Category Archives: Investment Strategies

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The New Book, Cash Flow Your Way to Wealth, is Closer than It’s Ever Been

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I remember when I was involved in testing in one of our facilities (my day job is “rocket science,” or more specifically, aerospace engineering), one of the most irritating things that one of our test engineers would say was, “We’re closer than we’ve ever been.”  He would say this when you asked questions like “How much longer do you think it will be before we’re ready to test?”  The answer was absolutely correct, but totally useless.

I remember specifically one day when I was supposed to meet my wife for lunch.  I didn’t have any way to contact her (didn’t have cell phones in that day).  We were testing in a facility that would blow really hot air over things like materials you would put at the front of a space capsule to allow it to survive coming back into the atmosphere.  This facility used compressed air at such high pressures it would look like a liquid if you could see it because the molecules were squeezed so close together.  Once the test started it would only run for a few minutes, so I knew that we could be done in just a minute or two if the test started, but as is usually the case when doing these kinds of tests, there was one delay after another as we were checking things and finding issues.

As I watched the time tick away, I got to the point where I would need to leave to meet my wife on time, then the time passed where I would be a little late, and then it started to get to the point where I was going to be more than a little late.  I didn’t absolutely need to stay for the test – I could find out afterward what had happened and look at the data then, but it was really neat to see this facility run and I didn’t want to miss it if I didn’t need to.  If I knew it was going to be a half-hour before we tested, I might have just gone for lunch, but thinking that it could happen at any minute, thanks in part to the test engineer saying we were “closer than we’ve ever been,” I stuck around and waited.

Finally, the test went off and I went to meet my wife.  By this point I was a half-hour late and had some explaining to do.  Luckily, she understood, but I still hated to keep her waiting.

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I feel like the same thing is going on with the new book, “Cash Flow Your Way to Wealth.  I keep thinking that the book is almost done, but then I get a proof copy and sit down to read through it for errors and issues, and find that there are still things I want to improve and move around a bit.  As a result, we’re always “closer than we’ve ever been.”

The other day I got a new proof copy (this is the third one) and started reading through it.  I think that it is finally to the point where there are just typos and grammatical errors to correct, which means that it should be out in about a month.  I’ve only made it through the first couple of chapters, however, so it may take a bit longer than I think.

I really like this book because it gives you something you really don’t find in other finance books – a specific strategy for managing your money to live a financially secure life.  If a high school senior picked up this book before he got into debt and made all of the other bad decisions many of us make, he could save himself a lot of pain and not need to use the Dave Ramsey debt snowball to climb out.  That is the beauty of it – we all start out clean and debt free when we first become adults.  It is at that point that we try to live beyond our means and we get into trouble.

Hopefully, there are a few folks out there who have been following my posts on writing this book who are eager to get their hands on a copy.  If you shoot me an email (VTSIoriginal@yahoo.com) I’d be happy to let you know when the book is ready so that you can buy a copy and not miss out.  I also have a special offer for those who buy a copy of the book and send me proof (like a picture of the book in your hands or a screen capture of the e-book):  I will give you a copy of a spreadsheet program I created to manage my own cash flow.  This means that you can use all of the work I went through in putting the spreadsheet together to make developing your cash flow plan that much easier.

So, we’re closer than we’ve ever been.  Please keep checking back to The Small Investor or subscribe to make sure you don’t miss the big release.  May financial security find you all.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Is this a Correction? Yes.

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Now that the markets have retreated a bit, as they always do eventually, we’ve started to see the commentators blather on with their endless speculations on where the markets will go from here.  One particular subject of discussion is about whether this is a correction or not.  Just the other day I heard one reporter say that it is important if the Dow Jones reaches a certain level because if it did, we would “be in a correction!”

To understand what a bear market and a correction are, you need to understand Dow Theory a little.  Previously I wrote about a pet peeve of mine – reporters and market commentators trying to distinguish between corrections and bear markets based on percentage changes – in a blog post from a few years ago.  You can find that post here if you want to be smarter than your friends.  The bottom line is that a correction and a bear market are both market events when stock prices decline, with a correction being one move down, followed by a resumption of the upward trajectory, and a bear market consisting of at least two legs down.  A trader didn’t feel like teaching Dow Theory to a bunch of journalists, so he just said that a correction is when the market indices go down by at least 10%, where a bear market is when it goes down at least 20%.  Journalists are lazy and didn’t bother to learn more, so the definition has stuck and become gospel.

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Where they used to worry about going into a bear market, the commentators are now all concerned if we even hit a correction level, as if that would matter.  Now it seems all important if we go down 10% because then we would be in correction territory.  It is as if everything is just fine and rosy if we go down 9.9%, but if we hit 10%, the end of the world as we know it will occur.  Who knows what would happen if we went down 20% and went into bear market territory?  Maybe we’d all be homeless and sleeping in our cars.

Well, I’ve got scary news for you:  We are in a correction.  It doesn’t matter if the markets go down 5%, 10%, or 90% before they recover.  In any of these cases we’ve seen a correction.  And now that the markets have recovered a bit from their lows, if they proceed down a second time before they start reaching new highs again, we will be in a bear market.  And should any of this matter to you?  Not in the least.

