 2012. It also would have kept you out of W.R. Grace (GRA), which was up 201 percent between January 2009 and August 2010, and up another 137 percent by March 2012. These are only two examples, but there are many others.
More important than how much the stock is up is its supply and demand relationship. By assessing the Point and Figure chart, you can gain insight into this relationship to gauge whether or not the stock is likely to move higher. Stocks that double can easily double again. Don’t miss out on these great opportunities.
Selling a Stock Because It’s Gone Up
Have you ever sold a stock for a small profit only to watch it continue to move higher and higher? It’s upsetting for any of us to remember those piles of money we let get away, but we have to keep in mind that in the long run it’s the size of your winners that counts, not how many winners you can find. For that reason, you want to become very judicious at managing the position. When you have a stock with strong technical qualities, prune the position, but hold the core position. There are a number of strategies to retain the core position, from just holding the stock, to using the options market. Relative Strength is one of the strategies I use. It’s a great tool for keeping at least one leg in a position for long-term growth.
Holding on to Losing Stocks and Hoping They Come Back
Often referred to as “buy and hope” or letting your losses run, many people are still holding stocks from the go-go years that have no possible chance of ever regaining their stardom. Just as the size of your winners matters, the size of your losers counts just as much or more. You need to make sure that you always come back with the ability to play another day. If you have a stock that declines 50 percent, then you’ve backed yourself into a corner because now you need that stock to double just to get back to even. It’s a fourth- down-and-forever situation, which is not desirable for any coach.
For example, the person who bought Cisco Systems (CSCO) at $82 in 2000 is reeling from its current price of about $20. That stock would have to quadruple just to get back to even! If you remember the early 2000s, investors were not beginning to sell stocks, this is when the average investor had just gone on margin to buy more. Will energy and gold become the next technology bubble? I don’t know. What I do know is the charts will give us sell points along the way and keep us from holding positions into the abyss.
Making Moves Based on a Magazine Cover
Following the hot news that appears on a magazine cover or a TV show is a shortcut to the poor house. Why would you follow the advice of an editor who has just moved from the society pages to the business section?
For instance, in October 2004 The Economist came out with a cover that said, “Scares Ahead for the World Economy” which would have made you think investing globally was not the correct play. Instead the International Markets’ returns dwarfed the U.S. from 2004 until late 2011. Their October 15th cover headlined, “Nowhere to hide. Investors have had a dreadful time in the recent past. The immediate future looks pretty rotten, too.” Since the then the S&P has gained 15 percent through the end of March 2012.
By staying far away from these money-draining traps, adhering to your pre-determined objectives, incorporating reasonable thought processes and using sound judgment, you can easily safeguard your investment portfolio and eliminate self-imposed losses.
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Roger S. Balser is the Managing Partner and Chief Investment Officer of Balser Wealth Management, LLC with more than twenty-five years experience. He works one on one with individuals to help regain control of their investment and retirement portfolio(s). Roger’s addressed a host of professional organizations nationwide and weekly give his two cents on the popular “Two-Minute-Tuesday.” If you have any questions about the particulars of your investment portfolio or retirement plan at work, or would like to discuss potential opportunities within the equity market, please contact Balser Wealth Management, LLC, 36873 Harriman Trail Avon, OH 44011, 440-610-3012, roger@balserwealth.com, www.balserwealth.com
Benefits of Position Sizing
Benefits of Position Sizing
The recent financial markets have been tough, to say the least. Some things that worked the first part of the year stopped working weeks later. Other segments of the market have experienced tough sledding for a year or longer. In summary, it has been hard to gain any traction with a lot of your investments.
But we must play the hand we are dealt. Right now that hand is one that offers short-term (and sometimes fleeting) gains. In other words, there are small pockets or sectors where things are working, but our time horizon needs to be adjusted. We can no longer focus on the intermediate or long term rather we must focus on shorter term trading moves to grow your balances.
The most important aspect of any portfolio has always been position sizing, but it is crucial in this environment. Once we decide to buy a stock or ETF, we need to establish three control parameters entry price, position size and a logical point to exit the position if the trade goes against us. Does this really matter? Absolutely. Without properly assessing these three parameters upfront, we have no way of minimizing position risk while maximizing the account value. So today I wanted to go over my preferred method for sizing positions. It’s called the Percent Risk Method, and it works for trading accounts and longer term investment accounts.
