Category Archives: Financial Literacy

Big Bad Market Volatility

Posted on by

“Using volatility as a measure of risk is nuts. Risk to us is 1) the risk of permanent loss of capital, or 2) the risk of inadequate return.” Charlie Munger

Risk is a difficult concept for many investors to grasp. Risk in the minds of many investors is frequently defined as volatility, which is how much an investment returns might vary over time. And, what investors must embrace the fact that volatility is a natural and normal characteristic of equity markets. Nevertheless, because it is normal doesn’t always make volatile markets easier to accept.

Emotions can often play a big role in investing decisions, especially during down markets. In financial circles, volatility is a measurement of the fluctuations of the price of a security. It is essentially an analysis of the changes in the value of a security. It is one of the most key measures in quantifying investment risk.

Volatility is a temporary concept consisting of sometimes mild to wild short-term market fluctuations that passes with time. Most people see it as an excuse to act. Volatility of equities and equity markets are facts of life that will never go away. Since the end of WWII, the equity market has annually declined more than ten percent on average.

Furthermore, the equity market has declined at least 15% an average of once every three years. And it’s declined at least 20% an average of once every five years. It is safe to conclude that the future will not be much different, according to Nick Murray. He stresses that “the U.S. equity markets can be inherently volatile in the short term. This is the primary reason for investors to hold equities and invest for the long run.”

Stock returns generally follow corporate earnings over the long run. In the short run, though, stock prices can be decoupled from corporate earnings and the economic realities that exist at the time.

https://youtu.be/ZX7DZ-cJZ-I

Mr. Market

“The true investor welcomes volatility … a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.” Warren Buffett

In The Intelligent Investor (1949), its author, Benjamin Graham, introduced a hypothetical character called “Mr. Market”. He described “Mr. Market” as being “schizophrenic in the short run, but rational in the long run.” “Mr. Market” was also described as being “a voting machine, based on belief and emotion, in the short term and a weighing machine, based on facts and objectivity, in the long run.”

In general, investors prefer returns that are relatively predictable, and thus less volatile. In truth, stock market volatility is never fun and tends to make retail investors anxious. It may be tempting to stop the pain by getting out of the market. But don’t fall into the trap of trying to time the market. 

Remember market’s long-term returns are positive. Keep your eyes focused on the long term and remember that successful long-term investing requires having the discipline to stay invested through the inevitable ups and downs you will experience.

Volatile Markets

“Stocks take the stairs up and the elevator down.” Wall Street adage

Stock market volatility measures fluctuations in stock prices. A security with high volatility means that its price can fluctuate considerably over a very short period. In contrast, a low volatility means that the price of a security will not change dramatically in short periods of time.

In times of high equity market volatility, it is important to:

  • Stay focused on long-term financial goals
  • Ensure allocations are consistent with longer-term risk profile and rebalance portfolio periodically.
  • Make sound investment decisions based on informed, rational reactions to news headlines.

Keep in mind, if you have 20 – 40 years horizon to invest, a bear market is noise to a long-term investor and should be ignored.  In fact, it should be celebrated, since stocks will be on sell. On the other hand, a stock market crash that starts the day after you retire can cause a permanent lifestyle impact if all your money is invested.

When the market is chaotic and market volatility is in hyper-drive over the latest inverted yield curve that may or may not predict a recession, or other temporary headwinds, just remember that it doesn’t represent a threat to any long-term investor, as long as they remain calm and disciplined.

Markets don’t move in a linear fashion but instead move through periods of loss and gain. The gains an investor can realize over the long term — even through periods of market volatility — has been an investor greatest ally.

References:

  1. https://marketbusinessnews.com/financial-glossary/volatility/amp/
  2. The Intelligent Investor by Benjamin Graham (Rev. Edition, 2003).
  3. Ameriprise Market Insights – Market Volatility

Investment Strategy

Posted on by

Great investors always have a clear strategy and adhere to it for years.

“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.”   Sun Tzu

It is important that we learn from the great investors. More importantly, if you have a strategy that works… Stick to it.

