We're going head to head with stock market pros this year, by comparing the results of buying the S and P 500 Index with that of professional investment strategists. In order to compare track records, let's look at how they did last year. All initial recommendations were taken from Barron's Magazine December 22, 2008 (and changes to portfolios were published as of September 7, 2009, and calculated as of September 30, 2009).
What Happened Last Year
S and P 500 Ended the Year at 1115.10
S and P Earnings were $55.91
Fed Funds Rate was .25%
10 Year Treasury was 3.85%
Best Performing Sectors were:
Technology (59.92%), Materials (45.23%), and Consumer Discretonary (38.76%)
If you'd bought the Index, you'd have been up 23.45% for the year.
What the Pros Predicted
Black Rock (Robert Doll)
S and P 500 - 1050 (5.8% low)
S and P Earnings - $57.5 (3% high)
Fed Funds Rate - 1% (300% high)
10 Year Treasury - 3.25% (16% low)
Best Performing Sectors: Technology (49.47%), Energy (11.29%), and Health Care (17.07%).
Sold Technology in the 4th quarter.
Portfolio return 25.94%
Deutche Bank Private Wealth (Larry Adam)
S and P 500 - 1025 (8% low)
S and P 500 Earnings - $71 (27% high)
Fed Funds Rate - .125% (50% low)
10 Year Treasury - 2.75% (29% low)
Best Performing Sectors: Technology (59.92%), Consumer Staples (11.2%) and Health Care (17.07%)
Sold Consumer Staples in 4th quarter, and replaced with Energy and Industrials.
Portfolio return 32.4%
JP Morgan (Thomas Lee)
S and P 500 - 1100 (1% low)
S and P 500 Earnings - $65 (16% high)
Fed Funds Rate - 0% (was .25%)
10 Year Treasury - 1.65% (57% low)
Best Performing Sectors: Financials (14.8%), Consumer Discretionary (38.76%) and Health Care (17.07%). Sold Consumer Discretionary and Health Care in 4th quarter and replaced with Energy, Technology, Industrials and Materials.
Portfolio return - 28.04%
US Trust (Christopher Hyzy)
S and P 500 - 1020 (8.5% low)
S and P Earnings - $60 (4% high)
Fed Funds Rate - .5% (50% high)
10 Year Treasury - 3% (22% low)
Best Performing Sectors: Energy (11.29%), Consumer Staples (11.2%), Utilities (6.8%), Technology (59.92%). Sold Consumer Staples, Utilities, and replaced with Industrials and Materials.
Portfolio return - 22.64%
Citigroup (Tobias Levkovich)
S and P 500 - 1000 (10% low)
S and P Earnings - $62 (10.8% high)
Fed Funds Rate - 0% (was .25%)
10 Year Treasury - 3% (22% high)
Best Performing Sectors: Technology (59.92%), Financials (14.8%), Consumer Discretionary (39.76%), Telecom Services (2.63%), Health Care (17.07%) and Industrials (17.27%). Sold Consumer Discretionary, Telecom Services, Health Care, and bought Materials and Energy.
Portfolio return - 23.26%
Goldman Sachs (David Kostin)
S and P 500 - 1100 (1% low)
S and P Earnings $53 (5% low)
Fed Funds Rate - .125% (50% low)
10 Year Treasury - 3.6% (6% low)
Best Performing Sectors: Consumer Staples (11.2%) and Health Care (17.07%). Sold both and replaced with Energy, Materials, Financials and Technology)
Portfolio return - 20.35%
Commission and Taxes
Do-it-yourself investors typically pay about .5% in annual fees, and full service brokers typically charge about 2% for their services.
Short-term capital gain tax rates are the same as ordinary income tax rates, which are 25% for most people (who earn between $33,950 and $82,250 per year). We'll ignore the tax effect on the relatively low (1.94%) dividend rate on both the index and its sectors in this comparison.
