The past couple weeks have been a roller-coaster ride for the stock market. If you have been tracking the stock market and trying to learn more about investing and Wall Street this fortnight has been a crash course for you. Be aware that the stock market’s performance is not always this hectic, but you need to be prepared for when it is. If you have learned anything from this personal finance blog I hope you have learned that when investing you must diversify to survive wild stock market swings. In my personal retirement investment account I have seen my investments lose half their all-time gains in one short period to almost back where it was when the stock market’s dysfunction began a couple weeks ago. The next 2 weeks will probably be decisive on which general direction the overall stock market will follow.
Archive for June, 2006
The U.S. Stock Market Rollercoaster Ride
Friday, June 16th, 2006Personal Finance Training
Friday, June 16th, 2006If you are a beginner or someone who would like to expand their personal finance acumen through personal finance training–this site and others are a great place to start.
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At Finance For Dummies I try to cover all aspects of personal finance online at all levels. The personal finance advice I give is from experience and knowledge I have obtained through work-related and self-taught personal finance training. I want to provide personal finance help to those out there in need.
I look forward to comments on this blog to see if people have specific personal finance advice they might need.
Today's Stock Market
Thursday, June 15th, 2006Well, as I have said it is difficult to time the stock market and although early this week signs pointed for more bottoming out the last couple days have not brought that. I thought everything pointed to more down days for the market, (and that still might be) but right now the stock market has bounced back well yesterday and today. Bad times might still lie ahead, but this goes to show how difficult it is to predict how the market will behave. Signs might point one way, but the market can go the other.
The S&P 500 is up over 1% for the day as we speak and showed great resilience yesterday by finishing up. Again, we will need to wait a couple weeks for the Federal Reserve to announce whether they will be raising interest rates or not. Once that and other economic information are revealed the market should not behave so erratically.
Historical Market Downturns and Recoveries
Wednesday, June 14th, 2006From 1926-1999 the U.S. stock market has seen several downturns and recoveries of varying length. During the Great Depression stocks lost 80% of their value and it took 12 years to recover. Often these downturns are preceeded by high returns, but you cannot predict a downturn.
Downturn Recovery
Period Length Amount Period Length
09/29-06/32 34 months -83.4% 07/32-1/45 151 months
06/46-04/47 11 months -21.0% 05/47-10/49 30 months
08/56-02/57 7 months -10.2% 03/57-7/57 5 months
08/57-12/57 5 months -15.0% 01/58-07/58 7 months
01/62-06/62 6 months -22.3% 07/62-04/63 10 months
02/66-09/66 8 months -15.6% 10/66-03/67 6 months
12/68-06/70 19 months -29.3% 07/70-03/71 9 months
01/73-09/74 21 months -42.6% 10/74-06/76 21 months
01/77-02/78 14 months -14.1% 03/78-07/78 5 months
12/80-07/82 20 months -16.9% 08/82-10/82 3 months
09/87-11/87 3 months -29.5% 12/87-05/89 18 months
06/90-10/90 5 months -14.7% 11/90-02/91 4 months
07/98-08/98 2 months -15.4% 09/98-11/98 3 months
The Wall Street Herd
Wednesday, June 14th, 2006In biology the “herd instinct†is a social instinct of groups of animals to herd together. Wall Street investors behave in a very similar way and they love to conform to the group of a certain opinion. The herd on Wall Street is always there, but is not always dangerous. Right now, because the Fed will announce at the end of June what they plan to do with interest rates, the herd is pushing the market and this can be dangerous. If the herd decides before or after the Fed announcement on interest rates that the U.S. economy is heading for higher inflation and a slow down things can get a bit chaotic. Real or perceived—it does not matter–because once the herd makes up its mind millions of investors will follow. This could make a downturning economy worse than it should actually be; or in good times make a rising economy over-inflate itself. Be careful of the herd mentality and respect it because if it begins to move public opinion things can shift quickly.
Current Stock Market Update
Wednesday, June 14th, 2006Well, it looks like it might get worse before it gets better. The recent downturn in the S&P 500 and overall market (S&P 500: -1.03% yesterday; -3.65 for June; -5.49 for the quarter) has spooked a lot of investors. When the stock market turns sour like it has recently many panic and sell as the market dives. Others are waiting for the stock market to bottom out and will try to get a deal. No one knows how the market will behave, but for some insight to stock market corrections during bull markets click here and scroll down to the Equity section and you will find a pdf to click on for a market correction chart. Once The Fed announces what it will do with interest rates everyone will have a better idea of where the stock market might go, but in the meantime investors are going to continue to behave irrationally.
