What is the Best IRA, Traditional or Roth?

The question of which IRA is the best IRA for an individual investor, a Traditional or a Roth? My answer is Yes you need to get one and which one depends on a couple of things.

A Traditional IRA is different from a Roth IRA in several ways shown below:

• In general, an investor in a Traditional IRA gets an income tax deduction while a Roth IRA does not.
• In general, a Roth IRA grows tax free an no income tax is paid on any gain in the future while a Traditional IRA grows tax tree and income tax is paid on any gain in the future.

If you have sufficient resources so that you can fund the IRA limit with either a Traditional or Roth IRA the Roth wins every time. Because the growth is tax free and no income tax is paid on any gain this gives the best value for an investor.

However, if you live on a limited budget a Traditional IRA may be better than a Roth IRA. The reason is the tax savings in the current year and the tax rate when the money is needed in the future.

Example: A investor has the resources to fund a Roth IRA by $3,000 a year. If a Traditional IRA gives the investor a tax reduction of another $1,000 each year that can be invested then $4,000/year can be invested. Due to re-investing of the tax deduction 25% more money is invested with the Traditional IRA. Which is better $3,000/year Roth IRA or $4,000/year Traditional IRA invested on average 9% per year for 30 years.

In 30 years, the Traditional IRA has a value of$545,230 that is taxable income while the Roth IRA has a value of $408,923 that is income tax free. Which is better? It depends on the tax rate at the end of 30 years. If the tax rate is the same as when the original money was invested, 25% the after tax value of the Traditional IRA is $408,923, the exact same as the Roth IRA.

If the tax rate is less, which is a real possibility, the Traditional IRA is better. If the tax rate is 20% the after tax value of the Traditional IRA is $436,184. This is better than the Roth by about $25,000.

If the tax rate is higher, which is a nice problem to have, the Roth IRA is better. If the tax rate is 30% the after tax value of the Traditional IRA is $365,304. The Roth IRA is better by about $44,000.

Which is better a Traditional or Roth IRA? It depends on the availability of resources, if the tax savings that goes with the Traditional IRA is invested, and the income tax rate when money is removed from the Traditional IRA account.

Cost of Mutual Fund Fees

In a previous blog we talked about fees and the transfer of money from your pocket. How much money are we really talking about?

Let's look at an example of $10,000 being invested at an average annual return of 9%. This means that every 8 years money doubles, from the rule of 72. You buy a fund that has a 8% front end load which means that you just handed over $800 in sales charges. Since it is a loaded fund the 12B-1 fee can be as much as another 0.5% per year or $50 the first year. We have a total of $850 in the first year.

You think no big deal $850, this mutual fund is great and I will get this back in no time. Wrong, this is a big deal!!!!!! You now lost the opportunity to make money that could go into your pocket.

How much did you lose with an 8% front end load and an extra 0.5% 12B-1 fee? For ease in illustration let's look at this every 8 years.

8 Years Later: $2,100 ($1,600 from load and $500 from fees)
16 Years Later: $4,800 ($3,200 from load and $1,600 from fees)
24 Years Later: $10,200 ($6,400 from load and $3,800 from fees)
32 Years Later: $21,000 ($12,800 from load and $8,200 from fees)

You lost your original $10,000 investment in about 24 years. OUCH!!!!!! The amount of loss grows rapidly by doubling in the next 8 years. The cost from fees becomes a bigger portion with time.

What is the value of $10,000 invested at 9% before fees and net after subtracting fees?

8 Years Later: $20,000 - $2,100 = $17,900
16 Years Later: $40,000 - $4,800 = $35,200
24 Years Later: $80,000 - $10,200 = $69,800
32 Years Later: $160,000 - $21,000 = $139,000

Bottom Line: This one is simple, BUY NO-LOAD MUTUAL FUNDS. More than 10% of your investment is consumed in loads and fees that should be in your pocket.

Mutual Fund Fees

Mutual funds investment companies deserve to be paid for their efforts and the returns that they obtain for their client. What are these fees? Fees can be put into 3 categories.

The first is management expense to do the investing. This is the cost of doing business.

The second is sales charges that is paid to others to sell the product such as a distributor or selling group member. This charge can be as much as 8.5% and benefits the mutual fund company not the investor. From the previous blog, it can hurt the investor in both cost and mediocre fund performance. This can be avoided by buying a no-load fund.

