P2JW188000-0-R00100-1--------XA CMYK Composite CL,CN,CX,DL,DM,DX,EE,EU,FL,HO,KC,MW,NC,NE,NY,PH,PN,RM,SA,SC,SL,SW,TU,WB,WE BG,BM,BP,CC,CH,CK,CP,CT,DN,DR,FW,HL,HW,KS,LA,LG,LK,MI,ML,NM,PA,PI,PV,TD,TS,UT,WO JOURNAL REPORT | A QUARTERLY ANALYSIS Follo The E w xper ts A Convn Online ersat D ET A I LS ion THE WALL STREET JOURNAL. © 2014 Dow Jones & Company. All Rights Reserved. Monday, July 7, 2014 | R1 INSIDE , R2 As Stock Prices Keep Rising, Should Investors Move to Cash? INTERVIEW Fund Manager: ‘Stupid’ Now, Smart Later? Eric Cinnamond isn’t afraid to pile up cash when he considers stocks pricey R2 FUND FIEND Fewer Shocks From Leveraged ETFs In a calm market, they perform about as expected R2 NEED TO KNOW Tap an IRA Early Without a Tax Penalty Taking dollars out of the market has hurt returns lately, but proponents say playing it safe will pay off Strategies to use if you must withdraw cash before age 59½ R5 WINNERS’ CIRCLE They’re the Millers BY MICHAEL A. POLLOCK EXCHANGE-TRADED FUNDS Richard Borge Momentum Investing Has Lost Its Mojo Lately, Cash Has Been Costly These U.S.-stock funds with the highest cash stakes all rank in the bottom 5% of their categories for performance over the 12 months through June. NAME | TICKER MORNINGSTAR CATEGORY Aston/River Road Independent Value | ARIVX Small value 71.2% $715 Intrepid Small Cap | ICMAX Small value 70.5% $686 Gabelli ABC | GABCX Midcap growth Cook & Bynum Fund | COBYX Large blend 42.6% $143 Gabelli Enterprise Mergers & Acquisitions | EMAAX Midcap blend 42.5% $269 Average U.S.-stock fund Note: Excludes funds with assets below $100 million Stephen Savage Big Numbers Resonate It isn’t that people are lazy or irrational, says Gerd Gigerenzer, managing director of the Max Planck Institute for Human Development and director of the Harding Center for Risk Literacy in Berlin. It’s that over the course of human history, people have typically encountered sta- Composite TWO FAMILIAR figures are duking it out in a battle for fund investors’ attention and comprehension. On the one side: the percentage. On the other, the plain dollar amount. Investment-related information is often given in percentage terms—both in documents and in conversations between financial planners and clients. A percentage makes returns comprehensible to investors at all levels—whether they have $5,000 or $500,000 at stake— and allows them to more easily compare funds. The problem is, percentages don’t seem like real money to many people. In particular, some experts worry that investors don’t fully grasp the magnitude of risks and expenses when they see them in percentage form. “You can tell me a percentage and it just doesn’t mean a thing,” says Ron Bennett, a 52year-old technology manager in Silicon Valley who started investing in earnest in 2006. While he can do the math to calculate how much a percentage means for his portfolio, “dollars always matter more,” he says. tistical information in ways they can count (say, seven instances out of 10), rather than contemplate in the abstract (as in 70%). People make better statistical projections, he says, when information is presented in concrete ways they can understand, such as a dollar amount. George Papadopoulos, a wealth manager in Novi, Mich., says he used to ask new clients about their risk tolerance as a percentage. Recently, though, he has started asking about the maximum dollar amount they could stand to lose. He says this makes clients think in “more real terms” and set healthy investment expectations. Percentages can lead investors to think fees are smaller than they actually are because of a concept called the “absolute magnitude effect,” says Barbara Roper, director of investor protection at the Consumer Federation of America. Tell consumers the fee for a $100,000 investment is 1%, and they won’t think it’s very high, she says. But say the fee for that $100,000 investment is $1,000, and they will think it’s much higher, even though the dollars involved are the same, she says. It’s simply that 1,000 is a much bigger number than one. “So if you want the investor to be sensitive to costs, you have to report them in the bigger dollar amounts—not the little percentages,” Ms. Roper says. The Securities and Exchange Commission has long required that funds disclose fees in dollar amounts as well as percentages in their prospectuses. And since ASSETS (mil.) $1,319 66.7% 3.3% Sources: Morningstar Percentages vs. Dollars: Victory Goes to the Clearest BY CHARLIE WELLS CASH AS PERCENTAGE OF ASSETS 2004, the SEC has required similar information in mutual-fund shareholder reports. These fee estimations are based on hypothetical amounts of $10,000 in prospectuses and $1,000 in shareholder reports. If it were up to Christine Benz, director of personal finance at researcher Morningstar Inc., investors would be told the dollar amount that went to fees annually based on their balance. Ms. Roper would like investors to get