Last transaction of the year!

Well, stocks have stayed up! That's a good thing for my yearly numbers. 17.0% return for 2010. Its likely to end up a little lower as people do a little, or possibly a lot, more profit taking on the last trading day of the year. So for my last payday of the year, 100% of my 401k contribution will go into the stable value fund, which will at last get me just slightly below 90% invested in stocks. I think a pullback soon is likely, so this will be a good place to be.

First time here?

Mystery Solved!

I was comparing notes with a friend of mine today in our respective 401k strategies. His strategy differs greatly from mine, but is a perfectly sound one. He is well diversified (unlike me... I'm entirely in stock index funds except for my small amount in stable value) and then leaves it alone. He hadn't even checked it yet this entire year until today. It turns out his rate of return is 15.X% so far this year... barely lagging me (I'm 16.8% at the end of the day today). So I asked what funds he was in. He had a variety but none had a return of more than about 10%. Hmmm......

He has a relatively new job so I asked him when he started contributing. It was before the beginning of the year. Hmmm....

Then I asked when did his company match, which is unusually good, kick in? Aha! It started in May... right when the stock market was down, and stayed down for a few months before climbing again at the end of the year.

In other words, he accidentally sort of did what I did. He beat all the markets he was into because he started contributing aggressively when stocks were low, which is where most of his gains were.

The comparison did make me research some other investment options (that I don't think I'll take but were interesting, like REIT's) and made him decide to set up automatic notifications for rebalancing. His account was way out of balance after not looking at it for a year. I didn't tell him that regular rebalancing is essentially what I do. :-)

First time here?

Santa Rally Out of Control!

I can't believe the Santa rally is going up again! Well, I'm still over 90% in stocks, so assuming the rally holds to the end of the day I'm going to make another 1% move out of stocks today.

You might be wondering about excessive trading. Good question. As I understand it, I'm ok as long as I'm going the same direction. Excessive trading in my plan applies to "round trips" in any particular fund of over $1000. Let's hope I've got that right. :-)

Year-to-date rate of return after today's close: 16.6%

First time here?

More Rebalance Today

This is a little bit unusual, but I decided to move money out of stocks just two business days after the last time. They have inched up slightly today, and its the end of the year so I think there will be profit-taking over the next 2 weeks and I will do the same. I'm still over 90% in stocks and I think I'll shoot for slightly below 90% by year end if the stocks stay up, and especially if they go up more.

The exceptions: I kept my pacific index fund the same because Asian stocks went down a bit, and also kept my company stock the same because I intend to increase my percentage there (maybe up to 10%) over the next year because it pays dividends.

Year-to-date return: 15.7%

First time here?

Today is the day to sell!

At last! I've been wanting to take some profits for the last few days but needed to wait until today because I bought some stock on November 16 when the S&P 500 got down to 1178 and I always wait at least one month to change direction to avoid any excessive trading problems, and because its just a good idea. At the moment the S&P 500 is 1240 (after hours update: it closed at 1242.87), nearly the highest number for the year. Time to take profits. But as I never do anything sudden, I am only moving 1% (as always) of my total portfolio out of stocks and into stable value. Because stocks have been climbing so much in the last 2 or 3 months, this still leaves me slightly over 90% in stocks. This means that if stocks go up even more, I still stand to profit (and will sell some more) and if stocks go down considerably, I've got a cash reserve to use for more buying.

Year-to-date return: 15.6%

First time here?

Up Up Up!!!

Stocks are going up some more and its making this contrarian more "sellish" (I'm never truly "bearish"). Therefore when payday comes in a couple of days my full contribution will go into the Stable Value Fund. I'll still be over 90% invested in stocks (currently about 94%). Later in the week I will almost certainly sell off slightly, probably 1% of my portfolio shifted from stock funds to stable value. The only reason I don't do it today is that I did some buying (also 1%) on the 16th of November, so I want to wait at least one month to reverse direction.
Year-to-date rate of return at end of today: 15.5%

First time here?

Don't Follow the Herd

This is tragic. Investors pulled out of stocks when they were low, and then invested in bond funds and lost there too. I hope the lesson is learned. The correct lesson is not to stay away from stocks or bond funds or any other particular investment. Rather, the lesson is to not follow the herd, and to not sell low or buy high. These investors forgot to be proper contrarians.