The third is 12B-1 that is an annual fee to promote and distribute fund shares. A no-load fund can charge up to a 0.25% annual fee. A load fund can charge up to a 0.75% annual fee.

Sales charges and high 12B-1 fees can cost you a lot of money. STOP paying them and put the money in your pocket.

In the book, Random Walk Down Wall Street, some research showed the impact of these fees.

1. From 1977 - 1997 an index fund beat the average fund by 2% after fees are considered.
2. From 1988 - 1998 less than 20% of the mutual funds beat an industry average index after fees.

Bottom Line: Either buy a low fee index fund or one of the top 20%. It's your money, put it in your pocket.

Mutual Fund Size

When investing in a mutual the size, or assets under management, is important. A small fund may not have the ability to properly diversify. Too large of a fund may not be able to achieve the anticipated performance. How can this be?

By definition a mutual fund that claims to be diversified must meet the 75-5-10 test. 75% of the assets must be invested in securities of other issuers. 5% or less of the assets may be invested in any one company. 10% or less may be owned of any company's outstanding voting stock.

Why is this important? Once a large mutual fund buys the limit of a company and still has money to invest it can either hold the cash or invest it. Since the purpose of a mutual fund is to invest, it finds another company to invest in and buys. As more money comes in, the stock of more companies must be purchased.

With time the largest mutual funds will start to look like an index fund as they have to purchase lots of companies. The only problem with buying the largest mutual fund instead of an index fund is the amount of fees. Index funds have a lower fee structure. If the choice is either one of the largest mutual funds and pay higher fees or an index fund, go with an index fund.

Bottom Line: If you are going to pay the money for an investment advisor, the advisor should understand the importance of an optimum fund size and not necessarily buy the largest mutual funds.

Bond Gains and Losses

The previous blog gave some information about how an investor can make or lose money on a bond when it is not held to maturity. When a bond is held to maturity the investor gets the face value. A $1,000 zero coupon bond regardless of the interest rate when purchased will pay the holder $1,000 at maturity and the transaction is between the issuing entity and the investor. If not held to maturity, the price is set in the secondary market and the transaction is between investors.

Let's go into more detail on this topic by looking at long term bonds at 10, 20, & 30 years in duration. If the normal interest rate on a long term bond is 5%, let's look at a higher rate of 7% and a lower rate of 3%.

Our example will be a $1,000 bond that has no coupon. The value of a 10, 20, and 30 year duration at 3 & 7% is shown below:

10 Year Values: 3% = $766, 7% = $544
20 Year Values: 3% = $570, 7% = $277
30 Year Values: 3% = $424, 7% = $141

If an investor buys a 30 year zero coupon bond at 7% the cost is about $141. If it is held for 10 years and the interest rate is still 7% the price is about $277, a $136 gain. If it is held for 10 years and the interest is 3% the price is about $570, a $429 gain. Having the interest rate drop resulted in an additional increase in value of about $293. This is a beautiful thing as the investor got about 4 times the initial investment over a 10 year period.

What happens if we do this in reverse. If an investor buys a 30 year zero coupon bond at 3% the cost is about $424. If it is held for 10 years and the interest rate is 7% the price is $277, a $147 loss. This is a terrible thing as the investor lost about one-third of their money.

Bottom Line: If your buying long term bonds and you think interest rates will be falling then you have an opportunity to get a capital gain. Currently, with long term interest rates are at or below historical levels I am not sure that now is a great time to become aggressive in long term bonds for the average investor. An investor that is buying long term bonds in this environmen t should review their investment savvy and ability to be nimble.

Understanding Bonds

The blog has been talking about making and losing money on bonds. Perhaps some questions need to be answered. How is it possible to lose money on bonds? Which bonds should a person buy? Should a person buy junk bonds?

How is it possible to lose money on bonds?

This is the main subject of the next blog. A few points of interest:

1. Bond prices move inverse to interest rates. What this means is if the interest rate drops it will cost more money to sell and buy a bond. To illustrate this point the value to sell and buy a $1,000 30 year bond that has no coupon, makes no semi-annual payments, is $141 at a 7$ interest rate and $424 at a 5% interest rate.
2. If a bond is sold early, not held to maturity, price come into play and if sold for less than purchases is a capital loss and if sold for more is a capital gain.

Which bond should a person buy?

