Category Archives: Investing

Staying the Course…Investing | Vanguard

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“The volatility of the financial markets during the first half of 2020, punctuated by the most sudden, steep decline in U.S. market history, tested the mettle of most investors. Despite the gut-wrenching drop of nearly 34% in the S&P 500 Index in just over a month, Vanguard investors held firm, sticking with their plans and, in some cases, rebalancing into equities during the downturn. This discipline ultimately results in better outcomes over the long term.”

Tim Buckley, Vanguard Chairman and CEO

“Stay the course” doesn’t mean do nothing during market volatility or drop. It means stick to your investment plan. If you’re a long term investor or retired, focus on what you can control, such as your spending and asset mix.

A willingness to weather sudden market drops is an important part of long-term investing. Although it is a natural instinct to seek to preserve capital when the market drops precipitously, too often investors remain on the sidelines and miss the inevitable recovery.

Back in March 2020 during the height of stock market volatility and as many retail investors sold stocks in a panic, most financial experts reminded investors to stay the course. They reminded investors that a balanced, diversified portfolio is built to weather tough markets. The majority of investors (83%) held fast from late February to May and didn’t transact. Even better, 9% of their clients rebalanced into the storm, buying equities and regaining their targeted asset allocations. Rebalancing helps mitigate risk, and it is a staple of their advice.

They strongly recommended keeping a long-term perspective and don’t get thrown off by short-term volatility.

Why is staying the course so important? As an extreme example, consider the investor who lost faith in the markets and cashed out on March 23, the low point in the U.S. stock market. Stocks subsequently rebounded more than 39% over the next three months; the unfortunate individual who moved to a money market fund earned a meager 0.14%. Our analysis found that about 85% of investors who fled to cash would have been better off if they had just held their own portfolio.

Additionally, just as investors should stay even-keeled during stock market downturns, they should ignore the euphoria of a sudden surge in the market and the fear of missing out on easy gains from investing in stocks such as Tesla, Apple or SalesForce.

Staying the course isn’t easy. Instead, focus on what you can do during market volatility, and you (and your portfolio) can get through difficult times of market volatility and declines. Nobody wants to spend less because the market is down. But you can control what you spend.

References:

  1. https://investornews.vanguard/what-stay-the-course-means-if-youre-retired/
  2. https://investornews.vanguard/staying-the-course-really-matters/

Sage Advice: Stay Invested

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“If you’ve got $25,000, $50,000, $100,000, you’re better off paying off any debt you have because that’s a guaranteed return.” Mark Cuban

The late Jack Bogle was fond of saying, “Nobody knows nothing.”  Which demonstrates that predicting the future is always hard, but 2020 illustrated to us just how difficult it can be. If you would’ve predicted that U.S. domestic stocks would rise over 10% in the same year as a global pandemic, no one would have believed you.  But that’s what makes markets so complex and volatile, especially in 2020, a year unlike any other.

The real problem is that there are too many economic and financial market unknowns to consider in the coming years and decade. And, he says, we, as a nation, are not focusing on what he believes to be the single most important concern in the economy: the “soaring cost of health care”. There is also the soon to be problem of pandemic caused ballooning federal deficits and national debt as a percentage of GDP.

Elected officials seem content to continue to kick the health care cost can down the road. But, with all of the potential economic uncertainty and financial market volatility, it’s hard to know what to do when it comes to investing.

The U.S. stock market is the greatest wealth-creation tool in history.

Investing in the stock market allows you to become a partial owner of thousands of profitable and growing companies. And, when paired with the power of compounding, the market is what allows you to save for retirement.

