Tag Archives: stocks

Dollar-Cost Average or Lump Sum into the Market?

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.

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.

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.

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 Purpose of Investing

The whole purpose of investing is to turn money into more money – it’s to be able to buy more things than you bought in the past. However, why not put all your money into savings? If I can lose “all” my money in the stock market, why not play it safe and keep everything in savings? There are two reasons. 1) You probably want to grow your money, not simply keep it safe. And 2) the value of money goes down over time. Wait, you might be asking, isn’t $1 always worth $1?

Yes and no. While $1 will always be the same, the amount that $1 can purchase generally goes down over time. Let’s use an example. Let’s say you have a small collection of 10 Legos. While you really love Legos, you only have these 10, so you tend to be really careful with them – you like them a lot.

One of your friends offers you an apple for one of your Legos. You refuse because you don’t want to have 9 left. However, a few months later, after Christmas and a birthday, you have received 36 more Legos. Your friend comes to you again and asks to trade one apple for two Legos. While you don’t like the idea of giving away more Legos, you don’t mind as much any more because you now have 36. So you do the deal.

What changed? Why were you willing to give more Legos up for an apple when before you wouldn’t even trade one for one? That’s because the Legos became less rare. This has to do with supply and demand. While demand for Legos stayed relatively the same, the supply increased, which decreased the value of the Legos relative to the apples.

We could get really technical with economics but for now the general principle can ring true with money as well. As the amount of money out in circulation, both physical and electronic, increases, the perceived value, and therefore the purchasing power of those dollars, decreases. In the last 100 years, inflation has gone up at about 2 to 4% per year.

The scary thing is that inflation continues even when your money isn’t growing. For example in 2008 when the whole real estate market and stock market crashed, inflation continued. Meaning, not only did stock investors lose 37% on their money, they also lost an additional 3%+ in purchasing power! Ouch!

In times of great economic panic gold often increase in price because it can act as a fear mechanism for investors when times get tough. When people in the market see inflation increasing and economic certainty decreasing, they often view gold, which has been used as money for literally thousands of years, as a safer location for their money.

The bottom line: real estate and stocks are fantastic investments for anyone looking to outpace inflation over long periods of time.

Stocks vs Real Estate – Which is Better?

Nearly all of the world’s billionaires have created wealth through business ownership. And the way most of them owned businesses was through stocks. So stocks, by default, are the vehicle by which many of the world’s wealthy have gotten there. Does this mean stocks are always the best investment over others? Not necessarily.

Is the list of richest people duplicatable? In other words, is it possible for someone starting off with nothing today, to buy and own businesses that eventually make them billionaires? The answer is clearly yes.

However there are other methods, less versatile that can provide the same type of opportunity: real estate investing. I am talking specifically about rental real estate, real estate built for the purpose of providing cashflow.

So if I’m a young person, deeply interesting in investing and committing to becoming rich, which paths should I take? Well real estate and stocks are both broad categories that are broken more specifically into numerous other sub-categories. So let’s take a brief look at your stock and real estate options:

Stocks

Stocks, which are ownership certificates in little pieces of publicly traded companies, can be broken down into various groups depending on the size of the company. They can also be categorized based on the industry or other factors. There are two general ways to get involved with stocks: direct purchase of stocks (through a brokerage account of some kind) or the purchase of shares of a mutual fund (a “basket” of stocks that is managed by a group of investment managers).

Individual investment in stocks can be a fantastic way to build wealth if you meet the following requirements: 1) Able to control your emotions in favor of logic, 2) time commitment to researching and analyzing your choices and 3) patience.

The other stock option, mutual funds, is perhaps the least involved option. I recommend this path for most people who aren’t wanting to spend a lot of time on their investments. One thing to be aware of in this type of investment is both the type of mutual fund (large-cap vs small-cap) and the fees that the mutual fund charges.

Real Estate:

Real estate is a vast field with both commercial and residential properties to choose from. When considering an investment path you need to pick somewhere and stay consistent. Building your knowledge up in a specific area of real estate can go a long way in mitigating risk, which should always be a big concern.

The best way to create wealth with real estate is by buying rental properties. You can either buy single-family homes, multi-unit properties (2, 3 and 4 units) or commercial apartments (5+ units). You should only invest in real estate if you have both time, interest and are capable of networking and management.

Conclusion:

Stocks can be good for people who have less time and more analytical skills. Real estate also requires analytical skills, but you also have to have interest and time to make money. The best choice for you depends on these factors.