Tag Archives: Google

Does Active Management Have a Place in the Modern Investment Portfolio?

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As index funds have become more and more popular a rising question has been, does active management still make sense for the average investor? Answer is of course not simple enough for a yes or no answer. However there are a few pros and cons we can look at for the two options. First let’s look at the advantages of passive management:

1) Relative autonomy 

Time is often saved from having passive investments. While of course there is initial research that goes into selecting the underlying ETF’s or mutual funds, once set up your strategy you will have relatively low time costs going forward.

2) Lower expenses

With passive management comes low expenses. Over the long term expenses can eat into  a large portion of your returns so paying close attention to this is crucial.

3) Lower taxes

Active management usually means less trading and less trading means both less transaction costs and less capital gains tax. Both of these add up in the long term.

Now that we’ve covered a few of the pros of passive management let’s dive into some of the pros of the alternative…

1) Potential for greater returns

By definition a passive manager can’t meaningfully beat their respective benchmark. However with active management everything changes. There is also ways a chance for outperformance. Of course the flip side of this double-edged sword is that you can underperform, which is often the case.

2) Lower volatility

Depending on the management style you are able to experience lower volatility in your investments from active management.

So which should you choose? After everything is said and done the thing that matters the most is your returns relative to the corresponding benchmark index. For example if you’re comparing a large-cap active fund verses and S&P 500 index fund.

Once you’ve selected your funds for comparison you need to determine if a) your fund has outperformed the benchmark in the past enough to cover expenses and additional active costs and b) will the fund continue to perform this way or better in the future.

If you can answer yes for both of these questions you may have a great candidate for an active portion of your portfolio.

The last option you have available is to execute the active management your self. This is a whole different story that deserves it’s own separate discussion for a different post. For the time being focus on comparing returns both pasts and potential for the future.

How I Wrote a Book in One Summer – and How You can Too

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Most of us see writing a book as a daunting project – one that could take months, if not years to complete. But it doesn’t have to be this difficult. I began my summer in 2018 with the idea of producing a manuscript that was both clear and comprehensive. And that’s what I was able to do.

I didn’t complete this task out of sheer discipline. In fact I put very little upfront effort into completing the first draft. How?

I all begins with habits. I made a point to start the summer with a new routine. Each morning I would produced about a 500 word chunk that could be added to one of my chapters. As time progressed throughout the summer I began to enjoy the process of writing each morning.

As writing became a daily habit my confidence began to grow. I went from a 10,000 word manuscript to a 25,000 word manuscript to a 40,000 word manuscript. And before I knew it I had completed the first draft of my book.

To be frank I didn’t finish editing the book until the end of the year. What I really did last summer, which I find to be the most difficult part of writing a book, is complete a first draft on little disciplinary effort.

My book, which just came out this January, proves to anyone, including those who hate writing, that book creation doesn’t have to be as tedious as we once thought. The key to success is to start and make writing part of your daily routine.

Getting from Guam to Indonesia – Why Investment Philosophy Matters

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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?

Meeting A Different Donald: Real Estate and Ways to Invest

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Most people, if not almost everyone, has heard of Donald Trump. As the 45th president of the United States, he has been a real estate developer and the previous host of the Apprentice show.

But have you heard of Donald Bren? He grew up as the son of two relatively successful parents. His father was a movie producer and real estate developer like him. His mother was a civic leader. After majoring in Economics and Business a the University of Washington, Bren attempted at Skiing in the Olympics but had to quit due to an injury. In addition, Bren became an Officer in the U.S. marine Corps.

After that he took a $10,000 loan out in 1958, he began developing and flipping homes until he had built up a business which he sold. He started another one, sold it, and then took the proceeds to buy a third stake in the Irvine Company. He eventually bought the outstanding ownership and now has a net worth of over $16 Billion.

Donald Bren took one path to real estate. But there are others. I want to briefly cover the three main ways you can approach real estate investing.

1. Direct Investment

A direct investment in real estate, like what Donald Bren did, involves purchasing property either directly or through a business entity. Either you focus on property appreciation, resale, or cashflow. With these metrics in mind, you seek to partner with others to produce above-average returns over the long-term. This is what Bren did.

2. Indirect Investment

The second, more modern way to invest in real estate is less direct. With an indirect investment you buy a company that invests in real estate. Usually this is either a REIT (real estate investment trust) or some sort of real estate syndication.

3. Hybrid

The last option is some sort of mix. It involves partnering with others so that you own the real estate but you don’t necessarily control management of it directly. An example might be a partnership between a handful of people in which you own, say, 20% of the upfront investment. You put a shared investment with say, 2 other people. One person is in charge of management, and the other two people sit passively by but provide the capital.

