I hope Valentine's Day went well for you and your family. The topic is the importance of diversification by investing in international stocks. At the end is a paragraph titled Inner Peace. The first section is the weekly recap published by Vanguard.
Vanguard
The U.S. economy is showing progress as some risks abate—at least for the moment. A deal in Congress to extend a payroll tax cut and federal unemployment benefits means households won't end up with less cash to spend this year, which some analysts had feared could have caused the recovery to falter. And though the housing market remains deeply troubled, home construction is showing signs of life. For the week ended February 17, the S&P 500 Index rose 1.4% to 1,361 (for a year-to-date total return—including price change plus dividends—of about 8.6%). The yield on the 10-year U.S. Treasury note rose 2 basis points to 2.01% (for a year-to-date increase of 12 basis points).
Importance of Investing Internationally
When building a portfolio that includes mutual funds of stocks it is always a good idea to have a mutual fund that buys stocks in international companies to provide some diversification. During this year, these mutual funds have not done as well as mutual funds that invests in US stocks because of a strong US Dollar. So while a strong US Dollar has been good for the US based stocks it has hurt the return for international based stocks. Given the actions by the federal government and the Federal Reserve this will ultimately change which is the focus of this section.
The primary reason given to purchase this type of mutual fund is that most countries outside of the US and the European Union have a faster growth rate. The primary risk with this type of mutual fund relates to currency fluctuations. An optimum ratio of US stock mutual funds to international stock mutual funds has been studied and a portfolio should have more in US stock mutual funds.
As the value of US Dollar changes relative to other currencies the value of international mutual funds will change while US mutual funds will not be impacted. The relative value of the US Dollar to other currencies is a function of the amount of US Dollars in circulation as well as the perception of the US government as a safe haven.
An example to illustrate the impact of the strength of the US Dollar will be the value of the US Dollar relative to the Canadian Dollar and the change in the Canadian Stock Market. In this example, a Canadian Stock Market Index goes up by 10% during a year. Since we live in the US and our currency is the US Dollar the changes has to be converted.
1) If the value of the US Dollar to the Canadian Dollar does not change during the year then the investment should go up by about 10% in your account.
2) If the US Dollar to the Canadian Dollar gets stronger by about 10% then the investment should not change in your account.
3) If the US Dollar to the Canadian Dollar gets weaker by about 10% then the investment should go up by about 20% in your account.
As our national debt climbs by about $1 Trillion each year this means that we are printing $1 Trillion more US Dollars each year. This trend looks to continue for awhile. The question is do investors want to buy more and more of this additional money each year? If they do then the US Dollar strengthens and if they do not then the US Dollar weakens. So right now, investors view the US as a safe haven and the US Dollar is strengthening.
In the future, when our debt level reaches that of European Union countries the US Dollar will weaken. When this happens owning this type of mutual fund will be very, very important. The question is not if it will happen but when will it happen?
Inner Peace
If you can start the day without caffeine - if you can al-ways be cheerful, ignoring aches and pains - if you can resist complaining and boring people with your troubles - if you can eat the same food every day and be grateful for it - if you can understand when your loved ones are too busy to give you any time - if you can take criticism and blame without resentment - if you can conquer tension without medical help - if you can relax without alcohol - if you can sleep without the aid of drugs - then you are probably -the family dog!
Showing posts with label Investing. Show all posts
Showing posts with label Investing. Show all posts
Sunday, February 19, 2012
Sunday, October 30, 2011
Value Investing
So far in October the U.S. Stock market indexes has risen about 14%, a good month. Remember my statements about 1,000 points lower on the Dow Jones Industrial Average, that now was a great to time to buy a mutual fund that invests in U.S. Stock. At the time, many people thought that I was a little crazy. The people who continued to contribute to their retirement account have been rewarded for their persistence. This is an example of value investing. First is the weekly recap from Vanguard. Lastly, are some quotes for your enjoyment.
Vanguard
Signs of progress on Europe's sovereign debt crisis and solid, but unspectacular, GDP growth in the United States sounded hopeful notes in a week of otherwise mixed signals. The S&P 500 Index rose 3.8% to 1,285 (for a year-to-date total return—including price change plus dividends—of about 3.9%). The yield on the 10-year U.S. Treasury note increased 11 basis points to 2.34% (for a year-to-date decrease of 96 basis points).
Value Investing
Value investing is when an investor views a decline in an asset as a potential buying opportunity rather than a time to panic. Some research is needed to know if it is a buying opportunity or a change in climate. It is important to look at the situation from a few perspectives.
Perhaps the most difficult thing about being a value investor is to buy when your emotion says to sell and to sell when your emotion says to buy. The best time to buy an asset is when it is a good value and when experts in the news media are saying how bad things are and that things are going to get worse. Conversely, the best time to sell an asset is when experts in the news media are saying how good things are and that things are going to get even better.
Interesting Quotes
An American went to Scotland and played golf with a newly acquainted Scottish golfer.
After a bad tee shot, he played a "Mulligan" which was an extremely good one.
He then asked the Scottish fellow, "What do you call a Mulligan in Scotland?"
"We call it 3."
A 2:00 am Police Stop: An elderly man was s stopped by the Knoxville, TN police around 2 a.m. and the officer asked him where he was going at that time of night. The man replied, "I am on my way to a lecture about alcohol abuse and the effects it has on the human body, as well as smoking and staying out late." The officer then asked, "Really? Who is giving that lecture at this time of night?" The man replied, "That would be my wife!"
"It’s not important who starts the game but who finishes it."-- John Wooden
“It is not sufficiently considered in the hour of exultation, that all human excellence is comparative – that no person performs much but in proportion to what others accom-plish, or to the time and opportunities which have been allowed them.” Samuel Johnson
“Life’s like a play – it’s not the length, but the excellence of the acting that matters.” Seneca
“The way to achieve success is first to have a definite, clear, practical ideal – a goal, an objective. Second have the ne-cessary means to achieve your ends – wisdom, money, mate-rials and methods. Third, enlist all your means to that end.” Aristotle
“Do not spoil what you now have by desiring what you have not – but remember that what you now have was once among the things you only hoped for.” Epicurus
“A great part of courage is the courage of having done the thing before.” Emerson
“If you’re strong enough, there are no precedents.” George Bernard Shaw
Vanguard
Signs of progress on Europe's sovereign debt crisis and solid, but unspectacular, GDP growth in the United States sounded hopeful notes in a week of otherwise mixed signals. The S&P 500 Index rose 3.8% to 1,285 (for a year-to-date total return—including price change plus dividends—of about 3.9%). The yield on the 10-year U.S. Treasury note increased 11 basis points to 2.34% (for a year-to-date decrease of 96 basis points).
Value Investing
Value investing is when an investor views a decline in an asset as a potential buying opportunity rather than a time to panic. Some research is needed to know if it is a buying opportunity or a change in climate. It is important to look at the situation from a few perspectives.
Perhaps the most difficult thing about being a value investor is to buy when your emotion says to sell and to sell when your emotion says to buy. The best time to buy an asset is when it is a good value and when experts in the news media are saying how bad things are and that things are going to get worse. Conversely, the best time to sell an asset is when experts in the news media are saying how good things are and that things are going to get even better.
Interesting Quotes
An American went to Scotland and played golf with a newly acquainted Scottish golfer.
After a bad tee shot, he played a "Mulligan" which was an extremely good one.
He then asked the Scottish fellow, "What do you call a Mulligan in Scotland?"
"We call it 3."
A 2:00 am Police Stop: An elderly man was s stopped by the Knoxville, TN police around 2 a.m. and the officer asked him where he was going at that time of night. The man replied, "I am on my way to a lecture about alcohol abuse and the effects it has on the human body, as well as smoking and staying out late." The officer then asked, "Really? Who is giving that lecture at this time of night?" The man replied, "That would be my wife!"
