Millennials Like Cash as a Long-Term Investment. Why?

millennials_prefer_cashCash is king, as the saying goes. That’s a concept that can apply to businesses, and to our own lives as well in many cases. Having money in hand offers less risk, on many dimensions, than having promise or hope for money in the future.

Pay me $100 today, or give me a promise to pay $100 next year, and I’ll take the former. To take money in the future instead of today, there needs to be a premium involved. Loaning $100 can perhaps get me $105 next year – well, not if I give it to the bank in the form of a checking account! Maybe peer lending could offer this and then some. There is risk involved, not to mention inflation.

This can apply to investments in other asset classes too, and one that jumps out is stocks. Sure, there is volatility – and if you need the money soon, stocks might not be the best holding spot if that risk bothers you. And stock returns don’t always beat inflation as one might believe, when you examine the data.

However,  stocks still do offer returns better than stuffing money under a mattress.   Over the long-term, you’ll generally do much better by investing in stocks than holding cash – based on historical performance.

Nevertheless, not everyone feels that way. An interesting study by Bankrate, summarized in a recent write-up on Yahoo!, showed that there are quite a few people that prefer cash as a long-term investment. In fact, according the study, nearly 40% of those between 18 to 29 years of age indicated that cash is their top choice for how to invest money that they won’t need for 10 or more years.

This is interesting, as it seems to be a real difference compared to how others might have seen stocks during that same age range. As a Gen-X person myself, I was squarely focused on stocks as they way to invest for the long-term. It’s definitely worked about better than had I kept all the money in cash.

I wonder why there is such a difference with those that are Millennials. Is it student loan debt, a shaky job market, seeing parents go through issues with jobs? Perhaps the recent housing crisis was a big influence. Or, maybe the market volatility of the 2008-2009 timeframe made a big impression.

There could be a number of reasons.

In some ways, I see a positive here. If people are now entering their working years with a more conservative approach to money, maybe that will mean an evolving attitude toward debt? Goodness knows that the U.S national debt isn’t a model for how people should run personal finance.   So conservatism with money can be a good thing.

Nevertheless, cash simply underperforms stocks over the long run. Let’s just take an example of a 30 year time frame, and say that stocks earned 7% annually on average. We’ll assume 0% earnings on cash. Let’s also assume a $100,000 initial investment in each, and ignore inflation just for this exercise.

After those 30 years, that $100,000 investment in stocks (with compounding) would be worth over $760,000. Holding that $100,000 in straight-up cash would clearly leave you without that $660,000 increase. Yes, rate of return is important for financial success.

So as I see it, I can see why people might be getting more cautious with money – but would rather see this applied to debt instead of long-term investment choices.

My Questions for You

What are your thoughts on this interest in cash as a long-term investment?

Do you agree with my focus on stocks and other investments, or do you like cash long-term?

Also, I’ve given some of my reasons as to why I think there might be a flight to cash by Millennials, but I’m interested in what you think – whether or not you’re a Millennial yourself!

Are 401(k) Lump Sum Matches Going to be the Future?

401k Match

Matches have value, but I prefer those of the 401(k) variety!

Most of us appreciate the benefits of 401(k) plans, and like having them as an option for retirement savings.  The tax deferred nature of them is great, and garners a lot of attention.  But the company match can be pretty nice too, and a great benefit!

This is why recent news of a company switching to a lump sum, end-of-year match garnered some attention from a lot of people.  Apparently, per this piece in the Washington Post, this created a bit of a fuss with a lot of people.  Instead of the match occurring with each paycheck, the match occurred only at the end of the year.

So, the match was not taken away.  Rather, it was just distributed at different intervals.  Not so bad, right?

Well, it depends on one’s perspective.  Having a match is better than not having a match.  So in that regard, it may not be as bad as the alternatives.  However, there are a couple of problems with this:

1) Diminished Power of Compounding

On the one hand, the exact amount of money given as a match might be the same whether given with each paycheck or in a lump sum.  If a person makes $100,000 annually, and gets a 3% match, basic math indicates that the match will be $3,000.  The lump sum at the end of the year would be, of course, $3,000.  If there are 12 monthly pay periods, as an example, there would be a $250 contribution each time.

The issue is that the money set aside earlier in the year has time to grow.  For example, lets say that after the 1s pay period, the stock market increased by 20% through the rest of the year.  That original $250 would end up being worth $300.  This concept could apply to many of the other contributions through the year as well.

