Mullooly Asset Management

Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ

stock market

Mullooly Asset Show Episode 2

by

1:35 – What actually happened to the stock market on August 24th, 2015
7:00 – How much you should have saved as a cash reserve
8:57 – No free lunch on Wall Street

Here is the link to the transcript of the video

Averages Can Be Misleading

by

I’ve written before about average returns and how they rarely occur. It’s great to look at long term market averages, but on a year-to-year basis, those averages should absolutely not be what investors expect. If you invest with the expectation of achieving average market returns year after year, you’re going to experience quite the emotional ride.

Tyler from Portfolio Charts recently provided an excellent example of how averages can be misleading. He discussed Millenium Force, a roller coaster at Cedar Point in Ohio. This is an extreme ride that reaches speeds of 93 mph with a drop of 300 ft. Tyler reminds us in his post that:

“At a length of 6595 ft and a duration of 200 seconds from start to finish, the average speed of the coaster is a pedestrian 22 mph”

Tyler’s point is that if you look at the averages, you’d probably think Millennium Force is a children’s ride. Another example of the averages not telling the whole story.

Investing is no different! A strategy’s average returns or the market’s average returns are not reflective of the returns that actual investors will experience from year to year. This is a crucial point that investors need to understand.

Source:

http://portfoliocharts.com/2015/08/03/how-averages-lie/

Is the S&P 500 a Good Portfolio Benchmark?

by

Subscribe: RSS

This morning at our daily research meeting, we discussed something that several clients have brought up to us recently: it’s June and the Dow Jones Industrial Average and S&P 500 are barely positive for the year. While it is important to monitor your portfolio’s progress over time, many investors make the mistake of comparing their entire portfolio to these widely recognized market indices. The S&P 500 (and Dow Jones Industrial Average) do not make good portfolio benchmarks for most investors.

We often have to remind investors (and ourselves) that the S&P 500 is simply a basket of 500 US large cap stocks. Likewise, the Dow Jones Industrial Average is a group of 30 US large cap stocks. We sometimes forget this because these two indices are frequently referred to as “the market”. Neither of them are, in fact, “the market” and it’s not even close!

Unless your entire portfolio is invested in US large cap stocks, the S&P 500 is not a good portfolio benchmark. If you’ve diversified your US equity exposure to include mid and small cap stocks, you need a new benchmark. If your portfolio includes international equities, bonds, or commodities, you need a new benchmark.

A really simple way to get a more accurate reading of your portfolio’s performance is to create a better benchmark. Financial professionals like to discuss things like Sharpe Ratios when given this task, and that’s great if you’re a professional or have a strong interest in finance. For the average investor, there are simpler ways to measure your portfolio’s performance though. While no measure is perfect, the following would be an improvement over simply using the S&P 500’s return. During our research meeting today, Tim mentioned using the S&P 1500 as your US equity benchmark instead of just the S&P 500. That would certainly be a step in the right direction for most people. You could even take things a step further by weighting the returns of the S&P 500, S&P 400, and S&P 600 to mirror your portfolio’s weightings. For example:

If your US equity allocation is 25% large cap, 25% mid cap, and 50% small cap, you could take 25% of the S&P 500’s return, 25% of the S&P 400’s return, and 50% of the S&P 600’s return to get a much more accurate picture of how your investments have been performing.

You could do the same to create more accurate benchmarks for the international equity and fixed income allocations in your portfolio as well. Again, these aren’t perfect benchmarks either, but I believe they’re less flawed than measuring your entire portfolio against the S&P 500.

It’s also important to remember that measuring performance over short time periods (like months or quarters) might frustrate you. No strategy works 100% of the time. Ben Carlson put it nicely, explaining that, “Nothing works all the time. The reason most investment strategies work over the long-term is because they don’t always work over the short-term.”

While some people might think of the S&P 500 as “the market”, we wouldn’t recommend using it as a total portfolio benchmark.

