Investing 
18
comments

Market Timing Works… Just Not For You

Market timing works.

The basic idea behind market timing is that you want to pick your spots, buy low and sell high. There are software programs that will automatically trade for you and there are firms, like Tradebot, who have not had a single losing day in four years. Tradebot typically holds a stock for 11 seconds and hasn’t lost a penny on a single day in four years. Four years.

Don’t give me the usual crap about market timing not working. It works.

The problem is that it won’t work for you because you don’t have a big pile of money to trade with, you don’t have nearly as much knowledge, and you don’t have a magic money machine software package. Without all three of those pieces, market timing doesn’t work and you should follow fish like me to the index fund promised land.

(Click to continue reading…)


 Investing 
9
comments

The 50-50 Mutual Fund Rule

Every month I receive “In The Vanguard,” Vanguard’s monthly newletter, and scan it cover to cover. It’s a document you can find online (speaking of which, I should change to electronic delivery or cancel the mailings) This month, I was introduced to an idea by Dr. Burton G. Malkiel, author of the famous investing text, A Random Walk Down Wall Street. Malkiel, who also lists Princeton University economist as an accolade, recommends that you follow the 50-50 rule when selecting mutual funds. The 50-50 rule states that:

When choosing a mutual fund or exchange-traded fund, choose one that has an expense ratio under 0.50% and a turnover rate below 50%.

Malkiel warns against the most frequently used alternative, historic returns, because it’s not a reliable predictor (though it has value in terms of discerning volatility).

Expense Ratio

Expense ratios are an often discussed, pretty well known, characteristic about mutual funds. The expense ratio is how much the fund charges you each year to keep your money there. Mathematically, it’s the fund’s operating costs divided by its average net assets; which translate to a deduction from your account. An expense ratio of 1% means that every year a dollar will be taken out for each $100 invested. You can see how that can have a significant impact!

Open the fund’s prospectus, you’ll see expense ratios most often listed under fees. The value can be broken up into administrative and other fees but the end result is the same, the expense ratio is how much the fund costs you each year. While you’re there, check the load, that’s the sales charge when you buy or sell the fund. I always go with a no-load (no sales commission) fund.

Turnover Rate

Turnover rate is a less often discussed characteristic about mutual funds but it refers to the turnover in holdings within the fund. Much like how you may trade stocks, bonds, etc. within your other brokerage accounts, mutual funds are companies are do the exact same thing. The higher the turnover, the greater the number of transactions, and the greater the cost to the fund. Costs associated with turnover are usually not itemized out and not integrated with the expense ratio, they are usually not detailed out at all and only reflected in the fund’s value.

Why a lower turnover rate? All things being equal, the more activity a fund has, the more you will lose to transaction fees (like broker commissions) and taxes (more short term, vs. long term capital gains). In the fund’s prospectus, you will usually find discussion about turnover rates under portfolio management, or wherever they discuss holdings, P/E ratios, and other similar metrics.

The 50-50 rule is just a guideline, there are always exceptions, but I think that it’s a good starting point if you aren’t sure how to go about picking a fund. You can’t control returns, but you can certain minimize costs.


Advertising Disclosure: Bargaineering may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website.
About | Contact Me | Privacy Policy/Your California Privacy Rights | Terms of Use | Press
Copyright © 2014 by www.Bargaineering.com. All rights reserved.