dollar-denominated fee information in a new pointof-sale disclosure document. Over the years, regulators have debated requiring such disclosures, but Ms. Roper says the debate has lost traction due to the SEC’s many other priorities. The Wall Street Journal ETFs offer varied ways to play hot stocks R9 Alternative Energy Gets a Second Wind Funds have posted big gains after years of losses R9 MIXING IT UP Small Stocks Could Be Getting Too Cocky Valuations are getting stretched, this financial adviser says R10 THE EXPERTS Insights From Online Excerpts from The Experts R10 VOO Vanguard S&P 500 ETF A low-cost way to give your clients access to 500 U.S. powerhouses. The Percentage’s Case All of this doesn’t mean that percentages aren’t important. Aaron Hunter, a 30-year-old political consultant in Chicago, prefers percentages in part because they make it easy to compare funds. He also thinks hearing about big potential gains or losses in dollars might make him greedy or fearful in the short term. Adam Nash, chief executive of online portfolio-management service Wealthfront Inc., says it’s easier for people to understand asset allocation in percentage terms, but presentation is critical. Because percentages can be abstract, Wealthfront uses an interactive tool that shows percentages as slices of a pie, allowing consumers to manipulate the percentages to get a feel for their portfolios. Still, absolute investment figures are helpful, too, he says. Wealthfront used to show users an estimation of their savings from certain tax-related trading strategies as a percentage. But it found that people prefer seeing a concrete figure showing how much they might stand to save. Now, this amount is shown on the site’s main dashboard, in a big dollar figure. Mr. Wells is a news editor for The Wall Street Journal in New York. Email him at [email protected]. Online>> Listen to a podcast with Mr. Wells at WSJ.com. Are you Vanguarding® your clients’ portfolios? The Vanguard S&P 500 ETF seeks to track the largest U.S. companies from America’s top industries. It’s a low-cost option available from the industry’s low-cost leader for over 35 years — Vanguard.* Find more cost-conscious choices at advisors.vanguard.com/VOOETF today. 800 376-9161 All investing is subject to risk, including the possible loss of the money you invest. Vanguard ETF Shares are not redeemable with the issuing Fund other than in Creation Unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor will incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling. For more information about Vanguard ETF Shares, visit advisors.vanguard.com/VOOETF, call 800 376-9161, or contact your broker to obtain a prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing. *Source: Morningstar as of 03/03/2014. Based on 2014 industry average expense ratio for S&P 500 Index Objective Fund ETFs of 0.08% and Vanguard S&P 500 ETF expense ratio of 0.05%. S&P® and S&P 500®, are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and have been licensed for use by S&P Dow Jones Indices LLC and its affiliates and sublicensed for certain purposes by Vanguard. The S&P 500 index is a product of S&P Dow Jones Indices LLC and has been licensed for use by Vanguard. Vanguard S&P 500 ETF is not sponsored, endorsed, sold, or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates, and none of S&P Dow Jones Indices LLC, Dow Jones, S&P, nor their respective affiliates makes any representation regarding the advisability of investing in such product(s). © 2014 The Vanguard Group, Inc. All rights reserved. U.S. Patent Nos. 6,879,964; 7,337,138; 7,720,749; 7,925,573; 8,090,646; and 8,417,623. Vanguard Marketing Corporation, Distributor. Follow us @Vanguard_FA for important insights, news, and education. P2JW188000-0-R00100-1--------XA AS STOCK INDEXES hit record highs, nervous investors increasingly face a difficult choice: Do they keep betting as heavily on the markets, or do they move more money into cash? The answer isn’t so simple. Cutting exposure with the aim of putting cash back to work when valuations drop can be soothing at first, but maddening if stocks continue climbing. What’s more, many nonprofessionals don’t have the expertise to accurately gauge valuations. And there is a fine line between adjusting exposure based on valuations and timing the market, which few individual or professional investors have done successfully. Eric Cinnamond of Aston/River Road Independent Value is among a small group of mutual-fund managers who are comfortable letting cash pile up in their portfolios. He believes small stocks are “outrageously expensive” and have significant risk. But his fund’s huge amount of cash—around 70% of assets recently—is earning almost nothing, hurting performance as markets move higher. Please turn to the next page Catalyst’s David Miller and Legg Mason’s Bill Miller (no relation) finish No. 1 and No. 2 in our ranking R7 MAGENTA BLACK CYAN YELLOW