Tag Archives: Finance

10 Steps to a DIY Financial Plan | Charles Schwab

Posted on by
  • Key Points
      • A financial plan isn’t only for the wealthy and it doesn’t have to cost a penny.
      No matter how much money you have, you can start with a DIY financial plan that will set you up for future success.
      With a good foundation in place, you can feel more confident about your finances and, when the time comes that you might need the help of a professional, you’ll be that much farther ahead.

    Did you know that 78 percent of people with a financial plan pay their bills on time and save each month vs. only 38 percent of people who don’t have a plan? That’s a pretty powerful statistic if you ask me. Or would it surprise you to learn that 68 percent of planners have an emergency fund while only 26 percent of non-planners are financially prepared to cover an unexpected cost?

    When I hear stats like these that were recently reported in a Schwab survey, it just reinforces my belief that everyone—no matter their financial situation—can benefit from a financial plan. So why aren’t more people planners? Usually it’s because either they don’t think they have enough money or they think a financial plan costs too much. But, as I’ve said many times, neither is the case.

    In fact, you can map out your own financial plan. That way, not only won’t it cost you a penny, but you stand to reap the long-term benefits. Here’s how to get started mapping out your financial future with a DIY plan.
    — Read on www.schwab.com/resource-center/insights/content/10-steps-to-diy-financial-plan

    Accumulating Wealth

    Posted on by

    The wealthy accumulate wealth by being frugal

    Frugality – a commitment to saving, spending less, and sticking to a budget – is a key factor in accumulating wealth, according to DataPoints’ founder, Dr. Sarah Stanley Fallaw.  Dr. Fallaw is also the co-authored “The Next Millionaire Next Door: Enduring Strategies for Building Wealth“.

    img_0788

    In an University of Georgia’s financial planning performance lab research paper examining the topic of “what does it take to build wealth over time”, the key findings were that those who were successful at accumulating wealth frequently exhibited the following behaviors:

    • Spending less than they earned
    • Having a long-term outlook on their financial future
    • Maintaining sound financial records
    • Keeping up with financial markets
    • Saving regardless of income level

    Essentially, her research shows that anyone can accumulate wealth if they know the right steps to take. And, if individuals possess a certain set of characteristics, they may be more likely to become wealthy, according to Dr. Fallaw, who is also director of research for the Affluent Market Institute.

    In her research, she found that six behaviours, which she called “wealth factors,” are related to net worth potential, regardless of age or income:

    • Frugality, or a commitment to saving, spending less, and sticking to a budget
    • Confidence in financial management, investing, and household leadership
    • Responsibility, which involves accepting your role in financial outcomes and believing that luck plays little role
    • Planning, or setting goals for your financial future
    • Focus on seeing tasks through to their completion without being distracted
    • Social indifference, or not succumbing to social pressure to buy the latest thing

    In order to accumulate wealth, it is imperative for investors to understand that their underlying financial behavior and habits matter significantly. DataPoints research supports the notion that, “…individuals who successfully accumulate wealth often engage in basic and identifiable productive financial management behaviors.” And, they are often “socially indifferent” to the latest “must haves” and they resist the “lifestyle creep,” which is the tendency to spend more whenever they earn more.

    To properly build wealth, financial experts recommend saving 20% of your income and living off the remaining 80%. Many wealthy individuals, who religiously follow this principle, espoused the freedom that comes with spending and living below their means.

    Reference

    1. Grable, J. E., Kruger, M., & Fallaw, S. S. (2017). An Assessment of Wealth Accumulation Tasks and Behaviors. Journal of Financial Service Professionals, 71(1), 55-70.
    2. https://www.datapoints.com/2017/04/06/tasks-of-wealth-accumulators/
    3. https://apple.news/A4YIQ2ahsSKqzUG3rh1PmTQ

    Financial Planning

    Posted on by

    It’s not about how much money you earn. It’s what you do with the money that matters.

    According to Schwab’s 2019 Modern Wealth Survey, more than 60 percent of Americans who have a written financial plan feel financially stable, while only a third of those without a written financial plan feel that same level of comfort. Those with a plan also maintain healthier money habits when it comes to saving and demonstrate good investing behavior.

