Give Your Kid $1,000,000...
I know what you're thinking... "My kid, with a million bucks? Bad idea!" But hear me out. I'm not talking about handing over a very large checking account to a teen. I'm talking about funding a Roth IRA with your kid and giving him or her the tools to effortlessly become a millionaire (or more) by retirement.
Stop a minute and think about how good it would be if you had an extra million at age 60. No, I'm not going to throw out the old pablum of "just put aside what you spend on Starbucks each month and you'll be a millionaire!" It's true that plans like that work, but such plans are easy get side-tracked from. One need only break the habit and the discipline is likely ruined. Furthermore discipline isn't exactly most seasoned adults' strong suit, let alone those in their youth.
What I'm talking about is simple plan that requires virtually no effort once set up and has a high probability of success. You can do it in 4 easy steps.
Step 1: Get your kid working. He can't make a Roth IRA contribution unless he or she has income. They can work for your business, and it has been suggested that they can just work for you (if you document the wages) doing household chores (more in this article http://moneycentral.msn.com/content/Taxes/...tips/P33215.asp ). They key is, they need to have adequate income to contribute to a Roth IRA. You can work the details out but get the income so you and your kid can make contributions, be in all at one time or over time.
Step 2: This may be the most difficult part of the plan. Explain the plan to your kid and make sure they understand what you two are doing and why and what it will mean to them long term. They have to understand that this money is untouchable until retirement and that they need to forget it exists until then.
Step 3: Invest the money ($4000 Roth IRA contribution) in a low fee/expense smaller capitalization value fund with a well established fund family. Why low fee? There's not much correlation between high fees and performance, but it's guaranteed that you'll keep more money if you don't have to pay inflated fees. Why Small-Cap Value? According to Ibbotson Associates, this sector is one of the better performing sectors longer term (since 1928). Smaller companies can grow faster, and by using a value filter, one helps to tilt the odds toward better performance. How much better? How about 14.7% versus 10%-12%? That seals it for me. Of course, one wants to stick with a quality fund family to decrease the risk of problems. Ideally, you don't want to have to deal with a fund closing or take over, or worse, some variety of fraud and these types of problems are less likely with a bigger fund group.
Step 4: Leave it alone! I know that this seems odd coming from a professional market timer, but the key to this plan is to let the market do it's magic. You have to resist the urge to fiddle with it. Why? Well, basically, over long periods of time, timing usually offers little additional value. Of course, it does offer the additional chance of screwing up and underperforming the market--which is what most individuals do when they first start trading. This is too important to mess with. Just park the money and let it make itself into $1 Million.
If you want to do something cute, you can add money during nasty declines. That will help to insure long-term success (though it's not necessary, in my view). But don't worry about timing or avoiding Bear markets with this core account. This is long term money and the only thought you should have in the event of a Bear market is how much more you can invest. If you want to time the market, use discretionary money in a taxable account so you can deduct the losses while you learn.
That's it. Create and fund that Roth account, and make that investment, and then ignore it. By retirment age, that initial $4,000 ought to be valued at something north of $1,000,000 (assuming historic returns and strictly limited fees).
