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Sound Advice: August 10, 2022

A Good Year For Hedge Funds After Lagging Badly For A Decade     Investing in a hedge fund may well spark an interesting conversation at a cocktail party, but a closer look at these high-end opportunities tells quite a story.   First, you have to be an accredited investor to join in.   For the typical hedge fund, that means a net worth of at least $1 million, exclusive of your primary residence, as well as an annual income over $200,000 if you’re single, or $300,000 if you’re married. Then there’s the matter of fees.   The typical fee for a hedge fund investment is 2% of assets managed plus 20% of the profits each year.   That’s a high price to pay, but one would hope that the ostensibly super-bright people running these operations could generate returns that justify the cost. The reality is that they have not.   Indeed, average hedge fund returns over the latest 10 years have been less than half those of the Standard & Poor’s 500 Index. For that matter, they have lagged beh
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Sound Advice: August 3, 2022

Are tech stocks worth the additional risk?   Companies whose focus is technology have been accounting for an increasing proportion of the total value of the Standard & Poor’s 500 Index over the latest 10 years.   Since the giant tech companies have grown more rapidly and now represent 28% of the total, the S&P Index has become more volatile. The S&P has been largely propelled by a group that had been known as the FAANGs: Facebook, Amazon Apple, Netflix, and Google.   The propulsion goes both ways.   This year, the combination of a lingering pandemic, hyperinflation, and conflict in Ukraine has sent the investment markets tumbling, with this group leading the way down. For this reason, it seems worthwhile to think about investing in the broad market in slightly different ways.   Since the S&P Index is biased toward the largest companies, it would be interesting to consider the results if all stocks in the index were equally weighted.   That would be an exchange-tra

Sound Advice: July 27, 2022

Is investing by factor a good idea?   Stocks can be described in many different ways, but common descriptions include labels such as Value, Quality, Momentum, Small Cap, Defensive, Cyclical, High Dividend, Minimum Volatility, and Multi-Factor.   It should come as no surprise that each of these has a strong following among different groups of investors. Let’s deal with the definitions first. Those in the Value group have low price-earnings ratios.   The Quality group leans toward the major companies that are the foundations of the U.S. economy.   Momentum stocks are those with above average price performance over the latest six and 12 months.   Small Cap stocks are those of smaller companies, which tend to grow more quickly, but are more susceptible to downturns in the economy.   Defensive stocks are those of companies whose products and services are essential (think Procter & Gamble).     Cyclical stocks are those of companies whose progress tends to go through boom-and-bus

Sound Advice: July 20, 2022

Tops and Bottoms   With all due respect to those who in hushed tones profess to know the precise levels of high and low points of the investment markets, no one has such a vision of the future.   At best, this information is available in retrospect, not in advance. Over the latest decade and a half, there have been four market tops and three market bottoms.   The fourth bottom may have already occurred or it still may lie ahead.   The first of these peaks was on March 24, 2000, just before the market was en route to a 49% plunge, which continued until October 9, 2002.   Those were the days of the dot.com companies with great stories, but no profits. The second peak was on October 9, 2007, the precursor to a 57% drop in the averages, which ended on March 9, 2009.   That 17-month pullback reflected the chaos in the financial markets that nearly brought the system to a halt. From that time until February 19, 2020, the Standard & Poor’s Index rose 401% before hitting the wall o

Sound Advice: July 13, 2022

The markets reflect changes in consumer confidence   Investors always look to the future.   When prospects are bright, they look far ahead.   When times are problematic, it often seems like they’ve swapped their telescopes for microscopes.   And, not surprisingly, what takes place during more troublesome periods is increased stock price fluctuation. At those times, confusion reigns the day and thoughts about what lies ahead run the gamut from “Everything will be OK” to “It’s the end of the world”. Since the start of the current millennium, weakness in the monthly Consumer Confidence Index (CCI) has always been accompanied by pullbacks in the U.S. stock market.   As the dot.com debacle began to unfold in late 2001 when companies with “brilliant concepts” but no profits fell by the wayside, the CCI plunged 28.6%.   At the same time, the S&P 500 Index dropped 6.9%. There was much more to come from the Summer of 2002 to the Spring of 2003.   Over that span, the downward spiral in

Sound Advice: July 6, 2022

Should international markets be of interest? Although the U.S. stock market always seems to be on center stage, investing in international markets has continued to grow, especially since the arrival of exchange-traded funds (ETFs), which greatly simplify the process.   It’s no longer a matter of trying to ferret out the details of important companies and untangling the differentials in local currencies. The simplest of all ways to invest abroad is to buy broad-based, exchange-traded funds that track the performance of specific countries or regions.   The broadest coverage of all would be IXUS, the iShares Core MSCI Total International Stock ETF.   Similar funds are available from Vanguard, Fidelity, and others. A narrower focus is available through EFA, iShares MSCI EAFE ETF.   EAFE stands for Europe, Australasia, and Far East.   Then there’s EEM, which is an ETF for emerging markets, IEV for Europe, EWJ for Japan, and FXI for China.   There are numerous others, but the essential

Sound Advice: June 29, 2022

Higher yields are available, but there’s a hitch.   After more than a decade and a half of well below average interest returns from fixed-income securities (most are bonds), the pendulum of interest rates is now swinging toward levels that had been considered “normal” over many decades in the past.   Way back when, interest income from investment portfolios that had a substantial portion in bonds was often sufficient, combined with pension payments and Social Security benefits, to provide a comfortable lifestyle for folks in their later years. Then came the banking crisis of 2007-9 and the Federal Reserve Board, this country’s central bank, plunged interest rates to historically low levels to keep the economy from collapsing.   As rates fell, bond prices rose.   Those who held bonds reaped hefty profits . . . if they sold prior to maturity.   But people who depended on interest income came up short when trying to make ends meet. Where to go now?   There are a number of choices, n