Smart401k Blog

In the headlines

A look at some of the market movers over the past week:

• Bunge (NYSE: BG) announced that it is buying Corn Products (NYSE: CPO) for $4.4 billion
• Nokia (NYSE: NOK) decided to buy the piece of Symbian that it doesn’t already own
• In response to fuel costs and a slowing economy, UPS (NYSE: UPS) slashed its second quarter estimates
• Goldman Sachs (NYSE: GS) said that it goofed when it recently upgraded financial and consumer stocks
• Eastman Kodak (NYSE: EK) got a boost when it announced a $1 billion share repurchase
• Consumer confidence continues to sag under the weight of the economy
• Manufacturing activity was no cheerier, and home prices unsurprisingly continued their slide
• The Federal Reserve left rates unchanged and cited inflation risks
• Higher oil inventories helped prices cool off for a couple days
• New home sales in May fell, while existing home sales rose slightly
• The bears had the day on Thursday, pushing markets to new lows
• First quarter GDP estimates were revised up to 1%

Commentary

It was a rough ride on Wall Street this week and the S&P 500 ended the week down 3%. The index is now down 8.7% for the month of June and 10.4% since the market changed direction in late May.

Economic considerations held sway in the markets during the week. The big drop in consumer confidence underscored the belief that consumer spending will continue to soften, which, in turn, will put pressure on economic growth. Inflationary pressures also continue to be front and center, particularly when it comes to oil prices. Meanwhile, investors had little reaction to the upward adjustment to first quarter GDP that was announced.

Also impacting the market in a big way this week were the stream of reports out of the investment banks. Not only were the banks very pessimistic on the prospects for their fellow investment banks, but — as in the Goldman Sachs report on financial services and consumer discretionary stocks — they were revising down their outlooks in other areas as well.

The announcement from the Federal Reserve that it is holding its key rates steady was widely expected and had little impact on the market. What the market did seem to latch onto, however, was the perception that the Federal Reserve has painted itself into a corner — it can’t raise rates to combat inflation because of low economic growth, and it can’t lower rates further to spark economic growth because of the inflation threat.

Looking ahead

Heading into the holiday week ahead, the market will have substantial pessimism to overcome following last week.

On the economic side, the week starts off with the Chicago purchasing manager’s index, which could contribute to setting an early tone for the week. Later in the week we’ll get the Institute of Supply Management index but more importantly we’ll have the trio of hourly earnings, nonfarm payrolls, and the unemployment rate, all of which will give a picture of how the job market is holding up. Of course, we’ll also have the weekly crude inventories and initial jobless claims reports, which the market will also certainly take notice of.

In a market like this it’s anybody’s guess how the coming week might turn out. While positive surprises in the economic reports could turn things back around, even good news could be taken in a poor light if investors stay as pessimistic as they were to close this past week. Further commentary out of the investment banks could provide an unexpected push in either direction as well.

What we’ll most likely see is investors taking a cautious approach to the market in light of two straight weeks of declines and the upcoming Fourth of July holiday. As a result, we’ll probably see the major indices roughly flat for the week.

But of course our faithful readers will know that at this point in our weekly commentary we will yet again emphasize that those saving for the long term should not get caught up in the market’s current pessimism and stop investing — or, worse yet, start pulling out their current investment dollars. When newspaper headlines talk about the indices crossing into “bear market territory” it’s much more of a reflection of what has happened recently than what we can expect ahead. It’s exactly as bear markets are making their lows — and it doesn’t have to be the lowest lows — that investors can find the best deals.

So, its been a couple weeks since I told you that I was going to run the NYC Marathon. I mentioned that I had a plan and a goal and thought that I was good to go.  The first week after my post went well.  I had two good runs during that week and also ran the longest I have ever run (11 miles) at the pace that I set for the marathon (8 min 30 sec / miles).  The next week started out well with two solid runs and then I got to my long run of the week… and the wheels came off.  I was trying for 13.1 miles (1/2 marathon) and only made it to 10 miles before my body (and mind) had, had enough.  To make matters worse I ran a slower pace than I had the previous week (9 min miles).