A bond is an obligation for an entity to pay you back on the money you are allowing them to use. A key is when do you want your money back? Realizing that the longer the time that this entity has your money the higher the return to compensate you for the additional risk. This is not always 100% true as yield curves on occasion do inverse with longer term bonds having a lower interest rates than shorter term bonds.

My guidance is to buy a series of bonds to ladder your maturity dates, have bonds mature at different times, instead of a single bond. Another alternative that is much easier is to buy a bond mutual fund. This gives a greater amount of flexibility for an average investor.

Should a person buy a junk bond?

The first thing to do is define a junk bond. The simplest definition is a bond that is assigned a speculative rating by a rating agency. To put it simpler, they have a higher chance of not paying you your money meaning a higher degree of risk. Why would anyone buy junk bonds because with greater risk should come the potential for a greater return.

Do I recommend an average investor buy a junk bond. No!!!

Do I recommend an average investor buy a mutual fund that includes a grouping of junk bonds. Yes!!! Why? In the book a Random Walk Down Wall Street, on average a mutual fund of junk bonds yields about 7.5% while a mutual fund with in investment grade bonds yields about 5.5%. This means to me that you can achieve about a 30% higher return at a low amount of risk of default. Things would have to be really bad if one of these funds had a 30% default rate.

Bottom Line: You need to understand your time horizon, needs, and risk level before buying bonds or bond mutual funds.

Conclusions & Surprises of Time Horizons

We looked at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds for a time horizon of 1 through10 years. The data was analyzed during the time period of 1926 - 1999 to include the Great Depression and 1940-1999 to include a more normal environment.

Conclusions & Surprises

1. For time horizons of 1 through 7 years showed that short bonds gave the best minimum return and highest percentage of positive returns.
2. At the 8 year horizon, we saw a major reversal and stocks became the leader with the best minimum return, maximum return, and percent positive return.
3. The trend continued for a 9 year and longer time horizon. The gap in minimum return between stocks and bonds continued to grow with time.
4. The Great Depression had a much greater impact on the performance of bonds than stocks. It is interesting that short term bonds had the best minimum return during 1926 - 1999 and worst minimum return during 1940 - 1999.
5. A surprise: During 1926 - 1999, short term bonds, known as the safest investment, had the worst minimum return for a 10 year period while small cap stocks, known as the riskiest investment, had the best minimum return during this period.
6. Another surprise: The safest long term investment with the best minimum return that also had the best maximum return was stocks. Who would have thought that small cap or large cap stocks would be considered safe?
7. The impact of the Great Depression on the performance of stocks can be seen for a 1 through a 7 year time horizon. Stocks turned from a negative minimum return to a positive minimum return at the 8 year time horizon during both time periods. The data was the same at the 8 year horizon for small cap stocks and at the 10 year horizon for large cap stocks.
8. A third surprise: The minimum return of short term bonds and long term bonds appear similar at the 10 year time horizon. Long term bonds with its longer time horizon and greater risk should have a wider spread. Greater risk should be rewarded with higher returns.

Bottom Line: If you can handle the ups and downs, keeping your focus on the long term of 8 or more years, stocks outperform bonds. Buy stocks rather than bonds. If you desire more stability in your account balance and are willing to reduce the potential return bonds need to be added to the portfolio. Understanding risk, performance of investments by time horizon, the time available before accessing the account, and the view of the investment environment are very important for an investor

Investing 10 Year or More Time Horizon

It is good to know the performance over a 74 year period or 60 year period or a 10 year period. How do you invest if you have a time horizon of 10 years or more? To answer the question, we will look at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds in the book Investments.

The information for time horizons of 1 through 7 years showed that short bonds gave the best minimum return and highest percentage of positive returns. At the 8 year horizon, we saw a major reversal and stocks became the leader with the best minimum return, maximum return, and percent positive return. The trend continued for a 9 year time horizon. Does is continue for 10 or more years?

We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.

