The 401K Diversification Article You MUST Read Today

My earlier Portfolio Diversification – 401K article provides an in-depth example of designing a diversified portfolio. I would urge everyone to read this previous comprehensive article today. It covers:

• MPT (Modern Portfolio Theory)
• Typical funds in corporate 401K plans
• Hard truths about size
• Active funds vrs. index funds
• Fund selection
• Risk Tolerance
• Portfolios by Age and Risk Tolerance
• Re-balancing
• 401k and Diversification Resources

How has my 401K performed?

It has been over a decade since the 401K Portfolio Diversification post; in this time I have regularly re-balanced the 401k account and adjusted it as my age increased.   My 401K has performed in-line with the the market indexes and expectations. In areas where active funds were used rather than index funds; actively-managed Small Cap Funds (SSMVX and successors) have out performed the indexes. Actively-managed Bond Funds and Foreign Stock funds generally have under-performed their indexes.  The under-performance of Bond funds was impacted by the low interest rate environment.

I stuck with my 401K portfolio and am generally pleased with the results over time.

The Repo Market

What is the Repo Market?  No, it is not the guy coming to repossess your automobile for those overdue payments.

The Repo Market is where over $3 Trillion in debt is financed each day worldwide. Repo is short for repurchase agreements.  Most transactions are effectively collateralized overnight short-term loans.

The U.S. Fed uses the Repo Market to temporarily extend credit in tight markets. 

Back on September 16th the federal Repo offering froze up, creating panic and fear. There was a mismatch in cash flowing out with securities coming in; this created a crunch for those needing cash driving up interest rates to above 10% which were normally at 2%.

To address the problem the U.S. Fed load out $75 Billion a day in cash over 4 days until the markets settled down.

Many, including the Fed, concluded in the immediate aftermath that two transitory events collided: investors used repo to finance the purchase of a large batch of newly auctioned Treasuries at the same time that quarterly corporate tax payments drained liquidity from that market.  This combination of newly auctioned Treasuries and quarterly corporate tax payments is occurring this week again leading to a microscope being applied to the Repo market.

The BIS (Bank for International Settlements) issued a report outlining broader concerns about the U.S. Repo Market - September stress in dollar repo markets: passing or structural?

Four banks (Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo) that dominate the U.S Fed Repo market hold about 25% of the reserves in the U.S. banking system, but 50% of the Treasuries. This creates a concentration that is apt for problems. 

There are many financial pundits and media outlets outlining fears that the Fed Repo crisis may be a bigger issue in December, and the September events were only a preview.

In the recent weekend the U.S. Fed has added billions in liquidity in an attempt to forestall any potential crisis. CNBC and other outlets covered the Feds weekend purchase operations in depth. The New York Fed issued an unusual statement about repurchase operations. 

How will the situation shake out this week in December and in the upcoming year? Only time will tell.  It appears the U.S. Fed is attempting to get ahead of the situation by providing more cash liquidity before critical junctures.

In Retrospective - 130/30 Funds

Back in 2007, 130/30 Funds were hyped as the next great thing in the market. As the market tumbled a dozen years ago the concept of a fund that would generate profits in both rising and falling markets was a sales pitch that hit appealed to the pain investors were encountering at this time.

Multiple mutual fund families immediately offered 130/30 Funds mirroring hedge funds. The mutual funds launched marketing campaigns in 2007 worked to draw in investors based on downside fear - many remembering the 2000/2001 decline. Some ads implied investors would profit greatly in both rising and falling markets.

As outlined earlier, 130/30 funds allow managers to short-sell up to 30% of their portfolios, and use the proceeds to buy an extra 30% long. The funds both use leverage and short-selling.

Now over a decade later - how have 130/30 Funds fared?   Back at that time I was very skeptical of 130/30 Funds. The results demonstrate I was quite right to question these 130/30 Funds as nothing more than a marketing gimmick with the intent of generating out sized fees for financial institutions.

Since 2008 the financial press has covered the decline of 130/30 Funds.   However now in 2019 as we seem to be approaching a market peak new 130/30 Funds are now again being offered.  One example is JPM and UBS unveil 130/30 funds.