Below are five pieces of advice for investors who are worried about the turbulent economy and volatile financial markets:

  1. Keep investing. Keep putting money away. Despite fluctuations in the market, Investors should continue to save. And if the market dips? That’s okay since a lower market can be beneficial for funding longer-term goals such as retirement and education. Saving is always a good idea, and if you can add to savings when the market is low, you may be in a better position when the market goes back up.
  2. Pay attention to asset allocation. A good starting point for asset allocation, according to most financial advisors is a portfolio consisting of 65% stocks and 35% bonds. That’s it. “Stay out of the exotic stuff,” he says, however, noting that the allocations of assets may change depending on age and circumstances. If you’re younger, for example, you might skew towards investing more in stocks: you have time to take more risks. However, if you’re older, you might consider putting more in bonds, typically more conservative and consistent. But don’t tilt too far in either direction, he warns, noting that you should pay attention to the norms.
  3. Diversification is the key to any successful portfolio, and for good reason–a well-diversified portfolio can help an investor weather through the most turbulent markets. Diversification is the practice of spreading money among different investments to reduce risk. Historically, stocks, bonds, and cash have not moved up and down at the same time. The rationale is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security. Diversification is a strategy that can be neatly summed up as “Don’t put all your eggs in one basket.”
  4. Expect lower returns. For years, the market was flush and paying out significant returns. That’s not going to continue. You should expect to see lower stock returns for the next 10-20 years, noting that 12% returns moving forward isn’t realistic. The same is true when it comes to bonds, he says, claiming that 6% returns are not in the cards. Managing those expectations is key.
  5. Don’t pay attention to fluctuating markets and keep putting money away so long as you are able. Remember that the markets – and your own investment strategy – may change over time. That shouldn’t make you so nervous that you bail. “Stay the course.”

If 2020 taught investors anything, it was, “Nobody knows nothing.”

It’s important to focus on saving and investing. You need to live below your means and invest the difference to accumulate wealth. There’s no backdoor trick around that fact.

References:

  1. https://investornews.vanguard/getting-started-with-investing/
  2. https://www.forbes.com/sites/kellyphillipserb/2016/06/15/vanguard-founder-jack-bogle-talks-about-taxes-investing-and-the-election/

Investing Goals

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“If you avoid the losers, the winners will take care of themselves.”

If you’re new to the world of investing, figuring out how and where to start can be daunting. Investing involves putting your money into an asset with the hope that the asset will grow in value or generate profit over time.

Deciding on which goals, on different kinds of accounts and investments are critical first steps to get you moving in the right direction.

The world of investing can seem vast and overwhelming if you haven’t been a part of it before. But if you take things one step at a time, you can make a plan that’ll get you started on the right path toward your financial goals.

Put your goals first. It’s important to decide what those goals are. Maybe you want to save for retirement.

  • The Joneses are in debt…Make your lifestyle and purchasing decisions based on what you can afford, not what your peers are buying, and instead of coveting thy neighbor’s car, try to feel smug about your fat retirement account, your zero credit card balances, and the car you own free and clear.
  • If it’s good for the planet, it’s usually good for your wallet. Think: small cars, programmable thermostats, compact fluorescent lightbulbs, a garden, refilling your water bottle…the list goes on.

“The biggest mistake you can make is to stop laying the foundation of a generational wealth developing portfolio because it feels temporarily monotonous.”

The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation — saving for the future, investing for the long term, and accumulating wealth — than you do. So be proactive. Do your research before buying a security or fund, ask questions of your adviser and be prepared to sell any investment at any given time if your reasons for selling so dictate.

Consistency is a key characteristic of successful investors. But as many longtime investors know, it’s hard to stay consistent when volatility whipsaws one’s portfolio, or when losses pile up, or even when one’s portfolio is perceived to trail those of one’s peers. All those factors can drive an investor to abandon their plan and make trades they might one day regret.

  • The secret to successful investing isn’t talent or timing…it’s temperament, according to Jean Chatzky, New York Times Bestselling Author and financial editor at the TODAY Show.. Sad but true–human psychology works against the behaviors that have historically led to good long-term returns.

    • Your goal should be excellence in investing. This means achieving attractive total returns without the commensurate higher risk. Your objective must be to strive for superior investment returns. Your first investment priority is to produce consistency, protect capital, and produce superior performance in bad times.

