Category Archives: Investing

Stop Orders

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A stop order, also referred to as a stop-loss order, is an order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price.  Stop orders are orders that are triggered when a stock moves past a specific price point. Beyond that price point, stop orders are converted into market orders that are executed at the best available price.

When the stop price is reached, a stop order becomes a market order.  

A buy stop order is entered at a stop price above the current market price.  Investors generally use a buy stop order to limit a loss or to protect a profit on a stock that they have sold short.  

A sell stop order is entered at a stop price below the current market price. Investors generally use a sell stop order to limit a loss or to protect a profit on a stock that they own.

https://youtu.be/wb3hpmu49OA

Stop orders are used to limit losses with a stop-loss or lock in profits using a bullish stop.

References:

  1. https://www.sec.gov/fast-answers/answersstopordhtm.html
  2. https://www.investopedia.com/terms/s/stoporder.asp

Successful Long Term Investing

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“All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.” Warren Buffett

You need courage, a long term focus, and the discipline to adhere to a long term plan to buy stocks when the markets are turbulent, stock prices are melting down, and the economy is in a deep slump, and the outlook for corporate earnings over the subsequent quarters is unfavorable. In Warren Buffett’s view, “Widespread fear is your friend as an investor because it serves up bargain purchases.” Thus, smart long-term investors love when the prices of their favorite stocks fall, as it produces some of the most favorable buying opportunities. According to Buffett, “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.” Warren Buffett

Warren Buffett

Additionally, investors must focus on the long term — a minimum of seven to ten years — and look for high-quality, blue-chip companies that have fortress like balance sheets and can generate extraordinary free cash flow. In the short term, equity markets tend to swing wildly from day to day on the smallest of news, trend and sentiment, and celebrate or vilify the most inane data points. It’s important not to get caught up in the madness but stick to your homework. Warren Buffett quipped that, “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”

Invest in well-managed, financially strong businesses that sell goods and services for which demand is consistently strong (think food, consumer goods, and medicines), since it’s essential to keep capital preservation and margin of safety at the top of your priority list when deciding how to invest your money. As Buffett says, “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

Businesses that are well managed and that have strong balance sheets typically display certain characteristics:

  • They carry little or no debt.
  • They generate enough free cash flow (earnings plus depreciation and other noncash charges, minus the capital outlays needed to maintain the business) that they don’t have to raise equity or sell debt.
  • They have a proven history of management excellence.
  • They have abundant opportunities for reinvesting capital (or clear policies for returning excess capital to shareholders), and their leaders boast an outstanding record of allocating capital.
  • They have a durable competitive advantage which could mean cost advantages, a strong brand name, or something else.
  • In addition, they are global in scope. After all, 95% of the world’s population lives outside the U.S., and economic growth is likely to be greater abroad than at home.

“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Warren Buffett

To be a successful long term investor, it’s essential to filter out the short-term noise. Most of the chatter from Wall Street and in the financial entertainment media headlines is just that: chatter you can and should ignore. “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. According to Buffett, “Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” Warren Buffet

If You’re Not Investing You’re Doing it Wrong

“Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.” Warren Buffett

Investing in equities delivers higher returns than bond or cash investments over the long term but is accompanied by a higher exposure to market risk. Investing in fixed income investments offers more modest return potential and risk exposure. Investors can invest in cash as a low- risk, low-return strategy, which is ideal for short-term savings goals or to balance out the risks of stock and bond investments. Ideally, investors’ asset allocations should reflect their goals, risk tolerance, time horizon, income and wealth, and other personal factors.

“The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” Warren Buffett

References:

  1. https://www.kiplinger.com/article/investing/t038-c000-s002-7-blue-chips-to-hold-forever.html
  2. https://www.fool.com/investing/best-warren-buffett-quotes.aspx
  3. https://www.ruleoneinvesting.com/blog/how-to-invest/warren-buffett-quotes-on-investing-success/
  4. https://personal.vanguard.com/pdf/how-america-invests-2020.pdf

Long-Term Investing

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“Finding success as a long-term investor requires navigating a psychological minefield.”. Ben Carson, Director of Institutional Asset Management at Ritholtz Wealth Management.

Everyone would agree that the stock market has been highly volatile since the turn of the 21st century, experiencing crashes of 50%, 57% and 34% since 2000. It’s possible this level of heightened volatility is going to remain for the foreseeable future with an assist from the internet, rising sovereign debt and inflation.

Investing for the long-term implies that you set aside money today so you can have more money in the future. But getting to whatever the “long-term” means to you requires seeing the present value of your holdings fall, sometimes in soul-crushing fashion.

In the coming 40-50 years, you should expect to experience at least 10 or more bear markets, including 5 or 6 that constitute a market crash in stocks. There will also probably be at least 7-8 recessions in that time as well, maybe more.

However, you can never be sure of anything when it comes to the equity markets or the U.S. economy, but let’s use history as a rough guide on this. Over the 50 years from 1970-2019, there were 7 recessions, 10 bear markets and 4 legitimate market crashes with losses in excess of 30% for the U.S. stock market. Over the previous 50 years from 1920-1969, there were 11 recessions, 15 bear markets, and 8 legitimate market crashes with losses in excess of 30% for the U.S. stock market.

Bear markets, brutal market crashes and recessions are a fact of life as an investor. They are a common and expected feature of the financial system.

If you’re investing in the stock market that means you should plan on losing at least 10% of your money once every 1-2 years, on average. You should also plan on losing 20% of your capital once every 3 or 4 years, 30% once every 6 or 7 years and 40% or worse every 10-12 years.

These time frames aren’t set in stone since actual stock market returns are anything but average but you get the point. If your money is invested in the stock market for the long-term, expect it to grow over time but also evaporate without warning on occasion.

The same applies to pretty much any risk asset.

