Dollar-Cost Averaging: Slow and Steady

on May 13 in Company Blog posted by

The concept of “dollar-cost averaging” might initially
appear intimidating to some, but the practice is actually quite simple. All you
have to do is invest the same amount of money each and every month. Pretty
simple, right? But what’s really nice is that something as straightforward as
dollar-cost averaging actually helps you invest smarter.

Say you want to invest $900 in a certain mutual fund. Over
three months, the fund’s price is $30, $20, and $25. If you invested all of
your money immediately, you’d wind up with 30 shares of the fund. However, if
you invested $300 into the fund each month, you’d end up with a total of 37
shares. By dollar-cost averaging you were able to obtain seven more shares. Of
course, if you knew ahead of time that the fund would fall to $20, you could have
bought all of your shares then. But you obviously can’t predict the future.
Dollar-cost averaging is a smart strategy that forces you to keep investing,
even if the market is dropping. It encourages discipline. Instead of being
tempted to sell your investments when prices are falling, you actually buy

One great thing about an employer-sponsored retirement plan
is that it automatically uses dollar-cost averaging—the same amount is taken
out of every paycheck. You can also set up automatic dollar-cost averaging
programs with most individual retirement accounts (IRAs).

Please keep in mind that dollar-cost averaging
does not ensure profit or protect against a loss in a declining market.
However, its benefits are quite clear: Dollar-cost averaging minimizes the
effects of market fluctuations, encourages discipline, eliminates the need to
decide when to invest, and avoids the temptation to time the market.

Closed-End versus Open-End Funds

on May 13 in Company Blog posted by

The general term “mutual funds” usually refers to investment
vehicles more specifically known as open-end mutual funds (the “mutual funds” denomination
has become so mainstream that the open-end classification is commonly omitted).
However, there exists a second mutual fund category identified as closed-end
funds. This category is lesser known and much smaller: Closed-end funds total
only $216 billion in net assets, compared to $8.4 trillion for open-end funds.
Three important differences between these two categories of mutual funds are
outlined below.

1. Share issuance: Open-end funds can issue an unlimited
amount of shares and then redeem them on demand. Closed-end funds generally issue
a fixed number of shares at inception in a process known as an initial public
offering (IPO). These shares are then traded on an exchange, similar to stocks.
A closed-end fund can issue new shares after the IPO, but this is rare. A
closed-end fund can, if it chooses, convert itself to an openend mutual fund
and issue an unlimited number of shares.

2. Share transactions: Shares of an open-end mutual fund can
be purchased directly from the fund at any given time. An investor can go
directly to the fund company and buy shares, or sell shares back to the fund if
he or she already owns them. In contrast, closed-end fund shares trade on an exchange,
like stocks, and are normally purchased through a broker, who charges a
commission. Closed-end shares can be bought and sold during normal market hours
and, as a consequence, their market prices also fluctuate throughout the day. Open-end
shares are only priced once a day at market close.

3. Share price: The price of open-end fund shares is equal to
the net asset value, NAV (the value of all the fund’s assets divided by the
total number of shares). For closed-end funds, it’s not that simple. Since
closed-end funds are traded on an exchange, prices are established by the
market, and shares can trade at prices different than the fund’s net asset
value. If the price is higher than the NAV, shares are said to be trading at a
premium— investors are willing to pay more than the fund is really worth.
Conversely, if the market price is lower than the NAV, the fund is trading at a
discount. This can be considered an advantage of closed-end funds over open-end
ones: who wouldn’t want to buy something at a price lower than its true value?

The image (see Newsletter) shows how month-end price and net
asset value can fluctuate for a hypothetical closed-end fund. From January
through September, the fund’s market price is higher than its NAV; the fund is
trading at a premium. From October through December, however, the situation is reversed
and the fund is now trading at a discount.

