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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

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  

The Economy Looks Strong. Why Aren’t Investors Happy?

By Gail MarksJarvis, Chicago Tribune (TNS)

Just as analysts were beginning to fixate on risks to the U.S. from a fragile global economy, a new report Wednesday melted away the gloom.

At the moment, the U.S. appears to be in surprisingly good shape. In fact, the service economy — or the great majority of the U.S. economy — surged to the highest level in a decade in July, according to the Institute for Supply Management non-manufacturing report.

The ISM report, closely watched by economists and investors, shocked analysts because it indicated surprising strength across a wide range of industries — from education services, entertainment and health care, to the wholesale trade, retail, and transportation. In addition, hiring continued its 17-month climb, reaching the highest level since 2005.

The report “was good news all-around,” said Ksenia Bushmeneva, economist for TD Economics. “There is definitely no summer lull in the U.S. services sector.”

Economist Jim O’Sullivan of High Frequency Economics said: “The data show good momentum.”

In contrast, the nation’s manufacturing economy has not been strong. Economies in Asia, Europe, and Latin America have been reluctant to make purchases; a strong U.S. dollar has made American products expensive to foreign customers.

The service economy is “less exposed to weakening in foreign demand,” said O’Sullivan.

While the Dow Jones industrial average first surged 100 points upon the release of the service sector data, the gains gave way to concerns from investors who fear the data will provide a green light for the Federal Reserve to start raising interest rates.

The Dow closed down 10 points to 17,540.

Interest rates have been near zero since the Fed started using stimulus to bring life to the recessionary economy. As low rates have persisted, they’ve been a knee-jerk signal to investors to buy stocks even when the economy has been troubled. With bonds paying little interest due to the Fed’s low-rate policy, stocks were perceived as the only game for investors who wanted to earn some income.

Now, if the Fed takes the pacifier away by raising interest rates in September, there is a concern that investors’ knee-jerk reaction will be to sell stocks. Presumably the stock market would dip from recent lofty levels. Yet just how far or how sustained that decline might be has been hotly debated. Some analysts point to history showing that the stock market typically rises, rather than falls, when the Fed starts raising rates, because the Fed action means the economy is strong. Other analysts say history is worthless because of unprecedented action by the Fed during the last few years to manipulate the economy and the stock market after the recession.

With investors anticipating a rate increase soon, the stock market has stalled this year. But the Standard & Poor’s 500 has climbed about 90 percent during the last five years.

Friday’s unemployment rate will be watched closely for another signal about the Fed’s next step. Until recently, Federal Reserve Chair Janet Yellen has said there were too many people without well-paying jobs, so the Fed had to continue to keep interest rates low. Her tone seemed to change after the Fed’s July meeting. On Tuesday, Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said it’s time for the Fed to start raising rates.

Economists increasingly are expecting the Fed to begin raising interest rates in September. They think concerns will persist about the potential drag on the U.S. from weakness in the global economy but assume that modest strength in the U.S. will last.

In particular, despite an ADP jobs report Tuesday that came in below expectations, analysts are assuming Friday’s unemployment report will be strong.

“We do not believe this Friday’s jobs report will be weak,” Deutsche Bank economist Joseph LaVorgna said in a note to clients Wednesday.

He noted that very few people have lost their jobs recently. “Initial jobless claims remain near a 42-year low,” and the taxes people are paying to the IRS from their paychecks have “been growing at a healthy 5 percent annual rate.”

Further, he added, “July motor vehicle sales were a robust 17.5 million units, which bodes well for hiring because households typically do not purchase big-ticket consumer goods if job and income prospects are not improving.”

Photo: Federal Reserve Chair Janet Yellen (AFP Photo/Saul Loeb)

Dear Millennials, You’re Ruining The Economy. Move Out

By Gail MarksJarvis, Chicago Tribune (TNS)

The kids are back home and showing no inclination to move out on their own.

More than five years after the end of the Great Recession, 18- to 34-year-olds seem to be comfortable with a lifestyle that differs dramatically from the past. Even though the job market has improved, millions more are living with their parents now than during the depths of the recession.

A study of U.S. census data by the Pew Research Center shows 16.3 million millennials living at home, compared to 13.4 million before the housing bust set off one of the worst recessions since the Great Depression. About 26 percent of young adults are living with their parents, according to Pew. In 2007, it was 22 percent. When the job market was at its worst, 24 percent of millennials were living with family.

That’s put some economy watchers on edge, because they expected a change by now.

During the dreary days of the recession, it made sense for young adults who needed a roof over their heads to stay home while job opportunities were slim. But they were expected to move out when they got jobs or better-paying jobs.

Of course, the job market still has a way to go to give young adults better financial footing. Yet unemployment is less of an issue now, with 7.7 percent of those 18 to 34 unemployed, compared to 12.4 percent five years ago. Pay has also improved, although it hasn’t popped back to pre-recession levels. Pew notes that the median weekly pay is $574 compared to $547 in 2012.

If the trend continues, there could be serious implications for the economy. Adult children curled up on their parents’ couches don’t need to buy their own furniture.

Pew economist Richard Fry found no uptick in the number of young adults establishing their households despite a 3 million spurt in the 18- to 34-year-old population since 2007.

“This may have important consequences for the nation’s housing market recovery,” he said. “The growing young adult population has not fueled demand for housing units and the furnishings, telecom and cable installations and other ancillary purchases that accompany newly formed households.”

Analysts wonder if there’s been a cultural shift that will continue to restrain the economy.

Previous research by Pew shows that millennials, unlike previous generations, aren’t in a hurry to get away from parents. But other research also suggests that financial reasons continue to draw young adults into their parents’ homes.

Rents have climbed sharply, rising 4.3 percent in major cities in June, while the average hourly wage has climbed just 2 percent. Because they went to college in 2008 as the recession trampled job opportunity, many young adults are laden with student loan debt.

A study by the New York Federal Reserve in June found that areas of the country with high youth unemployment, expensive housing, and high incomes tend to be where more young adults were living with parents.

Still, the majority of people 18 to 34 are living independently, although the tendency to be on their own has been shrinking.

During the first four months of 2015, 42.2 million 18- to 34-year-olds (67 percent of the group) were living independently compared to 71 percent prior to the recession. Women have been more likely to live independently, 72 percent compared to 63 percent of men.

Besides living with family members, millennials have also been doubling up with roommates who are not spouses or unmarried partners. Early this year, 47 percent were living with another person, most often a parent or adult relative. But 16 percent were living with a nonrelative, apparently sharing expenses rather than stoking the economy on their own.

Photo: Bill Benzon via Flickr