During my cool down walk back to my apartment I tried to analyze what went wrong and how I could “fix things” so that I could prevent this from happening again. By the time I got back, I had noted a couple things about the run (Time of day, food, hydration, etc.) that could be improvedand realized that it was probably just a bad run. However, I was still wondering if there were additional changes I could make.  Luckily for me, I talked to my friend Matt shortly after I got back and he convinced me not to make any major changes to my plan. He pointed out that my times and distances had been improving pretty quickly and that I was bound to have a down day.  We talked through my current training schedule and discussed running a bit earlier in the day, but other than that we decided that I shouldn’t make any major changes.  He also pointed out that I had a long way to go until the marathon and that my current plan was a solid one.

After talking through my plan and my anxieties about it, I realized that what I was going through was very similar to feelings that many of our client’s must have as the market continues its volatile ways.  During difficult times its natural to want to make changes to your plan, but these times are often the worst time to make substantial changes. It’s always good to give your plan a check-up and consider making small changes (i.e. run in the morning before the afternoon heat), but if it was a solid plan in the beginning it probably shouldn’t be changed all that much.

While I can understand your anxiety, I strongly caution you from making substantial changes to you investment strategy (assuming your initial investment strategy was a sound one) unless you have recently gone through a major life change.  If you have had a life event, I would urge you to talk to your advisor. Together, you can evaluate the changes that have occurred since putting your plan in place.

Before i wrap up, I thought I’d end with a few things I’d like you to consider.

• If you have more than 10 years until you need to access your retirement account, do your best to ignore the day-to-day gyrations of the market. Retirement investing is a long-term process making the short-term movements of the market just that…. short-term events that shouldn’t change your long-term focus.
• It’s hard to get back on the savings track when you get off.  If you aren’t planning to access your funds anytime soon, keep investing.  Buying at regular intervals reduces the anxiety of trying to time the market (it doesn’t work) and puts the focus on the future rather than the present.
• A funny thing about investing…. The best time to buy is often when everyone has given up on the market and is retreating…remember the old adage of  – Buy Low, Sell High? - Unfortunately, the most money flows into mutual funds during market peaks and the most money flows out of mutual funds at market bottoms.

If you have any questions/comments our advisors are available by phone, email or live chat. If you want to us to review your 401(k) investment strategy feel free to become a client today.  It only takes a few minutes.

In the meantime, I’m taking a long-term view to my training and hopefully you’ll take a long-term view towards your investments.

Scott H

Before I forget… Thanks to Rich for his comments/suggestions to my first post.  Rich, I went out and bought a new pair of shoes.

In the headlines

A look at some of the market movers over the past week:

• XM Satellite (Nasdaq: XMSR) and Sirius Satellite (Nasdaq: SIRI) made headlines as the merger started looking rocky again
• Amidst mounting losses insurer AIG (NYSE: AIG) announced the ousting of its CEO
• Crop conditions were the worst reported since 1996 as drenching rains in the Midwest have threatened corn and soybean fields in Iowa
• Shares of Chiquita Brands (NYSE: CQB) plunged on the company’s announcement of an expected loss in its third quarter
• Berkshire Hathaway‘s (NYSE: BRK-A) Warren Buffett announced his support for InBev‘s proposed buyout of Anheuser-Busch (NYSE: BUD)
• Goldman Sachs (NYSE: GS) analysts said that the credit problems are still in the early innings
• Meanwhile, Goldman announced earnings well above expectations
• Best Buy‘s (NYSE: BBY) earnings beat expectations
• Southwest (NYSE: LUV) is looking to expand its business as rivals are cutting back
• The US producer price index rose at a startling rate in May
• US housing starts continued to fall, though the decline was close to economists’ expectations
• FedEx (NYSE: FDX) sounded a dour note when it reported earnings
• China announced that it is raising the base price for gasoline in its country
• The tough times for bond insurers continues
• Economic leading indicators increased slightly in May

Commentary

Investors found little to cheer about this week and the S&P index was pushed down more than 3%, with a 1.9% decline on Friday to cap the week.

For dedicated market watchers, there was little that was new this week contributing to the market’s worries. Early in the week, investment bank Goldman Sachs announced earnings that were refreshingly better than the rest of the industry. However, the firm coincidentally released research suggesting that there is still plenty to be concerned about in the credit environment.