"It’s not important who starts the game but who finishes it."-- John Wooden
“It is not sufficiently considered in the hour of exultation, that all human excellence is comparative – that no person performs much but in proportion to what others accom-plish, or to the time and opportunities which have been allowed them.” Samuel Johnson
“Life’s like a play – it’s not the length, but the excellence of the acting that matters.” Seneca
“The way to achieve success is first to have a definite, clear, practical ideal – a goal, an objective. Second have the ne-cessary means to achieve your ends – wisdom, money, mate-rials and methods. Third, enlist all your means to that end.” Aristotle
“Do not spoil what you now have by desiring what you have not – but remember that what you now have was once among the things you only hoped for.” Epicurus
“A great part of courage is the courage of having done the thing before.” Emerson
“If you’re strong enough, there are no precedents.” George Bernard Shaw
Saturday, February 26, 2011
Libya and Investing
This week Libya was the top economic news story and the perceived impact on our economy. The news media spread fear about higher prices and a slowing economy. While it is good for traders, it really is not significant for a longer term investor. In honor of President's Day, the last section is on 5 memorable Presidents.
Vanguard
The U.S. economy grew 2.8% in the fourth quarter, the sixth straight quarterly increase, though the pace was more modest than an earlier estimate. Less spending by fiscally strapped state and local governments was one reason for the downward revision. Consumers also spent less than initially thought. For the week ended February 25, the S&P 500 Index fell 1.7% to 1,320 (for a year-to-date total return—including price change plus dividends—of about 5.3%). The yield of the 10-year U.S. Treasury note fell 17 basis points to 3.42% (for a year-to-date increase of 12 basis points).
Libya and Investing
First, I want to commend all of my clents for keeping their cool this week with all of the fear being spread by the media. I did not contact any clients because I did not agree with the gloom and doom and the volatility index indicated that this was not a significant investing event. This is a story that will fade and eventually the good news of an improving economy will prevail. If you are a trader this is a great opportunity to buy and sell stocks, if you own mutual funds this created no opportunity at all, let me explain.
When a mutual fund is bought or sold it is done at the end of the day. So when bad news comes and the stock market drops the buyer or seller get's the price at the end of the day. As good news comes and the stock market goes up the buyer or seller get's the price at the end of the day. If I would have sold the bad news and bought on the good news as an investor in mutual funds the end result would have been added cost with no benefit to you.
The bond centric and commodity centric mutual funds did well this week. These funds are owned to provide balance and stability during a crazy week. The bottom line is that an investor in mutual funds should maintain some balance and change on significant longer term events.
Information on Five Memorable Presidents
1. President John F. Kennedy — Famous for being the youngest president elected at that time and first Catholic president. He said the famous quote, “Ask not what your country can do for you but what you can do for your country.” He was the 4th president to be assassinated in office, shot in the head during a parade in Dallas, Texas. John F. Kennedy was a Democrat.
2. President Dwight D. Eisenhower — Famous for concentrated on maintaining world peace. He watched with pleasure the development of his “atoms for peace” program — the loan of American uranium to “have not” nations for peaceful purposes.
3. President Teddy Roosevelt — Famous for: With the assassination of President McKinley, Theodore Roosevelt, not quite 43, became the youngest President in the Nation’s history. He brought new excitement and power to the Presidency, as he vigorously led Congress and the American public toward progressive reforms and a strong foreign policy. He won the Nobel Peace Prize for mediating the Russo-Japanese War, reached a Gentleman’s Agreement on immigration with Japan, and sent the Great White Fleet on a goodwill tour of the world.
4. President Franklin D. Roosevelt — Famous for: He undertook immediate actions to initiate his New Deal. To halt depositor panics, he closed the banks temporarily. Then he worked with a special session of Congress during the first “100 days” to pass recovery legislation which set up alphabet agencies such as the AAA (Agricultural Adjustment Administration) to support farm prices and the CCC (Civilian Conservation Corps) to employ young men.
5. President Herbert Hoover — Famous for: Herbert Clark Hoover: Graduated Stanford University (1895). Secretary of Commerce under Harding, Secretary of Commerce under Coolidge. The New York Stock Market crashed on October 29, 1929, marking the beginning of a severe economic depression that dominated the Hoover presidency. The School of Engineering and Applied Science of Columbia University in 1964, Herbert Hoover and Thomas Edison were named the two greatest engineers in U. S. History. He was the youngest member of Stanford University’s first graduating class. During their first three years in the White House, the Hoovers dined alone only three times, each time on their wedding anniversary. Hoover was the first president to donate his salary to charity. One of the most honored presidents, Hoover received 84 honourary degrees, 78 medals and awards, and the keys to dozens of cities.
Vanguard
The U.S. economy grew 2.8% in the fourth quarter, the sixth straight quarterly increase, though the pace was more modest than an earlier estimate. Less spending by fiscally strapped state and local governments was one reason for the downward revision. Consumers also spent less than initially thought. For the week ended February 25, the S&P 500 Index fell 1.7% to 1,320 (for a year-to-date total return—including price change plus dividends—of about 5.3%). The yield of the 10-year U.S. Treasury note fell 17 basis points to 3.42% (for a year-to-date increase of 12 basis points).
Libya and Investing
First, I want to commend all of my clents for keeping their cool this week with all of the fear being spread by the media. I did not contact any clients because I did not agree with the gloom and doom and the volatility index indicated that this was not a significant investing event. This is a story that will fade and eventually the good news of an improving economy will prevail. If you are a trader this is a great opportunity to buy and sell stocks, if you own mutual funds this created no opportunity at all, let me explain.
When a mutual fund is bought or sold it is done at the end of the day. So when bad news comes and the stock market drops the buyer or seller get's the price at the end of the day. As good news comes and the stock market goes up the buyer or seller get's the price at the end of the day. If I would have sold the bad news and bought on the good news as an investor in mutual funds the end result would have been added cost with no benefit to you.
The bond centric and commodity centric mutual funds did well this week. These funds are owned to provide balance and stability during a crazy week. The bottom line is that an investor in mutual funds should maintain some balance and change on significant longer term events.
Information on Five Memorable Presidents
1. President John F. Kennedy — Famous for being the youngest president elected at that time and first Catholic president. He said the famous quote, “Ask not what your country can do for you but what you can do for your country.” He was the 4th president to be assassinated in office, shot in the head during a parade in Dallas, Texas. John F. Kennedy was a Democrat.
2. President Dwight D. Eisenhower — Famous for concentrated on maintaining world peace. He watched with pleasure the development of his “atoms for peace” program — the loan of American uranium to “have not” nations for peaceful purposes.
3. President Teddy Roosevelt — Famous for: With the assassination of President McKinley, Theodore Roosevelt, not quite 43, became the youngest President in the Nation’s history. He brought new excitement and power to the Presidency, as he vigorously led Congress and the American public toward progressive reforms and a strong foreign policy. He won the Nobel Peace Prize for mediating the Russo-Japanese War, reached a Gentleman’s Agreement on immigration with Japan, and sent the Great White Fleet on a goodwill tour of the world.
4. President Franklin D. Roosevelt — Famous for: He undertook immediate actions to initiate his New Deal. To halt depositor panics, he closed the banks temporarily. Then he worked with a special session of Congress during the first “100 days” to pass recovery legislation which set up alphabet agencies such as the AAA (Agricultural Adjustment Administration) to support farm prices and the CCC (Civilian Conservation Corps) to employ young men.
5. President Herbert Hoover — Famous for: Herbert Clark Hoover: Graduated Stanford University (1895). Secretary of Commerce under Harding, Secretary of Commerce under Coolidge. The New York Stock Market crashed on October 29, 1929, marking the beginning of a severe economic depression that dominated the Hoover presidency. The School of Engineering and Applied Science of Columbia University in 1964, Herbert Hoover and Thomas Edison were named the two greatest engineers in U. S. History. He was the youngest member of Stanford University’s first graduating class. During their first three years in the White House, the Hoovers dined alone only three times, each time on their wedding anniversary. Hoover was the first president to donate his salary to charity. One of the most honored presidents, Hoover received 84 honourary degrees, 78 medals and awards, and the keys to dozens of cities.
Sunday, February 20, 2011
Budgets and Investing
This past week, the news was full of state and federal budget information. In particular, was the budget battle in Wisconsin. Enough people are giving the political implications of these events so I would like to cover the investing side, in particular interest rates and stock prices. First will be a section from Vanguard. At the end is a section on NBA All Star Game Facts, which is being played today.