References:

  1. https://awealthofcommonsense.com/2021/05/sometimes-you-just-have-to-eat-your-losses-in-the-markets/
  2. https://awealthofcommonsense.com/2021/02/a-short-history-of-u-s-stock-market-corrections-bear-markets/

Investing – How to Get Started

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“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”  Robert Kiyosaki, Rich Dad Poor Dad

Investing, which involves putting your money to work, is a great first step toward building wealth for yourself and your family. If you think investing is gambling, you’re doing it wrong. The world of investing requires discipline, planning and patience. And, the gains you see over decades can be exciting. The three most common categories of investments, referred to as asset classes, include:

  1. Stocks – which are a share in a company. These tend to be riskier investments, but also typically offer more potential for profit over time.
  2. Bonds – which are a share of debt issued by a business or the government. These are safer investments, typically returning a lower profit than stocks over time.
  3. Cash and cash equivalents – which are readily available cash and short-term investments like certificates of deposit (CDs). These are the safest investments, but typically return little profit over time.

 

Before you start investing, it is important for you to understand a few basic concepts and definitions, such as:

Risk Tolerance

Risk tolerance is basically your emotional ability to deal with losing money. If you invested $1,000 today, could you deal with it being worth $500 for a period of time? That’s possible if you invest heavily in stocks, which tend to increase in value over time but can be volatile from one day to the next. If you answered yes to being okay losing a great deal of money for a period of time, then you have a high risk tolerance.

Time Horizon

Time horizon is the amount of time before you want to use your money. If you’re planning to use the money to make a down payment on a home within the next three years, you have a short time horizon and would likely have less risk tolerance. If you’re not planning to use the money until you retire in 30 years, then you have a long time horizon and can afford to take on more risk.

Asset Allocation

Asset allocation is the percentage of stocks, bonds or cash you own. If you have a high risk tolerance and long time horizon, you’re likely to want a larger percentage of stocks because you’ll be able to weather ups and downs and make more money over the long term. On the other hand, if you have a low risk tolerance and short time horizon, you probably want more cash and bonds so that you don’t lose money right before you need it.

Stocks, bonds and cash tend to respond differently to market conditions (one may go up when the others go down). Asset allocation helps you spread your money so that when one asset class unexpectedly zigs, your whole portfolio doesn’t zig along with it. In this way, asset allocation can help ensure your portfolio is correctly positioned to help you reach your financial goals, no matter what is happening in the market.

Diversification

Diversification splits your investments among different groupings or sectors in order to reduce risk. That includes your asset allocation. But it also includes where you invest within asset classes. For instance, you might diversify between stocks in companies located within the United States and stocks in companies located in Asia.

Different sectors of the economy do better at different times. It’s tough to predict which one will do well in any given year. So when you diversify and own stocks across different sectors, you are positioned to make money on whatever sector is performing well at the time. A well-diversified portfolio can help lessen the impact of market ups and downs on your portfolio.

Rebalancing

If you’ve done a good job with asset allocation and diversifying, then the balance of your portfolio is likely going to get out of whack over time as one sector does better than another. For instance, let’s say you wanted 10 percent of your stocks to be companies in Asia. If companies in Asia have a great year, those companies may now make up 15 percent of your stocks. In that case you’ll want to sell some of those stocks and use that money to buy more stocks (or even bonds) in parts of your portfolio that didn’t do as well.

Rebalancing on a regular basis (once or twice a year, for example) can help ensure your portfolio remains aligned with your goals. And because it provides a disciplined approach to investing, portfolio rebalancing also may prevent you from buying or selling investments based on emotion.

Dollar Cost Averaging 

Dollar cost averaging (DCA) involves putting your investment plan on autopilot.  With DCA, you invest a set amount at set intervals (for example, $200 every month) in the market. By investing systematically, you’ll buy more shares of an investment when the market is lower, fewer when the market is higher, and some when the market is in between. Over time, this may help you to pay a lower average price for the total shares you purchase.

DCA takes the emotion out of investing, helping you to start on your investment plan sooner, rather than later. And once you begin, DCA can also help you remain focused on your goals, no matter what’s happening in the market. It helps make investing a habit.

Capital Gains

Capital gains is an increase in the value of an asset or investment over time. Capital gains is measured by the difference between the current value, or market value, of an asset or investment and its purchase price, or the value of the asset or investment at the time it was acquired {cost basis}.

Realized capital gains and losses occur when an asset is sold, which triggers a taxable event. Unrealized gains and losses, sometimes referred to as paper gains and losses, reflect an increase or decrease in an investment’s value but are not considered a capital gain that should be treated as a taxable event.

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Fiscal Fact: The average white household had $402,000 in unrealized capital gains in 2019, compared with $94,000 for Black households and $130,000 for Hispanic or Latino households. These disparities have generally widened over time.  Source:  Tax Policy Center https://www.taxpolicycenter.org/fiscal-fact/unrealized-capital-gains-ff-05102021

Capital gains are classified as either short-term or long-term. Short-term capital gains, defined as gains realized in securities held for one year or less, are taxed as ordinary income based on the individual’s tax filing status and adjusted gross income. Long-term capital gains, defined as gains realized in securities held for more than one year, are usually taxed at a lower rate than regular income.

“If you want to become really wealthy, you must have your money work for you. The amount you get paid for your personal effort is relatively small compared with the amount you can earn by having your money make money.” John D. Rockefeller

Before you start investing or putting your money to work for your, do your homework and research. Once you’ve made a decision, make sure to re-evaluate the assets in your portfolio on a regular basis. A good asset today may not necessarily be a good asset in the future.

And, don’t panic during the inevitable setbacks and don’t be fearful during the inevitable stock market corrections that all long-term investors face. If the reasoning behind the investment decision was sound when purchased, stick with the assets, and they should eventually recover and grow.

References:

  1. https://www.investopedia.com/financial-edge/0511/the-top-17-investing-quotes-of-all-time.aspx
  2. https://www.northwesternmutual.com/life-and-money/how-to-invest-a-beginners-guide/
  3. https://www.northwesternmutual.com/life-and-money/4-investment-terms-you-should-know/
  4. https://www.investopedia.com/terms/c/capitalgain.asp

Volatility and Market of Stocks

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If you pay any attention to the stock market, you probably know that volatility is actually a normal part of investing.

