Tag Archives: technology

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.

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!

Money: Where it Comes From

Most people like money. They either collect it, or simply view it as a means to buy their next meal. The fact remains: money is useful. But why do we used money and where did it come from?

It is commonly thought that money arose as a result of the need to barter. This isn’t necessarily the case. There isn’t any society that we know of run completely on barter, even in ancient times. However people did barter a little, and the rest they either gifted or gave away as a form of debt.

At some point the use of debt was coupled with the use of commodity currency. Depending on the people group or the time period in which it was traded, money could be shells, wheat, precious metals, and eventually physical coins. It was after this first occurrence of coins around 600 B.C. by the Lydians that coins started to become more commonly used.

As time progressed, and more and more groups of people used coins, a representative form of money emerged. This was basically paper or some other useless thing, that was available to trade for something of value, like gold. These “certificates” became more and more widespread.

Other societies have since gone back and forth between representative money and actual commodity currencies. The U.S. started out with gold and silver coins as its money. At some point it started a gold certificate or what’s known as “the gold standard”. These could be traded in for a physical amount of gold. Then, with the actions of President Nixon, the gold standard was abolished and we have since been using what’s called fiat currency.

Fiat Currency is just paper, or electronic money, that can’t be turned in for any amount of gold or silver. The only way it has value is because the government says it does. The very nature of fiat currency, as with most currencies, is one of inflation. Since we have gone off the gold standard, prices have “gradually” gone up. What used to cost $1 now costs $10.

The beauty of our current system is that instead of bartering or becoming indebted every time we want something, we are able to trade currency for things of value. In giving someone a dollar, we are giving them something that is widely able to be “traded” for something else of value.

While our system of money in the U.S. certainly isn’t perfect, it has done a great job in facilitating the transfer of assets, resources and services from one side of the economy to the other.

When Should You Sell Stocks?

The old saying, “buy low and sell high” is a very noble goal to have as an equity investor. And during times of extreme prosperity, when the stock market is regularly reaching all time highs, it can seem easy to turn a little into a lot. However, most of the time, history has shown, investors get the timing wrong.

I made this mistake as well in my own life. When I was 16 or 17 I got $100 for Christmas along with a brokerage account, in my parents name, that I was allowed to trade with. After adding $10 of my own I opened it with $110 of fresh money to invest. I was excited!

My first trade, which wasn’t really researched, was the Walt Disney Company. The first month or so it went up. I became so elated as it continued to climb that after I took a “brief” fall I panicked. I told myself, “You’ve got to think long-term.”

So I didn’t sell. As the stock continued to fall gradually I continued to tell myself it would rebound eventually. At some point I caved and sold the stock, regrettably at a $5 loss. After this I purchased a Vanguard real estate ETF along with two shares of GE, which had recently been plummeting.

I have held onto these stocks for a while now and they have finally rebounded back to around $110 in value where I started. The real bummer though, is what the Disney stock has been doing. After I sold, it dropped a little more and then has continued to rise to around $117 per share.

If I had just held on I’d be $7 richer!

This silly little example shows that investing isn’t a day-by-day or even a month-by-month game. It’s a long-term play. When you buy a stock you’ve got to be willing for it to go down temporarily and eventually rebound. The important thing is making sure the fundamentals of the business are strong and then buying at a discounted price.

So, when exactly should you sell a stock?

You should sell when the stock is overpriced. And when is that? When the value you place on the overall business is significantly lower than the value the market is placing on it. That’s when you should run.

 

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.