Personal Finance Financial Planning & Investing

[BamaNation]

AKA, bait and switch

Not really bait and switch - it's just good business on their part and part of the contract but definitely caveat emptor! Reading the fine print is imperative.

Some other crazy requirements are (for example) 5% checking accounts. You get 5% on the first $1000 deposited and 0.01% on anything above that plus you have to make 10+ purchases using your ATM card at retail stores (or some similar crazy thing like that). Absolutely not worth it but again, reading the details matters.

 

[B1GTide]

Agreed, not bait and switch as the terms are very clearly laid out. But every investment vehicle is offered with the premise that the financial institution is the real winner. They all shift as much risk as possible. They offer returns, but they are not charities.

 

[Bamaro]

Because the benchmark index is a market cap weighted index, it means the bigger the stock, the more it influences the popular index's performance. Nvidia is single-handedly responsible for large swaths of the S&P 500's gains over the past two years.

In 2023, the Magnificent 7 stocks dominated the news cycle. So where the index gained 26.2% that year, Nvidia, Meta Platforms (NASDAQ:META), Tesla (NASDAQ:TSLA), Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), and Apple were responsible for 62% of the total performance.

They had grown so large that just those seven stocks made up about 28% of the S&P 500's total market capitalization and Nvidia alone was responsible for 13% of the index's gains. It had an even greater influence last year.

Where the market returned 23.3% in 2024, NVDA stock's 171% gain was responsible for a whopping 22% of the total. So despite appearing like we're in the midst of a massive bull market, it is because of a literal handful of stocks the S&P 500 is sitting at all time highs. And historically, the index tends to fall far more often after back-to-back 20% years than it rises.

May be time to cut holdings in S&P 500 indexed and similar indexed funds?

 

[BamaNation]

May be time to cut holdings in S&P 500 indexed and similar indexed funds?

Depends on your situation. If you've decided your risk tolerance has changed, maybe. If you're still contributing / buying funds and nothing else has changed, I might say no. Otherwise, you may be just chasing returns and you're almost always gonna be late to that party.

Jack Bogle had a great saying: “Don't just do something, stand there!” and "Stay the course"

We use VTI or VTSAX (or similar) - Vanguard's Total Stock Market Index whenever it is available in our retirement accounts if we are buying a total mkt index. We use an S&P 500 fund when it is not or approximate the total index fund ourselves by allocating to equivalent underlying funds. Historic return on the SP500 is about 10.4% vs total market return of 10.2%. But there's also (potentially) some risk you take on in the SP500 by not being as diversified.

There are differences in how each index is constructed (i.e. S&P500 vs VTI vs LageCap vs...) and that obviously makes a difference in returns, but there is high correlation over time between SP500 & total stock market indices. SP500 accounts for like $46B of the $54B in the market and has 500 funds. The other $8-10B are 5000+ mid & small caps that will go up/down with typically high betas that can only be captured if you're invested in the total market (or a small cap fund) when you rebalance.

The philosophy is that if you're only in the SP500 then you may not see that extra few % pts every so often, but if you want less stress and complexity just set and forget on one of them and don't worry about small fluctuations or differences.

 

[BamaNation]

Two Interesting observations from yesterday in my personal accounts...

total stock market index was down -1.4%
Total bond market index was up +0.53%
Total international market index was down -0.6%
S&P500 index was down -1.46%
some of our non-index investments up slightly (+0.1%)

Observations:
1) Our overall portfolio was down -0.4% on a day when $1T was wiped out of the market (mostly AI / growth companies)

2) FINALLY the bond market acted in the way one would expect in conditions like this

The moral of the story: Stay calm in the storm.

 

[DzynKingRTR]

I was a bit surprised at the amount of interest I made last year with my CDs, money market savings, and checking. I made double what I was expecting

 

[4Q Basket Case]

Yesterday's market activity was unusual, but highly instructive. It was a great illustration of the different composition and calculation methods of the big three indices -- Dow's up about .6%, S&P down a bit over 1%, and NASDAQ down about 3%.

So how'd that happen? It's all in the definitions.

(Note: The nitty gritty calculations change every day. The numbers quoted below are the latest ones I could find on short notice. While they will not be pluperfectly accurate at the close of business today, they're still valid for purposes of this discussion.)

Dow Jones 30 Industrials
The Dow is 30 companies. This is important: It's weighted by share price, not market cap. It's also diversified across a lot of industries.

A bit of foreshadowing here -- tech is a component, but not a massively outsized one.

Still, even at the Dow (remember, it's calculated based on share price, not market cap), tech has a bit of outsized influence because tech companies tend to have low to mid 3-figure share prices.

S&P 500
Obviously, 500 companies. But their individual influence on the index is determined by their market capitalization, not their share price. Market cap = (share price) x (# of shares outstanding).

This means huge companies have far more influence than smaller ones. How much more?

5 Largest S&P Companies By Market Cap = 26% of the index. IOW, the other 495 companies are 74%
10 Largest S&P Companies by Market Cap = 36% of the index. IOW, the other 490 companies are 64%

Tech accounts for 26% of the index.

NASDAQ 100
Biggest 100 Companies listed on the NASDAQ exchange. Also weighted by Market Cap.

5 Largest NASDAQ Companies By Market Cap = 36% of the index. The other 95 companies are 64%
10 Largest NASDAQ Companies by Market Cap = 52% of the index. The other 90 companies are 48%

Tech accounts for 58% of the index. NVIDIA and Microsoft alone account for about 17%

Point of all that geekiness? Tech drives the NASDAQ. It has a big influence on the S&P, but not so much as it has on the NASDAQ. It's one of a bunch of components of the Dow, and has less influence there.