The producer price index (PPI) increased at a brisk pace, keeping inflation at the top of most investors’ lists of concerns. Similar to the consumer price index, the PPI is measured on both an overall basis and a “core” basis excluding food and energy. The core measurement is increasing at a far slower pace than the broader measure, thanks largely to fuel prices, but this didn’t seem to provide investors much comfort. Meanwhile, flooding in the Midwest has stoked fears that food prices will continue to accelerate.

Looking ahead

We’re not likely to get a respite from the prevailing pain points next week. Early in the week we’ll have the The Conference Board’s consumer confidence June reading which is expected to be down slightly from the low levels of May. May new and existing home sales will be announced and it’s unlikely that these will be able to move the market much, even though existing home sales are expected to be up. The final GDP number for the first quarter is also unlikely to have much effect on the market unless the number is revised downward.

The weekly releases of initial unemployment claims and crude inventories will continue to have market moving potential.

Earnings announcements will be light next week, though we will likely get some commentary on food prices when General Mills (NYSE: GIS) announces earnings on Wednesday and ConAgra (NYSE: CAG) follows on Thursday. On the consumer side, investors may be watching Darden Restaurants (NYSE: DRI), Nike (NYSE: NKE), and Bed Bath & Beyond (NYSE: BBBY). Technology could get a boost if Oracle (Nasdaq: ORCL) is able to continue its recent string of success.

And last, but certainly not least, we do have an interest rate decision from the Federal Reserve on deck for next week. Surprised that it hasn’t been all over the headlines this past week? Don’t be. It’s unlikely that the Fed will be moving rates either way at this meeting so the announcement will likely be met with a yawn — unless there is some new commentary from the Fed that accompanies the rate decision.

We continue to recommend that long term investors stick to a steady investment plan. Market declines in the near term — the next six months to one year — will offer good opportunities for investors to buy at lower prices and benefit when the economy and the markets do recover from the current problems.

Soon, 401(k) investors will begin receiving quarterly statements to summarize the performance of their retirement account. The first thing many investors look for is the rate of return, and rightly so, it directly impacts the amount of money available for retirement. Investors also understand that the amount of risk they take will impact the returns they experience. For this reason, more focus should be paid to managing risk, rather than managing returns.

The fundamental method of risk management is in the asset allocation decision, which involves the process of deciding how money should be allocated between asset classes – stocks and bonds, foreign and domestic holdings, and large caps versus small caps. This decision becomes increasingly more important in volatile market environments.

The appropriate investment strategy is influenced by many factors, such as: investing time horizon (how long the money is invested), and the investor’s objectives, goals and risk tolerance. It is important that these factors are decided upon before making any long-term investment decisions. If you find yourself struggling with this step, it is important that you get some help.

The purpose of this article, however, is to evaluate what to do after this step. Before we proceed, please understand that from this point forward, the assumption is that you have already completed this thorough process.

Once you have decided on the right mix of asset classes for you at this particular moment, it’s always a good idea to revisit your account on a periodic basis. We suggest four times a year, once per quarter, to make sure that your allocation doesn’t move too far from the intended target.

Overtime, if left unchecked, your balances in each of the asset classes will stray away from the initial target allocation as the various sectors of the market perform differently. For example, let’s say you start with an allocation of international funds at 15 percent two years ago. This asset type has performed well over this time period, so now it makes up 20 percent or more of your total portfolio. The result: you now are more aggressive than you intended to be, and the risk builds that the well-performing sector may revert back to its historical mean return. A great resource for how asset classes have performed over time is shown in The Callan Periodic Table of Investment Returns:
http://callan.com/research/institute/download/?file=periodic/free/256.pdf

This chart shows the annual rank and return of each asset class from 1988 to 2007. Notice that the top performing asset class for the past three years, the “MSCI EAFE” (international) index, was also the worst performing asset class in seven of the 13 years from 1989 to 2001.

The idea here is that no one asset class is always the best performer, or even a good performer. I know it’s hard to sell an investment that’s doing well, but essentially you are selling high and buying low when you take this approach. According to findings from DALBAR’s study of Quantitative Analysis of Investor Behavior (QAIB), the average investor’s return is far less than the S&P 500 index return, which is in large part due to unsuccessful market timing. This shortfall is often caused by the tendency to gravitate towards areas of the market that have the best recent (short-term) performance.