By giving the match all at once at the end of the year, the compounding effect is taken away.  Thus, money could be lost.  In a year with increasing stock prices, this means lost opportunity.

Now, a lump sum might end up being better in a year where stock prices plummet.  But on average, stocks tend to go up most years.   So paying all at once is generally not a good attribute.

2)  Losing the Match if You Leave the Job

Aside from the aforementioned considerations with timing and frequency of matches, there is the issue of what happens to the match if the person leaves the job.

Now, people don’t usually join and leave companies on an exact calendar basis.  If someone leaves a company before the end of the plan year (whatever that might be), the match could be lost.  So, in the example above, let’s say that someone was with a company for 8 months of a year, then left.  This means that if there are monthly contributions, $2,000 will have been paid out – but zero if it’s a company with an annual lump sum.

Thus, while in many cases a lump sum could be preferable, this is probably not one of those situations.

Fortunately, in the situation described in the article, the company did reverse course with the lump sum decision.  Credit is deserved for the change in policy!

However, I wonder how many companies in general would feel compelled to make a change back.  What is the motivation?  Frankly, it would seem like there could be a fair amount of savings accruing to companies who make and keep a switch to lump sum payouts.  After all, people leaving before year-end would presumably get nothing.

Think about it.  If you’re interviewing for a job, would you truly turn down a really good opportunity based on the 401(k) match being given in a lump sum?  Or, if you’re working for a company that makes that switch, would it compel you to job search and look elsewhere strictly based on that?

It wouldn’t be surprising to see this happen.

To me, this just looks like a situation where there is not that much downside for companies to implement this.  But, there could be savings generated.  If there was a wave of businesses doing this, I don’t think any one situation would stand out and create an uproar.  This seems like low-hanging fruit.

My Questions for You

What would your reaction be if your employer switched the 401(k) match to a lump sum from a per-pay period contribution?

Do you think this might be the wave of the future?

Company Fixed Deposits Are a Reliable Way to Earn More

When one has a surplus to invest, one must take time to search for the best possible return and security. It may be that a parent starts an investment for their child’s education. They want to start deposits so that inflation does not affect their standard of living when they retire.

There are innumerable ways to chose from the saving accounts. One way is to make a Company Fixed deposit. It is considered a confident deposits (which are rather safe) with a variety of companies for a fixed term. Such deposits carry a prescribed rate of interest called ‘Company Fixed Deposit’ and can be made by financial institutions and non-banking finance companies (NBFCs). Mobilised deposits of this kind are governed by the Companies Act under Section 58A. They are not secured in the sense, that if the company defaults, the investor can’t sell the document to recover the capital. As mentioned earlier, they are considered confident deposits, but are not 100% assured.

There trick to ensure a reasonable and secure return is to select one of the more stable and known institutions dealing with company fixed deposits amongst their activities. As such deposits are governed by law, one may assume that a large or top-rated, publicly known company makes such deposit reasonably sure. In specialized institutions like FundsIndia’s deposit section, the staff may guide the depositors to exactly the kind of option they are looking for, be it industrial, construction, or production.

The rate of interest and the frequency of payment are two most frequently asked questions because not all follow the same rules. The interest may vary from 11% pro anno (PA) to 12% pa according to the length of the tenure. The interest payment is generally done quarterly and can be disbursed or added to the existing fund to create a larger deposit over time.

To choose a good company fixed deposit scheme is not easy for a layman, so it would be advisable to consult a competent person before deciding where and how much to invest. Each investment company has their specific rules and it would be careless not to investigate the reliability and profit before actually engaging in such a deposit, although they generally give better rates of return than common bank fixed deposits (FD).

Some companies would allow a substantial deposit to gain appreciation if the depositor allows certain more risky investments, but it is totally up to the investor to decide if he or she is willing to absorb eventual risk.

The amounts initially deposited may be as low as Rs. 50.000 and may go up to Rs. 25.000 for ordinary investment. A few Government investments may exceed Rs. 2 Lakh (as for example in case of the Kerala Transport Development Finance Corporation Limited). Most deposits will be cumulative and span over a period of 12 months to 15 month and some may have 500 days as maximum.

Then there are Public Issue of 100% secured National Credit Deposits (NCD), which carries interest rates up to 12.52% in effective yield. Employees and shareholders of public institutions may furthermore get 0.25%. An additional benefit is, that there is no tax deduction (TDS) on the interest if the deposits are held in a Demat account.

