Have You Heard Of Discount Brokers?

With the advent and growth of the Internet over the course of the past two decades, discount brokers have become ever more common. Discount brokers have opened the door to investing in stock to a wider swath of people than ever before. Indeed, with the broad availability of discount brokers in this day and age, nearly anybody with even a minimal amount of money to invest can afford to access the stock market.

In addition to being less expensive than a traditional broker, there is one primary distinction between the traditional derivation and a discount broker. A discount broker does not provide an investor with advice. Rather, an investor must do his or her own research and make his or her own decisions regarding the buying and selling of stock. Although this can lead to an overhaul of information, this also increases your chances of success.

People interested in this type of investment resource need to understand some of the essential elements associated with a discount broker. The following are tips to keep in mind when making your decision:

1. Online Platforms

A fundamental consideration to keep in mind when looking for a discount broker is the online platform provided for an investor. The online platform will be the portal used by an investor when he or she desires to buy and sell stock, to access real time information about the market and to conduct research. As a result this platform needs to reliable, easy to navigate and user friendly on all fronts.

2. Reduced Account Fees

A discount broker charges lower fees than the traditional alternative. There are differences between the fees charged from one discount broker to another. As part of making a selection, “shopping around” is always great advice in order to compare and assesse from one discount broker to another.

3. Analytical Capabilities

Because discount brokers do not provide advice to an investor, you absolutely must have access to reliable analytical data associated with a stock of interest. Although a number of reputable resources exist for this type of data, in the end it is important that the discount broker selected is able to provide an investor with comprehensive sound data to rely on.

Copyright 2014 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Evaluating Historical Financial Asset Class Returns (Part 2 of 2)

I’m off on a little camping trip, so I’m proud to allow Larry Russell, a fellow blogger, to contribute.  Part 1 was published last week.

Post-World War II economic expansion from 1947 through 1968 using inflationary dollars

Inflation was quelled by a post-war recession. The immediate post-war inflation spike ended with a drop in inflation of -1.2% during 1949. This immediate post-war downturn saw the value of stocks fall by 8.3% in 1946. For this reason, the chart below begins with 1947 as stock markets recovered and began an upward march for two decades through 1968.

Post-World War II Economic Expansion 1947 through 1968 inflationary dollars

Between 1947 and 1968, there were four years in which stock values fell measured year-over-year: -1.2% in 1953, -10.46 in 1957, -8.8% in 1962 and -10.0% in 1966. Nevertheless, during the other 18 years of this period, stock values rose. In 14 of those years, inflationary stock values increased by at least 10%. Moreover for those 14 years of double digit stock appreciation, 6 years experienced stock appreciation of 10% to 20%, 4 years experienced stock appreciation of 20% to 30%, 2 years experienced stock appreciation of 30% to 40%, and 2 years experienced stock appreciation exceeding 40%, including one year exceeding 50%.

Clearly this post-WWII economic expansion graph using inflationary dollars, shows that stock returns dominated cash and bond returns. Stock appreciation was dominant to the point that any possible appreciation for bonds or cash hardly registers on this inflationary dollars chart. While the inflationary value of the original stock dollar moved up by a factor of 18, the value of cash rose by just 73% and bonds by just 53% over these 22 years.

Post-World War II Economic Expansion from 1947 through 1968 using real dollars

This post-WWII economic expansion graph uses real dollars, rather than the inflationary dollars presented in the graphic above. Over these twenty-two years, the purchasing power of the initial stock dollar increased by ten-fold, while the purchasing power of both cash and bonds fell actually fell. Over this period, the purchasing power of cash fell by -3% and the real dollar value of bonds decreased by and even greater cumulative -13%.

Post-World War II Economic Expansion 1947 through 1968 real dollars

Escalating inflation and increasing economic stagnation from 1969 through 1981 using inflationary dollars

This inflationary dollar graphic for the 1969 to 1981 period demonstrates the increasingly caustic impact that sustained and increasing inflation can have to all asset classes — especially to stocks. Asset values measured in inflationary dollar increased over most of the period, yet initial one dollar invested in stocks dropped below one inflationary dollar in 1969, 1970, and again in 1974.

The fact that throughout this period that CPI line rises above the cash, bond, and stock asset classes means that all asset class did not maintain purchasing power in the face of consistently rising inflation. Clearly, the real dollar graphic below will tell a more accurate story about asset valuation.