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The markets are falling for two good reasons.  The first is that they went up huge last year, with many indices 20 or 30% plus higher than they were before the Presidential election.  Anytime that the stock market goes up like that, people get a little silly about what they are wiling to pay for stocks.  Eventually they look at their portfolio and decide maybe they paid a bit much, then try to quietly sell and get out of their positions.  If enough people do this, it causes prices to decline, which gets people worried, so they sell as well.  Before you know it, you’re seeing a correction.  This is normal after a big move upwards.

The second reason is that the economy is starting to do really well for the first time since 2008.  The Federal Reserve has been keeping interest rates at near zero for about ten years now.  This means that they can’t lower rates much at all should they want to spur the economy.  They therefore want to raise rates a bit to give themselves a little breathing room, but have not been able to do so for a long time because the economy has been so sluggish.  Now that they are seeing the economy start to grow rapidly, with GDP going over 3% for the first time that anyone born since the millennium can remember, they are taking the opportunity to let off on the gas a little.

They also worry that all of this great news about jobs being created, companies giving out bonuses and raises, and people going to full-time work and spending again, will  cause inflation.  They therefore want to raise rates to tamp that threat down as well.  Because higher interest rates affect the ability of businesses to borrow, raising rates causes the stock market to decline.  It is also bad news for current holders of bonds since they see their bonds decline, but it is good news for new buyers of bonds since they’ll be able to get a better rate.  It also helps those with savings accounts and money market funds.

What should you do?  Nothing that you are not doing already.  If you are building up a position and investing regularly, you should  continue.  If you are getting ready to retire soon, you should have already taken some money out of the markets (enough to meet immediate needs for the next few years) just in case a decline such as this occurs.

If anything, you should try to find more money to invest if you are not planning to retire for at least ten years since at this point, stocks are on sale.  You may not get the best price possible (they could decline more if we’re in a bear market), but you’ll get a better price than you did a week ago.  And prices will be higher than they are now in ten or twenty years regardless of whether this is a correction or a bear market.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

My Investing Journey, or, When I Stopped Fooling Around and Got Serious

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Probably fifteen years ago, I found a book that really changed the way I invest and really made a difference.  It was Do You Want To Make Money Or Would You Rather Fool Around ? by JD Spooner.  About that time was when I shifted from what I had done through my youth to what I now call the Serious Investing strategy.  It has made a huge difference in my investment returns.I started investing when I was twelve-years old.  My father was a big investor and I used to watch him keep track of his stocks using the stock tables from The Wall Street Journal.  He would diligently write the closing prices down each day, then make a chart of his stocks on graph paper.  This was around 1982, when there really were no spreadsheets, let alone the internet.  After talking about investing with him a bit, I decided that I wanted to take the $250 from my bank account and invest in stocks.

I bought 15 shares of Tucson Utilities for $15 per share.  We got the stock certificate in the mail a couple of weeks later, which featured a picture of some goddess shooting lightning bolts from her fingers.  I held the shares through high school and college.  I actually went to undergraduate school in Tucson, so I became a customer of my company, which felt pretty neat.  Along the way the stock went to about $80 per share and then collapsed when a scandal broke out at the company.  The share price dropped to $4 per share, and then $2.  I continued holding for several years.  Eventually the company started paying dividends again.  The share price recovered with time until the company was bought out.  Overall I made a good profit on the position.

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Rather than having me call home every few weeks asking for money for college expenses, my parents used the gift exemption each year when I was in high school to put money in a brokerage account for me.  Actually, my father transferred shares of stock that he had into the account, which allowed the profits from the eventual stock sales to be taxed at my lower rate, rather than at his high rate.  This was probably good and bad, in that it gave me a good start and financial security, but it also gave the opportunity for me to really mess things up since I was a young man with a fair amount of money available to throw at a whim.

For the most part I managed it well, not blowing the money on stuff as some late-teens, early twenty-somethings often would.  I was actually able to make the account grow while I was in undergraduate college while using the account for rent, food, books, and other expenses.  I had a state lottery scholarship that allowed me to go to college tuition-free, plus worked a job in a lab at school that paid about $400 per month.  Grad school was more expensive, living in the San Francisco Bay area with higher rents and costs, so even though I was also able to go to grad school tuition-free and had a research assistant job that paid $1500 per month, the account started wasting away a bit and was fairly small by the time I graduated and got a regular job.

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While I was fairly good with money management, I wasn’t that great at investing because I had lessons to learn.  A big lesson was that people have no business buying options for speculating.  During my sophomore year I was buying options on both some individual stocks and the S&P 500 and S&P 100 futures.  I had planned to try option speculating with a certain amount of money, and actually ended up losing about twice that amount before all was said and done.  Funny how easy it is to start throwing good money after bad, as the expression goes.

Besides doing really foolish things like trading options, a lesson I’d learned before I finished undergraduate school, I also wasn’t investing effectively because I was trading too much and not letting profits grow like I should have.  My mind was filled with the idea that you need to “cut your losses short” and “protect your profits.”  As a result I was selling stocks when I made a profit of $1000 and also selling them when I had a small loss (or sometimes a big loss, since stocks sometimes fall a lot before you can do anything).  Taxes each year were a pain as well since I typically had 15-20 trades I needed to detail on my tax returns.  Another issue I had was that I wasn’t buying in sufficient quantities to make much of a profit when I did get a winner since I had 100 shares each of maybe 20-30 stocks.