Monthly Market Commentary – May 2011

on May 13 in Company Blog posted by

The market’s primary focus during April was corporate
earnings, which were generally positive. The technology and manufacturing
sectors produced exceptional results while consumer spending, inflation,
manufacturing, and the Chinese economy continued on their strong upward

Earnings: The technology sector showed promise as both Apple
and Intel reported stellar results. Besides robust tech earnings, results in
the manufacturing sector were also encouraging. Organic growth (versus
acquisition-driven growth), auto-related data, and capital goods were positive.
Earnings from the banking sector however, weren’t as strong. New loan growth at
many firms including J.P. Morgan Chase was almost non-existent. Overall, J.P.
Morgan Chase revenues declined 9% while profits increased about 67%. Rising
commodity prices were the main reason for mixed earnings in consumer-oriented firms.
At McDonald’s, revenue increased but the stock fell about 1.9%.

Housing: According to the federal government report, home
prices were down 1.6% from January to February. Existing home sales increased
3.7%, reaching the 5.1 million unit mark. During the housing boom in 2005, the
annualized number of existing home sales was as high as 7.4 million units.
Outside the couple of odd months near the expiration of the two housing
credits, the lowest sales number was about 4.5 million units.

Inflation: Inflation reports from around the world were
higher than expected. Year-over-year inflation accelerated to 5.4% in China in
March 2011. In the euro zone, month-to-month inflation (annualized) accelerated
to 2.7% in March up from 2.4% in February. Inflation continues to accelerate
around the world despite attempts by central bankers worldwide to tighten rates
and boost reserve requirements. During March, the U.S. producer price index and
the consumer price index moved up 0.7% and 0.5%, respectively.

GDP: The recent GDP report suggested a growth rate of 1.8%,
in line with expectations but well below the fourth quarter number of 3.1%.
This slowing was largely due to shifts in government defense spending and
weather-related construction spending. The U.S. consumer spending growth came
in at 2.7%, higher than the expected growth of 1% to 2%. Business investment
spending grew 11% during the first quarter, while government spending (which comprises
about 20% of GDP) fell 5%.

Auto sales: Motor vehicle sales typically tend to be good
indicators of consumer spending. The recent motor vehicle sales report
indicated no change in the mix between domestic and import brands, which
appears to be a sign that Japanese supply issues weren’t holding back sales.

Unemployment: The recent unemployment report revealed a
43,000 surge with claims for unemployment rising to 474,000, the highest level in
eight months. The report suggested that the adjustment timing for a spring
break in New York State followed by a new emergency benefit plan in Oregon were
the main reasons for this surge.

Employment: Employers added 244,000 jobs in April, which
came in much higher than analysts’ estimates for the month. Goods-producing and
service-providing sectors experienced the most job growth while government jobs
posted a decline. On a year-over-year basis, overall payroll job growth
increased 1%.

According to Morningstar economists, auto sales figures,
employment, production and manufacturing statistics, will remain key indicators
of future economic health in the weeks ahead.

In Case of Emergency

on May 13 in Company Blog posted by

Nobody likes to think about the possibility of job loss,
serious illness or other major expenses. But these are all possible in an
uncertain world, and having an emergency fund in place can help if such
situations arise.

An emergency fund is a money market, savings or checking
account where you keep a specified amount of money to cover expenses. The
important part here is that the money is stored in an investment vehicle that
allows quick and easy access to funds. But you do not touch the money in this
financially liquid account unless a real emergency pops up. No ifs, ands or

Setting up an emergency fund is usually the first step
toward building a solid financial plan. If you don’t already have one in place,
start building one as quickly as you can. It obviously takes perseverance to
stash money from each paycheck into your emergency fund, but it may be well
worth it one day.

How much cash should you put aside? Most financial advisors
recommend to first aim to keep enough money in the fund to cover at least three
months of expenses. However, as your take-home pay increases or your expenses
grow, you may need to keep six months or even as much as a year’s expenses in
your fund.