Selling Stocks In a Bull Market: Interesting Historical Lessons

selling stocks in a bull marketMarkets go up, and they also go down.  Kind of like gravity: if you throw an apple into the air, it will eventually come back down.

Except, that’s not exactly how it goes with markets.  Sure, they do go up and down, but the long-term trend is up.  Even when you consider the impact of inflation on stocks, there’s at least some upward trajectory over time.  When you add in the reality that compounding can be a great benefit, that higher rate of return with stocks is understandably a place that’s appealing to many with long-term time horizons.

So stocks tend to go up over the long-term, and offer rates of return that are pretty good compared to lower risk vehicles.  We know that.  But what about when stocks have been going up for a while? In other words, do stocks get a lot more risky in a bull market?

I thought of this because as of this writing, stocks have reached historical highs here in the U.S.  Naturally, there tend to be a fair number of people who start to get squeamish during protracted bull markets.  In other words, they wonder when the floor will drop from underneath them prices will tumble.

There’s that saying that we should be fearful when others are greedy, and be greedy when others are fearful.  I’m no Oracle from Omaha (far from it!), but maybe we should be careful to avoid being too fearful in bull markets.  Perhaps we can hold onto that greed a little bit.

As I do on occasion here, I pulled and analyzed some historical stock data to figure this out.  In this case, I took historical S&P 500 data for just over 63 years – from January 1950 to November 2013.  Based on this available data, I analyzed the annual yearly change in the market price in the context of bull markets.   Here is what I found:

Finding #1: Stocks tend to follow a strong year with another solid year

How do you define “strong year?”  In this case, I defined it as a year with returns of 20% or more.  Since 1950, there have been 17 such full years.  In the year following a strong bull market year, stocks average a nearly 11% rate of return!

So, if you’re in a year that happens to be very good – where there is a bull market – the following year tends to have strong performance too.  Now, these are averages of course, and there were some subsequent years that were awful.  No streak continues forever!  But some were good, and clearly the average of nearly 11% is very solid

Finding #2: Stocks still don’t automatically fall after a strong 2-year period

So, we talked about one year in the previous finding.  What if we expanded it to 2 strong years?  In this case, we’ll define a strong 2-year period as one with a total increase of 35% over that time frame.  There were 13 such 2-year time periods since 1950.

In the year following 2 years of bull-market performance, stocks average a return of just over 4%.  So, after 2 years of well-above average returns, things tend to come back down to earth.  However, it’s not like a return of around 4% is a total disaster.   There are far worse “safe” alternatives, though it should be pointed out that with stocks there is a range of good and bad years in there.

What are the implications of these 2 findings?  I see this as a lesson to be learned, that just because stocks have gone up quite a bit during the course of 1 or 2 years, it doesn’t mean that they’re ready to start crashing.    Of course, going from 1 strong year to 2 strong years collectively can decrease the odds of subsequent strong returns.  However, clearly there is often longer life to bull markets than might occur to the more risk-averse investor.

As I write this, we are in the midst of a situation that basically fits both of these scenarios above:  1) Annual returns > 20% (YTD through mid-November), and 2) a nearly 2-year return > 35%.

Food for thought, as you consider what type of scenarios might happen next.

My Questions for You

Do you get worried that stocks will fall, after a prolonged bull market?

Do you agree that bull markets have a longer life than one might realize?

What are your current thoughts – positive or worried – about the markets might be headed?

Make My Money Work For Me, Treat it as an Employee!

make my money work for meWe all need an employee that will be there for us for many years, through thick and thin.  Even better is an employee that can directly help us make more money, and perhaps someday do all the work for us while we focus on other things!  The ultimate: the employee won’t ever talk to you, and can be monitored at all times.  The last point was for you controlling types :)

That employee is money!  When somebody says “I want my money to work for me”, it sounds like they’re at least on the right rack with intent.  We can work hard all our lives, and save money without thinking of it as anything more than just that: savings.  It’s a simple approach, but one that can really be costing us.  Stuffing cash under the mattress is still saving, but if it’s not compounding then it’s losing purchasing value in the absence of deflation.

Maybe one way to look at it is that you’re the CEO, and you can’t accomplish your goals by yourself.  You need help, and you need the right mix of employees to help you get where you need to be with your business.  Then, your business can reach its goals and you can bask in the glory of that success!