A hybrid between direct and indirect is usually less risky but also less financially rewarding if your investment becomes a success.

Conclusion:

Part of investing in real estate is understanding yourself. How much involvement do you want? Often the answer is not much, but for those adventurous few, you never know, you might become the next Donald Bren.

Acquiring a Domicile: How to Rent an Apartment

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Most people have or will rent at some point in their life. What often comes up is concern about rising prices or lack of adequate amenities. These issues will always be a concern. However the following steps will help prepare you for a move into someone else’s rental.

1. Determine your Renting Criteria

As soon as you decide that you want to rent, you need to determine what you’re after. What kind of budget are you looking at? What square footage? What types of Amenities do you want? What are your needs verse what are your wants? In which location specifically does this rental need to be?

Answering these questions will give clarity, allowing you to start the next step…

2. Narrow Search to 10 Rentals

As soon as you’ve determined your renting criteria you will be ready to begin screening. Similar to how a landlord screens potential tenants, you will be screen potential landlords. Find ten places that most closely meet your criteria.

Some places you can find rentals include:

Pad Mapper, HotPads, Lovely, Trulia and Walkscore

3. Visit Your List and Come Prepared

With your list in mind you can begin visiting each one. To come prepared, bring a checkbook, wallet, or some means of payment in case they want to charge you for an application fee. Also bring proof of income such as a pay stub or other documentation. Lastly, you’re going to want a photo ID.

At this point you should be well on your way to both knowing which locations fit your needs, and entering yourself into the landlords application process. Assuming you meet the rental criteria, you will probably get one of your applications responded to within a week or to.

You’re on your way! I hope this helps you on your rental journey.

Becoming the Squirrel of Personal Finance: 4 Places to Stash Your Cash

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Most folks around the world understand the concept of saving more; you can only increase savings when you either increase income or decrease spending. However if instead of investing, what if one were to put the money into savings? Where should they put it? That’s what I’d like to explore.

When considering where to put your savings there are two main factors: Risk of Inflation, and Risk of the Need for Capital.

Risk of Inflation:

When you put money into savings there’s not really a real risk of losing your money to a drop in the stock market. That’s a good thing. But the risky part is that with slower interest and growth on your money, you’ll have a harder time keeping up with inflation. Often the savings interest won’t even be enough to cover the different.

Therefore with saving there is always a risk your purchasing power can do down.

Risk of the Need for Capital:

What if you put money in a CD (Certificate of Deposit) and find out a few days later that you need the money for an emergency?

First, at least some of your money should have been in a liquid asset for emergencies. But secondly, if you have to take the money out, a CD will usually penalize you. So you should always be aware of the chance you’ll need the money and what you’ll do if you do.

With those to risks in mind, the need for capital and inflation, let’s explore the options for saving:

Conventional Saving Accounts

These usually command the lowest interest rates because of the relative liquidity of funds.

Online Savings Accounts

These are online accounts that you set up in which you usually receive higher rates of interest because there isn’t any brick and mortar building to maintain.

Certificates of Deposit

These are the best for funds you’re sure you won’t need for a short period of time. For example if you know you’re going to purchase a car in 3.5 months, then maybe taking out a 3 month certificate of deposit isn’t a bad idea if it gives you are larger return of interest.

Conclusion:

Decide your reason for saving and how much liquidity you’ll need. If you can stomach tying up your money for months or even a year at a time, maybe a T-Bill or CD is worth it. Otherwise, consider a regular bank account or Money Market.

The Stock Market is Falling: What Should I Do?

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The last few weeks started as a few percent decline in the market. As gurus and commentators covered it, they viewed the decline as a temporary, week-long or even a few day-long event. However a few weeks later here we are, still waiting and wondering when the market will rebound.

As a long-term investor this is exciting for me. Not only have stock declined roughly –% from their high, they continue to fall to increasingly discounted prices. Everything might not be a bargain at this point, but after falling about 9% the market is a lot closer to reasonable pricing than it was a month or two ago.

So when prices drop like this, what should an investor do?  They should do what the best investors do – find good companies and buy them at favorable prices. This might mean waiting and watching for a good company to drop below your perceived value it.

But for index and active mutual fund investors slowing dollar-cost-averaging into the market may make the most sense. Understand that the market will come back. It’s just a matter of how quickly it does.

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

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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.

Stock Market Sectors: Is This a Wise Investment Move?

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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.