Vangaurd
The Federal Reserve grew more confident in the strength of the U.S. economy, but not enough to pull back from its second round of quantitative easing. High unemployment remained a challenge. Rising commodity prices began to tug at the pockets of consumers and producers, but general inflation in the United States was not yet a concern. For the week ended February 18, the S&P 500 Index rose 1.0% to 1,343 (for a year-to-date total return—including price change plus dividends—of about 7.2%). The yield of the 10-year U.S. Treasury note fell 5 basis points to 3.59% (for a year-to-date increase of 29 basis points).
Government Budgets and Investing
What is the big deal about all of the state and federal budgets that are being discussed in our country? Normally, this is a topic that makes people yawn except for this year. Budget exercises are kind of like going to the dentist, you know you need to do it and you never look forward to it.
The key topis this year is how to balance a budget and the implications of getting it balanced. So from an investor's point of view this is very important. At risk is the credit rating of each state and the federal government. When an organization does not act fiscally responsible, such as a business or government agency, the credit rating agencies like Moody's gives it a lower score. A lower score means that a higher risk exists for defaulting, or not paying back a loan, so the interest rate that must be paid goes up. The lower the rating the higher the interest rate.
So if these budgets are not balanced, the interest rate that is paid by the government agency on the loan that is needed to cover the shortfall goes up. As more and more money is needed the rate goes higher and higher. With higher interest rates comes a lot of negative long term consequences. Stocks do well when interest rates are low and when they are rising in a normal range. When interest rates are high stocks do very poorly.
As investors, if budgets are balanced then we are happy and invest in a normal fashion. If budgets are allowed to have growing deficits then investors need to take action and become defensive. Higher interest rates are bad for virtually all types of bonds and stocks. I am rooting for a balanced budget for each state government and the federal government, to take smaller actions now avoiding much larger actions later.
NBA All-Star Game Facts
•The first NBA All-Star Game was held in Boston in 1951.
•The NBA Rookie Challenge, a game between the best first and second year players was first held in 1994.
•The Slam Dunk Contest features the NBA's highest flyers and most dominating dunkers and was first held in 1984. Previous winners include Michael Jordan, Vince Carter, Kobe Bryant and Jason Richardson.
•The highest scoring NBA All-Star Game was in 2003 when the Western Conference beat the Eastern Conference 155 - 145 in a double-overtime scoring fest. Kevin Garnett poured in 37 points and was named the game's MVP.
•The most points scored in a game by one player is 42 points, set by Wilt Chamberlain during the 1962 NBA All-Star Game.
•Michael Jordan holds the record for most career points in NBA All-Star Games. He scored 262 points while playing in 13 NBA All-Star Games.
Vangaurd
The Federal Reserve grew more confident in the strength of the U.S. economy, but not enough to pull back from its second round of quantitative easing. High unemployment remained a challenge. Rising commodity prices began to tug at the pockets of consumers and producers, but general inflation in the United States was not yet a concern. For the week ended February 18, the S&P 500 Index rose 1.0% to 1,343 (for a year-to-date total return—including price change plus dividends—of about 7.2%). The yield of the 10-year U.S. Treasury note fell 5 basis points to 3.59% (for a year-to-date increase of 29 basis points).
Government Budgets and Investing
What is the big deal about all of the state and federal budgets that are being discussed in our country? Normally, this is a topic that makes people yawn except for this year. Budget exercises are kind of like going to the dentist, you know you need to do it and you never look forward to it.
The key topis this year is how to balance a budget and the implications of getting it balanced. So from an investor's point of view this is very important. At risk is the credit rating of each state and the federal government. When an organization does not act fiscally responsible, such as a business or government agency, the credit rating agencies like Moody's gives it a lower score. A lower score means that a higher risk exists for defaulting, or not paying back a loan, so the interest rate that must be paid goes up. The lower the rating the higher the interest rate.
So if these budgets are not balanced, the interest rate that is paid by the government agency on the loan that is needed to cover the shortfall goes up. As more and more money is needed the rate goes higher and higher. With higher interest rates comes a lot of negative long term consequences. Stocks do well when interest rates are low and when they are rising in a normal range. When interest rates are high stocks do very poorly.
As investors, if budgets are balanced then we are happy and invest in a normal fashion. If budgets are allowed to have growing deficits then investors need to take action and become defensive. Higher interest rates are bad for virtually all types of bonds and stocks. I am rooting for a balanced budget for each state government and the federal government, to take smaller actions now avoiding much larger actions later.
NBA All-Star Game Facts
•The first NBA All-Star Game was held in Boston in 1951.
•The NBA Rookie Challenge, a game between the best first and second year players was first held in 1994.
•The Slam Dunk Contest features the NBA's highest flyers and most dominating dunkers and was first held in 1984. Previous winners include Michael Jordan, Vince Carter, Kobe Bryant and Jason Richardson.
•The highest scoring NBA All-Star Game was in 2003 when the Western Conference beat the Eastern Conference 155 - 145 in a double-overtime scoring fest. Kevin Garnett poured in 37 points and was named the game's MVP.
•The most points scored in a game by one player is 42 points, set by Wilt Chamberlain during the 1962 NBA All-Star Game.
•Michael Jordan holds the record for most career points in NBA All-Star Games. He scored 262 points while playing in 13 NBA All-Star Games.
Sunday, March 21, 2010
Health Care Reform and Investing
This newsletter will be relatively short and covers the impact of health care reform legislation and investment strategy. First an update on performance of investments using the current investment strategy for an economy that is stabile and preparing to grow. CONGRATULATIONS, all of the accounts are doing very well, growing nicely. At the end are some health care facts for your enjoyment.
If the health care reform legislation passes today will it alter my investment strategy? While this is very important for numerous reasons and may impact us in the future, it will not change the current investment strategy. The reason is that the impact of the legislation will occur with time such that it will not significantly alter the performance of the economy. The most important thing to do is to understand the legislation and the impact on a personal level.
US Health Care Facts
• The United States is the only industrialized country in the world without a universal health insurance system.
• Half of all bankruptcies are caused by medical bills. Three-quarters of those filings are people with health insurance.
• U.S. health care spending is approximately $2 trillion per year, or $6,697 per person. The United States continues to spend significantly more on health care than other countries in the world.
• Administrative costs account for 31 percent of all health care expenditures in the United States. The average overhead for U.S. private health insurers is 11.7 percent; for Medicare, it is 3.6 percent; for Canada’s national health insurance program, it is 1.3 percent.
• A baby born in El Salvador has a better chance of surviving than a baby in Detroit.
The infant mortality rate in Detroit is 15.5, compared to El Salvador's rate of 9.7.
• Canadians live three years longer on average than we do.
• There are four times as many health care lobbyists in Washington as there are members of Congress.
• Ninety percent of Americans believe the American health care system needs fundamental changes or needs to be completely rebuilt.
If the health care reform legislation passes today will it alter my investment strategy? While this is very important for numerous reasons and may impact us in the future, it will not change the current investment strategy. The reason is that the impact of the legislation will occur with time such that it will not significantly alter the performance of the economy. The most important thing to do is to understand the legislation and the impact on a personal level.
US Health Care Facts
• The United States is the only industrialized country in the world without a universal health insurance system.
• Half of all bankruptcies are caused by medical bills. Three-quarters of those filings are people with health insurance.
• U.S. health care spending is approximately $2 trillion per year, or $6,697 per person. The United States continues to spend significantly more on health care than other countries in the world.
• Administrative costs account for 31 percent of all health care expenditures in the United States. The average overhead for U.S. private health insurers is 11.7 percent; for Medicare, it is 3.6 percent; for Canada’s national health insurance program, it is 1.3 percent.
• A baby born in El Salvador has a better chance of surviving than a baby in Detroit.
The infant mortality rate in Detroit is 15.5, compared to El Salvador's rate of 9.7.
• Canadians live three years longer on average than we do.
• There are four times as many health care lobbyists in Washington as there are members of Congress.
• Ninety percent of Americans believe the American health care system needs fundamental changes or needs to be completely rebuilt.
Sunday, January 17, 2010
Investing and the Weather Spring
I hope you are enjoying the warmer winter weather. Having temperature above freezing sure does lift spirits. This newsletter is the first one in a series comparing spring time weather and spring time in the economic business cycle. A normal economic business cycle lasts between 5-8 years.
