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Average Can Be Hard to Achieve

Today’s Chart of the Day comes from Compounding Quality, @QCompounding on Twitter, and shows that over the last 20 years, the average investor realized only an annual return of 3.6%. This is less than 4.3% on bonds, and not much higher than inflation of 2.2%, meaning that many just barely broke even after inflation and taxes. This can be compared to a return of 9.5% on the large-cap stock index, or 7.4% for even a conservative generic portfolio of 60% stocks and 40% bonds.


Family Matters

In the desperation of trying to stay relevant and up-to-date within the banking industry, more and more community banks are falling prey to merger mania, albeit losing these banks means losing a part of the community. However, the Crews family


Top 10 Things to Do if Your Account Is Compromised

We’ve all heard nightmare stories about someone who has become the victim of credit fraud; however, what have you done to protect your financial well-being? Phishing links in texts or emails, compromised passwords or pins, and stolen credit card information are all ways fraudsters can hack your accounts, so it’s important to stay vigilant when it comes to your credit. Learn steps to ensure you’re protected from identity or credit theft.


Housing Un-Affordability

Today’s Chart of the Day is the history of the Housing Affordability Composite Index provided by the National Association of Realtors going all the way back to 1986, with the average line in dotted red.


Lack of Persistence in Mid- and Small-Cap

Today’s Chart of the Day from S&P Dow Jones shows the percentage of time the top 25%, or top quartile, of active investment managers stayed in the top 25% after five years.  A higher-than-average figure will tell us if the active managers have genuine skill or merely experienced good luck. 

If you flipped a coin, randomness would assume 25% of them would stay in the top 25%; however, the evidence does not support this. Yes, 27% of large-cap managers do, which shows that by and large their performance is merely good luck. However, the chilling figures are only 1.5% mid- and 0.9% of small- do. These are terrible odds. To add insult to injury, 15% and 23% of mid- and small-cap managers end up at the bottom 25%, meaning that even in the unlikely event you picked a good one, odds suggest you should sell it right afterward.

There are many theories to why this is, and we’ve discussed them in previous blogs including Why Indexing Works.

In the end, the significantly worse than average probability of active managers constantly beating the market in mid- and small-cap stocks is why we only use passive index funds. 


Investing in a Recession? “D@*! the torpedoes, full speed ahead”


According to Mighty History, “maybe one of the Navy’s finest moments came at the 1864 Battle of Mobile Bay, where Adm. David Farragut forced his way through a Confederate minefield and fought the Confederate Navy to a standstill.


Median Sale Prices in US

Today’s Chart of the Day comes from @WallStreetSilv on Twitter, with data provided by Redfin, covering the median sale price for a single-family residence in the United States.

Often the price of a house is constrained by the cost to build the structure which limits a wide range. For instance, why pay more for an existing house than you can build a new one for? So, the $200,000 to $600,000 range is quite alarming. Although the size of the home will impact the price, I suspect a large part of the wide range is in the cost of the underlying land, which is influenced by places with better weather, proximity to better employment opportunities, and scarcity of useful land to build on. For instance, places near the water, mountains and lakes could be influenced by these factors.


Change of Market Shares

Today’s Chart of the Day comes from @MorningstarInc and @MstarBenJohnson on Twitter. It shows the change from actively to passively managed investments over the last 10 years.

We often talk about this shift from active to passive, but it's interesting to see that it is not uniform throughout the different types of investments. For instance, in “alternative” investments such as private equity, hedge funds, and long-short funds, the industry’s use of passive investments only went from 1% to 11%.

In commodities, however, passive investments went from 0% to 70%.  I suspect passive works better in commodities since the alpha, the opportunity to outperform, is low and low costs are a primary driver of returns.

We primarily use Taxable Bonds and US Equity, and they went from 6% to 40% and 17% to 57%, respectively.  Again, primarily from the low alpha and low costs.

It will be interesting to see what the percentages are in 2032.


In Fixed Income, the Dip is Not Always an Opportunity

Today’s Chart of the Day is the five-year performance of the PIMCO over 25-year Zero Coupon Treasury (ZROC) in blue versus the 20-year US Treasury Yield in orange.  Since the peak at $189 in 2020, the value of the PIMCO fund has declined 70% to only $90.  

According to VettaFi, “ZROZ invests exclusively in . . . the final principal payments of U.S. Treasuries with at least 25 years remaining until maturity. As such, this product will be very sensitive to changes in interest rate movements, performing very well when rates fall but likely struggling if rates begin to climb.”

The reason for the volatility is the fact that there are no interest payments during the life of the loan, and only one payment of principal at the end, there is no chance to reinvest periodic interest payments at higher rates when rates rise. Or conversely, run the risk of reinvesting the interest payment at a lower rate when rates decline.

Why invest in such a product you may ask? Where does the stated return of 3.80% come from? Well, as an example, when a zero coupon bond was issued it could be purchased for $40, then held for 25 years until you get $100 back at maturity.  

When the 20-year rates were 1.00% in the summer of 2020, the 3.80% guaranteed appreciation in your principal for the 25 years looked very attractive, hence the near doubling of the price.  However, when rates are at their current yield of 4.00% the price fell just as dramatically and is now back to its normal “pre-pandemic” price. 

What can we learn?

We can learn that in fixed income, just because bond’s price is down 70%, this does not mean it is “on sale” or provide an opportunity to “buy the dip.” The 3.80% yield you see is what you get when you hold it to maturity. No more, no less. The rate will not change and therefore provides no real “buying opportunity.”

This is evident in this investment, since despite the wild ride up and back down, the investor simply is back to where they started, earning their original 3.8% for the next 25 years.  


Why Indexing Works

The theory that index/passive funds perform better than actively managed funds is backed by the fact that 90% of active funds underperformed their benchmarks over the last 10 years. So, it begs the question, “Why?”

Firstly, index funds do not have the added expenses of investment analysists and advisors, lowering overall cost and ultimately leaving more returns for investors to keep.

The chart above from S&P Dow Jones Indices shows the average actively managed fund costs 0.68% versus index funds of only 0.06%. So, right off the bat, every year the actively managed fund starts 0.62% in the hole.