Tag Archives: research

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.

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.

3 Forces Standing Between You and Your Financial Goals

Time

Often all the things we want to accomplish aren’t feasibly achievable in a set period of time. When this is true, we have to make the often difficult decision of determining which path matches with our values. In other words, we probably can’t achieve every goal we have so we have to prioritize.

This is very true with short term goals like making it to your kid’s basketball game verses watching the football game live. But it can also be true with long term goals. For example I certainly would enjoy the process of being a masterful accountant who has both technical skills and people skills. However I have come to realize that I might never become the world’s greatest accountant if I have other goals more worthwhile (for example like becoming a great financial advisor).

Goals

You might think a strange thing to add to this list is goals. After all, aren’t goals things that empower us and keep us on track? Yes and no. In one sense goals are essential to producing the results we want in life. In another sense, goals by themselves, without effective plans to get there and way to streamline actions towards them, are meaningless.

As Warren Buffet and Bill Gates agreed in an interview: one of the greatest factors to success is focus. Putting all your energy on one task, both with your mind and body, is a powerful thing.

Having too many goals, I have found, can get in the way of this powerful focus. That’s why it’s so important to recognize the things that are worthwhile and the things that can wait.

Inflation

Lastly on this simple list of 3 is inflation. This is more of a technical obstacle than a mental one. However the force can be equally important. If you were to buy a house in a stable neighborhood today, do you think the same house would be worth more in 30 years? Yes, I would hope so. This fact that we can all bet on, the fact that prices will overall rise year after year, is called inflation.

Inflation is powerful because it covers both the consumption side (for example like purchasing gum) and the investment side like stocks or investment real estate. Inflation is such an important force that I will be covering a brief history and action steps around it tomorrow in my blog. Tune in!

Investing in Gold: Should You do It?

There are usually two camps to the gold issue. One group says that gold has always been a medium of exchange and that, as a physical resource, the demand for gold will never go away. The second group argues that gold isn’t really worth much except what people are going to pay for it. It just sits there, collecting dust, not producing income or ROI.

So which is it? Is gold a legitimate investment or should we consider it a gamble? Well first let’s look at a brief (very brief) history of gold and how it has been used.

For thousands of years gold has been seen as a valuable resource. The ancient greeks at around 700 B.C. valued it enough to issue the first gold coins. This was under the reign of King Croesus of Mermnadae, who was a ruler of Lydia. They formed coins using a mixture of gold and silver that is called electrum.

As time progressed, more and more civilizations recognized the value of gold as a medium of exchange. For example the use of gold spread to Asia Minor as well as Egypt. The next big champion of gold were the Romans. They developed more technology that helped mine it in their vast empire.

As China and Indian economies developed, they began trading their valuables like silk and spices to the western countries for gold and silver. Gold continued to be used by civilizations for trade. It was always seen as a “precious metal.”

Fast forward a bit and we come to the early U.S.. The largest advancement in the case for gold occurred in 1792 when the U.S. adapted gold and silver as our currency standard. For decades after the U.S. used these two forms as money until paper currency was adapted in the United States. However even when we adapted paper, the backing behind it continued to be gold.

Eventually in the late 20th century, the gold standard was ended and fiat money took over as the form of currency for our country. Ever since gold’s price has moved up and down with demand and supply.

So, has it been a good investment?

The answer depends on what time frame you look at. For example after the crash of 08 and 09 gold skyrocketed in price. However recently the price has been dwindling. Overall, since we went off the gold standard, gold has gone up around 3% per year. How does that compare to stocks? Pretty poorly. Stocks have produced around a 6% return above inflation during that period.

So, does gold have any place in a portfolio? The answer is maybe. Looking at how modern successful investors view this resource, we can see that gold is best used as a small percentage of any portfolio. It can balance out times of panic when the stock markets plummet. Ray Dalio, a successful hedge fund manager and billionaire, has invested in gold only as a small portion of his overall investments.

Finally, the choice is really up to you. Talk to your investment advisor and do some research on your own. You may find that a 10% allocation of gold can significantly reduce the risk for your retirement account. Or maybe you decide not to because you realize you can produce better returns without it. Either way, don’t consider gold a true investment for any meaningful percentage of your investments.

How Much Should I Put in Savings?

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.