Spring is defined as a 3 month period on the calendar while actual springtime weather has a lot of variability. Spring time weather is when temperatures warm, plants return to life, animals reappear, etc. It is common to have frost and snow even once spring time weather has started. In fact, some major snowfalls do occur during spring and while it is an inconvenience it is still spring time.
Spring in the economic business cycle starts when the Federal Reserve states that the economy has stabilized and is starting to grow again. Interest rates are relatively low as the Federal Reserve is trying to get the economy at a 3% growth rate, their stated policy. Employment will start to improve as companies start to grow again. Interest rates will stay low for as long as it takes to get economic growth that creates jobs. It is a period of economic transition.
The economic spring does not have a defined time period and is more on the magnitude of a year instead of 3 months and it tends to last longer than winter. Stock markets rise around the globe in a jagged fashion just like the weather. In fact it is possible to have the stock market drop that gets people's attention just like a snow during spring.
The economic spring ends when the Federal Reserve states that the economy has returned to "normal" whatever they thing that the term means. Interest rates rise during spring as things improve.
Watching short term and long term interest rates is key in business cycle investing. Last week, I stated that because of jobs data long term interest rates would come down during the week and that the current bond funds should be maintained as we are early in the spring season. Indeed long term rates did come down during the week making this a good decision for now.
SPRING FACTS:
In the eastern United States, Spring weather travels northward at a rate of about 13 miles (20 km) per day.
The lifetime of a typical small cumulus cloud is 10 to 15 minutes.
A small, fluffy cumulus cloud may hold 100 to 1000 tons of liquid water.
More than just gentle showers: Under an average annual rainfall of 700 mm, the total impact energy of raindrops hitting the ground can be as much as 4000 tons of TNT.
God Bless you and your families. God Bless the people of Haiti and those who are working diligently in this situation.
Spring is defined as a 3 month period on the calendar while actual springtime weather has a lot of variability. Spring time weather is when temperatures warm, plants return to life, animals reappear, etc. It is common to have frost and snow even once spring time weather has started. In fact, some major snowfalls do occur during spring and while it is an inconvenience it is still spring time.
Spring in the economic business cycle starts when the Federal Reserve states that the economy has stabilized and is starting to grow again. Interest rates are relatively low as the Federal Reserve is trying to get the economy at a 3% growth rate, their stated policy. Employment will start to improve as companies start to grow again. Interest rates will stay low for as long as it takes to get economic growth that creates jobs. It is a period of economic transition.
The economic spring does not have a defined time period and is more on the magnitude of a year instead of 3 months and it tends to last longer than winter. Stock markets rise around the globe in a jagged fashion just like the weather. In fact it is possible to have the stock market drop that gets people's attention just like a snow during spring.
The economic spring ends when the Federal Reserve states that the economy has returned to "normal" whatever they thing that the term means. Interest rates rise during spring as things improve.
Watching short term and long term interest rates is key in business cycle investing. Last week, I stated that because of jobs data long term interest rates would come down during the week and that the current bond funds should be maintained as we are early in the spring season. Indeed long term rates did come down during the week making this a good decision for now.
SPRING FACTS:
In the eastern United States, Spring weather travels northward at a rate of about 13 miles (20 km) per day.
The lifetime of a typical small cumulus cloud is 10 to 15 minutes.
A small, fluffy cumulus cloud may hold 100 to 1000 tons of liquid water.
More than just gentle showers: Under an average annual rainfall of 700 mm, the total impact energy of raindrops hitting the ground can be as much as 4000 tons of TNT.
God Bless you and your families. God Bless the people of Haiti and those who are working diligently in this situation.
Saturday, January 9, 2010
Investing and the Weather
I hope you are all staying warm and safe during this very brutal cold weather. At the end, are some It's so cold jokes for your amusement.
This week was excellent for all of the accounts. It is good to see the year start so well.
The most important story of the past week, that has the biggest impact on investing decisions, was the job loss number for December. Instead of showing a job gain the result was a job loss. This is the most significant data because it guides the interest rate decision for the Federal Reserve, who will maintain the current low rates for awhile, and will put a ceiling on long-term interest rates for now. Because of this data, the current bond funds will be maintained for now.
Business Cycle Investing is like the weather in that both have 4 seasons and different actions are needed for each season. This brutal cold weather resembles the great recession that we have endured. We are investing like it is spring. Yes spring will arrive in a few months.
It's so cold that:
you light a candle and the flame freezes
your shadow freezes to the sidewalk
you have to break the smoke off your chimney
you have to open the fridge to heat the house
It was so cold the lawyers had their hands in their own pockets....
I'm shivering like a mobster in a tax office.
Stay warm and think of spring!!!!!
This week was excellent for all of the accounts. It is good to see the year start so well.
The most important story of the past week, that has the biggest impact on investing decisions, was the job loss number for December. Instead of showing a job gain the result was a job loss. This is the most significant data because it guides the interest rate decision for the Federal Reserve, who will maintain the current low rates for awhile, and will put a ceiling on long-term interest rates for now. Because of this data, the current bond funds will be maintained for now.
Business Cycle Investing is like the weather in that both have 4 seasons and different actions are needed for each season. This brutal cold weather resembles the great recession that we have endured. We are investing like it is spring. Yes spring will arrive in a few months.
It's so cold that:
you light a candle and the flame freezes
your shadow freezes to the sidewalk
you have to break the smoke off your chimney
you have to open the fridge to heat the house
It was so cold the lawyers had their hands in their own pockets....
I'm shivering like a mobster in a tax office.
Stay warm and think of spring!!!!!
Sunday, November 15, 2009
Investing and Road to Socialism
The idea for this newsletter came from a recent conversation concerning the leaders of this nation trying to head us down the road to becoming more socialistic. We hear about the health care debate including a public option and get concerned about what it means. In addition, we see an unemployment rate over 10% and wonder what it means. We hear about having a weak US Dollar and wonder what this means. The question is what should we do with our investments?
The answer is to follow the plan of business cycle investing. When all else fails, always remember the #1 rule of business cycle investing follow the lead of the Federal Reserve. The Federal Reserve sets monetary policy that controls the growth rate of our economy. The health care debate, unemployment rate, and strength of the US Dollar have an impact on the actions of the Federal Reserve and monetary policy. Just keep it simple and follow the actions of the Federal Reserve.
How should we be investing right now? We are entering a growth phase in our economic business cycle which means that investments should include: US and International equities, commodities, and short term corporate and mortgage backed bonds.
The previous weekend, the US House of Representatives passed a health care bill, that included this public option, and the stock market rose the next few days. This health care bill had little impact on the US Stock Market prices. It appeared that it was a relief to finally have it over and people were glad that it was not worse.
On Thursday the US Stock Market went down, why? News was published on late Wednesday and early Thursday that Market Breadth had weakened and that the rally was weakening and now was a good time to take profits. However, on Friday the US Stock Market went up almost as much, why? News was published late Thursday and early Friday that we were still in the midst of a bull market rally.
Why did we have these downs and ups? My opinion is that brokerage houses like Ameritrade, Scottrade, etc... need people to trade to make money so news, actually opinions by supposed experts, is published to get people trading. Remember that a brokerage company makes money only if people trade, buy or sell, and works hard to get people to trade regardless if a profit is made. If you follow things on a daily basis and try to rationalize why things to up and down it might just drive you a little crazy.
Rule #1: Follow the lead of the Federal Reserve.
Ignore the noise and keep your focus on the good things of life.
The answer is to follow the plan of business cycle investing. When all else fails, always remember the #1 rule of business cycle investing follow the lead of the Federal Reserve. The Federal Reserve sets monetary policy that controls the growth rate of our economy. The health care debate, unemployment rate, and strength of the US Dollar have an impact on the actions of the Federal Reserve and monetary policy. Just keep it simple and follow the actions of the Federal Reserve.
How should we be investing right now? We are entering a growth phase in our economic business cycle which means that investments should include: US and International equities, commodities, and short term corporate and mortgage backed bonds.
The previous weekend, the US House of Representatives passed a health care bill, that included this public option, and the stock market rose the next few days. This health care bill had little impact on the US Stock Market prices. It appeared that it was a relief to finally have it over and people were glad that it was not worse.
On Thursday the US Stock Market went down, why? News was published on late Wednesday and early Thursday that Market Breadth had weakened and that the rally was weakening and now was a good time to take profits. However, on Friday the US Stock Market went up almost as much, why? News was published late Thursday and early Friday that we were still in the midst of a bull market rally.