Time Period 1926 - 1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/6.74%/36.39%/100%
Large Stocks/2.53%/21.46%/100%
Long Bonds/0.33%/14.60%/100%
Short Bonds/-0.15%/9.32%/94%

Time Period 1940-1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/6.74%/34.80%/100%
Large Stocks/2.53%/21.46%/100%
Long Bonds/0.33%/14.60%/100%
Short Bonds/0.37%/9.32%/100%

What conclusions can we draw from this data:

1. The trend continues and at the 10 year time horizon, the same conclusions can be drawn as the 8 & 9 year time horizons.
2. The gap in minimum return between stocks and bonds continue to grow. It does not seem possible that the only negative minimum return is short term bonds during 1926 - 1999. One might have thought that short term bonds, known as the safest investment, would have been positive in any 10 year period. One might have thought that small cap stocks, known as the riskiest investment would have had this honor of having the worst minimum return.
3. The trend continues with stocks having better minimum returns, maximum returns, and % positive returns than bonds.
4. The data during 1926 - 1999 looks a little wierd as the % positive return for short term bonds is the lowest.
5. The impact of the Great Depression has had a greater impact on the performance of bonds rather than the performance of stocks. Stocks turned from a negative minimum return to a positive minimum return at the 8 year time horizon during both time periods.
6. The minimum return of short term bonds and long term bonds appear similar at the 10 year time horizon.
7. Bottom Line: If you can handle the ups and downs, keeping your focus on the long term, stocks outperform bonds in all categories. Buy stocks rather than bonds.
   

If you have a child going to college in 10 or more years you should be looking at mutual funds that contain large cap and small cap stocks.

Investing 9 Year Time Horizon

It is good to know the performance over a 74 year period or 60 year period or a 10 year period. How do you invest if you have a 9 year time horizon? To answer the question, we will look at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds in the book Investments.

The information for time horizons of 1 through 7 years showed that short bonds gave the best minimum return and highest percentage of positive returns. At the 8 year horizon, we saw a major reversal and stocks became the leader with the best minimum return, maximum return, and percent positive return. Will the trend continue for a 9 year time horizon.

We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.

Time Period 1926 - 1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/4.96%/37.62%/100%
Large Stocks/0.80%/21.82%/100%
Long Bonds/-0.08%/14.52%/98%
Short Bonds/-0.16%/9.75%/94%

Time Period 1940-1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/4.96%/37.62%/100%
Large Stocks/1.42%/21.82%/100%
Long Bonds/-0.08%/14.52%/98%
Short Bonds/0.29%/9.75%/100%

What conclusions can we draw from this data:

1. The trend continues and at the 9 year time horizon, the same conclusions can be drawn as the 8 year time horizon.
2. Things have changed with stocks having better minimum returns, maximum returns, and % positive returns than bonds.
3. The data during 1926 - 1999 looks a little wierd as the % positive return for short term bonds is the lowest.
4. Bottom Line: If you can handle the ups and downs, keeping your focus on the long term, stocks outperform bonds in all categories. Buy stocks rather than bonds.
   

If you have a child going to college in 9 years you should be looking at mutual funds that contain large cap and small cap stocks.

Investing 8 Year Time Horizon

It is good to know the performance over a 74 year period or 60 year period or a 10 year period. How do you invest if you have a 8 year time horizon? To answer the question, we will look at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds in the book Investments.

We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.

Time Period 1926 - 1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/2.36%/43.59%/100%
Large Stocks/1.85%/22.75%/100%
Long Bonds/-0.11%/15.34%/99%
Short Bonds/-0.22%/10.19%/94%

Time Period 1940-1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/2.36%/36.64%/100%
Large Stocks/2.88%/22.75%/100%
Long Bonds/-0.11%/15.34%/98%
Short Bonds/0.23%/10.19%/100%

What conclusions can we draw from this data:

1. Things have changed with stocks having better minimum returns, maximum returns, and % positive returns than bonds.
2. The data during 1926 - 1999 looks a little wierd as the % positive return for short term bonds is the lowest.
3. Bottom Line: If you can handle the ups and downs, keeping your focus on the long term, stocks outperform bonds in all categories. Buy stocks rather than bonds.

If you have a child going to college in 8 years you should be looking at mutual funds that contain large cap and small cap stocks.

Investing 7 Year Time Horizon

It is good to know the performance over a 74 year period or 60 year period or a 10 year period. How do you invest if you have a 7 year time horizon? To answer the question, we will look at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds in the book Investments.

We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.

