Tag Archives: Investment

Passive Investing

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

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

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

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

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

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

John ‘Jack’ Bogle

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

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

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

Early investing is better than perfect investing

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

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

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

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

Don’t peek; Set it and forget it

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

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

Keep it simple

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

References:

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

Secret to Financial Success

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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

Corporations: Value Based and Purpose Driven

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“Doing good is good for business”

According to one corporate Chief Marketing Officer who spoke at CES 2020, sixty-three percent (63%) of global consumers purchase items from companies with purpose. Said another way, a majority of global consumers, either consciously or unconsciously, purchased goods and services from companies whose overriding purpose and values were to make the world better. Purpose must be more altruistic than just increasing shareholders returns through capital gains and growing revenue, cash flow, earnings and dividends.

Salesforce.com

Marc Benioff, founder and Co-CEO of Salesforce.com, strongly advocated that corporations, especially big technology companies, must be a force for good and that brands can play a major role in doing good. He conveyed the message during a C-Suite session this month at CES 2020 that businesses can be mutually financially successful, sustainable and philanthropic business. He stated the point that a business can and should successfully serve the interests of all stakeholders, which includes the planet. In his opinion, every corporate CEO should adopt a public school, public hospital or combat homelessness in the community they operate. In short, all stakeholders have to matter; and, the planet and local community are key stakeholders.

“Don’t read people’s lips; Watch their feet.”

Marc’s company, Salesforce.com, from its beginning is 1999, has made trust its major value and serving all stakeholders’ interests which include giving back to its community a core purpose. Putting action to their words, the company has directed one percent (1%) of corporate resources which is over $300 million (profits, equity, and time) into giving back to the community. He went as far as proposing a corporate tax to battle homelessness. As a result, Salesforce.com has been regularly ranked as one of the best places to work in America and has had a 4,000 percent return on investment (ROI) for their shareholders.

“Businesses are the greatest platform for change.”

In his opinion and how he designed Salesforce.com, businesses are the greatest platform for change and people are basically good; his intent when he left Oracle to start Salesforce.com was to create a company culture based on trust and optimized to enable employees to do good. He felt that “…purpose is defined by the company; it cannot be enforced”.

Stakeholder Capitalism

Stakeholder capitalism, Marc Benioff opined, is a more fair, a more just and a more equitable form of capitalism than its predecessor. It means paying men and women the same. It’s means embracing values of trust, truth and doing the right thing over time. He often asks technology companies’ CEO’s and boards what are their priorities, what are their highest values, and what is truly important to them. Since in his view, making money is easy; doing the right thing takes effort and dedication.

But, leadership is about who you are and what you do. CEO’s of major technology companies must look at their values and purpose. They must assess whether they’re using these influential platforms to make the world better or just to make money. Despite the recent negative news surrounding big technology companies like Facebook on issues of privacy and impacting the U.S. Presidential elections, Marc stated that they can do both…make the world better for all stakeholders and make money for shareholders.

Don’t Just Save…Value Invest

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Make the most of your money and that means investing.

For many Americans, investing can appear to be a frightening gamble. Memories of the 2008 financial crisis devastated investment accounts with paper losses more than ten years ago create the reluctance among many to invest.

However, in order to beat inflation and ensure that your savings will work for you long term, it’s crucial to invest in growth-oriented investments such as the stock market. Whether through an employer-sponsored 401(k) plan, a traditional or Roth IRA, an individual brokerage account or somewhere else, to build wealth and financial security, individuals must invest in the equity stock market. And, it is important to start investing as early as you can to give your money as much time as possible to grow.

Valuation matters, and it matters a lot.

Value investing rarely performs well in the short run. This is especially true during strong bull markets. Popular non-GARP (growth at a reasonable price) stocks are likely to be overvalued whereas unpopular value stocks will be where the best bargains can be found.

Consequently, being a value investor means being a patient investor and implies that an investor have a long-term mindset. Value investing rarely produces short-term results, because value investing usually also implies investing in out of favor stocks. This unpopularity is often why they have become bargains.

