All posts by InvestmentPathfinder

About InvestmentPathfinder

19-year-old college student. Knowledgeable about Personal Finance, love to read, and enjoys waking up early.

Are Commodities A Good Investment?

When it comes to discussing investment options, commodities often pop up as something that is seen as a gamble. But are commodities actually a viable investment?

Commodities

There are a few basic kinds of commodities. There are metals like gold and silver. There are gas-type resources like oil and gasoline. There are animals like cattle and pigs. And then there’s also grown commodities like wheat and corn.

Commodities as an Investment

Not only are there many forms of commodities, there are also different ways of investing in them, take gold for example. If you were interested in investing in gold, you would have a few options to consider. The simplest route would to buy a gold bullion ETF, but you could also purchase gold bars and physically store them, or you could even buy gold jewelry and other gold-based products.

Generally as a whole, commodities are simply a resource used in the means of production, that is valued based on simple supply and demand. By very nature, the price of various commodities aren’t specifically predicable because of the way in which commodities are traded. Just like stock prices can’t be determined on a short-term basis, commodities are very volatile even in long periods of time.

However, this brings us back to our original question, should one invest in commodities? First off, I wouldn’t consider commodities a real investment because resources, just by themselves, aren’t growing enterprises that produce cashflow or even profit. So if one is going to discuss “investing” in these, let’s call it what it is: speculating.

My option speculation is that speculation as a whole is generally a bad idea for long-term investing. However if one considers the prices of certain commodities there are predicable supply-demand patterns that arise. Gold for example, has done considerably well in times of economic panic.

Overall, commodities aren’t a wise “investment” choice for the majority of investors. However as part of a broad portfolio, it might not be bad to put a 5% or 10% stake in gold as a hedge against economic disaster. Ultimately the choice depends on the individual.

Inflation Force: Is the U.S. Economy Turning to the “Dark Side”?

Often the anticipation of rising levels of inflation is met with a negative connotation. “How can the general rise of prices ever be good?” people ask.  We tend to view inflation as a negative force, or even as a predictor for economic disaster. This is especially easy to understand because the last decade has had relatively low inflation. It’s been years since inflation has gone over 3% for sustained periods and concerns are starting to rise; what does this mean for our lives?

Inflation

What is inflation? Inflation, as Google defines it, is “a general increase in prices and fall in the purchasing value of money.” As the Federal Reserve takes actions like quantitative easing (essentially making more money) and raising rates, this produces an overall increase in the rate of inflation.

As a result the cost of rent, food, gas and common household goods generally rises. Isn’t this all bad? Yes from one perspective it is. It’s easy to see how an increase in broccoli or fuel prices hurts the single mom who is struggling or the family trying to save up for that family vacation.

Almost everywhere in the economy, costs rise as a result of inflation. But there is another side to this. When prices of goods rise, what does this mean for businesses? Well, business are usually the entities who sell the goods and therefore they usually “profit” from rising prices. However this increase in dollar profit doesn’t necessarily translate to a net increase after adjusting for inflation.

What this means though, is that businesses profits generally, at the very least, increase with inflation. What this does do is cause stock prices to naturally rise as earning and assets raise in price to match the inflation. So stocks, naturally are a built in inflation hedge because over long periods of time they usually increase, at a bare minimum, with the rate of inflation.

This truth of rising inflation is partially an inevitable inconvenience or problem for consumers but it is a completely normal and in some ways beneficial aspect of business development. To take advantage of it one must own a business though.

There are many more ways that inflation is impacted and has impact. But what I want you to get out of this is that inflation is actually a good thing for equity investors. Investing in stocks is not only a great move before adjusting for inflation, but after inflation it becomes a beautiful hedge against the “evils” of this powerful economic force.

Fundamental Vs Technical Analysis

When it comes to picking specific stocks for investment, there are two ways to analyze them. The first is Fundamental Analysis.

Fundamental analysis the process of examining a company’s “fundamentals”. This means you look into their balance sheet, their income statement and the statement of cashflows. You look at the concrete facts about the company.

Ask questions like, is this business profitable? Do the facts suggest it will increase profitability in the next few years?

What kinds of debts (short-term and long-term) does this business have? Will it be able to pay them?

What weaknesses are there to this business and its market that could challenge its position? What are its strengths?

The second type of analysis is Technical Analysis. This involves projecting the stock price based on the trends. You look at the 50 day moving average, and even the 200-moving average. This is more of a charts and trends-based analytical process.

Overall, for long-term investors, fundamental analysis is the way to go. Not only does Fundamental analysis involve more logical and foundational decision-making, it is also the strategy used by some of the best investors in the world like Warren Buffet. Overall, if you’ll wondering which strategy is best, consider your purpose for investing.

