What’s an investor to do about rising volatility? For many investors, the answer is, not much. Ideally, one wants to be in the market on the up days and out on the down days. In reality, no one can call those days accurately in advance. Academic studies have shown that most of the gains in the stock market occur on just a few trading days. The risk of being out of the market on good days outweighs the reward of avoiding the losers and the transaction costs of managing the process.

The historical record
Business professor Javier Estrada of the IESE Business School in Barcelona, Spain, quantified the effect that exceptional days can have on investment returns. He studied the Dow Jones Industrial Average for the period from 1900 through 2006. Looking at the best 100 trading days, the lowest return was 3.9 standard deviations above the mean. Statisticians will tell you that data suggest such a return should be seen once in 83 years—yet that return or better occurred 100 times in the course of the study.

To translate Estrada’s findings into dollars, $100 invested in the DJIA at the beginning of 1900 would have grown to $25,746 by the end of 2006. However, if the investor had missed just the ten best days of those 107 years, the investment would have grown to only $9,008, a reduction of 65%. Miss the 20 best days, and the portfolio would have grown to only $4,313. Finally, missing the 100 best days of the 29,190 in the period under study, one-third of one percent of the trading days, would have resulted in a loss of capital, as the terminal wealth would have been just $83.
Of course, there are exceptional days on the downside as well, as Estrada documents. If you had kept all the best days and avoided just the ten worst days, terminal wealth would have jumped to $78,781. If you had accurately predicted the 100 worst days and avoided them, your $100 would have grown to an astonishing $11,198,734!
And it’s not just the U.S. stock market that exhibits such behavior. Estrada went on to document similar results in foreign markets as well. He concludes: “A negligible proportion of days determines a massive creation or destruction of wealth. The odds against successful market timing are just staggering.”

Lessons for investors
What can investors take away from studies such as these?
• The costs and risks of trying to time the market probably are larger than the potential benefits. Academic studies of returns are inherently artificial and tend to overstate returns because they do not factor in transaction costs or taxes. Thus, the case against market timing is likely even stronger than suggested by Professor Estrada.
• Over the long term, the stock market has balanced the negative and positive abnormal days. Past performance does not guarantee future results, but, overall, stocks have outperformed all other investment classes.
• Diversification may help moderate the impact of exceptional days. On a day when the stock market overall is down, some stocks are, nevertheless, up. Stock selection matters. The bond market doesn’t always move in lockstep with the stock market, so an allocation to this asset class also may reduce the impact of daily swings. Keeping some cash on hand may help the investor weather a rough patch, or even take advantage of opportunities that arise.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

Although they may seem similar, yield and return have very specific and distinct meanings when it comes to evaluating investments.
Yield is simply a measure of income, ignoring the possibility of the changes in market value that result in capital gains and losses. With common stocks, income comes from dividends, while bonds provide interest payments. For those investments that have stable values—bank CDs or money market funds, for example—yield and return are
the same.
Return is a more inclusive measure of investment performance. Calculation of
return starts with income, then adds changes (increases or decreases) in the market value
of the investment. Total return can be either positive or negative, in contrast to yield, which must be positive. Return is the better measure to use to evaluate the historical performance of stocks, bonds or mutual funds.
An illustration
Let’s say that a stock worth $100 today pays an annual dividend of $2.50. That’s a dividend yield of 2.5% (dividend divided by price). If the price of the stock rises by $5 during the course of a year, the price increase is added to the dividend to obtain a total return.
Dividend $2.50
+Price increase $5.00
= Total return $7.50
Thus, the total return for the year is 7.5%. Notice, however, that by the end of the year, the yield has fallen slightly, even though the dollar value of the dividend is the same. The $2.50 dividend must now be divided by the higher $105 price.
Bond returns are calculated in a somewhat similar fashion. Say a $100 bond pays $6 in annual interest for a 6% yield. If the price of the bond rises by $3 (because, for example, interest rates fall), the total return for the bond will be 9%.
Interest payment $6.00
+ Price increase $3.00
= Total return $9.00
But if prices of stocks or bonds fall, the total return can fall—to zero or below. In the short term, investors should expect occasional periods of negative returns—as we have seen recently. But in the long run, investors should see the good years outweigh the bad.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

Are women better investors than men?

Perhaps one of the most common of stereotypes is that women tend to leave family finances to men, while they manage the serious tasks of raising children and keeping the household functioning.
If this were true, should we then expect that men would be better investors—in other words, is there a greater chance that they will achieve success with their investments than women? Or, for some reason, might the opposite be true?
Confidence and gender
One often-cited study about gender differences and investing comes from research conducted in 2001 by two professors from the University of California at Davis, Terrance Odean and Brad M. Barber. The study examined the trading habits of male and female investors, and the effects that those habits had on investment performance.
Odean, speaking at a Morningstar Research, Inc., conference in 2008, reiterated his findings that men tend to be sure of their ability to make good investment decisions, while women are far more cautious. A tendency toward overconfidence can lead to excessive trading, borne out by the Odean-Barber research: Their data indicated that men traded 45% more actively than women, and single men traded 67% more actively than single women.
The investment performance favored the women. “Overactive” trading reduced the men’s net returns by 2.65 percentage points a year, compared with 1.72 percentage points for women. The reduced return came from the increased expense of extra trades, plus the fact that newly purchased securities did not outperform those that were sold.
Some of Odean and Barber’s findings are supported by a 2007 study of U.S. equity fund managers from 1994 to 2003. It found gender-correlated behavioral differences among fund managers who had a comparable educational background and experience. Women fund managers were more risk averse than men fund managers, and, as Odean and Barber found, they traded less. However, the study did not find any significant difference in the risk-adjusted investment performance of female- and male-managed funds.