But, remember that there are times when one style works best and times when another does.  So the take away is: Think flexibly but strategize rigidly. That is, decide which investment style is right for the present, and, once you have decided, stick with that style and the strategy that flows from it.  Adhere to what works until it stops working.

Most investors do not follow a financial plan or adhere to an investment strategy.  Instead, they collect stocks like a stamp collector collects stamps.  They buy what they like or buy what is in vogue. It may be growth stocks or value stocks or blue chips or small fry. When most investors find a stock they like better than the current collection, they trade for it.

“Forget trying to figure out the ideal moment to get in or out of the market. Instead, what really matters is the time spent sitting around in stocks.” John Goodell

You can see why people prefer collecting: It’s embedded in how our brains work from prehistoric times of hunting and gathering. Portfolio management, which goes far beyond diversifying by introducing risk controls. This is a discipline that operates under  rules:

  • Invest in companies that you both understand and believe will offer long-term value.  When buying ownership, you should be able to get your reasoning down on paper without relying on outside resources.   You should be able to write down exactly why you plan to invest in that particular company and ignore how the stock will perform in the near term.
  • Use a benchmark. Pick one carefully and manage against it. Morgan Stanley World  or S&P 500
  • Analyze your benchmark’s components. For each stock, think about expected return and risk. That way, you know what to own and how much of it. Think about countries, industries, size and valuation. What you don’t own is as important as what you do.
  • Know that you may be wrong. Believers in value investing think theirs is the only way to go. Growth investors feel the same about their philosophy. No style can be right always. Any strategy can fail.

Margin of Safety

“Move not unless you see an advantage; use not your troops unless there is something to be gained; fight not unless the position is critical.” Sun Tzu

Build insurance into your investments. In case you’re wrong. And that comes from blending negatively correlated items. In other words, seek something that would go up a lot should other things go down. Then, if your basic premise is incorrect, you don’t get killed. Making up for a decimated portfolio is hard to do. Remember, when you buy insurance, you don’t want it to pay off. You’ll be happy not to need it and just lose the premium. But the insurance really does reduce your risk.

What is the most common investor mistake? Trading–getting in and getting out at all the wrong times, for all the wrong reasons. You’ve heard it before: Most investors are their own worst enemies.

Most mutual fund buyers, for example, badly lag the very funds they buy (and sell) because of bad timing. The average mutual fund holding period for equity or fixed income is only about three years. It’s too short.

The solution is to trade less. Buy into good, well-researched companies and then wait. Let’s call it a sit-on-your-hands investment strategy

Short- vs Long-term Investing

A short term investment is any asset is held for one year or less. Most investors hold short term investments for no more than a few months at a time, if not several weeks.

A long term investment is any asset is held for more than one year. Most investors hold long term investments for several years as part of an overall strategy and financial plan for their portfolio.

Solving the Financial Literacy Problem

Posted on by

“A compelling body of evidence demonstrates a strong association between financial literacy and household well-being. Survey after survey shows that households that demonstrate low levels of financial literacy are those that tend not to plan for retirement, borrow at high interest rates, and acquire fewer assets.” Shawn Cole

Numerous reports show that a majority of American adults lack basic financial knowledge, behaviors, habits or skills to make good decisions about managing their money. Poor money management habits and a lack of financial literacy continue to be significant concerns for Americans and might pose a future a threat to the continued prosperity of America, since we cannot expect government to run huge fiscal deficits to provide essential needs of its citizens.

Additionally, it is one problem that has caused many Americans to be left behind despite ten years of economic expansion and a roaring bull stock market over that same timeframe. The economic good times have benefited high income and high net worth Americans; and it has led to an ever widening income gap, wealth gap and retirement gap within the United States.

Lack of Financial Literacy

“The number one problem in today’s generation and economy is the lack of financial literacy.” Alan Greenspan, Former Chairman, Federal Reserve

Forty-seven percent of college students surveyed said they do not feel prepared to manage their money. Managing money remains the most daunting challenge for college students for the fourth year in a row.

A recent survey, by financial firm AIG and education training company EVERFI of more than 25,000 college students, revealed that students struggle with even basic financial literacy about things like student loans, credit cards and investing.

