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Well, it’s the end of the trading year and it’s time for me to review how well I did on the stock market in 2011.  I crunched the numbers today and here’s how I did:

Okay.

But that’s alright.  It wasn’t a great year for anyone on the market:

US Stocks – the US Stock market, as measured by the S&P-500 (not the Dow Jones, which is useless) was flat on the year.  It was up 0% (not a typo).  The Nasdaq, which contains newer stocks and more tech stocks, was down -1.8%.  Pretty flat.

Europe – Europe discovered it has a serious financial problem on its hands and was down –14% this year.

Far East – The far east doesn’t have the same financial problems as Europe, but their stocks did worse and they were down –17% this year.

Emerging Markets – To check this, I use Vanguard’s emerging markets ETF.  It is made up of China, Korea, Brazil, Taiwan, South Africa, Russia, India and Mexico for 85% of its countries.  So, there is a little overlap with this one and the Far East.  Unfortunately, this group of countries was a disaster, down –21%.

Thus, after lagging everyone for years, the US outperformed nearly every other country, and did so easily.

When I compare my performance, I compare myself relative to everyone else.  How did I do compared to everyone else?  First of all, I pick a benchmark.  Because I invest globally, I pick an index that invests globally and the one I use is the iShares ACWI (all countries in the world index).  Here’s how I did against the various benchmarks:

Against the ACWI – I beat ACWI by 7.8%, excluding dividends.

Against the S&P-500 (most common measure of the US market) – I underperformed by –2.0%, thanks to my exposure to Europe and emerging markets.

Against the Nasdaq – I underperformed by 0.2%, which is almost (but not quite) a tie.

Now, comparing myself against the US market is a little unfair because the foreign stocks dragged me down and normally I would never trade foreign stocks.  How did I do against the US markets excluding my foreign positions?  This includes my passive portfolio, my trades in my personal account and my trades in my Roth IRA.

Against the S&P-500 – I beat the S&P-500 by 7.8%.

Against the Nasdaq – I beat the Nasdaq by 9.6%.

That’s pretty good, I’d say that I am pleased with my performance this years (especially since I beat my benchmark by a good amount).  I haven’t included dividends.

However, there’s still one more important question.  How did I do against the Dave Ramsey portfolio?  To check that, I included all of the dividends that I got and then back and added all of the dividends to a portfolio that he recommends using passive indexes using Google Finance.

Against Dave Ramsey – I beat the Dave Ramsey portfolio by 4.8%, including dividends.  This was the most important one because I lost (by a lot) in 2010 and 2009.

 

There we go.  Much of my outperformance was accomplished by getting out of the market before all of my gains were erased as it crashed in the middle part of the year, and then not doing anything during that time period.  I just blindly followed my lazy strategy and rebalanced everything, collecting dividends.

I can definitely outperform the market by a wide margin when it is going up but when it is down I give up most of my gains.  I do this every time… except this year when I only gave up part of them.  Granted, it was a big part but at least it was everything.

Maybe I am getting better at this.

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I’ve written in the past here that there are some things I agree with Dave Ramsey about, but other things I think he is wrong. 

Well, it turns out Peter Schiff is another guy who got things wrong.  If you don’t know who he is, Peter Schiff runs a money management company and by his own admission is one of the 1% (he made a video where he went to Occupy Wall Street and talked with the protestors).  Thus, his is very successful in real life.  However, his big thing is that the US government is printing too much money and spending too much money.  As a result, the US dollar will decline in value and the US economy will decline.  It will be eclipsed by just about every other country.  He view on the US is very bearish (negative).  He continually advises his readers to buy precious metals, especially gold and silver because those are the two metals that hold their value when currencies decline.

Still, I subscribe to his blog feed because I like what he has to say even though I am not sure everything he says is right.  His latest post was entitled “2012 Outlook: Gold and Stocks.”  Here’s what it says:

I think you are going to have a lot of choppiness in the stock market, but in the end I don’t expect a lot of movement in stocks. I don’t expect a crash or a big run, instead I think prices will continue to move sideways. In terms of the stock markets relation to gold I think it will continue to fall as a ratio.