Using these assumptions to adjust the returns:
S and P 500 Index - 23.45% - .5% commission = 22.95% net return
Black Rock - 25.94% - 2% commission - 3.25% capital gain taxes = 20.69% net return
Deutche Bank Private Wealth - 32.4% - 2% commission - .58% capital gain taxes = 29.8% net return
JP Morgan - 28.04% - 2% commission - 1.42% capital gain taxes = 24.62% net return
US Trust - 22.64% - 2% commission - .5% capital gain taxes - 20.14%
Citigroup - 23.26% - 2% commission - 1.61% capital gain taxes = 19.65%
Goldman Sachs - 20.35% - 2% commission - 1.94% capital gain taxes = 16.41%
In 2009, 1/3 of the pros listed beat the S and P 500 net return with their recommendations for investing, and you can see for yourself how each predicted the other investing categories for the year.
Congratulations if you followed the advice of Deutche Bank Private Wealth or JP Morgan last year. I suspect, however, that Deutche Bank Private Wealth charges higher than 2% for its advice, but we'll keep the figures consistent for comparison purposes.
If you followed the other 2/3, you'd have been better off just buying the S and P 500 Index. It will be interesting to see if Deutche Bank and JP Morgan will continue to outperform, and whether the others will improve their performance in 2010.
Showing posts with label stock market. Show all posts
Showing posts with label stock market. Show all posts
Monday, January 4, 2010
Friday, October 23, 2009
The Female Retirement Dilemma
Issues involved with planning for retirement are different for women than they are for men. And understanding them can be the difference between comfort and poverty in our old age.
I. By Saving the Same Percentage, We Retire with Less Than Half Than Men
Let's look at the result of both men and women putting aside 10% of their earnings for retirement.
First, women current earn, on average $.80 for every dollar men earn. So now, for every $.10 in men's retirement accounts, women have $.08 - 20% less.
Next, women spend an average of eleven years of their productive working lives as an unpaid caregiver for a family member. Assuming a work life from college graduation at 22 to retirement at 65, that unpaid absence lessens our earning years by another 25%. That reduction in lifetime earnings, added to the fact that we lower salaries, results in us having $.06 for every $.10 men save for retirement - or 40% less.
So, if we assume average annual earnings of $60,000 during their careers, men will save $258,000 and women, $154,800, assuming that those savings are invested in assets that keep up with inflation.
At 65, a man will need ten years of retirement income from savings of $258,000. Invested in assets that keep up with inflation and taxes, he will have $25,800 per year for ten years.
A woman, because of her additional life expectancy will have a sixteen year retirement with savings of $154,800. Invested in assets that keep up with inflation and taxes, she will have $9,675 per year.
No wonder twice as many women than men live in poverty.
II. What To Do
First, homemakers who care for children or parents should have Spousal IRA accounts funded on their behalf every year. Considering that replacing all the functions provided would total approximately $30 thousand per year (Source: http://www.womenwork.org/resources/tipsheets/valuehomemaking.htm), it is only reasonable that your retirement is funded while you provide these services at no charge.
Second, women must learn to invest their retirement assets in a way that will maximize growth without taking an inordinate amount of risk. The two long term investments that provide the highest return are stocks and real estate.
In the last few years, we have witnessed the volatility both these investments have. But, let's put this into perspective. The stock market high was in August, 2007. Just over two years later, the market is down about 30% from its high. There are two considerations we must make:
It requires only that we gain the knowledge to take action and the willingness to provide for our future.
I. By Saving the Same Percentage, We Retire with Less Than Half Than Men
Let's look at the result of both men and women putting aside 10% of their earnings for retirement.
First, women current earn, on average $.80 for every dollar men earn. So now, for every $.10 in men's retirement accounts, women have $.08 - 20% less.
Next, women spend an average of eleven years of their productive working lives as an unpaid caregiver for a family member. Assuming a work life from college graduation at 22 to retirement at 65, that unpaid absence lessens our earning years by another 25%. That reduction in lifetime earnings, added to the fact that we lower salaries, results in us having $.06 for every $.10 men save for retirement - or 40% less.
So, if we assume average annual earnings of $60,000 during their careers, men will save $258,000 and women, $154,800, assuming that those savings are invested in assets that keep up with inflation.
At 65, a man will need ten years of retirement income from savings of $258,000. Invested in assets that keep up with inflation and taxes, he will have $25,800 per year for ten years.
A woman, because of her additional life expectancy will have a sixteen year retirement with savings of $154,800. Invested in assets that keep up with inflation and taxes, she will have $9,675 per year.
No wonder twice as many women than men live in poverty.