A long list of media has demonstrated the gimmicks and decline of 130/30 Funds as they greatly under-performed the related index put forward by Andrew Lo of the Massachusetts Institute of Technology and Pankaj Patel of Credit Suisse and merely served as a payday for money managers.  A sampling of media 130/30 Fund articles include:

The decline, fall and afterlife of 130/30
https://www.ft.com/content/fdbf6284-b724-11e2-841e-00144feabdc0

130/30 Funds: 130% Gimmick/30% Good Idea
https://www.morningstar.com/articles/287506/13030-funds-130-gimmick30-good-ideak/30% Good Idea

130/30 Mutual Funds: Don’t Believe the Hype
https://investorsolutions.com/2012/09/28/13030-mutual-funds-dont-believe-the-hype-3/

A Hot Fund Design Turns Cold
https://www.wsj.com/articles/SB10001424052748704388504575419642095323262


Now that 130/30 Funds are being pushed by brokerages again, don't fall for the hype. Stick with your long term investment plan with proper diversification, low fees, and a long term view.

How to get Rich in the Stock Market

There has been all sorts of media, companies and individuals pushing methods of "getting rich in the stock market".  The proposed strategies range from stock picking to trading, all the way out to using esoteric long/short hedging strategies with options & futures.

The reality is that there is only one guaranteed method to get rich in the stock market. It involves time, diversification, low-cost funds, continuous investment, and patience.

1) Time
The first factor is time; you will need to be focused on the long term.  Success in the stock market is not based on the next quarter or year, but the expectation for results over long periods of time akin to decades.

2) Diversification
It is important to be properly diversified based on your investment objectives, accepted risk tolerance, and time frames.  You should be diversified across domestic stocks, international stocks, growth/income, and company size.  The is also need for a balance between stocks, bonds, and other investments based on your age and objectives. There are many articles available that discuss proper diversification including - Why Diversification Is Important in Investing.

My earlier thoughts on 401K diversification can be found here - https://www.gregboop.com/2007/02/portfolio-diversification-401k.html

3) Low-cost Funds
Investment costs such as mutual fund fees can eat into a good portion of your returns over time.  Funds with high fees don't offer better returns over time than index funds -- in fact many times their returns are worse than index funds.  It is best to find mutual funds that mirror indexes offered from funds families such an Vanguard, Fidelity, and Schwab. Mutual Fund marketing fees, front end load fees, back end load fee and other assorted fees merely make financial people rich -- they don't help you are all. 

4) Continuous Investment
The market goes through many cycles.  By investing regularly - for example adding money each paycheck to a 401K or IRA - you are riding the cycle.  When the market pulls back you are buying more at lower cost; when the market rises you are making solid returns on what you have purchased over time.   Continuous investment provides a safety cushion for market cycles; it is a much better strategy than simply purchasing funds at one point in time.   If you buy at the peak with all of your cash it is a harder climb to get solid investment returns.

5) Patience
Be willing to hold on an ride out market cycles.  Do not panic when the market goes down.  Do not take a lot of money out simply because the market is up (trying to time the market).  You need to have a long term view and be patient.  Getting "rich" in the stock market is a long term "play" not something that happens by next year.

Even the AARP is wondering "How much longer will Social Security be around?"

While the media continues to spew headlines proclaiming the death of pension plans   ('It's really over': Corporate pensions head for extinction as nature of retirement plans changes)- an event for most corporations which occurred over two decades ago; there is minimal mainstream press over the risk of depending on Social Security in retirement and what planning actions you should take.

There have been numerous articles outlining how the system will run through its reserve assets by 2035 and will need to reduce payments if nothing is done (AARP: How much longer will Social Security be around?) and multiple politicians running for office in 2020 have proposed plans for "saving" social security.  The bottom line is there has been no action in Washington D.C. for two decades.  Either there must be a increase in the portion of salary taxed and/or for an increase in the ceiling on the amount of salary that is taxed.

This lack of political action, of course, has left the Social Security system in a unfortunate position where it will not be able to fulfill its obligations starting in 2035 (according to the 2019 Trustee Report). "OASI would be able to pay 77% of promised benefits when funds are depleted in 2034" according to USA Today What happens when Social Security goes broke?