When asked six personal finance questions, the survey revealed that more than one in 10 college students answered none of questions correctly, and another 20% got just one question right. Still, more than half got just two or fewer questions correct — even incorrectly answering simple questions about net worth and savings.

Furthermore, fewer than 1% of college students taking the test got them all right.

This survey reveals a widespread problem inside America. It reveals that there is a Financial literacy problem in America and one that we must solve.

This is a major issue because of the financial realities facing college students and all Americans. For example, according to Sallie US:SLM data revealed that 83% of college grads have a credit card, though only about six in 10 say they pay the balance on time and in full each month.

Not Taught in High School

“You can come from humble beginnings, live frugally, invest as much as you can, save 10% to 20% of your paycheck, invest in low-cost ETFs, and become a millionaire.’—Dan LaSalle, Olney Charter School’s assistant principal

Why the shortfall in financial literacy? The reason is because not many students in the U.S. learn about personal finance in school, regardless of the income-level where they live. According to the nonprofit Next Gen Personal Finance, only five states require high-school students to take a personal-finance class: Virginia, Alabama, Utah, Missouri and Tennessee.

In other states, personal finance classes are often offered as an elective. (https://www.marketwatch.com/story/how-one-high-school-is-teaching-hundreds-of-students-to-become-millionaires-2019-05-03). As a result, we have a nation where a vast majority do not understand or even the basics of smart money management habits and behaviors.

“The single biggest difference between financial success and financial failure is how well you manage your money. It’s simple: to master money, you must manage money.” T. Harv Eker, author Millionaire Mind

Financial Literacy is one solution

Financial literacy is about knowing how money is made, spent, and saved, as well as the skills and ability to use financial resources to make decisions. These decisions include how to generate, invest, spend, and save money.

This concept is applicable to both individuals and organizations. Individuals must be able to balance a checkbook, comprehend personal income taxes, and understand the concept of budgeting in order to make wise decisions with money. These skills are vitally important; yet, many individuals lack this basic knowledge and consequently are unable to meet their daily expenses.

References:

  1. https://everfi.com/insights/white-papers/2019-money-matters-report/
  2. https://www.marketwatch.com/story/solving-americas-financial-literacy-crisis-starts-with-teachers-not-laws-2019-11-19
  3. https://www.marketwatch.com/story/more-than-half-of-college-students-fail-this-6-question-money-quiz-would-you-2019-06-05
  4. https://www.marketwatch.com/story/how-one-high-school-is-teaching-hundreds-of-students-to-become-millionaires-2019-05-03

A Man is What He Thinks

Posted on by

“A man is literally what he thinks.” James Allen

James Allen, a British philosophical author of ‘As a Man Thinketh’, wrote, “A man is literally what he thinks, his character being the complete sum of all his thoughts. As the plant springs from, so every act of a man springs from the hidden seeds of thought, and could not have appeared without them.”

The things you choose to focus on, your thoughts, determines how you perceive the world – and influences many of the experiences you have as a result. If you focus only on the negative things in your world, the world can seem like a terrible place and your mood and outlook may suffer.

“Every one of us is the sum total of our own thoughts. We are where we are because that is exactly where we really want or feel we deserve to be, whether we’ll admit it or not.” Earl Nightingale

But when you focus on the positive things in your world, you see that the world is actually full of faith, hope, love, and joy. There is kindness and beauty that inspires people to do incredible things.  Each man holds the key to their own perception and focus, good or bad. He also hold the key to everything that enters into his life. By working patiently and intelligently upon his thoughts and focus, he may remake his life, his behaviors and transform his circumstances. 

“You are today where your thoughts have brought you; you will be tomorrow where your thoughts take you.” James Allen

Thoughts of doubt and fear never accomplished anything, and never can. They always lead to failure. Purpose, energy, power to do, and all strong thoughts cease when doubt and fear creep in.

“He who has conquered doubt and fear has conquered failure.” James Allen

The will to do springs from the knowledge that we can do. Doubt and fear are the great enemies of faith and knowledge. The people who embrace readily doubt and fear, who refuses to slay them, hinder himself at every step.