About then was when I found JD Spooner and his book, Do You Want To Make Money Or Would You Rather Fool Around ?   From Spooner I learned that, if you are going to try to trade individual stocks, it is better to concentrate your investments in a few holdings than it is to buy a few shares of this and a few shares of that.  If you are spreading your money out, you might as well buy mutual funds, which are cheaper and do a good job of diversifying your investments.   Actually, you should use mutual funds for your core investments and then have a few individual stocks to try to increase your returns.

I then went from making a small amount off of my winners, maybe $2,500 off of a huge winner that went up 200% and that I didn’t sell just because I made $1,000, to making real, life-changing profits.  I now buy large positions for my individual stock investing (my 401K and a good portion of my IRA is in index mutual funds, in case I don’t do that well with stock picking) and let those investments grow for several years.  The only reason I sell is if the company has changed or the position has become so large that a loss would be devastating.  (I typically cut a position in half if it grows to about 5% of my net-worth or more.)

This has made all the difference and I have actually been able to beat the markets over time since I started using this technique.  There are some years when I lag the market, since I’m invested in a few companies and they don’t do well every year, but over a period of time I have done very well.  This is not to say that I have not had some significant losses, since concentrating also makes your losses big when you choose poorly, but by letting my positions get big, but not big enough to be devastating, I can tolerate the risk.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Become a Lazy Investor

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You don’t want to be a lazy worker since you’ll never see your income rise and you’ll be the first person laid off if you aren’t fired outright.  You don’t want to be a lazy spouse since it will hurt your marriage.  You don’t even want to be lazy when it comes to managing your money since you’ll waste all sorts of money buying stuff you won’t remember in a week.  One place where it is good to be lazy, however, is in investing.

Lazy investors don’t do anything very often.  They think about calling in an order to sell a stock that has gone way up in price, but then it is a week or two before they get around to it, so they only trade a couple of times per year.  They don’t feel like pouring through stock tables, so they pick a couple of mutual funds that cover the markets and just stick to them.  They use payroll deduction since they’re too lazy to send in a check each month.  They maybe check their account balance once a year, so they may actually miss a whole market crash and recovery (what great recession?).

Hey – if you like The Small Investor, help keep it going.  Buy a copy of SmallIvy Book of Investing: Book1: Investing to Grow Wealthy, buy one of the products shown, or just click on one of the product links and then browse and buy something else you need from Amazon’s huge collection.  The Small Investor will make a small commission each time you buy a product through one of our links.

Why does it pay to be lazy when it comes to investing?  It is because active traders do things that cause them to be bad investors.  They see the markets going up, so they put more money in just before it peaks and crashes.  They get scared in market crashes and sell just as stocks are hitting the bottom and starting to rally.  They go through their 401k account and shift out of the funds that have done poorly and into those that have done the best, buying those funds when they are high in price and selling the ones that are low in price right before they start to rally.  The next year they do exactly the same thing, trading back to the funds they owned before.  They watch CNBC and buy or sell stocks because some analysts tells them to, buying or selling with everyone else who saw that program and therefore getting a really bad price.


In the end they spend a lot in fees and make a lot of money for their brokers, and maybe get banned from trading by their mutual fund company, but they lag the returns of the markets.  They also create a lot of paperwork when they do their taxes since they need to account for each trade. So they do more work but get less done.

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Be lazy and you’ll make all the right moves.  You’ll just own everything, instead of trying to choose, so you’ll always have your money in the stocks that are doing well at any given time.  You’ll rarely sell, so you won’t sell in a panic.  You won’t generate costs and tax paperwork by doing a lot of trades.  You won’t be stressed at night about what the stock market did that day because you’ll not even look at the markets.  Being lazy is great for an investor.

If you want to become a lazy investor and make more money, here’s a few tips:

1. Be lazy when selecting investments.  Instead of spending hours researching stocks, buy mutual funds.  And instead of spending hours pouring over mutual fund evaluations and reports, just buy the basics – an S&P500 fund, a Small Cap Fund, a Total Bond Market Fund, and a Total World International Index Fund.  Don’t have the money to buy all of these at once?  Just buy the Small Cap fund now, then add the others when you think of it later, maybe in a year or two.

2. Be lazy in your fund allocations.  Instead of trying to figure out which funds to buy based on what the talking heads are saying is going to be hot next year, just invest 25% in each fund.  Whenever you have money to invest, find the fund that is the lowest percentage of your portfolio and buy that one.

3. Be lazy when selling.  With mutual funds, unless you need the money within five years, don’t sell at all.  Just let your money ride.  If the market goes down, don’t sell.  If the market goes up, don’t sell.  Just lock it and leave it.  If you own any individual stocks, don’t sell them unless one becomes worth more than $50,000 or ten percent of your account, whichever is bigger.  If that happens, sell half, but not too quickly.  Otherwise, give time for the company to grow.

4.  Be lazy when sending in money.  Put your investments on auto-pay so that you don’t need to remember to send in money.  Just have it magically leave your checking account once or twice a month and go into your mutual funds.