Escalation of Inflation and Increasing Economic Stagnation 1969 through 1981 inflationary dollars

Escalation of inflation and increasing economic stagnation from 1969 through 1981 using real dollars

This real dollar graphic for the 1969 to 1981 period is particularly helpful in understanding the negative inflationary impacts in relative terms between the cash, bond, and stock asset classes. Initially, yields on cash (3 month treasury bill) rose slightly above inflation, but eventually lost a modest amount of purchasing power during the second half of the period. At the end of these thirteen years, the initial dollar invested in cash was worth $.95 in real dollars.

Bonds also rose in value above inflation in the 1971 through 1973 period, but they fell in value more severely from 1977 to 1981, as annual inflation rates escalated. By the end of this thirteen year period, the initial dollar invested in bonds was worth only $.65 in real dollars.

Compared to cash and bonds, increasing inflation had a more substantially negative impact on stocks in the beginning and in the middle of this period. However, relative values for stocks improved during the last several years, despite the escalation of inflation. This trend reversal reflects, in part, the ability of firms to raise prices along with inflation. By the end of this stagflation period, the initial dollar invested in stocks was worth $.78 in real dollars, trailing the purchasing power of cash, but exceeding that of bonds.

Escalation of Inflation and Increasing Economic Stagnation 1969 through 1981 real dollars

Stock and bond bull markets as inflation recedes, including the Dot Com mania, from 1982 through 1999 using inflationary dollars

Inflation was finally defeated in the early 1980s, through harsh monetary policies and an associated recession. A two decade period of relatively high economic growth and high stock appreciation followed. The 1980s and 1990s stock value growth was comparable to the post-WWII expansion period from 1947 through 1968. However, unlike 1947 to 1968, the last two decades of the 20th century was also a bond bull market fueled by falling interest rates and a growing economy.

Stock and Bond Bull Markets, Inflation Recedes, Dot Com Mania 1982 through 1999 inflationary dollars

Stock and bond bull markets as inflation recedes, including the Dot Com mania from 1982 through 1999 using real dollars

When the 1980s and 1990s are viewed in real dollars, it becomes more obvious how stock value appreciation rates differed between the two decades. In constant purchasing power terms, the initial stock dollar grew to be worth $2.89 at the end of 1989 and to $11.30 in 1999.

Bonds and cash appreciated more steadily in inflation-adjusted terms without the “birth of the Internet” growth inflection point that stocks experienced in 1994. For bonds, the initial bond asset class dollar grew in real terms to be worth $2.16 at the end of 1989 and to $3.28 in 1999. For cash, the initial cash asset class dollar grew in real dollar terms to be worth $1.34 at the end of 1989 and to $1.60 in 1999.

Stock and Bond Bull Markets, Inflation Recedes, Dot Com Mania 1982 through 1999 real dollars

Dot Com crash and recovery, Credit Crisis, Great Recession, and recovery from 2000 through 2013 using inflationary dollars

Because we have all lived though the most recent economic period, it is obviously fresh in our memory compared to any of the earlier historical periods discussed above. The dot com crash was followed by an anemic recovery pumped up somewhat by increasingly unsustainable debt. The Credit Crisis — induced by completely irresponsible financial industry mortgage underwriting, deceptively cleaver financial engineering, and toxic mortgage debt derivatives — broke the global banking system and quickly impacted the real economy, leading to the very ugly Great Recession.

Stock prices bottomed in March of 2009 and have recovered to record levels measured by some stock market indexes. The slow revival of fragile economic growth has been facilitated by extraordinary monetary steps taken by central banks around the world. Even though stock markets have recovered, both consumers and investors are generally shell-shocked, and our economic, financial, and monetary systems seem far from whatever “normal” is.

During this period, bonds have been in the ascendancy and falling stock values have generated massive quantities of stomach acid. However, the bond versus stocks relative performance gap had closed substantially by the end of 2013. During the past year or two, one pervasive financial media meme has been the end of the bond bull market and the expected rise in interest rates that will negatively impact bond values. And, oh by the way, cash earned nothing during this period and ended slightly below inflation, if that really needed to be pointed out.

Dot Com Crash and Recovery, Credit Crisis, Great Recession, and Recovery 2000 through 2013 inflationary dollars

Dot Com crash and recovery, Credit Crisis, Great Recession, and recovery from 2000 through 2013 using real dollars

This real dollar chart for the latest period tells a similar story to the inflationary graph above. Because inflation has been relatively low and steady throughout this period of two crashes and two recoveries, making asset value adjustments for changes in CPI do not change the story of what has happened. Most people just hope that we are done with all this financial crisis excitement for a very long time.