Take it one step at a time. Once you’ve saved enough to
cover three months of expenses, try for the six-month mark, and so on. Easier
said than done, sure, but if you treat your emergency fund like any other
must-pay monthly bill, it will undoubtedly grow over time.

Responsible Investing with Socially Conscious Funds

on Apr 25 in Company Blog posted by

A socially responsible or socially conscious mutual fund
seeks to maximize returns by only investing in companies that adhere to strict
ethical and moral standards. For example, some socially responsible funds make
investment decisions based on environmental responsibility. Among these, alternative-energy
funds primarily invest in companies whose main business is energy coming from
sources that do not pollute and do not deplete natural resources. Other
socially conscious funds concentrate on human rights by refusing to profit from
unethical business practices such as child labor, exploitation, discrimination,
or unhealthy workplace conditions. Another category includes funds that invest
based on religious principles.

Generally, all socially responsible funds refuse to invest
in firms that manufacture or distribute weapons or are involved in the defense
industry. They also avoid companies involved in promoting alcohol, tobacco, or
gambling. Investors interested in such funds should examine the fund’s
prospectus to determine the manager’s exact philosophy, and whether the
manager’s definition of “socially responsible” is in line with their
own. Keep in mind that although a mutual fund might categorize itself as
socially responsible, this does not guarantee attractive returns.

Mutual funds are sold by prospectus, which can be obtained
from your financial professional or the company and which contains complete information,
including investment objectives, risks, charges, expenses and other information
about the investment company. Investors should read the prospectus carefully
before investing or sending money. Past performance is no guarantee of future
results. The investment return and principal value of mutual funds will
fluctuate and shares, when sold, may be worth more or less than their original

The Many Faces of Inflation

on Apr 25 in Company Blog posted by

During the recent 2007–2009 recession, it seems all we’ve
seen and heard about the economy was bad news: the housing market collapsing,
401(k)s suddenly being worth much less than before, a lifetime of savings
almost disappearing in a few months, rising unemployment, and fluctuating prices.
Now that the recession has officially ended in June 2009 and we’re on the road
to recovery, inflation may become a concern once again. In this uncertain
economic climate, it may be helpful to learn about the different types of
inflation and their immediate effects.

Inflation: Inflation is defined as a continuing rise in the
general prices of goods and services. Simply put, if prices, on average, are
going up in an economy, then you’ve got inflation. With a set amount of money
in an inflationary environment, consumers are able to buy less and less over
time. High rates of inflation can generate uncertainty, lower productivity and
discourage investment. The leading measure of inflation in the United States is
the Consumer Price Index (CPI). The government can change its monetary policy
to control the money supply and keep inflation in check, although this is not
the only variable affecting inflation. In November 2010, the Federal Reserve
announced it would buy back long-term Treasuries in order to inject money into the
economy, a policy called quantitative easing, which can trigger higher

Hyperinflation: Hyperinflation is extremely high, out of
control inflation, caused by a steep increase in the money supply without a
corresponding increase in the output of goods and services. Well-known examples
include the German hyperinflation after World War I and the hyperinflation in
Hungary after World War II. It appears that such an extreme phenomenon occurs mainly
as a result of radical changes and prolonged economic instability.

Deflation: Deflation is the opposite case: a general decline
in the prices of goods and services. In the U.S., deflation occurred as
recently as 2008 and 2009: The change in CPI was negative in the third and
fourth quarters of 2008 and in the fourth quarter of 2009, a clear indicator of
deflation. The obvious positive effect here is lower prices—many argue that
deflationary periods are good times to buy. The problem with deflation, though,
is that consumers reduce spending and businesses stop growing, which is not
good for the economy.