Changing the Subconscious Mind

Daily affirmations are techniques you use to begin he process of improving your life. Affirmations are simply statements that describe a goal or thought in its already completed state. Positive affirmation helps eliminate negative and limiting beliefs.

Affirmations can transform an individual’s comfort zone from a limited one keeping them trapped in mediocrity to a more expanded one where anything is possible. It helps to replace your “I can’ts” with “I cans,” and your fears and doubts with confidence and aspirations.

Affirmations are reminders to your unconscious mind to stay focused on your goals and to come up with solutions to challenges and obstacles that might get in the way.

“These things we bring on ourselves through our habitual way of thinking,”

Daily affirmations are simple, positive statements declaring specific goals in their completed states. Affirmations also hold a key to creating the life of your dreams. Successful people have long known that using willpower alone to energize their success isn’t enough.

Let go of negative beliefs

It is important to let go of and not focus on negative thoughts and images. Instead, individuals should bombard their subconscious mind with new thoughts and images that are positive and stated in the present tense.

In closing, William James said: “The greatest discovery of my generation is that human beings can alter their lives by altering their attitudes of mind. We need only in cold blood act as if the thing in question were real, and it will become infallibly real by growing into such a connection with our life that it will become real. It will become so knit with habit and emotion that our interests in it will be those which characterize belief.”

James also said,

”If you only care enough for a result, you will almost certainly attain it. If you wish to be rich, you will be rich. If you wish to be learned, you will be learned. If you wish to be good, you will be good – only you must, then, really wish these things, and wish them exclusively, and not wish at the same time a hundred other incompatible things just as strongly.”

References:

  1. Allen, James, As a Man Thinketh: Original 1902 Edition
  2. http://www.jamesallenlibrary.com/authors/james-allen/as-a-man-thinketh
  3. https://www.jackcanfield.com/blog/practice-daily-affirmations/
  4. https://www.jackcanfield.com/blog/become-a-millionaire-never-too-late/

Dividends Income Strategy

Posted on by

“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” John Rockefeller, founder of the Standard Oil Company

For retirees, dividends are a source for cash flow and a great form of income security in their post work years. For smart investors, dividend investments represent one of the closest things they can find to guaranteed income and possible capital appreciation.

John D. Rockefeller, founder of the Standard Oil Company and the world’s first billionaire, was a vocal advocate of dividends. He once commented that, “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

Dividend investing provides a steady income stream from the distributions of a company’s earnings to its shareholders. It works well for investors looking for long-term growth and for individuals preparing for or living in retirements who have a lower risk tolerance.

Dividend stocks are companies that pay shareholders a portion of earnings, or dividend, on a regular basis. These payments are funded by profits that a company generates but doesn’t need to retain to reinvest in the business. Dividend stocks are a major factor in the total return of the stock market. About 3,000 U.S. stocks pay a dividend at any given time.

Divdend income investor.

Dividend paying stocks are major sources of consistent income for investors. They can create income and wealth when returns from the equity market are highly volatile or at risk. Essentially, dividend–paying stocks have become an attractive alternative to bonds for investors looking for a reliable stream of investment income.

Companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by providing payouts or sizable yields on a regular basis. If you’re looking to build wealth or generate income, dividend stocks are pretty hard to beat.

Dividend-focused stocks do not offer much price appreciation in strong bull markets. However, they do offer a steady stream of income along with the potential of capital gains. These are the major sources of consistent income for investors to create wealth when returns from the equity market are at risk.

Companies that pay out dividends generally act as a hedge against economic uncertainty or downturns. They tend to provide downside protection by offering payouts or sizable yields on a regular basis.

Dividend stocks offer solid returns in an era of ultralow bond yields and also hold the promise of price appreciation. The S&P 500 index’s yield was recently around 1.9%, about even with that of the 10-year U.S. Treasury note.

Dividends also offer a number of advantages beyond income, one being that qualified dividend income is taxed as a capital gain and at a lower rate than ordinary income receives. The top federal capital-gains tax rate is 23.8%. Payouts can also help buffer volatility in tumultuous markets, providing returns even during a market decline.

