bright investing

The Hodges Fund has an average annual return of 12.74% since its inception in 1992, and has returned 7.07% so far this year. Expenses are on the high side, at 1.47%.  The fund’s 3 year beta is 1.5, so investors can expect some additional volatility compared with the S&P 500.  From the web site:

The Hodges Fund is a growth mutual fund that invests primarily in U.S. companies ranging from big blue chips to small undiscovered issues. Our mission is to find great companies of any market size whose shares have strong potential to appreciate.

This fund believes in disclosure, with a list of the top 25 weekly holdings available on their web site.  The top five holdings last week, constituting 12.89% of assets, were:

• Burlington Northern Santa Fe
• Trinity Industries
• Devon Energy Corp
• Transocean Sedco Forex Inc
• Apple Computer Inc

The minimum investment is a beginner-friendly $250, and an automatic investment plan is available.

The Dow hit an all time trading high today :

The Dow Jones industrial average set an all-time high on Tuesday, surpassing the previous record made in 2000, as investors bet that sliding crude oil prices will underpin corporate profits even as economic growth slows.

UPDATE: Finally — the Dow Jones Industrial Average closed today at an all-time high of 11,758.95, beating a previous high of 11,750.28 reached on Jan. 14, 2000. Essentially, this means we’ve finally put the crash of the first Internet bubble behind us, at least as far as this widely used benchmark is concerned. It also means if you had invested $10,000 in the Dow companies on January 14, 2000, you’d finally be back in the black, six and a half years later. Ouch.

UPDATE 2: Of course, not every stock index has recovered. For example, the tech-heavy NASDAQ Composite closed at 2,243.65 today — less than half its all time high of 5,132,52, achieved on March 10th, 2000.

UPDATE 3: IndexFundFan points out that the hypothetical Dow breakeven point I referred to in my first update would actually have come well before yesterday, thanks to dividend distributions.  That’s a great point.  See his post for more details.

Can a coin-flipping monkey beat hyper-active stock-trading guru Jim Cramer at his own game? According to CramerWatch.org, the monkey does indeed have a better stock picking record.

With $250 a month to invest, would you choose to put 100% in bonds and bank CDs? That’s the response finance writer Al Jacobs offers to this question:

I am single, 35 years old, possess few assets, and set aside $250 in surplus funds each month. How can I sensibly invest?

Right off the bat, Mr. Jacobs rules out stocks and mutual funds of any kind:

These monies should not go into the customarily recommended mutual funds, whether they be managed, index, balanced, sector, exchange traded, hedge, or any combination thereof.

He goes on to make this suggestion:

The assets should be placed into sound interest-bearing vehicles such as certificates of deposit, treasury notes, or corporate bonds.

Personally, I think having a 30-year time horizon and limiting yourself to just bonds and CDs is a terrible idea. I would suggest a simple strategy that has the potential to outperform a “bonds only” strategy without adding much risk. First, I’d recommend opening a Roth IRA with a major mutual fund company that offers low-fee index funds and an automatic investment program. Fidelity fits the bill nicely :

With as little as $200 a month, you can open a Fidelity SimpleStart Traditional or Roth IRA. With regular, automatic investments, you avoid the $2500 initial investment on most Fidelity funds (FundsNetwork funds not eligible). And, as with most Fidelity IRAs, there is no annual account fee.

The Fidelity Four-in-One Index Fund, with an expense ratio of just 0.21%, is a good single-fund investment option within the Roth IRA. This “fund of funds” invests approximately 55% of assets in the Spartan 500 Index Fund, 15% in Spartan Extended Market Index Fund, 15% in Spartan International Index Fund, and 15% in Fidelity U.S. Bond Index Fund. I feel dumb calling this simple advice a strategy, but that’s what it is — a sophisticated strategy that will almost certainly outperform bonds alone over the next 30 years, with little extra risk thanks to diversification and allocation among multiple asset classes.

Let’s say you can get an optimistic 7.5% return from your bonds and certificates of deposit. Invest $250 a month for 30 years, and you end up with $338,966.73. But invest in a diversified portfolio of stocks and bonds, and get maybe a 9.5% annual return, and you end up with $512,282.50. That’s a potential difference of $173,315.77.

UPDATE: As far as I can tell, the Fidelity Four-in-One Fund is eligible for the SimpleStart IRA, even though its minimums are higher than the usual Fidelity funds. However, two other good options are the Fidelity Puritan Fund (60/40 stocks/bonds) with an average return of 8.78% over the last ten years, and the Fidelity Balanced Fund (60/40 stocks/bonds) with an average return of 11.05% over the last ten years. The key to this simplified approach is to choose a single fund that offers good diversification across asset classes (domestic and foreign stocks, government and corporate bonds, etc.).

Canada’s mutual fund fees are even higher than ours in the US.

Management expense ratios average 2.68 per cent of fund assets in Canada vs. 1.42 per cent in the United States and a world average of 1.59, according to the study by Ajay Khorana, Henri Servaes and Peter Tufano.

But the best advice for most investors seems to be the same in both countries — buy low-cost index funds.