But first, you need to assemble that team of employees.    In the case of personal finance, those “employees” are like investments and asset classes.  Here are some things to consider:

  • Don’t hire employees who all have the same skills and background.   No business would do that, right?  Just as a business needs some diversity in experiences, you’ll need to diversify your portfolio.  In other words, using this analogy with your money, don’t pull all your eggs in one basket.  Rather, practice effective asset allocation.
  • Look at their work history.  Just as a CEO would take a close look at a potential key new hire’s background in order to gauge potential future success, you need to look at the resume of your financial “employee”  For example, if you’re looking at making an investment, analyze it to see if it’s a good fit for your portfolio. In other words, do your homework when making investment choices.
  • Hire for the right business cycle.  If a business is in growth mode, it can pay to take on some higher risk employees who might be fresh, full of energy and new ideas.  If a business is more mature, not in all out growth mode, and has stockholders or Wall Street to placate, it might get more conservative with its hires.  In other words, translating this to your investments, take more risks when starting out, and fewer risks when closer to retirement.

You get the analogy here.  Just like a business leader assembles the right talent to reach success while managing risks, each can do the same with our money by managing it in a way that entails investing wisely.

Ultimately, the more we put money to work for us and the more effective we are at getting it to work hard, the less we have to work going forward.  If a person had $100k earning 5%, that’s $5k per year.  If that same person had $1 million earning 8%, that’s $80k per year and much less pressure on us.  Which is great, because money is an employee that doesn’t feel pressure :)

Do you ever think about how hard your money is really working for you?

3 Important Financial Numbers for Building Wealth

Important financial numbers for wealth“Math class is tough!”

That’s not me talking.  That’s an infamous quote from a Barbie doll that was offered for sale to the public years ago.  Understandably, that line did not go over well with a lot of people.  We can all be glad that such toys aren’t offered for sale these days, and being a parent with a daughter who excels in math, you can certainly count me in that group!

Hopefully nobody out there is taking a page out of that playbook, and thinking that “personal finance math is tough!”   If they are, they should stop.  It’s not tough.

Yeah, there’s no doubt that math can play a huge role in finance.  This can even extend to personal finance, and it can actually be quite easy.  Big picture, it’s really matter of making more money than you spend, and taking the savings and investing it wisely to build up net worth.

As I think about it, there are actually 3 numbers we can focus on to help us go a long way toward financial success.  Here they are, 3 financial numbers that can help us build wealth:

Number of Years of Saving Money

Most of us have probably seen those examples of how much better off a person can be by starting to save for retirement when really young, compared to waiting a decade.   It can be quite startling.

Let’s say Joe saves $10,000 one year, and then holds it until retirement 20 years later.  Let’s also assume he invests it and earns 8% per year, and this amount compounds over time.  Joe would see his initial investment grow to nearly $47,000 (not inflation-adjusted) by retirement.

Now, let’s suppose his much younger sister Jane saves $10,000 that same year, and holds it until her retirement 30 years later.  All else equal, this amount will grow to over $100,000 by retirement.

So, the time to retirement was just 50% more, but the resulting dollar total was over 100% more.  Clearly, time has value!

Keeping it simple, the more years we have to save and invest, the more financially successful we’ll be.

Rate of Return on Investments

Going back to Jane, suppose she earned 10% on that $10,000 compounded over 30 years, instead of 8% as illustrated in the example above.  In this case, it would result in an amount of nearly $175,000 by retirement with the increased rate of return.

A 25% increase in the percentage points of return (8% to 10%) yields a nearly 75% increase in overall dollar total during the same time period.  Obviously, rate of return makes a big difference!

Keeping it simple, the higher our percentage rate of return on investments, the more financially successful we’ll be.

Percent of Income Saved

Let’s revisit our friend Jane again.  Let’s now suppose that she saved more than $10,000 that year which happened to be 20% of her $50,000 income.  Instead, let’s assume she saved 24% of her income – which would be $12,000.  Over the same 30 year period, that investment would grow to over $120,000.

Basically, that incremental $2,000 in that one year resulted in about $20,000 more at the end of that time period.  Seems like a pretty good return!

Keeping it simple, the higher the percent of income we save, the more financially successful we’ll be.

Bottom line:  sure there are many numbers and metrics we could analyze regarding money, but if we focus on simply increasing these 3 basic numbers, we’ll be going a long way toward putting ourselves in a position to succeed!