Current year-to-date return: 15.2%

Introduction

My investment strategy is pretty simple. Invest in broad stock market indexes, especially when they are low. Over time, they have always gone up, and in the short term, they are volatile. The way to make money in any investment is to buy low and sell high.

In my 401k, I invest enough to get my full company match; no more, no less. If I had no match I think I'd still invest something in the program but I haven't had to cross that bridge.

I am somewhat afraid of mutual funds. Obviously the Bernie Madoff scandal doesn't help this, but even a sound manager costs money that comes out of my earnings, and I don't even know for sure if the manager has the same investment philosophies I have. Plus, mutual fund managers are under tremendous pressure to please the "herd" and as an investment contrarian that is the exact opposite of what I do. I don't have the option of investing in individual stocks in my 401k plan, except my own company stock, and that is ok with me. It is difficult to find the time to investigate individual companies. I don't trust these "target date" funds either. I'm sure they are well managed but I have a hard time believing that they will match the market. I don't fully understand the behavior of bond funds. I know in theory bonds are supposed to be safe, but it turns out they are not really and I don't have the same certainty that they always go up over time as I do with the stock market. I could see myself someday having some bond investments if I can learn more about them. That day has not come yet.

So, I stick with what is familiar... the boring old stock indexes. I invest in a large cap index fund which mimics the S&P500, and a small/mid cap index fund which mimics the Russell 2500. The two of these make up about 60% of my portfolio. I think I would do just fine to invest only in these, but in order to call myself more "diversified" I also invest in an all-world stock index fund, a pacific stock index fund, a european stock index fund, and just for fun my own company stock. I've noticed that all of these pretty much go up and down together, so really if I wanted to be diversified I'd have to invest in something besides stocks. I guess I don't really want to be diversified that badly. I do use the "stable value fund" as a sort of cash-storage device and keep up to 10% of my portfolio invested there depending on market conditions. That way if stocks drop, I have some money beyond my bimonthly contributions to put back into stocks while they are low.

It is worth nothing that essentially the same thing can be accomplished by simply investing 90% of contributions in stock funds, 10% of contributions in the stable value fund, and then rebalancing as often as allowed to keep that ratio. This would automatically buy low and sell high; in fact many accounts will literally do it automatically at the time interval you choose. But its not as much fun as doing it manually. I like to actually go heavier on stocks when they're low, and lighter on stocks when they're high. If doing it manually is not fun for you, you should probably just do the automatic rebalancing and you'll probably do about as well and save a lot of time.

It seems the majority of people tend to buy high and sell low. It is the only way the extreme ups and downs of the market can be explained. This is good for contrarians like me, and you could argue I should leave well enough alone, but I have personally met so many people who have lost money or at least haven't made any in their retirement accounts that I felt compelled to share my strategies which seem to be working so far, although there is no guarantee I won't someday crash and burn. Either way, the ride will be revealed here. My actual gains and losses (by percent, not dollar amount) will be reported, so I cannot be accused of reporting theoretical gains "had I done such and such". These are the actual numbers. I only have the numbers from 2009 to the present. I am not trying to hide the fact that I lost a lot in 2008... it was probably 20% or 30%. I just wasn't keeping track back then, nor had I yet fully developed a strategy. I was 100% invested in stocks at the time, and my only regret about that is that I didn't have any cash to re-invest in stocks while they were low. Suffice it to say I kept buying (using my new contributions) all through the downturn, even during the drop, and that by mid-2009 I had recouped all my losses since the peak in 2007. If there is another crash, I'll have temporary losses again, but as with the crash of 2008, I'll end up profiting because I'll be buying low through the downturn (IF I can manage to stay employed that is, but that is not a matter for this blog).

