When investing your money you’ll hear many different forms of opinion. Experts like Dave Ramsey will tell you to invest in growth stock mutual funds, others will say that index funds are the way to go. Then there is a group of investors that says you can beat the market by buying “undervalued” stocks.
The question that arises is, is there such a thing as an undervalued stock, and if so, is there a reliable way to take advantage of this “market inefficiency”.
Your investment philosophy in stocks is largely dependent on your opinion on what’s called the Efficient Market Theory (EMT). This theory states that markets are fully efficient. In other words any given price in the markets reflects the cumulative “wisdom” of all investors actings logically on fundamental data regarding value.
Essentially the market, according to this theory, is always acting completely logically based on the current information. So at any given point the market isn’t overvalued or undervalued – it’s priced at the fair equilibrium price given the current information available.
Some practitioners and theorists have brought up concerns with the theory stating that it doesn’t accurately reflect the actual results we see in the real world. For example, in the tech “bubble” of 2000, were investors acting completely logically on the market’s information or was there inefficiency?
Ultimately you’ll have to make your own determination. At the moment there isn’t unanimous agreement by the community.
Some of the best tax-advantages are provided by the government for retirement. For example just the 401K alone lets you put aside $19K per year into your employer-sponsored retirement plan. In addition you are allowed to contribute $6K (as of 2019) into an IRA. You can also open these accounts as a Roth account.
A Roth account, whether 401K or IRA allows your contributions to grow tax-free after you pay taxes upfront. This is in contrast to the traditional 401K and IRA which each are contributed to pre-tax but only grow tax-differed. Meaning, you aren’t taxed until you decide to take your money out.
But in addition to these two massive tax-advantaged accounts, you are also able to set aside an additional $3.5K into an HSA(Health Savings Account) account. The account is for the purposes of health expenses. However if you decide, say, when you’re 65 that your HSA is large enough and that you won’t need all of it, you can take out as much as you’d like for non-health purposes. The only catch is that the withdrawal is taxed.
So in essence your HSA can become a glorified IRA if you decide you don’t need it for medical expenses!
Each of these three options together amount to $28,500 a year. In order to take advantage of the full benefit you will need to earn about $85K to $95K in most states so that you can still pay your living expenses.
The bottom line: there are many options for tax-advanced money. It just comes down to making enough and budgeting wisely. So what do you think, is it possible for the average personal to maximize their contributions?
There is clearly no one investment strategy that works for everyone. Some buy index funds, others pick their own stocks. Still others buy investment property and a few buy bitcoin. There are many ways to get from point A to point B in the investment world.
Recently I’ve been exploring with the idea of creating an investment model that can predict for stock market bear markets. This investment model would tell me when to buy stocks and when to sell them.
Creating a portfolio model seems daunting. There are many factors that go into developing your thoughts, strategies and relationships between variables. Without properly grounding yourself one might begin to think that there are simple or easy ways to create a model that beats the market while reducing volatility and drawdown.
Believe me, if this were the case I would be reaping the benefits of the hundreds of hours I put into my own model over the last couple months. Even now I’m beginning to realize that it might not be that easy. For those who have experienced success like Ray Dalio, I’ve always wondered what kind of indicators, and inputs they use in their models.
What are your thoughts? Is creating an investment model too difficult or should I give it a try?
Dollar-Cost Averaging is the process of purchasing securities over an extended period of time with the same dollar amount each time. Lump Sum investing on the other hand, involves just putting all your money into the market at once.
For example if you’re wanting to invest $100,000 should you put it all in the market all at once or over a few months? Many people might suggest putting it in over a period of time. However my suggestion is that for most cases, the opposite is actually the wisest move. Let me explain.
If you were to run with the $100,000 example, a simple dollar cost average might look like putting $5,000 in the market for 20 months. The other scenario is just putting the $100,000 in right now.
In most cases putting everything in is a better move because on average, the market goes up most of the time. So if you dollar cost average, you’d, on average, be missing out on the growth by keeping your money out of the market.
In the smaller percentage of times that the market goes down directly following investment, then dollar-cost averaging can make sense. For example if the market has been Bullish for many years with PE ratios climbing, looking at dollar-cost averaging can make sense.
Before I finish, please click here to take a look at a blog page that covers many investment topics. He has a post from early this year that covers this topic concisely: Exploring Dollar Cost Averaging Verses Other Strategies
Thanks, hope you have a great day.
As interest rates have risen considerably over the last year or so, many people have come to wonder if saving now “makes sense”. The characteristic of saving as a give or take isn’t quite right because saving should always be a part of someone’s financial picture. Let me describe the reasons one would want to save and ways in which to go about doing this.
1. Emergency Fund
The emergency fund is one of the universally required parts of any financial plan. Without emergency reserves the risks of anything, whether a personal household or a business operation, increase exponentially.
Savings for an emergency fund need to be accessible at a moments notice. Keep them in either a bank account or money market account.
2. Short-term savings
Short term savings, for things like buying a house are usually best placed in a short-term CD or money market. For example if you know you want to purchase a home in three months or so, getting a three-month CD can make sense.
If the timeframe is less certain, stick with a money market or basic savings account.
3. Long-term savings
For savings intended for expenses that are further out in the future, your best bet is in either a CD, government note, or a combination of more riskier investments. For example if you’re saving up for a car in 3 years, it might make sense to put the whole thing in a CD.
However if you’re able to take a little more risk, you might consider putting 25% in an S&P 500 index, 25% in a short-term government bond index, 25% in a gold bullion ETF and 25% in a money market. These four together over the last forty years haven’t lost money over any 3-year period as long as their rebalanced annually. (However past returns doesn’t guarantee future performance.)
4. Other Savings Goals
Any other goals should be taken in a case-by-case basis. Talk with your financial advisor about any questions you have before making investing decisions that you aren’t sure about.