5.  Be lazy when reading your statements.  Maybe open a statement once a year when you have nothing better to do, and then to mainly check and see if you’re getting hit with any fees.  So long as things are chugging along, don’t make any changes.

So there you have it.  Be active when it comes to exercise.  Be active when it comes to budgeting.  Be active at work and active with your kids.  But be lazy about investing, and you’ll do better than 90% of the other investors out there.

 

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why Should You Buy Individual Stocks Instead of Just Buying Mutual Funds?

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The Bogleheads’ Guide to Investing is truly a great book and one that you should read if you want to get involved in investing and to improve your financial life in general.  It includes information on mutual fund investing, budgeting, and what kinds of insurance you should have.  It also includes a lot of good information on research that has been done showing things like that the average investor would be better off just buying index mutual funds than managed mutual funds since most index funds outperform managed funds over time.  Likewise, it favors investors using mutual funds instead of individual stocks for the same reason – on average, most investors do better just buying index mutual funds than they do buying individual stocks.Now I have always been an individual stock (and bond, and warrant, and convertible) investor, probably because my father was an individual stock investor.  Of course, I started before index funds really existed.   Mr. Bogle started Vanguard and introduced the world to index funds back in 1976 with the start of the Vanguard S&P 500 Index fund, but back in 1984 when I started investing the fund was relatively small and there was little talk of index mutual funds, so I hadn’t heard of it.  I did buy a few closed-end mutual funds during that period, such as Tri-Continental Corp and Adam’s Express, but I was mainly invested in several individual stocks, taking up positions of 100 shares at a time.

There are really two purposes to a mutual funds.  The first is to allow small investors to spread their money out over several stocks, and thereby eliminate the risk that they would be substantially hurt should one of the companies in which they invest have an issue, for example, if the CEO defrauds the company or a company grossly misreads the markets and ends up closing down a lot of stores and going bankrupt.  I’ve had both things happen since I’ve been investing and I can affirm that you effectively lose your whole position when they do occur.  If you had your whole retirement savings in thee companies and one of them has an issue like this, you would see 1/3rd of your money disappear in a day.  If you have only a few stocks and even if nothing big happens, but a company stock simply flounders around for ten years and goes nowhere, you still have missed ten years of potential appreciation on your money.  You should have seen your money at least double in that time period, meaning you would have half as much money at retirement as you could have had.  This is why individual investors need diversification.

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The second reason for investing in mutual funds is to have an expert investor manage your money for you.  You pay an expert to do the research and pick the stocks for you, decide when to invest, and keep tabs on things.  You have fund companies like Janus who claim to have all sorts of insight and access to information that will allow them to make the best picks and do far better than you could do investing alone with your limited resources, or so the sales brochure says.

The trouble with this second idea is that professional money managers with managed mutual funds do not outperform the markets on a regular basis.  Various studies have shown both that investors would do better using index funds or simply throwing darts at a dart board much of the time.  This is because managers don’t outperform the markets with their picks or their market timing, instead maybe matching the performance of the markets at best.  You then do worse than the markets in a managed mutual fund due to the trading and research costs, especially if you include the fees they charge each year whether they beat the markets and make you money or not.


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So going back to the first question, why would anyone buy individual stocks instead of just buying index mutual funds?  If the pros can’t beat the index funds, what chance would an individual investor have?  The thing is, while there are few if any managed mutual funds that beat the index funds, there are individual investor who do so, and there are enough of them to make it more than just a fluke.  In fact, Warren Buffett, who has been the richest man in America at various times in the past, made his fortune by picking individual stocks.

The secret lies in the way you buy individual stocks, taking advantage of something an individual can do and a professional money manager at a mutual fund cannot – concentrate your holdings in a few great stocks and hold for long periods of time.

Concentrate your holdings.

By concentrating your holdings, while subjecting yourself to the single-stock risk discussed earlier, you are giving yourself the opportunity to make a real significant gain when you are right.  Professional money managers can’t do this because they have so much money to invest.  If they tried to put all of their money in just a handful of stocks, they would end up driving the price up and owning the companies.  An individual can buy 500, 1000 or even 2000 shares without the market even noticing.

If you own a large position and the CEO does jump town for Rio and the company goes bankrupt, you might be out $10,000 or $20,000 by doing this, but if you have a company that doubles a few times over a ten-year period, you can make $50,000 or even $100,000 if you have a lot of shares.  One success makes up for a couple of failures.


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Hold for a long period of time

  A professional money manager is constantly having her performance compared with the markets and other money managers.  Some managers even go out and buy whatever stocks did well right before the quarterly or annual report comes do to make it look like they had all of the hot stocks during the period. This adds to cost and means that they are buying stocks when they have already gone up in price.

Individuals can buy shares in a company and then just wait for the company to grow and do well, eventually catching the eye of the markets.  I sat on Home Depot stock through the late 1990’s and early 2000’s while the stock went nowhere.  Eventually they traded out CEOs and started to grow again.  Over the last few years, they have gone from $18 per share to about $190, which means that over the 20-year period they have returned about 12% annualized, compared with an 8% return for the S&P 500. If you were to look at my performance on that stock back in 2009, you would have only seen the stock go from about $18 to $20 over the 12-year period and I would have probably been fired if I were a fund manager.  It is only in the last ten years that the stock has greatly outperformed the markets.