Dot Com Crash and Recovery, Credit Crisis, Great Recession, and Recovery 2000 through 2013 real dollars

Conclusion

Viewing the relative 85-year historical performance of cash, bonds, and stocks broken down into these five major thematic periods tells a long-term story of “see-saw” investment performance between the primary financial investment asset classes.

During these first and fifth sub-periods of relatively high economic adversity, bond assets and cash held their purchasing power far better than stocks :

    • Stock market crash, Great Depression, and World War II from 1928 through 1946
    • Dot Com crash and recovery, Credit Crisis, Great Recession, and recovery from 2000 through 2013

During these second and fourth sub-periods of relatively strong economic activity, stocks appreciated in value far more than bond asset or cash assets:

    • Post-World War II economic expansion from 1947 through 1968
    • Stock and bond bull markets as inflation receded, including the Dot Com mania from 1982 through 1999

Only during this middle (third) sub-period of stagflation were comparative asset class returns mixed and relatively close to each other, when compared to the other four major sub-periods:

    • Escalation of inflation and increasing economic stagnation from 1969 through 1981

Several things do stand out, when one looks at the long-term historical data in this manner:

    • There have been extended periods when one or another asset class is generally ascendant or descendant.
    • Even within periods that seemed generally to have favored one asset class over another, there been significant trend reversals in comparative asset class performance.
    • In the two sub-periods when stocks have been ascendant, their appreciation multiples have been very high in both inflationary or real dollar terms. This largely accounts for the cumulative dominance of stock performance across the entire period.
    • A broad, long-term, but unpredictable picture of reversion toward upward trending return averages is presented for bonds and stocks. Obviously, the upward trending performance averages differ dramatically between bonds and stocks, while cash has barely exceeded long-term inflation.

The selection of beginning-points and ending-points for these five periods was arbitrary and driven by historical hind-sight knowledge. Nevertheless, these five periods do present a long-term, cyclical pattern. These previous five extended periods alternated or see-sawed between “good and bad” stock appreciation episodes.

Given that the most recent period exhibited relatively poor performance, going forward can we now expect an extended period of relatively high stock asset class appreciation? The answer is either an emphatic “no” or a perhaps a more wishy-washy “maybe – maybe not,” which really means do not count on it.

A statistician would complain about the paucity of data points, the pitfalls of data mining, etc. The problem is that historical data is solely informative. It can never be predictive. Expecting stocks to continue an extended bull market — beyond the post-credit crisis and Great Recession recovery that we have already experienced — is just one of a range of future scenarios. History knows nothing about the future, and neither do you nor I.

Securities history is not predictive regarding any particular aspect of the future, but historical returns and price volatility do illustrate the varying risk premiums that the various asset classes have paid over time. The only sane response to the uncertainty of investment risk and reward across asset classes is to diversify broadly and thoroughly.

Even then, each investor is challenged to determine how much to allocate to cash, bond, and stock securities. At one extreme, one could hold all cash, but history tells us that cash pays only a very small return over inflation. At the other extreme, one could hold all stocks, but history tells us that one needs a strong stomach and iron will to endure price fluctuations in pursuit of the higher risk premium that has been paid to equities.

Each individual investor and all investors in aggregate must face the future with complete uncertainty. All investment crystal balls are really completely opaque for both professional and amateur investors. Despite theories, models, and firmly held beliefs about the future, any belief in predictability is largely delusional.

The more certain any future event is to a larger number of investors, the larger the shock to the system when an improbable “black swan” presents itself. The factors that gave rise to the mortgage derivatives driven credit crisis of the past decade represent just another major delusion that later was made plain to investors.

Nevertheless, I do hope that this graphical review of the past 85-years of U.S. asset class performance has been illuminating. Understanding the historical context of relative financial asset class performance at least provides some reference points for deciding one’s investment strategy in the face of complete uncertainty about actual future events.

Larry Russell, the author of this investment returns article, is also a very strong proponent of investment cost reduction. While there are no reliable strategies that will beat the market, reducing investment costs to a minimum ensures that investors will keep the highest portion of their gross returns. Individual investors do not need to spend their lives paying tribute to the financial services industry without receiving commensurate benefits. Larry helps investors pull the plug on excessive investment fees through his free and paid personal investing books and articles.

