Happy days sing the CNBC funsters, the markets are up and experts are talking how the domestic market is fully valued, no dip in sight and the only thing we have to fear is rising rates. So why are so many investor accounts not responding like the indices? Why are these accounts even or slightly down year to date? Is it Voodoo?
It’s the math, dear reader. One stock can push the entire index into positive territory. We’ve seen it time and again where the overall market indices were up and individual stocks and/or funds were down and we wondered how that could be. We measure our performance against the DJIA or the S&P 500 index. The question is how is the index calculated.
Its not as simple as taking 30 stocks, as in the DJIA, totaling their value and dividing by 30 each and every day. There is a formula using a divisor which takes into account stocks splits and dividends. I am not going to go into detail here but you can learn more how this calculation works by going to Investopedia.com. Let’s assume GE is up $5 one day when the DOW is up 100 points. Using the present divisor used for the DJIA GE would account for about 35 of those 100 points.
Let’s also examine the broader market indexes. The Vanguard Total Stock Market Index Fund is off so far this year by a fraction. In other words the real market with 5000 stocks is losing money. While not off dramatically it is indeed not representing returns consistent with what the DJIA and the S&P 500 are printing. Looking at a chart of individual funds and ETFs also shows us that while many funds are off their lows dramatically they are not nearly where they were before the markets implosion.
One fund, that is my favorite, traded at an all time high of $50 is now at $34, and that is up 70% from the March 2, 2009 bottom. This fund in particular beat the indices on a regular basis. Today it lags it. While that doesn’t explain the current investment malaise there are other events that may.
Fund managers are getting defensive in their portfolios. Call them fraidy cats if you want but once bitten twice shy these boys and girls are not about to get loosy-goosy with investor’s money. They figure let the stock price come to them. They seem to refuse to trade for gain and instead buy and hold what they feel will reward shareholders down the road. This is fine when investors are relaxed and tossing more money into their accounts but today’s investor is wondering what can you do for me now. They are looking to make back what they lost and do it in a hurry.
Even some bond funds are not performing as well as one would like. The TIPs bond funds are getting killed so far this year. The long term interest rates are slowly rising but inflation isn’t so the TIPs are languishing. Investors put billions into TIPS and so far nothing in 2010 but disappointment. Sure the TIPS will reward the investor eventually, but again we have those that want a bit more for their money than they are getting.
Finally, this market may just be taking a well deserved rest. There are a host of problems from jobs to jobs to interest rate increases that we have to deal with. It is not uncommon in a year where huge returns or volatility was present in the previous year for the market to take a one-year sabbatical. A good many experts predicted single digit gains for 2010 and that may well be where we end up.
Let’s not throw stones at portfolio managers for not doing their jobs and keeping up with the Dow Joneses at the end of one quarter. Yes, so far its been disappointing but not enough to make us run for cash. Patience, as in poker, works equally well investing.
Remember if you have questions call Paul at 877 783 7080 or write pstanley@westminsterfinancial.com
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