    The goal of financial planning is to make your money goals a reality. Smart financial planning and long term investing involves in the utmost, spending less than you earn, saving and investing a modest amount each month, and accumulating wealth to end up with the financial assets to retire comfortably for 30 years or more.

    Developing a financial plan will require an investor to identify their short-, intermediate- and long-term goals, and to create a long term investment strategy for achieving them. Think of a financial plan as a written planning guide to remind you of what you want, where financially you want to be in the future, and what it will take to get there. Despite the benefits of planning, Schwab’s survey shows that only 28 percent of Americans have a financial plan in writing.

    Financial Self assessment

    A sound financial plan begins by outlining the investor’s goals as well as any significant constraints. Defining these elements is essential because the plan needs to fit the investor’s current reality. Before creating a financial plan, individuals should first perform a quick self-evaluation:

    • Are you currently spending more than you earn?
    • How much have you already saved?
    • What is your current net worth?
    • Have you created an emergency fund with three to six months of expenses?
    • Are you saving for kid’s college, retirement, or to purchase a home?
    • How much money is available for investing?
    • What is your risk tolerance?
    • Are you buying a stock for fundamental or technical reasons?
    • Which investing style do you prefer (e.g., growth or value, trend or countertrend)?
    • Determine your view of market sentiment: Is momentum generally tilted up or down?

    Simple Financial Plan

    “I believe that the biggest mistake that most people make when it comes to their retirement is they do not plan for it. They take the same route as Alice in the story from “Alice in Wonderland,” in which the cat tells Alice that surely, she will get somewhere as long as she walks long enough. It may not be exactly where you wanted to get to, but you certainly get somewhere.” Mark Singer, The Changing Landscape of Retirement – What You Don’t Know Could Hurt You

    Regardless of the reams of evidence of how critical planning remains, Americans are not spending the time or resources to plan for their financial future or plan for retirement. However, it is relatively straightforward to create a plan. A simple financial plan will include many of the following parts:

    • A personal net worth statement—a snapshot of what you own and what you owe. This will help you know exactly where you stand, and also give you a benchmark against which you can measure your progress.
    • Cash flow is essentially income minus expenses—exactly how much money comes in and goes out every year, and understand if it is sustainable in the long term. The foundation for a budget includes identifying fixed and what’s discretionary expenses and if necessary, devise a debt management plan.
    • A budget–helps to manage your money, to consider your immediate needs and wants, and to prepare you to achieve your long-term financial goals
    • An Emergency fund–ensure adequate cash on hand to cover three to six months of living expenses to handle any unplanned expenses or loss of income.
    • A debt management plan—is a crucial part of becoming financially responsibilities. Debt can be used smartly to achieve one’s financial goals, or debt can be used poorly to buy things a person may not need with money he or she does not have.
    • A retirement plan—specifying how much you need to save each year to achieve the lifestyle you and your family hope to maintain. This includes a recommendation on how best to maximize Social Security benefits, to incorporate any pension funds and to utilize personal savings.
    • An analysis of how current investment portfolio aligns with short, intermediate and long-term goals.
    • A plan for college education funding offspring.
    • A review of employee benefits, including equity compensation or deferred income planning.
    • A review of insurance coverage—the key is to make sure that you have the right types and amounts and that you aren’t paying for unnecessary coverage.
    • Planning for special needs—for a child, parent, or other dependent.
    • Recommendations for creating or updating your estate plan, including charitable giving and legacy planning

    Financial planning and managing your money:

    1. What are your long term financial goals including a retirement number and what does financial independence look like for you and your family lifestyle dream.
    2. Determine and track your financial net worth (assets – liabilities)
    3. Figure out your personal cash flow (income – expenses) that reflects the money coming in minus money going out…determine the source of money and where it is going…develop a budget.
    4. Align your financial goals to your spending.  Connect your spending habits to your priorities. Objective is to become financial independent in both the short and long term.
    5. Manage health, home owners, automobile, personal liability, long term care and life insurances to manage and mitigate your personal risks.
    6. Avoid debt and reduce taxes legally by starting your own business or investing in tax free or deferred assets.
    7. Create an investment plan and strategy for purchasing assets such as equities, real estate or a business. A plan helps an investor focus on long term goals and helps remove emotions (greed and fear) and bad behaviors from investment decisions.  Markets will always go up and down.  You only lose money if you sell assets and lock in the loss.  Buy real estate in great locations and companies doing sensible things and participate in global growth.
    8. Have a trust and estate plan in place to protect your assets. Ensure your goals and desires for your assets reflect your values and objectives.