Copyright 2014 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Evaluating Historical Financial Asset Class Returns (Part 1 of 2): Cash, Bond, and Stock Market Returns With And Without Inflation

I’m off on a little camping trip, so I’m proud to allow Larry Russell, a fellow blogger, to contribute.  This is a long article (but with lots of great information), so it will be split into two parts.  Part 2 will publish early next week.

Introduction to evaluating historical financial asset class returns with and without inflation

Very often, long-term historical U.S. asset class returns for the primary stock, bond, and cash financial investment asset classes are presented as:

    • graphics with cumulative long-term returns,
    • simple historical averages, or
    • dense tables of numbers

These approaches can be less than satisfying, because the relative performance of asset classes has varied over time depending upon the financial, economic, monetary, political, and inflationary situation within major sub-periods.

In this article, first I first present 85-year asset class cumulative returns graphics to illustrate this problem. Then, I break down this longer period into five major sub-periods that illustrate how asset class performance has varied depending upon the conditions of that period.

We begin by looking at cumulative U.S. stock, bond, and cash asset class returns from the beginning of 1928 to the end of 2013 with and without inflation. Then, because cumulative stock returns completely overwhelm those of other asset classes graphically, we will look at just U.S. bond and cash returns from 1928 to 2013 with and without inflation.

Later, we will break down 1928 to 2013 into five distinct periods:

    • Stock market crash, Great Depression, and World War II (1929 through 1946)
    • Post-World War II economic expansion (1947 through 1968)
    • Escalation of inflation and increasing economic stagnation (1969 through 1981)
    • Stock and bond bull markets as inflation recedes, including the Dot Com mania (1982 through 1999)
    • Dot Com crash and recovery; then Credit Crisis, Great Recession, and recovery (2000 through 2013)

Major economic, political, and securities market events influenced my choice of 1947, 1968, 1982, and 2000 as the breakpoints in splitting 1928 to 2013 into five periods. No attempt was made to make these five periods be of equal duration. The focus was on selecting distinct periods that could be described by the major economic, political, and securities market events that characterized them.

For the period represented by all graphics, it is assumed that one dollar was invested in each of the U.S. cash, bond, and stock asset classes at the beginning of the first year. No additional funds were added thereafter. Any change in asset value over time represents the total annually compounded gross return (pre-tax without investment expenses) for that asset class. Annual asset class returns include changes in asset market value plus reinvested interest and dividends.

For some of these breakpoints, perhaps one could argue that they should have been made a year or more earlier or later. Being overly concerned about a precise break-point year tends to miss the point. By breaking this 85-year period into five shorter periods, we can more effectively see graphically how the stock, bond, and cash asset classes performed in relative terms. Should you prefer a different year as a break point, simply view the adjacent graphics, note value changes for nearby years, and then make mental adjustments to a particular graphic.

This article includes a total of 14 historical U.S. asset class returns graphics. Seven graphics are provided in terms of inflationary dollars and a corresponding seven in real dollars. For each period discussed, the first graphic presents asset class values using inflationary dollars. Then, the following paired graphic provides the same information in real dollar terms adjusted for inflation. Real dollars represent constant purchasing power over time. (Note that on the screen, the background color of all inflationary graphics is lighter blue, and the background color of all real dollar graphics is darker blue.)

Concerning the U.S. annual data for stock (S&P Index), bond (10 year Treasury Bonds), cash (3 month Treasury Bills), and inflation (U.S. urban Consumer Price Index), several sources were consulted including the Bureau of Labor Statistics, Standard and Poors, Damodaran Online (Dr. Aswath Damodaran, Professor of Finance, New York University Stern School), and Online Data (Dr. Robert J. Shiller, Professor of Economics and Finance, Yale University).

Primary U.S. asset class returns from 1928 to 2013 using inflationary dollars

Over very long periods and especially during the second half of the 20th century, cumulative stock returns have been so high in relative terms that they have dwarfed bond and cash returns. Yet few investors have the luxury of holding only stock investments for decades hoping to capture higher stock returns. Even committed buy-and-hold investors with a high tolerance for investment risk sometimes need to draw cash down their investments to fund unplanned negative cash flow during their working careers.

Note also that academic research has demonstrated that even highly risk tolerant investors tend to benefit from holding at least some minority cash and bond asset positions over time. This is especially true, when there is uncertainty about when an investor might need to draw down some of their equity assets to fund negative cash flow. Unplanned cash flow draw-downs tend to be correlated with the loss of income associated economic downturns, and these downturns tend to be highly correlated with stock market sell-offs.