    It takes superior performance in bad times to prove that those good-time gains were earned through skill, not simply the acceptance of above average risk, according to Howard Marks of Oaktree Capital. Thus, you should place the highest priority on preventing losses. Since, it is should be your overriding belief that, “if you avoid the big losers, the winners will take care of themselves.”

    You can have too much of a good thing

    The power of asset allocation is all about building an intelligent portfolio of stocks, bonds, and other asset classes also means you’ll have less to worry about and more to gain. Asset allocation and asset class mix are a few of the most important factors in determining performance. Look at the size of a company (or its market capitalization) and its geographical market – U.S., developed international or emerging market.

    Financial advisory firm Edward Jones recommends that, when owning individual securities, you consider a diversified portfolio of domestic large-cap and mid-cap stocks. For the more volatile international, emerging-market and small-cap stocks, they favor a mutual fund to help manage risk. Remember, while diversification cannot guarantee a profit or prevent a loss, it can help smooth out performance over time since stocks, bonds, real estate, gold, and other investments move in different directions and are influenced by different economic factors. By holding multiple asset classes, you reduce your risk and increase the return you get per “unit” of risk you take on.

    References:

    1. https://www.forbes.com/sites/bobcarlson/2018/05/01/investing-as-a-business-what-the-tax-code-says/?sh=7b1c9f967bc6
    2. https://www.oaktreecapital.com/about/investment-philosophy
    3. https://investornews.vanguard/getting-started-with-investing/?cmpgn==RIG:OSM:OSMTW:SM_OUT:011921:TXL:VID:2MIN$$:PAQ:INVT:GAD:CSD:PRS:POST:GS:sf241078738&sf241078738=1
    4. https://www.edwardjones.com/market-news-guidance/guidance/stock-investing-benefits.html

    Investing in Edge Computing: Cloudflare

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    Cloudflare’s platform helps clients secure and accelerate the performance of websites and applications. Motley Fool

    Cloudflare (NYSE:NET), which completed its IPO in 2019, is a software-based content delivery network (CDN) internet security company that uses edge computing to protect against cybersecurity breaches. The whole premise of edge computing is to bring the access points closer to the end users. Cloudflare has access points at over 200 cities throughout the world, and they claim that 99% of Internet users are close enough that they can access the network within 0.1 seconds or less.

    This internet infrastructure company manages the flow of information online and therefore plays an important role in migrating data from the cloud to the edge. Its platform helps clients secure and accelerate the performance of websites and applications. And, it offers myriad security products and development tools for software engineers and web developers.

    The public internet is becoming the new corporate network.

    Cloudflare is a leading provider of the network-as-a-service for a work-from-anywhere world. Effectively, the public internet is becoming the new corporate network, and that shift calls for a radical reimagining of network security and connectivity. Cloudflare is focused on making it easier and intuitive to connect users, build branch office on-ramps, and delegate application access — often in a matter of minutes.

    No matter where applications are hosted, or employees reside, enterprise connectivity needs to be secure and fast. Cloudflare’s massive global network uses real-time Internet intelligence to protect against the latest threats and route traffic around bad Internet weather and outages.

    Edge computing

    While cloud computing houses data and software services in a centralized data center and delivers to end users via the internet, edge computing moves data and software out of the cloud to be located closer to the end user.

    Edge computing reduces the time it takes to receive information (the latency) and decreases the amount of traffic traveling across the internet’s not-unlimited infrastructure. Businesses that want to increase the performances of their networks for employees, customers, and smart devices can take advantage of edge computing to bring their apps out of the cloud and host them on-site either by owning and using networking hardware or paying for hosting at localized data centers.

    The company recently launched Cloudflare One, a network-as-a-service solution designed to replace outdated corporate networks. Cloudflare One acts as a secure access service edge (SASE). Rather than sending traffic through a central hub, SASE is a distributed network architecture. This means employees connect to Cloudflare’s network, where traffic is filtered and security policies are enforced, then traffic is routed to the internet or the corporate network.

    This creates a fast, secure experience for employees, allowing them to access corporate resources and applications from any location, on any device.