Try to stay diversified and this rough time will not be as rough.
Do Stock Winners Repeat Themselves?
Tuesday, June 13th, 2006Between 1980-2000 there was a study of stocks that had exceptional positive returns. The questions is do these handful of winner stocks repeat themselves?
Often you will read in the news that a particular stock has risen 20%-30% in a very short time and we kick ourselves for not getting part of the quick rise in stock value. In this study it is shown that individual stock perform much like asset classes; they have good periods and bad periods of performance. At the same time, individual stocks have a significant amount more of volitility and risk than asset classes because asset classes are a bunch of stocks and because they are more diversified than an individual stock the risk is less.
If you look at this period and take the top 10 performing stocks (minus the smallest 20% of the market) the average annualize 3-year performance of these equal-weighted portfolios of ten stocks was 135.3%. However, when you look at these 10 companies’ performance in the next three years they average 9% (the S&P average for this period is 17.3%). So if you chased performance and tried to market time and bought these stocks at the top you would be very unhappy with the results when compared to the S&P 500′s results.
Benefits of Long Term Investing in the Stock Market
Monday, June 12th, 2006Many believe that the stock market is a risky place to put your money, but when you examine it closer and look long-term the opposite seems true.
The stock market will have its bad periods (e.g. downturn of March 2000 and post-9/11), but fixed-income investments can also have periods of poor performance although considered less-risky than stocks. But when you look at long-term losses they typically can be recovered after a downturn in the stock market.
If you look at the period from 1926-2000 and break it down into one-year periods; five-year periods and fifteen-year periods you will see some interesting results.
- 75 one-year periods and 21 resulted in a loss
- Increasing the period to five years only 7 of the 71 overlapping five-year periods resulted in a loss
- In the 61 overlapping 15-year periods from 1926-2000 there were zero that resulted in losses
So you can see the longer your time horizon the less your chances of losses to occur over a long time horizon.
Stock Diversification
Sunday, June 11th, 2006When investing for your stock portfolio (retirement and non-retirement) often people will own a couple of individual stocks. One of the problems with owning a couple stocks is the lack of diversification. Let’s say you own stock in two companies, and those two companies end up being run poorly or cannot make a steady profit. By investing in only two have have little diversification and you are exposing yourself to way too much company risk (risk relative to the performance of that stock).
The larger the amount of stocks you own the less risk you assume and typically you will be well diversified. If you own 100 stocks you have eliminated almost all of your company risk. It is difficult to own 100 stocks on your own so many people turn to mutual funds. Mutual funds have the ability to invest in scores of stocks much easier than you can plus they have the added benefit that they are professional investors. This is a good option for most. However, market risk is not eliminated by holding scores of companies because although your company risk is extremely low you cannot get rid of market risk.
Company Stock in Your 401k
Sunday, June 11th, 2006Rule #1 of Investing is to be diversified. However, millions of employees who have the option of owning their company’s stock in their 401k do own the company’s stock. That is not a problem–the problem lies in the fact that they mistakenly believe that owning their company’s stock is a safe way to invest a major portion of your 401k.
After the scandals of 2001-2002 (see Enron, et al), many were hoping that investors learned their lesson vicariously through other peoples’ misery. However, 4-5 years later people have not learned that lesson and continue to expose themselves and their families to an extraordinary amount of risk in their 401k portfolio. So if you do have company stock in your 401k be aware that if your company is under scrutiny of the SEC or the investing community for fraud, or even worse allegations, you could see your 401k’s balance go from a healthy amount to you putting off retirement for a few extra years because your balance has plummeted.
I bought Enron stock on the way down before all the facts came out of their malfaesance. I bought it at around $9.00 and rode it all the way to $0.22. Luckily, I did not have a lot of money invested in Enron. I learned my lesson not to buy into a stock that the bottom is falling out of (there is a reason the bottom is falling out). Hopefully, with this information you will be prepared to diversify your 401k portfolio and not put all your faith in your company’s stock to lower risk in your 401k.