On Monday, August 24 many ETFs failed to work properly during the market meltdown. One fell 32% yet its individual stock components only fell by 9%. The problem was that ETFs have market makers who refused to step in and facilitate a price for an ETF that closely tracked the Net Asset Value of the ETF’s components. ETFs are supposed to have market makers who buy the components and put together a new share of ETFs if the components are too cheap compared to the ETF. They are also supposed to work in reverse if ETFs are too low in relation to the underlying asset inside them. The problem affected investors who placed stop loss orders which resulted
Some rental real estate in poor quality old properties yields 12% or about 8% net after paying operating expenses (ignoring depreciation). Should you buy that instead of bonds to get a decent yield? The median U.S. housing price to rent ratio is 11.3 per Zillow. This is a gross yield of 8.8% if you bought a house and rented it out. Assuming that 25% of rent was spent on expenses and there was no mortgage then your net income would be 6.6%, ignoring depreciation and non-recurring costs to sell the home. Since depreciation is real then it should not be ignored. Assuming one holds rental real estate for a long time then the true cost of depreciation will catch
When stocks crash 50% as they did in 2002 and 2008 (NASDAQ crashed 78% from 2000-2002) people need some way to deal with their emotional needs. People may be tempted to assume that if the price was rising for several years without a correction that therefor the recent high water mark is somehow a benchmark of intrinsic value. Thus when the market crashes 50% people will be deeply unhappy. To deal with this consider the philosophy of psychologist Albert Ellis where he advised that people need to avoid setting their expectations at an artificially high point and to avoid believing that they are “entitled” to a good outcome. Thus if you were expecting X result but
Today’s crash has resulted in the XLE oil index dropping as low as it was nine years ago. It dropped 40% since the June 1, 2014 peak. One could have done just as well in terms of total return if they had owned the Barclays/Lehman Aggregate bond index and they could have avoided the stress of owning a volatile asset. They could have had similar price return results with a Barclay’s national Muni bond index (although you can't invest directly in an index) and gotten better after-tax yield thus getting a better total return of about 19% higher total return over nine years (if gross up the tax-free yield to approximate the taxable equivalent. This depends on one’s hypothetical
Stocks crashed this week with the risk measuring VIX volatility index up 46% today. It doubled this week which is the biggest change ever for this. VIX went up 97% over 21 day moving average which happened only in July, 2011 budget crisis and 2010 Flash Crash. VIX had the highest increase over a 10 day average ever at 80%.
Typically stocks only crash during a recession and the economy still has a lot of positive signs including a reasonable 2.5% GDP for several years, low and dropping unemployment, rising homeownership, etc. Thus based on typically cyclical patterns something like a recession has to happen in order to justify and cause a stock market crash. Since most people doubt that a recession will soon happen then they mistakenly think stocks can’t crash. However this time may be different. Today’s stock prices are far above reasonable PE ratios and other similar metrics. Stocks are high priced because of Quantitative Easing, the myth of the Central Bank put option, and low interest rates and not because of fundamental reasons. Investors