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Spring cleaning: What to do with rotten eggs in your portfolio

nest-egg

Sometimes it feels like the whole personal-finance industry exists just to tell you what to buy. Yet knowing when and why to sell is just as important (if not more so), and investors can make costly mistakes if they don’t know how to dump the rotten eggs in their portfolio.

A big part of the problem is human nature. Really, who likes fessing up to a bad call? Behavioral finance experts such as Daniel Kahneman and Amos Tversky have documented in numerous studies how investor “loss aversion” can lead to irrational and money-losing mistakes.

In short, investors tend to feel the pain of loss more acutely than feel the pleasure of gain. Also, research published in 1998 by behavioral-finance professor Terrance Odean of the University of California, Berkeley, showed that individual investors are 50% more likely to sell a winning stock than a loser.

With a paper loss, it’s easier for investors to convince themselves the stock will come back and they’ll break even — if only they stick with it. Some will even double down and buy more.

Why? The depressed stock is a bargain relative to the original purchase price, investors often reason. This is a potentially dangerous game.

Overcoming the loss aversion syndrome requires stepping back, letting go of one’s pride and doing some dispassionate analysis.

One way to tackle the problem, suggests Mark Hulbert with The Wall Street Journal, is to “subject your stocks to the same valuation criteria that you used when initially deciding to purchase them.” If you bought a stock because it was outperforming its peers and had a lower price/earnings ratio, then ask yourself if that is still the case. If not, and the stock is tanking, it may be time to sell.

Biting the bullet on a stock that has significantly lagged the market over the past 12 months is another potential approach. Michael Sincere at MarketWatch suggests cutting lose a stock once it declines a certain percentage.

Morningstar StockInvestor editor Matt Coffina suggests remembering that any investment represents a choice among competing alternatives. As market conditions change, so can the relative attractiveness of your holding. Here’s his take:

“Every investment decision is relative. So, when you decide to own one stock, you’re also deciding not to own any number of other stocks, cash, bonds, options, or whatever it is. If we have a better opportunity, then that is the best time to sell and put that capital to work in something better.”

There are also some tax reasons to cut loose a trade gone bad. If you hold the stock in a taxable account, you may be able to use tax-loss harvesting to reduce the tax liability on capital gains elsewhere in the portfolio.

DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. Neither Covestor Limited nor its representatives are engaged in rendering tax, accounting or legal advice. A qualified professional should be consulted regarding the effect of such considerations on the matters covered in this article. Past performance is no guarantee of future results.

The best-performing sector of 2014 may surprise you

utilities

Many investors were bearish on utilities stocks heading into this year after the sector lagged the S&P 500 in 2013. Expectations of rising interest rates and continued risk-on sentiment were key components of the bearish thesis, but that hasn’t exactly happened.

Utilities Select Sector SPDR Fund (XLU) is actually the best performer among the nine major U.S. sectors so far this year — and it isn’t even close.

The utilities ETF is up more than 11% for the year-to-date period, and was actually rising to new all-time highs on Tuesday amid weakness in the overall market.

utilities-etf.png

The outperformance of the utilities sector isn’t something that the bulls want to see. Utilities are seen as a defensive sector that investors tend to flock to during times of heightened uncertainty in the market. The strength of utilities stocks also suggests interest rates could be heading lower, not higher.

The chart below shows the relative performance of the utilities versus the S&P 500, and the sector’s recent strength.

utilities-xlu.png

Meanwhile, the underperformance of consumer cyclical stocks is another worrying sign for the health of the overall market and the broad economy.

Consumer Discretionary Select Sector SPDR ETF (XLY)  is the worst performer of the nine major sectors so far this year with a loss of nearly 6%. The relative performance chart below illustrates this fact.

consumer-discretionary.png

Finally, the recent outperformance of another defensive sector, Consumer Staples Select Sector SPDR ETF (XLP), suggests that investors are moving more toward a risk-off posture.

Photo credit: Matthew Youngberg via Flickr Creative Commons.

DISCLAIMER: The investments discussed are held in client accounts as of January 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

Smartphones: Like cigarettes, only better

smartphones

By Barry Randall

Pop Quiz: What fits in your pocket, annoys others not partaking, is addictive, and costs more every day?

If you answered cigarettes, you’re right. But another correct answer is smartphones.

We’re not the first ones to make this comparison. But from an investment point of view, it’s useful.