So the bottom line is that individuals would be just fine buying only index mutual funds and the vast majority of investors should do so.  You’ll outperform managed funds and earn a good return on your money.  Every investor should have index mutual funds as the core holdings in their 401k plans, IRAs, educational IRAs, and other places where they really need to make sure the money will grow over time and be there when they need it.  Some investor, however, could also be well-served to add a couple of individual stocks, bought in high concentrations (at least 500 shares but never consisting of more money than one would be willing to lose) and held for long periods of time to their investment accounts outside of their core mutual-fund holdings.  I think there is still a role there for individual stocks.

New to investing? Want to learn how to use investing to supercharge your road to financial freedom?  Get the book: SmallIvy Book of Investing: Book1: Investing to Grow Wealthy

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How Long Would It Take to Be A Millionaire

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How long would it take you to becoming a millionaire?  Well, I used an investment calculator to determine at what age you would become a millionaire if you invested different amounts, from $200 per month to $1000 per month, starting at age 20.  Here’s the results:

Monthly Savings 10% Return 15% Return
$200.00 59 49
$500.00 50 43
$750.00 46 40
$1,000.00 43 38

So if you put $200 per month away ($2400 per year) into stocks and saw another period like the 1980’s and 1990’s, you would become a millionaire somewhere in your early 50’s.  If you put away $1,000 per month, or $12,000 per year, you would become a millionaire at age 43 even if you just got modest, average returns from the markets.  If you could get a 15% return, you’d be there are age 38, just 18 years later.

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Note that $12,000 per year for 18 years is $216,000, which is what you could easily pay at a private, four-year college.  If you then left the money invested, and were able to earn 12% annualized, you would have a cool $12M at retirement with no effort on your part.  On the other hand, if you earned $200,000 per year at a job because you went to an elite college from age 20 to age 65, you would earn only $9M over your working lifetime.  Just saying….

Be sure to check out this month’s book, The Bogleheads’ Guide to Investing.  

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Is This the End for Stocks (or Just the Start of Something Big)?

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There was an interesting article in The Wall Street Journal on Friday about how companies are slowing down stock buyback programs.  This is one way in which companies return money to shareholders – they use some of the extra cash they are generating to buyback shares, taking them out of the market and reducing the number of shares out there.  Theoretically, this makes the remaining shares more valuable, thereby rewarding shareholders.  I’d say that the jury is still out on whether this actually works.

One thing share buybacks definitely do is to increase the earnings per share since there are fewer shares out there even if earnings remain the same.  Because many investors use earnings per share to judge how well a business is doing, reducing the share count might lead to additional investments and higher share prices.  I always look for a string of earnings per share increases when evaluating a stock.  That said, seeing EPS increase just because the share count is being reduced is questionable.  Kind of like saying that your car is faster because you’ve installed smaller tires that make your speedometer read fast.

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The main reasons that a company buys back shares are to 1)reduce the dilution caused when they issue shares and options to employees and executives and 2) because they don’t have good places to invest the money, so they figure they should just reduce the number of shares out there.  It appears that the latter has been true for the last several years with share buybacks reaching very high levels from 2011 to 2016 as a sluggish economy has caused many corporate boards to hunker down and wait for conditions to improve.  This meant that share prices increased, but the overall economy was relatively stagnant.  From the Journal: “The postcrisis surge in buybacks has been frequently cited by stock-market bears as a sign that the market’s eight-year advance has been driven more by financial engineering than by long-term growth.”

Since the election of Donald Trump and the proposed tax cuts, along with cuts in regulation, companies are thinking that the economy may pick up and they may be able to expand again.  In particular, rollbacks in regulations associated with The Affordable Care Act, such as the requirement that businesses with more than 50 full-time employees provide health insurance, may lead to growth since companies could hire more workers and have more workers full-time (or even overtime) without incurring a big change in labor costs for passing from 49 to 50 workers.


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Why this should be interesting to investors is that the current stock market rally, which has gone on for about eight years now, may be able to continue despite the relatively lofty evaluations.  Price to earnings ratios will eventually return to historic averages, but that can occur by stock prices declining or by earnings increasing.  If companies expand and see earnings increase, current stock prices may become more justifiable, allowing share prices to hold their gains and maybe continue on for a while.  The end may not be as near as prognosticators are predicting.

That said, stock prices may already reflect a lot of the expected growth, meaning that as earnings increase due to sales increasing, instead of due to stock buybacks, share prices may remain stagnant since the good news is already priced in there.  We may even see the scenario where earnings increase, but not by as much as investors were expecting, so share prices may actually decline.  The lesson, as Yogi Beara used to say, is that predictions are always hard, especially when they are about the future.


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So what is the investor to do?  The answer is the same as it always is:  Invest money that is not needed for the next five to ten years and invest regularly.  It is hard to say where the market will be in three years, but in ten years it will very likely be up.  Over long periods of time, stocks will perform better than CDs, bonds, or any other interest-bearing asset.  This is because the stock investor is taking more risk than the income investor and prices are set to reward investors accordingly.  If there is a decline as share prices reset from the big run-up we’ve seen, it will just mean that there will be bigger profits to gain when share prices rebound to current levels and beyond.