This 1928 to 2013 inflationary dollar graphic illustrates how stock asset class returns have dwarfed cash and bond returns. One dollar invested in stocks at the beginning of 1928 through the end of 2013 had a cumulative gross total return factor of over 2,500 measured in inflationary dollars.

Cumulative stock returns have been so high in relative terms that this graphic makes it appear that cash and bonds have barely appreciated over this long period. Furthermore, relatively high asset appreciation in recent decades makes it appear that stock investment returns only began to diverge in the mid-1970s to leave cash and bonds in the dust. Later graphics will demonstrate that this was not actually the case.

Primary U.S. Asset Class Returns 1928 to 2013 inflationary dollars

Primary U.S. asset class returns from 1928 to 2013 using real dollars

This graphic presents the same cumulative long-term cash, bond, and stock returns, but the data have been adjusted for inflation. One dollar invested in stocks at the beginning of 1928 through the end of 2013 had a cumulative gross total return factor of about 190 measured in real, constant purchasing power dollars.

In addition, this real dollar chart now makes it seem that stock returns began to diverge from cash and bond returns in the mid-1950s rather than in the mid-1970s, which was suggested by the earlier inflationary dollar graphic.

Primary U.S. Asset Class Returns 1928 to 2013 real dollars

Primary U.S. asset class returns without stocks from 1928 to 2013 using inflationary dollars

From the two charts above, clearly we can learn something about cumulative long term U.S. stock returns, but nothing about cash and bond returns. Since stock returns have been so overwhelming in relative terms, one approach is simply to exclude stock returns if one wishes to understand better relative cumulative cash and bond returns over this 85 year period graphically.

The graphic below indicates that one dollar invested in 10 year U.S. Treasury bonds at the beginning of 1928 through the end of 2013 had a cumulative gross total return factor of about 64 measured in inflationary dollars. For cash returns one dollar invested in 3 month U.S. Treasury bills at the beginning of 1928 through the end of 2013 had a cumulative gross total return factor of about 20 measured in inflationary dollars. Note that over this period urban CPI inflation eroded the value of a dollar by a factor of about 13 times.

Primary U.S. Asset Class Returns without stocks 1928 to 2013 inflationary dollars

Primary U.S. asset class returns without stocks from 1928 to 2013 using real dollars

This chart presents the same cumulative gross long-term cash and bond returns, but the data have been adjusted for inflation. As noted above, inflation eroded purchasing power over this period by a factor of about 13.

This graphic indicates that one dollar invested in 10 year U.S. Treasury bonds at the beginning of 1928 through the end of 2013 had a cumulative gross total return factor somewhat above 4.5, when measured in real dollars. For cash returns, one dollar invested in 3 month U.S. Treasury bills at the beginning of 1928 through the end of 2013 had a cumulative gross total return factor of about 1.5 measured in real dollars.

Primary U.S. Asset Class Returns without stocks 1928 to 2013 real dollars

Long-term investment returns broken down into five sub-periods

The remainder of this article will break down cumulative 1928 to 2013 returns into the five distinct periods listed above in the introduction. For each of these periods, you will find separate graphics of cumulative inflationary dollars and real dollars for the cash, bond, and stock asset classes.

Again, keep in mind that it is assumed that one dollar is invested into each of the three major cash, bond, and stock asset classes at the beginning of each of these five sub-periods. Total gross returns are presented, including asset market value changes plus reinvested interest and dividend payouts. Returns are gross and do not include any taxes or investment expenses.

Stock market crash, Great Depression, and World War II from 1929 through 1946 using inflationary dollars

While the full period includes 1928, this graphic starts with January 1929 values. Doing so emphasizes the behavior of asset classes including and after the 1929 stock market crash, but without the effects of the significant run-up in stock asset values during the 1920s.

One of the first things that this chart illustrates is that stock prices declined in a continuous train wreck until 1932. So much historical memory has focused on 1929 and Black Friday that some people do not realize that the years following were much worse in terms of year-over-year returns.

In the first half of 1929, stock prices had continued to run up, so the full year effect of the 1929 crash was that 1928 year-end to 1929 year-end stock prices prices fell “only” by 8.3%. In contrast, year-over-year stock prices collapsed by an additional 25.1% during 1930, then 45.8% more in 1931, and by 8.6% more during 1932. Measured by calendar years, the cumulative collapse was 65% for 1929 through 1932.