The Most Advantaged Retirement Account

When it comes to picking a place to keep your retirement savings, there are two basic types of accounts to be aware of. The first is what is called a taxable account. This simply means the growth is taxed like most other investments. The second type of account is what is called tax-advantaged. In other words, this account has tax advantages like either  tax free or tax deferred growth.

In the category of tax advantaged accounts, there are a few popular names. Names like 401K and IRA are often used. When setting up a retirement account you can either set one up through your employer, or independently through a broker.

The types of accounts usually provided through an employer are 401K’s and 403B’s. Essentially these accounts are the same, but talk to your tax advisor about the differences and what applies to your specific situation.

If you decide to take the route of setting up a retirement account on your own, you can set up what’s called an IRA  (individual retirement account). IRA rules, for this current year, allow you to put up to $5500 of income away, tax deferred. In other words, you can avoid paying taxes on $5500 of income this year.

So the major employer-sponsored plans are 401K’s and 403B’s. The major independently funded retirement accounts are IRA’s. Within these options there is what’s know as a Roth. Whether it is a Roth 401K or a Roth IRA, the Roth has a few characteristics:

  1. Instead of deferring taxes upfront (and deducting the contribution from your taxable income) you pay taxes from the start.
  2. Instead of paying taxes on the growth, you avoid paying taxes in the future if it is taken out after 59.5.

In other words, Roth accounts are different in the fact that you pay taxes up front, but avoid paying it in the future if all the requirements are met. In recent years, the Roth has become more popular for these reasons.

Generally speaking, the Roth is better than the conventional account because of the power of “tax free” withdraws”. There are a few other types of accounts, but for most people, some form of IRA or 401K is the best option. I hope this helps on your retirement journey, whether you’re starting out, or in the midst of major changes.

3 Factors to Look at When Determining Where to Live

As a financial blog, I have dealt a lot with individual personal finance issues, like what to invest in, how to budget, and what to do in different areas financially. Here I want to step back and cover 3 financial factors that you should think about when considering a city to live in. While these three aren’t the only things to think about, they certainly will cover the broad range of financial determining factors:

Job and Career Potential

Here you’re just trying to get an idea as to how easy or hard it will be to have employment, and sustain employment in your chosen career field. Two of the things to consider are the unemployment rate, which is a good indicator of how many people who want jobs have them, and job growth. With job growth you want to look at the number of new jobs being created, specifically in your career field, over the last decade.

Cost of Living

Housing costs will be broken down into to two big areas: housing and everything else. When looking at housing, there are usually two broad options available. You can either rent or you can buy. You are going to want to compare the costs of rent vs the rest of the country. Pay special attention to the rent increases. For example maybe your area currently has slightly higher rents than the national average, but over the last couple years the rents have been skyrocketing. You want to be mindful of areas in which the costs of living, including rents are rising quickly.

The second housing option to look at is homeownership. What is the average costs of a home in the area. This can vary greatly from one neighborhood to another. For example one neighborhood might costs $300,000 but just across the road might be $250,000 for a similar house. Find the area you’re thinking about and start comparing prices.

After paying for housing there are the rest of the general costs associated with living and breathing. These costs can include food, insurance, transportation, recreation, and especially taxes. Taxes are a huge part of your yearly expenses. There are income taxes (both federal, state and sometimes city), as well as sales tax and property tax. Look at these rates for you area.

Long-Term Stability

The last thing you want to look at after job potential and cost of living is the general stability in the area. The stability of the area is both the economic factors and the political factors.

For example look at one of the leading factors of growth for cities: population growth. Take a look at the recent trend in population. For example are massive amounts of people entering or leaving the area? This might be a sign that things are changing. With the change in demographics and population comes changes in political preferences.

Maybe these changes will lead to political leadership upheaval in the local government. Think about how these changes could potentially impact your life in terms of local taxes, regulations, social programs, and building projects in the future. Are you okay with these potential changes and the uncertainty that comes with them?

Conclusion:

Overall, these three factors can paint a pretty clear picture of the financial concerns about one area over another. After going through them, you should know whether this area is something you would want to consider moving to. Naturally though, there will be others things of concern, like climate, education, health and other issues. While these concerns might not directly impact your finances, most of them should be looked at closely for the effects they could have down the road.