II. What To Do
First, homemakers who care for children or parents should have Spousal IRA accounts funded on their behalf every year. Considering that replacing all the functions provided would total approximately $30 thousand per year (Source: http://www.womenwork.org/resources/tipsheets/valuehomemaking.htm), it is only reasonable that your retirement is funded while you provide these services at no charge.
Second, women must learn to invest their retirement assets in a way that will maximize growth without taking an inordinate amount of risk. The two long term investments that provide the highest return are stocks and real estate.
In the last few years, we have witnessed the volatility both these investments have. But, let's put this into perspective. The stock market high was in August, 2007. Just over two years later, the market is down about 30% from its high. There are two considerations we must make:
- These are long term investments, intended for use in ten years or more. In the 30+ years since I've been in the business, I've witnessed a years-long 50%+ correction in the 70's, a heart-stopping drop in the '80's, a precipitous fall in the 90's, the dot com bubble bursting in the early part of this decade and the current correction. These are predictable, and those who have made wise stock investments and held them have fared far better, even at this point, from those who put their money in so-called "safe" investments, like money market accounts, Treasury Bills and insured savings accounts, which fail to stay ahead of inflation and taxes. Note that there were two times billionaire investor Warren Buffett publicly admitted to buying stock in US companies: once, during the correction in the 1970's; and the other, from March to year end, 2008.
- Even at retirement, we have life expectancies that mandate we stay ahead of inflation and taxes, and therefore advise consideration of keeping at least a portion of our long term portfolios in capital markets.
- Conversely, our short term (five years or less) cash flow needs must be kept in safe investments, so that our expenses are met and we are not tempted to sell our long term investments during market lows.
It requires only that we gain the knowledge to take action and the willingness to provide for our future.
Saturday, October 3, 2009
Important Pricey Leather Handbag Information
I. Gender Marketing says. . .
Men identify deeply with their jobs. They're hardwired for task orientation. When they lose their jobs, they tend to lose their identity.
"Women are . . . worried about their jobs, but not to the extent that they feel their . . .existence is being threatened, and so they are in the mood to buy despite the crisis," gender marketing expert Diana Jaffe told Reuters recently.
So, do we conclude that men face the current economic slump by questioning their identity and cutting back on spending, and women make themselves feel better by shopping for pricey leather handbags?
II. Why do we buy?
Maybe watching "Madmen" has hurled us back in time and made us behave as though we were living in far less liberated 1960's. Maybe we are taking the ostrich approach to managing our money, and, like Nero, are fiddling while Rome burns. Maybe, in this particular case, we should behave more like men - but for very different reasons.
We need not define ourselves by the way we earn a living in order to face our current economic situation. We can continue to be well-rounded human beings who know that our net worth and our self worth are very different. But in order to pursue the things that bring us happiness, we'd best ensure we have a roof over our head and food on our table in our old age before we buy "pricey leather handbags."
Yet, the fashion industry send us messages - four times a year, via preposterously thin teen-age girls - that we "need" what they offer. Do we? Does spending money on handbags and shoes really make us feel good enough to forego providing for our long term needs?
III. Put Yourself First
If you have put aside enough for yourself to live comfortably for the rest of your life and you need a handbag, by all means buy one, as long as you have the money. But if you have not provided for your long term security, exactly what do you accomplish by buying something that you truly cannot afford?
The appearance of wealth is nothing. It is for someone else. It speaks to others - not you.
IV. You Say
Times are difficult. Current times are more difficult than the grueling recession that took place in the 1970's, when I began working in finance. It was a time when wealth was lost in a grinding market correction that took place over years and cut portfolios in half. Inflation was out of control and job losses made the national mood grim. It was also the time when Warren Buffett invested heavily in the stock market and earned wealth that is measured only slightly less than that of Microsoft founder Bill Gates.
It is your right to buy whatever you want, whenever you want. You can be tempted by the fashion industry to buy gladiator shoes, designer bags or whatever it is - as long as it speaks to your authentic self.
You can also decide to put that money aside in investments that will outperform the ravages of inflation, like stocks and real estate, which will provide for you for the rest of your life.
One in four of us will live to age 95. Elderly and destitute with a pricey handbag in my closet, is not the choice I make for myself. I invite you to join me in defying gender marketing research, and investing your time and resources in investing in your future.
