Will Investors Pardon These Turkeys?

Turkey 003

Turkey is welcome on most people’s plates this time of year — but a turkey in your portfolio? While the S&P 500 is up nearly 12% for the year so far, individual investors who have built balanced portfolios with low-cost index funds are likely in the black. But those who are betting on individual stocks might be dealing with a turkey (or two).

Who are these turkeys? One of the biggest losers individual investors who sync their accounts with SigFig so far this year has been General Motors (GM). The automaker has been struggling all year to contain the fallout from massive recalls of cars with faulty ignition switches, which were first announced in February. The average GM investor is sitting on unrealized losses of 34%, or roughly $7,500.

Other big losers for the year include some energy stocks. Oil prices have fallen significantly, and offshore drilling companies like Transocean (RIG) are scrapping some rigs. Investors in that stock have seen average losses of 29%, or just under $5,000 per investor. The other energy-sector turkeys on the list — Westport Innovations (WPRT) and LinnCo (LNCO) — have missed revenue targets this year, and have left investors with average losses of nearly 56% and 27%, respectively.

Falling commodity prices have also hurt metals and mining companies like Vale SA (VALE), an iron ore miner whose investors are sitting on losses of 31%, and Barrick Gold (ABX), whose investors have losses of just under 32%.

The marijuana industry is also well represented here. Investors in GrowLife (PHOT), Hemp Inc (HEMP), Cannabis Science Inc (CBIS), and Medical Marijuana Inc (MJNA) have lost between a quarter to three quarters of their original stakes. Fortunately, those initial stakes weren’t too big. Even the 75% loss suffered by GrowLife investors only comes to an average $1,300 per investor holding the stock.

It can be difficult for investors to let go of portfolio losers, particularly when selling means taking a substantial hit. And, of course, some of this year’s turkeys could be next year’s high flyers. But investors who are holding these losers do have at least one thing to be thankful for this holiday week: tax-loss harvesting. For some investors, selling out of a losing position can provide a tax break on the gains they realize elsewhere in their portfolios–some cold comfort to go with the cold turkey sandwiches we’ll be eating this weekend.

Methodology: To compile the list of top 10 stocks with largest unrealized losses, we analyzed anonymous and aggregated data from more than 750,000 users, filtering for stock holdings owned by at least 1500 investors. We then ranked them by realized and unrealized returns by percent change relative to cost basis, as well as dollar gains/losses.

Please note this research is for informational purposes and does not constitute an investment recommendation or advice.

Fail Whale? 66% of Twitter Investors are Underwater

Twitter’s (TWTR) first birthday as a public company was not a very happy one for investors. The stock closed at $40.31 on November 7: 10.6% lower than its opening price on IPO day and 45% off its 52-week peak, $73.31 on Dec 26, 2013.

Add to that the blow of a downgrade to “junk” rating from credit agency Standard & Poor’s and investors might be thinking if the company’s now iconic “fail whale” error image was oddly prophetic.

Still, TWTR’s rocky ride in the past 12 months means not all investors are nursing losses. Those who bought when the stock bottomed out at $30.51 on May 27, are now sitting on a 32.7% gain.

So how have TWTR investors really fared? SigFig has unique insight into this, as our portfolio tracker allows investors to sync their brokerage accounts, tracking more than $300 billion in total assets. Our findings were quite revealing:

1. Where are the ladies?

The vast majority of SigFig users who own TWTR — 88% — are male. In fact, TWTR is among the top male-dominated stocks among SigFig users: a finding consistent with a trend among male investors to prefer stocks (especially tech stocks), while female investors tend to gravitate towards mutual funds and healthcare stocks.

2. Do investors skew young – or old?

Twitter 001

Roughly 4% of all SigFig users hold TWTR in their portfolios and the distributions among age groups (split into 10-year segments) is fairly even. It’s most popular among investors in their 30s (4.5% of all users), but those in their 40s have bet the most on the company, with an average stake of $21,100.

So how are they all doing?

As of Nov. 17, 2014, 66% of all SigFig users who own TWTR were underwater, with a median loss of 7.3%.

IPO buyers have fared a little better. Nearly a third — 28.5% — of investors who bought on Nov 7, 2013, are still holding onto the stock, with an average weighted loss of 2.8%.