So, still don't believe me? Well, check out the numbers:
Roth Value Return at 14.7% *Start4000
Age 21 $ 4,588 $ 588
Age 22 $ 5,262 $ 674
Age 23 $ 6,036 $ 774
Age 24 $ 6,923 $ 887
Age 25 $ 7,941 $ 1,018
Age 26 $ 9,108 $ 1,167
Age 27 $ 10,447 $ 1,339
Age 28 $ 11,983 $ 1,536
Age 29 $ 13,745 $ 1,762
Age 30 $ 15,765 $ 2,020
Age 31 $ 18,082 $ 2,317
Age 32 $ 20,741 $ 2,658
Age 33 $ 23,789 $ 3,049
Age 34 $ 27,287 $ 3,497
Age 35 $ 31,298 $ 4,011
Age 36 $ 35,898 $ 4,601
Age 37 $ 41,175 $ 5,277
Age 38 $ 47,228 $ 6,053
Age 39 $ 54,171 $ 6,943
Age 40 $ 62,134 $ 7,963
Age 41 $ 71,268 $ 9,134
Age 42 $ 81,744 $ 10,476
Age 43 $ 93,760 $ 12,016
Age 44 $ 107,543 $ 13,783
Age 45 $ 123,352 $ 15,809
Age 46 $ 141,484 $ 18,133
Age 47 $ 162,283 $ 20,798
Age 48 $ 186,138 $ 23,856
Age 49 $ 213,501 $ 27,362
Age 50 $ 244,885 $ 31,385
Age 51 $ 280,883 $ 35,998
Age 52 $ 322,173 $ 41,290
Age 53 $ 369,533 $ 47,359
Age 54 $ 423,854 $ 54,321
Age 55 $ 486,160 $ 62,307
Age 56 $ 557,626 $ 71,466
Age 57 $ 639,597 $ 81,971
Age 58 $ 733,618 $ 94,021
Age 59 $ 841,460 $ 107,842
Age 60 $ 965,154 $ 123,695
Age 61 $ 1,107,032 $ 141,878
Age 62 $ 1,269,766 $ 162,734
Age 63 $ 1,456,421 $ 186,656
Age 64 $ 1,670,515 $ 214,094
Age 65 $ 1,916,081 $ 245,566
Age 66 $ 2,197,745 $ 281,664
Age 67 $ 2,520,813 $ 323,068
Age 68 $ 2,891,373 $ 370,560
Age 69 $ 3,316,404 $ 425,032
* Source: Small Cap Value return since 1928 from Ibbotson Assoc.
The above is just a hypthetical and should not be construed to be personalized investment advice. Further, past performance is no guarantee of future returns. Still, I'll bet that the average financial consultant will agree that this is a pretty sweet plan to start one's retirement savings on the right foot. By the way, this is not a substitute for establishing a sound savings plan, nor should this be an excuse for not participating in a company or personal retirment plan. You should do both, but this could be a very nice suppliment and would provide a great deal of financial freedom and piece of mind.
Give it some thought.
Mark Steward Young
Equity Guardian Group, LLC
Check out the latest T-4 Indicator readings.
The sentiment picture is very interesting. The Hedge Fund Sentiment is leaning pretty heavily long. Small Speculators are starting to get a bit overly Bullish too as are Individual Investors. We've got some charts of AAII and II sentiment below.
Here's the latests T-4. Note that we had a reading of 73 much like we did in December, but this time, traffic was well above those levels. The T4 measures stronger emotions about the market--perhaps even analytical confidence. We have found that readings north of 80 seem to be rather reliable indications of a change in trend, or at least a brief reversal of the existing trend. Higher readings seem to indicate more important turns. The tricky part is when we either get marginal readings or when the market has already had a counter trend move--is a high T4 reading confirmation or a signal of an impending reversal?
See our earlier blog entries for some historical charts of this indicator.
Below are the II and AAII weekly charts (courtesy of DecisionPoint.com).
The good news for the Bears is that this is starting to show the type of Bullishness that sets up a top. The bad newsis that we know from experience that most really good declines come some time after the first excessive AAII readings.
Mark S. Young
Equity Guardian Group, LLC
It has been a while since our last entry, so I thought it would be good to go over the big picture for you all.
Firstly a technical run down.
We are still in a Cyclical Bull Market. Sentiment says that the Bull market top is yet ahead of us, and price confirms.
Nearer term, however, the weekly trend has turned down as has the daily. Fortunately, for the Bulls, the 21-day has been holding (though as of today -Friday- it is under attack) as has the cumulative breadth data (see chart).
Unfortunately for the Bulls, small hedge fund sentiment as well as advisor sentiment is showing excessive Bullishness. We see almost no confidence on the part of the Bears and that's a prescription for a nasty little correction. Additionally, our Rydex Speculation Oscillator has quietly reversed most if not all the accumulated Bearish asset shifts that we saw going into the June-July lows. Given this and the other sentiment readings, we ought to pay attention to any intermediate-term Sells.
