Comments on: A Week in the Rearview – week ending 12/19/08 http://blog.smart401k.com/2008/12/21/a-week-in-the-rearview-week-ending-121908/ News, Views and Education on Retirement Investing and the Financial Markets from Smart401k Tue, 27 Dec 2011 13:01:08 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Kevin http://blog.smart401k.com/2008/12/21/a-week-in-the-rearview-week-ending-121908/comment-page-1/#comment-2681 Kevin Mon, 29 Dec 2008 22:48:36 +0000 http://blog.smart401k.com/?p=142#comment-2681 Hi Frank, Thanks for posting your thoughts. I did find one error in the example - if you lose 99% the 1st year and have 100% gains in the 7 years that follow, you would actually have a positive return (6 years of 100% gains after a 99% loss would give you a negative return). You are correct, however, in your proof that it takes greater returns to recover any previous losses. For this reason, and to avoid any undue volatility, we prefer to choose funds that have consistent performance each year rather than ones that may have greater average performance with less consistent annual returns. For example, if Fund A outperforms others in its category 4 out of 5 years and has an average 5-year return of 15% vs. Fund B that only outperformed its category 2 out of 5 years, but had a 5-year return of 17% (due to 2 great years but 3 poor years), we would have a strong preference for Fund A. Even though we can't predict short-term market movements, and therefore won't make major attempts to time the market, we do focus on creating investment plans that match each client's objectives and tolerance for risk with the best possible mix of funds available. Each client's situation will dictate how much risk is suitable, it is up to us to work within those constraints and requirements to build an appropriate recommendation each quarter. Kevin Jaegers, Senior Investment Advisor Hi Frank,

Thanks for posting your thoughts. I did find one error in the example – if you lose 99% the 1st year and have 100% gains in the 7 years that follow, you would actually have a positive return (6 years of 100% gains after a 99% loss would give you a negative return). You are correct, however, in your proof that it takes greater returns to recover any previous losses. For this reason, and to avoid any undue volatility, we prefer to choose funds that have consistent performance each year rather than ones that may have greater average performance with less consistent annual returns.

For example, if Fund A outperforms others in its category 4 out of 5 years and has an average 5-year return of 15% vs. Fund B that only outperformed its category 2 out of 5 years, but had a 5-year return of 17% (due to 2 great years but 3 poor years), we would have a strong preference for Fund A.

Even though we can’t predict short-term market movements, and therefore won’t make major attempts to time the market, we do focus on creating investment plans that match each client’s objectives and tolerance for risk with the best possible mix of funds available. Each client’s situation will dictate how much risk is suitable, it is up to us to work within those constraints and requirements to build an appropriate recommendation each quarter.

Kevin Jaegers, Senior Investment Advisor

]]> By: Frank Kerdesky http://blog.smart401k.com/2008/12/21/a-week-in-the-rearview-week-ending-121908/comment-page-1/#comment-2662 Frank Kerdesky Fri, 26 Dec 2008 13:01:01 +0000 http://blog.smart401k.com/?p=142#comment-2662 As the saying goes "there are lies, more lies and statistics". The use of the % gained in the S&P index or for that matter, any mutual fund over various timelines is very misleading. I noticed that you use this verbage in your radio shows very frequently. In a practical sense it is reasonable but the fact of the matter it hides what people really want to know, i.e. how much money did the fund make. A 20% rate over 3 or 5 years may sound impressive but it goes not give you an accurate idea of how much profit was realized during that period. In fact, I know you are aware that even with an average gain of 20% over x amount of years, you could still ending up losing money since the real value is based on the principal at the moment. For example, if one invests 100 dollars in a fund and it loses 99% the first year then it gains 100% over the next 7 years (601% total gain for 8 years without dividends) you will still have lost 36 dollars or 36% of your original investment. Negative gains or losses in principal make the returns over extended periods of times suspect. As you also know, a 40% loss means you need to make a gain of approximately 67% to just break even because of the reduction in principal. I notice that many brokers or financial consultants tend to ignore telling people that fact. They always give the "based on a x% gain" but they should also include "and no negative returns". The individuals who panicked in this environment and sold equities when they were 20% down or less may indeed be the real winners after all. If they invest now, they have more upside than those of us which includes me who followed your and the vast majority of financial advisors advice. Sometimes it pays to panic or be extermely cautious. Frank PS. I hope you reply and tell me my comments are basically wrong. I certainly would feel better about it. As the saying goes “there are lies, more lies and statistics”. The use of the % gained in the S&P index or for that matter, any mutual fund over various timelines is very misleading. I noticed that you use this verbage in your radio shows very frequently. In a practical sense it is reasonable but the fact of the matter it hides what people really want to know, i.e. how much money did the fund make. A 20% rate over 3 or 5 years may sound impressive but it goes not give you an accurate
idea of how much profit was realized during that period. In fact, I know you are aware that even with an average gain of 20% over x amount of years, you could still ending up losing money since the real value is based on the principal at the moment. For example, if one invests 100 dollars in a fund and it loses 99% the first year then it gains 100% over the next 7 years (601% total gain for 8 years without dividends) you will still have lost 36 dollars or 36% of your original investment. Negative gains or losses in principal make the returns over extended periods of times suspect. As you also know, a 40% loss means you need to make a gain of approximately 67% to just break even because of the reduction in principal. I notice that many brokers or financial consultants tend to ignore telling people that fact. They always give the “based on a x% gain” but they should also include “and no negative returns”. The individuals who panicked in this environment and sold equities when they were 20% down or less may indeed be the real winners after all. If they invest now, they have more upside than those of us which includes me who followed your and the vast majority of financial advisors advice. Sometimes it pays to panic or be extermely cautious.

Frank

PS. I hope you reply and tell me my comments are basically wrong. I certainly would feel better about it.

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