Why did we have these downs and ups? My opinion is that brokerage houses like Ameritrade, Scottrade, etc... need people to trade to make money so news, actually opinions by supposed experts, is published to get people trading. Remember that a brokerage company makes money only if people trade, buy or sell, and works hard to get people to trade regardless if a profit is made. If you follow things on a daily basis and try to rationalize why things to up and down it might just drive you a little crazy.
Rule #1: Follow the lead of the Federal Reserve.
Ignore the noise and keep your focus on the good things of life.
Sunday, October 25, 2009
US Dollar and Investing
This is the last in the series on the US Dollar and it covers the topic of how to invest to make money as the US Dollar changes. One of the easiest way to invest is in US companies that produce commodities. Commodities are invested using exchanges throughout the world and the price tends to move in unison to prevent arbitrage. Arbitrage is where a commodity is bought on one exchange and sold on another exchange due to exchange differences. As commodity prices change on an exchange the profit made by a US company changes.
In general, as the value of the US Dollar drops global commodity prices rise, including in the US. Vice versa, as the value of the US Dollar rises global commodity prices drop, including in the US. A point to remember is that commodity prices on occasion move by speculation such as the change in oil last year from $140 to $40 per barrel. An example is the oil trader that supposedly earned a $100 million bonus by trading oil futures last year.
The value of the US Dollar has no impact from a currency valuation perspective on a US manufacturer. As US Dollar prices drop and commodity prices increase the US producers have a lot of leverage to make a profit. In an investing class, I found out that a 15% drop in revenue can easily drop profit 40% or a 2.5 times leverage. Likewise, this same 2.5 times leverage exists as revenues increase.
If you want to pursue this idea, you need to invest in US companies. Two of the best companies to use are Exxon Mobil for Oil and Freeport McMoran for Copper. This is for traders not for long term investors.
Have a great week and count your blessings. This is the Pastor Appreciation Month so make sure you tell your Pastor how important they are to you. Let me know how I can help you.
In general, as the value of the US Dollar drops global commodity prices rise, including in the US. Vice versa, as the value of the US Dollar rises global commodity prices drop, including in the US. A point to remember is that commodity prices on occasion move by speculation such as the change in oil last year from $140 to $40 per barrel. An example is the oil trader that supposedly earned a $100 million bonus by trading oil futures last year.
The value of the US Dollar has no impact from a currency valuation perspective on a US manufacturer. As US Dollar prices drop and commodity prices increase the US producers have a lot of leverage to make a profit. In an investing class, I found out that a 15% drop in revenue can easily drop profit 40% or a 2.5 times leverage. Likewise, this same 2.5 times leverage exists as revenues increase.
If you want to pursue this idea, you need to invest in US companies. Two of the best companies to use are Exxon Mobil for Oil and Freeport McMoran for Copper. This is for traders not for long term investors.
Have a great week and count your blessings. This is the Pastor Appreciation Month so make sure you tell your Pastor how important they are to you. Let me know how I can help you.
Sunday, June 14, 2009
Do As Financial Experts Do
Perhaps you have heard and seen financial experts talking about what to do now with your investments. For example, Jason Zweig, The Intelligent Investor, recently wrote that now might be a good time to take some profits and sell some stocks as the market has risen 30+% in about 3 months. Other experts talk about stocks normally go down to sideways in June any now may be a good time to sell and take some profits.
To understand what to do now, look at the money trail of what category of investments are being bought and sold. We all know that what someone does is more important than what someone says. Barron's reports money flow into mutual funds by category on a weekly basis. For the last 4 weeks an average of $3.1 Billion dollars has gone into Equity, aka Stock, funds while an average of $8.4 Billion dollars has left Money Market Funds. The rest of the money, about $5.2 Billion, has gone into different categories of bond funds.
The numbers say that investors are investing, taking lots of money from money market funds, about $35 Billion over the last month and putting it to work and that they are buying stocks. If you look at the trend over the last 4 weeks, the amount of money going into stock funds is staying stable while the amount going into bond funds are going down by a significant amount.
It is true that stocks tend to do very little in June since typically few companies report earnings in June, the last month of a quarter. With this said, it is very possible for some individual stocks to make significant moves during June. It is true that the stock market has gone up 30+% in about 3 months. This is good information for a trader who is looking to buy and sell fairly frequently instead of a long term investor. The flow of money tells a long term investors that financial experts for all of their talk are putting money from a defensive position and into the stock market.
Investing in gold has also gotten a lot of press lately and people are being encouraged to buy stock in gold mining related companies. A few months ago, I wrote that you should avoid gold for a number of reasons. Since writing this statement, gold has risen slightly while stocks in general have given far superior returns. In my view of the current economic situation, it still is not time to buy gold or shares of gold mining related companies.
To understand what to do now, look at the money trail of what category of investments are being bought and sold. We all know that what someone does is more important than what someone says. Barron's reports money flow into mutual funds by category on a weekly basis. For the last 4 weeks an average of $3.1 Billion dollars has gone into Equity, aka Stock, funds while an average of $8.4 Billion dollars has left Money Market Funds. The rest of the money, about $5.2 Billion, has gone into different categories of bond funds.
The numbers say that investors are investing, taking lots of money from money market funds, about $35 Billion over the last month and putting it to work and that they are buying stocks. If you look at the trend over the last 4 weeks, the amount of money going into stock funds is staying stable while the amount going into bond funds are going down by a significant amount.
It is true that stocks tend to do very little in June since typically few companies report earnings in June, the last month of a quarter. With this said, it is very possible for some individual stocks to make significant moves during June. It is true that the stock market has gone up 30+% in about 3 months. This is good information for a trader who is looking to buy and sell fairly frequently instead of a long term investor. The flow of money tells a long term investors that financial experts for all of their talk are putting money from a defensive position and into the stock market.
Investing in gold has also gotten a lot of press lately and people are being encouraged to buy stock in gold mining related companies. A few months ago, I wrote that you should avoid gold for a number of reasons. Since writing this statement, gold has risen slightly while stocks in general have given far superior returns. In my view of the current economic situation, it still is not time to buy gold or shares of gold mining related companies.
Sunday, February 1, 2009
Investing and the Impact of Obama Stimulus Package
The Obama Administration and the Democractic Senators and Representatives are rolling out a $825 Billion stimulus package. Since investing is about making decisions based upon financial events, what moves if any should be done?
This amount is roughly equal to $3,000 for each citizen. I doubt that my family will see $12,000. Who will get the money? Businesses and banks will be the primary benefactors rather than directly to the citizens.
In order to share in this money you need to buy stock in businesses and banks.The next question is should the stimulus package increase stock price? Stock price is a function of interest rate and growth rate. Stock prices increase as the growth rate is higher than the interest rate. Currently, stock prices are at a negative growth rate indicating a future deep recession. The stimulus package will increase the growth rate of business and banks which means that the long term impact of the stimulus package should raise stock price. Virtually all segments of our economy will get money, kind of like putting butter on toast. Companies that provide infrastructure products will do really really well, such as basic materials, electrical power infrastructure, and wireless communication.
Another result will be higher interest rates. The risk from the stimulus package is to create inflation which would result in an interest rate above the growth rate. Higher interest rates are great for short term bonds such as a money market fund and kills long term bonds. Stocks should be balanced with short term bonds and long term bonds should be avoided.
Stock prices around the world are linked to the US economy as we import more than we export. We are the biggest consumers of any other country in the world. Global stock prices will rise as our stock price rise. This means that a portfolio of US and International stocks should do well in the future.
This amount is roughly equal to $3,000 for each citizen. I doubt that my family will see $12,000. Who will get the money? Businesses and banks will be the primary benefactors rather than directly to the citizens.
In order to share in this money you need to buy stock in businesses and banks.The next question is should the stimulus package increase stock price? Stock price is a function of interest rate and growth rate. Stock prices increase as the growth rate is higher than the interest rate. Currently, stock prices are at a negative growth rate indicating a future deep recession. The stimulus package will increase the growth rate of business and banks which means that the long term impact of the stimulus package should raise stock price. Virtually all segments of our economy will get money, kind of like putting butter on toast. Companies that provide infrastructure products will do really really well, such as basic materials, electrical power infrastructure, and wireless communication.