This inflationary dollar graphic shows this 65% value for one dollar invested in stocks at the beginning of 1929. Because it uses annual figures, this graphic tends to mask the somewhat greater peak to trough decline that occurred in stock prices measured on a daily basis. This is not very important, because our purpose is to understand relative behaviors between the asset classes from the 1929 stock market crash, through the Great Depression, and through World War II.

Stock Market Crash, Great Depression, and World War II 1929 through 1946 inflationary dollars

Clearly, an investor with a portfolio much more heavily invested in bonds and cash did much better throughout most of this period until after WWII, when equity prices recovered and almost closed the valuation gap with bonds. However, when the stock to bond gap was at its greatest during the Depression at the end of 1932, in inflationary dollars the initial bond dollar was worth $1.15, while the initial stock dollar was worth only $.35 for a difference of 80 cents. A second peak inflationary dollar valuation gap occurred in 1941, when the original bond dollar was worth $1.59, while the original stock dollar was worth only $.65 for a difference of 94 cents.

In addition to the more well known advantage of bonds and cash versus stocks over this period, there is a lesser know story that this chart tells us. From 1929 through 1932, the U.S. economy suffered cumulative deflation of almost 25%. If you ever wonder why central banks during the more recent Credit Crisis and Great Recession expressed so much concern about deflation and took such extraordinary measures to prevent deflation, the reasons can be found in the 1929 to 1932 period.

Laissez faire national fiscal and monetary policies during 1929 to 1932 period were almost completely hands-off, and securities markets, the economy, and consumer prices were left to find their own equilibrium points. Unfortunately, those were very low equilibrium points that induced a severe and sustained depression.

Economic demand plummeted, because the one-quarter of the working population that was unemployed could afford to buy very little. Moreover, the remainder of the population who still had jobs and/or possessed financial assets did not consume as they might normally. Deflation in the Depression was so pernicious, because declining prices provided an incentive to delay consumption. Particularly during the first five years of the Depression, the cost of products and services declined steadily. Delaying consumption is hardly a recipe for a growing economy, and the 1929 to 1932 period is an important case study for anyone who wishes to understand the deleterious effects of deflation.

Stock market crash, Great Depression, and World War II from 1929 through 1946 using real dollars

The 1929 through 1946 real dollar graphic below adjusts cash, bond, and stock values for changes in the urban CPI over this period. This chart displays asset values in terms of constant purchasing power, and thus the CPI line is displayed as a constant $1 over this period.

Note that the real dollar charts below for each of these five major sub-periods all draw a constant CPI, wherein the CPI is, in effect, adjusted by itself. Holding CPI at a constant $1 value is intended to remind the reader that all asset values on these real dollar charts are inflation adjusted and reflect constant purchasing power over time.

Stock Market Crash, Great Depression, and World War II 1929 through 1946 real dollars

During the worst of the financial collapse from 1929 through 1933, it is notable that a flight to asset safety caused the real dollar value of both cash and bonds to escalate by 50% to about $1.50 for each dollar invested at the beginning of 1929 through 1933. Also, in 1931, stock values had begun to stabilize in real dollar terms and recover unevenly in value between 1932 and 1936, reflecting the fragile financial recovery that began with the New Deal era.

In 1934, cash and bond asset values began to diverge, as the value of holding cash declined over the remainder of the period, while bond values moved upward to peak at about $2 in real dollar terms in 1940, just before U.S. entry into WWII. In contrast, real dollar stock asset values experienced another significant set-back in 1937, as stimulus measures were reduced.

Stepped up economic activity related to war production caused stock asset values to rise throughout the war and almost close the gap with bonds by 1945. However, economic adjustments after the end of the war caused another decline in stock prices, as inflation rose by 8.1% in 1946, 14.1% in 1947, and 8.1% in 1948.

Lawrence J. Russell wrote this article. He is a Pasadena, California fee-only family financial planning consultant and registered investment adviser. He is also the developer of the VeriPlan personal financial planning software.

 

 

Copyright 2014 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Why I Hired A Financial Planner

Note: This is a post by contributor Jim Kelly.  This is timely information because I’m just exploring the possibility of dipping my toes in the water as far as working with a financial planner.  Jim and I share many of the same underlying circumstances in life, so I felt that sharing this info was timely and valuable.

This year we decided to enlist the services of a financial planner. Now, you’re probably thinking that we have to be rich to be able to afford to pay someone else to manage our money.

That’s not true.