    Enterprise accelerating growth

    Cloudflare has gained hundreds of thousands of users with a unique go-to-market strategy, according to Motley Fool. It launches a new product for free (with paid premium features) to acquire lots of individual and small business customers and then markets its new product to paying enterprise customers.

    Cloudflare has created a massive ecosystem that it can leverage to land new deals and later expand on those relationships. It’s what makes this company a top edge computing pick since businesses and developers continue to flock to the next-gen edge network platform.

    There is increased risk associated with a small-cap, pure-play edge computing company like Cloudflare.

    References:

    1. https://www.fool.com/investing/stock-market/market-sectors/information-technology/edge-computing-stocks/
    2. https://www.cloudflare.com
    3. https://www.fool.com/investing/2021/06/17/forget-amc-this-growth-stock-could-make-you-rich/

    ARK’s Cathie Wood

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    “Cathie Wood is a star stock-picker and founder of ARK Invest, which invests in innovations like self-driving cars and genomics.” Forbes

    Cathie Wood founded ARK Investment Management seven years ago in 2014. One of the biggest secrets to ARK’s investment strategy and noteworthy success, according to Wood, is “the willingness to step in when others are selling a stock for very short-term reasons. We get great opportunities like that.”

    Wood said it “pains me more than anything” to think clients might be panicking and selling at the wrong time.

    Thus, Wood isn’t focused on short-term fluctuations. She takes a long term and bold view. “We have a five-year investment time horizon,” she says. Since, the big ideas blossoming todaywere planted 30 years ago, she says: “We are ready for prime time now.

    Additionally, Wood and her team has been early on many themes—they embraced active management when investing seemed inexorably tied to indexing; they implemented stock-picking in active ETFs while the largest asset managers said it couldn’t be done; and she bought companies that others thought were overpriced, a novelty, or both.

    Investing in transformative technologies that are going to change the world

    Wood’s focus has been on innovative companies with technology to disrupt the way we live. Her portfolios are loaded with stocks that have skyrocketed—for example, Tesla is a big holding in three of her funds. She is an advocate of a future where technology would make everything better, more productive and profitable.

    As Wood and her company’s research frequently remind investors, electrification, the telephone, and the internal combustion engine turned the world upside down a century ago. Now, she believes that five technologies—artificial intelligence, blockchain, DNA sequencing, energy storage, and robotics—are bringing about an equally profound transformation of the economy. These innovations will converge, recombine into things like autonomous taxis and whatnot, and create a perfect economic storm of higher wages, falling prices, and wider profit margins.

    Ark’s ideas start with their research. Wood researched stocks with dogged determination. “Cathie is insatiably curious; she was a voracious consumer of research from all over the Street. She read everything from everyone,” says Lisa Shalett, chief investment officer for Morgan Stanley Wealth Management.

    For example, they state that they take a blank sheet of paper and just say, “What is an autonomous vehicle? What’s the right way to build one? What are the critical variables?” They believe that they will inevitably run into the companies that not only have good answers, but are leading the charge

    She was on a mission to allocate capital to its best use—transformative technologies. Innovation is early-stage growth, and it is typically exponential growth. Companies developing these platforms can generate revenue growth of more than 20% [annually] for years and years.

    Wood looked at places that other investment analysts ignore. She found stocks that sat at the intersection of multiple industries, and weren’t followed by analysts from any side. This, she realized, is where innovation happens.

    Most growth companies have a decay rate, which means the bigger a company gets, the harder it is to grow. Exponential growth often includes network effects and virality, which means the more people joining the network, the more valuable it becomes, and the faster it grows.

    Wood’s believes in transparency when financial firms don’t allow portfolio managers and analysts to use social media to share their research or even gather information. At ARK, Wood created an open-source ecosystem, where the team can share research and collaborate with scientists, engineers, doctors, and other experts. Every Friday morning, she convenes an investment ideas meeting with her analysts and outside experts that’s part business school seminar and part free-form futurist bull session. “Most compliance teams would not be comfortable with that,” Wood says. “From the beginning, ARK actively shares the knowledge they’re generating.

