Will Rising Higher Interest Rates Hurt the Stock Market?

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After many years of keeping short-term interest rates at zero to help the economy recover from the 2008 recession, the Federal Reserve Board is slowly nudging rates up. It has implemented several quarter-point increases and says it intends to push rates up to the 3% range over the next several years. This is good news for conservative bank savers who may finally get paid some interest on their capital, and potentially bad news for bond holders who may see the value of their bonds fall in the short-term as new bonds with higher interest rates are issued. But what will rising rates mean for stock investors? Accepted wisdom says higher interest rates hurt stocks, because investors now have more choices for guaranteed higher yields on fixed income products like bonds, money market funds, and the bank. Dimensional Fund Advisors decided to test that wisdom by taking a statistical look at what has...

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Domestic investors miss a world of opportunity


Over the past few years international stock markets have trailed the U.S. stock market by big margins. Faster growth in U.S. corporate profits, coupled with a strong dollar, meant that domestic investors were rewarded for keeping their money here. That dynamic changed this year as foreign stocks in aggregate began to outpace American stocks with average returns overseas running as much as 50% higher than U.S. returns. Once again, investors are being reminded that it’s not good to concentrate their money in one market, even if that market is the biggest in the world. There are some 10,000 non-U.S. stocks listed on foreign exchanges and their market capitalization accounts for about 48% of the world’s stock market value, says Dimensional Fund Advisors (DFA). That means a domestic-only investor misses out on almost half of the available stock market opportunities. Even though the U.S. market did well in the three years leading up to...

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Stock markets make money, individual stocks often don’t


You’ve heard this statement many times before: the stock market’s returns beat that of low-risk investments many times over. Well, it’s true: since 1926, when comprehensive stock market statistics began to be gathered in the United States, the stock market’s annualized return has run a little over 10% a year, three times greater than the returns on one-month U.S. Treasury Bills. But individual stocks often don’t do as well as the stock market, says a new research paper by Hendrik Bessembinder, a finance professor at Arizona State. He found that returns on most individual stocks have not surpassed T-Bill returns. In fact, most of the stock market’s outperformance is due to just 4% of listed stocks; “The other 96% collectively matched one-month Treasury bills,” he wrote. More than half of U.S. stocks over the period were beaten by T-Bills, he found. Even worse, the most common net total return for a single stock...

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Do I Need a Financial Advisor? Top 10 signs that say you do


How do you answer the question "Do I need a financial advisor?" Here are some warning signs that we see when new clients come to us: You don’t seem to be getting anywhere. Money comes in and goes out, you don’t save, and your credit card balances never go down. Your employer offers a 401k or other tax-favored retirement savings plan, but you don’t contribute. You contribute something to your employer’s plan, but have no idea what you are invested in. You have multiple retirement accounts at former employers and don’t know what to do with them. You’ve inherited a much larger amount of money and investments than you are used to dealing with. You aren’t sure how much money you’ll need to generate an adequate retirement income. Or, even worse, you think Social Security will take care of all your needs. You aren’t sure how your family will get by if you die or become disabled...

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Is The Trump Rally a Myth?


All too often investors make the mistake of projecting onto the stock market their hopes and fears relating to current events. It’s almost as if they view the market as a reflection of the national zeitgeist: if we are feeling good about current events, we buy stocks and markets go up, while they drop when we are feeling worried or depressed about the daily news. This phenomenon has manifested itself of late in talk of a “Trump Rally” in U.S. stocks. According to this theory, stocks have been gaining in value since Trump’s election because investors are happy to have a business-friendly, regulation-hating president who has vowed to cut taxes and spend big on infrastructure. Investors are buying stocks in anticipation of economic growth that will follow from the new administration’s initiatives, the argument goes. This is not consistent with how the markets actually operate. It has long been known that political...

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The Retirement Savings Crisis

Source:U.S. Census Bureau

Financial advisors routinely advise American workers to save as much money as they can for retirement, preferably in a tax-deferred savings plan. Social Security will only fund about one-third of the average worker’s retirement income needs, and few workers these days are covered by old-fashioned pension plans. Just 10% of workers over age 22 have traditional pensions, found a recent Pew Charitable Trusts analysis. Unfortunately, a new study by the U.S. Census Bureau says that only about one-third of workers are contributing to an employer-sponsored 401k plan or other tax-deferred savings plan. Even worse, the research indicates only about 14% of employers offer any type of savings plan. Although large companies tend to offer plans, the many employees working for employers with 100 or fewer employees may have no plan available to them, the research found. When it comes to employers that offer tax-deferred plans, only 41% of workers are taking advantage of...

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Investors Have a World of Choices for Their Portfolios


It’s understandable that U.S. investors focus so closely on the domestic investment market; after all, it is the largest and one of the oldest in the world. But to do so in this day and age is to miss the wealth of opportunities for excess profits and risk reduction available by investing in international stock and bond markets. It’s easy to argue that those who invest everything solely in the United States are getting only about half of the world’s potential investment returns. Consider the chart above, which shows the size of each country’s stock market, based on its percentage of the world’s stock market capitalization. As of the end of 2016 stocks listed in the United States added up to 54% of the world’s stock market wealth. Domestic-only investors missed out on opportunities in the other 46% of the world stock market. Japan was the second largest stock market, with 8% of...

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Do new highs in the market mean it’s time to sell?


U.S. stock market indexes have been reaching new all-time highs repeatedly since last year’s Presidential election. Does this mean investors should be worried that the market is hitting a “top” and that prices are about to slump? In a word, no: New highs in the markets do not tell us anything about what comes next, say researchers at Dimensional Fund Advisors. In fact, much of the time stock prices continue to go higher even after the Standard & Poor’s 500 Stocks Index hits record levels, DFA research shows. Looking at returns on the S&P 500 Index from 1926 through 2016, DFA found that the market was higher 80.5 percent of the time a year after hitting a new monthly record high. That was an even better positive performance than just looking at the market’s 12-month performance after any index level, when it gained in value 74.7% of the time. “Looking at this data,...

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How to Streamline Your Tax Records


Are you still scrambling to put together your 2016 tax records so that you can get your taxes done? Now may be the time to systematize your tax record-keeping, while the pain is still fresh in your mind. Although we think electronic recordkeeping is the way to go and will discuss how below, let’s look at a simple folder system for those who prefer paper records. Get yourself nine manila folders and some type of larger file to hold them together. Label the large file “2017 Taxes” and label the manila folders this way: Pay: Put your pay stubs and/or 1099 earnings statements here, and, once you get them, all W-2 Forms. Interest and Investments: This is where you will file interest, dividends, and capital gains statements from your bank, brokerage account, mutual fund account, and any other savings or investment account that is not a tax-deferred retirement account. Retirement Distributions: All records related to...

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Stock picking doesn’t work, but vested players keep on promoting it


A recent article in Barron’s, a weekly investment publication, concludes that technology and regulatory reform have made active investing obsolete. Active investing, for those not into market lingo, means the constant search for stocks or industry sectors that will beat the market. The article is no surprise (academic researchers have long concluded that active managers can’t beat the market), but its appearance in Barron’s is unusual, given that the old-line weekly concentrates on stories about individual stocks or investment sectors. But it acknowledges what has long been an open secret: since the turn of the century, there have been no five-year periods when active investment managers have beaten market indexes. “Active investment managers” in this sense are the thousands of mutual fund managers who run stock and bond portfolios. The article notes that Standard & Poor’s, which began comparing the results of its indexes to active management results at the turn of the...

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