So NVIDIA was the story yesterday. Lost 17% of its value, or about $600 Billion dollars. It alone accounted for a huge chunk of the overall decline in the S&P and NASDAQ.

And BamaNation was spot on in that this move isn't a reason to change your investment allocation. It's very seldom that market events on any one day are.

What is a good reason to change your allocation? A change in your risk tolerance. Usually, that involves a change in your time horizon. It could something happy....like you just turned 55 and are 10 years out from retirement. Or just life...like a child turning 10, and you have about one business cycle before you have to pay for college. It could be something sad....like a bad diagnosis for your or your spouse.

Regardless, the point is that it's not often a good idea to change your allocation in response to moves in the market. That's also known as chasing the market, really means you're buying high and selling low, and almost never works out. A good reason to change is because something in your own personal life has changed. Or it's part of a periodic rebalancing of your portfolio.

So unless something changed for you personally, "Don't just do something....stand there!"

 

[B1GTide]

My portfolio is up almost 100% over the last 3 years. It can't be sustainable. I am considering pulling back a bit since I am almost 60.

 

[BamaNation]

A decent quick and dirty rule of thumb for figuring out what one's asset allocation should be...

ALLOCATION PHILOSOPHY	EQUITY ALLOCATION % CALCULATION
Conservative	100 minus your age
Moderate	110 minus your age
Aggressive	120 minus your age

some may quibble with the philosophy label and the exact calculation (i.e. "conservative should be moderately conservative and it should be 90 minus your age") etc. Couldn't care less. This is decent way of figuring out where you are currently and where you might want to get back to in a reallocation.


We look at reallocating around July 4 and during Christmas holidays. We also have a +/- 5 pct points band that could trigger reallocation at other times (i.e. if we want to be 25% bonds and it goes to 19% that would trigger a reallocation for us). Some have tighter or looser bands. The key is to develop a philosophy and stick to it so that market events don't cause you to panic buy or sell. This alone has spared me from all kinds of stress I would have otherwise incurred over the last 10 years.

 

[4Q Basket Case]

My portfolio is up almost 100% over the last 3 years. It can't be sustainable. I am considering pulling back a bit since I am almost 60.

Transitioning to a lower risk portfolio makes perfect sense -- not because of an unsustainable three-year runup (which was in part a function of a pandemic-induced low starting point), but because you're in a later phase of your working career.

IOW, you no longer have nearly as much time on your side to recover from a downturn....which will come, it's just a question of when.

There are several ways to plan for that, and you'll need to work with your financial advisor to determine the right one for your specific circumstances -- this is an area where one size definitely doesn't fit all.

A lot of people use the 60% / 40% allocation -- as in 60% diversified stocks and 40% bonds. Mrs. Basket Case and I have a barbell portfolio -- 5 - 7 years worth of living expenses in laddered CDs and money market funds, with the rest in a diversified portfolio of mostly US equity index funds.

Between SSI, a pension and the cash (or near-cash) holdings, it's enough to bridge an economic downturn and keep us from having to liquidate stocks at depressed prices in order to put food on the table and gasoline in the car.

We don't have any long-term bonds because rates are still low when viewed against long history.

For reasons discussed earlier, their market value (as distinct from their ability to pay interest) is really vulnerable to increases in interest rates. For my blood, the additional yield you get for going out long today is just too small to justify the associated risk of a hit on MV. I'll take a yield that's only slightly lower in order to have minimal exposure to declining MV on shorter-term instruments.

But like I said, that's us. Everybody's situation is different. Your financial plan should reflect your situation, not anybody else's.

 

[B1GTide]

Transitioning to a lower risk portfolio makes perfect sense -- not because of an unsustainable three-year runup (which was in part a function of a pandemic-induced low starting point), but because you're in a later phase of your working career.

IOW, you no longer have nearly as much time on your side to recover from a downturn....which will come, it's just a question of when.

There are several ways to plan for that, and you'll need to work with your financial advisor to determine the right one for your specific circumstances -- this is an area where one size definitely doesn't fit all.

A lot of people use the 60% / 40% allocation -- as in 60% diversified stocks and 40% bonds. Mrs. Basket Case and I have a barbell portfolio -- 5 - 7 years worth of living expenses in laddered CDs and money market funds, with the rest in a diversified portfolio of mostly US equity index funds.

Between SSI, a pension and the cash (or near-cash) holdings, it's enough to bridge an economic downturn and keep us from having to liquidate stocks at depressed prices in order to put food on the table and gasoline in the car.

We don't have any long-term bonds because rates are still low when viewed against long history.

For reasons discussed earlier, their market value (as distinct from their ability to pay interest) is really vulnerable to increases in interest rates. For my blood, the additional yield you get for going out long today is just too small to justify the associated risk of a hit on MV. I'll take a yield that's only slightly lower in order to have minimal exposure to declining MV on shorter-term instruments.

But like I said, that's us. Everybody's situation is different. Your financial plan should reflect your situation, not anybody else's.

I poured everything into the market after it crashed, twice. Payed off both times. I am through gambling. I am really worried about the damage that Trump's policies will have in my investment time frame. Yeah, time to reallocate.

 

[Padreruf]

I wanted to up my equity allocation but my financial guide talked me out of it. Was he ever right! My portfolio actually went up a small bit yesterday....even with the tech stocks wiping out.