Dividend stocks can reduce the amount of volatility or beta in a portfolio. Essentially, dividend investing is boring, and lacks the thrill of a small cap tech stock with exponential revenue growth and avoids the volatility of small caps.

Dividend Payout Date

Getting a regular income from the companies investors own are a testament to their discipline, the health of their business, and their confidence in its future. Companies will announce when their dividend will be paid, the amount of the dividend, and the ex-dividend date. Investors must own the stock by the ex-dividend date to receive the dividend.

The ex-dividend date is extremely important to investors: Investors must own the stock by that date to receive the dividend. Investors who purchase the stock after the ex-dividend date will not be eligible to receive the dividend. Investors who sell the stock after the ex-dividend date are still entitled to receive the dividend, because they owned the shares as of the ex-dividend date.

Dividend Payout Ratio

Dividends are typically paid from company earnings, but not all dividends are created equally. If a company pays more in dividends than it earned, then the dividend might become unsustainable. Comparing dividend payments to a company’s net profit after tax is a simple way of reality-checking whether a dividend is sustainable.

Unless there are extenuating circumstances, from the perspective of an investor who hopes to own the company for many years, a dividend payout ratio of above 100% is definitely a concern.

Another important check is to see if the free cash flow generated is sufficient to pay the dividend, which suggests dividends will be well covered by cash generated by the business and affordable from a cash perspective.

Still, if the company repeatedly paid a dividend greater than its profits and cash flow, investors should be concerned. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

High Dividend Yield

A high dividend yield strategy does have several drawbacks. Those disadvantages include vulnerability to rising interest rates and the potential exposure to financially challenged companies that may have trouble maintaining and growing dividends. Since the stock prices of firms with stable cash flows tend to be more sensitive to fluctuations in interest rates than those with more-volatile cash flow streams.

With lower interest rates and the stock market trading at near all-time highs, the high dividend paying stocks and ETFs could be excellent picks at present. Dividend ETFs provide investors with a diversified portfolio of dividend-paying stocks that allows you to invest and collect income without having to do nearly the amount of research you’d need before buying a large number of the individual components.

Another source of income are preferred stocks. Preferred stocks are known for offering higher dividends than their common stock counterparts. In fact, they can be viewed as a safe haven in case of a market pullback as the S&P 500 is up nearly 24% so far this year.

Stocks with a history of above-average dividend yields typically can be a sign of companies with deteriorating business fundamentals. While that can be the case in certain situations, there are many companies with strong underlying fundamentals that are some of America’s largest and most stable companies.

Bottom line, don’t fall for a high dividend yield in a vacuum. It may not paint an accurate picture of the stock’s potential. Instead, look at the company’s fundamentals and determine how dividend payouts change over time. That may indicate a company’s financially stability. Also, it may illustrate long-term dividend potential.

Dividend-Growth Strategies

An investor should not buy dividend stocks just for the sake of dividends to generate income…they should also be seeking capital appreciation to keep up with inflation and mitigate the risk of the long term loss of buying power of the dollar, as well. The most successful dividend investors seek dividend paying stocks that have the potential to grow their dividend each year.

Dividend payers with a history of dividend growth over a prolonged stretch (10 years’ worth of dividend hikes) tend to be highly profitable, financially healthy businesses. While dividend growers prioritize delivering cash to their shareholders, they’re balancing that against investing in their own businesses. Such firms have often held up better than the broad market, as well as the universe of high-yielding stocks, in periods of economic and market weakness.

During the market downturn from early October 2007 through early March 2009, dividend appreciation stocks, such as Dividend Aristocrats, held up better as a category versus the broad market and versus high dividend yield benchmark.

Dividend-growth strategies also look appealing from the standpoint of inflation protection, in that income-focused investors receive a little “raise” when a company increases its dividend. Dividend-growth stocks will tend to hold up better in a period of rising bond yields than high-yielding stocks. That’s because dividend-growth stocks’ yields are more modest to begin with, so they’re less vulnerable to being swapped out when higher-yielding bonds come online.

The dependability of dividends is a big reason to consider dividends when buying stocks. Not every stock pay a dividend, but a steady, dependable dividend stream can provide a nice boost to a portfolio’s return.