Dow Jones Industrial Average Celebrates 119th Birthday

by

Subscribe: RSS

Yesterday the Dow Jones Industrial Average celebrated its 119th birthday! Charles Dow and Edward Jones created the index, and it was first calculated on May 26, 1896. While the Dow Jones Industrial Average is certainly the most discussed US market index, you may be surprised to hear that it’s actually only the second oldest. Dow and Jones created the Dow Jones Transportation Average first! Tom and I discuss the Dow Jones Industrial Average’s 119 year transformation, and point out a useful tip we can take away from it on this week’s podcast.

Back in 1896, Charles Dow and Edward Jones wanted to measure the performance of the industrial sector within the overall US economy. Their solution was the Dow Jones Industrial Average, which price weighted 12 stocks into an index. This price weighted index featured stocks from major US industries like tobacco, railroads, leather, and cotton. These 12 stocks were supposed to be the barometer that measured American industry. Somebody reading this information today might be surprised to hear of the Industrial Average’s roots. Many of today’s Dow stocks have little or nothing to do with the industrial sector.

Other than longstanding General Electric, the only constant in the Dow Jones Industrial Average has been change. There have been 53 stock changes in its 119 year history. Not only the index members have changed, as we’ve also seen the number of holdings increase over time. What was initially 12 stocks became 20 for a brief period, and ultimately ended up being the 30 stock index we know today. Lately, changes to the members of the Industrial Average have occurred with pretty high frequency too. The most recent change was Apple’s addition to the index in March of this year. The index’s price weighted methodology has remained in place throughout its history. This ensures that the highest price stock in the Dow Jones Industrial Average receives the heaviest weighting, and thus the most influence.

Just as we’ve seen the Dow Jones Industrial Average grow from 12 industrially based stocks into 30 major US companies, we can see changes and adaptation take place in our own portfolios. The number of holdings you have may not remain static over time, and you may not own an individual stock or fund forever. The only constant is change, meaning everybody should be periodically reviewing their portfolio and staying abreast of any changes that may need to take place.

Stock Market Games Encourage Poor Behavior

by

Happy Stock Market Games, and may the odds be ever in your favor!

If you took an investing class in high school or college, you likely played some variation of a stock market game. You know, that game where teams try to obtain the best investment returns over a semester, month, or set period of time. While these games are fun (and quite similar to fantasy sports), the type of investor behavior they encourage is terrifying.

Jason Zweig of The Wall Street Journal recently described the goal of the annual Capitol Hill Challenge stock market game, writing:

“You need to understand what many of these young portfolio managers were trying to do: to beat the market over a 14-week period by taking as much risk as possible.”

4,400 groups of students from all over the United States participated in the Capitol Hill Challenge this year. The game’s sponsor, Sifma, states their goal is to teach students, “the importance of long-term saving and investing”. However, the type of behavior they’re actually endorsing is more or less the exact opposite of that. Some of the strategies used by past winners include taking massive margin loans to invest in heavily leveraged funds. To be clear, the students’ trades are done in paper accounts and no money is actually lost or gained. Do they understand that it’s just a game or are they left with a distorted perception of investing?

I get it, the stock market game is a fun way to pique youth interest in an area they would normally want nothing to do with. At what cost are we obtaining their interest though? You can tell students that the incredibly risky investment strategies used to win stock market contests don’t work well over time, but will they listen? Or will they get caught up in the rush of making a few successful stock picks and believe that’s how investing works? I know that most people my age are far more interested in picking hot stocks than investing in a diversified portfolio of no-load mutual funds or ETFs. Are stock market games promoting this gambler’s mentality?

The speculative behavior learned from stock market games is probably more harmful than helpful when it comes to educating kids about investing for the long term. Sound investment strategies may be boring to teach, but they also have infinitely more real-life value.

Source:

http://blogs.wsj.com/moneybeat/2015/05/08/stock-market-101-teaching-the-wrong-lessons/