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Greetings!
What a difference a year makes! September will be known as the month when "it really hit the fan" in 2008. On Monday, September 15 when Lehman Brothers filed for bankruptcy the 2008 stock market crash was officially underway.
When Lehman went under everyone wondered who would be next? Lehman was a giant--and it was slain in a weekend! That Monday the Dow jettisoned 500 points like it was nothing--and the worse was yet to come.
This September 15th the Dow was up 60 points--but at 9,683 it still hadn't returned to the 10,917 it was at the end of the day on September 15, 2008. It has come a long way however, and it's been a harrowing trip--sinking to its lowest point of 6,547 on March 9, 2009. Thankfully, we seem to be heading in the right direction.
Panicking investors make excellent buying opportunities for those who are steadily adding to their investment portfolio--see the Dollar Cost Averaging article below.
For the month, September 2009 was a positive one with the DOW up 216, the S&P500 up 37 and the NASDAQ up 113 points.
A peaceful, quiet October is just what I'm looking for--now if we could keep those darn Yankees out of the World Series it would be icing on the cake.
Marty
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Dollar Cost Averaging
Dollar Cost Averaging (DCA) is the systematic process of investing money by making regular and consistent purchases. By making the purchases consistently, regardless of the market conditions, you essentially take human emotion out of the investment process-and over time usually your investments are made at a lower average price per share.
A DCA investment strategy really paid off through this last year. In November 08 to March 09 when many people were selling or on the sidelines those DCA investors--who with dogged tenacity and gritted teeth, stuck with the strategy and allowed the regular buys to happen-were picking up a lot of shares at deeply discounted prices.
Let me use an example of how the DCA strategy could have worked (and has worked for many of our clients who have the automatic investments set up in their accounts.) In the example I'll use a $100 purchase on the 15th of each month and we'll use September 15, 2008 as the start and August 15, 2009 as the end date. I'll use a fund that many of us have in our portfolios, the Oppenheimer International Small Company-A Shares (OSMAX). This was a very volatile fund during that time. Remember this is an example and past results do not imply future results-this merely demonstrates how DCA can work. Finally we won't count dividends, capital gains or commissions to keep the math simple.
Date Price per Share[i] Number Bought Cost
Sept 15 $14.40 6.94 $100
Oct 15 $9.76 10.25 $100
Nov 17 $8.14 12.29 $100
Dec 15 $8.79 11.38 $100
Jan 15 $8.69 11.51 $100
Feb 17 $9.09 11.00 $100
Mar 16 $9.15 10.93 $100
Apr 15 $11.51 8.69 $100
May 15 $13.08 7.65 $100
Jun 15 $16.11 6.21 $100
Jul 15 $16.15 6.19 $100
Aug 15 $17.48 5.72 $100
In the example we can see the wild trip this fund took. If we bought all $1,200 worth on September 15, 2008 we would have received about 83.33 shares and at today's price of $18.71 (9-22-09) would be worth about $1,559; a nice increase in value of about $359. But by using the DCA investment method we would have many more shares--about 108.74 total, worth roughly $2,034, an increase of $834. Now that's something to crow about.
And let's not forget, one of the things we must always consider is our emotional reaction to the drop in the market-so let's say we actually did buy all our shares in September 2008-how would you have felt on November 15 when the $1,200 you invested in September was worth only about $678?
DCA allows investors to take solace in the fact that in a falling market at least they are buying more shares at cheaper prices.
Most investments will allow money to come directly out of a checking account and into a portfolio (usually there is a minimum--typically $50 per month.) Consider DCA as an investment strategy if you're in the accumulation period of your investment life.
Marty
(By the way, I appoligize for the columns in the above graph, those of you who know my OCD side know the crooked columns are killing me--but I just can't get this email program to straighten them up.)
[i] [i] Prices quoted through Yahoo Finance and are @ NAV
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This Month's Quote from Benjamin Graham's The Intelligent Investor
Warren Buffett called it "By far the best book on investing ever written." Benjamin Graham's, The Intelligent Investor has been in print since 1947--has been revised and updated every five years or so. The edition I have was published in 1973 and updated by Jason Zweig in 2003.
This week's quote is from Page 206
"Aside from forecasting the movements of the general market, much effort and ability are directed on Wall Street toward selecting stocks or industrial groups that in matter of price will "do better" than the rest over a fairly short period in the future. Logical as this endeavor may seem, we do not believe it is suited to the needs or temperament of the true investor--particularly since he would be competing with a large number of stock-market traders and first-class financial analysts who are trying to do the same thing. As in all other activities that emphasize price movements first and underlying values second, the work of many intelligent minds constantly engaged in this field tends to be self-neutralizing and self-defeating over the years."
"The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. He should never buy a stock because it has gone up or sell one because it has gone down. He would not be far wrong if this motto read more simply: "Never buy a stock immediately after a substantial rise or sell on immediately after a substantial drop."
This month's selection reminds me of the story of a reporter who once asked Mr. J. P. Morgan--the great American Financier of the 19th and early 20th Century, what will the stock market do? To which Mr. Morgan said, "It will fluctuate."
Lately the price of most things flucuated--homes, cars, boats, stocks, mutual funds, commodities--it is the minute-by-minute pricing of stocks that drive us a bit crazy.
Marty |
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Concept of the Month: Social Security
I've been thinking about writing on some Social Security tactics for a long time and have wondered how to incorporate them into the newsletter in such a small space without further clouding the waters. I've decided that the best way would be to cover a series of topics over the next few issues.
Social Security is one the most reliable and widespread retirement benefits available-but I think it is also the most misunderstood. Much of the information we have learned about Social Security comes to us in dribs-and-drabs over the proverbial water cooler. I think if we take this one step at a time we can clear up a lot of misconceptions and myths; so let's start with how you get a Social Security pension and where does the money come from.
First of all, the money comes directly from the paychecks of just about every employed person in the country. Listed on the paystub as FICA, (Federal Insurance Contribution Act) employers are required to withhold from employees 6.2% of all their income under $106,800 (adjusted for inflation each year).1 In addition the employer must kick in 6.2% from their coffers. At the limit, $6,621.60 is taken from the worker and $6,621.60 is taken from the employer for a grand total of $13,243.20 per year.
That $13,243 is sent to the Social Security Administration where a portion is forwarded to those folks currently collecting SS checks. Any money left (and right now there's a lot left over) is shipped off to the US Treasury where it is promptly spent. In return for the excess funds spent, Uncle Sam sends the SS Administration an IOU.
So the bottom line definition is that SS is a forced savings plan-you can't opt out. And the US Government gets to use the money until you are entitled to get some of it back. In return for our money, we get the promise of a lifetime pension.
However, many people never get their savings back. You must qualify--and there are a lot of rules to cover. For example, if you don't work at least 40 quarters paying in to Social Security you are not entitled to get anything back. (A quarter is defined as earning $1,000 of income with a maximum of four quarters a year.) So to be eligible, an employee must work ten years making at least $4,000 a year. So in the example above, if you earned and paid FICA on $106,800 per year for only nine years you and your company would have collected $119,188 from your pay and sent it to the SSA and, in the end, the employee gets absolutely nothing in return.
Next month, How do they figure out that monthly "benefit?"
Marty
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Book I am reading now: "Signal 13" by S. Eric Briggs
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