Stock market volatility is a measure of how much the stock market’s overall value fluctuates up and down. A stock with a price that fluctuates wildly—hits new highs and lows or moves erratically—is considered highly volatile. A stock that maintains a relatively stable price has low volatility. according to Investopedia.

Stock market volatility is most commonly measured by standard deviation, which is a measure of the amount of variability around an average. The larger the standard deviation, the higher the volatility will be.

Volatility is often associated with fear, which tends to rise during bear markets, stock market crashes, and other big downward moves. However, volatility doesn’t measure direction. It’s simply a measure of how big the price swings are. You can think of volatility as a measure of short-term uncertainty.

“Keep it simple and avoid complications in the markets.”

  • Sooner or later, most investors realize that the stock market is actually a ‘market of stocks’ that is chaotic, dictated by investors’ emotions of fear and greed, and influenced by interest rates and macro economic conditions. Good stocks don’t always advance. Bad stocks don’t always fall. Reality is rarely ever as bullish, or as bearish, as forecasted by financial analysts and strategists.

What is certain is that a quasi-invisible force known as volatility is always always present, threatening to disrupt the market’s delicate equilibrium and sanity.

“One of the hardest parts about being a long-term investor is the fact that sometimes your money is going to get incinerated and there’s nothing you can do about it.” Barry Ritholtz

Investors have a few primary ways to respond.

  • They can sit tight and act like long-term investors. Time tends to reward such behavior, though research has shown that it is as difficult to practice as it is uncommon.
  • Most investors never hold stocks long enough to benefit from the fact that the market rises over time. Investors typically buy too late and sell too early. They routinely “greed in” and “panic out” of stocks. They hold stocks for just a few years — or worse, a few months — rather than carefully curating a portfolio over decades, which means most investors behave like salmon swimming upstream. They struggle against the stock market’s natural rhythms.
  • Rotations is when smart and retail money runs after gains in certain sectors until a rally there becomes exhausted, and then their money runs to other sectors.
  • Investors can use options to more effectively navigate the stock market. A well-placed put or call can make all the difference in an uncertain market. A well-placed options contract can turn the unpredictably of investing into a defined outcome.
  • There are two types of options. A call option gives investors the right to buy a stock at a certain price and time. A put option gives investors the right to sell a stock at a certain price and time. An easy way to remember the difference between puts and calls is that a call gives you the right to “call in” a winning stock, while a put gives you the right to “put off” a bad stock on someone else.
  • Investors buy puts when they want to protect stock that they own from losing value.
  • Investors buy calls when they want to own a stock they believe will increase in value.
  • Many investors sell puts and calls to generate income.
  • Many people pick options that expire in three months or less. When you buy an options contract that expires in a year or more, you spend more money because time equals risk.
  • Simplicity is everything. It’s important to keep your trading strategy simple and avoid complications in the markets. Since everything could change tomorrow, or not, and thus we fall back on something we learned during the dark days of the 2008-09 financial crisis: Focus on the facts that have held up over time

Consider keeping a list of stocks or exchange-traded funds you would like to buy during market sell offs or crashes.

When in doubt, always remember: “Bad investors think of ways to make money. Good investors think of ways to not lose money.”

To keep from panicking when stock market volatility ticks up, it’s important to realize that volatility comes with the territory when you decide to invest. The stock market will always have its ups and downs, and there’s no use trying to predict what’s going to happen. So if you’re investing for the long term, consider basing your decisions on your goals. timeline and tolerance for risk, rather than on what’s happening in the markets from one day to the next.

Also, remember that being diversified is one way to help manage your exposure to volatility. By spreading your money out over various asset classes you’re also spreading out your market risk, and ensuring your portfolio’s results aren’t based on the performance of one type of investment.

References:

  1. https://www.fool.com/investing/how-to-invest/stocks/stock-market-volatility/
  2. https://www.barrons.com/articles/how-to-buy-and-sell-options-without-making-a-fool-of-yourself-51600336811
  3. http://www.barrons.com/articles/how-to-use-options-to-beat-the-market-1477415121
  4. https://awealthofcommonsense.com/2021/05/sometimes-you-just-have-to-eat-your-losses-in-the-markets/

Road to Wealth | American Association of Individual Investors (AAII)

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You can build wealth by saving for the future and investing over a long term. The earlier you start, the easier it is for your money to work for you through compounding. 

Building wealth is essential to accomplish a variety of goals, from sending your kids to college to retiring in style. Wealth is what you accumulate; not what you spend. Most Americans are not wealthy. and few have accumulated significant assets and wealth.

How long could the average household survive without a steady income.

Every successful saving and investing journey starts with a set of clear and concise goals, whether they’re as big as retirement or as small as wanting to save for new tires for your vehicle. It’s important to determine and write down what are your savings, investing and wealth building goals.

Rather than trying to guess what’s going to happen, focus on what you can control. Each financial goal calls for a positive step you can take no matter what the market or the economy is doing.

The Wealth-Building Process can help you keep many of these financial goals and investing process on track. It is designed to give you clarity on what you are investing for and what steps you need to take to reach and fulfill those goals.

The key is to stick to your financial plan and recalibrate the investing process throughout the year. One way to do so is to set up reminders that prompt you to go back and review your goals. Positive change often requires a willingness to put yourself back on track whenever you drift away from the plan.

With that in mind, here are financial and investing tactics for investors:

1. Only follow strategies you can stick with no matter how good or bad market conditions are.  All too often, investors misperceive the optimal strategy as being the one with the highest return (and often the one with the highest recent returns). This is a big mistake; if you can’t stick to the strategy, then it’s not optimal for you. Better long-term results come to those investors who can stick with a good long-term strategy in all market environments rather than chasing the hot strategy only to abandon it when market conditions change.

