Well, the New Year's party is over. Time to plug some numbers into the spreadsheet and see how my 401-k performed this year. I admit to some trepidation...the market has been so wild this year, the carnage so widespread, is it possible my system failed me this time?
I guess it was inevitable... I'm down big time this year. But, with the help of the year end rally, the news is not as bad as it felt. For those who are not familiar with this blog, I use a system I call "Dollar Cost Averaging on Steroids" to manage my 401-k. (You can read about in in earlier posts if interested). The claim I've been making is that it virtually guarantees "beating the market."
The bottom line...I beat the weighted average of the markets I invested in for the 9th straight year. For 2008, I'm down 25.1%, while the weighted average of the markets was down 28.3%, consistent with the results from previous years, when I've beat the market by 2-4% per year.
Okay, so a loss of more than 25% is not exactly what you hope for each year. But, the 2-4% per year outperformance over the long term is huge, more than doubling your nest egg over your career, and redoubling it during a typical retirement. That's enough to make difference between happy early retirement and slogging away for extra years and worrying about running out of money.
Thursday, January 1, 2009
Thursday, December 18, 2008
Hank, Here's an Idea
Dear Hank and Ben,
Since you are determined to pump liquidity into the economy, why not do it in a way that would guarantee a nice profit for the taxpayer? Is there some rule that says the taxpayer always must get hosed? If not, I'd like to propose the following outstanding investment that I believe will meet all your goals, while enriching the taxpayer.
You may have been too busy to notice, and if so, you may want to call the Secretary of Energy and ask him to do some checking. But, the energy market is so chaotic these days that it has created a unique opportunity for the federal government (as well as a small group of investors).
I know this seems too good to be true, but give me just a few seconds.
The crude price today closed below $38 per barrel. Meanwhile, the February Futures contract for the same oil is about $46 per barrel. That means if you buy oil today you can store it and sell Feb futures and guarantee a 20% return in 2 months, less expenses. That is an annualized return on your money of over 100%.
You may be wondering-if this is such a good deal why isn't everyone doing it? Good question, and according to a recent article in the Wall Street Journal, some are. The article mentions that BP and other oil companies are storing crude in tankers to take advantage of this golden opportunity. But, here's the kicker...the Federal Government is in a unique position to work this deal, as a result of available capacity in the strategic reserve. This storage option is uniquely large and low cost, and the government has the people and infrastructure in place to activate the plan. Invest a billion dollars and get $1.2 billion back in two months. I know the government can just print money, but this is almost as good, and it is a real money maker in contrast to the printing presses with their risk of unintended consequences. Just to review, here is what you can accomplish with a pen stroke:
Since you are determined to pump liquidity into the economy, why not do it in a way that would guarantee a nice profit for the taxpayer? Is there some rule that says the taxpayer always must get hosed? If not, I'd like to propose the following outstanding investment that I believe will meet all your goals, while enriching the taxpayer.
You may have been too busy to notice, and if so, you may want to call the Secretary of Energy and ask him to do some checking. But, the energy market is so chaotic these days that it has created a unique opportunity for the federal government (as well as a small group of investors).
I know this seems too good to be true, but give me just a few seconds.
The crude price today closed below $38 per barrel. Meanwhile, the February Futures contract for the same oil is about $46 per barrel. That means if you buy oil today you can store it and sell Feb futures and guarantee a 20% return in 2 months, less expenses. That is an annualized return on your money of over 100%.
You may be wondering-if this is such a good deal why isn't everyone doing it? Good question, and according to a recent article in the Wall Street Journal, some are. The article mentions that BP and other oil companies are storing crude in tankers to take advantage of this golden opportunity. But, here's the kicker...the Federal Government is in a unique position to work this deal, as a result of available capacity in the strategic reserve. This storage option is uniquely large and low cost, and the government has the people and infrastructure in place to activate the plan. Invest a billion dollars and get $1.2 billion back in two months. I know the government can just print money, but this is almost as good, and it is a real money maker in contrast to the printing presses with their risk of unintended consequences. Just to review, here is what you can accomplish with a pen stroke:
- Inject liquidity in the market
- Guarantee a great return for the taxpayer
- Stabilize the commodity markets, which I believe are a big part of the overall instability in the economy.
For my readers, I'm sorry it would be difficult for you too capitalize directly on this idea. But, if it makes sense to you, you may want to forward it to someone in Washington.
Regards,
Energy Guru/Personal Finance Guru
Sunday, November 23, 2008
Hoping for a Bottom
I got my wish. The market has now dropped so far that I’ve had the opportunity to get all the cash from my retirement plan into the market. As you may know, I was lamenting last fall that my “Dollar Cost Averaging on Steroids” system had me sitting on a huge pile of cash after a long bull run with few interruptions. So, I was wishing for some market volatility that would allow me to invest the cash at lower levels. As of last week, it was all in the market.
I should have recognized that time as one of those “Be careful what you wish for” moments. I have to admit I underestimated how painful that might be. Now, I’m wishing for a bottom. Emotionally, that feels pretty awful, but from a logical standpoint the chances seem pretty good to me. Most major bear markets have ended with long term average P/E ratios of around 10. Currently, I believe we are about 10-11. Not that this was a factor in my decisions, of course…my system works on autopilot. But, now it can’t operate effectively until we at least get some significant bounces.
While I would like to have some more cash to invest at these levels, most of what I see on financial shows is about where you can “hide” from the market. So, while I pray for a bottom, I think that discussion is worth some ether ink.
I have to admit it sounds comforting at one level, but I have a hard time believing the best thing to do is hide from a market that is on sale at it’s best valuation in 30 years. The last time valuations were this low was in the 1970’s. Of course, most profess to be ready to get back in once the bottom is comfirmed. When it will come, I’ll admit don’t know, but I heard a commentator on PBS a couple of days ago expressing things pretty much as I see them. His comment was something along the lines of “We’ll only know we have a bottom about 6-8 weeks after the fact when prices are up 30-40%.”
