Archives For August 2013

Several years ago, providers of 401(k) plans wanted to make the process of selecting a fund much easier. In doing so, they took a buy-and-hold methodology and added to that an age-based formula to develop new funds for 401(k) plans that would provide easy selection and a lifetime hands-off the steering wheel approach.

To select an appropriate fund (according to the designers) within the 401(k), a participant selects their intended retirement date, and then selects a fund that is close to that date. So if you plan to retire in the year 2015, the target date fund closest to that date would be heavily weighted in bonds. At the other extreme, if you plan to retire in the year 2045, the fund closest to that date would be heavily weighted in stocks. Both funds would hold stocks and bonds – the percentage allocated to each depends upon your desired retirement date.

This sounds good in theory, until you consider the fact that the bond market can decrease just like the stock market can decrease. And when both of these happen at the same time, it can be devastating to someone who is near retirement or in retirement.

Participation in these funds runs fairly high, and that makes the mutual fund companies very happy – since they only earn fees as long as you are invested.

Interest Rates

 

The chart shows the historical record of interest rates, and it is quite obvious that interest rates are at extreme lows. When interest rates rise, the value of existing bonds decline. As we begin to approach the end of Quantitative Easing by the Fed, we have seen interest rates already begin to rise with just the anticipation of the end of QE. Once QE ends, interest rates are very likely to rise significantly higher.

How will this affect those who are near retirement or in retirement whose portfolio consists of a high percentage of bonds? It should be fairly obvious – they will lose a lot of money!

What could make it worse? A simultaneous declining stock market – so not only would they lose money from their bond positions, but from their mutual fund stock positions as well. This is what happened from 2007 to 2009.

If you are invested in target date funds in your 401(k) – whether you are in retirement, near retirement, or even if retirement is far away, a review of the options in your 401(k) is in order. Find an advisor who can help to select the best funds, sectors, and asset classes available within your 401(k). There is no need to see your hard earned money – and matches, decrease.

 

Chart source: dshort.com

 

Any day, you can listen to the financial talking-heads in the media and hear pretty much anything you want to read or hear.  It’s even possible to hear viewpoints within the same hour that are diametrically opposed to one another.  So what is an investor to do?

One could pick a favorite in terms of style or performance, but the problem surfaces when it comes to predicting where the economy, inflation, or the market will go in the future.  Many times when predictions are involved, there may be an agenda that is not apparent.

I’m not casting judgement or even suggesting anything regarding the positive outlook of a prominent national homebuilder as quoted in an article appearing on Business Insider today (8/21/2013), but I will use it as an example.  The quote from CEO Douglas Yeardley in an article titled, “The American Housing Recovery is Only Beginning”.  In the article, he stated, “We believe the recovery is real and w are in the early stages of the rebound”.  Maybe he’s right, maybe he’s wrong – only time will tell.

Here is what the data shows.  Overall, the graph below (click on graph to expand) shows nationwide Housing Starts from 1976 to 2013.  In the graph, it is apparent that housing starts declined dramatically from 1984 to 1991, then increased from 1991 to 2006.  And then we see a very dramatic decrease beginning in 2007.  From 2012 until a few months ago, housing starts have been increasing, but since April of this year, they have been declining.

The beauty of technical analysis is that it shows “what is”.  When I’m driving at night, I want to be careful to not drive at a speed that causes me to not be able to see beyond my headlights.  Technical analysis provides the ability to make decisions using real data from the market to make decisions today, and not drive past your headlights.

 

Housing Starts

 

 

 

 

 

 

 

 

Graph 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.