An explanation

What might account for the finding that women lack self-confidence and fear taking risks when it comes to investing?
There is some evidence that younger women are more comfortable managing their own finances today, according to Tahira K. Hira, author of The Handbook of Consumer Finance Research. In the past the division of labor really did follow what, today, we consider stereotypical.
Hira’s research found that women chose to focus on day-to-day tasks. Whether they had the skills or not, the demanding and time-consuming assignment of planning for their family’s financial future was an aspect of their lives that they left in the hands of their spouses.
The result, says Hira, is a catch-22: “Many women have low confidence because they haven’t done a lot of planning or investing. And because they find it difficult and stressful—or they aren’t expected to deal with it — they don’t get the experience that would boost their confidence.”
Unique challenges for women
There are some indisputable facts about the role gender plays in a woman’s financial life. For one, they live longer than men. Figures recently released from the National Center for Health Statistics put the average life expectancy of a woman at 80.7 years; a man, 75.4.
Women who have chosen to be out of the work force for several years, or who work part-time in order to raise a family, might earn less, and they might be less likely to be covered by a company retirement plan or, if they are covered, might receive a smaller pension or payout. Some women may find that they lack funds sufficient to provide income that will see them through what may be a long life, including, perhaps, some years living on their own.
What we can do
The major studies on gender differences examine behavior and investment results from people who make their investment decisions based upon their own knowledge and experience.
What’s missing from the equation is what a professional might accomplish for investors of both genders. The challenges that women face call for an investment strategy that will provide long-term security. Even men who feel confident about their investing abilities can learn about new opportunities and alternatives to their current strategies.
That’s why we believe that we can provide valuable services for both men and women . . . and why we recommend that you make an appointment now to discuss how we can assist you with your investment management needs.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

Whether expected or not, an inheritance, divorce settlement, severance package or pension payout, proceeds from the sale of a business, life insurance, legal judgments, or even lottery winnings—all can put in your hands the equivalent of several years of earnings. Now you’re at a crossroads—suddenly called upon to switch from wealth-building mode to wealth management. You will, of course, face circumstances special to your situation. Yet, there are some general guidelines that apply to almost all such transitions.
Proceed cautiously
Financial windfalls often come with an emotional price tag: the loss of a loved one, a serious injury. Or it can mean a major change in your life—ending a career or selling a business. Even for a lottery winner, euphoria may make long-term planning a challenge. Fortunately, in most situations, major decisions are not required immediately. Cash can be set aside in the money market, in short-term CDs or in an interest-bearing bank account. Although rates are not very impressive these days, at least you won’t lose money while you regroup.
Similarly, retirement plan assets can be left in place for a reasonable period of time. An inherited IRA, for example, gives the beneficiary until December 31 of the year following the death of the owner to decide between cashing in immediately, or within a five-year period, or over his or her life expectancy.
Whatever the case, give yourself some time to regain your emotional bearings and to think about what uses of your new wealth will give you the most satisfaction.
Where are you headed?
Is your sudden wealth large enough that you can retire? If that course is attractive to you, you should think of your assets—new and old—not as a lump sum but in terms of the after-tax annual income that they can produce over the course of your life. Is that figure enough to support the lifestyle that you envision for yourself and your family? Or, if you will continue in your present position, do you simply want to clear debts, ensure your children’s education, invest for your eventual retirement and provide for those whom you leave behind?
Among your goals should be a review and update of your estate plan, so as to include your increased assets. You also will want to consider a revocable living trust and/or a durable power of attorney to provide for the management of your assets in the event of incapacity.
The issue of taxation
If your new wealth is taxable, it will be taxable as ordinary income when it comes from lottery winnings, royalties, severance payments, mineral rights and the like. Legal judgments are taxable, except to the extent that they are compensation for physical injury.
If the money comes from the sale of a business, it may be subject to tax on any capital gains realized. Proceeds from the sale of your home also are subject to capital gains tax, but the first $500,000 in gains may be exempt for a married couple ($250,000 for a single individual). Retirement plan payouts are taxable and may be subject to a penalty tax as well if you aren’t age 59 1/2. However, tax may be deferred when rolled over into an IRA. Most inherited assets are received with a stepped-up basis and, thus, are subject to little or no tax if sold.
Taxes can be a major complicating factor to new wealth. The services of an experienced tax advisor may help you uncover ways to minimize their impact and are well worth investigating.
Looking for assistance
The planning and decision-making necessary as a result of the receipt of a large lump sum can be overwhelming. And very few people have the investment management expertise that they will need.
Professional guidance can help, but do your homework. For instance, do the professionals charge a fee based on the amount of assets under management or rely on commissions from the products that they sell? Be sure to ask for and check references before entering into any agreement.
We would be pleased to tell you about the services that we provide. Our investment management team has many years of experience dealing with the challenges and opportunities that wealth presents, and our sole focus is the needs of our clients. And we offer a wide range of fee-based services:
Full management services. We map out strategies to help you achieve the balance of growth and Full management services. income, risk and reward that best fits your needs. We handle all day-to-day tasks and tax accounting, reporting results to you on a regular basis.
Advisory services. We develop an investment strategy based on your individual situation, and make specific buy and sell recommendations for your approval. You make the decisions, and we execute them.
Custodial services. We handle only the “housekeeping” chores—record keeping,
execution of trades, collecting dividends and providing you with tax data—ensuring timely attention to your financial affairs, even when you are not available.
Trust services. A revocable living trust complements any of the services above, enabling the trustee to step in and handle your financial affairs when you are incapacitated. It also offers considerable estate planning advantages.
______________

Our goal is to work together with our clients and their tax and legal professionals to craft plans suited to their individual needs. Contact us at any time to find out more.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.