And for nearly one in ten TWTR investors – 9%, a fairly small, but not negligible subset – the stock represents an average 26% of their net worth. Single-stock concentration is not uncommon among investors, in fact, and exposes investors to unnecessary risk. Those investors are likely seeing some gut-wrenching ups and downs in their portfolios: a risk that can be improved by properly diversifying with a set of low-cost index funds or ETFs.

Why Most Investors Can’t Let Go of their Portfolios’ Biggest Losers

Do you own stocks that are down significantly since you bought them, but can’t bring yourself to sell?

Selling “loser” stocks can make sense, especially as we get close to the year’s end and those losses can offer a tax break on capital gains elsewhere in one’s portfolio. Yet, investors tend to do just the opposite: they sell portfolio winners and hang onto losers. That’s the consistent finding of nearly thirty years of research on the disposition effect, beginning with a 1985 paper by Hersh Shefrin and Meir Statman.

The disposition effect is a behavioral anomaly consistent with Prospect Theory, which suggests that the pain of losing a certain amount of money is greater than the pleasure of earning the same amount. And investors don’t consider their gain or loss “real” until they sell.

Maury McCoy, a financial consultant, has experienced the disposition effect and learned his lesson. “After a number of years of investing, one of the lessons I’ve learned is it is okay to take a loss and move on,” he says. “I’ve held three stocks to zero, which is a painful experience.”

So what the “biggest losers” in investors’ portfolios these days? According to data from our users – investors who sync their portfolios with SigFig, in third place is a once-hot tech startup whose performance fizzled fast and furious after a hyped-up IPO. Investors who own this stock – Zynga (ZNGA) – have, on average, a 30% unrealized loss (as of Oct 13, 2014). And the top two are, well, Growlife (PHOT), a “cultivation services provider,” and Medical Marijuana Inc (MJNA): two marijuana stocks that are far off their one-time highs.

Biggest Losers 003

So why are folks holding onto these stocks?

Some cop to the disposition effect, admitting that they don’t want to sell at a loss. Nathan Polak, a business analyst and MBA candidate, owns MJNA. “My logic was that as these and other markets opened to the marijuana industry, the stock would appreciate due to increased revenues,” he says. “I believe the term at the time was ‘Pot Fever,’ and I foolishly failed to do thorough research on this company.”

Now, he says he’s holding the stock “mainly to just see what happens.”

But some investors truly believe in the potential of a stock to recover. McCoy, who had experienced the pain of holding stocks that become worthless, now owns ZNGA — because he thinks the stock is worth more than its current price. “I see this stock as an option on Zynga potentially having a big winner in the mobile gaming or real money gaming space,” he says.

Christopher Soria, a retail banker, says he bought MJNA and PHOT because he believes “marijuana legalization is inevitable in the U.S. and this stock will benefit from it (or at least the hype).” He plans to sell if the federal government blocks the possibility of legalization definitively, but his current plan is to hold the shares until “something hypes them up, then sell on the hyperbolic rise, and buy back sometime later.”

Hold on or cut loose?

None of this means that these investors are wrong to hold onto their “loser” stocks. As we know from every teen comedy made ever, today’s losers can turn into tomorrow’s winners.

So how can investors decide when they’re being rational (“I want to hold onto this stock because I still believe in the company”) or irrational (“I want to hold onto this stock because I can’t accept pain of realizing the loss”)?

One way is to avoid individual stocks, period, and invest in a total market portfolio of ETFs or mutual funds. This approach won’t protect investors from overall market declines and financial panics, but the goal of passive investing is to protect people from the mistakes of trading too often and trying to time the market, not to mention single-stock concentration risk, which is far more common than you may think. And let’s face it: a low-cost total market portfolio does alleviate the worry about whether the company you’ve chosen is a star… or a stinker that’s about to go to pot.

Editor’s Note: This article was first published on Daily Finance earlier this week.

SigFig Launches Diversified Income Portfolio, with 4% Target Yield and Low Volatility

Generating investment income is a goal for many investors, especially for those in or approaching retirement. Unfortunately, most investors who seek income do a poor job of it. They are often poorly diversified (64% of income investors own three or fewer stocks*), or generate low yields by investing in cash and bonds, and almost always have US home-country bias.