Lesson learned: Be diversified across major asset classes, continue to invest in all market cycles (dollar-cost averaging) and periodically rebalance the account to make sure that your investments stay aligned with your long-term investment strategy. Some plans are now offering an automatic rebalance feature that lets you select the frequency your account is reset back to the original allocation. One word of caution with this feature is that you don’t completely forget to look at your account again, and remember, that you must take prudent action to decide how the investments should be allocated in the first place.

Managing your own investments can be hard sometimes, especially in periods of high market volatility. We think you will have a lot more success, and will rest much easier, if you follow this systematic approach to investing. A sound investment strategy and rebalancing schedule will be your guide, rather than letting fear and emotion lead you to an inevitable journey of irrational decisions.

If you feel you need help with this area of your investment strategy, or at least want a second opinion, please give us a call at (877) 627-8401.

Kevin Jaegers, Senior Investment Advisor

In the headlines

A look at some of the market movers over the past week:

• Fed chief Ben Bernanke made it clear that he has his eye on inflation
• Lehman Brothers (NYSE: LEH) projected a $2.8 billion quarterly loss and said it will raise $6 billion
• Apple (Nasdaq: AAPL) announced its much anticipated new 3G iPhone
• Staples (Nasdaq: SPLS) finally found a price to close the Corporate Express (NYSE: CXP) acquisition
• Belgian beverage giant InBev made a $46 billion bid for Budweiser (NYSE: BUD)
• Lender Thornburg Mortgage (NYSE: TMA) announced a big first quarter loss
• It appears the discussions with Microsoft (Nasdaq: MSFT) and Yahoo! (Nasdaq: YHOO) are over for good, and Yahoo! has signed an advertising agreement with Google (Nasdaq: GOOG)
• Economists surveyed by The Wall Street Journal showed support for The Fed’s policies
• ExxonMobil (NYSE: XOM) announced its intention to get out of the retail gas business
• May retail sales came in much higher than anticipated
• Jobless claims and business inventories rose more than expected
• US Airways (NYSE: LCC) made the most recent of the airline cutbacks
• Foreclosure filings continue to soar
• Oil prices sagged a bit on OPEC comments about the high price and recent volatility
• Food and oil continue to propel price inflation

Commentary

Better than expected retail sales numbers and a positive outlook on rising inflation were enough to keep the market flat for the week after carry-over concerns from last week provided an early week hit.

The week started off on a sour note after the plunge last Friday due to the unemployment rate. Continued concerns over financial services companies, particularly the much embattled Lehman Brothers, also added to the rocky first half of the week.

As expected, though, economic indicators took center stage for most of the week. Because of the importance of consumer spending for the economy and the current pressures on consumers, retail sales were a major focus for the week. Despite the forecast of a 0.5% increase in overall consumer spending and a 0.7% increase in spending excluding auto sales, readings came in markedly higher at 1% and 1.2%, respectively. Though this was well received by the market, the reaction was muted to some extent by the assumption that the jump was at least in part due to the government stimulus checks.

Meanwhile, a somewhat higher than expected inflation reading on Friday surprisingly played in the markets favor. Though the rise in core CPI — which excludes food and energy — came in at the anticipated 0.2%, the broader measure of CPI was up 0.6% against the 0.5% expectation. The sharp rise for CPI continues to stem from skyrocketing food and fuel prices. Investors took the news in stride, though, and seemed to be placated by a slight drop in oil prices on Friday.

Looking ahead

We will have much of the same to look forward to going into next week. Weekly economic indicators like crude inventories and initial jobless claims are sure to grab some eyeballs. Those looking for direction on the housing market will likely be focused on building permits and housing starts, both of which are expected to be down from the prior readings. Center stage, though, will likely be given to the producer price index, which will give investors another view on inflation, and the reading on economic leading indicators.

Earnings will likely play a bigger part in the market next week as we’ll have a handful of notable earnings reports. On Monday Lehman Brothers will finally turn weeks of speculation into reality when it reports earnings, and tech giant Adobe (Nasdaq: ADBE) will also announce. We’ll have more reads from the financial services industry later in the week as Goldman Sachs (NYSE: GS) reports on Tuesday and Morgan Stanley (NYSE: MS) follows on Wednesday. We’ll likewise get a good consumer data point from Best Buy (NYSE: BBY) when it reports on Tuesday.

But of course while these events will help paint the picture for the market next week, we are still not recommending that retirement investors make any changes to their long-term savings strategy.

