Archives For May 2013, there are two potential problems before us in the investment world: rising interest rates; and stock market highs.

Most often, when we think of risk, we think of money invested in the stock market. There are several different kinds of risk, and there is some kind of risk in every investment. Many like to think that bonds are a safe investment, but the fact is that when interest rates rise, the value of existing bonds decline – including bond funds.

Because of the Fed’s quantitative easing program, interest rates have been kept low for some period of time. When they will begin to rise again no one knows, but rise they will. For the last few weeks, we have witnessed rising interest rates on treasury securities. The Fed tells us that QE will not end any time soon, but could see some pullback in the amount of money they have been printing. Whenever this does finally happen, interest rates are sure to rise.

The chart below shows the current and reset yield on 10 year treasuries. Columns of X’s indicate rising yields, while columns of O’s indicate decreasing yield rates. The scale on the chart is the 10 year treasury yield multiplied by 10. The sporadic numbers and letters within the X’s and O’s indicate months of the year. By looking at the chart, it’s easy to see that rates are on the  rise, and they now exceed the level they reached earlier this year.  (Click on the image to enlarge.)


For those who have placed a portion of their 401(k) assets in Target Date funds and wanting to implement a set-it and forget-it strategy, there may be a significant downturn in the value of their 401(k) because of rising rates.  Depending on the particular target date, a substantial portion of the Target Date fund may be invested in bonds.

Going forward, we need to keep a close eye on these yields, and have a plan to deal with the situation regardless of which way the yields move.

The second thing that can go wrong from here is a decline of the stock market.  We are seeing all-time highs in the major indexes.  The old adage of what goes up, must come down, and that is certainly true with the stock market.  The image below shows  the S&P 500.  Notice how the chart has generally increased over the last several months.


The major market indicators at this time indicate high risk in the market.  This doesn’t necessarily mean that we should sell just because the risk is high, but it certainly suggests that we should pay closer attention.  Just as we pay closer attention to our driving when the streets are wet, we should pay closer attention at this point in time, and have a plan in place if things go well, and a plan if things do not our way.



The charts above were created by Dorsey Wright and Associates.  The postings on this site are my own and do not necessarily represent Dorsey, Wright & Associates positions, strategies or opinions. happens when you stretch a rubber band?  You pick up a rubber band lying in its normal state, and when you stretch it you can feel the resistance and feel that the rubber band wants to return to its normal state.

When the stock market gets stretched too far, it wants to return to its normal state also, and this is easily seen through statistics and the bell curve.  The least desirable means for the market to return to a normal state is through a pullback in prices.  Several market indicators are telling us that the stock market is stretched. The S&P 500 and the Dow Jones are at all-time highs. Just yesterday, I noticed that an indicator that measures participation in the market is at an all-time high also.  Just when the market will pull back is unknown, and that unknown is what makes things interesting and difficult.

One school of thought to deal with a situation like this is to simply buy and hold. In fact, the mutual fund industry has promoted the buy-and-hold methodology for decades. It’s in their best interest.  This methodology says that we should simply hold on when the market goes down because it will always come back. When there is time for the market to come back, as in the case of a very young person, this strategy can work well in the long term. But if you are in retirement or near retirement, it’s a much different story because the market may not come back in the time that you need your money. Another proven problem with this methodology is in regards to significant pullbacks. Since the year 2000, we have seen the stock market experience two major declines of 50% or more.  Many, many people who were in retirement or near retirement during those downturns were devastated.

A much different school of thought to deal with an over-stretched market is to not hold onto weak positions when the market declines beyond a certain point.  The thought here is that if the position was weak when the market was heading up, it may be weaker when the market declines.  Setting stop loss points is another way to deal with a declining market.  One should have a plan for what to do if things go according to plan, and a plan for what to do if things do not..

No matter what risk management strategy we employ, averting losses can give us comfort and greater peace-of-mind.  Now is a time to be observant and aware of what the market is doing.  As Yogi Berra taught us, you can observe a lot just by watching.