One way to tell if your strategy is optimal is to look at the portfolio actions you took this past year. Make sure that you are not taking on more risk than you can actually tolerate. Alternatively, you may need to develop more clearly defined rules about when you will make changes to your portfolio.

2. Focus on your process, not on your goals. Mr. Market couldn’t care less about how much you need to fund retirement, pay for a child’s college education or fulfill a different financial goal you may have. He does as he pleases. The only thing you can control is your process for allocating your portfolio, choosing investments to buy and determining when it’s time to sell. Focus on getting the process right for these three things and you will get the best possible return relative to the returns of the financial markets and your personal tolerance for risk.

3. Write down the reasons you are buying an investment. One of the most fundamental rules of investing is to sell a security when the reasons you bought it no longer apply. Review your current holdings and ask yourself the exact reasons you bought them. Recommend you maintain notes, so you don’t have to rely on your memory to cite the exact characteristics of a stock or a fund that attracted you to the investment.

4. Write down the reasons you would sell the investments you own. Just as you should write down the reasons you bought an investment, jot down the reasons you would sell an investment, ideally before you buy it. Economic conditions and business attributes change over time, so even long-term holdings may overstay their welcome. A preset list of criteria for selling a stock, bond or fund can be particularly helpful in identifying when a negative trend has emerged.

5. Have a set schedule for reviewing your portfolio holdings.  If you own individual securities, consider reviewing the headlines and other relevant criteria weekly. (Daily can work, if doing so won’t cause you to trade too frequently.) If you own mutual funds, exchange-traded funds (ETFs) or bonds, monitor them quarterly or monthly.

6. Rebalance your portfolio back to your allocation targets. Check your portfolio allocations and adjust them if they are off target. For example, if your strategy calls for holding 40% large-cap stocks, 30% small-cap stocks and 30% bonds, but your portfolio is now composed of 45% large-cap stocks, 35% small-cap stocks and 20% bonds, adjust it. Move 5% of your portfolio out of large-cap stocks, move 5% out of small-cap stocks and put the money into bonds to bring your allocation back to 40%/30%/30%. How often should you rebalance? Vanguard suggests rebalancing annually or semiannually when your allocations are off target by five percentage points or more.

7. Review your investment expenses. Every dollar you spend on fees is an extra dollar you need to earn in investment performance just to break even. Higher expenses can be justified if you receive enough value for them. An example would be a financial adviser who keeps you on track to reach your financial goals. Review your expenses annually.

8. Automate when possible. A good way to avoid unintentional and behavioral errors is to automate certain investment actions. Contributions to savings, retirement and brokerage accounts can be directly taken from your paycheck or from your checking account. (If the latter, have the money pulled on the same day you get paid or the following business day.) Most mutual funds will automatically invest the contributions for you. Required minimum distributions (RMDs) can be automated to avoid missing deadlines and provide a monthly stream of income. You can also have bills set up to be paid automatically to avoid incurring late fees.

9. Create and use a checklist. An easy way to ensure you are following all of your investing rules is to have a checklist. It will both take the emotions out of your decisions and ensure you’re not overlooking something important.

10. Write and maintain emergency instructions on how to manage your portfolio. Typically, one person in a household pays the bills and manages the portfolio. If that person is you and something suddenly happened to you, how easy would it be for your spouse or one of your children to step in and take care of your financial affairs? For many families, the answer is ‘not easily’ given the probable level of stress in addition to their lack of familiarity with your accounts. A written plan better equips them to manage your finances in the manner you would like them to. It’s also a good idea to contact all of your financial institutions and give them a trusted contact they can reach out to, if needed.

Even Warren Buffett sees the value of this resolution. In his 2013 Berkshire Hathaway shareholder letter, he wrote, “What I advise here is essentially identical to certain instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for my wife’s benefit … My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” Considering the probability of Mrs. Buffett having learned a thing or two about investing over the years, it speaks volumes that Warren Buffett still sees the importance of including simple and easy-to-follow instructions in his estate documents.

11. Share your insights about investing with your family.  If you’re reading this, you likely have some passion for, or at least interest in, investing. Share it with your family members by having a conversation with them. Talk about how you invest, what you’ve learned and even the mistakes you’ve made. It’s a great way to pass along a legacy to those younger than you and to maintain a strong bond with those older than you. You might even learn something new by doing so. Our Wealth-Building Process can provide a great framework for facilitating these types of conversations.

If a family member isn’t ready to talk, don’t push them. Rather, write down what you want to say, give the letter to them and tell them you’ll be ready to talk when they are. For those of you who are older and are seeking topics that your younger relatives (e.g., millennials) might be interested in, consider our discount broker guide, which includes a comparison of the traditional online brokers versus the newer micro-investing apps.

12. Check your beneficiary designations. It is critical that all of your beneficiary designations are current and correctly listed. Even if nothing has changed over the past year, ensure that the designations on all of your accounts are correct. Also, make sure your beneficiaries know the accounts and policies they are listed on. Finally, be certain that those you would depend on to take over your financial affairs have access to the documents they need in the event of an emergency. We think this step is so important that we included a checklist for it in our Wealth-Building Process toolkit.

While you are in the process of checking your beneficiaries, contact all of the financial institutions you have an account or policy with to ensure your contact information is correct.

13. Be disciplined, not dogmatic. When you come across information that contradicts your views, do not automatically assume it is wrong. The information may highlight risks you have not previously considered or that you have downplayed in the past. At the same time, don’t be quick to change your investing style just because you hear of a strategy or an approach that is different than yours. Part of investing success comes from being open to new ideas while maintaining the ability to stick with a rational strategy based on historical facts. When in doubt, remember resolution #1, only follow strategies you can stick with no matter how good or bad market conditions are.

14. Never panic. Whenever stocks incur a correction (a decline of 10%–20%) or fall into bear market territory (a drop of 20% or more), the temptation to sell becomes more intense. Our brains are programmed to disdain losses as well as to react first and think later.