New to investing? Want to learn how to use investing to supercharge your road to financial freedom?  Get the book: SmallIvy Book of Investing: Book1: Investing to Grow Wealthy

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Simple Ways to Invest in your 401k

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Congratulations – you are now a pension fund manager.  There is only one person in your pension plan, but that person is very special – you.  If you are working for a company with a 401k plan, ready or not, you are now the manager in charge of your pension plan.  Do it well and you’ll come out way ahead of where you would have in a traditional pension plan.  Do it poorly, and it will be a long, cold retirement.  Unfortunately, you can’t sue the pension plan manager for mismanagement, so take a few minutes to learn at least the basics.  It really isn’t very hard (believe it or not).

Interested in learning how to invest in individual stocks?  A SmallIvy must-read is JD Spooner’s Do You Want To Make Money Or Would You Rather Fool Around?

The dirt simple method:

The easiest method of investing your 401k assets will provide a reasonable return – better than a traditional pension plan – and take only a few minutes one time to implement.  Here’s the recipe:

  1.  Look through your 401k investment options and look for a target date retirement fund.  These will normally include words like “target” in the name and have a year in their title.  For example, the Vanguard Target Retirement 2020 fund is one of these funds.
  2. Find a fund with a date near your retirement age.  For example, if you’re 20 today, pick one 50 years into the future, so either a 2070 fund or a 2065 fund.
  3. Direct all of your investments into this fund.
  4. Go off and have a cold beverage of your choice.  You’re done.
  5. Look at your statements maybe every five years or so.

Why this works:  A target-date fund automatically shifts investments as you age, going from more aggressive investments when you’re young to more conservative investments when you’re older.  Theoretically, the fund managers should just take care of everything for you, which is why they’re called one-decision funds.

Why you can do better:  Unfortunately, one-decision funds are not always set up optimally.  (Notice that I didn’t say they were set up “wrong.”  I said, “not optimally.”)  Investing in one is far better than putting your money in the money market fund where it will lose money each year if you include inflation in your calculations, but you will not get the returns you will get by allocating the funds optimally on your own.  These funds also vary in their investment allocations by fund company, with some being too conservative and some being too aggressive.

                           

Great beginner investment guides.  


The simple but not dirt-simple method:

If you want to get better returns, but still not spend much time or learn very much, do the following:

  1.  Figure out your allocation between growth investments and income investments.  Do this by setting your income allocation equal to your age minus ten, and your growth allocation equal to 110 minus your age.  For example, if you’re 25, your income allocation would be 25-10 = 15% and your growth allocation would be 110 – 25 = 85%.
  2. Invest your income allocation in a bond fund that covers as much of the market as possible.  For example, the Vanguard Total Bond Market Fund, which invests in bonds that come due over a variety of time periods, would be appropriate.  If you were 25, you would set up your 401k to put 15% of your contributions into the bond fund.
  3. Invest the rest in a broad market stock fund.  For example, the Vanguard Total Stock Market Fund, which invests in all kinds of different companies, would be appropriate.  A twenty-five-year-old would put 85% in the stock fund.
  4. Go off and have your favorite frosty beverage.
  5. Look at your statements every five years to see how you’re doing.  Adjust your holdings as needed as you age to keep your age minus 10 in bonds and 110 minus your age in stocks.  For example, at age 30 you would have 20% in the bond fund and 80% in the stock fund.  You would need to both move money between funds and change how new investments are invested.  Many mutual funds have online tools to do this in a couple of clicks.

Why it works:

When you invest in stocks, you make money when the company grows and eventually pays a dividend.  Because you’re depending on the growth of the company, returns are more sporadic than they are with things like a bank account that pays a predictable interest rate.  When companies do grow, however, the rate of return is much higher than it is with interest-bearing assets (because you’re taking on more risk).  Over long periods of time, if you invest in a lot of different stocks, you’ll get market returns which have averaged between 10 and 15% over the last 100 years when assets are held for long periods of time (like 25 years).  As you get closer to retirement, you shift to interest-bearing assets like bonds and real estate that have a more predictable return, which helps reduce the severity of declines, but which return less.  You therefore start out mostly in stocks when you’re young and can afford to go through a big market decline since you can wait for good times to return (plus, you have little money invested), and then shift to bonds when you get older to reduce the volatility (how much your portfolio value goes up and down) since you need more security at that point in your life.

Why you can do better:  

Only looking at your portfolio every five years and adjusting your investments will mean that your allocations may get a little skewed until you finally adjust how the money is invested.  For example, if stocks do really well but bonds lag, you may end up invested in a larger proportion of stocks than you should be, which means you’ll get hit harder during a stock market decline than you would be if you had the right amount of bonds.

Want all the details on how to invest to amplify your wealth?  Try The SmallIvy Book of Investing.

The slightly harder than the simple method for those who can turn off Netflix for an hour a year

Rebalancing, which is what you’re doing when you adjust the amounts invested in stocks and bonds in step 5 of the Simple Method, should really be done about once per year, but no more often than twice a year. To improve your returns a little more with the simple method, instead of looking at your portfolio only every five years and rebalancing, rebalance once per year.  Keep in mind while it is very unlikely that you’ll see a decline in your portfolio over a five-year period, you may very well see one over one year.  Just realize you’re able to buy more shares with the money you have when prices go down and stay the course.