My wife and kids and I are your average middle-class family, with a mortgage and bills, just like everyone else. In fact, a lot of people who use financial planners are in the same boat. After managing our finances ourselves for several years, here’s why we decided to go with a professional.

We can handle our own finances, but don’t have time. 

We’ve never bounced a check, we’ve never paid bills late, we have retirement accounts and college savings for the kids, we’re doing all right; but we also know that we could be doing better. Instead of keeping us afloat, our money could be working getting us ahead. But between work and kids and other obligations, we don’t have the time to really spend time on our finances.

Our financial planner does, because he has one job – to manage our money. He also has skills and tools that we don’t have, like years of experience doing nothing but managing money, and access to financial planning software for advisors.

We’ve got big dreams, and we want to make them real. 

In an earlier post, I talked about being realistic when setting big goals. Well, two of our big goals are being able to retire and maintain our current standard of living, and to send our kids to college without saddling them with student loan debt.

While we knew those were both realistic goals, we weren’t entirely sure how to get there. Our financial planner helped us come up with an actual plan for achieving our goals, as well as tracking our progress. Our dreams look a lot more possible now than ever before.

We have kids to plan for. 

Planning for our kids goes beyond preparing for college expenses. Neither one of us had any idea what would happen to our kids financially if, God forbid, something were to happen to the both of us. We don’t like to think about it, but the both of us dying prematurely is a possibility, and we need to be prepared. A financial adviser can take care of all that, so that our kids will be provided for.

Our investment portfolio needed an overhaul. 

As I said before, my wife and I both have retirement accounts, but there really isn’t much rhyme or reason to them. Some of the investments were things that we had chosen ourselves, others were part of our 401K offerings that we never really let go of when we rolled them over.

The truth is that our retirement plans could have been a lot more cohesive than they were. Our financial planner took a close look and helped us come up with a more efficient financial strategy.

For us, hiring a financial planner was the best thing we could have done. Does it cost money? Absolutely, but the peace of mind we get is worth the adviser’s fees. In fact we are better off financially than we were this time last year, even with his fees.

About the Author: Jim Kelly is a husband, father, and a self proclaimed finance geek. Jim is always looking to mainly read and sometime write on PF, especially on his own strategies and struggles. When Jim isn’t nose deep in a blog you can find him on the softball field with his daughter or the soccer field with his son!

Copyright 2014 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Overpaid And Useless: A Profession That Needs To Go Away

Weather forecasters get a pretty bad rap for their accuracy.

However, this post isn’t about ripping on weather forecasters.  In fact, quite the opposite.  I bring them up so that I can compare them to another group of individuals whose profession  should really be brought into question.

You see, meteorologists often get blamed whenever a forecast is wrong.  If it rains on a day when sun was predicted, they get called out for a ruined picnic or day at the beach.  Clouds instead of the predicted sun can put a big damper on an outdoor activity.  The list goes on.

As I’ve gotten more interested in weather and looking at things, I’ve actually become a lot more tolerant of meteorologists.  If you look at what they do, it’s in fact pretty amazing that they get it right as often as they do.   They look at weather as it stands, then look at things that are happening hundreds, if not thousands, of miles away, and make predictions on what’s going to happen hours, and even days, down the road.  There are many things that can change, each with potential impact on what actually happens.  If you’re on the East coast and reading this, consider that your forecast for what’s supposed to happen is based on weather that hasn’t even hit land all the way across the continent.

What If There Were No More Forecasts?

So, what does this have to do with another profession that is pretty much useless?  I’m getting there.  Stick with me as I stay with the weather forecaster example for just a bit longer.

Imagine, for a second, that meteorologists stopped forecasting the weather.  What if all they did was talk about what already happened?  Think about tuning into the 5:00 news and having the four minutes dedicated to the meteorologist telling you what happened.  The Weather Channel would just talk about the last few days.  Online weather sites and apps would give up to the minute information about weather that already happened.

It sounds pretty useless, doesn’t it.

You’re right.

So, why do Wall Street analysts get to do exactly that?

Reporting News From Yesterday And Beyond

mb-201402wallstThere are a lot of Wall Street analysts out there, and from what I’ve been told, they get paid a lot of money to do what they do.  Which is to come up with snazzy reports with lots of important sounding language that rehashes information that, for the most part, has already been released and is well known.

Where do I sign up?

Upgrades and Downgrades On Yesterday’s News

I’ve noticed a troublesome pattern over the past several years as I track stocks I own or stocks that interest me.  The upgrade and downgrades that accompany reports seem to come out after big news has been announced, and therefore, after the stock market has already moved the stock in response to that news.