My Questions for You

What do you think about these 3 numbers as levers we could pull to grow our net worth?

Which of these are you focusing on to improve your financial picture?

Any other suggestions on simple numbers or metrics we can focus on?


International Diversification with Stocks

When it comes to one’s portfolio, it’s generally important to avoid putting all of your eggs in one basket.  At least, that’s conventional wisdom that’s dispensed to most people.

Frankly, I find it hard to disagree with that conventional wisdom.  For example, keeping one’s entire savings in cash is usually not considered to be smart.  At least, not for someone with many years to retirement.  The rate of return of investments matters, and you’re not likely to get much by keeping money in cash or cash equivalent.  I’m not picking on the obvious asset class here; the notion of not putting everything in one basket can apply elsewhere too :)

So, we keep our funds in different asset classes.  Cash, bonds, real estate, stocks….you get the idea.  With respect to the latter, there can be significant diversification opportunities as well.  We can invest in individual stocks, ETFs, maybe funds.   In terms of companies, we can invest in small companies, mid-size, or large blue chippers. 

There is also the opportunity to find investment opportunities in different countries as well.  Sometimes, it might entail buying shares in a multi-national company traded on a specific exchange but doing business in many different markets.  There is some inherent diversification in such companies, as they are managing risk by doing business in different markets.

Other times, there are simply companies that do business in specific markets and are traded on those company’s markets.  It’s possible to buy shares of companies on a variety of different exchanges.  For example, one could purchases shares trades on the NYSE in the U.S. Others following the Australian market might be focused on asx share prices.  Or, perhaps people might buy shares of companies traded on the NIKKEI, which is Japan’s stock exchange.  Whatever the case, stocks are traded on many exchanges globally, and this presents quite a few opportunities for investors to diversify.

That being said, how many people actually look to diversify internationally?  I’ve shared a story about how I attended a going away part for someone retiring years ago, of a full generation older than me.  He enthusiastically encouraged everyone to put their investments fully into the company’s stock!  I couldn’t believe how everyone applauded him for that, when clearly he was making such a ridiculous suggestion.  Sure, it may have worked for him but it was a very risky move that could have really damaged his retirement plans if it was a different company in different market conditions.

So, given that “approach” to diversification, I wonder how many people really focus on international stocks at all.  Investing everything in one’s home country might offer a lot of diversification, but in a global economy could it be somewhat analogous to that guy who put everything in one company’s stock?

Frankly, I don’t focus nearly enough on stocks outside of my own home country.  I’ve talked about it and written about it, but checking my own portfolio, it’s extremely domestic in focus.  Not exclusively, but perhaps too much so now. Maybe it’s time to revisit this?  After all, investment opportunities are in many corners of the world.

My Questions for You

Do you diversify your investments internationally, or do you primarily focus on domestic investments?

If you don’t diversify internationally, what’s your rationale? 


Stocks and Inflation: What is the True Equity Premium?

stocks_and_inflation_moneyStocks have been long considered a staple in the portfolio of the average investor.  Through purchases of individual stocks, as well as funds through 401(k) and other retirement vehicles, a significant number of investors are counting on the markets to make money for them.  The idea is that when comparing stocks and inflation, equities would provide returns that can outpace increases in the cost of daily living.

Certainly, the market has shown the propensity to provide out-sized returns at times.  2012 and early 2013 saw very high rates of return, making investors quite happy.  The late 1990′s provided a multi-year period of strong stock returns as well, as many of us know.  There have also been numerous other individual years with very good returns – as in, well over 20%.  It’s tough to get that type of return in a conservative investment, right?

Well, stocks aren’t always money machines, like ATM machines dispensing for account holders.  Rather, they have good years and bad years – sometimes stocks lag inflation!

In the midst of a bull market, I decided to take a look at the returns of stocks, 3-month T-Bills, and compare to inflation.

Stocks and 3-Month T-Bills vs. Inflation

For this analysis, I went all the way back to 1970.  It’s possible to go back further, but I think over 40 years is a pretty good time frame.  In crunching the numbers, I used the following data:

  • Stocks: S&P 500 annual open and close values
  • 3-Month T-Bills: FRED (Federal Reserve Database) reported rates
  • Inflation: annual percentage rate increases reported by Bureau of Labor Statistics

I then broke out the data by decades:

  • 2010-2012 (3 years)
  • 2000-2009 (10 years)
  • 1990-1999 (10 years)
  • 1980-1989 (10 years)
  • 1970-1979 (10 years)

For each metric, I calculated the average, minimum, and maximum.  For example, for averages, this was based on a  sum of each year’s individual performance, divided by the number of years in the group.  To take a 2 year time period as an example, if year one had a 10% return, and year two had a 5% return, that would equal an average annual return of 7.5%.  As in, 15 divided by 2.

