Tax Time

It is tax time in the United States, and estimated payments for a variety of entities are due on January 15th.

January 2009 Outlook

Just a few thoughts for January. The market has started to gain traction, yet there appears to be a large area of resistance at 960-990 for the S&P 500. This will be a big test for the short-term as we approach the inauguration, and if we can break through that resistance, then the foundation may be set for strong gains in 2009. Stay tuned.

Monday, 5 January 2009 Investment Thoughts

I have been contemplating certain strategies with regard to moving forward with certain investments for 2009, and I did a little research to see how stocks perform over different time periods. Most notably, I took a look at the three year period ending December 31, 2006 which was a very good period for equities. Here is some of the research from Craig Israelsen published in Financial Planning Magazine that analyzes individual stocks versus mutual funds and their benchmark indexes.

Israelsen’s (2007) study indicated that 2,637 U.S. equity funds survived the entire year in 2006. Further, Israelsen (2007) revealed that the average large capitalization mutual fund performance was 13.2% in 2006, while the average return for the average equal-weighted return for 3,719 stocks was a positive 48.7% for 2006. On the other hand, there were 2,414 stocks with negative performance for 2006 with an average equal-weighted return of -30.5%. Israelsen (2007) also analyzed the largest mutual fund by asset value, the Vanguard 500 index fund which represented approximately $118 billion in market capitalization at December 31, 2006, which was slightly more than 3% of the total United States fund equity base of $3.1 trillion. In that year, the Vanguard 500 Index Fund performance was 15.64%.

Israelsen (2007) also studied the longer periods to include the three year period ended December 31, 2006. Over that period, the mean equal-weighted annualized return of the 5,573 individual stocks that survived the entire period was 6.3%, while the median return was 7.3%. Of the 5,573 stocks, 2,073 had a negative three year return of -25.4%, while 3,478 stocks had a positive three year annualized return of approximately 25.3%. Over the ten year period ending December 31, 2006, the average return with respect to the 3,626 stocks that actually survived the period was only 3.2%, while the median ten year return was 7.7%. Israelsen (2007) concluded by noting that the impact of 2000-2002 was readily evident in that the median annualized investment return was significantly higher than the average return which is a reminder that there were some substantial losses in that time period thus reducing the median returns to the average.

Why does any of this matter? Consider that during so-called good markets that many stocks are still down for various periods, and that one has to consider how to approach a portfolio. That is, should it be constructed with broad based mutual funds, index funds, or individual securities? In this market, each investor has to consider his or her own specific financial planning circumstances to completely answer this question. I would be interested in your feedback. Best regards, Mike