Some Big Tech Companies Are Looking Strong


SmallIvy_1x1Dear SmallIvy,

Love your website for small and beginners. Are you planning on investing in Alibaba? I have about 100,000 and would like to get in on Baba. what are your thoughts? Also yahoo who has 24% in BABA. would you also buy some yahoo? I don’t know how many shares to buy at IPO but don’t want to buy to few as you mentioned in one of your articles. Thank you so much for your time and knowledge you are sharing with us!

Mary

Dear Mary,

Thank you for the kind words and for reading the The Small Investor blog.

I know that IPOs are exciting, especially since the 1990’s when we saw internet start-ups shoot through the roof.  That type of speculation, however, doesn’t fit the investing style I recommend.  First of all, with all of the hype and excitement, it is unlikely you’d be able to get a good price for the stock.  While stocks like pets.com went up dramatically during their IPO days, they also fell dramatically once the insiders were able to sell their restricted shares.  I would love to get shares of an IPO at the opening price, but not at the price of the second or later trades since it is very likely that I would be paying way too much.  I would rather wait for the fall from grace and then buy some shares if the company does have sound fundamentals.  Think about buying Amazon in late 2000.

Another reason I would not invest at this time is that I have no history from which to develop an opinion on how Alibaba will do.  I don’t know if their management team knows what they’re doing.  I don’t have any record of earnings and earnings growth.  I really don’t even know much about the markets they’re in.  I like to be able to have enough information to minimize the risk of a bad management team or a bad product.  That requires some history as a public company and the release of earnings over a few years.

Also note that since they are operating in parts of the world where the government could swoop in and nationalize them on a whim, there is a political risk as well.  I try to stay away from situations involving politics since that is very unpredictable.  You need to know who the favorites are of the government officials in power.

Now on the amount you’re talking about investing.  If you have several million dollars invested elsewhere, putting $100,000 on a single, unproven company might be justified.  It is just your gambling money that may pay off, but no great harm done if it vaporizes.  If that is most of the money you have, however, it is way to big a risk unless you are the CEO of Alibaba and therefore have a great deal of control over the company.  Even then it is risky and you would be better served spreading your money out into other companies.

Regards,

SmallIvy

 
Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Are Blue-Chip Companies Good Investments when Approaching Retirement?


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Dear SmallIvy,

I am 59 years old and believe that I need to “catch” up some to have a comfortable retirement. I have been contributing $23,000/year to retirement account at work through AIG Valic(only option. I have a variable annuity income lock investment with them. Periodically I will contribute to a separate 401 K regular and Roth IRA investment vehicle through another company. I do not have a financial advisor or accountant. My question is, I am leaning to putting new investments in large, solid “blue chip” dividend producing companies such as Johnson and Johnson, Proctor and Gamble, Baxter,Dover with plans to diversify into energy companies and REITS. Is this a sound strategy or can you offer some suggestions. Thank you for any help.

Thanks, Benny

 

Dear Benny,

You are right that blue chip stocks are a good investment when you’re looking for more stability.  These are big companies with many different product lines.  They have the ability to wait out bad times and buy out competitors before they become a major threat.  They also pay a good dividend.  This means that if you get into a period where stock prices are going nowhere you’ll still have income from the company. which is important when you’re retired and need to pay expenses whether the economy is growing or not.  An ideal situation for a retiree is to have enough dividends and interest payments coming in to pay for expenses so that you don’t need to sell shares of stock for cash.  You just write checks or use a debit card to pay for things from the account and then magically the cash in the account is replenished by dividends and interest payments that come in.

That said, even big companies run into trouble.  Shareholders in General Motors and General Electric, giant companies that looked unstoppable, saw sudden drops in the price of their stocks during the 2008 credit market collapse due to the large numbers of loans these companies had made.  They are safer than young companies, but there is always the chance that a single company stock could lose 90% of its value or more very rapidly, so you need to spread your investments out and not have any more invested in one company than you could afford to lose.  Mutual funds are a good way to do this, and there are mutual funds that invest in income producing assets (I’ve held the Duff and Phelps Income fund (DNP) for about 25 years now) and also ETFs and Index Funds that favor large companies (like the Vanguard S&P500 Fund and the corresponding ETF).  If you go with the individual stock route, I would have at least 10 different stocks in your portfolio – 20 would be better.