Sources:

  1. https://finance.yahoo.com/news/dividends-capital-gains-differ-195903726.html
  2. https://www.fidelity.com/learning-center/investment-products/stocks/all-about-dividends/why-dividends-matter

AT&T CEO Interview on CNBC Squawk Box

Posted on by

Friday morning from the AT&T Pebble Beach National Pro-Am, CNBC Squawk Box co-anchors Joe Kernen and Becky Quick interviewed AT&T CEO and Chairman, Randall Stephenson.

In this far ranging early morning interview, Randall discussed the current and future outlook of the large cap communications and entertainment company he leads.  Effectively, he stated that he was very bullish on the projected economic output in 2020 for the company.

He stressed that the top priority for the AT&T was to pay down the massive debt incurred from its acquisition of Time Warner.  He commented that the goal was to bring down debt to a ratio of 2.5X debt-to-EBITDA and this past year, they successfully paid off $30 billion in debt.  Additionally, Randall shared that AT&T realized a 45% total shareholder return in calendar year 2019.

Media Business

Overall, he commented that AT&T’s media business, renamed Warner Entertainment, is doing well.  In the short term, they expect to roll-out HBO Max in May 2020 which will feature Warner Bros. extensive inventory of content, including the TV series “Friends” and “The Big Bang Theory”. and content from Turner’s networks.

Currently, premium HBO streaming has approximately 30 million subscribers.  Those subscribers will automatically convert to HBO Max once the it comes on-line. He expects that HBO Max will grow to 50 million subscribers.

Financials

Activist shareholder, Elliot Management, bought a large stake in AT&T back in September 2019 and criticized the management and board leadership, and the direction of the company.  Elliot Management in a letter wrote that AT&T’s stock could potentially surge to above $60 a share by 2021 if the company “increased strategic focus, improved operational efficiency” and “enhanced leadership and oversight.”

Furthermore, Elliot Management questioned the company’s succession plan of tagging Warner Media’s CEO and AT&T COO, John Stankey, as CEO Randall Stephenson’s heir apparent.  They expressed concerns with Stankey’s decision making. his lack of experience operating and communications and entertainment company, and his ability to manage the conglomerate.

Bottom line is AT&T’s financial future appears highly dependent on the success of HBO Max growing paid subscriptions, management paying down the high level of corporate debt on its balance sheet, and developing a coherent strategy that can effectively discover and employ the synergies of AT&T’s diverse assets and enterprises.

Sources:  https://www.cnbc.com/2020/02/07/att-ceo-randall-stephenson-on-promise-to-remain-ceo-through-2020.html?&qsearchterm=randall%20stephenson

Picking Stocks

Posted on by

Picking individual equity stocks can have the potential for market beating returns – but also carries increased risk. A study done by Hendrik Bessembinder of equity markets spanning nine decades revealed that only 4% of the best-performing U.S.stocks produced all the market’s increases. The rest were flat – the gains of the following 38% were offset by the losses of the bottom 58%.

Research demonstrates that investors have difficulty making sensible investment choices. A DALBAR study analyzed investors from 1986 to 2015 and found that the average investor significantly underperformed compared to the S&P 500 benchmark . Over 30 years, the S&P 500 produced a return of 10.35%, while the average retail investor return was only 3.66%. An important takeaway of this study is that investors underperform because they try to time volatile markets and permit their emotions to dictate their investment decisions. Intelligent investors tend to underperform their benchmark because they allow emotions, such as fear or greed, to drive investment decisions.

Theses investors tend to be overconfident and misjudge risk, latch onto a price target, or perceive a pattern that isn’t there. This “behavior gap”, over the long-term, can be catastrophic with potential underperformance of hundreds of thousands of dollars sabotaging your retirement.

Retirement Investors

Your retirement portfolio should be managed with a long term strategy of performance over decades and generations. Most self-directed investors tend to fall short when it comes to long-term results that meet or beat market benchmark. One solution is to take 10% of your investable assets and trade to generate alpha and seek outsized returns.

A retirees’s assets earmarked for retirement should be invested using a more long term, conservative, risk managed approach to generate steady, compounded returns so you can safely reach their retirement goals.