Another result will be higher interest rates. The risk from the stimulus package is to create inflation which would result in an interest rate above the growth rate. Higher interest rates are great for short term bonds such as a money market fund and kills long term bonds. Stocks should be balanced with short term bonds and long term bonds should be avoided.
Stock prices around the world are linked to the US economy as we import more than we export. We are the biggest consumers of any other country in the world. Global stock prices will rise as our stock price rise. This means that a portfolio of US and International stocks should do well in the future.
Sunday, January 25, 2009
Investing Gameplan
It's possible to strike a balance between checking your investment account every morning (and tempting yourself to make inopportunely timed changes) and complete and utter portfolio neglect. The following steps should get you on your way.
Step 1: Do your own heavy lifting. Whether you're talking about home prices or the stock market, forget the days when rising prices did all the heavy lifting for us. Most people who have amassed real wealth in this world did it the hard way: They deferred spending today in order to save for tomorrow.
Step 2: Get a plan. Investors need a blueprint--an overarching view of how much they should have invested in stocks, bonds, and cash given the age at which they hope to retire, how much they're saving each year, and their risk tolerance. Instead of getting a big-picture view of how they should be investing, many investors proceed straight to picking individual funds, often basing important decisions on the meager information their employer and plan provider have given them.
Not having a target asset-allocation mix can leave you feeling particularly adrift at a time like this, but there are some basic rules of thumb for determining the appropriate stock/bond mix. A common one is to subtract your age from 100% to determine how much you should have invested in stocks and stock funds. That's better than nothing, and holding at least a little in bonds would've helped many portfolios hold up much better than they did in 2008.
Step 3: Make sure you have a rock-solid core. Because many plans offer a long menu of choices, it's tempting to fill up on a little bit of this and a little bit of that. But the biggest favor you can do is to stay away from the niche offerings and instead build out a solid core of rock-solid funds. Such holdings should make up 75% to 80% (or more) of your portfolio.
Step 4: Avoid the big mistakes. Last, but not least, vow that you'll do your part to avoid the big mistakes that can bedevil investors by loading up on company stock. The demise of Lehman Brothers, where many employees had also invested heavily in company stock, provides an updated case study.
Step 1: Do your own heavy lifting. Whether you're talking about home prices or the stock market, forget the days when rising prices did all the heavy lifting for us. Most people who have amassed real wealth in this world did it the hard way: They deferred spending today in order to save for tomorrow.
Step 2: Get a plan. Investors need a blueprint--an overarching view of how much they should have invested in stocks, bonds, and cash given the age at which they hope to retire, how much they're saving each year, and their risk tolerance. Instead of getting a big-picture view of how they should be investing, many investors proceed straight to picking individual funds, often basing important decisions on the meager information their employer and plan provider have given them.
Not having a target asset-allocation mix can leave you feeling particularly adrift at a time like this, but there are some basic rules of thumb for determining the appropriate stock/bond mix. A common one is to subtract your age from 100% to determine how much you should have invested in stocks and stock funds. That's better than nothing, and holding at least a little in bonds would've helped many portfolios hold up much better than they did in 2008.
Step 3: Make sure you have a rock-solid core. Because many plans offer a long menu of choices, it's tempting to fill up on a little bit of this and a little bit of that. But the biggest favor you can do is to stay away from the niche offerings and instead build out a solid core of rock-solid funds. Such holdings should make up 75% to 80% (or more) of your portfolio.
Step 4: Avoid the big mistakes. Last, but not least, vow that you'll do your part to avoid the big mistakes that can bedevil investors by loading up on company stock. The demise of Lehman Brothers, where many employees had also invested heavily in company stock, provides an updated case study.
Investing Rules
Two rules of investing to follow.
Warren Buffett said that the two rules of investing are: #1: Don't lose money, and #2: Don't forget rule number one. He then explained some more basics: When you buy a share do so as though you are becoming a partner in the business; Make sure you use the market to serve you, not to instruct you; And before buying be certain there is a sufficient margin of safety, a cushion of comfort between the price you are paying and the value of the company.
I want to add one more: Make sure the company can stay in business. That's sort of a corollary to part three, about the sufficient margin of safety, but it's more dramatic. And in these times, you need to figure this part out first before you begin working on all other valuation metrics.
For example, value investors look for low P/E (price to earnings) ratios, high cash positions, low debt, low price to book, preferably less than half, etc. They're looking for the margin of safety Buffett recommends.
The second important factor is access to capital. That is, the ability to raise capital when needed. Large companies with strong balance sheets can do this now, especially in the debt markets. Not so much in the equity markets. No matter how large or strong the company is at the moment, it's almost impossible to raise equity unless it's a special arrangement like a private placement or preferred stock. Common equity is not accepted because investors appetite for risk is almost zero now. They don't want just equity. They want some income (hence the preferreds have a better chance). But only companies with strong balance sheets qualify.
When looking for a specific stock the most important to analyze is cash management. A good company that exemplifies this is CommScope.
Warren Buffett said that the two rules of investing are: #1: Don't lose money, and #2: Don't forget rule number one. He then explained some more basics: When you buy a share do so as though you are becoming a partner in the business; Make sure you use the market to serve you, not to instruct you; And before buying be certain there is a sufficient margin of safety, a cushion of comfort between the price you are paying and the value of the company.
I want to add one more: Make sure the company can stay in business. That's sort of a corollary to part three, about the sufficient margin of safety, but it's more dramatic. And in these times, you need to figure this part out first before you begin working on all other valuation metrics.
For example, value investors look for low P/E (price to earnings) ratios, high cash positions, low debt, low price to book, preferably less than half, etc. They're looking for the margin of safety Buffett recommends.
The second important factor is access to capital. That is, the ability to raise capital when needed. Large companies with strong balance sheets can do this now, especially in the debt markets. Not so much in the equity markets. No matter how large or strong the company is at the moment, it's almost impossible to raise equity unless it's a special arrangement like a private placement or preferred stock. Common equity is not accepted because investors appetite for risk is almost zero now. They don't want just equity. They want some income (hence the preferreds have a better chance). But only companies with strong balance sheets qualify.
When looking for a specific stock the most important to analyze is cash management. A good company that exemplifies this is CommScope.
Saturday, October 18, 2008
Investing, Time To Buy Stocks
The recommendation in the last blog was that stocks are on sale now and get ready to buy. After 1 week of investing it looks like now is the time to buy stocks for mone with a time horizon of at least 6 months. Sell money market funds, short term bond funds, CD's, etc... to get money to invest.
The first reason is the Warren Buffet factor who currently has the most influence in the stock market, even more than the Fed Chairman, Treasury Secretary, President, etc... Below is an article that was published yesterday. Enjoy reading it.
Warren Buffett: Buy Stocks! Cash Is Trash! Posted Oct 17, 2008 10:42am EDT by Aaron Task
"I don't like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I'll follow the lead of a restaurant that opened in an empty bank building and then advertised: 'Put your mouth where your money was.' Today my money and my mouth both say equities." Or so declared Warren Buffett Friday in an extraordinary op-ed piece in The New York Times. Buffett's call to stocks amid an ongoing financial crisis could help restore investor confidence, a crucial ingredient so far missing from the government's turnaround effort.
Buffett's optimism is based primarily on the following:
The first reason is the Warren Buffet factor who currently has the most influence in the stock market, even more than the Fed Chairman, Treasury Secretary, President, etc... Below is an article that was published yesterday. Enjoy reading it.
Warren Buffett: Buy Stocks! Cash Is Trash! Posted Oct 17, 2008 10:42am EDT by Aaron Task
"I don't like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I'll follow the lead of a restaurant that opened in an empty bank building and then advertised: 'Put your mouth where your money was.' Today my money and my mouth both say equities." Or so declared Warren Buffett Friday in an extraordinary op-ed piece in The New York Times. Buffett's call to stocks amid an ongoing financial crisis could help restore investor confidence, a crucial ingredient so far missing from the government's turnaround effort.
