WSJ: Understanding a Mutual Fund's Average Annual Return

By SIMON CONSTABLE

What does it mean when a mutual fund reports its average annual return over a period of, say, three or five years? It isn't exactly what you might think. What's more, computing the figure yourself will require more than the general arithmetic you use in other areas of your life.

Consider a person who invests $100 and has a 10% loss one year and a 10% gain the next. That might seem to be an average return of zero. But the investment would actually be down one dollar in value—dropping 10% to $90 the first year, then growing 10% to $99 the next.Specifically, average annual return can't be determined by calculating the simple average of three or five one-year returns—the way you would calculate the average height of two people who are 5 and 6 feet tall, respectively. That's because investment returns are volatile and the results compound year after year, says Paul Justice, director of data methodology at Morningstar Inc.

So fund companies and data providers typically report multiyear returns as "compounded average annual returns," or geometric returns, which reflect how a series of returns affect an initial investment. The annualized return in our example is about negative 0.5%.

The details of the calculation aren't important because fund companies will do the sums for you.

What is important to remember is that even seemingly small differences in annual returns compound over many years to create big dollar differences in how an investment grows. If you started with $10,000 and invested it for a couple of decades, a difference in average annual return of, say, half a percentage point could easily mean a difference of a few thousand dollars at the end of the period.

Quoted fund returns generally include the reinvestment of dividends and capital-gains distributions. They are net of operating expenses, but typically not of any sales charges.

See original story here.

WSJ: Roubini -- Twitter Value "Ridiculous."

By SIMON CONSTABLE

Valuations among tech startups are looking frothy, and that includes Wall Street darling Twitter Inc., according to the man known as Dr. Doom.

“Tech is a bit ridiculous in terms of the deals being done,” said Nouriel Roubini, founder of Roubini Global Economics. He was speaking with The Wall Street Journal at the World Economic Forum in Davos. “Startups with barely any profits are selling for sixty times expected forward earnings.”

He also said there were some examples of firms with no revenue selling for huge sums.
“Take Twitter,” he said. “Based on current revenue and earnings the valuation is totally ridiculous.”

It’s not that Roubini doesn’t like Twitter. Quite the contrary, he “loves” it and uses it multiple times every day.

The problem, as he sees it, is how the company can build a “revenue base” to justify the value.
It’s a useful tool, he says, but he doesn’t see the company growing bigger than Facebook Inc. or Google Inc.

It’s not just Twitter that has a crazy value, he says, pointing to some companies with zero revenue being acquired based purely on their “option value.” Or put in more simple terms, the purchase price is based on the small chance that one day the company builds a successful and profitable business.

Famously, close to two years ago Facebook purchased Instagram, which had zero revenue at the time, for $1 billion in cash and stock.

He also pointed to “flops” in the startup space, naming Groupon as an example of the risks inherent in the space.


To be sure, there are some “amazing” tech firms” and “some will be successful,” he said. Just not all of them.

See original story here.

WSJ: What Is 'Alpha' in Investing?

By SIMON CONSTABLE

When you pick portfolio managers, you need to know how good they are at their job—or put another way, how much alpha they add.

If you could have done just as well buying an index-tracking investment—such as the SPDR S&P 500 exchange-traded fund for broad U.S.-stock exposure—your portfolio manager isn't adding any alpha. If the manager does better than just tracking the market benchmark, then he or she is adding alpha.Alpha, the first letter of the Greek alphabet, in this context means the positive difference someone makes in the investment process, says Art Hogan, chief investment strategist at Lazard Capital Markets in Boston. An investment manager who adds a lot of alpha is "a good stock picker or sector picker," he says.

Alpha only goes so far, though. "When you add alpha it's a relative term," says Mr. Hogan. For instance, if you owned gold stocks and the gold sector plummeted like it did recently, your alpha might be that you lost less money than other investors.

Also, don't confuse alpha with beta, another term taken from the Greek alphabet. In this conversation, beta refers to how stocks move relative to the overall market. A stock with a beta of 1 moves in sync with the market.

See original story here.

WSJ: Holiday Gifts for the Money-Minded

By SIMON CONSTABLE
If there's one time of year when people are apt to break the budget, it's Christmas.

Here are some gifts that at least stand a chance of nurturing the money-savvy gene. What's more, we have a gift idea for pocketbooks of all sizes.
1. One Antarctic Dollar ($1)
Giving cash is an old standby, but often not special. So what about beautiful currency from far-flung lands? See original story here.

Photo by Derek Oyen on Unsplash

Sales of WSJ Guide Continue to Soar...

By SIMON CONSTABLE

Sales of the WSJ Guide to the 50 Economic Indicators that Really Matter have now surpassed 70,000 worldwide including editions in Japanese, Korean and Chinese as well as the original English.

WSJ: Mandela Obituary

By SIMON CONSTABLE

Nelson Mandela

South Africa The Good News / www.sagoodnews.co.za, 

CC BY 2.0, via Wikimedia Commons

WSJ: Year-End Distributions Hold Dangers for Fund Investors

By SIMON CONSTABLE

Congratulations, you've made it through another year! Well, almost. For mutual-fund investors, there is at least one more thing that could trip you up: ignoring the so-called date of record for the capital-gains distributions that many funds pay near year-end. Failure to pay attention may mean you get taxed for profits you didn't actually participate in.

With stocks, you decide when to take your capital gain or loss when you sell. But funds must distribute substantially all of the net realized gains in their portfolios to investors each year, explains Brian Peer, co-portfolio manager at Novato, Calif.-based Hennessy Funds. See original story here.