I’m happy to report that I recently found out that I got into the New York City marathon. You can either qualify for it — which I’m not fast enough to do — or you enter a lottery, which is what I did. I’ve been running a lot lately, but now that I’m officially entered, I have to figure out how to run 26.2 miles.

So now I need to develop a training plan that will get my body and mind ready to run a distance that is far longer than I have ever attempted to run. Luckily, I know the distance that I have to run and I have figured out the time that I want to beat. Now, if you’re wondering why I’m writing about my marathon training here, here’s why: while I was figuring out my goal for the marathon, I realized that it was a very similar process to what I went through to figure out my retirement savings goal.

I have always been a goal oriented person, and as a result I’ve taken the time to set a savings goal that I believe will allow me to lead the type of lifestyle that I desire in retirement. Unfortunately, I have found that the majority of people that I talk to haven’t taken the time to do this for themselves.

When creating a plan, the first step is to think about what kind of life you want to live in retirement. Are you planning to travel? Maybe move to an area that has a higher cost of living? Or perhaps you expect to sell your house and move to something smaller? These are just a few of the scenarios that will impact how much you need to save.

The general rule of thumb is that you need to be able to replace 70-80% of your pre-retirement annual income to maintain a similar quality of life in retirement. If you’re not planning any big changes that’s probably a good goal. However, if you’re planning to travel or move to a warmer climate — that’s more expensive — you’ll probably need to be able to replace more that 80% of your income.

After you figure out what type of life you want to lead in retirement, you’ll be able to use one of our calculators to figure out how much you’ll need to save to reach your goal. Once you have that number, you can use it to determine how much you are going to need to save each year to reach your goal. You can then compare those results to how much you are currently saving. If you are ahead of the game, then congratulations! You might be able to retire earlier than you thought, or perhaps you can take that vacation you have been daydreaming about.

If you’re behind where you need to be to reach your goal, it’s time to take a look at how you’re spending your paycheck. There are some easy fixes like drinking the office coffee instead of buying a latte at Starbucks every day, and there are also some bigger fixes like moving to a smaller house or buying a smaller car. But no matter what position you’re currently in, starting now is always a better option than continuing to put off thinking about it.

So back to the marathon… My goal is to run it under 3 hours and 45 minutes which is right around 8 minute and 30 second miles. I’ll keep you updated as my training progresses (the marathon is on November 2nd). If you have any tips for how to prepare for a marathon, I’d love to hear them. Meanwhile, if you have any questions about how to start a retirement plan let us know. We’ll answer your questions as best we can and will try to post our answers here to help others that might be in a similar situation. No question is too small or simple –we’re all beginners in something. For me it’s running… What is it for you?

Scott H

In the headlines

A look at some of the market movers over the past week:

• China Telecom (NYSE: CHA) took a step in China’s massive telecom restructuring by buying China United Telecom’s mobile phone assets
• Standard & Poor’s lowered the credit ratings on multiple major banks
• Homebuilder Toll Brothers (NYSE: TOL) reported yet another quarterly loss
• State Street (NYSE: STT) announced plans to raise $2.5 billion of new capital
• Wachovia (NYSE: WB) ousted its CEO, Ken Thompson
• Investment bank Lehman Brothers (NYSE: LEH) came under heavy fire for it’s capital position and what is expected to be a poor upcoming quarterly earnings release
• Fed chief Ben Bernanke spoke out about the weak US dollar
• GDP growth estimates continue to trend down for both 2008 and 2009
• United Airlines (Nasdaq: UAUA) decided to shutter its low-cost airline Ted
• The JM Smucker Company (NYSE: SJM) announced that it is acquiring the Folgers brand from Procter & Gamble (NYSE: PG)
• Verizon (NYSE: VZ) announced that it will be acquiring wireless carrier Alltel
• Bond insurers Ambac (NYSE: ABK) and MBIA (NYSE: MBI) officially lost their AAA ratings
• A big jump in oil and a rise in unemployment sent the markets plunging on the last trading day of the week

Commentary

It was a rough week for the markets and there was plenty going on. Concern over banks and financial services companies was back in focus again early in the week. Lehman Brothers found itself in an uncomfortable spotlight as speculation ran rampant over the firm’s liquidity position and its upcoming quarter. Wachovia made headlines as well as its CEO became the most recent executive casualty of the housing and credit crisis. Meanwhile, Ambac and MBIA finally found themselves stripped of their coveted AAA ratings — an action that most investors have been expecting for some time.