Active Mutual Funds Vs Index Funds: Which is Better?

Mutual Funds

A mutual fund is basically an amount of money that is “mutually funded” by a large amount of people. This money is managed by fund managers who require a percentage fee for their labor. The managers invest in securities and as the value of the investments rise or fall, so the equity of the shareholders in the fund rise and fall.

So if you purchased one $1 share of a $100 fund then you own 1% of the overall value of the fund. If the management’s investments of the fund raise the value to $110 then you just made 10% and your share is now worth $1.10.

This is a very simple overview. Clearly the details are much more complex. For example the management fees, taxes and dividends change the return dynamic. But in terms of understanding the basics of mutuals funds, this does the job.

1. Active Mutual Funds

An active mutual fund is one in which the manger(s) work to select the best security investments they think will produce the best returns. They usually charge a higher management fee because of the perceived value and expertise they provide.

2. Index Funds

The alternative is to have a fund set up in a way that involves very little research and work on the part of the management. “But why wouldn’t you want to take of advantage of the manager’s expertise?” you might ask. The answer comes down to two variables: Cost and performance.

Not only do active mangers usually charge higher fees (cost) but they often don’t actually invest in a way that outperforms the market(performance). So the alternative that involves lower cost is called “index investing”.

An index is essentially a set of stocks that meet certain requirements or have certain common characteristics to one another. For example the most popular index, the Standard and Poor’s 500. It’s an index that takes the 500 largest US stocks on the market.

What this means for index investing is that an S&P 500 Index Fund would be managed in a way to match the S&P 500 index. In other words, the mangers would simply try to buy and sell stocks to keep their investments in line with the 500 largest companies on the market. That’s how they can keep their management fees so low – they don’t have a ton of research to do.

Index Options

But there are other indices. S&P 500 is the most popular but there are others like the Dow Jones Industrial Average (DJIA), which is 30 massive companies weighted according to price. The DJIA is the oldest index.

The following are some others that you might like to consider:

The Nasdaq Composite Index

The Nasdaq is actually a stock exchange that predominantly trades technology companies. The index seeks to perform according to the stocks on the exchange.

The Russell 2000

Of the 3000 largest companies in the Russell 3000 (another index), the Russell trades the bottom 2000. Thus, this fund trades mostly smaller to middle size companies.

There are many, many more you can look up on your own. The bottom line is that for most cases index funds provide the better choice.

Stock Market Sectors: Is This a Wise Investment Move?

There are some investment advisors who scare away from the idea of sector investing. However, with adequate research, one might find that certain areas of the overall market tend to outperform others in various economic seasons. But is the risk of overexposing ones’ self to sectors worth it?

Before I answer this question I’d like to list the 11 major stock sectors:

1. Industrials

2. Real Estate

3. Consumer Discretionary

4. Consumer Staples

5. Healthcare

6. Financials

7. Tech/IT

8. Telecommunication

9. Utilities

10. Materials

11. Energy

Before someone considers investing in specific sectors, they must recognize that over time there are periods and seasons in which one sector performs better than others. Some of the worst sectors to own in bear markets is Technology stocks like Google, FaceBook, Apple, Amazon and Microsoft. However as times get better, this sector usually outperforms the rest of the market.

My recommendation is to not invest in specific sectors and sector funds unless you are comfortable risking a significant portion of your portfolio. If you do decide to invest in sectors, pick one that is both posed to do well over the next few months as well as the next decade. You want both the fundamental and technical analysis working in your favor. Overall, stock sectors can be a very lucrative strategy for investing.

Different Stock Investing Strategies

I am going to briefly cover the top most widely used “investment” strategies for stocks. Technically not all of these methods are investing because a few of them involve short term trading.

1. Stock Index Mutual Funds

There are many types of indexes. Indexes are essentially a predetermined basket of stocks that are formulated using a set of rules. For example the most widely used index, the S&P 500, is an index that incorporates the 500 largest companies in the US and weighs them in the index accordingly. There are other indexes such as small-cap indexes or tech stock indexes. The bottom line is that with an index you are purchasing a tiny portion of a large basket of US stocks that is going to reflect your sector of choice.

2. Actively Managed Mutual Funds

Actively managed indexed funds are very similar to indexes except for 1 key difference: They aren’t bound by a predetermined set of guidelines. For example an active mutual fund might have a focus on large-cap stocks or international stocks, yet there aren’t any rules on how much of each of these have to be purchased. This is different from an index where the predetermined weight of each stock is set in stone. Out of this difference comes an increase in management fees because of the funds active, and therefore more costly management structure.

3. Value Investing

This is the method used by the smartest and most successful investors (in my opinion). Warren Buffet is the most famous example of this. Value investing involves determining a company’s value (regardless of current perceived value) by looking at a balance sheet and income statements using fundamental analysis. As the investor sees a price drop well below it’s determined real value the value investor can seize up good deals and hold on for the long-term.