    Retirement and Financial Planning and Goals 

    “Our goals can only be reached through a vehicle of a plan in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.” Pablo Picasso

    The first steps of retirement planning are to define your long term retirement and financial goals, to establish your number, and write a retirement plan. 

    Any sound financial plan requires that you figure out your retirement expenses in advance. And, a retirement can now last 30 years. A retirement plan isn’t something you set up once and then leave unattended. A successful retirement plan takes patience, attention, and discipline.

    • Planning for retirement involves identifying assets and sources of income, and matching against retirement expenses.
    • Planning for retirement involves setting financial, health and emotional including spiritual retirement goals.

    An individual may have a higher probability to achieve their goals if they have a specific savings number and long-term goals in mind, which can help keep an individual on track along the way. It gives someone a target against which they can measure progress.

    Key elements of a strong financial plan:

    • An emergency fund
    • A budget to determine cash flow and calculating net worth
    • Paying down and avoiding debt
    • Health and disability insurance
    • Start saving and investing early, pay yourself first and put it on automatic
    • Pay yourself first
    • Create long term goals
    • Saving and investing for retirement and/or college
    • Saving and investing for shorter term goals like vacations or a home purchase
    • Trusts, wills and estate planning

    It is important to find creative ways to spend less — such as exploring local or nearby attractions that are free or less expensive.

    After creating your financial goal or plan, you are bound to have times when you don’t reach your goals or you diverge from your plan. But, just like with a diet, if you make a bad food choice, it doesn’t mean you throw out your new way of healthy eating or exercising. Same thing with financial goals and plan. Americans aren’t saving enough for retirement.

    But how much is enough? Strategies to calculate the size of the nest egg you’ll need for your  golden years. But then life happens, and in life there are unknown variables and unexpected events that can throw a wrench into even the best-laid plans. Still, it’s better to have a plan, rather than to fly blindly into the sunset.

    • One popular rule of thumb is that you’ll need to have saved 10 times your final annual salary by the time you are 67.
    • Another way to calculate this ultimate goal is to look at current living expenses—annual or monthly—and assume that, in retirement, you will incur about 80% of those expenses.
    • Some retirement planning professionals suggest using “the 4% rule” to determine how much retirees can withdraw from their retirement account each year in order to provide a continuing income stream. 

    Sock away as much as you can.

    Power of Compound Interest

    Use the power of compound interest —which is interest earned on top of interest — to potentially enhance returns.  Because compound interest builds on itself over time, investors who start early tend to have a significant advantage over those who wait,

    compounding-no-amtd

    Calculate how much money you may need once you get to retirement.

    There are several common financial retirement concerns individuals have. Managing risks are important for retirees because retirees don’t have time to wait for a recovery of the economy or the market after a down period.

    • Investment Loss – One of the biggest financial fears retirees may have is investment loss. Because the markets move cyclically, there’s a good chance you’ll experience a market downturn during retirement.
    • Running Out of Money – Once you’re close to or in retirement, a market decline cannot be weathered and running out of money becomes a serious concern.
    • Major Health Event – As we get older, it’s common to see an increased need for health care. It’s natural, as a retiree, to worry about a major health event that can set you back financially. But it’s possible to prepare to some degree for such events.
    • Inflationary Effects – Inflation is sometimes considered the “quiet killer” of retirement. Over time, prices rise, making your money less valuable. A dollar today is worth more than a dollar tomorrow. Keeping up with inflation is an important part of retirement planning.

