Eye on the Market: Performance 101

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Last week, I answered your question, “Using your system, what were the trading signals for Bank of America before this week’s sell-off?” Today, I am answering your questions on the importance of comparing securities performance to the general market-the S&P 500.

Recently, I had a workshop student wanting to compare her spouse’s 401 selections. I asked if they were diversified to make sure they didn’t have all of their eggs in one basket. The feedback was “of course.” When the student researched their current statement, she was shocked that they were not diversified, and all retirement monies were in one security. The available securities in their particular 401K were target-date funds.

Per Invetopedia.com., Target-Date Funds are; mutual funds in the hybrid category that automatically resets the asset mix of stocks, bonds and cash equivalents in its portfolio according to a selected time frame that is appropriate for a particular investor.

For example, a younger worker hoping to retire in 2050 would choose a target-date 2050 fund, while an older worker hoping to retire in 2025 would choose a target-date 2025 fund. Because it has a longer time horizon, the 2050 fund would likely be weighted heavily toward stocks, with a relatively small percentage of bonds and cash equivalents, while the 2025 fund would hold relatively more bonds and cash equivalents and fewer stocks so it would be less volatile and more likely to contain the assets the investor needs to begin making withdrawals in 2025.

Their choices of target-dated funds: VTWNX 2020 Fund, VTTVX 2025 Fund, VTHRX 2030 Fund, VTTHX 2035 Fund and VFORX 2040 Fund. The employee planned to retire in less than ten years, and they decided to invest in the VTWNX 2020 fund. Once the student plugged the securites into the performance template, she discovered their fund had underperformed the market by almost 6 percent and was the fund with the greatest underperformance compared to the market. To say the student was shocked “would be” an understatement.

What are the lessons my student learned? First, by studying their statement, she discovered they were not diversified and wanted to be. Second, their sole selection had grossly underperformed the market in the last year and the last five years. Third, the student was upset with their selection, but glad she took the time to do her “due diligence” and discover this underperformance factor now, instead of after the spouse retired. Fourth, if they had invested in the S&P 500 ETF Symbol (SPY) they would have invested in a fund that outperformed the market.

When considering a particular security, I compare the security price action with the performance of just investing in the market. When you properly design and plot your targeted securities compared to the market, this can be invaluable information to add to your buying decisions. Why buy securities that have constantly underperformed the market when there are many candidates that outperform the market on a regular basis? Of course, past performance does not predict future returns.

I have taught many my performance charting template, and you can learn as well. If interested in learning my performance templates for your securities, sign up for my next workshop Tuesday, May 20, at John A. Logan College. Take the time to learn how your securities perform compared to just investing in the market-low fee S&P 500 index funds.

This information is to be used for educational purposes only. If you would like to see my performance comparison using your security, simply send the symbol and I may work them into a future column.

Plan your work, work your plan and share your harvest!


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