Schiff has been giving this advice for a long time, as long as I have been reading his blog (since March 2009).  He’s obviously richer than I am, and I am familiar with his beliefs (the US’s money printing press is contributing to inflation and thus dooming the US economy).

So is he right?

Well, let’s go back in time and see how good his prediction was for 2011:

  1. US dollar demise: Schiff does not see much safety in the US dollar.  Schiff says it is not just a dollar collapse, it is a bond collapse too; "avoid any kind of long term bonds, avoid treasuries, and avoid municipal bonds."

    The year is not over yet, there is still one more trading day so this can change, but in 2011 the US dollar is up 1.85%, basically flat.  No collapse in the dollar like what Schiff predicted.

    The 3-year Treasury bond fund (SHY) is up 0.56% (basically flat), 10-year Treasury bond fund (IEF) is up 12%, and the 20-year Treasury bond fund (TLT) is up 28%.  No collapse in treasuries like what Schiff predicted.

    I looked up three municipal bond ETFs (PZA, MUNI, MUB) and they are up 8%, 5%, and 10%.  No collapse in municipal bonds like what Schiff predicted.

    I looked up one long term bond ETFs (BLV) and it is up 16%.  No collapse in long term bonds like what Schiff predicted.

    Indeed, every bond fund I checked was up big this year (and everyone one I wasn’t invested in was up more than mine).  Quite simply, what Schiff predicted would occur this year did not occur.

  2. Buy emerging markets and foreign currencies.  Schiff is focusing on Asia where people work hard, are producing and have savings.

    The emerging market funds (VWO, EEM) were down 20% this year.

    For currencies:

    Japanese Yen: +4%
    Australian Dollar: –0.9%
    Swiss Franc: –1%
    Canadian Dollar: –2%
    Swedish Krona: –3.06%
    Euro: –3%
    Chinese Yuan: –1%
    Mexican Peso: –11%
    New Zealand Dollar: –10%
    Russian Ruble: –4%
    US Dollar: +1.85%

    How did the US dollar do against some other currencies directly?
    vs Singapore Dollar: +1.48%
    vs Hong Kong Dollar: –0.03%
    vs South African Rand: +25%

    Looks like the US dollar did very well this year and held its own against almost everyone, contrary to what Schiff said.  Emerging markets also did poorly, contrary to what Schiff said.

  3. Buy precious metals and commodities.  Stay with gold, stay with silver.

    Gold is up +9% this year, so he got this one right.  However, silver is down –10% this year.  Copper is down 42%, Aluminum is down 45% and platinum is down 25%.  If you were lucky enough to buy a precious metal ETF, you could have made some money but not very much, maybe 3%.

    What about other commodities? The general commodities ETFs (GSG, MOO, DBA) are down 3%, 20% and 11%.

    The fact is that commodities did not do very well this year, contrary to Schiff’s advice.

If you would have listened to Peter Schiff this year, you wouldn’t have done very well in the market.  You would have underperformed it.  Everything he recommended was either flat (currencies), down big (emerging markets) or straight up wrong (collapse in dollar, treasuries and bonds).  He was right on gold but wrong on silver – and every other metal.  That’s 1 out of 7.

Now, you can argue (as Schiff does) that gold is a long term investment and long term, everything he is saying will turn out to be correct.  Maybe.  But for now, his prognostications are no more correct than anyone else’s.

He did say, after all, that this was his outlook for 2011.

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… but so far in 2011 I have made $666 in dividends from my stocks that I currently hold.

I am not making that up.

Ha, ha, ha, you know what?  I just thought of something funny.  Wouldn’t it be a hoot if I gave a bunch of donations to a church, and at the end of the year it totaled $666?

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Today on Facebook, one of my friends (who I didn’t block during my self-imposed exile from politics) posted in his status that the best way to stimulate economic growth is to give money to the poor.  He then alleged that the Congressional Budget Office had numbers to back up that assertion.