The action needed in your retirement planning

The bottom line is that with no mechanism to rescue Social Security in place you should be expecting payment cuts of 23% in whatever payments you expect out of Social Security out in 2035 Your retirement planning should include this expectation plus the assumption of no cost of living increases.

Any retirement plan evaluating cash flow in your later years should have this assumption in place as one of the scenarios to be evaluated.

Trimming Underperforming Stocks from your Portfolio

A majority of the stocks in my portfolio have done well over time. There are a few under-performers in the mix; I have admittedly been lax about trimming them and trading them out over the years.  There are the usual rash of rationalizations I make; they will come back or they represent a particular diversification that is desired.

One stock I failed to trim for over a decade now is Gannett Co., Inc. (GCI).  I purchased GCI in Dec 2007 at the upper 30s in price; now it is at a mere 6 bucks.

Gannett does represent a particular niche in my portfolio.  It is in a tax protected account with a diversified portfolio of stocks focused on strong dividend yield using stocks that allow dividend re-investment into more shares.

Gannett is in a tough industry that has been steadily declining; newspaper publishing.  Back in 2007 there was still a glimmer of hope that newspapers would adapt in a digital world and come back - not so much anymore a dozen years later.

Still GCI represents a diversification point in my portfolio; it is the only individual stock that covers paper-based media.   It still has a a strong dividend yield; with the stock price down at $5.97 the forward yield is an astounding 23.38% (based on $1.52 yield).  However even with this yield the drop in stock price over time nearly wipes out the yield returns - when calculating quarter by quarter.

On top of this back in mid-November shareholders of Gannett Co. Inc. (NYSE: GCI) signed off on a roughly $1.2 billion proposal for the McLean company to be acquired by the parent company of rival GateHouse Media.  I doubt that the new company will still offer very high dividend yield; this further drives the plan to bail out of paper media stock and rotate into another sector.

The time has come to trim GCI and a few other under performers that I have held onto for more than a decade. My New Year's resolution will be to do this in January... or is this just a way of procrastinating and putting this off for yet another month.

One interesting point will be to compare my portfolio of dividend focused stocks to a mutual fund (or index) that follows the same strategy and see how the performance compares over a decade.  Have I beat the indexes with my stock-picking or not -- this will be an upcoming subject next year when I finally rotate out of the under-performers.

An Explanation of the Business/Consumer Cycle

Gummy Stuff Archive of Financial Spreadsheets and Tutorials

Gummy Stuff is a large number of financial spreadsheets and tutorials created by Peter Ponzo after he retired from the University of Waterloo.

An archive of the information he created can be found at - https://www.financialwisdomforum.org/gummy-stuff/gummy_stuff.htm
 
A modern version of his tutorial list can be found at - https://www.financialwisdomforum.org/gummy-stuff-tutorials/

Gummy Stuff is a great resource for financial information and valuable spreadsheet resource.  It is all free!  I urge people to check it out.

Retirement Calculators

I have finally reached the point in life where I am looking for retirement calculators.  Maybe this is just wishful thinking because there is someway to go before I am eligible for social security.

Along the way I have been searching for online retirement calculators and articles.  I have created a spreadsheet for savings, investments, and spending by year -- which at some point when its perfected I will post.

In the meantime I found a good article which references several good on-line retirement calculators.

5 Excellent Retirement Calculators (And All Are Free)

https://www.forbes.com/sites/robertberger/2015/07/12/5-excellent-retirement-calculators-and-all-are-free/#7631ca374d1c

An uphill struggle for Ford in China

Even as the trade standoff heats up Ford is not giving up in its efforts in the Chinese market. Over the past decades the market has been a tough nut for the U.S. automakers to crack.  Despite all of this Ford is still pushing forward but never gaining more than a 5% market share.

Ford’s battle to turn around its China business

https://www.cnbc.com/2019/12/03/fords-battle-to-turn-around-its-china-business.html

Cyber Monday looking up

Cyber Monday surges to $9.4B in sales

 https://www.foxbusiness.com/retail/cyber-monday-sales-record

Tariffs now appear to be a significant headwind for the economy and market

How the market sell-off could get much worse: ‘Better put on your helmet’

https://www.cnbc.com/2019/12/03/how-the-market-sell-off-could-get-worse-better-put-on-your-helmet.html