Time Period 1926 - 1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-9.48%/49.83%/96%
Large Stocks/-0.15%/25.08%/99%
Long Bonds/-1.10%/15.34%/99%
Short Bonds/-0.29%/10.63%/93%

Time Period 1940-1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-7.24%/38.79%/96%
Large Stocks/-0.15%/25.08%/98%
Long Bonds/-1.10%/15.34%/98%
Short Bonds/0.19%/10.63%/100%

What conclusions can we draw from this data:

1. The data during 1926 - 1999 looks a little wierd as the % positive return for short term bonds is the lowest.
2. The minimum return data shows mixed results. Small stocks which gave the best long term performance had the worst numbers. Short term bonds, long term bonds, and large stocks are close.
3. The maximum return data shows that stocks outperform bonds. Small stocks that had the most negative minimum return value has the largest maximum value indicating the most volatility. Large cap stocks and long term bonds got closer together.
4. The percentage of time that a positive return had mixed results. Short term bonds had the highest value and got to 100% during the 1940-1999 period. The rest of the data is about the same in the 96% - 99% range except for short term bonds in the 1926 - 1999 period.
5. If you are an aggressive investor that only has a focus on the maximum gain stocks outperformed bonds by a wide margin.
6. Bottom Line: Large cap stocks, long term bonds and short term bonds are looking very similar.

If you have a child going to college in 7 years you should be looking at mutual funds that contain large cap stocks, mutual funds that contain long term bonds, and short term bonds or a money market account. Remember that the tuition payment is due when the tuition payment is due, regardless of what happens in the stock market.

Investing, 6 Year Time Horizon

It is good to know the performance over a 74 year period or 60 year period or a 10 year period. How do you invest if you have a 6 year time horizon? To answer the question, we will look at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds in the book Investments.

We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.

Time Period 1926 - 1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-16.88%/56.31%/93%
Large Stocks/-6.00%/26.22%/94%
Long Bonds/-1.20%/16.20%/97%
Short Bonds/-0.35%/11.09%/93%

Time Period 1940-1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-16.88%/46.28%/96%
Large Stocks/-2.01%/26.22%/98%
Long Bonds/-1.20%/16.20%/96%
Short Bonds/0.16%/11.09%/100%

What conclusions can we draw from this data:

1. The data during 1926 - 1999 is starting to look a little wierd. The % positive return for short term bonds has dropped to a level below long term bonds and large stocks and equal to small stocks which does not make sense except that a large negative value can have a lingering impact.
2. The minimum return data shows mixed results. Small stocks which gave the best long term performance had the worst numbers.
3. The maximum return data shows that stocks outperform bonds. Small stocks that had the most negative minimum return value has the largest maximum value indicating the most volatility. Large cap stocks and long term bonds got closer together.
4. The percentage of time that a positive return had mixed results. Short term bonds had the highest value and got to 100% during the 1940-1999 period. The rest of the data is about the same in the 93% - 98% range.
5. Looking at the 1940 - 1999 data, a short term bond is the right answer, as it has the highest minimum return value and highest percent positive return followed by large stocks at 98%.
6. If you are an aggressive investor that only has a focus on the maximum gain stocks outperformed bonds by a wide margin.
7. Bottom Line: Your view of the future starts to come into play. Stocks had the greatest potential for growth and the greatest risk in the amount of loss. Large cap stocks are similar to long term bonds in a normal investing environment.

If you have a child going to college in 6 years and your view is of a relatively normal investing environment in the future you should be looking at mutual funds that contain large cap stocks, mutual funds that contain long term bonds, and short term bonds or a money market account. If your view of the future is a worst case scenario, you need to be investing in mutual funds that contain long term bonds, and short term bonds or a money market account. Remember that the tuition payment is due when the tuition payment is due, regardless of what happens in the stock market.

Investing 5 Year Time Horizon

It is good to know the performance over a 74 year period or 60 year period or a 10 year period. How do you invest if you have a 5 year time horizon? To answer the question, we will look at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds in the book Investments.

We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.