The information in this post is not a recommendation or advice.  You should consult a qualified advisor prior to making any changes.

Over and over again, we’ve all heard that – over the long-term, the stock market has averaged a respectable return – 7% in excess of inflation is often quoted.  The problem with that concept is that averages don’t apply to individuals.  When we consider what makes an average, we see that there are data points above and below the average.  For example, while the average temperature for a region may be 75 degrees, there may also be times when in that same area the temperature is 8 degrees,and times when it is 108 degrees.

The same is true with the stock market.  There have been extended periods of time when the market has under-performed the average, and times when it has over-performed the average.  Take a look at the image below.

The black diagonal line shows a 6.9% average gain from 1925 to 2012.  The blue line shows real large-cap returns including capital gains and dividends.  Notice the periods of time of under-performance and over-performance.  Notice that some of these periods are extended.

Suppose that one of these extended periods of under-performance occurs in the 10 years preceding your retirement, and you’ll be able to see why averages don’t apply to individuals!  You may have planned on a 6.9% overall average, and the market wasn’t kind.  Notice the two large declines in the market since 2000.  One decline was about 50%, and the other was about 57%.  These two declines have caused the market to under-perform it’s long term average for the last several years.

Although no investing methodology is right 100% of the time, another investing approach is to over-weight investments in the stock market when it is performing above the average, and under-weight investments in the stock market when it performing below the average.  Relative Strength investing is a methodology that does just that.



Chart provided by Dorsey Wright and Associates. The postings on this site are my own and do not necessarily represent Dorsey Wright & Associates positions, strategies or opinions. The information contained in this post is neither investment advice nor  a recommendation or solicitation to buy or sell any security.  You should consult an investment professional before making any investment decision.

Market Update

May 14, 2013

The stock market as measured by the S&P 500 is at an all-time high.  While this is joyous to some because it means recovery from the nasty downturn of 2007-2009, it is also producing a condition of increased risk.  It’s been said that the only way to hold onto the gains you’ve made is to prevent further losses.  Watch & listen to the audio/video below for an update on current conditions, risk, and to see where we’ve been.

(NOTE: For best viewing quality, after you click on the arrow to start the video, click on the gear icon in the YouTube window and change the resolution to 720p, then click on the Full Screen icon.)



Charts produced by Dorsey Wright and Associates

The postings on this site are my own and do not necessarily represent Dorsey Wright & Associates positions, strategies or opinions.  The information contained in this post and video is neither advice nor  a recommendation or solicitation to buy or sell any security.

Need Income?

May 7, 2013 that you are around 65 and ready to retire, or thinking about retiring. You have accumulated a large nest egg through your 401(k), IRAs, and after-tax investments. You’ve been saving for many, many years and now you are in need of $50,000 per year of income in addition to the amount you will receive from Social Security, and you’re wondering where you can put your nest egg in order to generate that kind of income. Fortunately, there are multiple asset classes to choose from.  However, the amount you would need to invest in each asset class to generate the $50,000 of annual income differs GREATLY between asset classes.

For example, you would have to:

Invest about $20 million in 2-year Treasury bills to generate $50,000 annual income.

Invest about $1.7 million in dividend yielding stocks to generate $50,000 annual income.

Invest about $800,000 in high yield (junk) bonds to generate $50,000 annual income.

What you may notice is the huge difference there is in the amount required to generate income.   You may also notice that there is a big difference in terms of risk, between the asset classes above.  Treasury bills are considered to be safe investments, but the risk of losing principal spikes up with both stocks junk bonds. The examples above do not consider capital gains – they simply show how much it would generally take to derive desired income.

Another way to generate income is by using an annuity.  Many annuities today are available with an income rider – which guarantee lifetime income and guarantee that remaining principal will pass along to your heirs after you depart this world.  With this option, you would need approximately $1 million (and much less depending on holding time prior to receiving income)  to generate the desired income.


Returns extrapolated from