This focus on the short term causes us to ignore the lessons of history. Market history shows a pattern of rewards for those who endure the bouts of short-term volatility. We saw this last year. The coronavirus bear market was sharp, and the drop was quick. Those who were steadfast—or used it as an opportunity to add to their equity positions—were rewarded with new record highs being set late in the year and so far this year.

Drops happen regularly and so do recoveries. If you sell in the midst of a correction or a bear market, you will lock in your losses. If you don’t immediately buy when the market rebounds—and people who panic during bad market conditions wait too long to get back in—you will also miss out on big gains, compounding the damage to your portfolio. Bluntly put, panicking results in a large and lasting forfeiture of wealth.

15. Don’t make a big mistake.  Things are going to go haywire. A stock you bought will suddenly plunge in value. A mutual fund strategy will hit the skids. A bond issuer will receive a big credit downgrade. The market will drop at the most inopportune time.

If you are properly diversified, don’t make big bets on uncertain outcomes (including how President-elect Biden’s administration and the Democrats’ control of Congress will impact the financial markets), avoid constantly chasing the hot investment or hot strategy and set up obstacles to prevent your emotions from driving your investment decisions, you will have better long-term results than a large number of investors.

16. Take advantage of being an individual investor. Perhaps the greatest benefit of being an individual investor is the flexibility you are afforded. As AAII founder James Cloonan wrote: “The individual investor has a distinct advantage over the institution in terms of flexibility. They can move more quickly, have a wider range of opportunities and can tailor their program more effectively. They have only themselves to answer to.”

Not only are we as individual investors not restricted by market capitalization or investment style, but we also never have to report quarterly or annual performance. This means we can invest in a completely different manner than institutional investors can. Take advantage of this flexibility, because doing so gives you more opportunity to achieve your financial goals.

17. Treat investing as a business. The primary reason you are investing is to create or preserve wealth, and no one cares more about your personal financial situation 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.

18. Alter your passwords and use anti-virus software. There continues to be news stories about hacks. The best way you can protect yourself is to vary your passwords and use security software. A password manager is helpful for this. Anti-virus software and firewalls can keep viruses off of your computer and help thwart hackers.

19. Protect your identity. Identity theft can cause significant problems. Freezing your credit, monitoring your credit reports (Consumer Reports recommends AnnualCreditReport) and paying your taxes as early as possible can help prevent you from becoming a victim. Promptly challenge any suspicious charges on your credit card or telephone bills. If you get an unsolicited call asking for personal information, such as your Social Security number, or from someone claiming to be an IRS agent, hang up. (Better yet, don’t answer the phone unless you are certain you know who is calling.) It’s also a good idea to cover the keypad when typing your passcode into an ATM. Never click on a link in an email purporting to be from a financial institution (a bank, a brokerage firm, an insurance company, etc.). Instead, type the company’s website address directly into your browser.

The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 required credit bureaus to allow consumers to freeze their credit reports at no cost. The following links will go directly to the relevant pages on each credit bureau’s website:

  • Equifax: www.equifax.com/personal/credit-report-services
  • Experian: www.experian.com/freeze/center.html
  • TransUnion: www.transunion.com/credit-freeze

20. To help others, invest in yourself first. Investing based on your values, donating to charity, devoting your time to causes you are passionate about and giving to family and friends are all noble actions and goals. To do so now and in the future requires taking care of yourself. Keep yourself on a path to being financially sound through regular saving and controlled spending. Good sleep habits, exercise and following a healthy diet (eat your vegetables!) are also important—as are continuing to wear a face mask and practicing social distancing. The better shape you keep yourself in from a physical, mental and financial standpoint, the more you’ll be able to give back to society.

For those of you seeking to follow an ESG strategy, be it due to environmental, social or governance issues, make sure you stay on a path to achieve financial freedom. The same applies to other values-based investing, such as following religious beliefs. While it is possible to do well by doing good, every restriction you place on what you’ll invest in reduces the universe of potential investments you will have to choose from.

21. Be a mindful investor. Slow down and carefully consider each investment choice before making a decision. Ensure that the transaction you are about to enter makes sense given your investing time horizon, which may be 30 years or longer, and that it makes sense given your buy and sell rules. A common trap that investors fall into is to let short-term events impact decisions that should be long-term in nature. If you think through your decision process, you may well find yourself making fewer, but smarter, investment decisions.

22. Take a deep breath. Often, the best investing action is to simply take a deep breath and gather your composure. Short-term volatility can fray anyone’s nerves, but successful investors don’t let emotions drive their trading decisions. It’s okay to be scared; it’s not okay to make decisions that could impact your portfolio’s long-term performance based on short-term market moves. If you find yourself becoming nervous, tune out the investment media until you get back into a calm state of mind and then focus on resolutions #1, #2, #3 and #4 (found in last week’s Investor Update). Success comes from being disciplined enough to focus on your strategy and goals and not on what others think you should do.

“I found the road to wealth when I decided that part of all I earned was mine to keep. And so will you.”  The Richest Man in Babylon

Finally, remember that you have a life outside of the financial markets. Investing is merely a means to an end. Put the majority of your energy into activities you truly enjoy, including spending time with family and friends.

References:

  1. https://www.aaii.com/learnandplan/aboutiiwbp
  2. https://www.forbes.com/sites/jrose/2019/09/26/ways-to-build-wealth-fast-that-your-financial-advisor-wont-tell-you

Avoiding Investing Mistakes

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“You have to learn how to value businesses and know the ones that are within your circle of competence and the ones that are outside.” Warren Buffett

Research shows that most active investors underperform the market over the long-term, according to CNBC. In reality, profitable day traders make up a very small proportion of all traders. Only 1.6% of all day traders are profitable in an average year, according to an Haas School of Business University of California, Berkeley, study. This means that’s roughly ninety-nine out of every one-hundred day traders fail and lose money. And, “overconfidence can explain high trading levels and the resulting poor performance of individual investors,” Brad M. Barber and Terrance Odean of the University of California, Berkeley concluded.