    Conservative philosophy

    The dawning of a high-tech future is central to Wood’s life philosophy. In starting ARK, her goal was “encouraging the new creation,” by investing in “transformative technologies that were going to change the world.” The triumph of innovation also fits well with her free-market views. To a younger generation tempted by socialism, she’s hoping to show that capitalism can still work its magic.

    She’s conservative, both politically and economically. For decades she’s championed green investments. Wood has bemoaned President Joe Biden’s plans to spend big and tax the wealthy, even though many of his proposals are designed to bring the economy closer to her futuristic vision for it, and though higher capital-gains taxes could push more money into tax-efficient funds like hers. She warns that higher taxes on companies and investors will discourage future innovation.

    References:

    1. https://www.barrons.com/articles/arks-cathie-wood-disrupted-investment-management-shes-not-done-yet-51614992508
    2. https://www.bloomberg.com/news/features/2021-05-27/cathie-wood-is-a-believer-from-bitcoin-to-tesla-even-as-arkk-fund-stumbles
    3. https://www.barrons.com/articles/tesla-telehealth-and-the-genomics-revolution-power-ark-funds-51603450802

    The Five Simple Rules to Investing | TD Ameritrade

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    Investing does not have to be complicated and can be a hedge to expected strong inflation.

    https://youtu.be/NxEcO7ITtMo
     

    “Global investment managers are more worried about the risk of inflation on markets than they are about the risk of Covid-19.” Bank of America survey

    72% of global fund managers expect strong inflation to be transitory, despite US prices surging 5% year-on-year in May, according to Bank of America’s latest survey. The Bank of America survey polled 224 managers with $630 billion in assets under management between March 5 and 11, 2021.

    In their collective opinions, trillions of dollars in federal stimulus spending in the United States helped set the economy on the path to recovery, but it’s also fueled concerns about ballooning levels of debt and the rapid inflation that could accompany the injection of so much money into the fragile economic system, according to an article in Forbes. 

    Despite the risks, investor sentiment overall is still “unambiguously bullish,” the survey found, with 91% of fund managers expecting a stronger economy in the future and nearly half of fund managers are now expecting a v-shaped recovery in global markets. 

    “Investors (are) bullishly positioned for permanent growth, transitory inflation and a peaceful Fed taper,” said Michael Hartnett, chief investment strategist at BofA, adding that 63% of the investors believe Fed will signal a taper by September.

    References:

    1. https://www.forbes.com/sites/sarahhansen/2021/03/16/inflation-not-covid-19-is-now-the-biggest-risk-to-markets-bank-of-america-survey-shows/?sh=6f5fd2db3b1f
    2. https://www.reuters.com/article/us-markets-survey-bofa/investors-see-transitory-inflation-and-peaceful-fed-taper-bofa-survey-idUSKCN2DR0Z9

    Investing Goals

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    “The goal of investing is to maximize your returns and to put your money to work for you.” 

    Emergency funds
    Being prepared for life’s surprises can take a burden off your mind—and someday, your wallet. An emergency fund is a stash of money set aside to cover the financial surprises life throws your way. These unexpected events can be stressful and costly.

    Here are some of the top emergencies people face:

    • Job loss.
    • Medical or dental emergency.
    • Unexpected home repairs.
    • Car troubles.
    • Unplanned travel expenses.

    3 benefits of having emergency money

    Aside from financial stability, there are pros to having an emergency reserve of cash.

    — It helps keep your stress level down.

    It’s no surprise that when life presents an emergency, it threatens your financial well-being and causes stress. If you’re living without a safety net, you’re living on the “financial” edge—hoping to get by without running into a crisis.

    Being prepared with an emergency fund gives you confidence that you can tackle any of life’s unexpected events without adding money worries to your list.

    — It keeps you from spending on a whim.

    You’ve heard the saying “out of sight, out of mind.” That’s the best way to store your emergency money. If the cash is only as far away as your closest debit card, you may be tempted to use it for something frivolous like a designer cocktail dress or big-screen TV—not exactly an emergency.

