August 2006
You are currently browsing the articles from General Finance written in the month of August 2006.
As stated previously value investing over the very long term has provided excellent returns especially compared to growth. However, if you shrink the time line to 10 years you will see differing results. For example, 1990-2000 large cap stocks performed the best, with large cap growth leading the way at 18.1%. Small growth stocks were the worst at a 14.0% average rate. Large cap value returned 17.5% over this period and small cap value returned 16.1%.
So although a very long time horizon favors value stocks, in this specific case large caps stocks ruled over ten years with large cap growth being the best.
Written by mike on August 21st, 2006 with no comments.
Read more articles on Investing and Stocks.
There are many different classess of stock that you can choose to diversify your portfolio. Growth and value stocks are just another way to distribute your investments.
Examing the growth of $1 invested in large cap growth, large cap value, small cap growth and small cap value on December 31, 1927-2000 you will find interesting results.
Value stocks outperformed growth stocks by a significant margin. $1 in small cap value has an average return of 14.2% with an ending balance of $16,027. Large value returns 12.4% average return with a balance ending at $5,170. On the other hand, small growth returned 10.0% and ended with $1,017 and large growth ended with $727 and a 9.4% return.
Obviously there have been periods of time that growth has outstripped value, but this information gives you insight on how to approach growth and value investing long term.
Written by mike on August 20th, 2006 with no comments.
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For several months we have discussed budgets. There is no time like the present for examining how your budget is coming.
- What have you learned so far?
- Have you been able to apply what you learned?
- Have you been able to make cuts in your spending?
- Are you staying within your budget
- Does keeping a budget make you more conscious of the money you spend?
Budgets can create discipline. You know that the end of the month is coming and you will need to explain to your spouse (or yourself) what money went where and why. There are consequences that you will be able to see. If it was a good month you might be able to save, invest, payback debt, etc. more than before. If it was not so good of a month then you will not be able to pay as much down on your credit card as you wanted. Maybe that means you will be paying it back another several months or you have to pay more in interest.
So take some time out and see how your budget is coming and try to see how it is helping you.
Written by mike on August 19th, 2006 with no comments.
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The stock market has showed significant strength lately with oil prices dropping and the Israeli/Lebanon conflict in a cease fire. Investors hope this rally can sustain itself, but we will need to wait and see.
Currently world conditions are relatively stable, however, with so many issues out there anything could happen and the immediate results would not be good for the stock market. Also, if the Fed’s actions in the coming months does not convince investors that the economy is ok that will hurt the stock market as well.
Examine your portfolio and if there is a dog you have been thinking about getting rid of—now is the time. Take advantage of the high market performance while you can because you never know what will happen next.
Written by mike on August 18th, 2006 with no comments.
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Growth and Value is another method of classifying stocks or portfolios because usually they will have many aspects of one or the other. Like sectors and asset classes, it is important to know when growth is in or out and when value is in or out.
Growth stocks are stocks of companies that historically have been able to grow their businesses faster than the average company and that growth is expected to continue. Because of this growth investors are willing to pay more for these sticks than they would for value stocks relative to current earnings. They reinvest their profit to continue to grow.
Value stocks are stocks of companies that historically have had slower growth in sales and earnings than average or recently experienced some type of trouble that caused the stock price to decrease. Investors, like Warren Buffet, see value companies to be turn-around opportunities where a change in management or business strategy could increase its potential for growth.Since value companies are not expected to grow quickly their yield will be higher to retain investors.
Written by mike on August 17th, 2006 with no comments.
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We have discussed the ying and yang of investing many times. Another way of examing stocks is growth and value.
Here are some characteristics of both:
Growth
- High growth rate of earnings and sales
- High price-to-book, price-toearnings ratios
- Reinvesting earnings in the business and paying little to no dividend
Value
- Slower growth of earnings and sales
- Higher dividend yields
- Low price-to-book and P/E ratios
Written by mike on August 16th, 2006 with no comments.
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The stock markets has cycles and at certain times certain asset classes or sectors can be in or out of favor. If you chart out sectors and asset classes you will see specific times when a sector is in favor and then will have a down period. So if you can find companies or mutual funds with good earnings and future growth with a P/E under the benchmark you can sometimes ride a strong wave to excellent stock market performance. On the other hand, the opposite can happen as well. So consider these factors when investing in non-retirement funds.
Written by mike on August 15th, 2006 with no comments.
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A bull stock market makes it easy to stay on course with your long-term investment goals; the challenge is to do this during bear markets. It can be tough, but when that bull market comes if you are well-diversified there is nothing you should do but stay the course.
If you examine performance during a a recessionary period of 1971-1974 you can see that stocks went down about 25%; if you had a 50/50 stock and bond portfolio you lost around 9% and if you had all bonds you were up around 10%. On the other hand, looking at a long period of time (1974-2000) the opposite becomes true. $1,000 would be worth over $48,000 if invested in stocks; about $25,000 in a 50/50 bond and stock portfolio and about $11,000 for an all bond portfolio.
So you might be at a loss in the short run, but if you can stay with your plan of diversification through the bad times you will win out in the end.
Written by mike on August 13th, 2006 with no comments.
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It is amazing to examine how investing early in life will help you in the long run. Compounding is the main reason for this.
If an investor started investing $2,000 per year for each of the next ten years. Then in 1990 they stopped putting in $2,000 annually and let their account grow until 2000. At this time you would have invested $20,000, but your portfolio worth would be almost $230,000 because of compounding. ANother investor waited 10 years and began in 1990 and invested $4,000 each year in stocks for 10 years. By the end of 2000 your totally amount invested would be $40,000 and your total portfolio worth would be only $105,700 because of compounding interest.
So start early, no matter how small the investment is will not matter because extra years of compounding will make a huge difference in your portfolio value.
Written by mike on August 13th, 2006 with no comments.
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Examining the period from 1980 to 2000 you can see that market timing can be detrimental to your portfolio value. Take $1 at December 31, 1980 and by December 31, 2000 that $1 would be $18.43–pretty good, right? However, when you take that $1 over the same period it would be worth $4.73 if you missed the best 15 months of the stock market returns. $1 invested in Treasury bills would be worth $3.61. So if you were unsuccessful in your market timing your performance would be just above the return for Treasury bills.
AllFinancialMatters has some thoughts on learning how to buy and sell stocks.
Written by mike on August 12th, 2006 with no comments.
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As stated previously value investing over the very long term has provided excellent returns especially compared to growth. However, if you shrink the time line to 10 years you will see differing results. For example, 1990-2000 large cap stocks performed the best, with large cap growth leading the way at 18.1%. Small growth stocks were the worst at a 14.0% average rate. Large cap value returned 17.5% over this period and small cap value returned 16.1%.