These facts makes it clear that the odds are stacked against the ordinary retail trader or investor. Thus, you have to tread carefully if you want to achieve success over the long term.

Building an investment framework

Multitudes of successful investors, including both Berkshire-Hathaway’s billionaires Warren Buffett and Charlie Munger, believe it is essential to avoid high-risk equity investments at all costs. This means avoiding investments and businesses that have a high chance of failure. It also means avoiding any companies that are difficult to understand or fall outside of your circle of competence.

Following a few basic guidelines can help any investor avoid significant losses from struggling and failing companies.

Another piece of investing advice is not to overpay for companies. If you don’t understand the value or how to value a business, then that is a pretty clear indication that it does not fall inside your circle of confidence, and thus, it might be better to avoid the investment. Buffett believes that the market will eventually favor quality stocks that were undervalued (margin of safety) for a certain time.

Finally, investors shouldn’t rush to get rich quick and they should follow an investment plan and rules. Investors who rush to get rich tend to take unnecessary risks such as borrowing money to purchase stocks, buying stocks they don’t understand or allocating capital to opportunities that seem too good to be true. Moreover, research continues to show that investors who stick with a comprehensive long-term investing plan tend to outperform those who collect stocks and constantly jump in and out of the market. All of these actions can lead to significant losses.

The key investment principle of not being in a rush helps ensure you’re not rushing into anything you don’t understand or taking on too much risk. In short, being patient and not rushing into investments is a very low-tech and straightforward way of trying to eliminate mistakes.

By following this advice, an investor may be able to improve their process and outcome.

In the words of arguably the world’s most successful long-term investor, Buffett states, “We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”

References:

  1. https://faculty.haas.berkeley.edu/odean/papers/Day%20Traders/Day%20Trading%20and%20Learning%20110217.pdf
  2. https://www.cnbc.com/2020/11/20/attention-robinhood-power-users-most-day-traders-lose-money.html

Dividend Growth Stock Investing

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Dividend growth stocks, known for steady dividend increases over time, can be valuable additions to your income portfolio.

Since 1926, dividends have accounted for more than 40% of the return realized by investing in large-cap U.S. domestic stocks, according to American Association of Individual Investors. The 9.9% historical annualized return for stocks is significantly impacted by the payment of dividends. Research shows that if dividends were taken out of the equation, the long-term annual return for stocks would fall to 5.5%.

Dividend stocks have long been a foundation for steady income to live on and a reliable pathway to accumulating wealth for retirement. Even in times of market stress, companies could be counted on to do everything possible to maintain their payouts. Most dividend-paying companies follow a regular calendar schedule for distributing the payments, typically on a quarterly basis. This gives investors a reliable source of income.

This stream of income helps to boost and protect returns. When stock prices move upward, dividends enhance shareholders’ returns. Shareholders get the benefit of a higher stock price and the flow of income; when combined, these elements create total return. Dividend payments provide a minimum rate of return that will be achieved, as long as the company does not alter its dividend policy. This helps cushion the blow of downward market moves.

Yet, dividend stocks typically don’t offer dramatic price appreciation, but they do provide investors with a steady stream of income.

“I do not own a single security anywhere that doesn’t pay a dividend, and I formed a mutual-fund company with that very simple philosophy.” Kevin O’Leary

Kevin O’Leary, known to many as “Mr. Wonderful”, is Chairman of O’Shares Investments and can be seen on the popular TV show Shark Tank, invests only in stocks that have steady “cash flow” and “pay dividends” to shareholders.  He looks for stocks that exhibit three main characteristics:

  1. First, they must be quality companies with strong financial performance and solid balance sheets.
  2. Second, he believes a portfolio should be diversified across different market sectors.
  3. Third, and perhaps most important, he demands income—he insists the stocks he invests in pay dividends to shareholders.

Kiplinger

Power of Dividend Investing

Dividends are a commitment by a company to distribute a portion of its earnings to shareholders on a regular basis. Once companies start paying a dividend, they are reluctant to cut or suspend periodic the payments.

Dividends are payments that companies make to shareholders at regular intervals, usually quarterly. Dividends and compounding may be a strong force in generating investor returns and growing income.

Dividend-paying stocks are not fancy, but they have a lot going for them. Dividends have played a significant role in the returns investors have received during the past 50 years. Going back to 1970, 78% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding.

“High” dividend yield stocks beat “Highest”

Investors seeking dividend-paying investments may make the mistake of simply choosing those that offer the highest yields possible. A study conducted by Wellington Management reveals the potential flaws in this thinking.

The highest-yielding stocks have not had the best historical total returns despite its ability to pay a generous dividend. The study found that stocks offering the highest level of dividend payouts have not always performed as well as those that pay high, but not the very highest, levels of dividends.

With the economy in recession, equity income investors may be at risk of dividend cuts or suspensions in their portfolios. Dividend quality matters more today than it has in a long time. Thus, it’s important to select high quality U.S. large-cap companies for their profitability, strong balance sheets and dividend quality, which increase the likelihood that they will be able to maintain and grow dividends paid to investors even during periods of economic uncertainty.

Income-producing dividend stocks

Dividends have historically played a significant role in total return, particularly when average annual equity returns have been lower than 10% during a decade. Seek dividend stocks that possess the following characteristics:

  • Currently pays a dividend;
  • Dividend yield above bench mark yields;
  • Higher dividend payments this year relative to last year, or a reasonable expectation that future dividend payments will be raised (in certain cases, a company that recently initiated a dividend will be considered if there is a reasonable expectation that it will increase its dividend in the future);
  • A free-cash-flow payout ratio below 100%(utility stocks are allowed to have a ratio above 100% if free cash flow is positive when calculated on a pre-dividend basis);
  • Improving trends in sales and earnings;
  • A strong balance sheet, as measured by the current ratio and the liabilities-to-assets ratio;
  • An attractive valuation, as measured by the price-earnings ratio;
  • Has no more than one class of shares; and
  • Dividends are paid as qualified dividends, not non- dividend distributions.