    Keeping the money out of your immediate reach means you can’t spend it on a whim, no matter how much you’d like to.

    And by putting it in a separate account, you’ll know exactly how much you have—and how much you may still need to save.

    — It keeps you from making bad financial decisions.

    There may be other ways you can quickly access cash, like borrowing, but at what cost? Interest, fees, and penalties are just some of the drawbacks

    Retirement

    Saving for retirement might be the most important thing you ever do with your money. And the earlier you begin, the less money it will take.

    When it comes to preparing for retirement, there are a lot of things you can’t control—the future of Social Security, tax rates, and inflation, for example. But one big thing that you can control is the amount you save.

    Social Security shouldn’t be your only retirement plan since Social Security was never meant to be anyone’s sole source of retirement income.

    In fact, a 30-year-old making $50,000 per year today—and who might realistically expect to make substantially more by the time he or she retires—can expect less than $22,000 per year from Social Security at age 67 (in today’s dollars).

    In the past, pensions often offered an additional source of income for retirees. But pension plans are becoming rare in today’s world, and it’s more important than ever to take advantage of the opportunity to save for your future.

    Keep in mind that on average, Social Security payments make up only about 33% of Americans’ retirement income, according to Social Security Administration.

    Spending now could mean you’ll pay for it later

    Perhaps you’d rather spend your money on other things that are more fun than saving for retirement.

    But because compounding can enhance the value of your savings, the “pain” of each dollar you save now can be greatly outweighed by the flexibility you gain later.

    Of course, we’re not suggesting you’d be better off squeezing the last drop of enjoyment from your life.

    But we think that knowing you’ll be all set to meet your basic needs later—with enough left over to let you comfortably do the things you look forward to in retirement—is worth going without a few treats now and then.

    Choosing to spend less on certain expenses now could make a huge impact in the long run! For example, you could spend $3,600 a year on payments for a new car during the next 5 years … or you could watch that money grow to $80,000 over the next 40 years!*

    Control what you can

    In the end, the future of Social Security isn’t the only thing that’s out of your hands. Tax rates will almost certainly change between now and your retirement date, and inflation will continue to increase prices over time. Other government programs, like Medicare, might also change.

    But there’s one thing that only you can completely control: how much you save. Start now and you might be surprised at how little you notice the sacrifice.

    1. https://investor.vanguard.com/emergency-fund/
    2. https://investor.vanguard.com/retirement/savings/why-save

    Apple’s Stock Price Underperforms Market 2021 YTD

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    “‘Most important, have the courage to follow your heart and intuition.’ Remembering Steve and the many ways he changed our world.”  Tim Cook

    On June 8, 2021, Apple Inc. (ticker: AAPL) closed $18.35 below its 52-week high ($145.09), which the company achieved on January 25th, and the stock is down slightly more than 4% year-to-date (YTD).

    No photo description available.

    Despite the recent stock price underperformance, Apple remains the most valued U.S.-traded company, at $2.1 trillion market capitalization. On April 28, 2021, Apple announced financial results for its fiscal 2021 second quarter ended March 27, 2021. The Company posted a second quarter record revenue of $89.6 billion, up 54 percent year over year, and quarterly earnings per diluted share of $1.40. International sales accounted for 67 percent of the quarter’s revenue. While hardware like the iPhone and iPad will continue being a significant part of Apple’s revenue, look for services to play an increasingly important role over the next decade in the company’s growth and success.

    Yet, investors remain concerned regarding the big questions facing Apple and its ecosystem, according to an article reported in the Wall Street Journal. The company has been sued for alleged anticompetitive behavior by “Fortnite” maker Epic Games over the rules and fees for its App Store. A bench trial on the matter wrapped up last week.

    That trial ended with Apple Chief Executive Tim Cook facing sharp questions from U.S. District Judge Yvonne Gonzalez Rogers, who seemed skeptical about some of the company’s explanations for its business practices on the App Store. A ruling in the case is not expected for months.