This market is certainly vulnerable to some selling here, but we really need to not get too Bearish and definitely remain very nimble if we do any shorting. There are any number of forces that tend to support this market at this time of year. Considering that we're still in a Bull market, we ought to view weakness as corrective and should we see pessimism rise again, we should be quick to buy.
Yesterday, I was looking at the Dow during the past 21 presidential cycles and I noted that only 4 Januarys were down in years prior to elections. Of those, none were down much (on a month end basis). According to historical probabilities, if we get some weakness here, the odds on play is to look for higher prices into month end and if not then soon thereafter. Historically during this part of the presidential election cycle, 100% of the time we've seen a nice rally start in February after a down January. Additionally, of the past 21 pre-presidential election years only one (FDR) hasn't seen a dandy rally by the end of July. During the Hoover administration, the rally didn't last long and during Truman's, you had to suffer some pain, but the bias for this part of the presidential election cycle is clearly higher.
Thursday night we had a high reading from the T-4 indicator (for more see our earlier blog entries), but I'm not at all confident that it was high enough to generate even a borderline signal. Especially a "Sell" during this seasonally strong period. That said, we can, and should be open to just about anything. If we DID get a "Sell", the market shouldn't take out Friday's highs.
From time to time, I post an intra-day heads up about a "divergent ARMS" (I say ARMS to honor the creator Richard Arms, instead of using the generic TRIN). Most folks use the ARMS on a multi-day basis, smothing it with a 4-, 5- or 10-day moving average, summation, or some sort of exponential. Many, including Dick Arms use these measures as reversal indicators. In other words, a very low 5- or 10-day ARMS might be a sign of a market top and a very high 5- or 10-day ARMS might be a good bottom signal. These are perfectly legitimate ways of using this classical tool of technical analysis (see the bottom of this entry for basics of the ARMS). I look at the 10-day ARMS a little differently, but I'll get to that in a moment.
Back to the point. I often watch for a divergence in ARMS, particularly on big moves. I view it as an indication of a possible fake-out. So, for instance, if the market is up in the morning and the ARMS is high, then I'll read that as distribution (barring some extraneous factor) and look for the rally to fade. It's not fool proof, but it's a good heads up. I often use this profitably. More importantly, it has kept me from taking some bad trades. There's nothing worse psychologically for a lot of traders than getting faked out--you end up second guessing your indicators too much. So, when day trading, watch for the divergent ARMS, and incorporate it with other indiators.
As I said above, I look at the 10-day open ARMS a bit differently. Most folks look at a high 10-day open ARMS as an over-sold Buy signal. That's fair enough, but only in the context of a serious decline. During rallies that are accompanied by a high 10-day ARMS, and I consider that a sign of distribution, too. That's Bearish, and while it's not a Sell signal, I'll get more careful and start paying attention to ST Sells more. BTW, this is the context of the current market.
For those who are new to TA or just the ARMS (TRIN) it's calculated as the following:
(Advancing stocks/declining stocks)/(advancing stock volume/declining stock volume)
This will almost always be described as a numerical ratio usually ranging from 0.1 to 2.75 (though mathematically smaller and larger numbers are possible and occasionally they do occur). In normal contexts on an intra-day basis a ratio of 1.0 or higher implies some selling in volume is going on and thus is Bearish. A ratio below 1.0 indicates implies that folks are buying stocks up on volume and thus is Bullish. Obviously, this is a bit simplistic, but the concept is sound. We must beware, however, of times when one large issue is either up or down on huge volume due to a deal or bad news or something similar. This can terribly skew the ARMS data for a time, particulary early in the day.
Here's how the 10-Day Open Arms (above) is calculated:
(Last 10 day's Advances/Last 10 day's Declines)/(Last 10 day's Advancing Volume/Last 10 day's Declining Volume)
Mark S. Young
Equity Guardian Group, LLC
Here is the current T-4 chart. As you can see, we got SOME sort of a signal on Friday.
I'm agnostic, for now. For more on the T-4 see my comments below.
