2005 Retirement Contribution Maximums

The 2005 governement set retirement account contribitions are as follows:

• IRA (Traditional or Roth): $4,000
  • catch-up contribution: $500
• SIMPLE IRA: $10,000
  • catch-up contribution: $2,000
• 401k, 403b, 457b, SARSEP: $14,000
  • catch-up contribution: $4,000

The catch-up contribution applies to contributors over the age of 50.

2004 Returns

Amex	22.2%
Dow	3.15%
Nasdaq	8.59%
NYSE	12.2%
Russell 2000	17.0%
S&P 500	8.99%
Wilshire 5000	8.59%

December Returns

Amex	2.00%
Dow	3.40%
Nasdaq	3.75%
NYSE	3.49%
Russell 2000	3.04%
S&P 500	3.38%
Wilshire 5000	3.62%

Employer Funded Retirement

The company I work at gives all it's employees raises at the New Year. This is an excellent time to either start or increase your contribution to pre-tax retirement accounts such as a 401k or 403b.

You should also make sure that you are contributing enough to get the full employer match. This is free money to you. The only reason to possibly not contribute to an employer matched plan would be if the money only goes into company stock.

If you are already contributing enough to get the company match, you should consider increasing your contribution percentage when you get a raise. You are unlikely to miss the increased pay if you don't actually see the money on your paycheck.

Should Your House be considered a Real Estate Investment?

The June Money magazine has an article about how the average American has 27% of their assets in their own home. Most investors would be unwilling to have one quarter of their assets in a single stock.

Most investors try to reduce their risk by diversifying their asset allocation by investing in at least stocks and bonds. Wealthier investors may have investments in stocks, bonds, real estate, and possibly commodities or other asset classes.

The article has two suggestions as to how you could reduce the risk incurred by having such a high asset allocation due to owning a home.

Laurence Siegel, director of investment policy research at the Ford Foundation, says one way to diversify is to buy real estate investment trusts (REIT) in other areas of the country. The idea behind this is that if the value of your home goes down, the value of the other real estate may maintain it's value. Siegel also thinks that REITs make more sense early in a mortgage, since your bank has more ownership in your house than you do.

Stanford finance professor Steven Grenadier and economics consultant Peter Bernstein say owning your home is enough real estate risk. They say that you can hedge your risk by buying bonds. They point out that bonds tend to go up when home values go down.

Hans Nordby, Property & Portfolio Research strategist, says that as long as you are planning on living in your house, as opposed to selling it, you shouldn't consider your house as an investment. He considers a primary residense as a form of consumption. You get a return from you house by living in it, not from tapping it for cash.

Rising Interest Rates and Market Cap

The June Money magazine points out small-cap stocks have outperformed large-cap stocks for the last four years. The Russell 2000 has risen 51% over the past 12 months, while the S&P 500 is up only 25%.

The price/earnings (PE) ratio of small-cap stocks is 18.6, while the PE ratio of large-cap stocks is 18.2. This is the first time since 1984 that the average PE ratio of small-caps has been higher than large-cap stocks.

Large-cap stocks tend to perform better in the later stages of an economic recovery, while small-caps tend to do better in the earlier part of an economic recovery. Since 1984, large caps have returned 8% in the second year of a recovery, while small-caps returned 5%.

When short-term interest rates are rising, large-caps have returned 10.3% per year, while small caps only returned 7.7% per year.

Historical October Returns

I just read an article from the Oct. 4, 2004 Newsweek which discusses the historical stock market returns in October. It points out that October has historically been an average month, while September has been the worst.

The Dow's three largest one-day percentage drops were in October. Five of the Dow's (1896-present) and Wishire 5000's (1974-present) ten largest one-day percentage declines were in October.

Three of the Dow's and the Wilshire's ten best one-day gains were in October. These all occured following big losses.

September is the worst month for investors. It is the only month with more losses than gains.

Political Returns

No, this post has nothing to do with my political views. It is purely statistics that I found in another of my old Money magazines (June 2004). I have seen this before, but now I have it in writing.

The bear market from 1969-1974, and the market crashes of 1929 and 1987 all occured with a Republican president. The bull markets during the 1960s and 1990s occured with a Democratic president.

According to the Stock Trader's Almanac, since 1901 the Dow Jones Industrial Average (DJIA) has returned 6.4% annually with a Republican president, and 9.1% annually with a Democratic president.

Also according to Richard Bernstein of Merrill Lynch, since 1943, stocks rose 13.6% per year with a Democratic president, and only 11.7% per year with a Republican president. He also pointed out that long-term Treasury bonds returned 9.5% under the Republicans, while they only returned 2.8% during Democratic administrations.

He also noticed that industrial stocks did better under Democrats, and consumer stocks did better under Republican administrations.

Foreign Stocks

I often fall far behind in my magazines and newspapers that I read. I am currently on vacation, using this years vacation days up. Right now I am reading one of my Money magazines (August 2004).

Money magazine cites a Merrill Lynch statistic that says that a portfolio with 20% foreign stocks would have performed as well as a portfolio with only domestic stocks, and would have been less volatility.

The article also points out that if you are worried about the U.S. economy, then you may be worried about the security of your job also. If you expect the U.S. stock market to decline, then it may be in your best interest to spread your investments to other countries which may be more stable.

More Millionaires

A survey by Merrill Lynch and Capgemini found the number of millionaires in the U.S. jumped 14% last year. That is 1 in every 128 Americans.

More on ETFs

ETFs, Exchange Traded Funds, offer the advantages of both stocks and mutual funds.