Stagflation: This is the worst-case scenario: high inflation
and slow growth simultaneously. Normally, there is an inverse relationship
between inflation and unemployment; if the economy is able to tolerate a higher
rate of inflation, lower unemployment can be achieved, and vice versa. But
during a stagflation period, both inflation and unemployment go up. An
interesting measure for stagflation is the misery index, which, as illustrated
in the image (see Newsletter), combines the unemployment and inflation rates.
The U.S. experienced severe stagflation in the 1970s, when unemployment and
inflation reached a combined high of almost 20%. There has been talk of stagflation
during the recent crisis as well, but the potentially encouraging news is that
the misery index is not nearly as high now as it has been in the past.

April Monthly Market Commentary

on Apr 25 in Company Blog posted by

The market has had its ups and downs in March, but the
overall atmosphere has been optimistic in light of less negative news from
Japan and the Middle East. On the not-so-optimistic side, however, bad news on
the European debt crisis (Portugal in particular) may signal some dark clouds
looming ahead.

Employment: After a year of almost no progress, employment
statistics have finally begun to show some improvement. Current unemployment claims
are in the 300,000–350,000 range, approximately half of the 674,000 we’ve seen
in the early months of 2009. Since 20%–25% of the jobs lost during the
recession were in the construction sector, significant improvement in unemployment
numbers may not occur until both the homebuilding and construction industries recover.
Still, in light of these recent positive numbers, next week’s jobs report is an
eagerly awaited piece of news.

Consumer spending: Other statistics to be released next week
include personal income and spending data for the first quarter of 2011, which may
provide insight into whether consumer confidence is back or still waning.
Consumption numbers are crucial data points for quarterly GDP forecasts, which
for now appear to be in the 2.0%– 4.0% range. With higher inflation rates and volatile
import numbers, Morningstar analysts estimate that first-quarter GDP growth may
be on the lower side of this range. However, companies will start reporting
corporate earnings next month, significantly impacting the market and economic

Tech sector: Excellent news from the tech sector fueled the
market in recent weeks, with some technology companies reporting revenue growth
as high as 25% and raising their dividends. In the improving economic
environment, businesses now have more money to invest in new technologies, such
as cloud computing, which in turn may fuel future growth.

Housing market: Unfortunately, housing data still does not
indicate any significant improvement. New and existing home sales in February
were dismal; only 250,000 units were sold, a new record low dating back to the
1960s. This is in sharp contradiction with realtors’ and builders’ optimism
about the spring selling season. Even when taking seasonal factors into
account, such as bad weather and low temperatures, the outlook remains bleak.

Economic growth: The GDP number for the fourth quarter of
2010 has been revised for a third and final time, from 3.3% to 2.8% and now
back to 3.1%. Increasing consumer confidence was reflected in strong spending
on consumer durables, with modest growth in non-durable goods and consumer
services displaying the smallest growth. The overall message is clear: consumers
are back, increasingly confident and willing to spend.

The tale of two recoveries (rich versus not so rich): As
worrisome as this news may be, it is by now clear that so far in the recovery
higher earners have fared much better than their counterparts (especially those
with less education). The latter continue to face double-digit unemployment and
have difficulties confronting the higher food and energy costs. Further pain in
the lower income brackets may create a ripple effect and stall overall economic

Quarter-end insights: Although this year started on a bad
note, Morningstar economists are optimistic and predict that real GDP growth of
3.5%–4.0% may still be possible if inflation doesn’t get out of control.
However, this is a big “if.” Judging by the already-rising fuel and food prices,
inflation may reach 3% in no time (the annualized increase in the Consumer
Price Index over the last six months is an even more frightening 3.9%). Looking
forward, consumer spending remains key, as well as business investing. These
may well be the two most important determinants of the recovery for the rest of
the year.

Chasing Performance

on Apr 25 in Company Blog posted by

Investors often endure poor timing and planning as many
chase past performance. They buy into funds that are performing well and
initiate a selling spree following a decline. This becomes evident when
evaluating a fund’s total return compared with the investor return. Overall,
the investor return translates to the average investor’s experience as measured
by the timing decisions of all investors in the fund.

