Investment – Page 2 – The Well Tempered Investor

Can Actively Managed Funds Outperform the Market? Study Shows They Cannot Most of the Time

The stock market in 2023 recovered much of the losses from the downturn of 2022, before it reached its record highs in 2024. The S&P 500 had a 26% return in 2023, rebounding from an 18% loss from the previous year. More impressively, the largest 50 companies within the S&P 500, rose by 38%. Having seen such performance in the past year may cause investors, particularly newcomers, to expect consistently high returns.

Recently, I engaged in a conversation with a prospective investor who was targeting a 10-20% return on investment. When we consider the historical performance of the S&P 500, it has delivered an average annualized return of approximately 9% over the last two decades. Some other fund categories, including the large-cap growth stocks yielded more, reaching as high as 10.5%. Consistently achieving 10-20% annual returns would thus entail surpassing these already excellent market average. Since my approach is building and preserving clients’ assets with the movement of the general market, I informed him that it was not something I was able to deliver.

Three Misconceptions of US Stocks – How Investors Can Navigate the Current Economy

We often hear the term, “diversification”, concerning investments. This strategy often involves spreading risks in various asset categories, not only in US stocks, but also international stocks, bonds, real estate, commodities and others. However, many people exclusively consider the S&P 500, a major US stock index, when thinking about investments, despite the availability of other options.

One reason for this focus on the main US stock exchange, may be its frequent media coverage, since it represents the largest firms in the country, and has historically delivered high returns. While people commonly assume US stocks always yield the best returns, this has not always been the case. This article will address three misconceptions about stocks and how individuals can navigate today’s economic conditions.

Weighing Optimism and Caution – Interpreting the Nature of Stock Market Rallies though the PE Ratio

The stock markets including those in the US, recently broke record high prices, despite the presence of various negative economic factors. While there are investors who are content to buy stocks at these record prices, others remain skeptical about the current state of the market. Such cautious investors may delve into fundamentals, including the Price-to-Earnings (PE) ratio, to understand the nature of the market rally before making an investment decision.

The PE ratio is a key financial metric that helps investors assess a company’s valuation. Essentially, it indicates how much investors are willing to pay for each dollar of a company’s earnings. A high PE ratio suggests that the stock may be overvalued that it could be pulled back to its fair market value, while a low PE ratio suggests that the stock may be undervalued and that it has a potential for future growth. Although it is not the sole determinant of stock value, it serves as a useful tool in valuation. However, non-professional investors might often overlook it.

Understanding the Realities of Whole Life Insurance – A Critical Analysis

“With whole life insurance, not only can you protect your loved ones with death benefit, you can accumulate assets for yourself, called cash value. In addition, you will receive guaranteed 5% dividends, and you can access your assets anytime tax-free, in the form of a loan. This feature is unlike a 401k, which you have to wait until retirement to make distributions, and will be taxed. You essentially become your own bank, a strategy used by many extremely wealthy individuals, like Bush and Rockefeller families who have built generational wealth.”

Upon hearing such a pitch from an insurance agent, aspiring individuals may mistakenly consider insurance, a contractual agreement drafted in insurance companies’ favor, to be a versatile do-it-all financial asset, and a ticket to the upper class. When something sounds too good to be true, there is usually a catch, and whole life insurance is no exception. The following analysis highlights three reasons it is not suitable for individuals who are just beginning to accumulate wealth, and suggests alternatives to whole life insurance to protect heirs and accumulate financial assets.

Personal Finance Lessons from Dostoevsky’s “Poor Folk”

In Fyodor Dostoevsky’s novel Poor Folk, Makar Divushkin, a middle-aged copying clerk in 19th-century Russia, grapples with a life of poverty. Moreover, he is dissatisfied with his job, and believes his lack of skills makes his career prospect bleak. Instead of attempting to improve his situation, his thoughts are heavily consumed by Varvara Dobroselova, a young woman of higher social standing, with whom he maintains heartfelt letter correspondences. In a bid to win her affections, Makar Divushkin goes into debt and buys her expensive gifts, which ruins him financially.

Dostoevsky’s Poor Folk, which partly critiques the rigid social hierarchy of 19th-century Russia and the destitution of ordinary people, holds relevance in contemporary America, since many individuals similar to Makar Divushkin exist among us today. Potentially due to coming from a challenging background, they aspire to enhance how they are socially perceived, by engaging in activities such as pursuing university education, traveling, and acquiring cars and homes, often funded with debt. Alarmingly, in 2023, the total credit card debt in the US surpassed $1 trillion, with student loan balance nearing $2 trillion. On an individual level, a person who went to a university typically carried a credit card debt of around $7,000 and student loan of $30,000, largely in the pursuit of upward mobility.