Saturday, November 17, 2007

Best Posts Over The Past Year (2006-2007)

I started my Finance and Investments blog on November 8, 2005. I have posted 118 times since then, including 41 times during the past year, discussing a number of topics primarily focusing on stock market investing (including tracking a model portfolio), basic coin collecting, and general personal finance issues. Here are some of my favorite posts from 11/2006 - 11/2007:

Best posts relating to Stock Market Investing:
(1) 1980 - 2006 Stock Market Returns for Various Indices
(2) The First BRIC ETF Was Launched In September
(3) How To Construct a BRIC-Tracking Portfolio
(4) Barclays Offers the Only Indian Stock Market ETF
(5) The First Russian Stock ETF Was Launched In April
(6) S&P 500 Dividends (Updated through January 2007)
(7) Historical Earnings and P/E Ratios for the S&P 500 Index

Best posts relating to Coin Collecting:
(1) How to Collect Pre-1982 Pennies and Nickels
(2) New Designs For The U.S. Penny Will Be Introduced In 2009 To Commemorate Lincoln's 200th Birthday
(3) The U.S. Mint Is Implementing A New Rule Abolishing the Melting of Pennies and Nickels
(4) The Melt Value of U.S. Nickel Coins Is Still Increasing

Best posts relating to Miscellaneous Personal Finance Issues:
(1) The Motley Fool Has Lost A Lot Of Credibility Over the Past Few Years
(2) The iShares Emerging Markets ETF Does a Poor Job of Tracking the MSCI Emerging Markets Index
(3) Emigrant Direct Has Onerous Money Transfer Rules

*** See also: Best posts from 11/2005 - 11/2006

Friday, November 09, 2007

The Evolution of the Russian Stock Market From 1995-2005

Russia is one of my favorite emerging markets and its stock market has delivered incredible stock market returns over the past few years. In research the Russian stock market, I recently discovered an interesting paper analyzing the evolution of the Russian stock market, and its associated risk factors, during the period from 1995 and 2005.

Here is a hot link to a .pdf of the article: Risks of investing in the Russian stock market: Lessons of the first decade

This is the abstract for the paper:
The modern history of the Russian stock market has mirrored ups and downs of the country’s transition as well as swings in investor perceptions. In this paper, we describe the evolution of the Russian stock market over its first decade, with particular attention to the risk factors driving stock returns. First, we analyze the development of the institutional infrastructure and dynamics of the market’s size and liquidity measured by the number of listed and traded stocks, depositary receipts and IPOs as well as trading volume in the local stock exchanges and abroad. Then, we examine major political and economic events, which influenced the investor perceptions of the country risk and were reflected in stock prices. Finally, we carry out quantitative analysis of risk factors explaining considerable time and cross-sectional variation in Russian stock returns. We document a significant role of corporate governance, political risk, and macroeconomic risk factors, such as global equity markets performance, oil prices, and exchange rates, whose relative importance varied a lot over time.

Sunday, November 04, 2007

Fidelity Offers a Low Margin Rate for Wealthy Investors

Some investors attempt to enhance their portfolio returns by using financial leverage, such as options or margin borrowing. Margin borrowing is probably the more popular leverage-enhancing technique used by individual investors. By borrowing "on the margin," i.e., from one's brokerage firm to purchase shares of stock, the investor can achieve large returns in a short amount of time if shares of the stock held rise rapidly. Downside risk is also enhanced for the same reason.

Despite its relatively common use, margin borrowing is unsuitable for many small investors, primarily because the margin interest rates charged by brokerage firms tends to be very high. For example, the FED recently cut its overnight lending rate to banks to 4.50%. However, most brokerages are still charging margin interest rates exceeding 10%.

Fidelity, for example, currently charges a margin interest rate of 10.325% to anyone borrowing less than $10,000. Fidelity, however, provides a great incentive to wealthy investors who want to borrow on the margin. As of October 31, 2007, Fidelity only charges a margin interest rate of 5.25% to anyone borrowing $500k or more, as shown in the chart below:

If I had a large brokerage account, I would certainly consider borrowing from Fidelity to purchase shares of certain equities. For risk tolerant investors, 5.25% seems like a small price to pay for the potential returns possible from margin borrowing. If I were to borrow on the margin, I would probably use the borrowed money to purchase shares of an index-tracking ETF, such as the S&P MidCap 400 Index ETF (symbol: MDY) or the S&P 500 Index ETF (symbol: SPY), to minimize individual company-specific risk.

