Investment Newsletter for the end of August, 2016

The Dow was down this month. It started at 18,432.24 and ended at 18,400.88. A very small loss I admit, but I have a point to make. Every one of your portfolios was up, but the Dow was down. How is this possible? Remember, I am attempting to mirror the market with the equity piece of your portfolios and I have an allocation to fixed income for almost all of you. If the Dow represents the market, how am I beating it?

The answer here is that the Dow Jones Industrial Average is not the market. The Dow is an index made up of 30 very big stocks. There are many thousands of stocks in the market ranging from very big to very small. It is convenient to glance at the Dow and say the market is up or down. I do the same thing many times every day. It is fast and more or less accurate. After all, the different pieces of the market have a tendency to move together.

On the quarterly reports, I always present five indexes to compare your results against. I present the Dow Jones Industrial Average, the Nasdaq Composite Index, the Russell 3000 index, the Russell 2000 index, and the S&P 500 Index.

The S&P 500 represents 500 big companies. These companies are very large and include the 30 Dow companies as well as 470 others. This index is a wider representation of the market. The Russell 2000 represents 2,000 smaller companies. The Wilshire 5000 represents 5,000 small and big companies. There are many dozens of indexes. None of them are perfect representations of the market. They are samples with different methodologies. So we use the Dow for a quick and dirty guess.

It is not always accurate, however. Big stocks and small stocks may go up and down at different times. Smaller stocks also outperform larger stocks. They may not in any particular month or even year but over time they will outperform. I have focused your portfolios on smaller capitalization stocks because of the higher potential gain. You have very little exposure to Dow type stocks and only a small exposure to larger stocks in general. An index that presents smaller stocks is more appropriate in your case.

This particular month, smaller cap outperformed larger cap. The Dow was down .17%. The S&P was down .12%. The Russell 2000 index was up 1.6%. This month was an example of the small cap premium. It was only a month. So by itself, it is not statistically important. The statistics become more meaningful over longer periods of time. Year to date the Dow is up 5.5% and the Russell 2000 up 9.1%. Eight months is more interesting than one month but is still not that important. I also focus on value stocks rather than growth as value will outperform growth over time.

It is unknown what the future will bring. I’m keeping the portfolios allocated according to plan. I rebalanced several weeks ago as you know. I took some gains off the table and reduced your risk. Rebalancing is occurring roughly every 500 points using the Dow as a measure.

Thank-you all for your business and support. Call me with any questions you might have.

Fee Structure

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the entire account. So a person with a $750,000.01 account pays less than a person with a $750,000 account. I will waive personal tax return fees for accounts over $1 million. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.

As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. If you would like to submit a post to my blog, please contact me.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

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