Time Period 1926 - 1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-17.94%/75.36%/90%
Large Stocks/-9.79%/28.71%/91%
Long Bonds/-2.34%/16.38%/97%
Short Bonds/-0.42%/11.31%/93%

Time Period 1940-1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-14.31%/56.15%/95%
Large Stocks/-0.75%/28.71%/98%
Long Bonds/-2.34%/16.38%/96%
Short Bonds/0.12%/11.31%/100%

What conclusions can we draw from this data:

1. The data during 1926 - 1999 is starting to look a little wierd. The % positive return for short term bonds has dropped to a level below long term bonds which does not make sense except that a large negative value can have a lingering impact.
2. The minimum return data shows mixed results. Small stocks which gave the best long term performance had the worst numbers. An investor's view that the future environment might include a depression will guide investments toward bonds while a view of a more normal environment will guide investments toward large stocks.
3. The maximum return data shows that stocks outperform bonds. Small stocks that had the most negative minimum return value has the largest maximum value indicating the most volatility. Large cap stocks and long term bonds got closer together.
4. The percentage of time that a positive return had mixed results. Short term bonds had the highest value and got to 100% during the 1940-1999 period. Large stocks during the 1940-1999 period had a positive return 98% of the time. Long term bonds during the 1926-1999 period had a positive return 97% of the timer. Surprisingly, large cap stocks had a higher value than long term bonds during 1940-1999.
5. If you are concerned about losing money on your investment, a short term bond is the right answer, as it has the highest minimum return value and highest percent positive return. Depending upon your view of the future environment, large stocks came close at 98%.
6. If you are an aggressive investor that only has a focus on the maximum gain stocks outperformed bonds by a wide margin.
7. We see some unique situations develop between these 2 time periods so your view of the future starts to impact how to invest. If you believe that the future is more like the 1926-1999 time period then bonds are clear winners when looking at the minimum return data. If you believe that the future is more like the 1940-1999 time period then one would purchase large cap stocks instead of long term bonds because they have a better minimum return, large cap stocks have a higher maximim return and a higher % positive return.
8. Bottom Line: Your view of the future starts to come into play. Stocks had the greatest potential for growth and the greatest risk in the amount of loss. Large cap stocks look better than long term bonds in a normal investing environment.

If you have a child going to college in 5 years and your view is of a relatively normal investing environment in the future you should be looking at mutual funds that contain large cap stocks, mutual funds that contain long term bonds, and short term bonds or a money market account. If your view of the future is a worst case scenario, you need to be investing in mutual funds that contain long term bonds, and short term bonds or a money market account. Remember that the tuition payment is due when the tuition payment is due, regardless of what happens in the stock market.

Investing 4 Year Time Horizon

It is good to know the performance over a 74 year period or 60 year period or a 10 year period. How do you invest if you have a 4 year time horizon? To answer the question, we will look at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds in the book Investments.

We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.

Time Period 1926 - 1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-33.68%/91.47%/85%
Large Stocks/-22.07%/32.87%/90%
Long Bonds/-2.86%/17.85%/93%
Short Bonds/-0.53%/11.92%/94%

Time Period 1940-1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-13.12%/73.39%/89%
Large Stocks/-1.96%/30.63%/98%
Long Bonds/-2.86%/17.85%/91%
Short Bonds/0.15%/11.92%/100%

What conclusions can we draw from this data:

1. Comparing a 4 year time horizon to a 3 year time horizon, all of the minimum returns improved. A longer timer horizon is good for a riskier investment when looking at the minimum return and % positive returns.
2. The minimum return data shows that short term bonds did the best. Small stocks which gave the best long term performance had the worst numbers. Long term bonds during 1926 - 1999 had lower negative numbers indicating that they provided more stability. Large stocks during 1940-1999 had better performance than long term bonds. An investor's view that the future environment might include a depression will guide investments toward bonds while a view of a more normal environment will guide investments toward large stocks.
3. The maximum return data shows that stocks outperform bonds. Small stocks that had the most negative minimum return value has the largest maximum value indicating the most volatility. Large cap stocks and long term bonds got closer together.
4. The percentage of time that a positive return was achieved shows the investments had about the same value during both time periods except short term bonds and large stocks. Short term bonds had the highest value and got to 100% during the 1940-1999 period. Large stocks during the 1940-1999 period had a positive return 98% of the time. Surprisingly, large cap stocks had a higher value than long term bonds during 1940-1999.
5. If you are concerned about losing money on your investment, a short term bond is the right answer, as it has the highest minimum return value and highest percent positive return. Depending upon your view of the future environment, large stocks came close at 98%.
6. If you are investing in small stocks, large stocks, and long term bonds it is possible to lose money.
7. If you are an aggressive investor that only has a focus on the maximum gain stocks outperformed bonds by a wide margin.
8. We see some unique situations develop between these 2 time periods so your view of the future starts to impact how to invest. If you believe that the future is more like the 1926-1999 time period then bonds are clear winners when looking at the minimum return data. If you believe that the future is more like the 1940-1999 time period then one would purchase large cap stocks instead of long term bonds because they have roughly the same minimum return, large cap stocks have a higher maximim return and a higher % positive return.
9. Bottom Line: Your view of the future starts to come into play. Stocks had the greatest potential for growth and the greatest risk in the amount of loss. Large cap stocks looks better than long term bonds in a normal investing environment.