Buffett's optimism is based primarily on the following:
"Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors." Cash is trash. "Today people who hold cash equivalents feel comfortable," he writes. "They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value."A few caveats to Buffett's dramatic call:
By his own admission, Buffett is making a long-term call. "I can't predict the short-term movements of the stock market," he writes. "I haven't the faintest idea as to whether stocks will be higher or lower a month -- or a year -- from now. In the short- to intermediate-term, there's still the issue of reviving the banking sector, and key bank CEOs like JPMorgan's Jamie Dimon have expressed little optimism for the Treasury's program of capital injection. Nobody, not even Warren Buffett, is always right.
The second reason is the low interest rate environment. No long term investor will keep money at an interest rate below the inflation rate very long because they will lose money. When some sort of sanity comes back to the stock market this money will move back to the stock market fueling a rally.
Thirdly, sanity is coming back into the financial sector. Banks are starting to lend again as indicated by the over night, Libor rate, that is the lending rate between banks, has come back to a normal level. Also the Fed has added $600 Billion into the banking system and lowered the Fed funds rate. If the reason for the crash was tight credit then as credit loosens and money begins to flow this should have a positive impact on the stock market.
Lastly, the lower cost of gas and oil will stimulate the economy and increase stock prices. Friday's gas futures price for November delivery was $1.66 per gallon and if you add $0.60 per gallon for taxes and delivery it says that gas will continue to come down to below $2.50 per gallon in most parts of the country by Thanksgiving. This is the financial equivalent of having another $700 Billion infusion into the economy.
Bottom Line: The business cycle of what happens in an economy is acting normally. What has not been normal has been the credit crisis that crushed stock prices. As the credit crisis ends stock prices should recover with time. The rate of recovery is fueled by lowered interest rates and lower energy cost. This means that stocks are on sale now and with money that is not needed for at least 6 months it is time to shop.
Saturday, October 11, 2008
Investing, Time to Get Ready to Buy Stocks
The guidance from the last blog last week was to hold your investment positions for a number of reasons. The guidance now is to get ready to buy stocks and let the market tell you when to buy as stocks are ON SALE NOW.
This past week, we had the worst performance on record even worse than during the depression. Let's recap:
This past week, we had the worst performance on record even worse than during the depression. Let's recap:
- Virtually all investments crashed: stocks, bonds, and commodites except for gold.
- Stocks dropped the largest point total and percentage amount ever.
- Investors pulled money out of the market and put it into cash in large chunks.
- On Friday, we had a 1000+ point swing and got within about 5% of the low during the last correction.
- On Friday, we had about 10 times the normal volume on the NYSE, 11.5 billion shares.
- As you check any US or international mutual fund it seems that it has lost about half of the value.
- If you want to see what a financial shock looks like as yourself did you really want to look at your account balance or your mutual fund performance???
If we got within 5% of the previous correction this means that we probably know where the bottom will occur, Notice investors bought stocks to achieve a 1,000 point swing. THIS MEANS THAT THE STOCK MARKET IS NOW ON SALE, TIME TO BUY!!!!!
When do you know when it is a bottom? When bad news comes in and the stock market goes up anyway.
When you see this happen you can buy literally any US or international mutual fund as virtually all of them were punished. You want to avoid gold as it will fall and act like the other commodities as the crisis ends. You want to avoid bonds as interest rates will rise and price will fall as the crisis ends.
Friday, August 8, 2008
Retirement Investing Lessons
The Monday August 4, 2008 Wall Street Journal had an article on the importance of proper investing for retirement. The title of the article was “When 401(k) Investing Goes Bad.” This article talks about West Virginia school employees who 17 years ago shifted from a pension plan with a defined benefit to a 401(k) defined contribution plan.
A defined benefit plan has the employer contributing and having a professional managing the money for retirement with the employer at risk to meet the retirement need. A defined contribution plan typically has the employer matching contributions of the employee and the employee assumes the risk to meet retirement needs.
This is a story that applies to many people. The article states that only 21% of full-time employees have a defined benefit pension plan in 2007 down from 54% in 2004. In 2007, 54 of the largest 100 US employers offered a defined benefit plan down from 58 in 2006.
For the people in the article, things have not gone well for all of the members. One person called it horrible. Most of the members felt poorly informed and they invested too conservatively. Many got guidance from people they knew and trusted who represented a life insurance company over lunch and during school hours. Those giving guidance were just representatives selling a financial product acting in an investment advisory role rather than being a Registered Investment Advisor.
The guidance given was to purchase a fixed rate annuity because it was safe. What happened over time was these annuities could not grow as fast if the money had been diversified and professionally managed in a defined benefit plan. The end result is people not having enough to retire in a manner that they desire or deserve.
The average 401(k) balance for people 60 & above in this group was $34,420. Not enough to replace the benefit from a defined benefit plan.
A couple of other issues are mentioned in the article. Some members did not contribute as much to the plan as would have occurred with the defined benefit plan. Some members took money from their 401(k) plan reducing their retirement account.
As employers move away from defined benefit plans and shift to defined contribution plans the employees have a greater amount of risk. This means people need to understand how much to invest and how to invest to meet a future need. In short they need professional guidance and a retirement plan.
Most investment professionals will choose a defined contribution plan over a defined benefit plan if investing with a long term time horizon because they should get a higher return. However, if a person does not know investing and the ramifications of certain actions, a defined contribution plan can lead to a very low amount of retirement savings.
Bottom Line: If you are in a 401(k) plan and do not feel comfortable about investing, get professional guidance and develop a retirement plan.
A defined benefit plan has the employer contributing and having a professional managing the money for retirement with the employer at risk to meet the retirement need. A defined contribution plan typically has the employer matching contributions of the employee and the employee assumes the risk to meet retirement needs.
This is a story that applies to many people. The article states that only 21% of full-time employees have a defined benefit pension plan in 2007 down from 54% in 2004. In 2007, 54 of the largest 100 US employers offered a defined benefit plan down from 58 in 2006.
For the people in the article, things have not gone well for all of the members. One person called it horrible. Most of the members felt poorly informed and they invested too conservatively. Many got guidance from people they knew and trusted who represented a life insurance company over lunch and during school hours. Those giving guidance were just representatives selling a financial product acting in an investment advisory role rather than being a Registered Investment Advisor.
The guidance given was to purchase a fixed rate annuity because it was safe. What happened over time was these annuities could not grow as fast if the money had been diversified and professionally managed in a defined benefit plan. The end result is people not having enough to retire in a manner that they desire or deserve.
The average 401(k) balance for people 60 & above in this group was $34,420. Not enough to replace the benefit from a defined benefit plan.
A couple of other issues are mentioned in the article. Some members did not contribute as much to the plan as would have occurred with the defined benefit plan. Some members took money from their 401(k) plan reducing their retirement account.
As employers move away from defined benefit plans and shift to defined contribution plans the employees have a greater amount of risk. This means people need to understand how much to invest and how to invest to meet a future need. In short they need professional guidance and a retirement plan.
Most investment professionals will choose a defined contribution plan over a defined benefit plan if investing with a long term time horizon because they should get a higher return. However, if a person does not know investing and the ramifications of certain actions, a defined contribution plan can lead to a very low amount of retirement savings.
Bottom Line: If you are in a 401(k) plan and do not feel comfortable about investing, get professional guidance and develop a retirement plan.
Thursday, January 17, 2008
Investing 10 Year or More Time Horizon
It is good to know the performance over a 74 year period or 60 year period or a 10 year period. How do you invest if you have a time horizon of 10 years or more? To answer the question, we will look at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds in the book Investments.
The information for time horizons of 1 through 7 years showed that short bonds gave the best minimum return and highest percentage of positive returns. At the 8 year horizon, we saw a major reversal and stocks became the leader with the best minimum return, maximum return, and percent positive return. The trend continued for a 9 year time horizon. Does is continue for 10 or more years?
We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.
Time Period 1926 - 1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/6.74%/36.39%/100%
Large Stocks/2.53%/21.46%/100%
Long Bonds/0.33%/14.60%/100%
Short Bonds/-0.15%/9.32%/94%
Time Period 1940-1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/6.74%/34.80%/100%
Large Stocks/2.53%/21.46%/100%
Long Bonds/0.33%/14.60%/100%
Short Bonds/0.37%/9.32%/100%
What conclusions can we draw from this data:
The information for time horizons of 1 through 7 years showed that short bonds gave the best minimum return and highest percentage of positive returns. At the 8 year horizon, we saw a major reversal and stocks became the leader with the best minimum return, maximum return, and percent positive return. The trend continued for a 9 year time horizon. Does is continue for 10 or more years?