    Apple’s share price has fallen 3% since the start of the trial and is now off nearly 7% for the year—the worst performance among its mega-cap tech peers. Part of that can be chalked up to worries about a peak iPhone cycle following the strong sales performance of last year’s models.

    From a capital allocation perspective, Apple’s board hiked its dividend by 7% and announced a new $90B share repurchase program. Despite well-known industry chip supply constraints, Apple appears to be executing extremely well and is seeing robust demand across all business line.

    References:

    1. https://www.marketwatch.com/story/apple-inc-stock-rises-monday-still-underperforms-market-01623097911-d343febf425e
    2. https://www.wsj.com/articles/apples-big-show-may-not-be-enough-11622804401
    3. https://www.apple.com/newsroom/2021/04/apple-reports-second-quarter-results/

    Investment Risks and Taxes

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    No investment is completely free of risk.

    When it comes to investing, it’s critical to understand that no investment is 100% safe and all investments come with risk. Unlike when you store your money in a savings account, investing has no guarantees that you’ll earn a return. When you invest, experiencing a financial loss is a possibility.

    Investing means that you’re putting your money to work into a financial asset in the expectation of getting a positive return. Yet, where there’s the chance of financial gain, there’s always going to be the chance of a financial loss. Investment risk and investment reward are two sides of the same investing coin.

    On the other hand, saving — which is basically parking your money in an account so it’ll keep its value.

    Some investments are considered safer than others, but no investment is completely free of risk, because there’s more than one kind of risk, according to SoFi.

    Different Types of Risk

    Investors who choose products and strategies to avoid market volatility may be leaving themselves open to other risks, including:

    • Inflation risk – An asset could become less valuable as inflation erodes its purchasing power. If an investment is earning little or nothing (a certificate of deposit or savings account, for example), it won’t buy as much in the future as prices on various goods and services go up.
    • Interest rate risk – A change in interest rates could reduce the value of certain investments. These can include bonds and other fixed-rate, “safe” investment vehicles.
    • Liquidity risk – Could an asset be sold or converted if the investor needs cash? Collections, jewelry, a home, or a car could take a while to market—and if the owner is forced to sell quickly, the price received could be lower than the asset is worth. Certain investments (certificates of deposit, some annuities) also may have some liquidity risk because they may offer a higher return in exchange for a longer term, and there may be a penalty if the investor cashes out early.
    • Tax risk – An investment could lose its value because of the way it’s taxed. For example, different types of bonds may be taxed in different ways.
    • Legislative risk- A change in law could lower the value of an investment. For example, if the government imposes new regulations on a business, it could result in higher costs (and lower profits) for the company or affect how it can serve its customers. Or, if taxes go up in the future, savers who put all or most of their money into tax-deferred accounts [IRAs, 401(k)s, etc.] could end up with a hefty tax bill when they retire.
    • Global risk – An investment in a foreign stock could lose value because of currency problems, political turmoil, and other factors.
    • Reinvestment risk – When an investment matures (think CDs and bonds), the investor might not be able to replace it with a similar vehicle that has the same or a higher rate of return.

    Taxes

    “Worried about an IRS audit? Avoid what’s called a red flag. That’s something the IRS always looks for. For example, say you have some money left in your bank account after paying taxes. That’s a red flag.” Jay Leno

    Taxes are a key consideration for investors – and not one that investors might think about when logging into their brokerage account. Yes, $0 trades are exciting, but don’t forget about taxes — which are an investors “biggest expense” or every traders “silent partner”.

    The key to taxes is to not just think about taxes in tax season, because there’s not that much you can do besides contribute to an IRA.

    When it comes to tax planning, most of it has to be done before the year is over. One strategy that’s very useful is tax-loss harvesting. Essentially, it allows investors with any sort of investment losses to use that to offset any gains, reducing the amount of taxes owed.