With that in mind, here is what I found:

2010 – 2012

During these 3 years, which are the most recent in the analysis, stocks clearly performed very well.  Here is how things went:





As can be seen, treasury bills haven’t returned much.  Inflation has been higher! Of course, inflation has also been low, which puts those returns in perspective as being remarkably low.  Stocks have done quite well by comparison, easily outpacing inflation.  This isn’t even including the increases in 2013, which would further reinforce this point.

Clearly, people who have owned stocks have seen their investments make money for them, relative to low-risk alternatives and in comparison to inflation.  Stocks have generated wealth in the early part of this decade!

This, I think, is what many folks might be focusing on. It seems like the recency bias can impact investors to high degree.   It’s almost as if this is the way markets are supposed to perform – or so we would hope!

2000 – 2009

Things look different when we go back to the past decade:





There were a few really bad stretches for stocks during this time period.  2008 was atrocious, as many of us remember how gloomy it was for investors then.  Annual declines were well over 30%.  2000 to 2002 were bad years as well, as the market retracted each year.  Of course, there were good years mixed in too, but overall it was kind of a silent decade for stocks on balance.

Meanwhile, one could have done better in other investments.  In many markets, the early 2000′s saw unreal returns in real estate, though some of that was given back toward the end of the decade.  Simply keeping pace with inflation would have been good for those investing in equities.  Stocks trailed inflation for the decade!

1990 – 1999

During this decade, stocks performed quite well.  Much of this benefit came during the back half of the 90′s, as 1996 to 1999 saw mega-sized returns during a prolonged bull market.  A lot of people got wealthy during this time, and the smart (or lucky?) ones that cashed out before the millennium actually got to convert the paper gains into real wealth.





Note that inflation was higher, but 3-month T-bills provided solid returns, compared to what has been seen in recent years!

1980 – 1989

Going back another decade, this was another good one for stocks.  What jumps out at me are the 3-month T-bill returns, which were clearly quite high during a part of this decade.  In 1981, in particular, this brought over 14%, while stocks declined nearly 10%!





Check out inflation, which was quite high in the early 1980′s, reaching double digits for a while.  Clearly, the current low rates of inflation pale in comparison to what we have seen in the past!

1970 – 1979

Here, we see that stocks actually had kind of a rough decade, all things considered.  There were some good years, but some bad ones as well which impacted the decade.  1973 and 1974 were particularly tough years.





Neither stocks nor T-Bills outpaced inflation during the 1970s.  If people talk about the first decade in the 21st century as being a lost one, how about the 1970′s? The era when people spent money on disco fashion and avocado-green bathtubs was also one where on average they weren’t seeing enough money being generated through stocks.

Overall: 1970 – 2012

When taken together, this decade currently in progress and the four prior combine to paint an interesting picture.  On average, stocks have provided a rate of return higher than inflation and supposedly “risk-free” investments.





The thing is, however, these returns are not that much greater.  Clearly, there is only a modest difference over this 43-year period between stocks, T-bills, and inflation.

Stocks and Risk Premiums

Take a look at that modest benefit to stocks, in terms of differential in returns.  Just a few percentage points, that’s it.  On the other hand, there is significant volatility in stocks, as we can see by the staggering max and min of the annual returns within each decade and overall.  Thus, there has only been a minimal equity risk premium to stocks over this time period.

That premium has been enough for people to make money, obviously.  Every percentage point counts, and rate of return is important.  Stocks, on average, haven’t been bad investments.

However, we should also keep in mind these points:

  • There is no guarantee that stocks will be great investments.  I think that’s important for people to remember, especially when during bull markets or other periods of good stock returns.
  • Inflation isn’t always insignificant, and recent years have been quite unusual.  It simply takes looking at past decades to show that there have been times when the cost of living soared while stock markets declined, so things can go the other way.

Bottom Line: Stocks can be great, and it’s easy to be intoxicated with confidence about the markets and their ability to make us money.  But they’re no guarantee of success, depending on your time frame.  Realism is vital, and so is diversification!