Continue reading →

Passive Investing

Posted on by

The ‘father of passive investing’, Burton Malkiel, Princeton University professor emeritus of economics and author of the famous investing book, “A Random Walk Down Wall Street“, believes that most investors should invest passively. This idea is embodied by exchange-traded funds that track major stock market indexes, such as the S&P 500, and passive mutual funds.

Malkiel’s theory is that investors are better off buying a broad universe of stocks, index funds, and minimizing fees rather than paying an active manager who may not beat the market. Index funds, also known as passive funds, are structured to invest in the same securities that make up a given index, and seek to match the performance of the index they track, whether positive or negative. As the name implies, no manager or management team actively picks stocks or makes buy and sell decisions.

In contrast, active funds attempt to beat whichever index serves as the fund’s benchmark, although — and this is important — there is no guarantee they will do so. Active managers conduct research, closely monitor market trends and employ a variety of trading strategies to achieve return. But this active involvement comes at a price. Actively-managed funds typically have significantly higher fees and expenses.

A 2016 study by S&P Dow Jones Indices showed that about 90 percent of active stock managers failed to beat their index benchmark targets over the previous one-year, five-year and 10-year periods; fees explain a significant part of that under performance.

Vanguard’s John ‘Jack’ Bogle – Stay the Course

Many industry leaders, including Vanguard’s John ‘Jack’ Bogle, who pioneered index funds, were influenced by Malkiel’s theory on passive investing.

John ‘Jack’ Bogle

Jack Bogle, who founded the pioneering investment firm Vanguard in 1975, is widely regarded as the father of index investing. Index investing is a strategy that functions best when investors sit on their hands for decades. This strategy is far removed from the thrill and excitement of trying to beat the market by picking individual stocks — but one that research says works.

Over the decades, Jack Bogle’s philosophy has acquired a plethora of devout investors whom follow his teachings. His followers, known as the Bogleheads, embrace long-term commitments to broad, boring investments. Bogleheads choose investments that are low-cost index mutual funds and exchange-traded funds (ETFs).

These low-cost index mutual funds and ETFs are designed to mimic their respective benchmark stock or bond markets, not beat them. Bogleheads’ core belief— stay the course — is so essential to their investment strategy. Bogleheads’ key tips for beginners are:

Early investing is better than perfect investing

Don’t get overwhelmed with your options and let decision paralysis keep you from investing sooner. The magic of compound interest is where your money grows that much faster because you keep earning interest on your interest. To illustrate the strategy, a person who starts investing small amounts in their early 20s will be better off than someone who starts later and invests larger amounts later to catch up.

Stay in the market; Don’t try to time the market

For Bogleheads, the best way to invest is through passively-managed index funds like those pioneered by Vanguard. That way, while your investment will rise and fall with the market, you’re not a victim to any particular company’s misfortune.

Investing in passively-managed funds is a core Boglehead tenet — and research shows the strategy is a sound one. The majority of actively-managed funds have underperformed the stock market for nearly a decade, according to an annual S&P Dow Jones Indices report. In other words, trying to pick winners doesn’t work; simply riding out the market’s ups and downs does.

Don’t peek; Set it and forget it

It is advised that investors check their investments a few times a year—but they shouldn’t react to market volatility or short-term corrections. The key to passive investing is to “set it and forget it”— that is, once you know what you’re investing in, leave it alone, let the market do its thing and be patient.

Over the past decade, passive investment has been closing the gap on active management. Yet, the ‘father of passive investing’ believes there are still too many investors who are not taking advantage of passive investing. Malkiel believes strongly that “…[passive investing] works. It’s the best thing for individual investors to do for the core of their portfolio.”

Keep it simple

In a nutshell, the best approach is a simple, low cost, diversified portfolio of index funds that matches the market return. Don’t try to beat the market—ignore hot tips and check your returns infrequently.

References:

    https://www.cnbc.com/2020/01/02/burton-malkiel-says-his-passive-investing-idea-was-called-garbage.html
    https://money.com/theres-a-super-secret-conference-dedicated-to-investing-legend-jack-bogle-heres-what-its-like-on-the-inside/
    https://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf

A Penny Saved is a Penny Earned | Financial Literacy

Posted on by

”One penny may seem to you a very insignificant thing, but it is the small seed from which fortunes spring.”

