| Bonds Online |
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| 5/10/2013Market Performance |
| Municipal Bonds |
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S&P National Bond Index
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3.00% |
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S&P California Bond Index
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2.96% |
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S&P New York Bond Index
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3.13% |
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S&P National 0-5 Year Municipal Bond Index
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0.70% |
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| S&P/BGCantor US Treasury Bond |
400.09 |
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| Income Equities: |
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| Preferred Stocks |
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S&P U.S. Preferred Stock Index
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848.03 |
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S&P U.S. Preferred Stock Index (CAD)
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636.26 |
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S&P U.S. Preferred Stock Index (TR)
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1,701.05 |
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S&P U.S. Preferred Stock Index (TR) (CAD)
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1,276.26 |
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| REITs |
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S&P REIT Index
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174.07 |
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S&P REIT Index (TR)
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425.30 |
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| MLPs |
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S&P MLP Index
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2,469.58 |
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S&P MLP Index (TR)
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5,428.50 |
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See Data
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A key reason so many investors lose money |
BY WARREN BOROSON
NEWJERSEYNEWSROOM.COM
BOROSON ON MONEY
A research company called Dalbar regularly checks how ordinary investors have been faring vis-a-vis the stock market and inflation.
And what Dalbar has found is that, over the long term, investors are behind the curve. Way behind the curve. They consistently do much worse than the stock market-as represented by the Standard & Poor's 500 Stock Index.
For example, for the 20 years ending in 2007, the stock market was up 12%. Inflation rose 3%. Investors' portfolios had risen a mere 5%.
Lori R. Sackler, first vice president and senior investment management consultant for Morgan Stanley SmithBarney in Paramus, thinks the problem is that many investors "go in and out." They tend to get into the stock market when it's hitting out all the lights – when they probably should be getting out. And they tend not to hold onto their investments – to change them, on average, every three years. So, in effect, they are selling low and buying high. Not a good way to make money.
Institutional investors, on the other hand, tend to do better-because they have a long-term investment strategy. They tend to ride out bearish markets and hold on during bullish markets.
"What people need is a process," Sackler recently told The Investors Club of Hobbyists Unlimited in Ridgewood.
They should begin by defining their objectives. When, for example, do they want to retire?
Next, what kind of asset allocation do they want? What percentage of their portfolio should be in stocks, bonds, and cash equivalents? The answer, Sackler believes, depends to a large extent on their objectives-and how well they can tolerate the stock market's terrifying volatility.
Next, they should evaluate and select money managers-assuming that they don't invest in stocks by themselves.
Finally, they should periodically review how their money managers are doing and evaluate their performance against benchmarks-and switch managers if necessary.
To protect your portfolio against a terrible storm, she went on, you need a variety of investments: not just stocks, but "growth" stocks (the favorites, which usually don't pay dividends), "value" stocks (underdogs), foreign stocks, large-company stocks, small- and mid-sized company stocks, and emerging-market stocks, as well as a variety of bonds-including high-yield bonds and foreign bonds.
"Adding more investment classes reduces risk and may boost your return," she pointed out.
To keep up with inflation and to actually reduce risk in an all-bond portfolio, Sackler said, you need some stocks in your portfolio-even if you are retired.
"What the biggest risk in retirement?" she asked. The correct answer: inflation. (My own answer, death, apparently was not correct.)
Another solid piece of advice she gave: Don't put more than 5% of your portfolio in any one stock. She recommended having a total of at least 30-35 stocks in different asset classes – "so you will be able to diversify away much of the stock risk. But during a downturn, you will still be subject to the market's moves."
She reminded her listeners that when a stock goes down, it must rise by a bigger percentage just to return to its original price.
If you lose 10 percent – say, your $100,000 sinks to $90,000 – you must gain 11.1 percent to get back to where you were. If you lose 50 percent, you must gain 100 percent to recover. Lesson: Control the downside.
But don't overemphasize the importance of stock-picking, she advised. Studies have shown that your asset allocation-the percentages you have in stocks, bonds, and cash-determines 60 percent to 70 percent of your return, while other factors (stock-picking, market-timing) account for only 30 percent to 40 percent.
Owning a variety of mutual funds, she noted, may not mean you have a diversified portfolio. The mutual funds may duplicate each other, holding the same stocks.
She put in a few good words for alternative investments, like private real estate and hedge funds. While hedge funds didn't avoid the market's decline, she pointed out, they did better than the stock market last year-down around 15 percent compared with the S&P 500's loss of 37 percent.
Index funds? They have low expenses, and there's no limit to how much you can invest. But they provide unlimited exposure to a market, they ignore profitable opportunities, and they provide only mediocre risk-reward returns.
By contrast, active management exploits "inefficiencies" in the market (pricing opportunities, for example) and can provide remarkable risk-reward returns. But they do have higher costs and the potential for underperformance. A minority of active managers outperform their appropriate indexes.
Sackler warned against market-timing-trying to flee bear markets and enjoy bull markets. Getting out of the market is fraught with peril. She noted that from 1980 to 2000, if you had remained invested in the S&P 500, you would have earned 11.8 percent. If you had been out only the 50 best days, your return would have shrunk to a mere 3.1 percent.
Sackler is a strong advocate of buying high dividend-paying stocks-and preferred stocks. If you buy high dividend-paying stocks whose dividend grows over time, she said, research shows that you have a better chance of keeping up with inflation and of not running out of money, even over long periods of time.
Sackler is a Certified Financial Planner as well as a Certified Public Accountant. She has more than 20 years of experience counseling high net-worth clients on financial matters.
On Sunday nights she has a radio program on WOR 710 in New York on how to communicate about money to family members. She has a B.A, with distinction from the University of Michigan and an M.S. in marketing and finance from the University of Texas. She lives in Tenafly with her husband, Michael, and their two sons.
Veteran financial writer Warren Boroson will answer questions about personal finance - taxes, investing, insurance, and so forth. He will be conducting a class on great opera singers of the past at the County College of Morris on the morning of Sept. 29.
Boroson on Money appears Mondays at Newjerseynewsroom.com.
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| Stuff to look at |
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S&P Commentary and Newsletters: S&P
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| BondsOnline Advisor |
Income Security Recommendation January 2013 Issue.
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