My Questions for You

When thinking about stocks, do expect them to have a rate of return greater than that of inflation?

Do you think that many people can be overconfident in stocks, overlooking historical considerations?

What do you think about the risk premium for stocks, based on the difference in return of stocks versus other less risky vehicles?


Japanese Stock Market Up Sharply: Interesting Historical Trends Emerge As Well

Okay, if you’re in the U.S. like I am, the stock market trends you’re probably following are those that are here.  Perhaps you’re tracking the Dow, and even the S&P 500.  When you hear how the market performed for a day, you’re thinking domestically.  Japan’s stock market probably doesn’t come to mind right away.

That being said, if you agree with me that rate of return is important, you might there has been something quite impressive happening with Japanese stocks.  The Nikkei has gone up significantly over the last year, and has given investors a fantastic return on their investments.  On May 9, 2012, the Nikkei 225 closed at 9,045.06.   Just one year later, on May 9, 2013, it closed at 14,191.48.   That’s a whopping 57% increase!

Of course, the S&P 500 has gone up too.  The increase over the same time period has been 20%, which is pretty impressive in its own right.  But still, despite the attention the U.S. markets have gotten with surging prices, what happened with the Japanese market is really worth recognizing.  Wouldn’t you like to get a 57% increase in the value of your stock investments?  I sure would, and wish I had paid closer attention and invested in that market!

Recent Monthly Returns

It actually gets even better.  In the last 3 months, the Japanese market has gone up 27%.  If one annualized that, it’s more than doubling your money.  Can you imagine an investment that successful?  If you took a $1,000 investment, and doubled it each year, you’d have over $1,000,000 after 10 years!

Okay, I know that this isn’t going to be happening, and we all know that.  However, I’m just trying to put into perspective how impressive such short-term returns are.  A lesson here is to pay attention to markets outside our own, and be open minded to different opportunities!

Historical Monthly Returns

If we look at patterns of stock returns for Japan’s stocks, there are trends that emerge.  You might recall an analysis I did of historical stock market returns, specifically of monthly performance of the S&P 500.  There, it was clear that over a 40 year time period (1971 – 2010), that some months have been better than others for stocks.  Here is a summary of the average monthly returns of the S&P 500:

January: 1.22%

February: -0.19%

March: 1.15%

April: 1.56%

May: 0.72%

June: 0.29%

July: 0.25%

August: 0.08%

September: -0.77%

October: 0.58%

November: 1.15%

December: 1.71%

A couple of things that emerge there are the concepts of Sell in May and Stay Away, and The September Effect.  Meaning, after May stocks don’t perform as well in the Summer months, culminating with September being a historically poor month on average.  Given the recent strong performance of the S&P 500 in reaching historic levels, is the long-term trend of a slumbering summer market something to think about now?  Is the market on the verge of a pullback?

In terms of the Japanese stocks, there are also monthly trends that emerge.   Here is the average monthly performance for the Nikkei 225:

January: 0.60%

February: 0.75%

March: 1.50%

April: 1.19%

May: -0.15%

June: -0.11%

July: -0.53%

August: -0.65%

September: -1.61%

October: -0.85%

November: 0.41%

December: 1.52%

As can be seen, there are clearly some months that the Japanese market does well, and others when it doesn’t.  Can you see the similarities between the S&P 500 and the Nikkei?

Now, this data above for Japan was pulled for 29 years – from 1984 to 2012.  A slightly different time period, but most years overlap and the findings are still similar.  The party starts to end in May, and things aren’t too exciting all summer.  September is the worst month for both markets across the pacific from one another.  Apparently, Santa visits investors in both markets :)

What to Make of This

Well, first of all, the recent amazing returns in Japan make it clear that we should be looking beyond our own borders for great investment opportunities.  This is something we know anyway, but to me it’s really more evident when looking at actual returns such as that 27% increase over 3 months.

Beyond that, this analysis shows that monthly stock return trends may have more to them that meets the eye.  If this happens over the long-term, and in 2 different markets, maybe there is something to this concept.

Perhaps, being at least somewhat active as an investor and paying attention to 1) different markets, and 2) historical trends, might have legitimate benefits!

My Questions for You

Do you look outside your home country for investment opportunities?

Have you been noticing the incredible returns in Japan?

What do you think of the concept of some months being better than others for investing, based on similar data for these 2 markets?