We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.
Time Period 1926 - 1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/6.74%/36.39%/100%
Large Stocks/2.53%/21.46%/100%
Long Bonds/0.33%/14.60%/100%
Short Bonds/-0.15%/9.32%/94%
Time Period 1940-1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/6.74%/34.80%/100%
Large Stocks/2.53%/21.46%/100%
Long Bonds/0.33%/14.60%/100%
Short Bonds/0.37%/9.32%/100%
What conclusions can we draw from this data:
- The trend continues and at the 10 year time horizon, the same conclusions can be drawn as the 8 & 9 year time horizons.
- The gap in minimum return between stocks and bonds continue to grow. It does not seem possible that the only negative minimum return is short term bonds during 1926 - 1999. One might have thought that short term bonds, known as the safest investment, would have been positive in any 10 year period. One might have thought that small cap stocks, known as the riskiest investment would have had this honor of having the worst minimum return.
- The trend continues with stocks having better minimum returns, maximum returns, and % positive returns than bonds.
- The data during 1926 - 1999 looks a little wierd as the % positive return for short term bonds is the lowest.
- The impact of the Great Depression has had a greater impact on the performance of bonds rather than the performance of stocks. Stocks turned from a negative minimum return to a positive minimum return at the 8 year time horizon during both time periods.
- The minimum return of short term bonds and long term bonds appear similar at the 10 year time horizon.
- Bottom Line: If you can handle the ups and downs, keeping your focus on the long term, stocks outperform bonds in all categories. Buy stocks rather than bonds.
If you have a child going to college in 10 or more years you should be looking at mutual funds that contain large cap and small cap stocks.
Investing 9 Year Time Horizon
It is good to know the performance over a 74 year period or 60 year period or a 10 year period. How do you invest if you have a 9 year time horizon? To answer the question, we will look at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds in the book Investments.
The information for time horizons of 1 through 7 years showed that short bonds gave the best minimum return and highest percentage of positive returns. At the 8 year horizon, we saw a major reversal and stocks became the leader with the best minimum return, maximum return, and percent positive return. Will the trend continue for a 9 year time horizon.
We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.
Time Period 1926 - 1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/4.96%/37.62%/100%
Large Stocks/0.80%/21.82%/100%
Long Bonds/-0.08%/14.52%/98%
Short Bonds/-0.16%/9.75%/94%
Time Period 1940-1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/4.96%/37.62%/100%
Large Stocks/1.42%/21.82%/100%
Long Bonds/-0.08%/14.52%/98%
Short Bonds/0.29%/9.75%/100%
What conclusions can we draw from this data:
The information for time horizons of 1 through 7 years showed that short bonds gave the best minimum return and highest percentage of positive returns. At the 8 year horizon, we saw a major reversal and stocks became the leader with the best minimum return, maximum return, and percent positive return. Will the trend continue for a 9 year time horizon.
We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.
Time Period 1926 - 1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/4.96%/37.62%/100%
Large Stocks/0.80%/21.82%/100%
Long Bonds/-0.08%/14.52%/98%
Short Bonds/-0.16%/9.75%/94%
Time Period 1940-1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/4.96%/37.62%/100%
Large Stocks/1.42%/21.82%/100%
Long Bonds/-0.08%/14.52%/98%
Short Bonds/0.29%/9.75%/100%
What conclusions can we draw from this data:
- The trend continues and at the 9 year time horizon, the same conclusions can be drawn as the 8 year time horizon.
- Things have changed with stocks having better minimum returns, maximum returns, and % positive returns than bonds.
- The data during 1926 - 1999 looks a little wierd as the % positive return for short term bonds is the lowest.
- Bottom Line: If you can handle the ups and downs, keeping your focus on the long term, stocks outperform bonds in all categories. Buy stocks rather than bonds.
If you have a child going to college in 9 years you should be looking at mutual funds that contain large cap and small cap stocks.
Wednesday, January 16, 2008
Investing 8 Year Time Horizon
It is good to know the performance over a 74 year period or 60 year period or a 10 year period. How do you invest if you have a 8 year time horizon? To answer the question, we will look at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds in the book Investments.
We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.
Time Period 1926 - 1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/2.36%/43.59%/100%
Large Stocks/1.85%/22.75%/100%
Long Bonds/-0.11%/15.34%/99%
Short Bonds/-0.22%/10.19%/94%
Time Period 1940-1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/2.36%/36.64%/100%
Large Stocks/2.88%/22.75%/100%
Long Bonds/-0.11%/15.34%/98%
Short Bonds/0.23%/10.19%/100%
What conclusions can we draw from this data:
We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.
Time Period 1926 - 1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/2.36%/43.59%/100%
Large Stocks/1.85%/22.75%/100%
Long Bonds/-0.11%/15.34%/99%
Short Bonds/-0.22%/10.19%/94%
Time Period 1940-1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/2.36%/36.64%/100%
Large Stocks/2.88%/22.75%/100%
Long Bonds/-0.11%/15.34%/98%
Short Bonds/0.23%/10.19%/100%
What conclusions can we draw from this data:
- Things have changed with stocks having better minimum returns, maximum returns, and % positive returns than bonds.
- The data during 1926 - 1999 looks a little wierd as the % positive return for short term bonds is the lowest.
- Bottom Line: If you can handle the ups and downs, keeping your focus on the long term, stocks outperform bonds in all categories. Buy stocks rather than bonds.
If you have a child going to college in 8 years you should be looking at mutual funds that contain large cap and small cap stocks.
Investing 7 Year Time Horizon
It is good to know the performance over a 74 year period or 60 year period or a 10 year period. How do you invest if you have a 7 year time horizon? To answer the question, we will look at the minimum return, maximum return, and percentage of time for a positive return for a Small Cap Stock Index, Large Cap Stock Index, Long Term Bonds, and Short Term Bonds in the book Investments.
We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.
Time Period 1926 - 1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/-9.48%/49.83%/96%
Large Stocks/-0.15%/25.08%/99%
Long Bonds/-1.10%/15.34%/99%
Short Bonds/-0.29%/10.63%/93%
Time Period 1940-1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/-7.24%/38.79%/96%
Large Stocks/-0.15%/25.08%/98%
Long Bonds/-1.10%/15.34%/98%
Short Bonds/0.19%/10.63%/100%
What conclusions can we draw from this data:
We will look at the time period from 1926 - 1999, to include the Great Depression and 1940-1999 to reflect a more normal period. It depends if you want a true worst case or a more normal environment.
Time Period 1926 - 1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/-9.48%/49.83%/96%
Large Stocks/-0.15%/25.08%/99%
Long Bonds/-1.10%/15.34%/99%
Short Bonds/-0.29%/10.63%/93%
Time Period 1940-1999
Investment/Min Return/Max Return/% Positive Return
Small Stocks/-7.24%/38.79%/96%
Large Stocks/-0.15%/25.08%/98%
Long Bonds/-1.10%/15.34%/98%
Short Bonds/0.19%/10.63%/100%
What conclusions can we draw from this data:
- The data during 1926 - 1999 looks a little wierd as the % positive return for short term bonds is the lowest.
- The minimum return data shows mixed results. Small stocks which gave the best long term performance had the worst numbers. Short term bonds, long term bonds, and large stocks are close.
- The maximum return data shows that stocks outperform bonds. Small stocks that had the most negative minimum return value has the largest maximum value indicating the most volatility. Large cap stocks and long term bonds got closer together.
- The percentage of time that a positive return had mixed results. Short term bonds had the highest value and got to 100% during the 1940-1999 period. The rest of the data is about the same in the 96% - 99% range except for short term bonds in the 1926 - 1999 period.
- If you are an aggressive investor that only has a focus on the maximum gain stocks outperformed bonds by a wide margin.
- Bottom Line: Large cap stocks, long term bonds and short term bonds are looking very similar.
If you have a child going to college in 7 years you should be looking at mutual funds that contain large cap stocks, mutual funds that contain long term bonds, and short term bonds or a money market account. Remember that the tuition payment is due when the tuition payment is due, regardless of what happens in the stock market.
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