    Although it may seem like a long way off, starting earlier can help you accumulate wealth and deal with unexpected bumps along the way. It’s important to consider:

    • What do you want out of retirement?
    • How much do you currently take in and spend?
    • How much will you need to maintain a comfortable lifestyle?

    As a rule of thumb, you’ll need between 60-80%* of your current income to maintain your standard of living, but this will vary based upon how soon you enter retirement. To help you estimate these considerations use our tools below.

    Financial independence and building wealth comes with the knowledge and financial literacy. It’s okay not to spend more than you earn and sacrifice short term benefit for long term financial independence. Think about the end goal — to secure your well being physically, emotionally and financially!

    Manage Your Investments and Cash Flow

    It’s easy to put things off until tomorrow… or maybe the next day. But with retirement, planning for cash flow (income) and nest egg are required today. And contributing regularly can help you accumulate assets faster.

    Developing a financial plan, monthly budget and learning to stay within their boundaries will help you make these contributions. Additionally, your financial plan and budget will help you track your spending, cash flow, net worth and develop the discipline that can help you when you finally enter retirement.

    When creating a budget, carefully weigh competing demands such as:

    • Paying off debt
    • Managing a mortgage
    • Taking a vacation
    • Raising a family
    • Saving for college or retirement

    See how these financial considerations – and waiting to invest for retirement – can cost you in the long run.

    Implement Your Plan

    After assessing your situation, it’s time to look into available choices and then start investing. When weighing your options, consider:

    • How involved you want to be in managing your assets.
    • Whether there are any benefits to using your employer’s retirement plan.

    Depending on your answers to these questions, some products may be better suited to your needs. If you’re the do-it-yourself-type, an index fund that mimics the S&P 500 may be the best choice. For those who aren’t comfortable with or don’t want to be managing their assets closely, a managed portfolio such as a target date fund might be the right way to get started.

    Evaluate and Adjust Your Plan

    It’s important to monitor your financial plan and investment strategy regularly. As your situation changes, you may need to adjust your allocations or investment strategy. No matter what plan you’re using, or whether you’re doing it on your own or with the help of a financial advisor, it’s important to evaluate your progress from time to time.

    The starting point for financial planning start with goals you can achieve. If you don’t know where you’re going, how can you plan to get there? So before you get into the details of saving, budgeting and investing, take time to think about what’s most important to you and what you want your money to achieve.

    • Have an financial plan that is simple, goal oriented, realistic and actionable.
    • Understand your plan, follow it, and adjust it when things change in your life.

    Put your plan into action.

    • Keep your portfolio diversified with an asset allocation that’s right for your risk tolerance—and stick with it.
    • Don’t wait. If you invest now, you’ll start earning sooner.

    Stay on track.

    • Do periodic checkups to keep your portfolio healthy.
    • Keep in mind that long-term goals are more important than short-term performance.

    References:

    1. https://www.aboutschwab.com/modernwealth2019
    2. https://www.brownleeglobal.com/saving-vs-investing/

    Schwab Sector Views: New Sector Ratings for the New Year | Charles Schwab

    Posted on by

    By Schwab Center for Financial Research

    Macro environment:  Rising stocks and Treasury yields, fading U.S. dollar

    We [Charles Schwab] continue to see a gap between the health of the manufacturing sector and that of the services sector and consumers. Despite recent U.S.-China trade war de-escalation, manufacturing activity remains under strain from ongoing tariffs, new tariff threats and still-elevated trade policy uncertainty, combined with slow global growth. On the other hand, the services sector continues to thrive amid strong consumer confidence and consumption, in large part due to a strong job market. 

    While economic momentum overall has slowed, we do see signs of stabilization in both the United States and abroad. Accommodative monetary (central bank) and fiscal (tax cuts and government spending) policies have provided a strong tailwind for the global economy.

    The signing of a “phase-one” trade deal between the U.S. and China, combined with congressional passage of the new U.S.-Mexico-Canada (USMCA) trade pact, have eased some trade uncertainty. Amid this apparent global economic revitalization and shrinking trade risk, Treasury bond yields have risen, the value of U.S. dollar has declined and U.S. stocks have advanced to record highs.