The similarities between smartphones and cigarettes came to mind recently. I was reading a Wall Street Journal article describing that while the conventional wisdom is that aggressive competitive moves by T-Mobile (TMUS) and Sprint (S) ought to be driving prices down, mobile-phone bills continue to climb. According to the story, the average monthly revenue per postpaid user across the U.S. wireless-service industry has climbed from $55.80 in the first quarter of 2010 to $61.15 at the end of 2013. That’s a nearly 10% increase.

What other technology-based service or product has risen in price during that time? Cable TV? Nope, going down with “cord cutters.” Tablets? Not with Samsung (SSNLF) carving into Apple’s (AAPL) market share. Basic DRAM memory? On a price-per-gigabyte basis, DRAM prices have been halved in the last four years.

For our firm’s flagship tech portfolio, we typically follow the lead of our quantitative model, which ignores the specifics of a particular company’s product or service, focusing instead on its financial performance and market share trends.

But I admit I was surprised recently to observe that we own no less than six wireless service providers in our 50-stock Crabtree Technology portfolio. These include Verizon (VZ), Turkcell (TKC), Atlantic Tele-Network (ATNI) and a few more. The fact that we own six phone companies is almost happenstance – we didn’t go looking for them. Instead, with their huge cash flow and generally steady market share, they found us.

And what about market share? With four major wireless providers in the U.S., and typically only one wireless carriers in any given international region, is market share really changing hands?

Not literally. But in a subtle yet very real way, wireless providers are taking market share. This was made brilliantly apparent by blogger Steve Cichon. In a post this past January, Mr. Cichon pointed out that almost everything found in a 1991 newspaper ad from Radio Shack had been absorbed into a modern smartphone and contemporary wireless service.

Answering machine. CB radio. Alarm clock. Video camcorder. Calculator. CD player. Personal computer. And, of course the land-line and “Mobile Cellular” phones themselves.

Amazing. The wireless industry isn’t swapping much market share among its players, but overall, they’re taking “dollar” share from other industries.

I’m often asked what the big deal about technology is. Why are people so eternally interested in it? So much so that tech remains the single biggest sector (18.6%) of the S&P 500.

I usually answer by saying that tech is interesting because of cool new products, or the way it profoundly changes our world in positive (GPS navigation) and sometimes not-so-positive (texting-while-driving) ways.

But it’s also honest to say that the “thing” about technology is our devices change, but our needs don’t. We need to communicate, so it used to be smoke signals, the telegraph and CB radios. Now it’s mobile phones. Tomorrow it might be telepathy. But underneath, it’s communication. Even cigarettes are not immune to this dynamic, as some smokers leave behind tobacco for electronic cigarettes because nicotine is, well, addictive. Smokers need it, distasteful though that may be to some.

So as investments, wireless service providers seem like a sweet deal: pricing power leading to plenty of cash flow and taking share from seemingly unrelated businesses. Oh, and customers displaying clear signs of addiction. And now, apparently, a growing number are using more than one smartphone: one each for work and play. Life is great for wireless service providers. What could possibly go wrong?

Lots of things. Starting with the self-inflicted wounds common to monopolists and oligopolists, like hubris and myopia. Then there are the here-and-now threats, such as over-the-top texting services like WhatsApp, which rely simply on the broadband connection and not a dedicated texting service plan. These would seem like a major threat to the wireless carriers.

But at the end of the day, the carriers ultimately have the network, without which none of these cool services can happen. In other words, the carriers have assets for which others will need to pay. WhatsApp has $19 billion of Mark Zuckerberg’s money, but they don’t have a network. And telepathy isn’t an option. Yet.

The jury is still out on whether cell phones cause cancer, something long accepted as a certainty for smoking. But as addictions, smoking and smartphones usage appear to be headed in opposite directions: the former marginalized; the latter taking up more and more of our time and money.

So thank you for talking. And texting. And binge-watching “Orange is the New Black” on your smartphone.

Meanwhile, got a light? There’s an app for that, by the way. And the Radio Shack ad didn’t even mention flashlights!

Photo credit: Maxime via Flickr Creative Commons.

DISCLAIMER: The investments discussed are held in client accounts as of March 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.

Tax refunds on record pace: What will you do with yours?

Tax return check

It’s never fun paying taxes, but the good news is that many Americans will be receiving a bigger refund from Uncle Sam this year.

Of course, it’s tempting to go out and spend what seems like “found” money on a vacation or luxury item. Yet saving or investing that refund might be the wiser option.