Orison Swett Marden

“A penny saved is a penny earned” is a way of saying that one should not waste money but should save it, even if the amounts are small. Over decades, even small amounts of money saved regularly and if invested wisely, have the potential to add up thanks to the magic of compounding.

This well-used financial idiom is often attributed to Benjamin Franklin.

When money is saved instead of spent, you end up ahead in your financial total net worth by the amount saved instead of down by the amount spent. It means that you are two steps ahead of where you would have been financially.

“Too many people spend money they earned..to buy things they don’t want..to impress people that they don’t like.”

Will Rogers

So when you save your hard earned money, it will be there when it might be needed, especially in emergencies or retirement. This fact makes money saved similar to money earned. Thus money saved creates the same financial benefit as money earned (trading time for money) through work, thus, a penny saved can be viewed as the same as a penny earned.

The suggested amount of pennies saved should be at least 10 to 15 percent of your monthly income. But, if 10 to 15 percent is not currently possible, even small amounts of money are better saved than spent.

“The real cost of a four-dollar-a-day coffee habit over 20 years is $51,833.79. That’s the power of the Compound Effect.”

Darren Hardy

If you’re patient and disciplined, your pennies or money can work for you and make a real difference in your account balance over time.

U.S. Markets Overreacting

Posted on by

Updated:  Monday, 2/3/2020 at 8:25 am

We never want to downplay the threat posed by the Novel Coronavirus in China and globally. The highly contagious coronavirus is a pneumonia-causing illness that infects an individual’s respiratory tract. It is now responsible for a reported 360 deaths in China as of Monday morning and 17,000 infections, according to Chinese officials and official figures from the World Health Organization. Furthermore, it can be confidently assumed that the Chinese Communist government has drastically under reported the magnitude of the spread and the total number of its citizens effected by the virus.

Consequently, the U.S.represents a relative virgin population for the Novel Coronavirus. Americans have little to no immunity to this strain of virus from previous spreads or vaccination.  Thus it does pose a potential temporary risk and impact to the U.S. economy.

Subsequently, the World Health Organization has declared the fast-spreading coronavirus a global health emergency — a rare designation that should help to contain the spread and outbreak.

On Friday, the Federal government decided to quarantine Americans arriving on U.S. soil from Wuhan and the Guangdong province in southern China. Additionally, the U.S. initiated measures to screen passengers arriving from all other regions of China. Those found without symptoms are released and asked to self isolate themselves for the fourteen days, the prescribed incubation period for the Coronavirus.

U.S. Influenza Season

However, most Americans are not aware that the CDC estimates that there has been 25 million cases of seasonal influenza in the U.S., 250K hospitalizations and 20,000 deaths reported. This is not abnormal for influenza season in the U.S. Moreover, influenza has been assessed as widespread in Puerto Rico and in 49 states.

Image if the media chose to report these statistics like the quantity of seasonal influenza cases, hospitalizations and deaths in the U.S. every hour and had quasi-infectious disease experts on-air to pontificate about the potential severity and potential deaths. Additionally, image if they had their reporters stoke fear by wearing a nurse’s mask to cover their respiratory system and displaying concern in their voices while reporting live from a mall in Chicago.

More than likely, the market would have been impacted by the over reporting of news.

Conclusion

Bottom line, the market has been  freaking out over the coronavirus outbreak, which doesn’t pose a threat to any long-term investor, as long as they remain calm and disciplined.  The media’s coverage and reporting of the coronavirus might be best described as over-dramatic. The effect has been the market sell off and market volatility. Additionally, the media appears to be now over hyping the preventive measure U.S. officials have taken to prevent the spread of the highly contagious virus on U.S. soil.

Friday’s U.S. stock market two percent sell off was definitely an overreaction to the over-reporting and over-hyping by the U.S. entertainment media.

References:

  1. https://www.cdc.gov/flu/weekly/index.htm#ILIActivityMap