With that in mind, the investment team at SigFig set out to create a well-diversified portfolio with a generous income stream while managing risk. Today, we are excited to unveil SigFig Diversified Income, a portfolio that is designed to target a 4% income yield by blending eight different income-generating ETFs. By diversifying across many asset classes and geographies, our Diversified Income portfolio provides 4% gross annualized yield** with half the volatility of the S&P 500.

Yield vs Risk 009

Unlike traditional wealth management firms who frequently have high minimums of $1 million or more and charge high fees of over 1%, the SigFig Diversified Income portfolio has a minimum investment requirement of $100,000 and management fees of 0.50% which include all trading commissions. And unlike bonds and CDs, which can be hard to sell before they mature or are subject to early withdrawal penalties, our Diversified Income portfolio can be sold at any time, for any reason.

At SigFig, our mission is to help investors improve their portfolios by balancing risk and return and minimizing fees. With this product, investors who seek income can do so at reduced volatility and at very low cost.

Want to know more? Click here to speak with a SigFig Investment Advisor, who will answer any questions you may have.

* Data is from investors who have synced their investment portfolios with SigFig who are 40+ years old with at least 30% of the portfolio in dividend stocks or AGG/BOND/TIP. Historical data to calculate yields and volatility are from Yahoo Finance and Google Finance.

** Target yield of 4% is net of underlying fund expense ratios and gross of management fees. Since its inception 5/31/2012, the Diversified Income portfolio has gross annualized yield of 4.3% and net annualized yield of 3.8%.

Additional disclosures: Target returns are based on model performance and do not represent actual client accounts. There are inherent limitations with model portfolios, such as the limited impact of market factors related to executing trades or liquidity, among other limitations. The target results are not an indicator of the returns a client would have realized or will realize in relying on the Diversified Income portfolio. Past performance is no guarantee of future return. All investments carry a degree of risk. For more information and disclosures, please visit https://www.sigfig.com/l/terms.

Funds are for Venus, Stocks are for Mars

Recently we took a look at how men and women behave differently as investors.

Overall, we found, women invest better (less trading, less playing around with individual stocks, and better performance), but the differences are small.

This week, we want to ask a related question: which securities are especially favored by male or female investors? Or, to put it in an a terrible but immediately comprehensible way, what are the “pinkest” and “bluest” securities — stocks, mutual funds, and ETFs — among SigFig users? And if it turns out men invest in car companies and women invest in cosmetics firms, how much trouble are we going to get into for pointing this out?

Luckily for us, it didn’t turn out that way at all. We found evidence that men and women do favor somewhat different types of securities, but the trend only matched one popular stereotype.

gender 001b

The pink and the blue

First, a quick explanation of how we determined which securities are “blue” and which ones are “pink.”

Most SigFig users – about 80% – are men. So on average, each security in our dataset is owned 80% by men and 20% by women. Any security whose ownership is more than 20% female goes on the “female-favored” list.

We found 18 securities that passed this test. They showed a mild bias toward health care investments (Vanguard Health Care fund, Pfizer, AbbVie, and Fidelity Select Biotechnology Portfolio). Overall, the female-favored securities break down as follows:

Index funds and ETFs: 7
Active mutual funds: 6
Individual stocks: 5

For comparison, we also looked at the most male-dominated securities. Here we see a lot of big-name individual stocks, including Alibaba, Twitter, Tesla, Coke, Microsoft, and Ford. The breakdown goes like this:

Index funds and ETFs: 7
Active mutual funds: 0
Individual stocks: 11

What’s going on?

We should be careful about drawing too many conclusions from this data. It’s based on a particular point in time, and the favorite holdings may already have shifted. And few of these securities show a large male or female bias. Everything we’re calling a “trend” could be a statistical artifact.

But let’s ask the question anyway: why do men tend to favor individual stocks? It could be because they believe they can pick and trade them profitably, but it might also be because men (particularly men who use an online investing tool) are more likely to work at startups, tech firms, and other companies that pay them in stock. Twitter, for example, employs 70% men. Microsoft? 71%.

We also found evidence that men are more likely to hold an account at a trading-oriented discount brokerage (such as Scottrade or TradeKing) and women are more likely to have an account at a mutual fund giant like Fidelity or Vanguard.

The takeaway

Women are more likely to hold active mutual funds and health care investments; men are more likely to hold ETFs and individual stocks—especially tech stocks. But the differences aren’t huge. And, as usual, we only know what we see among investors who use SigFig to track their portfolios. They may not be representative of investors as a whole.