The economic reports for the week were a mixed bag. In the first four days of the week, we had the Institute of Supply Management (ISM) announce that its closely watched index for manufacturing was unexpectedly up in May. Though the index still suggests that the sector is contracting, the increase was a welcome report against the drop that was expected. Meanwhile, the ISM’s services index fell less than expected in May. Additional positive news came from worker productivity, which gained more than expected, and initial jobless gains, which fell 18,000 from last week.

Of course the economic indictor that most investors ended up focusing on at the end of the week was the surprising jump in the unemployment rate to 5.5%. Compounding this, and helping to spark Friday’s big sell-off, was a spike in oil prices that left crude at nearly $140 per barrel to end the week.

Though the 1.9% gain on the S&P index on Thursday helped mute three down days this week, the S&P finished the week off 2.8%.

Looking ahead

With the stream of earnings reports all but dried up, the market will be looking for news to focus on next week. High on the list is again likely to be economic reports, which will include the Fed’s “Beige Book,” pending home sales, retail sales, and the consumer price index. Many investors and analysts have been concerned about the potential for stagflation — rising prices combined with a slowing economy — so the readings on retail sales and consumer prices should grab some headlines. Current expectations are that retail sales excluding autos will be up 0.7% from April, and CPI will jump from 0.2% to 0.5%.

Despite the market’s sell-off on Friday, the S&P is still up more than 8% from the intraday lows that we hit earlier in the year. And though the magnitude of the sell-off was notable, the news that sparked it on Friday did not seem drastically out of line with the data that was already available and digested.

For retirement savers, we continue to recommend a steady, diversified investment plan that adds new money on a regular, set schedule. Even in a rocky market like we’ve had over the past year, this is still the best bet for capturing the returns from the global economy while minimizing timing risk.

A customer wrote us yesterday and told us that they didn’t need our advice right now because they had pulled all their money out of the market and put it into the money market fund in their account. While this is not the first time this has happened, it still bothers me a great deal whenever I hear about it.

There are certainly very legitimate reasons to move your retirement money into a cash-equivalent investment like a money market or stable value fund.  When you don’t have the time to ride out shorter-term ups and downs of the market, you may need to get more conservative with your money.  But the more frequent reason people pull out of the market is flat out nervousness.  Many people that get nervous about the markets are tempted to pull their money out before (they think) things could get worse.  When the market starts to go back up, the plan is to jump back into their original investments, reaping the rewards of future market gains. 

Well, I’m here to tell you two things: 

1.  Pulling out of the market whenever you fear further declines is a form of market timing

2.  Market timing is extremely risky and can easily cost you tens of thousands of dollars if your timing is off the slightest bit.  Read on to get the facts. 

Goldman Sachs Asset Management did a study that looked at market returns as represented by the S&P 500 Index from 1986 to 2006.  Here is what the data shows:

Stay invested in all 5,297 days of this study period, and the annual return is 12.12%

Miss the 10 best days and the annual return is 8.56% – a difference of 3.56% per year.

Miss the best 40 days and the annual return drops to 1.87%.

Miss the best 70 days and the annual return drops to -3.02%. 

As the data above indicates, if you are out of the market only a handfull of key times, your returns can be severely impacted.  What does this return difference mean in terms of dollars in your account at retirement?  Let’s say you just missed the 10 best days over the above 20 year period, saved $400 per month for all of those 20 years, and had a return on your investments of 8.6% (rounded for our calculator) per year.  You would have $254,500 after the 20 years.  Under the same assumptions, except if your return were instead 12% per year (rounded for our calculator), you would have $ 399,700 – a difference of over $145,000 (these are before tax numbers).  And that’s only 10 days! Imagine if you had missed the top 70 days, just over 1% of the days covered in the time period, and lost money! 

Given these numbers, is it really worth the risk of going in and out of the market?  We think not.

-Scott Revare

The returns listed are based on the S&P 500 Index, which is the Standard & Poors’ 500 composite stock price index of 500 stocks, an unmanaged index of common stock prices. The index figures do not reflect any deduction for fees, expenses or taxes.  Past performance is not indicative of future results.