Like mutual funds, ETFs include a number of stocks, this diversification offers less volatility than holding a single stock. There are tax advantages to holding ETFs, such as lower capital gains taxes. They generally offer lower fees than mutual funds. This is due to the stocks held in the ETF being changed infrequently. ETFs are not actively managed like mutual funds, each has a specific class of stocks that it holds, and are only changed when necessary.

Like stocks, they are highly liquid (frequently traded). The cost of trading is the same as trading stocks, and any number of shares can be traded. Advanced trading techniques can be used such as shorting, limit and stop orders, buying (calls) or selling (puts) options, and ETFs can be purchased on margin.

There are several companies that offer ETFs: Barclay's iShares, Vanguard VIPERs, and State Street's StreetTracks.

Update 12/23/04: Today I found PowerShares, another ETF.

Update 1/4/05: Merrill Lynch offers HOLDRS.

My Exchange Traded Funds

I have been asked what Exchange Traded Funds (ETF) I invest in.

I actually do not invest in many ETFs, but that is more because there are stocks which I feel I can get a better return from.

I have several accounts, each one has a different investment strategy. This is because of how I am able to fund the accounts, not because I'm testing the strategies. I have a Roth IRA, a 401k, and a couple brokerage accounts, one professionally managed, one self-managed, and I keep my change in a piggy bank ;-) . I will leave the strategies for each account to another post, and answer the question which was asked though.

Of my accounts, currently the only one with any ETFs in it is my 401k. My 401k only offers 2 choices of ETFs. I am limited to a Russell 2000 ETF, and an S&P 500 ETF. I am currently invested in both. i currently have 20% of my 401k in the S&P 500 ETF, and 25% in the Russell 2000 ETF. This is not intended as a long term allocation though, it is the same reasoning as my option investment from my last post.

after mid-January I will probably change the allocation to have about a 30% allocation in the S&P 500 ETF, and a 15% allocation in the Russell 2000 ETF. I will invest the rest in the mutual funds that are available. When I change my assett allocation in mid-January I will update my blog.

Russell 2000 January Call

Last December I bought January call options on the iShares Russell 2000 ETF (IWM), slightly out of the money, at $2.40 based on this article. In mid-January, the expiration date, I sold the options for $7.70 for a 320% gain, excluding trading expenses.

I am going to try this again. Thursday I bought January call options at $4.00. I am buying about a week earlier than I did last year. Also I am buying an option which is in the money. Last year the option I bought was out of the money. So I have put up about 75% more money initially, but hope to make a better return. If I am correct and the options increase in value over the next week or two, I may increase my position.

Update 12/16/2004: So I didn't do exactly what the article said to do. The options have been much lower that the $4.00 that I bought them at. I think they got close to $2.00.

If I had bought them today, I could have gotten them for around $3.20. I may look into buying more options slightly out of the money if it looks like the Russell 2000 is starting to move up, but right now I don't like how it looks. I will continue to hold the previously purchased options until near their expiration in mid-January.

Asset Allocation - November to May

If you aren't in the stock market right now, you probably should be.

At the beginning of November I moved my 401k money from about 50% bonds / cash and 50% stock funds to be 100% invested in stock funds. I am presently allocated at 40% large cap, 15% mid-cap, %25 small cap, and 20% international. This asset allocation was up 5% for the month of November.

I consider myself an aggressive investor. I am still young and don't expect to retire for 40 years. I can handle a lot of fluctuation in the stock market right now. This asset allocation is not for everyone, and I don't recommend it for people approaching retirement.

The reason I am writing this is because I found this article. I have seen similar research done in the past, but I can never remember where it is when I try to find it. It states that the stock market (since 1950) has done significantly better between the months of November to May (average gain of 8.5%), then from May to November (average loss of -0.1%).

I am not saying that I will get out of the market in May, but I will consider it. If they stock market looks like it isn't growing as fast or is declining, then I probably will reallocate my investments to mostly bonds and dividend yielding stocks.

Update 12/16/2004: Another article with similar information.

Rant on Stock Analysts

I must say that I do not like stock analysts.

I have had a position in US Steel (X) for several weeks. It has gone up over $10 / share since I have owned it. Today a stock analyst said that it has gone up too much, and downgraded the stock, so of course the stock dropped several dollars. I think the stock was undervalued when I bought it, and is probably still undervalued, not by as much though.

Several years ago a lot of analysts got in trouble with the SEC because they were paid off by companies to give them favorable ratings.

I think the average stock investor would probably do better if we didn't have the analysts offering their ratings on stocks. Investors should do their own research rather than relying on the "pros" to offer them advice. People over react to the analysts recommendations, rather than thinking for themselves. If they don't want to think for themselves, they should be in mutual funds.

I haven't heard too many analysts downgrade Google (GOOG) even though it is wildly overvalued. I can only find one analyst who has Google rated as a sell, as opposed to 8 with buy ratings. Do they not remember when the tech stocks all bombed in 1999. Most of the tech stocks that tanked were overvalued then.

I think Google was fairly priced when they IPOd. Regardless of the share price, $85, the brokerages that ran the IPO did a good job. Google could have released more shares at a lower price, but didn't want to. I have heard people say that Sergey Brin and Larry Page admire Warren Buffet and want to emulate his business, Berkshire Hathaway (BRK.A, BRK.B). I do not think that Google will turn into a technological Berkshire Hathaway. One day Google may deserve a price near $200, but I don't think that will be in the next several years.

November Returns

Amex	7.22%
Dow	3.99%
Nasdaq	6.17%
NYSE	4.68%
Russell 2000	8.56%
S&P 500	3.86%
Wilshire 5000	4.51%