Very cool tool from ETF Database that allows you to select the least expensive way to express nearly any sector or style investment, with both lowest internal expense ratio and the median cost in that particular space.
(Let me know if they missed any and I will inform ETF Database of the omission)
Source: The Big Picture
Binary market action as in a daily game of red light green light. Take a look at this week’s daily action in the sectors. What will tomorrow bring?
(click here if charts are not observable)
Source: The Big Picture
Binary market action as in a daily game of red light green light. Take a look at this week’s daily action in the sectors. What will tomorrow bring?
(click here if charts are not observable)
Source: The Big Picture
James Grant, publisher of Grant’s Interest Rate Observer, talks about gold prices, inflation and credit markets. He speaks with Deirdre Bolton on Bloomberg Television’s “Money Moves.” Bloomberg’s Michael McKee also speaks.
Source: Bloomberg, April 15 2013
Source: The Big Picture
When I think back to my grandparent’s retirement years, I remember them talking about how they generated income from their investments. While they received a Social Security check each month in the mail, a good portion of their income actually came from their investments. Most of their investments were in what are considered safe investments, (bank certificates of deposit and bonds) to help lower the risk of them losing principal. The rest was invested in high quality, dividend paying stocks. Unfortunately today, many retirees cannot take the same approach with their retirement income. The primary reason is because of low interest rates.
Photo:posterize
Bank Accounts
If you are looking at brick-and-mortar banks, you will be hard pressed to find an account paying anything more than 0.25% interest. In some cases, this might even be high! Granted, there are some smaller, local credit unions that pay a higher interest rate, but for the most part, it is still not ideal.
You can turn to internet banks, but they too offer interest rates too low for most. In these cases, you’ll be lucky to find interest rates around 1%. With inflation currently hovering around 2%, keeping your money in a savings account is a losing battle.
Certificates of Deposit
Historically, bank certificates of deposit have paid higher interest rates than bank accounts. This is because the bank will pay you a premium to “lockup” your money for a set period of time. While the interest rate offered on bank CD’s today are still higher than a standard bank account, the interest rate is still paltry. Various five-year certificates of deposit are paying around 1.8% as of this writing. For shorter term CD’s, the story is even worse.
Looking back to the mid-2000’s a $100,000 investment in a six-month certificate of deposit will churn out over $5,000 of income annually. Fast forward to today and that same $100,000 will earn you about $450-$750 annually depending on the bank.
Where to Look for Alternatives to Low Interest Rates
With rates being so low, what is a retiree to do? There are a few options. First, you can look towards high quality dividend paying stocks. These companies tend to be less volatile than smaller company stocks and many have been increasing their dividends. (Note that many slashed their dividends during the recession of 2007-2009 but have been increasing payouts since and many have reached their previous payout levels.) Of course, investing in stocks carries the risk of lost principal and many retirees cannot afford to lose much of their nest egg. For this reason, it is wise to invest only a portion of your portfolio in stocks.
Another option is with short-term bonds. While short-term bonds will carry a lower interest rate when compared to longer term bonds, there is good reason for this. The same risk-return principal that applies to stocks also applies to the maturity of bonds. The longer the term of the bond, the higher the risk of interest rate fluctuation, among other risks. This means that since the price of bonds move in the opposite direction of interest rates, when interest rates rise, the price of the bonds will decrease, meaning lost principal. (The reason for this is because investors will sell the lower yielding bonds for higher yielding ones. As a result, the demand for the lower yielding bonds will decrease, forcing prices lower.) With short-term bonds, this risk is greatly reduced since the bonds mature in such a short period of time.
The best way to invest in short-term bonds is through a low cost ETF fund. Doing so provides instant diversification among many short-term bonds for much less money than investing in individual bonds directly.
Final Thoughts
With the Federal Reserve Bank promising to keep interest rates low through at least 2014, retirees are stuck when it comes to finding higher interest rate investments. Your best bet is to have a portfolio of many different investments (short-term bonds, longer term bonds, high quality dividend paying stocks and some cash) to allow yourself to get the most income while also not placing all of your eggs in one basket and feeling the repercussions should something happen.
Unfortunately, there is no low risk, high yielding investment out there. If anyone approaches you claiming otherwise, your best bet is to turn and walk the other way. It can be tempting to buy into their story, but know that all investments are tied to risk and return. To offer a high return, you are going to have to take a good amount of risk.
More on Bonds
What Are Treasury Inflation Protected Securities?
Comparing Different Types of Treasury Securities
Everything You Need to Know About Buying I Bonds
More on CDs
Why I Have a 5 Year CD… That I Do Not Plan to Hold for 5 Years
Create CD Ladders for Short Term Money Needs
Unique CD Strategy to Lock in Higher Rate
Are CDs Obsolete?
Written by Don
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© My Dollar Plan
Source: My Dollar Plan
Since it is a Friday (following Valentine’s Day), I want to step back from the usual market gyrations to discuss a broader topic: The pursuit of Alpha, where it goes wrong, and the actual cost in Beta.
For those of you unfamiliar with the Wall Street’s Greek nomenclature, a quick (and oversimplified) primer: When we refer to Beta (β), we are referencing a portfolio’s correlation to its benchmark returns, both directionally and in terms of magnitude.
We use a scale of 0-1. Let’s say your benchmark is the S&P500 — it has a β = 1. Something uncorrelated does what it does regardless of what the SPX does, and its Beta is = 0. We can also use negative numbers, so a Beta of minus 1 (-1) does the exact opposite of the benchmark.
Beta measures how closely your investments perform relative to your benchmark. If you were to do nothing else but buy that benchmark index (i.e., S&P500), you will have captured Beta (for these purposes, I am ignoring volatility).
The other Greek letter we want to mention is Alpha (α). Alpha is the risk-adjusted return of active management for any investment. The goal of active management is through a combination of stock/sector selection, market timing, hedging, leverage, etc. is to beat the market. This can be described as generating Alpha.
To oversimplify: Alpha is a measure of out-performance over Beta.
Why bring this up today?
Over the past few months, I have been looking at an inordinate number of portfolios and 401(k) plans that have all done pretty poorly. I am not referring to any one quarter of even year, but rather, over the long haul. There is an inherent selection bias built into this group — well performing portfolios don’t have owners considering switching asset managers. But even accounting for that bias, a hefty increase in the sheer number of reviews leads me to wonder about just how widespread the under-performance is.
One of the things that has become so obvious to me over the past few years is how unsuccessful various players in the markets have been in their pursuit of Alpha. We know that 80% or so of mutual fund managers underperform their benchmarks each year. We have seen Morningstar studies that show of the remaining 20%, factor in fees, and that number drops to 1%.
The overall performance of the highest compensated group of managers, the 2%+20% Hedge Fund community, has been similarly awful, as they have underperformed for a decade or more.
All of which leads me to a number of intriguing questions:
• How much does the pursuit of Alpha cost managers in terms of Beta?
• What is the overall drag on investing returns across the entire investing landscape? (Think of the drag on Individual portfolios, retirement accounts, charities)
• What are the literal costs of active versus passive management?
• What proportion of the finance industry exists to either chase Alpha or capitalize on those who do? Consider this in both percentage and dollar terms.
• Are managers consciously aware of the compromise to Beta they risk in the pursuit of Alpha?
I do not know the answer to these, but exploring questions such as these might lead us to some interesting places.
I’ll update this line of thinking in the near future . . .
Source: The Big Picture
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