Why it works:

By rebalancing once per year, you automatically sell what did well during the last year and buy what did poorly.  This means you’re taking profits when things go up and are likely relatively expensive (and therefore may decline in price or just not go up as fast during the next year), and buy things when they’ve gone down in price and are on sale.  You only want to rebalance once a year or so since doing so too often will mean you may sell at the beginning of a big rally.  Stocks and bonds tend to have what is called momentum, meaning that when they are going up, they tend to keep going up for a while and vice-versa.  Rebalancing too often will mean you’ll miss this momentum.

Why you can do better:  

Investing in the whole US market in stocks and bonds is good, but adding other kinds of assets can improve your returns even more.  In addition, by skewing your investments towards other asset types, like small stocks which have more room-to-grow than big companies, you can get a little better return.

In the next post, we’ll go into some ways to get that little bit extra out of your 401k portfolio if you’re willing to just do a little more.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Rumors of Retailing’s Death are Greatly Exagerated

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There is a difference between investing and speculating.  With investing, you know that you are going to make money, and you can estimate the rate-of-return you will get, within a range of percentage points.  For example, if you buy a set of index mutual funds with low fees, diversified to include large and small US stocks (like an S&P500 fund and a Small Cap fund), and hold them for 15-20 years, you pretty much know you will make money and you’ll probably get an annualized return of between 8 and 12%.  You can assume this because all of the whole-market investments in the past with holding periods of 15 years or longer have always had a positive return and for most, except for periods that start right before the beginning of the Great Depression, returns have been at least 8%.  Most bear markets last just a couple of years, and when they end stocks race back past their old highs quickly.  The natural tendency for the markets is to grow because businesses are always expanding and growing more efficient, and because there are always more people being born, who then start producing and consuming things.  This may not always be the case, but when it stops, you may be worrying about a lot more than the returns on your mutual funds because you’re looking a an economic collapse.

Speculating is unpredictable and has no assurance of a positive return.  It is true that you can make lots of money quickly with a good speculation, just as you can make money at the roulette tables in Las Vegas, but there is no guarantee.  People who are serious about making money invest.  Those who are in it for entertainment speculate.  A great book talking about the difference that every new investor should read is JD Spooner’s Do You Want To Make Money Or Would You Rather Fool Around ?

That said, there are times when even the serious investor can read the writing on the wall and may choose to make a speculation.  One of those times is when a whole industry (or even the whole market) has been beaten down, taking the good stocks with the bad down in price to the point where many companies are obviously greatly underpriced.  During these times you can try to goose your returns a little bit by loading up on a couple of different companies in the sector.  In fact, most of the upside you’ll see that leads to those returns of 8-12% occur right after periods such as that.

Retailing, or more specifically, brick-and-mortar retailing, is in such a phase right now.  There are many good, strong retailing companies that have seen their share price decimated as Amazon has moved into the marketplace for virtually everything big time, making some investors sell with abandon, to the point where many great companies are at bargain-basement prices right now.  Many of these companies are still making great profits, but just have seen their sales slow down a little (or even just said that they expect their sales to slow a little over the next couple of quarters) and as a result seen their share price drop fifty percent or more.  This presents a buying opportunity.  Normally you could expect to possibly make an annualized rate-of-return of 10-15% with a good retailer, but at times like this, you might see returns of 100-200% over a year or two.  Coincidentally, Amazon was in just this same position in 2001, falling from $110 down to about $5 per share as all of the dot com companies burst.  Today it is at about $1100.

 

                           

Great beginner investment guides.  

Of course, as I’ve said, this is a speculation, meaning you could be wrong and lose money.  If things are really changing and retail stores close down because people would rather order from Amazon and wait for the drones to deliver their goods, you could lose money, perhaps your entire investment.  The timing is always tricky as well since stocks tend to stay down longer than you would expect, so you could buy in and then see the share price continue to drop before eventually turning around and shooting up.  You need to be willing to buy in and sit on the speculation for some time, perhaps a few years, before things turn in your favor.  You also need to only invest pn;y what you can afford to lose, because not every speculation works out.

I had about 400 shares of Chicos FAS, which sells women’s clothes, in an IRA that I’d bought at about $10.50 per share back in 2011.  The company had done well, going up near $20 a couple of times since that point.  The company has been battered down lately, however, along with virtually all of retail, trading below $7.50 last October.  The company is still making money, but their earnings are expected to decrease a small amount over the next couple of years.  It seems like losing 70% of share price in exchange for seeing earnings cut by a couple of percentage points is overkill to me, so it looks like an opportunity at a turn-around.  The company has shown that they were able to make money consistently in the past, and I  believe they probably will continue to grow in the future once retail figures out how to handle the online rivals, making them a long-term investment in addition to a speculation.

Want all the details on how to invest to amplify your wealth?  Try The SmallIvy Book of Investing.