Men identify deeply with their jobs. They're hardwired for task orientation. When they lose their jobs, they tend to lose their identity.
"Women are . . . worried about their jobs, but not to the extent that they feel their . . .existence is being threatened, and so they are in the mood to buy despite the crisis," gender marketing expert Diana Jaffe told Reuters recently.
So, do we conclude that men face the current economic slump by questioning their identity and cutting back on spending, and women make themselves feel better by shopping for pricey leather handbags?
II. Why do we buy?
Maybe watching "Madmen" has hurled us back in time and made us behave as though we were living in far less liberated 1960's. Maybe we are taking the ostrich approach to managing our money, and, like Nero, are fiddling while Rome burns. Maybe, in this particular case, we should behave more like men - but for very different reasons.
We need not define ourselves by the way we earn a living in order to face our current economic situation. We can continue to be well-rounded human beings who know that our net worth and our self worth are very different. But in order to pursue the things that bring us happiness, we'd best ensure we have a roof over our head and food on our table in our old age before we buy "pricey leather handbags."
Yet, the fashion industry send us messages - four times a year, via preposterously thin teen-age girls - that we "need" what they offer. Do we? Does spending money on handbags and shoes really make us feel good enough to forego providing for our long term needs?
III. Put Yourself First
If you have put aside enough for yourself to live comfortably for the rest of your life and you need a handbag, by all means buy one, as long as you have the money. But if you have not provided for your long term security, exactly what do you accomplish by buying something that you truly cannot afford?
The appearance of wealth is nothing. It is for someone else. It speaks to others - not you.
IV. You Say
Times are difficult. Current times are more difficult than the grueling recession that took place in the 1970's, when I began working in finance. It was a time when wealth was lost in a grinding market correction that took place over years and cut portfolios in half. Inflation was out of control and job losses made the national mood grim. It was also the time when Warren Buffett invested heavily in the stock market and earned wealth that is measured only slightly less than that of Microsoft founder Bill Gates.
It is your right to buy whatever you want, whenever you want. You can be tempted by the fashion industry to buy gladiator shoes, designer bags or whatever it is - as long as it speaks to your authentic self.
You can also decide to put that money aside in investments that will outperform the ravages of inflation, like stocks and real estate, which will provide for you for the rest of your life.
One in four of us will live to age 95. Elderly and destitute with a pricey handbag in my closet, is not the choice I make for myself. I invite you to join me in defying gender marketing research, and investing your time and resources in investing in your future.
Tuesday, September 8, 2009
How Much Will YOU Earn?
As I mentioned six days ago http://womensfinancialplanning.blogspot.com/2009/09/is-stock-market-cheap.html , I look to Standard & Poor's for earnings projections. I had mentioned that, in the next twelve months, projections for S&P 500 earnings are $48.67. Note that the next twelve months are September, 2009 - August, 2010.
Last Saturday, Barron's magazine published projections for 2010 by ten strategists, who charge dearly for their advice. These projections are for January, 2010 - December, 2010. Let's take a look.
I. Next Year's Earnings for the S&P 500
Since I'm writing this column, I'll go first.
Last Saturday, Barron's magazine published projections for 2010 by ten strategists, who charge dearly for their advice. These projections are for January, 2010 - December, 2010. Let's take a look.
I. Next Year's Earnings for the S&P 500
Since I'm writing this column, I'll go first.
- Standard & Poor's projects S&P 500 earnings to be $72.99 in 2010.
- The optimist of the Barron's group is Prudential International, which predicts $80 - 9.6% more than S&P.
- Three (BlackRock, Goldman Sachs and JP Morgan Chase) predict $75 - 2.75% more than the S&P.
- Two strategists (Deutsche Bank Private Wealth Management and Morgan Stanley Investment Management) predict $72 - 1.4% less than S&P.
- US Trust projects $70.50, and and RBC Capital Markets, $70 (about 3.5% - 4%) less than S&P.
- Citigroup predicts $68 - 6.8% less than S&P.
- Gloomy Barclay's Capital? $60 - almost 18% less than S&P.
So, one of the statistical methods you may have slept through in Stats Class, was to throw out the highest and lowest numbers and average the rest. Doing so gives us $72.19 - 1% difference between S&P's projection and that of esteemed (and expensive) strategists. That's not much.