Tom Lydon tells us that twenty new ETFs were added this week, from three different companies. That seems like a pretty full week.

Jim Cramer was suffering from ETF burnout back in July. But RealMoney.com contributer Chip Hanlon definitely thinks ETFs are the future.

I’m a big fan of the ETF movement, but I don’t know about all these thinly-sliced indexes. Call me boring, but I’m partial to VTI.

Tom Middleton’s criticism of traditional index investing doesn’t seem to jive with the reality that indexers beat almost everyone else, year after year. Nevertheless, he takes an interesting look at some new ETFs that claim to avoid overpriced stocks in this article. Excerpt:

WisdomTree takes a contrary approach, giving the most weight to stocks paying the highest dividends — that is, with the lowest relative prices. Academic research has demonstrated that value stocks deliver higher returns than growth stocks over very long periods.

Of course, what Tom doesn’t mention is that sometimes stocks are cheap for a reason. Even so, maybe there’s method to the madness:

According to Jeremy Siegel, the Wharton finance professor (and a WisdomTree consultant) who is author of “Stocks for the Long Run,” a dividend-weighted index outperformed the capitalization-weighted Russell 3000 total-market index by 1.23 percentage points a year between 1964 and 2005.

In the recent bear market, when the Russell went down nearly 50%, the dividend index declined only 20%. “The dividend-weighted index is now about 40% above its March 2000 close, whereas the S&P 500 and Russell 3000 are still not yet back to even,” Siegel says.

At the very least, these new “value” ETF’s are probably worth a look.

See also: WisdomTree

Finally:

The Dow Jones industrial average topped its record-high close this morning, reaching a milestone in Wall Street’s recovery from nearly seven years of corporate upheaval, economic recession and the impact of terrorism. The high close was 11,722.98 set on Jan. 14, 2000.

Lifted by growing optimism about stable interest rates and a soft landing for the economy, the Dow rose to 11,724.86 in morning trading, before slipping back to 11,699.08. It faced one more milestone, its intraday high of 11,750.28, before it could move into uncharted territory.

The benchmark still hasn’t closed at an all time high, or hit an all-time intraday high, but it looks like both might happen today.

UPDATE:  So close! 

Fortune Magazine has an interesting look at insider trading, including this successful method for getting illegal tips:

Plotkin and Pajcin allegedly recruited a young M&A analyst at Merrill Lynch to tip them off to pending transactions.

And this far less successful method:

Pajcin and Plotkin, the SEC says, coached exotic dancers on questions to ask Wall Street customers about possible deals. They never got anything useful.

Always remember, when it comes to insider trading: moles - good, strippers - bad.

McDonald’s (MCD) is increasing their dividend:

On Wednesday, fast-food king McDonald’s said its board has approved increasing its quarterly dividend to 25 cents from 17 cents — a roughly $1.2 billion hike.

With all those dollar items on the value menu, can an annual dividend of $1 a share be a coincidence?  Ok, it can.  Even so, McDonald’s investors must be pleased.

I just added 3 handy calculators to the site:

• Millionaire Calculator
• Future Value Calculator
• Monthly Saving Calculator

These links can also be accessed from the home page under “Tools”. There’s also a stock lookup form on the home page, in the quotestream box on the far right sidebar.  Finally, there’s a Market Overview page here.

Stockpickr.com lists stock picks from financial professionals like Mark Cuban, Carl Icahn, Warren Buffet, as well as hundreds of mutual funds and money managers. The relatively new site gathers information from public sources to compile portfolios. I’m not sure how accurate they are, or how useful this information is, but it’s an interesting idea.

Why are there so many index fund enthusiasts?  Because, “In the first half of 2006, three out of five large-cap managed funds – those that focus on the 500 biggest US companies – failed to beat the index.”   Why aren’t there more index fund enthusiasts?  Because those low expense ratios - sometimes just a tenth of what active funds charge - don’t leave a lot of money for advertising and aggressive marketing.  Plus, there’s the psychological appeal of attempting to “beat the market”.  Me?  I’d rather beat most investors than beat “the market”.

Tax facts many of your friends will refuse to believe:

The 2003 tax cut was the third in three years, but the tax code still remains highly progressive. The average tax rate ranges from 2.97 percent of income for the bottom half of the earning spectrum to 23.49 percent for the top 1 percent.

The top-earning 25 percent of taxpayers (AGI over $60,041) earned 66.1 percent of nation’s income, but they paid more than four out of every five dollars collected by the federal income tax (84.9 percent). The top 1 percent of taxpayers (AGI over $328,049) earned approximately 19 percent of the nation’s income (as defined by AGI), yet paid 36.9 percent of all federal income taxes.

The wealthy are easy targets, but it’s hard to make the case that they don’t pay enough taxes when the top 1 percent pay 36.9% of all federal income taxes and the top 25% pay 85%.

Indexfundfan takes a look at the U.S. national debt, and finds that things aren’t as gloomy as one might suppose.  In fact, 34 nations have a debt-to-GDP ratio higher than ours.  The nation that surprises me most is Japan, which is number 4 on the list, with a debt that’s 158% of GDP.  Ours is only 64.7% of GDP.