If you have a child going to college in 4 years and your view is of a relatively normal investing environment in the future you should be looking at mutual funds that contain large cap stocks, mutual funds that contain long term bonds, and short term bonds or a money market account. If your view of the future is a worst case scenario, you need to be investing in mutual funds that contain long term bonds, and short term bonds or a money market account. Remember that the tuition payment is due when the tuition payment is due, regardless of what happens in the stock market.

Investing 3 Year Horizon

It is good to know the performance over a 74 year period or 60 year period or a 10 year period. How do you invest if you have a 3 year time horizon? To answer the question, we will look at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds in the book Investments.

We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.

Time Period 1926 - 1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-48.56%/93.80%/86%
Large Stocks/-26.87%/32.64%/90%
Long Bonds/-5.04%/23.98%/93%
Short Bonds/-1.27%/13.26%/94%

Time Period 1940-1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-23.63%/80.85%/91%
Large Stocks/-7.34%/31.32%/95%
Long Bonds/-5.04%/23.98%/91%
Short Bonds/0.11%/12.41%/100%

What conclusions can we draw from this data:

1. Comparing a 3 year time horizon to a 2 year time horizon, all of the minimum returns maintained or improved, all of the max returns maintained or reduced and all of the % positive returns improved except for short term bonds during 1926 - 1999. A longer timer horizon is good for a riskier investment when looking at the minimum return and % positive returns.
2. The minimum return data shows that short term bonds did the best. Small stocks which gave the best long term performance had the worst numbers. Bonds had lower negative numbers indicating that they provided more stability. Stocks that give the best long term performance had less stability. It is interesting to note that large cap stocks and long bonds were very close in minimum return during the 1940-1999 time period.
3. The maximum return data shows that stocks outperform bonds. Small stocks that had the most negative minimum return value has the largest maximum value indicating the most volatility. Large cap stocks and long term bonds got closer together.
4. The percentage of time that a positive return was achieved shows the investments had about the same value during both time periods except short term bonds. Short term bonds had the highest value and got to 100% during the 1940-1999 period. What is interesting and somewhat surprising is that small stocks, large stocks, and long bonds are similar and about 9/10ths of the time have a positive return. Surprisingly, large cap stocks had a higher value than long term bonds during 1940-1999.
5. If you are concerned about losing money on your investment, a short term bond is the right answer, as it has the highest minimum return value and highest percent positive return.
6. If you are investing in small stocks, large stocks, and long term bonds it is possible to lose money about 1/10th of the time. The size of the loss is the least with long term bonds.
7. If you are an aggressive investor that only has a focus on the maximum gain stocks outperformed bonds by a wide margin.
8. We see some unique situations develop between these 2 time periods so your view of the future starts to impact how to invest. If you believe that the future is more like the 1926-1999 time period then bonds are clear winners when looking at the minimum return data. If you believe that the future is more like the 1940-1999 time period then one would purchase large cap stocks instead of long term bonds because they have roughly the same minimum return, large cap stocks have a higher maximim return and a higher % positive return.
9. Bottom Line: Your view of the future starts to come into play. Stocks had the greatest potential for growth and the greatest risk in the amount of loss. Large cap stocks and long term bonds are looking more similar in a normal investing environment.

If you have a child going to college in 3 years and your view is of a relatively normal investing environment in the future you should be looking at mutual funds that contain large cap stocks, mutual funds that contain long term bonds, and short term bonds or a money market account. If your view of the future is a worst case scenario, you need to be investing in mutual funds that contain long term bonds, and short term bonds or a money market account. Remember that the tuition payment is due when the tuition payment is due, regardless of what happens in the stock market.

Investing 2 Year Horizon

It is good to know the performance over a 74 year period or 60 year period or a 10 year period. How do you invest if you have a 2 year time horizon? To answer the question, we will look at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds in the book Investments.

We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.

