ETFs let you avoid early trades

Anxiety Eh, Let me tell you a little story. I’ve done quite well in the last few years in the market but last year I noticed an anomaly. The accounts that I manage for my two Daughters had results that ran well ahead of my personal account results; it was a magnitude of plus 4 to 5 %.

My management training taught me that when you reflect on a problem it’s important to dig down deeply to determine the “root” cause; it’s the old “sit-in-a-dark-room” and thinks it through to a conclusion before you act. Without getting too deep into psychobabble I determined that my underperformance was due to me; I was the guilty party! Socrates said that people make themselves appear ridiculous when they are trying to know obscure things before they know themselves. Plato also alluded to the fact that understanding 'thyself,' would have a greater yielded factor of understanding the nature of a human being (it’s Human beings that think their stock-pickers BTW).

The cliff-note version of why I did better trading for my kids is that I worried about my holdings daily and I had structured those holdings to reflect my ego; I had a great many individual stocks. Looking a little deeper I saw that I was a pretty good stock picker. I had owned Netflix, Apple, Wells-Fargo, Facebook, Visa, MasterCard etc. at various times and traded in & out for small profits regularly. In KAS’s account things like a 50 share purchase of Visa eventually yielded a better that $7K profit. You get the picture; I was looking at my stuff way too often and trading way too much trying to react to every nuance that CNBC reported on.

It took me a while to work through it but here’s what I found. Individual stock holdings almost force you to review them very often so the daily-weekly market noise screams “do-something” to your detriment. I found that my Mutual Funds, being composed of a large basket of holdings made it impossible to react to day-to-day noise and I left them alone and they grew significantly in value over time. BTW, you’re young, always set your portfolio up to reinvest the dividend stream it furnishes you with automatic “Dollar-Cost-Averaging”.

As I looked more closely I couldn’t escape another troubling fact; Mutual Fund fees were expensive and it was a super rare manager that managed to beat his Funds comparable index. Whalla, the answer was inescapable, Buy that index. There are ETFs that sport an expense ratio low enough as to be a non-issue and while it’s less than 5% of Fund managers that can beat the S&P-500 benchmark almost all of the S&P ETF mirrors match it or beat it. It’s a simple premise that alluded me for a long time; an ETF holding somewhere between 35 and 500 equity holdings is not the kind if investment that you look at daily / hourly. If you eliminate the noise you’ll make more money with less anxiety and that’s all good.

In a nutshell that’s my version of why the “little-guy” usually has crappy returns. His single stock pick isn’t diversified and he’s scared to death that he’ll lose money on it so he frets, worries, trades trying to make his short-term bet a long term winner. Watching CNBC flacks can be detrimental to your portfolio returns!

So for the last 18 months I’ve been selling my mutual fund holdings on good market days and buying ETFs on market lows. I would estimate that I’m about half there to my goal. I got lucky since the market has essentially traded in about a 800 point range since the yearend; from a high of $18,000+ to a low of about $17,200.

A side benefit to all this is that it greatly simplifies my life because you just don’t worry and fret about a diversified basket of stocks like you would a single equity position. It also greatly aids my Estate Plan for now Wifey would inherit what I consider a balanced, diversified portfolio that would best be just left alone.

A related word on how the Experts predicted the 2007 market debacle. I’m ready to admit that I personally don’t really know when the market will swing or down. Okay, fine: I haven’t got an clue; there I’ve said it. Then again, neither does anyone else. I looked back at the financial media in the months before the market crash in 2007. The Lexis-Nexis database contains around 800 stock market stories for the three months immediately before the worst collapse in three-quarters of a century. By limiting the search to U.S. sources, I got it down to a nearly-manageable 400 or so which I proceeded to scan.

Here’s what I discovered: almost without exception, the public statements of major financial media outlets, mutual fund managers and hedge fund managers were stunningly clueless. Almost without exception, the story was that other than for one or two little puffy clouds in the distance, the skies were clear, you should have a song in your heart and a equity buy order in your hands.

Kiplinger’s led that parade in 2007 with “Why Stocks Will Keep Going Up” (July). BusinessWeek urged us, “Don’t Be Afraid of the Dark” (August 13). Money asked “Is This Bull Ready to Leave” (July) and concluded that the market was undervalued and that large cap growth stocks had “a strong outlook.” Fortune did some fortune-telling and found “A Sunny Second Half” (July 9); relying on “a hedge fund superstar,” they promised “This Bull Has Legs” (August 20). John Rogers of the Ariel Funds declared “Subprime Risks: Overblown … [it’s] time to buy” (September 17). Standard & Poor’s thought “equities could register nice gains by the end of the year” (September 20) as the result of a Fed-fueled breakout.