As anyone reading this blogs knows, the United States economy is sluggish.  It has been this way since the recession started in December 2007.  It then went full blown recession in 2008 but since it emerged out of it in March 2009, the economy has grown but very slowly.  It’s anemic, even.

Why is this?  Why is economic growth so bad?  What do we have to do to kick start it?  I was going to reply to my friend’s post but I need more time to delve into it than what is available in a simple Facebook reply.

My friend’s response reflects a theory pushed forth by the economist John Maynard Keynes.  This is the dominant economic model today in all the world’s economies.  In an oversimplified nutshell, this view says that economic growth responds to aggregate demand.  All of us buy stuff.  When we want more stuff, the economy grows because people who sell it will make more.  We buy more, people make more, and in order to make more they will hire more people and give them jobs.  More jobs = more taxes to pay = more government income and less unemployment.  It’s pretty simple.  More buyers = better economy.  If people demand less stuff, people make fewer things and lay people off, leading to more unemployment.

My friend’s view that giving money to the poor stimulates growth fits into this.  Since the poor cannot afford to buy things, there is not enough total demand in the economy.  If the poor had more money, they would spend it.  Producers would see “Oh, there’s more demand for my stuff” and hire more people. 

Where would this money to give to the poor come from?  From the government.  Where would the government get this money?  From rich people.  Rich people do not spend all of their money, therefore, there is potential capital sitting on the sidelines.  If the government were to take their money (in the form of taxation) and give it to the poor, or we were to give it voluntarily, the poor would spend it whereas the rich just horde it.  Unused money sitting in a bank account is less efficient than poor people spending it and driving economic growth. 

In truth, my friend’s view is an extreme one; most Keynesians say that the government should tax the rich and spend it – the government does the hiring or gives it to private businesses to do the hiring (i.e., the government needs to build a dam therefore they hire an architectural firm to do it; this is what they mean by shovel-ready projects).  They don’t take from the rich and give directly to the poor, instead, they employ them in order to make them productive citizens.

To sum up, according to my friend, the more people who are buying stuff, the better the economy.  Giving money to poor people takes unused money and gives it to people who will buy stuff.

More in my next post.

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Today is one of those days.

I have been holding onto shares in Netflix for 8 months or so.  This is a stock that goes up and pulls back, goes up and pulls back, etc.  It does this regularly on a predictable cycle.

I decided I was going to make some money on the downside.  Just when I thought Netflix couldn’t get any higher, I bought a put option.  This means that you make money when the stock goes down.

Well, it didn’t go down.  It kept going up. Eventually I rolled my eyes and took my loss.  The stock went down the next day.  Had I held, I would have recovered 2/3 of my losses on that one.

But that’s not why I hate trading.

Today, Netflix released its earnings after the day closed, and in after-hours trading it is down 28 points (about 10%).  I could have made a lot of money by buying a different put option and then waiting until tomorrow to sell.  But no, instead, I lose money waiting for it to go down – which it did but not in time – and then by holding it some more the stock gets slaughtered (in truth, they did that to themselves with their ridiculous increase in prices).

Some days, I hate the market so very much.

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I decided to login to my Scottrade account this morning and I saw an advertisement for commission-free ETFs.

“What the—?” I said.  “Free ETFs?”  I decided to check them out.  They are a bunch of Morningstar funds that are brand new.  They are so new that they don’t show up in Yahoo Finance or MSN Money when I try to get quotes on them.

What is a commission-free ETF?  It means that when you login to your trading account and buy them, you don’t pay a commission to trade.  This is a game changer for me.  Not only that, but the expense ratios of these funds are about the same as the Vanguard funds, and low expense ratios are something I have been preaching for years!

I tested the theory.  I set up a trade to buy a fund and guess what?  The commission was zero dollars!

The funds are limited only to US stocks, but this is going to have to force me to evaluate my investing options.  I don’t see what the dividend rates are (might be too new to forecast it) but if they do pay dividends then I am going to have to adjust my lazy portfolio strategy.