Citi, for example, released poor earnings.  The day of the earnings report, twelve analysts released reports that downgraded the stock, after it lost a few percent in early trading.  Wow, really big leap on that one.

In other words, they effectively said “And yesterday’s weather was..”

Do you know how many analysts downgraded Citi leading up to the reports?

Not a one.

Recently Ford has been under a lot of pressure.  A poor earnings reports, reduced guidance for 2014 sales, and a monthly sales report sent the stock on a slow slide.  After it slid for about six weeks, losing nearly 20% of its value, an analyst downgraded the stock, citing risk from the very items which had already been reported as threats to the stock price.

You don’t say.

Where do I sign up?

The Lost Value Of This Profession

Now, it seems to me, that these recommendations and analysis would have been more useful to investors before the report.

Some would argue that the data isn’t there.  Maybe that’s true, but I know that at many rating agencies, there are analysts dedicated exclusively to one company.  All day, every day, their job is to understand what’s going on.  At one company.  So while the company may not (and shouldn’t) release data to that analyst, if they’re not able to get some sense of what the company is doing and how they’re performing, and the challenges or opportunities that go into a report, what value is there in that job?

I’m thinking very little if any at all.

But, these analysts get paid a lot of money.  Probably a lot more than meteorologists. They get recruited from the best business schools.  They are held in high prestige.   Their information gets printed in glossy reports that get sent out all over the place.

But for what?

So they can release a report after the company in question releases theirs to say the same thing and guide investors to do what they’ve already done in the time between the actual drivers and the report being released.

Where do I sign up?

Once Upon A Time

I’m wondering if there was once value in this profession.  Before the internet when news releases were sparse and data wasn’t available and digested within moments of a company announcement, maybe these reports held value.  Back then, a report released hours or days after an earnings announcement may have held value if the market was slower to respond and there were days available to price in a driving factor.

But, that window doesn’t exist anymore.  Earnings, guidance, profits, sales, whatever the drivers are, those bits of data are processed and priced into stock prices in a matter of seconds.

Thanks But No Thanks

At this point, I take analyst recommendations at face value.  What that personally means is that for about every recommendation I see, it’s too little, too late, and it doesn’t tell me anything that has not already been reported.

If you ask me, I’d just as soon they disappear altogether.  And, if you’re used to reading them and wonder what else you could do, here’s a suggestion.

Go look up the weather forecast.  You might actually get some useful information.

Copyright 2014 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Taking the Risk Out of Trading

Many people believe that being financial independent and in control means that you have to play it safe and not take any risks. However, this can mean that your money will remain safe without ever accruing much wealth. With banks accounts offering little or no real interest nowadays, it is impossible to get rich putting your savings into a bank account. Investing might seem like the better option although it is fraught with risk and, as such, many people are put off. Here are our top tips to take the risk out of trading and investing:

Plan, Plan, Plan

You can never be too careful when you’re investing your own money. There are so many different guides available on investing and trading that you can take advantage of for free. The more you can plan and learn, the lower the level of risk that you are taking. Once you’ve learned the basics, you can begin to look at trading strategies and trading styles. There really is a wealth of material available and, the more you read, the more educated your decisions will become, eliminating much of the risk involved.

Scour the Market and Seek Expert Advice

Always remember that the trading market is vast and, as a result, it is always best to shop around for the best deal. Nowadays, there are so many brokers competing against each other that each one is looking to gain a competitive advantage by offering additional services. Features such as newsrooms, mobile trading and social trading are all optional extras that you should be aware of and should actively seek when you’re opening an account. Remember that any optional bonus can keep you ahead of the markets and enhance your knowledge, thus lowering risk further.

Try Before You Buy

If you’re unsure as to whether investing is right for you then you should seriously consider trying before you buy. Nowadays, many companies offer demo trading accounts and, as a result, you should always make sure that you utilize this feature before taking the plunge. This way, you can be absolutely certain that trading is right for you before you start investing your own money. If you just start trading without checking, you maximize the risk, exposing your savings in the process. It is always better to make mistakes when it doesn’t cost you a single penny.

To conclude, although trading is inherently risky, there are ways that you can limit this in order to maximize any potential returns on your investment. By taking these very simple hints and tips on board, investing will become easier than ever and you should start maximizing your income in no time.

This was a guest post.

Copyright 2014 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.