    Investors can use the tax-loss harvesting proceeds to buy something else, and it can even be very similar. Or they can use the money to rebalance. “Don’t hesitate to take losses and use them to your advantage,” said Hayden Adams, director of tax and financial planning at Charles Schwab. “You’re likely to have losses and tax-loss harvesting is a great way to rebalance to get back to proper risk tolerance.”

    The key for investors is to know the rules and work within them.

    References:

    1. https://www.sofi.com/learn/content/what-is-a-safe-investment/
    2. https://www.businessinsider.com/safe-investments
    3. https://finance.yahoo.com/news/what-new-stock-traders-need-to-know-and-do-before-the-end-of-the-year-192426159.html

    Dividends and Income

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    “Income and cash flow are the priority in retirement.”

    A dividend is a payment made from a company to its shareholders – often quarterly, but sometimes monthly. Dividends are a way for shareholders to participate and share in the growth of the underlying business above and beyond the share price’s appreciation.

    Dividends are cash payments made on a per-share basis to investors. For instance, if a company pays a dividend of 20 cents per share, an investor with 100 shares would receive $20 in cash. Stock dividends are a percentage increase in the number of shares owned. If an investor owns 100 shares and the company issues a 10% stock dividend, that investor will have 110 shares after the dividend.

    When publicly traded companies have extra cash on hand, it gives the management team some flexibility and options. With some extra cash, they can:

    • Take that money and invest it back in the business – they might do that through expanding existing operations, building factories, possibly acquiring another company that can help them grow.
    • Take that money and buy back shares of its own company – this strategy reduces the number of ways ownership of the company is sliced up, increasing the ownership. or
    • They can pay out some of that money to people who own shares of the company as a way to “share the wealth” and reward them for owning the business (dividend)

    Dividends vs. Bonds

    Bonds are obligated to pay interest to bondholders on a regular basis, but there’s no obligation for a company to pay dividends. When income from dividend producing assets decline, retirees may realize they don’t have enough cash flow to pay all their expenses. In order to save cash, some non-essential expenses are often cut or eliminated.

    Investors who rely on income, especially those in retirement, tend to gravitate to dividend stocks because bonds pay so little. They could be in for a big shock. Many steady dividends payers have said they will cut their dividends (AT&T) or eliminate them completely (Boeing). For people who live off of dividends, a severe cut would significantly affect the amount of money they have to live on.

    Additionally, dividends are taxed at the more favorable capital gains tax rates. This can be an important benefit for retirees who likely don’t have a lot of write-offs,

    Long-term investors should focus on total return (capital gains plus dividend income) when thinking about how to invest your retirement savings.

    Dividends importance to total equity returns over the long term cannot be overstated. Ibbotson Associates data from 1927 to 2002 show that more than 40% of the compound annual growth of its large-cap equity index can be attributed to dividend payouts. That said, the contribution of dividends over shorter periods can exhibit a fair amount of disparity. Indeed, over the decades, it has ranged from a low of about 15% in the 1990s to a high of 71% in the 1970s.

    Graphing the difference between ten-year compounded growth rates from dividends and capital appreciation for the years 1947 through 2002, a picture of alternating leadership begins to appear. Clearly, capital appreciation has been dominant in periods of lower inflation and stable interest rates due to the positive impact that it has on price-to-earnings (P/E) multiples. On the other hand, dividends have carried most of the burden of equity market returns in periods of higher inflation and volatile interest rates when P/E multiples were contracting.

    Consider all streams of income — Social Security, pensions, IRAs, part-time work — when devising a broader strategy (and tax plan) for your retirement years. Given that “investors using dividend-paying stocks for income must have a strong constitution,” says Richard Steinberg, chief market strategist at The Colony Group.

    Dividends are not guaranteed and are paid at the discretion of the board of directors. Unlike a bond, which must pay a contracted amount or be in default, the board of directors can decide to reduce the dividend or even eliminate it at any time.

    References:

    1. https://money.usnews.com/investing/investing-101/articles/how-to-live-on-dividend-income
    2. https://money.usnews.com/investing/investing-101/articles/what-are-dividends-and-how-do-they-work