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A few weeks ago, I wrote about how I disagreed with Dave Ramsey’s investment philosophy when it comes to mutual fund investing.  The portfolios that he recommended, I surmised, were not optimally allocated.

Since then, I have seen his DVD lesson on it and there are some things that I have to change.  When he makes recommendations for allocation (i.e., what to put your money in), he uses the terms differently than how people in the investment community use them.  For example, when he says “Aggressive Growth” what he means is a small cap fund.  Since smaller companies grow faster than larger companies, they are aggressively growing but also experiencing larger swings in the market.  Ramsey uses the term “Growth fund” to refer to a mid-cap fund, that is, a mutual fund made up of mid-size companies.  Finally, he uses “Growth and Income” to refer to a large cap fund, that is, a mutual fund that invests in large companies. 

That’s actually not how the industry uses the terms.  Income refers to stocks that pay dividends and are not growing very fast, if at all.  These are also frequently referred to as Value stocks.  Growth refers to companies that do not pay dividends but are there for capital gains (i.e., you buy the stock and it goes up in value).  I like to divide Growth and Value by the average p/e ratio of the stock market (i.e., the average price of the average stock).  Anything above it is Growth, anything below it is Value.  That makes the definition less arbitrary.

Ramsey recommends a 25% weight across Aggressive Growth (small cap), Growth (mid cap), Growth and Income (large cap) and International funds.  The question to me is the following: is this a good weighting?

In my view, it’s pretty decent.  Here’s a more in-depth analysis:

  • The percentages aren’t bad, but they are heavily weighted in US funds rather than International funds.  Still, if that’s what you want to do, here’s what your portfolio should look like if you want to invest in Exchange Traded Funds (I’d have to look up what the mutual funds are):

    VB – Vanguard Small Cap ETF – 25%
    VO – Vanguard Mid Cap ETF – 25%
    VV – Vanguard Large Cap ETF – 25%
    VEU – Vanguard All World except USA ETF – 25%

    That gives you a split of 75% US and 25% International exposure.  Altogether, you’d have the following exposure:

    North America – 77%
    Europe – 11%
    Pacific Rim – 6%
    Emerging Markets – 6.25%

    Alternatively, you could just simply decide to buy one ETF that tracks the entire global index of stocks, all in one shot.  That is the Vanguard Total World Stock ETF, VT (the mutual fund is VTWSX).  You’ve got big caps, small caps, and mid caps in there.  North America and International.  If you did that, you’d have the following exposure:

    North America – 46%
    Europe – 26%
    Pacific Rim – 14%
    Emerging Markets – 15%

    My advice?  I’d probably go with the all-in-one.  Simpler to manage, you have built-in diversification and you get the same exposure.

  • Ramsey published his stuff in 2007 before the market crash.  However, obviously, even before that people were calling him and protesting that his advertised rates of 12% return for a good mutual fund was easily attainable.  He shot back that he’s got funds that are doing it and that Morningstar makes it possible for average people to get those returns.

    He’s wrong.

    As I have stated before, and Yahoo Finance agrees with me, the most important criteria for picking a fund is how low the management fees are.  In all my selections above, those are Vanguard funds which are index funds that track the market.  They are not actively managed and therefore have very low management fees.  The fact is that 80% of funds cannot be the general indexes after fees.  They especially can’t do it year after year and if they do it one or two years in a row, they most likely won’t do it a third year.  The market is too complex, and the bigger the fund the more difficult it is to beat the market.

    Ramsey protests this, but the reality is that sure, some of his funds got 12% or better.  What did the rest of the market do?  My lazy portfolio got 14% in 2010.  But I underperformed the US market (but outperformed the international ones).  The fact is that you might be getting better than 12% but if the rest of the market got 14%, then you are lagging it.  Returns go up and down all the time but for the most part they revert back to the long term mean.

    The market’s average rate of return, including dividends, is 10.5%, not 12%.  Pick funds that track the broad market with the lowest fees.  That’s how you win when it comes to mutual fund investing.

Those are my views.

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