    However, geopolitical risks—while reduced somewhat—remain elevated, and equity valuations are high. Given this combination, we think bouts of increased volatility and more frequent pullbacks are possible. This doesn’t necessarily mean the rally won’t keep going—it’s likely the strong momentum in stocks may continue until there is a catalyst sufficient to deflate the current extremely bullish investor sentiment—but the risks need to be considered.

    — Read on www.schwab.com/resource-center/insights/content/sector-views

    Uncertain Financial Markets

    Posted on by

    “Don’t gamble. Take all your savings and buy some good stock and hold it till it goes up; then sell it. If it don’t go up, don’t buy it.” Will Rogers

    Since the financial crisis of 2008-2009, the U.S. stock market has been on a long-term uptrend. In the crisis’ aftermath, a nearly 11-year bull rally emerged from its ruins becoming the longest-ever uptrend in Wall Street history.

    And, the American economy is equally robust as consumer spending remains strong and as the unemployment rate (3.5%) remains at the lowest in 50 years. Despite low employment, Federal Fund interest rates still sit near historical lows and the 10-year Treasury yields only 1.8%.

    Financial Crisis

    Bringing back painful financial memories for investors, the financial crisis of 2008-2009 wreaked havoc on the stock market. During the crisis, the S&P 500 index (SPX) lost 38.5% of its value in 2008, making it the worst year since the nadir of the Great Recession in 1931.

    Today, many economists and financial industry pundits conclude that global economies will face an increasingly uncertain and potentially volatile future. Those future concerns range a gambit of political, geopolitical, economic and socio-political issues.

    The uncertainties and concerns include the upcoming U.S. presidential elections, potential turmoil in the Middle East, growing fear regarding cross border spread of the Novel Corona virus, and the growth concerns regarding the economies of the rest of the world economies.

    Investing in an Uncertain Environment

    “Never under estimate the man who over estimates himself…he may not be wrong all the time.” Charlie Munger

    When it comes to investing in an uncertain environment, it is difficult to know what actions to take. But, nobody knows with certainty what is going to happen next in the markets or can predict the direction with certainty of the global economy. Despite the many self proclaimed stock picking experts who promote their ability to forecast the markets and abilities to select the next Amazon-like stock, it important to always remember that no one knows what will happen in or can accurately forecast the future.

    Recently, Charlie Munger, Vice Chairman of Berkshire Hathaway, shared his thoughts about investing in general and regarding Elon Musk and Tesla, specifically. He commented that Elon is “peculiar and he may overestimate himself, but he may not be wrong all the time…”.

    Additionally, Munger commented that he “…would never buy it [Tesla stock], and [he] would never sell it short.” Prudent investors would be wise to heed Munger’s advice and be concerned not only about potential rewards but, more importantly, also concerned about potential risks investing in hot, high flying stocks.

    In Munger’s view, there exist too much “wretched excess” in the market and investors are taking on too much unnecessary risk. He worries that that there are dark clouds looming on the horizon. And, he believes markets and investors are ill-prepared to weather the coming market “trouble”.

    References:

    1. https://www.marketwatch.com/story/wretched-excess-means-theres-lots-of-troubles-coming-warns-berkshire-hathaways-charlie-munger-2020-02-12

    Dividends Income Strategy

    Posted on by

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

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

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

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

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

    Divdend income investor.

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

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

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

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

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

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

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

    Dividend Payout Date

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

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

    Dividend Payout Ratio

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

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

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

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

    High Dividend Yield

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

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

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

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

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

    Dividend-Growth Strategies

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

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

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

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

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

    Sources:

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

    Secret to Financial Success

    Posted on by

    The secret to financial success is positive cash flow.

    Positive cash flow means that you’re earning more than you’re spending monthly. It means your cash inflows exceed your cash outflows.

    And, if you have positive cash flow, you have the basis for building and achieving financial success. How you build that financial success depends on your long-term financial goals, personal risk tolerance and your existing lifestyle and habits.