For the sake of example, here is a pictorial view of my investing strategy over the year of 2010. Open up the S&P500 chart and on the lower right of the chart enter a date range of January 4, 2010 to December 10, 2010. This is a graph of the stock market over a one-year period as represented by the S&P500 stock index. Notice there are two major low periods, one in February, and another from May to October. My year-to-date returns were negative during both of these periods, and I was in full "buy" mode, which means 100% of my paycheck contributions were going toward stocks, and I was rebalancing toward stocks roughly once or twice a month, about 1% of my total portfolio each time. How did I know the market had reached a bottom? I didn't. All I knew was that the market was low as compared to recent history. After that, dollar-cost averaging takes over. The market could continue to go down, but thanks to averaging, I could not possibly miss the bottom, and I did not miss. I did small amounts of selling in April where there is a high. Again I didn't know where the absolute high would be and didn't need to know since dollar-cost averaging works the other way as well. I also rebalanced 1% into stocks during that brief low on November 16. On December 16 we were hovering around 2-year highs and I rebalanced out of stocks by 1% to lock in the gains. I may do this again once more before 2010 is over if stocks do not drop much.

I have no method of predicting the future. I read all the articles on internet news sites about finance, and it seems no one else really knows how to predict the future either even though they are paid to try. So, I do not speculate on whether the markets will go up or down at any given time. I tend to look at what the S&P500 has been doing over a one-year period (I have trained myself to follow this broader index and not the Dow, although in the end it doesn't matter much; they go up and down together). If it is at a low for the year, I buy, if at a high, I tend to hold or sell (putting my contributions into stable value instead of stocks), all while attempting to keep a balance of 90% stocks, 10% stable value plus or minus 10%. Meanwhile, the all-time history of the S&P500 is in the back of my mind. Currently it is around 1200, and it has been as high as 1500 in 2007 and I do fully expect it to get there again someday, and then go beyond. Really, the only way this could not be true is if the world as we know it comes to an end, in which case none of our investments really matter anyway (though admittedly the ones who invested in gold, guns, and canned food will be better off than me if that happens).

This brings me to my final point, which is that I don't actually plan to ever retire in this life. As a born-again Christian, I have an eternal retirement plan far better than any earthly one and so there isn't much reason to try to create a heaven on earth. If I do stop working for a paycheck, it will be to work full time in ministry. At this time, I don't feel called to that so I keep working and give what I can to my local church and other ministries so that others can have this eternal retirement plan as well, and donate my time as I am able. So really, in my earthly retirement plan I am just doing what I can to make sure I'm not a burden to others when I am unable to work, and maybe even be able to help others even when my body fails. God could have other plans for me and I could still end up being dependent, but at least it will not be for lack of stewardship if that happens.

I plan to update regularly. I'll try to highlight posts where I report actual activity, which at most will be every other week (my pay period). Other posts will be commentary on investing in general. I hope you can learn from me and that you'll comment so I can learn from you.

No activity today. Stocks are flat. I'd be tempted to sell some stock, but my balance is in the ballpark of where I want it. My goal for now is about 10% stable value, 90% stock funds. Currently my stock funds are at about 94% of my portfolio, and 100% of my new contributions are going into stable value. That's a good setting for now. If stocks go up, great. If they go down, I'll start buying again and if they go down a lot, I can take that stable value and invest it into stocks as well.

Here is a good article about the S&P 500 Index, and why you should be invested in it. There is quite a bit here I didn't know about the index, but it reinforced my view that it should be the foremost holding of any portfolio.

This fund is usually named something like "Large Cap Index Fund" in a 401k account.

Enjoying the Ride

Everyone in the news seems excited about stocks for the remainder of the year. I am too, but the indexes are high at the moment, and I only buy when they are low. So, no activity for tomorrow unless something really drastic happens. If stocks remain high, when payday comes on the 15th I'll put 100% of my 401k contribution into the Stable Value Fund so I can use the money to buy stocks later next time they're down.

This is the time to sit back and relax and enjoy the gains on all the stocks we bought when they were low in June through September.

Personal Rate of Return for year to date: 14.1%

Allocations:
31.47% Large Company Index (S&P500)
31.37% Small/Mid Cap Index (Russell 2500)
12.95% European Stock Index (MSCI® Europe Index)
10.35% Int'l Stock Mkt Index (MSCI® All Country World Ex-USA Investable Market Indx)
4.72% Pacific Stock Index (MSCI® Pacific Index)
2.67% Company Stock
6.47% Stable Value Fund

To be honest I think I could do just as well with just an S&P 500 index, one of the small Russell indexes, and the Stable Value, but I guess in theory this spreads out the risk more. I've noticed all the world stock indexes tend to go up and down pretty much together.