About three out of four filers typically get refunds, and last year taxpayers received an average refund of $2,755, according to the IRS.

“Individual tax refunds are up 9% over last year and look set to break all-time records. As of the end of week 13 in 2014, Americans have received an incremental $17.6 billion back from the U.S. government over last year,” according to a note from ConvergEx Group.

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Some other data points from ConvergEx:

  • Where that money goes is hard to track – we assume taxpayers use half for debt pay down and savings. The other half likely gets spent.

  • In fiscal 2013, the IRS collected over $2,8 trillion dollars from American consumers and businesses.

  • In Fiscal 2013, the IRS processed 146 million individual tax returns and issued 118.5 million refunds.This year, the IRS is quoting refunds levels closer to $3,000, although that includes all types of returns. For many American households, a $3,000 direct deposit is the equivalent of two week’s pay or more.

  • Refunds got off to a slow start in 2014 (for the 2013 tax year), but as of last Friday they were 9.2% higher than the same 13 week period in 2013.That equates to $17.6 billion of incremental payments to taxpayers.

  • The total amount paid out in refunds breached the $200 billion mark in Week 12, and this year’s refunds look to set all-time records in terms of total payments. We’ve included a chart with the annual run rates by week from 2005 to 2014 after this note, along with some other exhibits.

  • When compared to the average amount of IRS refunds since 2005, the scale of 2014’s incremental payments is more pronounced.The average of 2005 – 2013 refund payments is $180 billion, or $20 billion less than the money already distributed this year.

The positive takeaway is that many Americans will be receiving fatter tax refund checks in the mail this year.

It might be a good idea to put that money to work rather than spending it. How? Consider using your refund to pay down debt, boost savings, augment your emergency fund or invest for retirement.

Charles Sizemore, who manages the Dividend Growth portfolio on Covestor, recently discussed the benefits of putting refunds in a traditional or Roth IRA.

“With wage growth being stagnant over the past decade, saving money can be something of a challenge,” he said in a MainStreet report. “However, $3000 placed into a traditional IRA is worth an immediate $750 in tax savings in the 25% tax bracket.”

Photo credit: DRivers@WorldLaw via Flickr Creative Commons.

DISCLAIMER: The information contained in this article is general in nature and not intended as specific advice. Neither Covestor Limited nor its representatives are engaged in rendering tax, accounting or legal advice. A qualified professional should be consulted regarding the effect of such considerations on the matters covered in this article.  

Portfolio manager Carlos Seras talks taxes and investing

radio

Financial Tales Portfolio co-manager Carlos Seras recently appeared on HealthyLife’s News@7 radio broadcast to to talk about tax season and his favorite insights for investors.

Seras discussed some last-minute tax tips with HealthyLife anchor Jay Cruz. Although investors have limited options “this late in the ballgame,” he suggested contributing to IRAs before the April 15 deadline.

The portfolio manager also discussed his investing philosophy and the origins of his Financial Tales blog.

Seras weighed in on how to use moving averages when investing, and why he’s not a fan of a “buy-and-forget” approach.

The full radio interview is embedded below:

Photo credit: dustinjacobsen via Flickr Creative Commons.

DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. Neither Covestor Limited nor its representatives are engaged in rendering tax, accounting or legal advice. A qualified professional should be consulted regarding the effect of such considerations on the matters covered in this article. Past performance is no guarantee of future results.

IRAs, 401(k)s and more: The alphabet soup of retirement investing

401k-taxes

April is National Financial Literacy Month in the U.S. and also the deadline month for funding various types of retirement accounts.

Therefore, we thought it was a good time to take a quick tour through the array of retirement savings plans available to investors.

Individual Retirement Accounts

Traditional and Roth IRAs are established by individual taxpayers who contribute a portion of their pay. With a Roth IRA, there is no up-front tax break, but you don’t have to pay tax on withdrawals in retirement. The opposite is the case with traditional plans.

There are other important differences between the two as illustrated by this useful chart prepared by the IRS:

IRAs.png

401(k) Plans

This is a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts. Workers choose salary deferrals up to a set amount ($17,500 annually for traditional plans), which are excluded from the employee’s taxable income. That said, 401(k) plans come in many different flavors.

Some companies match employee contributions. However, since the financial crisis in 2008, employers have become less generous with company matches and have set lower limits for the maximum annual payment they’ll make to a 401(k) account.

Simplified Employee Pension Plan

This is basically a traditional IRA plan that is set up for employees by companies.  A business of any size, even self-employed, can establish a SEP.