    Yet, no matter how wealthy you are or how much you earn in monthly income, you must manage your spending. Many professional athletes and entertainment celebrities have earned millions of dollars of income during a professional career only to file for bankruptcy during their lifetimes due to reckless or undisciplined spending. Consequently, spending matters greatly.

    Cash Flow Basics

    To accumulate wealth, you must spend less than you earn. This is the fundamental law of money:

    [WEALTH] = [WHAT YOU EARN] – [WHAT YOU SPEND]

    This law tells us three things about cash flow:

    • If you spend more than you earn, you are losing wealth — a negative cash flow. Negative cash flow is generally an indication that you are living beyond your means and are likely incurring debt.
    • If you spend less than you earn, you are accumulating wealth — a positive cash flow. Positive cash flow may allow for you steps to save, invest or even to pay off debts.
    • If you spend equal to what you earn, you are neither accumulating or losing wealth — a neutral cash flow. Neutral cash flow is spending to the penny exactly what you earn.

    Subsequently, the greater the difference or delta between earning and spending, the faster you lose (or accumulate) wealth. And, there are only three things you can do to increase your cash flow: spend less or earn more or do both.

    Smart personal finance is very simple. Everything else — paying yourself first, investing ten to twenty percent of what you make, building an emergency fund — is done in support of and dependent on this fundamental law of positive cash flow.

    References:

    1. https://farnoosh.tv/?s=Financial+sUccess
    2. https://www.getrichslowly.org/the-power-of-positive-cash-flow/
    3. https://financialwellness.utah.edu/counseling/cash-flow.php

    Goals are Key

    Posted on by

    “When you define your goals, you give your brain something new to look for and focus on. It’s as if you’re giving your mind a new set of eyes from which to see all the people, circumstances, conversations, resources, ideas, and creativity surrounding you.” Darren Hardy, author of Compound Effect

    With goals, investors can create a realistic plan for achieving their investing objectives within a certain time frame. Since one of the biggest mistakes investors make is confusing investing with stock picking or trading. Ask many people how their money is invested and they might quickly jump to tell you the latest hot stock they’ve purchased and the investment thesis that explains why they think it’s going to take off.

    Without an investment plan, what is the goal? Probably just to make some quick, easy money, which neuroscience has shown makes us feel good. Unfortunately, behavioral economics tells us that acting on such impulses tends not to end well. To be true to the term, investing must start with a specific goal corresponding to a set time horizon. The goal itself could be anything: buying a new car in two years; purchasing your first home in five years; or retiring in 40 years. What’s most important is to have the goal be the focus of your approach.

    Once you’ve identified a goal, an investment plan can take shape. How much savings can you devote to it? How much time do you have? How realistic is the goal given the first two questions and the amount of risk you feel comfortable taking? If you choose to work with a Financial Advisor, he or she can help you find answers to these questions, and take you a long way to devising a strategy to help achieve that goal. 

    Know your time horizon

    How long do you plan to hold a stock and what purpose will it serve in your portfolio? Your trade time frame depends on your trading strategy. Generally speaking, traders fit into one of three categories:

    • Single-session traders are very active and are looking to gain from small price variations over very short periods of time.
    • Swing traders target trades that can be completed in a few days to a few weeks.
    • Position traders seek larger gains and recognize that it often takes longer than a few weeks to achieve them
    • Determine your entry strategy  Look for entry signals—for instance, divergences from trend lines and support levels—to help you place your trades. The signals you employ and the orders you use to make good on them hinge on your trading style and preferences.

    Plan your exit

    When it comes to an exit strategy, plan for two types of trades: those that go in your favor and those that don’t. You might be tempted to let favorable trades run, but don’t ignore opportunities to take some profits.

    For example, when a trade is going your way, you could consider selling part of your position at your initial target price to make gains, while letting a portion run.

    To prepare for when a trade moves against you, you can set sell stop orders underneath a stock’s support area, and if it breaks below that range, you can choose to sell.

    Determine your position size

    Trading is risky. A good trade plan will establish ground rules for how much you are willing to risk on any single trade. Say, for example, you don’t want to risk losing more than 2–3% of your account on a single trade, you could consider exercising portion control, or sizing positions to fit your budget.

