Leveraged ETFs are Complex?

It’s not exactly grabbing headlines, but our nation’s regulatory watchdogs are on the scent of yet another scourge from which investors need to be protected: leveraged ETFs. Apparently, these things are like snakes in the grass, just waiting to spring at poor innocents who wander by.

Several brokerages have taken steps to discourage their clients from buying leveraged ETFs and in some cases prohibit it altogether. The folks at Motley Fool have been waving people off them. The association of state securities regulators named leveraged ETFs as one of their Top 10 Investor Traps, along with Ponzi schemes and currency and gold bullion scams.

And just last week, FINRA, the financial industry’s self-regulation body, announced changes to the margin requirements for buying leveraged ETFs that go a long way towards destroying their usefulness. A FINRA spokesman called leveraged ETFs ”very complicated, with a high element of risk."

Read more »

Stocks are not the Only Investment that Counts

Wednesday’s WSJ had a piece on Rethinking Stocks’ Starring Role. It’s about time.

Don’t get me wrong, stocks are an important asset class, maybe even the most important one. But they are just that, a large category of reasonable things a reasonable person might invest in, but not the only such category. Yet for generations, received wisdom has made it the center of individuals’ investing plans, the main course in the wealth accumulation dinner.

Why? ‘Cuz the stock market went up so darn much over the last fifty years or so. (Er, uh, recent events not included. Let’s say 1957 to 2007.) I know fifty years sounds like a really long time. Long enough that you might consider it to be approximately forever. If the stock market has gone up a certain percentage on average over that long a time a person is sorely tempted to think of that as the basic nature of the beast.

Read more »

Pound Wise and Penny Foolish

A few days ago there was an encouraging little post on The Wallet about how we’re spending more on life’s smaller luxuries in the face of the Great Recession. I call it encouraging because I think it is the direction most people should go in their spending, more on the small stuff, less on the big things, and I like reading positive articles about how consumers are doing this. Not that I really think this is going on.

My theory, admittedly not based on much science, is that we’re happier if we spend more on the smaller things we like than on the big things. A great big house may indeed add joy to our lives, but not as much as the equivalent in nights out on the town. (Or rounds of golf, or manicures or whatever floats your boat.)

Read more »

Best of Frank: The Tragedy of Impulse Saving

[I'm off this week, enjoying the waning days of summer and catching up on a few things I promised to finish before September. In the meantime, please enjoy this example of that great American summer tradition, reruns. This post originally ran March 25, 2009.]

As any reader of this blog knows, I enjoy nothing more than tweaking the nose of personal finance conventional wisdom. Well, joy of joys, yesterday’s New York Times had an article, in the science section no less, that spits in conventional wisdom’s face, knees it in the groin and then kicks it as it rolls on the ground.

The piece discussed the work of Ran Kivetz and Anat Keinan, two professors of marketing from Columbia and Harvard Business Schools respectively. (Marketing professor is, incidentally, the same line of work as the authors of The Millionaire Next Door.)  They have discovered a new malady to avoid: saver’s remorse.  It’s just what it sounds like: that sad feeling you get with money in your pocket that you could have spent in some enjoyable way but, in a moment of weakness, chose to save.

This is just so awesome.

The sober professors don’t call it saver’s remorse.  I think John Tierney, The Times’ science guy, came up with that.  They use the term hyperopia, literally excessive farsightedness.  Sufferers of hyperopia “deprive themselves of indulgence and instead overly focus on acquiring and consuming utilitarian necessities, acting responsibly, and doing ‘the right thing.’” (K&K 2006 p.274)

Read more »

Best of Frank: Why Market Timing is Hard

[I'm off this week, enjoying the waning days of summer and catching up on a few things I promised to finish before September. In the meantime, please enjoy this example of that great American summer tradition, reruns. This post originally ran April 7, 2009.]

Not long after you convince yourself that buy-and-hold is the best way to invest in the stock market, you start to get doubts.  Sure, owning a well diversified portfolio of stocks through thick and thin is the best way to capture the high long-term average returns that you expect, but couldn’t you do a little better?  Couldn’t you sell your stocks when the market is particularly high and maybe double down when it is particularly cheap?  How hard could that be?

Pretty darn hard, it turns out.  Only in the clarity of hindsight are those market peaks and bottoms obvious.  The towering heights that the market reached in the spring of 2000 and fall of 2007 now look like great places to exit only because we know what happened next.  Yes, stocks in 2000 were by many measures more expensive than they had ever been in the past, but saying that everybody should have therefore known to sell is unfair, because stocks had been unprecedentedly expensive in each of the four or five years prior to 2000 as well.

Spotting the low points when they happen is no easier.  After its disastrous September, the market was by many objective measures very cheap in the fourth quarter of last year.  And then it went down a lot more.

But even if you did have a useful objective measure that would tell you when the market was too expensive or cheap, actually using it would be a lot harder than it sounds in the abstract.  See that dip on the chart above in early March?  That’s when the market hit its low for the year so far.  It is also when I published this post, making the strong case that the market was then really cheap.  Since that day the S&P is up about 25%.

Did I act on my judgment that the market was a bargain, invest big and reap a much needed profit?  Are you kidding?  Read the post again.  I had thought it was too cheap months before, only to watch it get more cheap every week. I didn’t understand why it had gotten so low, and so had no reason to believe it wouldn’t go lower.

When I was just starting out in the professional investing world, one of the senior guys in the office took me aside and said something like “Frank, what you gotta understand about the market is that it’s really all psychology.”  This guy made roughly a hundred times as much money as I did, so I nodded and smiled, all the while thinking to myself something like “what a pompous and empty platitude.”  It only took me about ten years to understand the wisdom he was trying to pass on to me.  It’s not just that stock  prices move up and down because of the irrational behavior of other investors.  It’s that making money in the market is hard because of your own irrational behavior.

It has been said that the four most dangerous words in investing are “this time is different.”  When the market is very cheap it is nearly impossible to convince yourself that it is a good time to buy, even if in hindsight every other time it was that cheap it had been a great time to buy.  Because when push comes to shove you are sure that this time is different.  You worry that this time the world really is coming to an end, that capitalism is dead, and that your kids better start studying Chinese if they ever want to get a job.  Then the market goes up, the dust settles, and you feel like an idiot.

That it is very difficult to buy at the bottom and sell at the top is not mere coincidence.  You are just like everybody else, irrationally scared at the lows and foolishly confident at the highs.  Widespread fear and confidence is why the market was low and high to begin with.

Which is why you should cast away your doubts about buy-and-hold.