Such plans are attractive to many companies, because they don’t have the high administrative costs of a conventional retirement plan. Workers can chip in up to 25% of their pay into these plans.

Profit-Share Plans

As the name implies, companies sometimes share their profits with employees in a separate account for each employee. Such contributions are discretionary and there is no set amount a company must make to qualify. There are contribution limits: The lesser of 25% of compensation or $51,000 (for 2013; $52,000 for 2014.

Defined-Benefit Plans

This is your grandfather’s corporate pension plan and increasingly a rarity these days. With a defined benefit pension plan, an employer uses payroll contributions and matching funds to guarantee a specified monthly benefit on retirement.

The amount is determined by a formula based on age, length of service and an employee’s earnings history rather than the fluctuations of investments backing the plan.

According to the Pension Benefit Guaranty Corporation, there are about 38,000 insured defined benefit plans today compared to a high of about 114,000 in 1985. Companies have moved away from defined plans due to their complexity and cost.

Employee Stock Ownership Plans (ESOPs)

Employee ownership plans come in several varieties. Employees can buy stock directly, be given it as a bonus, can receive stock options, or obtain stock through a profit sharing plan. Some employees become owners through At worker cooperatives, where employees become owners, everyone has an equal vote.

But by far the most common form of employee ownership in the U.S. is the ESOP, or employee stock ownership plan.  About 12,000 companies now have ESOPs or similar trust-based plans, covering over 11 million employees, according to the IRS.

Tomorrow is April 15! Check out our recent posts on last-minute tax tips and ideas for investing your tax refund.

Photo credit: helium heels via Flickr Creative Commons.

DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. Neither Covestor Limited nor its representatives are engaged in rendering tax, accounting or legal advice. A qualified professional should be consulted regarding the effect of such considerations on the matters covered in this article. Past performance is no guarantee of future results.

Ideas for investing your tax refund

tax-refund

Don’t know what to do with your tax refund? Two portfolio managers on Covestor in a recent MainStreet report suggested that individuals should invest their tax refund rather than spending it.

Below are some excerpts from the article:

With the average refund yielding $3,000, investors who put that amount toward an IRA or Roth IRA will have reached half of the contribution limit, depending on whether they qualify, said Charles Sizemore, a CFA based in Dallas who manages four investment portfolios on Covestor, an online marketplace for investing.

"With wage growth being stagnant over the past decade, saving money can be something of a challenge," he said. "However, $3000 placed into a traditional IRA is worth an immediate $750 in tax savings in the 25% tax bracket."

Consumers should use their tax refund dollars to invest in areas of the market which have “great long term prospects and yet are undervalued such as the emerging markets,” said Daniel Beckerman, a portfolio manager on Covestor and a financial planner in Oakhurst, N.J.

"After being led by high momentum stocks for quite a while such as Netflix, Tesla and Amazon, the stock market is now experiencing a healthy rebalance," he said. "The overpriced stocks are being punished and the fundamentally undervalued areas are showing relative outperformance."

Equities in the emerging markets trade at 11 times earnings, which is a substantial discount relative to the U.S. stock market, Beckerman said. The emerging markets dramatically underperformed compared to the U.S. over the past year. A turning point occurred recently and in March, emerging markets rose by 5%. At the same time, the S&P was down 2% and the Nasdaq was down over 5%, he said.

"Most investors are underexposed to the emerging markets sector anyway, so it is a great time to make sure that they have a reasonable allocation there," Beckerman said.

Read the full article at MainStreet.

Photo credit: eFile989 via Flickr Creative Commons.

DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. Past performance is no guarantee of future results.

April 15 tax deadline may be hurting U.S. stock market

april-15-taxes

The Nasdaq Composite was down nearly 100 points on Thursday afternoon and a lack of market-moving news has some observers blaming the recent weakness in U.S. stocks on the looming April 15 tax deadline.

“The need for investors to raise cash in 2014 to pay substantial capital gains, or taxable income from the sale of investments held longer than a year, has added to selling pressure ahead of the April 15 deadline to file tax returns,” the MoneyBeat blog reports.

Some investors may be unloading stocks to generate cash since they’re facing higher tax bill due to a more than 30% gain for the S&P 500 last year, and increasing taxes.

The theory is that this selling may be at least partly responsible for recent turbulence in the market.

Blogger Ryan Detrick notes that going back four decades, U.S. stocks tend to see some jitters before the April 15 deadline, although the trend for the second half of the month is higher on average.

