Here are some articles that caught my eye this past weekend. Topics include: Finding out just how much procrastinating your next IRA contribution is going to cost you, How much actively trading options is going to cost you, How much your regret of being in cash since 2009 is going to cost you…and more
There were some really great articles written this past weekend on finance and investing. Without further ado here is my top few:
Vanguard – The ‘procrastination penalty’
We talk a lot on Begin To Invest about how important getting started saving and investing early is.
(In case you haven’t seen.. just compare how much less a 25 year old has to save each month to reach 1 million dollars at age 65 compared to a 35 year old here: http://begintoinvest.com/saving-for-a-million-dollars/)
But there is more than just getting started saving and investing early on in your life…how about getting started early EACH YEAR?
Vanguard took a look at how much money investors leave on the table by making their contributions to their IRAs later in the tax-year compared to early on. Investors make their 2014 IRA contributions anytime starting in January 2014 all the way through April 2015. Most wait until April:
But this means your money is invested in the market 15 months later than it could be. Since the stock market has historically risen, investors who wait 15 months to contribute to IRAs get less return from their investment on average.
Just how much will this cost you?
The average person misses out on $15,500 just because of when they make their annual contribution! Investors are now eligible for 2014 contributions, so stop procrastinating! If coming up with the $5,500 at one time is an issue, most brokers can easily set up automatic monthly direct deposits. For those under 50 years old that ends up being $458 a month, or $211 per paycheck if you are paid bi-weekly. For those 50 years or older, who can contribute $6,500 this year to your IRA that means $541 a month or $250 per paycheck if paid bi-weekly.
Technical Analysis and Individual Investors
As a warning, the paper is 60+ pages long. Worth the read if you are into the topic, but the abstract tells you all you need to know:
“ We find that individual investors who use technical analysis and trade options frequently make poor portfolio decisions, resulting in dramatically lower returns than other investors… Overall, our results indicate that individual investors who report using technical analysis are disproportionately prone to have speculation on short-term stock-market developments as their primary investment objective, hold more concentrated portfolios which they turn over at a higher rate, are less inclined to bet on reversals, choose risk exposures featuring a higher ratio of nonsystematic risk to total risk, engage in more options trading, and earn lower returns.”
The paper looks at a sample of 5,500 Dutch investors who trade options and use technical analysis as a basis for buying and selling. What they find is that those who use technical analysis trade more often and obtain lower returns (about 4% per year lower).
Reminds me of one of my favorite investment quotes ever. In 2009 as the market was crashing, Jack Bogle, the founder of Vanguard came on CNBC and calmly stated: “Don’t just do something, stand there!”
Even professionals experience a likelihood to under perform the more they trade. Don’t get caught up in the herd. Find quality investments and stay the course.
The Bull That Got Away
Jason Zweig’s Intelligent Investor column is worth the subscription to the Wall Street Journal by itself, and this weekend was no exception.
He details the stories of several asset managers and investors who sold all their stocks when the market crashed in 2008/2009. Now, they want to jump back into the market.
After being programmed by the gospel of investors like Bogle, Buffett and many others, all I can do is shake my head as investors who have been in cash since 2009 now look to buy everything back today.
Stocks were ~60% cheaper in 2009 and they sold everything… now stocks have nearly tripled and they think stocks are a bargain?
Hopefully some readers can see the absurdity of their logic. Don’t make the same mistakes.
To quote Mr. Zweig:
“That is especially important when you bear in mind that U.S. stocks fell 57% between 2007 and 2009; if you couldn’t stand that pain then, you have no business clamoring to buy stocks now.”
Ups and downs are part of the market. And despite some amazing efforts, we still can’t predict the market, and in fact I guarantee that an investor who buys stocks today will have negative returns some year in the future. But for investors with decades left on their investment time horizon the best thing they can do is regularly buy and hold quality investments, not try to trade around and try to time the market.
The U.S. Stock Market is Expensive, and It Should Be
“Is the U.S. stock market expensive? To answer the question, we need to get precise about what we mean by “expensive.” Expensive relative to what? When valuation bears say that the stock market is expensive, they usually mean “expensive relative to the past.” They take charts of normalized valuation metrics–Shiller CAPE, Price to Sales, Price to Book, Market Cap to GDP, Q-Ratio, and so on–and point out that the current value is higher than the average value.
OK, but so what? Most of us already agree that the stock market is expensive–again, relative to the past.“
Here, blogger “Jesse Livermore” goes into some great detail on how investors should value the stock market today.
I post this topic not to try to convince investors to take action, but realize just how vast the stock market is. There is so much more than a P/E Ratio when determining whether or not to invest in the stock market. If you are actively trading based on a simple P/E ratio, you are doing it wrong.
For investors looking to get into some really great, in depth analysis, Jesse Livermore does not disappoint here.
All 4 of these weekend reads really hit home to a simple concept. Invest regularly as early as possible, don’t try and time the market and don’t trade too often. A simple recipe for success and yet so few seem to be able to make it work.