    Review your trade performance

    Are you making or losing money with your trades? And importantly, do you understand why?

    First, examine your trading history by calculating your theoretical “trade expectancy”—your average gain (or loss) per trade. To do this, figure out the percentage of your trades that have been profitable vs. unprofitable. This is known as your win/loss ratio. Next, compute your average gain for profitable trades and average loss for unprofitable trades. Then, subtract you average loss from your average gain to get your trade expectancy.

    Profitable trades

    A positive trade expectancy indicates that, overall, your trading was profitable. If your trade expectancy is negative, it’s probably time to review your exit criteria for trades.

    The final step is to look at your individual trades and try to identify trends. Technical traders can review moving averages, for example, and see whether some were more profitable than others when used for setting stop orders (e.g., 20-day vs. 50-day).

    Sticking to it

    Even with a solid trade plan, emotions can knock you off course. This is particularly true when a trade has gone your way. Being on the winning side of a single trade is easy; it’s cultivating a continuum of winning trades that matters. Creating a trade plan is the first step in helping you think about the next trade.

    Source:

    1. Lee Bohl, 5 Steps for a Smart Trade Plan, Fidelity Insights, November 21, 2019
      https://www.schwab.com/resource-center/insights/content/5-steps-smart-trade-plan?cmp=em-QYD
    2. www.morganstanley.com/articles/having-goal-key-to-investing

    Many Americans are feeling these 3 big financial stresses – MarketWatch

    Posted on by

    If you look only at the nation’s low, 3.7% unemployment rate, it would be easy to assume that the economy’s humming and that Americans are feeling great about their finances. But after reviewing five recent notable surveys, I believe many people are actually feeling three big financial pain points now.

    Overall, according to the Bank of America Workplace Benefits Report of 996 retirement-plan participants, just 55% of employees rate their financial wellness as good or excellent, down from 61% a year ago. “That’s something to keep a close eye on,” says Lisa Margeson, head of Retirement Client Experience and Communications at Bank of America.

    — Read on www.marketwatch.com/story/many-americans-are-feeling-these-3-big-financial-stresses-2019-10-02

    Stocks Have Outperform Other Asset Classes

    Posted on by

    For the next decade, which asset class among stocks, bonds, real estate, cash, gold/metals, or bitcoin/cryptocurrency, would be the best vehicle to invest money for the highest long-term total returns?

    Since 1890, the S&P 500 (or its predecessor indexes) has outpaced inflation at a 6.3% annualized rate (when including dividends). Long-term U.S. Treasury Bonds have produced an annualized inflation-adjusted total return of 2.7%. Finally, U.S. real estate has produced an annualized return above inflation of just 0.4%, as judged by the Case-Shiller U.S. National Home Price Index and the consumer-price index.

    Yet, the U.S. stock and bond markets are currently overvalued, and it is plausible that real estate will do better than either stocks and bonds over the next decade.

    According to almost all standard valuation metrics, U.S. equity stocks currently are somewhere between overvalued overvalued. Furthermore, you can only partially explain away this overvaluation because of low interest rates.

    Given stocks’ overvaluation, it’s entirely possible that stocks will over the next decade have the potential to fall short of their historical averages.

    To the contrary, real estate has been relatively undervalued and historically less volatile than the stock market—a lot less as measured by the standard deviation of annual returns.

    As a result, real estate has proven to be less riskier than equities. Yet, the misperception that real estate is riskier has been derived from the leverage typically used when purchasing real estate adds inherent risk to investing in real estate. Essentially, the risk for real estate comes from the leverage, not real estate inherently.

    If there is a major stock bear market in the next decade, real estate might be the better investment just because of it’s lower risk and relatively undervalued.

    Sources:

    1. https://www.marketwatch.com/story/the-single-best-investment-for-the-next-decade-2019-08-08
    2. https://www.marketwatch.com/story/stock-bulls-are-telling-themselves-a-lot-of-lies-about-this-market-2019-06-04