WSJ.com’s MarketBeat adds that history shows the pre-deadline weakness in U.S. stocks tends to be more pronounced following a big up year for the S&P 500.

s&p-500

Of course, investors shouldn’t rely too much on history. Just because something happened in the past, it doesn’t mean history will repeat.

“These types of seasonal influences are tertiary at best, but it does suggest a very slight headwind, if anything for stocks in the coming days,” said Jason Goepfert, founder of Sundial Capital Research, in the MarketBeat post.

Paying taxes is painful enough, so investors are hoping the U.S. stock market will get back on track after April 15.

Photo credit: eFile989 via Flickr Creative Commons.

DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. Past performance is no guarantee of future results.

Is the Nasdaq signaling another tech wreck?

social-media-ipos

A spate of IPOs and investor hunger for technology growth stocks with little or no current profits have triggered murmurs of another tech bubble, even though the Nasdaq is still about 20% below its all-time high.

“Fifteen years ago, we were in a massive tech-stock bubble. Some people are pointing to evidence we’re already in another tech bubble now,” writes Kevin Kelleher for Time. “Others are certain we’re nowhere near the insane investing we saw in 1999. It’s possible they can both be right.”

After peaking in March 2000, the Nasdaq lost nearly 80% of its value during the dot-com crash before bottoming out in October 2002.

Currently, the Nasdaq is down about 5% from its recent March 5 high. While the S&P 500 and Dow have broken out to all-time highs, the Nasdaq is still below its 2000 peak.

From a technical perspective, Chartoftheday.com notes that the Nasdaq has just broken below support of its 17-month uptrend channel.

nasdaq.png

The Nasdaq Composite Index closed Wednesday at about 4,184, while the all-time closing high was just shy of 5,049 set on March 10, 2000.

The tech-heavy index posted a total return of about 38% in 2013 to outperform the S&P 500, although the Nasdaq is lagging so far this year. Recent weakness in high-momentum names and social-media stocks in particular have weighed on the tech sector.

Kelleher concludes that the current market for tech stocks is not in a bubble like the dot-com or real estate bubbles of the past two decades.

“But it may well be in the early stages of a bubble marked by irrational investments, a bubble that could easily expand out of control if smart people keep rationalizing away the early warning signs,” he writes.

“And there are warning signs, whether it’s a growing tolerance of insanely priced IPOs and M&A deals, or the return of spurious metrics like revenue per user, or even a piece of junk mail touting an unwise stock investment,” Kelleher adds. “Such early signs are kindling that, if left to gather, can make for a bonfire later on. No, it’s not 1999 at all. But it may well be 1998 – or something a lot like it.”

Photo credit: Lee Traupel via Flickr Creative Commons

DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. Past performance is no guarantee of future results.

Younger hedge funds perform better: study

hedge-funds

Youth is not wasted on hedge funds.

So says a report released on Wednesday from eVestment.

The study suggests that the age of a hedge fund plays a greater factor in relative performance than size of assets.

“Young [hedge] funds posted the highest cumulative returns since 2003 and during the past five years have also outperformed mid-age and tenured funds,” according to the report. “By annual returns, young funds have consistently outperformed mid-age and tenured funds.”

The hedge fund industry is maturing, with a greater number of older and larger funds, according to eVestment.

Small hedge funds have outperformed their larger peers on a cumulative basis since 2003, although more recent data shows the tendency for smaller funds to outperform has declined.

Other studies have documented how younger, emerging hedge funds on average have outperformed larger, more established managers. In other words, size counts — and smaller can be better because managers can be more nimble.

Smaller transactions are also less likely to impact the prices of securities that managers are trading. And smaller asset bases can allow managers to focus only on their best ideas, since they’re less likely to be forced to put money to work.

In fact, some of the greatest investors and hedge fund managers of all time delivered the best performance of their careers when they were small and undiscovered portfolio managers.

At Covestor, we’re built an online marketplace that gives individuals the chance to invest alongside emerging portfolio managers who oversee smaller asset bases.

To try Covestor, open a free trial account.

DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. Past performance is no guarantee of future results. Covestor provides limited due diligence to verify portfolio managers’ past investment performance, which is not audited or verified by an independent third party. Covestor Limited (“Covestor”) is an SEC registered investment adviser.  Information pertaining to the registration status of Covestor can be found at www.adviserinfo.sec.gov, or may be received from Covestor upon request.