Dividend Growth Key to Outperformance

You should invest in corporations that consistently grow their dividends, have historically exhibited strong fundamentals, have solid business plans, and have a deep commitment to their shareholders. They also demonstrate a reasonable expectation of paying a dividend in the foreseeable future and a history of rising dividend payments.

You should also take into consideration the indicated yield (projected dividend payments for the next 12 months divided by the current share price) for all stocks, but place a greater emphasis on stocks with the potential to enhance the portfolio’s total return than those that merely pay a high dividend.

The market environment is also supportive of dividends. A pre-pandemic strong US economy has helped companies grow earnings and free cash flow, which resulted in record levels of cash on corporate balance sheets. This excess cash should allow businesses with existing dividends to maintain, if not grow, their dividends. And while interest rates have risen from historic levels, they’re expected to stay stable for another year or so. This means dividend- paying stocks should continue to offer attractive yields relative to many fixed-income asset classes.

Furthermore, dividend growers and initiators have historically provided greater total return with less volatility relative to companies that either maintained or cut their dividends. There is ample evidence that dividend growers outperform other stocks over time with much lower volatility. For instance, a Hartford Funds study of the past 50 years showed dividend growers outperforming other dividend payers by 37 basis points annually and non-dividend payers by 102 basis points.

One reason dividend growers tend to outperform may be the expanding earnings and cash flow and shareholder-friendly management teams that often characterize these companies. In addition, consistent profitability, solid balance sheets and low payouts enable dividend growers to weather any economic storm.

Trends that bode well for dividend-paying stocks include historically high levels of corporate cash, historically low bond yields, and baby boomers’ demand for income that will last throughout retirement.

Traits of consistent dividend payers

Today’s historically low interest rates have caused investors to invest heavily in dividend- paying stocks and strategies, which has helped bolster their performance. This trend shows no sign of abating as long as interest rates continue to remain relatively low, and demand for these investments will only grow as investors continue to seek income and return.

Here are several financial traits investors should look for in consistent dividend payers:

  • Relatively low payout ratios. A payout ratio measures the percentage of earnings paid out as dividends. The median is 38% for S&P 500 companies, according to Goldman Sachs. In theory, the higher the ratio, the less financial flexibility a company has to boost its dividend
  • Reasonable debt levels. As with payout ratios, this isn’t a one-size-fits-all metric. But if a company has a big debt load, there’s less cash available for the dividend.
  • Strong free cash flow. This typically measures operating cash, minus capital expenditure. It’s important for a company to cover its dividend with its free cash flow.
  • Stable earnings growth. Put another way, dividend investors should be wary of companies with volatile earnings, which can pressure the ability to maintain, let alone raise, payouts.

It’s important to know that not all dividends are treated the same from a tax perspective.

There are 2 basic types of dividends issued to investors:

  • Qualified dividends: These are dividends designated as qualified, which means they qualify to be taxed at the capital gains rate, which depends on the investor’s modified adjusted gross income (MAGI) and taxable income (the rates are 0%, 15%, 18.8%, and 23.8%). These dividends are paid on stock held by the shareholder, which must own them for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. This means if you actively trade stocks and ETFs, you probably can’t meet this holding requirement.
  • Nonqualified dividends: These dividends are not designated by the ETF as qualified because they might have been payable on stocks held by the shareholder for 60 days or less. Consequently, they’re taxed at ordinary income rates. Basically, nonqualified dividends are the amount of total dividends minus any portion of the total dividends treated as qualified dividends. Note: While qualified dividends are taxed at the same rate at capital gains, they cannot be used to offset capital losses.

Dividend growth stocks, known for steady dividend increases over time, can be valuable additions to your income portfolio. A dividend grower typically has a cash-rich balance sheets, formidable cash flow and meager payouts allowing room for more dividend growth. Additionally, dividend growth stocks can provide an hedge against inflation by providing a bump in income every time the dividend is hiked.

References:

  1. https://www.aaiidividendinvesting.com/files/pdf/DI_UsersGuide_12.pdf
  2. https://www.hartfordfunds.com/dam/en/docs/pub/whitepapers/WP106.pdf
  3. https://www.kiplinger.com/investing/stocks/dividend-stocks/602692/dividend-increases-stocks-announcing-massive-hikes
  4. https://www.valdostadailytimes.com/news/business/kevin-o-leary-says-thanks-a-billion-as-aum-passes-1-0-billion-for-o/article_0c22d134-4004-5bc5-868b-c705e26194cc.html
  5. https://vgi.vg/37Gls7y

Past performance does not guarantee future results. Dividend-paying stocks are not guaranteed to outperform non-dividend-paying stocks in a declining, flat, or rising market.

Saving and Investing

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“The easiest way to wealth are saving and investing in your mind and in appreciating assets.”

Save and invest today for the life and financial freedom you want later. Investing for the long-term is the only way to truly build wealth and achieve financial freedom.

Retirement doesn’t mean what it used to for a lot of Americans. It used to be something you could count on — and when it came, you were going to pursue the goals and lifestyle you dreamed about and love.

Today, many Americans don’t believe that they will retire, while others are not waiting until retirement and are doing what they love now.

Regardless of your unique circumstances or life’s priorities, it important to save and invest now so later the resulting financial freedom will allow you – in a tax advantaged way – to enjoy a better and happier life later.

A smart investor:

  • Plans for life’s unexpected challenges and investing in uncertain times
  • Conducts research on a product before investing
  • Assesses the impact of fees when choosing an investment
  • Understands that risk exists in all investments
  • Avoids “get rich quick” and “can’t lose” schemes
  • Recognizes the power of compound interest
  • Recognizes the importance of diversification
  • Plans for and invests according to his/her future needs and goals
  • Recognizes the benefit of long-term, regular and diversified investment
  • Verifies that an investment professional is licensed

Establish Emergency Savings

Unexpected emergencies often sabotage our financial goals, so getting in a savings mindset and building an emergency fund is crucial. Start small and think big by setting a goal of a $500 rainy day fund. Once you’ve reached that goal, it will be easy to continue!