The image (see Newsletter) illustrates the investor return
relative to the total return for a given fund. Over the short term, both the
total and investor returns were positive, with the investor return ending
slightly lower. Over a 10-year period, however, total return greatly exceeded
investor return. Investors who attempted to time the market ran the risk of
missing periods of exceptional return.

Dangers of Market Timing

on Mar 30 in Company Blog posted by

Two of the most dangerous words in the investing world are “market timing.” Market timing occurs when investors try to predict which direction the stock market will head. While some investors have been known to make money timing the market, it is highly inadvisable for long-term investors to try this extremely risky strategy. Opponents of Market Timing: Most investors and academics believe it is impossible to forecast market movements. Such a technique amounts to gambling when compared with a sound investment approach. It fails far more than it works, and market timers often end up buying high and selling low. Furthermore, you run the risk of missing periods of exceptional returns. For example, over the past 20 years, a $1 investment in stocks, as represented by the Standard & Poor’s 500®, would have grown to $5.75. If that same $1 investment happened to miss the best 13 months of stock returns over the past 20 years, the ending value would have equaled only $1.96. This would have been less than the value for an investor in a 30-day Treasury bill, a.k.a. cash, $1.97. Only those who remained invested in stocks throughout the entire period were sure to get market exposure during the crucial hot months.

Advocates of Market Timing: On the contrary, a number of websites, newsletters, and other trading services boast they can time the market. While their returns may have in fact beaten the market by a considerable margin, it’s safe to assume that these systems can’t consistently hold up over the long term. On some occasions and during some stretches of time, market timing can help generate impressive profits. However, you must be familiar with the dangers behind such an approach.

Investing With(out) Frontiers

on Mar 30 in Company Blog posted by

The United States is generally considered a developed country with a strong economy (lately, not so strong), but investments in other countries and regions have the potential to provide better returns than U.S. investments.

In the commonly used classification system, countries generally fall into two categories, developed and developing (or emerging). Developed countries have stable economic and political systems, strong levels of industrialization, and healthy economic indicators (such as gross domestic product and income per capita). Examples of developed countries include the U.S. and Canada in North America, the U.K., France and Germany in Europe, Japan in Asia, and Australia. Developing countries have weaker economies and lower economic indicators, but they are making significant progress toward becoming like the stronger, developed markets. Examples include Poland and Hungary in Europe, Mexico and Chile in Latin America, and China and India in Asia. But there remain countries that don’t fit into either category, making the need for a third category apparent. These economic leftovers are called “frontier markets.”

In 1992, the International Finance Corporation first established the term “frontier markets” to designate countries undergoing multiple economic changes with the goal of attaining a modern, capitalist market economy while still facing significant problems like unemployment and poverty. From an investor’s perspective, these markets are obviously very risky and illiquid because of their general political and economic instability. On the positive side, these countries also have the potential to grow quickly and are usually in need of foreign funds in multiple areas, such as infrastructure, health care, and residential or commercial real estate. Opportunities for investment are abundant. Frontier markets may contribute to increasing returns, and their elevated risk levels can possibly be reduced if the investments are included as part of a diversified portfolio.

As of December 2010, MSCI Barra identified 26 countries as frontier markets. They include many countries in Eastern Europe and in what used to be the Soviet bloc, like Romania, Bulgaria, Kazakhstan, Lithuania, and the Ukraine. In Africa, frontier countries include Kenya, Mauritius, Nigeria, and Tunisia, while in Asia and the Middle East some examples are Jordan, Kuwait, Lebanon, Pakistan, Sri Lanka, the United Arab Emirates, and Vietnam.

The image (see chart at Newsletter) illustrates the growth of $100 invested in frontier markets, emerging markets, non-U.S. developed markets, and the U.S. market from June 2002 through December 2010. Emerging markets provided the highest return and the largest ending value during this time period, followed by frontier markets. International developed markets provided a decent return, but they lagged behind their less-developed counterparts. Out of all four investments, the U.S. market performed the worst during the time period analyzed.

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