II. The S&P 500 Index - Left Alone vs. Sliced Up
If you buy the S&P 500 Index, it looks like this:
- Technology - 18.6%
- Financials - 15%
- Health Care - 13.5%
- Energy - 11.7%
- Consumer Staples - 11.6%
- Industrial - 10%
- Consumer Discretionary - 9.1%
- Utilities - 3.8%
- Materials - 3.4%
- Telecommunications - 3.2%
Our esteemed strategists, on the other hand, want you to buy individual sectors of the index that look like this
- Technology - 22.2% (3.6% more than the index)
- Energy - 19.4% (7.7% more than the index)
- Materials - 19.4% (7.7% more than the index)
- Industrial - 16.7% (6.7% more than the index)
- Financials - 13.9% (1.1% less than the index)
- Health Care - 5.5% (8% less than the index)
- Consumer Discretionary 2.8% (6.3% less than the index).
They don't want you to buy any
- Consumer Staples (11.6% of the index)
- Utilities (3.8% of the index), or
- Telecommunications (3.2% of the index)
III. The Cost of Buying the S&P 500 Index vs A La Carte
So, basically, this is the deal. You'll be paying a big fat fee to strategists in order to slice up the sectors of the S&P 500, ignoring about 20% of it, and whittling the remaining 80% + up or down by an average of about 5%. They're suggesting that, by doing this, you will see earnings increases on your investments of an average of about 24.5% - less their big fat fee.
You'll pay nothing to me to recommend the S&P, which is predicting earnings increases of 34.5%. And neither S&P nor I care whether you buy or not.
Strategists, on the other hand, stake their livelihood on whether you pay them for their opinion.
Which do YOU think is the better deal? Just for fun, let's keep track of the difference between buying the S&P 500 index in 2010, and doing what strategists suggests throughout 2010. Then, we'll subtract their average big fat fee from their returns and nothing from mine, and see who wins.
It's one woman versus ten men. I'm comfortable with those odds.
Wednesday, September 2, 2009
Is the Stock Market Cheap?
If the answer were "yes" or "no", this would be a short column.
I don't write short columns.
First of all, we have to decide what we mean by "cheap".
I. Ancient History
Going back to the last quarter of 1936, you would have paid an average of $15.82 for every dollar of earnings for the Standard and Poor's 500 Index (more diverse than the better known Dow Jones Industrial Average, which consists of 30, as compared with 500 companies). That average price is the numerator (top number in the fraction) of the Price/Earnings, or P/E ratio. The denominator (bottom number in the fraction) is the amount the S&P 500 earns. So, the average P/E (or amount you pay for every dollar of earnings you're buying) has been 15.82
Last Friday, the S&P 500 average was $1028.93. That's the price. S&P projects the next twelve months' earnings to be $48.67.
1028.93/48.67 = 21.14 Right now, you're paying $21.14 for every dollar the S&P 500 is projected to earn for the next year. That's 25% more than the average price has been since 1936. So, using that measurement, no, the market is not cheap.
II. Last Year
A year ago last Friday, the S&P 500 average was 1282.83. Earnings over the last year were $33.60.
1282.83/33.60 = 38.18. $33.18 is 80% more than $21.14, so the market is a lot cheaper than it was last year. You may have heard something about this. The market is down a lot.
III. Forward vs. Trailing Earnings
Many of you are racing to your Wall St. Journals and saying, "Hey, Kitty, what gives? Their P/E ratio is different from yours!"
You're right.
Some financial publications do the math this way:
Right Now Price divided by Last Year's Earnings
I do my math like this:
Right Now Price divided by NEXT YEAR'S EARNINGS
Why do I do that? Last year's earning were earned by people who bought the market last year. When I talk about earnings, I am talking about now - not last year. I get my earnings projections from Standard & Poor's - not some Wall St. schlub who's trying to talk me into buying or selling. Standard & Poor's doesn't care if I buy or not, so I trust their projections more than I trust those who have a stake in how the answer looks.
My preference.
IV. Comparable Yields
The Federal Reserve, and a lot of other really smart people determine the value of the market by comparing it with what you'd get if you invested someplace else.