I had said at the very beginning that I'd try to offer up some "accumulated wisdom". I didn't mean that as a statement of arrogance, but rather simply a recognition of the fact that over 20 years, a trader will make enough mistakes to learn a thing or two that will help us make money.
So, here we go.
BEWARE EASILY QUANTIFIED OBVIOUS BUY SIGNALS.
First of all, any technical indicator that can be readily programmed for has been programmed for and long ago the benefit of such a signal will have been exploited away. Additionally, over time, obvious signals can often be a trap that specialists or programmers or large scale traders use to catch less experienced traders or investors wrong-footed.
Case in point: Yesterday, the market was just strong enough to give a Buy from the standard MACD. This is a commonly used indicator in virtually any technical analysis or charting program. Using the default settings, we got a Buy on the S&P at the close.
Hmmm, a nice, fresh, standard Buy from the widely followed MACD, as the market is breaking out to new highs (another obvious Buy signal), no less. This is a perfect set up to bag a bunch of less sophisticated traders who bought the break up and added on MACD confirmation.
With options expiration nearly upon us, there's also some motivation for the options boyz to try to get a little decline going that will increase implied volatility. Why? Increased volatility makes for bigger options premiums which they would love to sell this week. Next Friday, those options will expire and if they aren't "in the money" it will be a nice pay-day for whoever shorted the options this week.
Now, trading this is tricky, since it's always tricky picking a top, but just for experimental purposes, let's see if this obvious MACD Buy signal isn't a great fade.
It's the T4 indicator.
Of course, it's not all that new. I've discussed this on Fearless Forecasters before and I regularly refer to this in the ISA Daily Trade Navigator. The T4 measures stronger emotions about the market--perhaps even analytical confidence. We have found that readings north of 80 seem to be rather reliable indications of a change in trend, or at least a brief reversal of the existing trend. Higher readings seem to indicate more important turns. The tricky part is when we either get marginal readings or when the market has already had a counter trend move--is a high T4 reading confirmation or a signal of an impending reversal?
Here's the current chart. We'll try to update as we go forward.
Note that it's not clear if Friday's reading was a clear Sell or a buy, and I expect volatility could make either call right, but MY read is that the high reading suggests at least another day of selling, perhaps more.
Here's the T4 going back to last year.
We attempted to "normalize" the data today, and over time we found that the straight T4 indicator is best. If you have trouble seeing the charts, set your monitor resolution higher. We will be uploading additional historical charts to provide some additional context for you.
If you would like to try the Institutional Sentiment and Analysis Weekly, or our ISA Daily Trade Navigator, check out the link below.
Equity Guardian Group, LLC
I found out today that one of my heros, Nick Proffitt died on November 10th. Nick was something else. A gem. I met him first on the old Decision Point Fearless Forecaster message board on AOL. I'm thinking it was 1994, but it could well have been earlier.
Nick was generous with his ideas and a joy to read. In time, Carl Swenlin tapped him to start a stock newsletter. I knew he had written a novel, but it took me a while to realize that it had been made into a movie. There was a lot to the man. Like the fact that he tried to strangle Hunter S. Thompson.
To read the full story, check out this wonderful obit.
I and many others are going to miss Nick. I'll be posting bits and pieces by him that I can find. He's worth reading always, and a great resource.
Other reactions are on this thread.
While I was looking for material on Nick in my vast archives, I found this quote. While unrelated, it's pretty neat stuff.
The symbol of all relationships among such men, the moral symbol of respect for human beings, is the trader.
We, who live by values, not by loot, are traders, both in manner and spirit.
A trader is a man who earns what he gets and does not give or take the undeserved.
A trader does not ask to be paid for his failure, he does not ask to be loved for his flaws.
A trader does not squander his body as fodder, or his soul as alms.
Just as he does not give his work except in trade for material values, so he does not give the values of his spirit -- his love, his friendship, his esteem -- except in payment and in trade for human virtue, in payment for his own selfish pleasure, which he receives from men he can respect.
The mystic parasites who have, throughout the ages, reviled the trader and held him in contempt, while honoring beggars and looters, have known the secret motive of their sneers: a trader is an entity they dread - a man of justice.