There may be additional tax benefits that further enhance the desirability of margin borrowing. Qualified dividends are currently taxed at a maximum rate of 15% per year. If one has enough deductions to itemize on one's federal tax returns, one can deduct margin interest against one's federal income taxes, giving the person an additional benefit. If the person is in the highest marginal tax bracket, that person will effectively be deducting the margin interest against income that would be taxed at a rate of 35% per year.

Saturday, November 03, 2007

October 2007 Returns For My Model Long-Term Portfolio

My Hypothetical Model Portfolio had its second strongest performance (on a % basis) of 2007 during October. Although the month was volatile, the Portfolio rallied on October 31st when the Federal Reserve cut its benchmark overnight interest rate by 25 basis points to 4.50%. The FED released a statement indicating that it now thinks the risks of recession and higher inflation are in "balance," a signal that the FED is less likely to make another cut down the road.

As of the market close on October 31, 2007, the Hypothetical Model Portfolio was up $5637, or about 3.56% during October. The Hypothetical Model Portfolio is now up about $18567 in 2007, a gain of 12.76%, as shown on the table below (click for a larger image of the table). Based on the strong October returns, the 2007 returns for the Hypothetical Model Portfolio are now ahead of the 10.83% return of the Vanguard S&P 500 Index fund (VFINX), my benchmark proxy for the S&P 500 index.

International stocks generally led the way again in October, most likely due to the FED's interest rate cut, which devalues the U.S. Dollar, and consequently increases the value of foreign-denominated assets such as international equities. The iShares Emerging Markets ETF (EEM) was my best performing holding, rising about 11.87%. The Templeton Russia closed-end fund (TRF) rose about 8.74%, and the Vanguard Developed Markets Index mutual fund (VDMIX) rose about 4.41%.

Tech stocks were also strong performers during October - the Nasdaq 100 ETF (QQQQ) rose an impressive 7.09%. Small caps also performed well, with the Vanguard Small Cap Index mutual fund (NAESX) rising 2.62% and Vanguard Small Cap Value Index (VISVX) returning about 1.34%.

Financials were laggards again - the SPDR Financial components ETF (XLF) dropped 0.97%, whereas the iShares Dow Jones U.S. Select Dividend Index Fund (DVY) rose a scant 0.93%.

The results of the holdings in the Hypothetical Model Portfolio have been very disparate through the first 10 months of 2007. EEM, QQQQ, and VDMIX are leading the way with phenomenal returns of 46.44%, 27.71%, and 18.62%. Four of the holdings, on the other hand, have had abysmal returns - TRF, XLF, DVY, and VISVX have returns -9.92%, -6.54%, 0.49%, and 1.03% respectively for the year. The winners have more than made up for the weak performance for the poor performers, and the portfolio is currently nearly a full two percentage points ahead of the 10.83% return of the Vanguard S&P 500 Index fund (VFINX), my benchmark proxy for the S&P 500 index, as discussed above.

Three of the holdings in my Hypothetical Model Portfolio paid dividends during October. As I mentioned in a previous post, I reinvest the dividends from mutual fund holdings when distributed. I allow dividends from closed end funds or the ETFs to accumulate in the "CASH" column until it reaches at least $100, at which point I invest the CASH in the mutual funds lagging my benchmark asset allocation by the largest amount at the time. The reason why I wait until $100 is accumulated is because that is the minimum amount required to invest in a Vanguard mutual fund at a time.

At the end of September, the CASH column totaled $66.05. On October 1st, DVY paid a dividend of $0.59722/share (a total of $59.72). This dividend payment was immediately moved into CASH, and the CASH column accumulated a total of $125.77 as of October 1, 2007. As of that date, the most underperforming mutual fund holding was VISVX. Accordingly, on the following date, October 2, 2007, $125.77 was invested in VISVX to purchase an additional 7.207 shares at $17.45/share.

Two other holdings paid dividends in October. On October 3, 2007, XLF paid a dividend of $0.2554/share (a total of $25.03), which was moved to "CASH" on the table shown below. QQQQ paid a dividend of $0.026/share (a total of $5.46) on October 31st, which was also moved to "CASH" on the table shown below.

I anticipate that the portfolio returns will continue to be volatile for the rest of 2007 and will probably be slightly higher by the end of December, 2007.

*The Hypothetical Model Portfolio was created with an investment of $100,000 in securities as of the closing values on December 30, 2005 and an additional $25,000 was invested n securities as of the closing values on December 29, 2006. The reason why the total cost in the chart is greater than $125,000 is because the total cost accounts for the value of distributions reinvested into the mutual funds in the portfolio.

September 2007 Returns