Open Your Savings Account

If you don’t have a savings account, now’s the time! Ensure your savings account is federally insured with a reputable financial institution with no fees (or low fees).

Set up Automatic Savings

The easiest way to save is to save automatically!

Choose the amount you would like to automatically save each period. Even $10-50 of your paycheck, weekly or bi-weekly, can provide substantial savings over time.

Contact your employer to set up a direct deposit into your savings account each pay period or set up an automatic transfer from your checking account to your savings account at your financial institution.

Even small amounts, saved automatically each pay period, make a big difference.

Get Serious About Reducing Your Debt

Paying down debt is saving!

When you pay down debt, you save on interest, fees, late payments, etc. Not only that, by having savings you’re less likely to need credit for emergencies – allowing you to keep a lower credit usage percentage.

When you reduce your debt, you save on interest and fees while maintaining or improving your credit score! Create a debt reduction plan that works best for you. Utilize America Saves resources to see the different options to pay down debt.

Get Clear On Your Finances

Create a Spending and Savings Plan that allows you to easily see your income, expenses, and anything leftover. Once you have a clear view of your finances, you can determine where to make changes and what else you should be saving for based on your financial goals.

It’s always the right time to create a saving and spending plan (aka a budget). It’s also a good idea to revisit that plan annually or when a major shift occurs in your income or expenses.

Here are several tips to help ensure that your money is working smarter and harder for you.

Step 1. Determine your income.

To create an effective budget, you need to know exactly how much money you’re bringing in each month. Calculate your monthly income by adding your paychecks and any other source of income that you receive regularly. Be sure to use your net pay rather than your gross pay. Your net pay is the amount you receive after taxes and other allocations, like retirement savings, are deducted.

Step 2. Determine your net worth which is your assets minus your liabilities

Net worth is assets minus liabilities. Or, you can think of net worth as everything you own less all that you owe.

Calculating your net worth requires you to take an inventory of what you own, as well as your outstanding debt. And when we say own, we include assets that you may still be paying for, such as a car or a house.

For example, if you have a mortgage on a house with a market value of $200,000 and the balance on your loan is $150,000, you can add $50,000 to your net worth.

Basically, the formula is:

  • ASSETS – LIABILITIES = NET WORTH

And by the way, your income is not included in a net worth calculation. A person can bring home a big paycheck but have a low net worth if they spend most of their money. On the other hand, even people with modest incomes can accumulate significant wealth and a high net worth if they buy appreciating assets and are prudent savers.

Step 3. Track your cash flow which is both your expenses and your spending.

This step is essential. It’s not enough to write out your actual expenses, like rent or mortgage, food, and auto insurance, you must also track what you are spending.

If you’ve ever felt like your money “just disappears,” you’re not the only one. Tracking your spending is a great way to find out exactly where your money goes. Spending $10 a day on parking or $5 every morning for coffee doesn’t sound like much until you calculate the total cost per month.

Tracking your spending will help you pinpoint the areas you may be overspending and help you quickly identify where you can make cost-efficient cuts.  Once you’ve written out your expenses and tracked your spending habits, you’re ready for the next step.

Step 4. Set your financial goals.

Now you get to look at your present financial situation and habits and decide what you want your future to look like. Ask yourself what’s most important to you right now? What financial goals do you want to achieve?

Some common goals include building an emergency fund, paying down debt, purchasing a home or car, saving for education, and retirement.

Step 5. Decrease your spending or increase your income.

What if you set your financial goals and realize there’s not enough money left at the end of the month to save for the things you want?

You essentially have two choices. You can either change the way you manage your current income or add a new source of income. In today’s gig economy, it’s easier than ever to add a stream of income, but we know that everyone’s situation is different, and that’s not always an option.

Even if you can add income, you may have identified some spending habits you’d like to change by decreasing how much you spend.

Take a look back at your expense tracking. For the nonessential items, consider reducing your spending. For example, if you find that you are spending quite a bit on entertainment, like movies or dining out, reduce the number of times you go per month.

Then apply the money that’s been freed up to your savings goals.

For more ideas on how to increase your savings, read 54 Ways to Save.

Step 6. Stick to your plan.

Make sure you stick to your spending and savings plan. To make saving more efficient, set up automatic savings so that you can set it and forget it! Saving automatically is the easiest way to save.

Reassess and adjust your plan whenever you have life changes such as marriage, a new baby, a move, or a promotion.

Following your plan ensures that you’re financially stable, are ‘thinking like a saver,’ and better prepared for those unexpected emergencies.

References:

  1. http://www.worldinvestorweek.org/key-messages.html
  2. https://americasaves.org/media/yordmpza/7steps.pdf
  3. https://old.americasaves.org/blog/1754-creating-a-budget-for-your-family

Top 10 Investing Terms Google Search

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Investing can feel intimidating when you’re just starting out, but it won’t feel that way forever. If you take things one step at a time, you’ll be a seasoned investor before you know it.

Every successful investing journey starts with a set of clear and concise goals, whether they’re as big as retirement or as small as wanting to save for new tires for your vehicle. It’s important to determine and write down what are your savings, investing and wealth building goals.

Additionally, before you start investing, it’s important that you’ve paid off your credit card and consumer debt, that you’re not investing money or capital that you will need within the next six months to three years, and that you have created emergency savings with six to twelve months of essential expenses in cash or cash equivalence.

Here are the top 10 investing terms people search on Google the most:

Search engine data is a great barometer for what’s really on people’s minds, according to Vanguard Investments —and if you’ve ever felt a little embarrassed about googling an investing term you think most people already know about, take comfort in the fact that there are millions of people out there who have exactly the same question.

References:

  1. https://investornews.vanguard/the-top-10-investing-terms-people-google-the-most/