4. Day Trading

This is a common strategy by short-term investors who use primarily technical analysis (looking at charts and trends) to make “investing” decisions about which stocks to buy and then sell quickly for a profit. The risky thing about this is that if you accidentally buy a stock or ETF that suddenly drops in price, you could get stuck with a plummeting investment that was truly overvalued.

5. Random Strategy

This strategy is specifically for people who don’t know what they’re doing and don’t even pretend to try to act like it. They randomly purchase stocks that “sound cool” and then hope that they rise in price. By far this is the stupidest strategy just behind day trading. You can lose your shirt much easier with mindless/random investing or day trading than you can with the other strategies I outlined above.

Conclusion:

Whatever you do, please don’t choose route 5, and preferably strategy 4 as well. Not only is day trading risky and the fees expensive, it has also be statistically been proven to outperform traditional investing methods over the long-term.

6 Types of Financial Institutions and Which are Important

The following is a list of institutions that are useful to understand when dealing with money on a regular basis.

1. Conventional Bank (Retail, Commercial and Online Banks)

These are financial institutions that take up the task of performing regular financial functions for both businesses and individuals. The provide services like setting up savings and credit accounts, issuing credit cards, certificates of deposit, mortgages and taking deposits.

2. Credit Unions

These do practically the same thing as conventional banks yet are geared towards a specific group of people. For example a military credit union would be geared towards veterans or active members of the armed services.

3. Insurance Institutions

These companies provide wide rages of insurance intended to decrease the chance of loss. When you go to get car insurance this is where you go.

4. Brokerage Firms

These companies administrate the investing process. Whether someone is investing in bonds, stocks, mutual funds or ETF’s this subset of financial groups likes to help the individual or business execute their purchase of securities.

5. Investment Firms

These Banks or Companies are funded by issuing shares. These funds are mutually owned (thus the name mutual fund) and are usually invested in stocks, bonds and other securities.

6. Mortgage Firms

Generally these companies are geared towards individual mortgage seekers but there are some that specialize in commercial properties. These companies either fund or originate loans and mortgages.

Each of these institutions has their place in the financial world. See where you can recognize them in your daily or monthly financial activities.

Lending Investments: Are They Worth It?

When it comes to investing money for retirement two of the most common investments are stocks and bonds. Today I want to focus on the latter.

When it comes to investing in debt investing there are a few main types which I will briefly mention:

1. Corporate Bonds

These are a form of debt security that is issued by a corporation. Because they aren’t backed by the government, there is a higher risk and therefore higher yield associated with this kind of loan. There are many forms of this kind of bond.

2. Government Bonds

These can refer to Treasury Bills (T-Bills) which are debt securities lasting less than a year, Treasury Notes (T-Notes) which are debt securities lasting between 1 and 10 years or Treasury Bonds which are debt securities lasting more than 10 years. In addition there are also something called Treasury Inflation Protected Securities (TIPS) which involve lending money to the government in return for small payments and ultimately principal that is indexed to inflation.

Under this category I will also place Government agency bonds. These are bonds that are issued by Government Sponsored Enterprises (GSE’s) and/or Federal Government Agencies.

Bonds issued by GSE’s usually have the following characteristics: 1) A small return that is slightly higher than treasuries because 2) they have credit/default risk. Examples of Government Sponsored Enterprises: Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal Home Loan Mortgage Corporation (Fannie Mae).

The second kind of agency bonds, which are issued by Federal Agencies have the following characteristics: 1) less liquidity and therefore 2) slightly higher yields than treasuries but 3) are backed by the full faith and credit of the United States. Examples of government agencies: Small Business Administration, Federal Housing Administration and Government National Mortgage Association.

3. Municipal Bonds

Municipal bonds are debt securities issued by states, cities, counties and smaller government entities. There are two types, General Obligation Bonds (Bonds issued by small local governments that are backed by their full faith and credit), and Revenue Bonds (Bonds backed by specific revenue sources like tolls). These will always have yields higher than government bonds because of the slightly higher risk.

4. Bank Debt Assets (mortgage-backed, asset-backed and collateralized debt obligations)

This is a type of asset-backed security that is secured by a mortgage or collection of mortgages. It can get complicated to explain but for now you just need to know that banks and financial institutions usually own these.

5. Peer-to-Peer Lending

This is by far the most recent debt invention. Peer-to-Peer lending refers to a means by which individuals give and borrow money to each other usually over the internet to produced higher returns than can be given by other bonds or get a loan they otherwise couldn’t get.

Conclusion:

So should you invest in lending investments, and if show which ones? The answer really depends on your goals, risk profile, capacity for risk and the options available to you. Talk to your finical advisor about this or refer to one of my upcoming posts on the subject of asset allocation.