I went ahead and bought another 950 shares of Chicos back in the middle of October for $7.40 per share.  If retailing is truly dead, or if the executives at Chicos cannot figure out how to turn things around, I could see a big loss.  I saw things go badly for Pacific Sunwear and lost a whole position in the past when the company ended up filing for bankruptcy after years of profitable, reliable growth.  Still, if things do turn around and they go back to their old highs near $20 within a couple of years, I’ll see a 200% return.  I’ll also be making a profit as the stock passes the $10.50 mark where I bought the original shares, instead of just breaking even after waiting 8-10 years.

So far things are looking up.  The stock has bounced off of its lows and I’m up about 3% on the new position.  Of course, I’m looking for a much bigger profit than this since this is a speculation.  I’m also fundamentally a long-term investor since that is where you make the real gains. I’m not looking for a 5-10% gain, but a 1000%, life-changing gain when I invest, even when I’m speculating.  I also believe in the fundamentals of the company and think the company executives will figure out how to shift things around, possibly selling more online themselves, so I am willing to give it time for things to materialize since that reduces my risk greatly.  Remember that risk is inversely proportional to time, so the longer you are willing to hold and wait for things to turn around, the lower your risk will be.

I also don’t think that brick-and-mortar retailing is dead, especially with clothes.  People like to be able to try things on.  People also want somewhere to go and things to do, and tend to buy impulsively when they are out shopping.  Plus, Amazon is trying to figure out how to have same-day delivery, but that is what you already have with traditional stores.  If you want it now, you head to the mall.  If it can wait a few days or you aren’t close to a mall, you order online.

If I’m wrong and retail dies a slow, agonizing death, I might end up selling out at $4 a share, losing a few thousand, or maybe even see the full $7,000 disappear.  That’s the risk you take when you speculate.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How to Find A Broker and Start Investing

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If you’re interested in investing, you’ve probably spent some time looking at different websites and blogs on how to invest, and you’ve probably found several sites giving strategies.  There are some sites that give information on different investing strategies.  Even more talk about how to do important things like diversify.  Once you’ve spent some time learning, hopefully reading a few books on investing, and you have your financial house in order (no debt beyond your home, $9,000 to $12,000 in a bank account for emergencies, 10-15% of income going into the 401k at work and/or an IRA, and a budget to help control your spending), you may be ready to take the plunge and actually invest.  The question then becomes, now what?

If you’re investing in mutual funds, it is pretty easy.  You just go to one of the mutual fund provider’s sites, such as Vanguard or Schwab.  You can setup an account, send in funds, and then choose and buy funds, all from the site.  That is a big reason many people buy mutual funds – ease of use, in addition to automatic diversification.



SmallIvy Book of Investing: Book1: Investing to Grow Wealthy

If you’re looking to invest in ETFs or individual stocks, it is a little harder, but not much.  What you will need then is someone called a broker.  This is an individual who works with one of the big brokerage houses who has access to the stock exchanges.  Personally, I have always invested through a broker and called in orders over-the-phone.  I started investing in about 1982, way before the internet, and have just stuck with the same methodology.

I also work with what is known as a full service broker.  This means the account has all kinds of extras, and also that I have access to research on stocks and other tools.  It also means I pay a good amount when I trade.  Typically, if I were to buy shares of a stock for $3,000 say, I would probably pay $60 to $80 for the trade to be made.  The amount  I would pay would increase if I bought more shares, but the percentage would drop.  This is expensive, but then I don’t trade very often, so it really doesn’t matter much.

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A cheaper way to trade is to use an online broker.  Here, you would enter orders through a website and pay a lot less, like $25 per trade or maybe even $5 per trade, depending on the brokerage firm.  You would probably not have a specific individual you would deal with, but probably a help desk you would call if needed.   In general, there would be few frills like stock research.

A good article ranking online brokers is available through reviews.com here.  They evaluated several different brokers to find online brokers that offered both low trading prices and extras like stock research.  They really do a nice job of going through the online brokers and providing some great suggestions.

 

        

Now just because you may be able to trade for $4.95 per trade through an online broker, doesn’t mean that you should be constantly trading.  Study after study has shown that those who trade a lot will have dismal returns when compared to the markets.  When you are buying and selling short-term, you are basically just flipping a coin and betting on heads or tails.  Some studies even suggest that trying to buy individual stocks at all instead of mutual funds is a fool’s errand in any case.

I do feel that, in addition to a core of mutual funds, especially in an IRA or 401k account, you should add a few individual stocks, but you need to buy the right kinds of stocks and buy them in the right way.  These should be companies that you buy for the long-term.  You should pick these companies based on the business, including things like a solid record of profitability and growing earnings, low or no debt, room to expand, and steady growth in the share price.  Try to pick just one great company each in a few different industries, rather than spreading the money around to several different companies.

Find stocks you plan to hold for 10-15 years, buy a significant amount (build up to 500 to 1000 shares, buying a few hundred shares at a time on dips), then ignore the noise.  Just concentrate on earnings growth and whether the company is expanding their business.  Don’t worry about analyst ratings, stories about where the economy is going in the next year, or stories about consumer sentiment.  Hold as long as the company is doing well, sell off a few shares if the position gets too big, and other wise just leave things alone.  Do this and find a great company or two, and you may be able to beat the markets with your individual stock picks.

Have a question?  Please leave it in a comment.  Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. 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. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.