These are just a sample; remember the best-selling book, “Dow 20,000 this year”. In any event the market has rewarded the popular equity indexes with a very steady uptrend since 1900 even with the numerous short-term market breaks. Let us remember that the major market crash in 2008 was essentially erased in the next two years if you stayed in the market!

I think you can expect to make 12% on your investments over time based on the historical average annual return of the S&P 500. The S&P 500 gauges the performance of the stocks of the 500 largest, most stable companies in the Stock Exchange. It is often considered the most accurate measure of the stock market as a whole. The current average annual return from 1926, the year of the S&P’s inception, through 2011 is 11.69%. That’s a long look back, and most people aren’t interested in what happened in the market 80 years ago.

So let’s look at some numbers that are closer to today. From 1992–2011, the S&P’s average return is 9.07%. From 1987–2011, it’s 10.05%. In 2009, the market’s annual return was 23.46%. In 2010, it was 12.78%. In 2011, it was -1.12%. So yes the confluence of events triggered by the mortgage crisis in 2008 caused a market crash of 38.5% but look at 2009 and 2010 results. In those two years right after the famous 08 crash and you'll see that the market corrected by 23.46% in 09 and 12.78% in 2010. Morale of the story, stay invested; the trend is your friend.

The Good Old Days
By Murray Stahl Nov.2014

I ran into this writing on 1955 recently and thought it so very true. When I was looking at it I remembered one of the quotes of the Greek philosopher Socrates that I think of whenever someone waxes poetic about the “good old days.” He was born in 469B.C. and this quote truly proves that the more things change the more they stay the same.

Socrates thoughts on youth, “Our youth now love luxury. They have bad manners, contempt for authority; they show disrespect for their elders and love chatter in place of exercise; they no longer rise when elders enter the room; they contradict their parents, chatter before company; gobble up their food and tyrannize their teachers.”

Now lets fast forward to 1955,
“I'll tell you one thing, if things keep going the way they are, it's going to be impossible To buy a week's groceries for $20.00.”

“Have you seen the new cars coming out next year? It won't be long before $2,000.00 will only buy a used one.”

“If cigarettes keep going up in price, I'm going to quit. A quarter for a pack is just ridiculous.”

“Did you hear the post office is thinking about charging a dime just to mail a letter?”

“If they raise the minimum wage to $1.00, Nobody will be able to hire outside help at the store. “

“When I first started driving, Who would have thought gas would someday cost 29 cents a gallon.. Guess we'd be better off leaving the car in the garage.”

“I'm afraid to send my kids to the movies any more..Ever since they let Clark Gable get by with saying “DAMN in GONE WITH THE WIND”, It seems every new movie has either HELL or DAMN in it now”.

“I read the other day where some scientist thinks it's possible to put a man on the moon by the end of the century. They even have some fellows they call astronauts preparing for it down in Texas.”

“Did you see where some baseball player just signed a contract for $75,000 a year just to play ball? It wouldn't surprise me if someday they'll be making more than the President.”

“I never thought I'd see the day all our kitchen appliances would be electric. They are even making electric typewriters now.”

“It's too bad things are so tough nowadays.. I see where a few married women are having to work outside of the home to make ends meet.”

“It won't be long before young couples are going to have to hire someone to watch their kids so they can both work.”

“I'm afraid the Volkswagen car is going to open the door to a whole lot of foreign car business.”

“Thank goodness I won't live to see the day when the Government takes half our income in taxes. I sometimes wonder if we are electing the best people to congress.”

“The drive-in, drive-up restaurant is convenient in nice weather, But I seriously doubt they will ever catch on.”

“There is no sense going to New York City or Toronto anymore for a weekend, It costs nearly $15.00 a night to stay in a hotel.”

“No one can afford to be sick anymore, At $35.00 a day in the hospital it's too rich for my blood.”

“If they think I'll pay 50 cents for a haircut, forget it.”
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Here’s a few more of Socrates’ thoughts to ruminate on:
“The only true wisdom is in knowing you know nothing.”

“By all means marry; if you get a good wife, you’ll become happy; if you get a bad one, you’ll become a philosopher.”

“If you don't get what you want, you suffer; if you get what you don't want, you suffer; even when you get exactly what you want, you still suffer because you can't hold on to it forever. Your mind is your predicament. It wants to be free of change. Free of pain, free of the obligations of life and death. But change is law and no amount of pretending will alter that reality.”

“The secret of happiness, you see, is not found in seeking more, but in developing the capacity to enjoy less.”

And so it goes.