Last January, I posed the question that buying shares in the S and P 500 may be just as effective as following professionals' stock market picks. Some women who are participating in the Self-Invested Women Pilot Program are considering whether they are passive (people who buy an index, like the S and P 500) or active (people who buy individual stocks or types of stocks, like energy and health care) investors. This may help you make that decision.
The S and P 500 Index
This index allows investors to buy 75% of the publicly traded companies in the US, many of which derive a significant part of their income outside the country. While there are many indexes (Dow Jones Industrial, the Russell 2000, the Wilshire 5000), the S and P 500 is the index against which the vast majority of money managers measure their performance.
The Challenge
Last September, ten investment strategists gave their recommendations for which sectors of the market would outperform the total market in 2010 in Barron's magazine. We chose six of these strategists, representing US Trust, Citigroup, JP Morgan, BlackRock, Deutsche Bank and Goldman Sachs. We'll compare the S and P 500 index performance against the sectors recommended by each investment professional, assuming you were to invest equally in all sectors.
Fees
It requires no management fee to invest in an index like the S and P 500. Investment advisers' fees range from 2% to 5%. We'll use the lower figure, 2%, for this comparison, and deduct 1/2% every quarter from the recommendations by the advisers.
Since there are trading costs for both individuals and money managers, we'll consider this a "wash."
Long Term Investing
We'll assume that we're in the stock market for long term investing, not short term "trading." Therefore, one quarter's data is insufficient to make this decision. We'll look at this performance all year, and discuss how relevant this little experiment is to your long term strategy.
First Quarter Performance
S and P 500
S and P 500 was up 6.04% in the first quarter this year.
US Trust
Technology + 10.45%
Materials + 6.89%
Energy + 5.04%
Industrials + 4.77%
Weighted Average performance +6.7875%, less 1/2% fee = +6.2875%
US Trust's recommendations beat the S and P 500 by about a quarter of one percent in the first quarter.
Citigroup
Materials + 6.89%
Financials - 3.68%
Software + 10.45%
Energy + 5.04%
Weighted Average performance + 4.675%, less 1/2% fee = +4.175%
Citigroup's recommendations lagged the S and P 500 by about 1.87% the first quarter.
JP Morgan
Energy + 5.04%
Industrials + 4.77%
Financials - 3.68%
Technology + 10.45%
Materials + 6.89%
Weighted Average performance + 6.166%, less 1/2% fee = +5.666%.
JP Morgan's recommendations lagged the S and P 500 by about 3/8 of one percent in the first quarter.
BlackRock
Energy + 5.04%
Health Care + 8.53%
Weighted Average performance + 6.785%, less 1/2% fee = + 6.285%.
BlackRock beat the S and P 500 by just under 1/4 of one percent in the first quarter.
Deutsche Bank
Technology + 10.45%
Health Care + 8.53%
Energy + 5.04%
Industrials + 4.77%
Weighted Average performance + 7.1975%, less 1/2% fee = +6.6975%.
Deutsche Bank beat the S and P 500 by 3/4 of one percent in the first quarter.
Goldman Sachs
Energy + 5.04%
Materials + 6.89%
Financials - 3.68%
Technology + 10.45%
Weighted Average performance + 4.675%, less 1/2% fee = 4.175%.
Goldman Sachs lagged the S and P 500 by 1.865% in the first quarter.
Summary
So far this year, three underperformed the S and P 500 and three lagged behind its performance, with Deutsche Bank doing best, and Goldman worst.
Last year, only Deutsche Bank and JP Morgan beat the averages, and four lagged behind.
Another update after the second quarter.
We'd love to hear your thoughts. Are you an active or passive investor - and why?
Showing posts with label buy and sell. Show all posts
Showing posts with label buy and sell. Show all posts
Wednesday, April 7, 2010
Monday, January 4, 2010
Sizing Up the Competition
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.
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.
Sunday, August 23, 2009
A Disturbing Trend
As the discussion about health care reform drones on, the current emphasis seems to be focused on how we pay doctors, and whether that pay structure is an incentive to our long term health care goals. Before you stop reading, by the way, this is NOT a discussion of health care. It is a discussion of payment for services, how we structure those payments, and whether that structure pays people to do what we value most.
It seems we pay surgeons an average of about $600,000 per year, and doctors who practice family medicine about $160,000 per year. In other words, we think the doctors who perform lap band surgery to shrink our stomachs after we're morbidly obese are more valuable than the ones who tell us to eat healthier diets.
I'm not in medicine, but that seems weird.
I do, however, have some experience in the world of money management, and can point to an interesting commonality with the medical field. We pay stock brokers a fee every time they buy or sell a security for us, yet countless studies - particulary those in the field of "value" investment (that philosophy practiced by Warren Buffett as a desciple of Benjamin Graham) - show that a "buy and hold" strategy is more appropriate for the investor than buying-and-selling-all-the-time.
Yet, if a broker practices the latter philosophy, she will be paid far less than those who are hopping in and out of stocks, racking up high commissions, and leaving clients with additional short term capital gain payments. That's higher taxes, in plain English.
Why are we paying higher fees to doctors who operate on us than those who keep us healthy, and higher commissions to brokers who buy and sell all the time rather than buy and hold, which, in the case of the vast, vast majority of clients, will result in a higher return on investments?
Hmmmmm. It seems we value people who give us short term solutions to our problems more than those who act in a way that address our long term goals.
We certainly pay them more.
Well, that's all for now. I'm going back to being angry with the current administration for not solving our problems in seven months. What's taking them so long? I want long term solutions -and I want them NOW. Who CARES how much it costs?
Oh, I see now. When I think that way, doctors fees and broker commissions make much more sense.
It seems we pay surgeons an average of about $600,000 per year, and doctors who practice family medicine about $160,000 per year. In other words, we think the doctors who perform lap band surgery to shrink our stomachs after we're morbidly obese are more valuable than the ones who tell us to eat healthier diets.
I'm not in medicine, but that seems weird.
I do, however, have some experience in the world of money management, and can point to an interesting commonality with the medical field. We pay stock brokers a fee every time they buy or sell a security for us, yet countless studies - particulary those in the field of "value" investment (that philosophy practiced by Warren Buffett as a desciple of Benjamin Graham) - show that a "buy and hold" strategy is more appropriate for the investor than buying-and-selling-all-the-time.
Yet, if a broker practices the latter philosophy, she will be paid far less than those who are hopping in and out of stocks, racking up high commissions, and leaving clients with additional short term capital gain payments. That's higher taxes, in plain English.
Why are we paying higher fees to doctors who operate on us than those who keep us healthy, and higher commissions to brokers who buy and sell all the time rather than buy and hold, which, in the case of the vast, vast majority of clients, will result in a higher return on investments?
Hmmmmm. It seems we value people who give us short term solutions to our problems more than those who act in a way that address our long term goals.
We certainly pay them more.
Well, that's all for now. I'm going back to being angry with the current administration for not solving our problems in seven months. What's taking them so long? I want long term solutions -and I want them NOW. Who CARES how much it costs?
Oh, I see now. When I think that way, doctors fees and broker commissions make much more sense.
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