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How To Avoid Huge Losses In The Next Stock Market Plunge

How To Avoid Huge Losses In The Next Stock Market Plunge

By Gail MarksJarvis, Chicago Tribune (TNS)

It was a brutal week that finished with a relatively happy ending for people paralyzed with fear about the stock market, but a disaster for some who tried to escape danger at any cost.

Despite a horrifying 1,100-point plunge at the start of the week, and more nail-biting downturns later, by the close on Friday the damage was not nearly as bad as you might have imagined. The Dow Jones Industrial Average finished the week about 1 percent higher than where it began the week, although the Dow remains down 6.6 percent for the year.

If you have a 401(k) you are probably looking at losses, but nothing like what they were when the Dow was down 11 percent early last week.

People who were hit hard by the downturn tried to run for the exits while the stock market was plunging. Even those who tried to pick a moment when the downturn wasn’t too bad got hurt. For example, Monday for a short time the Dow seemed to be recovering. After being down 1,100 points stocks began to climb, and at a point when the Dow was down only about 150 points, people might have assumed they would bail out and escape any future danger. But it didn’t work that way, and never does if you are trying to get out of mutual funds in a plunge.

People with mutual funds often don’t realize that when they get cold feet about 401(k)s or any other investments, they can’t just get out of their funds on a moment’s notice. Instead, you have to wait until the end of the day even if you notify the fund hours earlier to get you out. So last Monday, a person might have decided to bail when stocks were down just 150 points around noon, but the loss they had to take was more like 600 points because that was the carnage in stock funds by the end of the day.

To make matters worse, since nervous people sold their funds at the worst of times, they didn’t get the benefit of the recovery that came late in the week.

It wasn’t only mutual fund investors who took a hit in the rush to the exits.

Sometimes people buy exchanged traded funds so they can sell their funds on a moment’s notice during scary moments. But last week was an extremely scary period, and individuals in ETFs got hurt too.

People yanked $29.5 billion out of stock funds during the week through Thursday, the largest move on record since 2002, according to analyst Michael Hartnett of Bank of America Merrill Lynch. As they sought safety they dumped $22 billion into money market funds, the largest amount since December 2013.

So many people were trying to flee all at once that it didn’t matter when they contacted their brokers and said “sell” now. The value of the funds fell precipitously before the selling actually could be completed, so people ended up losing far more money than they expected.

This happened in solid stocks too, like General Electric. Usually it’s a mild-mannered stock with relatively calm ups and downs. But in the midst of wild selling Monday it fell about 20 percent. It hit a low of $19.37 before climbing to $25.16 by the end of the week.

It was tough to find enough buyers for stocks and ETFs when so many wanted to sell all at once. So many people were going onto sites like Schwab and TD Ameritrade to sell, there were technical troubles. Details will be examined in the weeks ahead, but the lessons for individuals are simple.

If you think you are going to escape from danger in stocks when it hits, there’s probably little chance. Last week people panicked over a slowdown in China, but China’s problems have been brewing for a long time.

Analysts are not sure what to expect for the weeks ahead, and say that more worries about China and the Federal Reserve raising interest rates could cause more downturns. But they can’t be sure. If you were panicked last week, shave away some stock exposure — not all — during an upturn.

Also, if you invest in stocks or exchange traded funds, never make the mistake that too many people made last week. They simply told their brokers to “sell” with what are known as market orders. When brokers get such orders they sell your stocks or ETFs whenever they are able. That means you might decide when you’ve lost 5 percent to sell, but maybe end up losing 10 or 20 percent by the time your order actually is concluded.

To protect yourself, always sell with a “limit order.” With such an order you tell your broker what price you want to use when selling. That keeps you from selling at an unknown price along with the panicky mobs.

Photo: A pedestrian looks at an electronic board showing the stock market indices of various countries outside a brokerage in Tokyo, Japan, August 27, 2015. REUTERS/Yuya Shino

Invest In Index Funds For Better Returns

Invest In Index Funds For Better Returns

By Gail MarksJarvis, Chicago Tribune (TNS)

Do you search the Web to find the best price on clothes or electronics? Do you drive across town to get a discount on a household item or to shave a few bucks off your groceries?

Americans love a deal. But when it comes to their 401(k)s, IRAs, or other retirement and college savings, many are lousy shoppers. Consequently, they throw thousands of dollars away buying inferior mutual funds that will fail to cover retirement or kids’ college adequately.

I’m talking about big bucks, not the $25 saved on shoes.

For years, people have been able to get the most out of their investment money by buying cheap mutual funds or exchange-traded funds (ETFs), which are called index funds. The investment industry also calls them passively managed funds because the investments in them are simply gathered together and sit month after month without tinkering.

These funds are the opposite of what are called active funds, or most of the funds sold to people by brokers or advisers who often call themselves financial consultants. Active funds sound appealing because they employ supposedly brilliant fund managers to “actively” pick winning stocks and bonds for you and steer clear of losing investments.

Who wouldn’t like such a fund? After all, no one wants a loser.

The trouble is that the brilliant activity rarely works better than picking a cheaper index fund without any brainy managers working on your behalf.

This is haunting many fund companies, which count on people buying the higher-priced “actively managed” funds.

Increasingly, investors are getting wise to the fact that they can pay less and make more money on simple index funds rather than forking over more money for the expertise of stock and bond pickers. In the last year, investors poured about $421.6 billion into simple index mutual funds and ETFs, according to Morningstar. They only put $48.9 billion into active funds. That’s a huge change from a decade ago, when passive funds were still relatively new.

Now, active funds still are managing more money than passive funds, with $10.1 trillion versus $4.5 trillion, according to Morningstar. But over the last few years, the trend to skip the active fund manager has been growing dramatically as passive funds have beat most of the pros during good times and bad times in the markets.

Whether picking stocks or bonds, passive funds have far outperformed those with active managers at the helm, said Aye Soe, senior director of research at S & P Dow Jones Indices.

Last year, as the large stocks that make up the Standard & Poor’s 500 index gave individuals about a 13.6 percent gain, the active managers who tried to beat that index flopped. Only 13.5 percent were able to do better than the index, said Soe. In 2015, only 40 percent have been able to beat the index. In other words, the extra fees individuals pay so brainy managers can make money for them are ending up being a waste.

Likewise, most stock pickers have failed to be worth their keep in funds picking small and midsize company stocks. In 2014, only 27 percent of the active small-cap stock managers were able to beat the Standard & Poor’s 600 small-cap index funds, and only 33.7 percent beat the mid-cap index, Soe found.

Advisers will argue that you can’t judge a fund based on one year, and they are correct. But Soe said most active managers have also failed in five- and 10-year periods. Even when a manager wins in a single year, he or she usually fails to keep it up for five or 10 years.

Why? It’s mostly a matter of fees. People pay more to have an active manager, and few can pick stocks and bonds that soar so much that the gains cover the fees. The average passive fund charges people about 0.2 percent to use a fund. It’s 0.79 percent for an active fund, according to Morningstar.

If a person invests $10,000 and the investments earn 7 percent annually for 20 years, the person ends up with $37,200 in the cheap passive fund and $33,000 in the more expensive actively managed fund. Try it with your funds.

Some advisers argue that active management is worth the extra money for more complicated investments like high-yield bonds, which need to be scrutinized for a potential bankruptcy. But Soe said that over the last 10 years, only 10 percent of active managers did better than the passive funds that invest in high-yield bonds.

Photo: Traders work on the floor of the New York Stock Exchange, July 28, 2015. REUTERS/Brendan McDermid