The Percent Risk Method
First, we look only at positions that fit our risk-based criteria using Point and Figure charting. Let’s say you have a $500,000 investment or retirement account. Depending on the type of market we are in, we would choose position sizes ranging from 1⁄2% to 2% of your total portfolio value. As an example, let’s say we agree to use a 1% risk tolerance per position in your account. This means that each position will be sized so that the risk to your overall portfolio is no more than 1% of your $500,000 account. One percent of $500,000 is $5,000; so that will be our risk for the first position.
So let’s now approach that single position based on our calculated risk. In this example we will use our old favorite XYZ. Since we know (or can determine) our stop loss point for our trade in stock XYZ, we would determine the distance from our entry point to our stop loss point (risk to stop), and then divide that into our $5,000 risk for the position. The resulting value will be the number of shares that we can purchase to stay within our 1% risk tolerance.
Here’s an example: XYZ is trading at $49 on its trend chart, and we determined that this is a reasonable investment to consider. We have a pattern that would suggest exiting at $45. Our entry price would be $49, and our risk on this trade is $4 ($49-$45, our stop).
We now divide our $5,000 risk for this position by our $4 risk per share to give us a position size of 1250 shares. So if we buy 1250 shares of XYZ, and get stopped out with a $4 loss, you would lose $5,000 – which was your original risk tolerance for this. Naturally, as the distance to your stop loss point decreases, your share size will increase; conversely, the opposite will occur when you are considering stocks trading further from your stop point — the number of shares purchased decreases.
So again, with the percent risk model that we used, the most that is ever risked per trade is 1% of the account value at the time the trade is made. (So you mark the account to market each day before you can figure out what the 1% risk would be for any subsequent trades.) The main rule to adhere to with this method is that you must respect your stop points. Remember, your position is sized as a function of the risk to the stop point. So if your stop point is hit, you must stop out, or obviously will risk losing more that the previously decided 1%.
But the beauty of the percent risk method of position sizing is how much it can enhance your returns. If you have a large position in an individual security (and therefore the stop point will be tight), and that trade works out in your favor, it will add considerable money to the bottom line vis-à-vis a smaller position, all while risking the same as any other trade.
Another fundamental benefit of this approach is that it helps us deal with emotions. The Percent Risk model takes some of the emotional influence out of the process by forcing you to make smaller ‘bets’ when the market dictates, and forcing you to make sequentially equivalent bets on each trade. When the market is on offense, we would typically suggest taking a 1% position in every trade, regardless of how bullish your emotions are telling you should be on any single trade. This keeps any single position from beating you, and allows for the trading system to work based upon its own merit. Finally, the often-difficult, emotion-ridden decision of when to sell has been pre-determined when you go into the trade. The key, though, is to adhere to your pre-determined stop.
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Roger S. Balser is the Managing Partner and Chief Investment Officer of Balser Wealth Management, LLC with more than twenty-five years experience. He works one on one with individuals to help regain control of their investment and retirement portfolio(s). Roger’s addressed a host of professional organizations nationwide and weekly give his two cents on the popular “Two-Minute-Tuesday.” If you have any questions about the particulars of your investment portfolio or retirement plan at work, or would like to discuss potential opportunities within the equity market, please contact Balser Wealth Management, LLC, 36873 Harriman Trail Avon, OH 44011, 440-610-3012, roger@balserwealth.com, www.balserwealth.com
Roger S. Balser
Pearls of Market Wisdom From Savvy Investors
There is an old saying that children don’t come with instructions. Instead, we rely on the wisdom and knowledge we’ve gleaned over the years to teach our children what they need to create a happy and fulfilling life. So where does that wisdom come from? It comes from years of personal experiences and the experiences of our friends and loved ones.
Just as we’ve learned our lessons on how to raise children, we can learn some important lessons from savvy investors on how to succeed in the market. So without further ado, I bring you my “Ten Pearls of Market Wisdom from Saccy Investors.
2012 July