Energy is getting killed right now with oil prices declining.  I invested in Cameco (CCJ), a large Canadian Uranium producer, as a way to both invest in the energy market and have a hedge against inflation (uranium prices, like all commodities, will increase in price if there is inflation) a few years ago with bad results so far.  I’ve also taken up positions in Oasis Petroleum (OAS) and Enesco (ESV), but I think I may have bought in too late for the current rally and am sitting on losing positions right now.  I’ll reevaluate these soon and decide if I should stay pat, invest more, or sell out.  I like energy long-term as an inflation hedge, so I’ll probably stay invested.  That’s the beauty of long-term investing – it makes decisions a lot easier.  Energy companies also tend to pay large dividends since they generate so much cash, so holding isn’t a bad thing.

I always like REITs as another way to generate income, as an inflation hedge, and as a non-correlated asset to stocks.  These will not generate the returns of stocks over long periods of time, but the returns are very respectable when compared with bonds.  Some of these can be volatile, however, so buying a handfull of them, keeping them as a relatively small portion of your portfolio, and buying them in a mutual fund of REITs instead of picking individual REITs are considerations you should make.

Let me finally say that there is nothing like cash when you are retired.  If you have a year or two worth of cash assets (money market funds or CDs) you can wait out dips in the market.  You can even have 3-5 year’s worth stored up if you want to be more cautious.

Thanks for reading and best of luck.

Regards,

SmallIvy

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice; it gives information on investing, personal finance, and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Playing Catch-Up With Retirement Investing


Dear SmallIvy,

Hi, thank you for this blog. I am 53 and have always “lived for today” and seriously regret it. The only debt I have is a mortgage which will be paid off in February of 2014. I am very interested in the market but know NOTHING about it. I don’t even have a savings account but my mother’s estate is in probate and will be settled by June 2014. I don’t know how much I will inherit but just say the available cash is $10,000, where should I invest? Also, could you give me an idea of how to recoup years of financial gain that are lost? Thanks in advance.

Lynne

 

Dear Lynne,

I’m sad to hear you say that you regret “living for the day” because there is certainly something to be said for doing so to some degree.  There are things you can only do (or at least do right) when you are young.  I certainly don’t advocate squirreling every dollar away and waiting for retirement to start living.  I just advise taking care of necessities and making little sacrifices (like eating in fairly often or buying used cars instead of new) appropriate to your life that will allow you to take advantage of the power of investing and compounding.

That said it is definitely a lot easier to invest and grow wealth when you are young than when you are old because time reduces risk and doing really well in investing involves putting money into more risky things but doing so for long periods of time to reduce your risk.  It is easy for someone who is 20 to fund their retirement by simply putting a few hundred dollars away each month into a 401k and investing it in stock mutual funds.  It is much more difficult for someone who is in their 50’s because they need to put a lot more away and be more cautious with investments, but there is still the potential to retire a millionaire with some discipline.  For some one in their 60’s, there is almost no chance without a huge income and the willingness to live like a college student for a few years.

As far as where to invest, with your need to preserve what you have while still trying to grow wealth, combined with your lack of knowledge about investing, the only way to go is mutual funds.  Individual stocks would be too risky and require you to gain too much knowledge to know how to pick stocks.  With mutual funds the secret is to buy funds with low fees and costs (less than 0.5% of assets), which means index funds.  The best funds are those that are “plain vanilla,” such as large cap funds or small cap funds, rather than exotic funds with some sophisticated trading strategy.  You would also want to include income stocks and bonds in your portfolio to help dampen the fluctuations in value that an all-stock portfolio would produce.  Again, there are bond and income mutual funds.

Finally, the biggest and best tool you have right now is the ability to generate an income through work.  If you can increase your income through job promotions, working paid extra hours, possibly working a second job for a period of time or during holidays, and maybe finding a side business that can generate some income you still have time to save up enough to have a comfortable retirement.  This is if you combine increasing your income with cutting your expenses because you will never be able to out earn your ability to spend.  Paying off your mortgage is a good first step since now you can direct that money into savings and investments so long as you don’t add new expenses to replace your mortgage payment.  If you never spent time living like a broke twenty-something, maybe this is the time to do so for a period.  It will beat living in poverty during the long years of retirement.

Regards,

SmallIvy

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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