Inflation: What it is and How to Use It

Inflation has essentially been around since currency was created. But what is it? The Marriam Webster dictionary defines inflation as:

“a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services”. That’s nice to know but how does this effect us in our daily lives?

Well the “rise in the general price level” can mean things like groceries, fast-food, restaurants, as well as other things like insurance, utilities and housing (both for buyers and renters).

With this cost increase usually happening year over year, what are some things we can do to minimize this?

Well the first big thing is planning. If you are considering retirement in a decade, realize that the cost to live then will be higher than the cost to live now. Do a rough calculation on the average rate of inflation (roughly 3.5%). Over ten years the cost of everything will most likely rise 41%!

After understanding the impact of inflation and incorporating it into your estimated retirement costs, it’s time to talk about investing. The best types of investments for inflationary periods are stocks and real estate. The reason for this is because stocks’ value (in the long-term)is based on the earnings of the company and earnings generally go up with inflation. So off the bat you have a built in inflation protector.

The second ideal investment, real estate, is a little more complicated to invest in. A common “investment” people choose to make is in their home. While it is certainly the case that homes usually go up in value, the decision isn’t a clearcut one. (Check out my blog on the rent vs buy debate)

Another way to invest in real estate is to buy rentals. This is more hands on and therefore takes more time and energy. If you are comfortable with this then by all means go forth and invest! However a lot of people find the intensive commitment inherent in this type of real estate investing too much to handle.

If this is the case with you you can consider another options, REIT’s. Real Estate Investment Trusts, or REIT’s as they are called, involve the investment of large groups who buy large quantities of real estate. The earnings and appreciation from this real estate is owned through a large quantity of shareholders who buy part of the ownership, like a stock.

While this is certainly an option, I find REIT’s to be remarkably unimpressive long-term compared to stocks or direct real estate investments.

Whichever path you choose to take, be wary of the inflation hurdles and the best ways to overcome them.

Combining Your Passion and Values With Income

Often when students or even middle-aged employees are considering which career path to choose they run into a dilemma. “Should I choose a greater income or sacrifice money to do the things I love?” many ask themselves. Even as a college student I have met and spoken with many older folks who find themselves still in a situation of questions.

Countless people go through their life without truly finding something that is both enjoyable and lucrative (or at least enough to pay the bills). Most people have heard of the classic situation of an artist or writer who lives in their parents basement. But what about the countless others out there who are in similar, yet less extreme situations?

Teachers a good example of this. Many of them make just enough to pay the bills, yet work long hours and stressful lives. Assuming they are doing something they enjoy (which I believe many of them are), how do teachers continue to do what they love while keeping the financial strain at a minimum?

There’s no easy answer to this question. I’m going to simplify a process I have used in my own life (before even exiting college) that has allowed me to understand myself better going into my “working years”. If your financial situation isn’t stable, you may have to work a J-O-B while you get these questions figured out.

1. What do you value?

Ask yourself, if you had only 24 hours to live, what people, places and activities would you care about? What would make your last 24 hours feel “full”? The answer to this can be revealing. As soon as you have grasped the things that matter most to you, begin looking at the things you want to pursue that match those values….

2. What do you love to do?

Everyone likes to do something. Maybe you love math. Or maybe writing or reading are your favorite. Or maybe science has always been a blast. There are numbers things you could find enjoyable. Find some of the top things and list them.

3. What are you good at?

This can be hard to know just looking at yourself. It may take honest questions with people who know you well to pinpoint what you’re good at. Maybe you are a eloquent or articulate writer. Or maybe you can organize things efficiently and effectively. Or maybe you are a natural leader. Or maybe you always have found analyzing numbers and facts easy. Whatever thing(s) you find stand out, those are some things you should double down on.

With these three questions answered you now have set the parameters. Your values dictate where you will never work. For example if you value family, your probably won’t work for a drug gang that breaks up families. Or if you value moral integrity, you probably won’t become a jail robber, even if your greatest skill is stealth and deception.

With values as your parameter, your passions are the arrow, pointing you towards a career field. Lastly your abilities and talents are the final part of the puzzle in determining what position best suites you.

For example what if you value family. You’re also highly interested in personal finance. As you become interested in the subject, you realize that you’re best at analyzing data and making good decisions. Upon looking at these three angles you will determine that becoming a personal financial planner suites you best!

I used the example of myself but you can use these questions for any situation or interest. Overall, these questions are simple, but they may take time to answer completely. And as if often the case, they may lead somewhere that doesn’t pay well. In that case you can either work somewhere on the side, take a pay cut or continue looking for that thing that is both fulfilling and pays the bills. Good luck in your journey!