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Mutual Fund Cash

March 17, 2010 By Jeremy Jones, CFA

Cash levels as a percentage of total assets in stock mutual funds is bordering on an all-time low. When was that low hit? It was July 2007 – three months prior to the last bull market high. The dry powder in stock mutual funds that helped fuel a 72% rise in the S&P 500 from the March 2009 lows is spent. Individual investors still have dry powder, but they’re flocking to bonds and hoarding cash. Two vicious bear markets in 10 years’ time will do that. Stocks could move higher if individuals move aggressively back into the market, but if you are forming a long-term investment plan on the … [Read more...]

The Real POP in Investment Returns

February 25, 2010 By E.J. Smith

Putnam Investments’ full-page colored advertisement in this week’s WSJ was hard to miss—the Putnam marketing team made sure of that. In the ad, they tout their suite of Absolute Return Funds, which seek to do well in any type of market environment, up or down. As is often the case, and certainly is here, if it sounds too good to be true, it is. The funds have outperformed their laughable benchmarks, but have failed every one of mine. It used to be a well-known fact at Proctor & Gamble that the smart people worked in engineering and the really smart ones worked in marketing. I’ve been … [Read more...]

Pop Quiz

February 11, 2010 By E.J. Smith

You’re right if you guessed that the largest stock fund is an exchange-traded fund (ETF), a fact I always find somewhat surprising when studying the list of the largest stock funds in The WSJ’s monthly fund report. The one at the top of the list is the SPDR S&P 500 ETF (SPY), with $91.11 billion in assets. When I first started working in this industry, back in 1995, Fidelity Magellan was the largest stock fund. It was an actively managed fund, so it was a big deal when it was surpassed by Vanguard’s Index 500, a passive index fund. With the index fund, investors knew what they owned, … [Read more...]

Investment of the Decade

January 7, 2010 By E.J. Smith

Trust has been kicked to the curb by Washington and Wall Street. Not a smart move, as the former prepares for mid-term elections and the latter feels the effects of investors voting with their feet. Many clients and brokers have fled the big Wall Street firms for independent advisors. Washington and Wall Street may realize too late that trust is a terrible thing to waste. The bailout of Bear Stearns, Lehman's bankruptcy, the controversial merger between Merrill Lynch and Bank of America, and Citigroup's near collapse had little to do with their client brokerage accounts. In fact, brokerage … [Read more...]

Class A American Fund Nightmare

November 6, 2009 By E.J. Smith

My mother is always finding things because she pays attention. And she's passing that skill along to my kids. After a recent walk, they came back cheering about finding $2. It may as well have been $2,000. You too may be a person who knows how it pays to pay attention, and if so, you've probably taught that lesson to someone you love. Here's another lesson for you to teach, from a box titled "How the Largest Mutual Funds Did" in The WSJ's "Money and Investing" section. The box illustrates how most investors are sold what they own, how little attention they pay to fees, and how a ratings … [Read more...]

Top 10 Mistakes #3

October 23, 2009 By Dick Young

October 23, 2009 Number three on my list of the top 10 mistakes that investors make is performance chasing. The quickest way to make a million investing in mutual funds is to invest two million in yesterday’s winners. No matter how often investors are warned not to select funds on the basis of past performance, they do just that-often with devastating consequences. The problem here is that success attracts inflows, which tends to limit both the agility and opportunity set of portfolio managers. When assets under management become bloated, portfolio managers often do one of two things: they … [Read more...]

Top 10 Mistakes #4

October 16, 2009 By Dick Young

October 16, 2009 Mistake #4 on my list of the top 10 mistakes investors make is ignoring cost. Cost is a vital determinant of investment performance. Reams of academic and professional research show that no-load funds with  low expense ratios and no 12b-1 fees consistently outperform their high-cost cousins. There is absolutely no good reason to invest in any fund with a sales load or a 12b-1 marketing scab. These fees are simply kickbacks that fund companies pay brokers for hawking their funds. See the conflict here? Brokers aren’t interested in finding the best funds for you; they’re … [Read more...]

Top 10 Mistakes #8

September 4, 2009 By Dick Young

September 4, 2009 More money has probably been lost by overreaching for yield than by any other misguided strategy. Today, investors are really spooked. Money market funds, bank CDs, and treasuries offer little in the way of yield. That’s why I would suggest that you eschew all three, except for your emergency funds. I would also, given my views on inflation (expressed monthly in my letters and Matt’s client letter), avoid long maturities. A middle-ground approach is the way to go. I outline my views in both my monthly strategy reports and use this work to craft portfolios at Richard C. Young … [Read more...]

A Strategy for the Current Stock Market Rally

August 14, 2009 By Jeremy Jones, CFA

The S&P 500 is up 15% since July 10 and up close to 50% from its March low. What's the catalyst for recent gains? A strong second-quarter earnings season. More than 75% of S&P 500 companies that have reported earnings beat analysts' estimates. Strong second-quarter earnings gave the minutiae-focused quarterly earnings crowd the courage to leap back into stocks. Even after the recent rally, there remains a truckload of cash sitting on the sidelines. But are quarterly earnings a reliable signal of future sustainable stock gains? In this case, I think not. Closer examination of the … [Read more...]

The 401(k) is Broken

August 13, 2009 By E.J. Smith

The 401(k) is broken. Year-end 401(k) assets were $2.4 trillion, down $600 billion from year-end 2007 including the inflow from employer match and employee contributions. Average participant investment performance was down 27%. That's average. Many did much, much worse and some people are retiring this year facing the grim possibility of outliving their money. In fact, four of the top five holdings in 401(k) plans by asset value had one-year returns through March 9, 2009, of -46.2%, -53.3%, -41.5%, and -40.8%. The S&P 500 was down 47%. Nearly four dozen target-date funds did even worse … [Read more...]

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