Time Period 1926 - 1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-48.25%/106.48%/78%
Large Stocks/-35.73%/42.00%/84%
Long Bonds/-4.31%/28.32%/88%
Short Bonds/-1.27%/13.26%/96%

Time Period 1940-1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-35.14%/80.16%/83%
Large Stocks/-20.58%/42.00%/90%
Long Bonds/-4.31%/28.32%/85%
Short Bonds/0.03%/13.26%/100%

What conclusions can we draw from this data:

1. Comparing a 2 year time horizon to a 1 year time horizon, all of the minimum returns improved, all of the max returns reduced and all of the % positive returns improved except for short term bonds during 1926 - 1999. A longer timer horizon is good for a riskier investment when looking at the minimum return and % positive returns.
2. The minimum return data shows that short term bonds did the best. Small stocks which gave the best long term performance had the worst numbers. Bonds had lower negative numbers indicating that they provided more stability. Stocks that give the best long term performance had less stability.
3. The maximum return data shows that stocks outperform bonds by a very wide margin. Small stocks that had the most negative minimum return value has the largest maximum value indicating the most volatility.
4. The percentage of time that a positive return was achieved shows the investments had about the same value during both time periods. Short term bonds had the highest value and got to 100% during the 1940-1999 period. What is interesting and somewhat surprising is that small stocks, large stocks, and long bonds are similar and about 4/5ths to 9/10ths of the time have a positive return.
5. If you are concerned about losing money on your investment, a short term bond is the right answer, as it has the highest minimum return value and highest percent positive return.
6. If you are investing in small stocks, large stocks, and long term bonds it is possible to lose money about 1/10th to 1/5th of the time. The size of the loss is the least with long term bonds.
7. If you are an aggressive investor that only has a focus on the maximum gain stocks outperformed bonds by a wide margin.
8. Bottom Line: Stocks had the greatest potential for growth and the greatest risk in the amount of loss. Bonds had the least potential for growth and provided better stability.

If you have a child going to college in 2 years and you are invested only in mutual funds that contain stocks, you need to consider selling some and invest in short term bonds or a money market account to have some stability. Remember that the tuition payment is due when the tuition payment is due, regardless of what happens in the stock market.

Investing 1 Year Horizon

It is good to know the performance over a 74 year period or 60 year period or a 10 year period. How do you invest if you have a 1 year time horizon? To answer the question, we will look at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds in the book Investments.

We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.

Time Period 1926 - 1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-52.71%/187.82%/65%
Large Stocks/-45.56%/54.56%/74%
Long Bonds/-8.74%/32.68%/74%
Short Bonds/-1.59%/14.95%/96%

Time Period 1940-1999

Investment/Min Return/Max Return/% Positive Return
Small Stocks/-40.54%/103.39%/67%
Large Stocks/-26.4%/52.55%/78%
Long Bonds/-8.74%/32.68%/70%
Short Bonds/-0.07%/14.95%/98%

What conclusions can we draw from this data:

1. The minimum return data shows that short term bonds did the best during both time periods and during 1940-1999 only had a value of -0.07%. Small stocks which gave the best long term performance had the worst numbers at -52.71% and -40.54%. Bonds had lower negative numbers indicating that they provided more stability. Stocks that give the best long term performance had less stability.
2. The maximum return data shows that stocks outperform bonds by a very wide margin. Small stocks that had the most negative minimum return value has the largest maximum value indicating the most volatility.
3. The percentage of time that a positive return was achieved shows the investments had about the same value during both time periods. Short term bonds had the highest value at 96% & 98%. What is interesting and somewhat surprising is that small stocks, large stocks, and long bonds are very similar and about 2/3rds to 3/4ths of the time have a positive return.
4. If you are concerned about losing money on your investment, a short term bond is the right answer, as it has the highest minimum return value and highest percent positive return.
5. If you are investing in small stocks, large stocks, and long term bonds it is possible to lose money about 1/4th to 1/3rd of the time, the size of the loss is the least with long term bonds.
6. If you are an aggressive investor that only has a focus on the maximum gain stocks outperformed bonds by a wide margin.
7. Bottom Line: Stocks had the greatest potential for growth and the greatest risk in the amount of loss. Bonds had the least potential for growth and provided better stability.

If you have a child going to college next year and you are invested only in mutual funds that contain stocks, you need to consider selling some and invest in short term bonds to have some stability. Remember that the tuition payment is due when the tuition payment is due, regardless of what happens in the stock market.