Be that as it may, the vehicle many are choosing as their hiding spot, US Treasuries, seems a questionable choice to me. Granted, according to conventional wisdom, these are the safest bet you can make. But, 3 month treasury bills are yielding well under 1%, and 5 year bonds are yielding only about 3%. This is because of the huge buying related to the flight to safety, but, to me, this only makes sense if you expect massive deflation accompanied by much lower interest rates. While I expect some deflation as a result of the big decrease in energy and other commodity prices, I expect this will be relatively short term. Over the longer term, I worry the massive borrowing governments are doing will lead to inflation. In fact, aside from the immediate borrowing binge, I believe the only way government can get out of the massive federal debt is to inflate their way out. And those in treasuries would be murdered by inflation. No, treasuries don’t sound so safe to me.
An alternative might be US I Savings Bonds. They yield only about 1% over inflation, but at least you are protected from inflation and don’t have to worry about rising interest rates. Unfortunately, the rules prohibit you from parking large sums there. Inflation adjusted treasuries are unlimited, and might seem a good substitute, but these would still be hurt badly by increasing interest rates.
Federally insured short term (up to 1 year) CDs seem like a better choice. They are yielding several times as much as treasuries of similar duration, and for my money are just as safe. You would do well during any deflation and you can be pretty sure you will get your money back with interest. And you can always roll them over at higher rates if interest rates go up over the longer term.
Of course, most who are hiding their money want to be able to jump back into the market at a moments notice once they have confirmed the bottom (Note that, according to the theory stated above, that might be 30-40% above the bottom!). For this purpose, money market funds would appear to be hard to beat. Yields are not as good as CDs but generally are better than short term treasuries, and they will go up rather than down in case of inflation. In the case of deflation they probably would not do as well as CDs or treasuries, but I don’t think they would do too badly. Now, with the extending of FDIC insurance to many of these accounts, they again appear to be very safe.
As for the ultimate in hiding your money, I guess you could consider your mattress… or gold. But neither of those seem too comfortable to me. If you are that worried, buy land. You can't eat cash or gold, but you can always raise your food if you have some land. Though I still don’t expect to really need it, I’ll admit I have my farm, bought and paid for several years ago.
I should have recognized that time as one of those “Be careful what you wish for” moments. I have to admit I underestimated how painful that might be. Now, I’m wishing for a bottom. Emotionally, that feels pretty awful, but from a logical standpoint the chances seem pretty good to me. Most major bear markets have ended with long term average P/E ratios of around 10. Currently, I believe we are about 10-11. Not that this was a factor in my decisions, of course…my system works on autopilot. But, now it can’t operate effectively until we at least get some significant bounces.
While I would like to have some more cash to invest at these levels, most of what I see on financial shows is about where you can “hide” from the market. So, while I pray for a bottom, I think that discussion is worth some ether ink.
I have to admit it sounds comforting at one level, but I have a hard time believing the best thing to do is hide from a market that is on sale at it’s best valuation in 30 years. The last time valuations were this low was in the 1970’s. Of course, most profess to be ready to get back in once the bottom is comfirmed. When it will come, I’ll admit don’t know, but I heard a commentator on PBS a couple of days ago expressing things pretty much as I see them. His comment was something along the lines of “We’ll only know we have a bottom about 6-8 weeks after the fact when prices are up 30-40%.”
Be that as it may, the vehicle many are choosing as their hiding spot, US Treasuries, seems a questionable choice to me. Granted, according to conventional wisdom, these are the safest bet you can make. But, 3 month treasury bills are yielding well under 1%, and 5 year bonds are yielding only about 3%. This is because of the huge buying related to the flight to safety, but, to me, this only makes sense if you expect massive deflation accompanied by much lower interest rates. While I expect some deflation as a result of the big decrease in energy and other commodity prices, I expect this will be relatively short term. Over the longer term, I worry the massive borrowing governments are doing will lead to inflation. In fact, aside from the immediate borrowing binge, I believe the only way government can get out of the massive federal debt is to inflate their way out. And those in treasuries would be murdered by inflation. No, treasuries don’t sound so safe to me.
An alternative might be US I Savings Bonds. They yield only about 1% over inflation, but at least you are protected from inflation and don’t have to worry about rising interest rates. Unfortunately, the rules prohibit you from parking large sums there. Inflation adjusted treasuries are unlimited, and might seem a good substitute, but these would still be hurt badly by increasing interest rates.
Federally insured short term (up to 1 year) CDs seem like a better choice. They are yielding several times as much as treasuries of similar duration, and for my money are just as safe. You would do well during any deflation and you can be pretty sure you will get your money back with interest. And you can always roll them over at higher rates if interest rates go up over the longer term.
Of course, most who are hiding their money want to be able to jump back into the market at a moments notice once they have confirmed the bottom (Note that, according to the theory stated above, that might be 30-40% above the bottom!). For this purpose, money market funds would appear to be hard to beat. Yields are not as good as CDs but generally are better than short term treasuries, and they will go up rather than down in case of inflation. In the case of deflation they probably would not do as well as CDs or treasuries, but I don’t think they would do too badly. Now, with the extending of FDIC insurance to many of these accounts, they again appear to be very safe.
As for the ultimate in hiding your money, I guess you could consider your mattress… or gold. But neither of those seem too comfortable to me. If you are that worried, buy land. You can't eat cash or gold, but you can always raise your food if you have some land. Though I still don’t expect to really need it, I’ll admit I have my farm, bought and paid for several years ago.
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