Since you're much too smart an investor to jump in and out of the market, paying short term capital gains taxes on all your sales, you are a long term investor. Short term investors don't belong in the stock market. Stock markets can correct, as you've seen recently, and short term investors can get their heads handed to them in corrections.
So, the long term investor compares the price they pay for the market to another long term investment - the 10 year Treasury Note. That's a loan to the US Treasury for that collection of deficits we've been running up lately.
The ten year Treasury Note is paying 3.48%. So, what is the market paying?
It's the reverse of the P/E, it's E/P. Again, the projected earnings are $48.67 and the market is trading at 1028.93.
48.67/1028.93 = 4.73%
4.73% is 26% more than the 3.48% Treasury Note yield, so your return on the stock market looks a lot better than your return on a 10 year bond. And it should.
Those stock market earnings aren't guaranteed. Something bad could happen. There's risk in the market. That's why you should get paid more.
But 26% more is pretty good under anybody's measurement.
V. So, is the market cheap?
Historically cheap? No
Cheap compared to last year? Yes
Cheap compared to comparable yields? Yes
More yes than no.
If this stuff were easy, everybody would be rich.
I don't write short columns.
First of all, we have to decide what we mean by "cheap".
I. Ancient History
Going back to the last quarter of 1936, you would have paid an average of $15.82 for every dollar of earnings for the Standard and Poor's 500 Index (more diverse than the better known Dow Jones Industrial Average, which consists of 30, as compared with 500 companies). That average price is the numerator (top number in the fraction) of the Price/Earnings, or P/E ratio. The denominator (bottom number in the fraction) is the amount the S&P 500 earns. So, the average P/E (or amount you pay for every dollar of earnings you're buying) has been 15.82
Last Friday, the S&P 500 average was $1028.93. That's the price. S&P projects the next twelve months' earnings to be $48.67.
1028.93/48.67 = 21.14 Right now, you're paying $21.14 for every dollar the S&P 500 is projected to earn for the next year. That's 25% more than the average price has been since 1936. So, using that measurement, no, the market is not cheap.
II. Last Year
A year ago last Friday, the S&P 500 average was 1282.83. Earnings over the last year were $33.60.
1282.83/33.60 = 38.18. $33.18 is 80% more than $21.14, so the market is a lot cheaper than it was last year. You may have heard something about this. The market is down a lot.
III. Forward vs. Trailing Earnings
Many of you are racing to your Wall St. Journals and saying, "Hey, Kitty, what gives? Their P/E ratio is different from yours!"
You're right.
Some financial publications do the math this way:
Right Now Price divided by Last Year's Earnings
I do my math like this:
Right Now Price divided by NEXT YEAR'S EARNINGS
Why do I do that? Last year's earning were earned by people who bought the market last year. When I talk about earnings, I am talking about now - not last year. I get my earnings projections from Standard & Poor's - not some Wall St. schlub who's trying to talk me into buying or selling. Standard & Poor's doesn't care if I buy or not, so I trust their projections more than I trust those who have a stake in how the answer looks.
My preference.
IV. Comparable Yields
The Federal Reserve, and a lot of other really smart people determine the value of the market by comparing it with what you'd get if you invested someplace else.
Since you're much too smart an investor to jump in and out of the market, paying short term capital gains taxes on all your sales, you are a long term investor. Short term investors don't belong in the stock market. Stock markets can correct, as you've seen recently, and short term investors can get their heads handed to them in corrections.
So, the long term investor compares the price they pay for the market to another long term investment - the 10 year Treasury Note. That's a loan to the US Treasury for that collection of deficits we've been running up lately.
The ten year Treasury Note is paying 3.48%. So, what is the market paying?
It's the reverse of the P/E, it's E/P. Again, the projected earnings are $48.67 and the market is trading at 1028.93.
48.67/1028.93 = 4.73%
4.73% is 26% more than the 3.48% Treasury Note yield, so your return on the stock market looks a lot better than your return on a 10 year bond. And it should.
Those stock market earnings aren't guaranteed. Something bad could happen. There's risk in the market. That's why you should get paid more.
But 26% more is pretty good under anybody's measurement.
V. So, is the market cheap?
Historically cheap? No
Cheap compared to last year? Yes
Cheap compared to comparable yields? Yes
More yes than no.
If this stuff were easy, everybody would be rich.
Subscribe to:
Posts (Atom)