Moreover, value stocks are typically inexpensive for good reasons. Therefore, we need to ascertain whether the discounted stock price is justified or perhaps an overreaction by investors. These judgments can help us determine the level of risk we are facing and if we are being adequately compensated for taking it by the low valuations or not.

Additionally, in the long run value stocks often dramatically outperform and very often do so by taking on significantly less risk than other strategies such as momentum, or in many cases even growth. This is attributed to the fact that the risk is being mitigated by low valuation (price) and margin of safety.

As a result, the key benefit of value investing is the valuation risk mitigation element. Research demonstrates that stocks that are properly valued, or undervalued, are more defensive in a volatile or bear market.

Margin of Safety

Margin of safety is the difference between the intrinsic value of a stock against its prevailing market price. Intrinsic value is the actual worth of a company’s asset, or the present value of an asset when adding up the total discounted future income generated:

  • Deep value investing – buying stocks in seriously undervalued businesses. The main goal is to search for significant mismatches between current stock prices and the intrinsic value of these stocks. This kind of investing requires a large amount of margin to invest with and takes lots of guts, as it is risky.
  • Growth at reasonable price investing – choosing companies that have positive growth trading rates which are somehow below the intrinsic value.

Margin of safety serves as a cushion against errors in calculation. Since fair value is difficult to accurately predict, safety margins protect investors from poor decisions and downturns in the market.

Source: https://www.cnbc.com/2020/01/07/how-much-money-youd-have-if-you-invested-500-dollars-a-month-since-2009.html

Goals are Key

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“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

The 5 Step Guide to Avoid Making Investment Mistakes

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“The only man who never makes a mistake is the man who never does anything.”

If you apply this famous quote by Theodore Roosevelt to investing, the easiest way to avoid mistakes while investing is by not investing at all. But, that is the biggest investment mistake one can make.

Investing is important to build wealth in the long term. However, just investing is not enough as investing right is equally important.
— Read on www.entrepreneur.com/article/343454

Why many Americans don’t have brokerage accounts | Yahoo Finance

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A new survey from JPMorgan Chase revealed that 21% of Americans don’t have brokerage accounts, or have any other way to invest other than their company 401K or pension plan.

Even a few hundred dollars a month put in a brokerage account, invested in the stock market and allowed to grow over multiple decades can make a difference in the long term.

Please go to: finance.yahoo.com/video/why-many-americans-don-t-142910567.html

Retirees: Don’t Make Mistakes Before a Correction | Kiplinger

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Take some lessons from the mistakes many retirees made during the downturn that socked stocks in 2008. By adjusting accordingly, you don’t have to fear outliving your retirement portfolio, even if you’re about to retire.

How can someone who’s approaching retirement, or is already retired, better handle the next financial crisis?

Although many might say the economy is going through a healthy pullback, there is no doubt that another financial crisis will come at some point. Be sure to avoid making the same mistakes so many retirees did in 2008.

— Read on www.kiplinger.com/article/investing/T047-C032-S014-retirees-don-t-make-mistakes-before-a-correction.html

8 Ways to Help Close a Retirement Income Gap | Wells Fargo

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Have you discovered a gap between the income you’d like to have in retirement and the income you think you’ll get based on your investments and current savings rate? It happens to lots of people.

“They have a number in mind about how much they need to save before they can retire,” says Will Larson, Retirement Planning Strategist at Wells Fargo Advisors. “Sometimes they can get there and sometimes they can’t.”

As concerning as it might be to discover a retirement income gap, knowing it’s there is the first step in closing it — usually by increasing your income and assets, reducing retirement spending, or both.

— Read on communications.wellsfargoadvisors.com/lifescapes/8-ways-close-retirement-income-gap/

Lifestyle changes to make if you want to get rich in 2020

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If you want to build more wealth in 2020, start with these five lifestyle changes endorsed by self-made millionaires.

If your’re looking to build more wealth in 2020, money won’t simply appear — you’re probably going to have to make some changes to reach your goals.

Here are five lifestyle changes that have helped self-made millionaires get to where they are today. If they worked for them, they could also work for you.
— Read on www.cnbc.com/2020/01/03/lifestyle-changes-to-make-if-you-want-to-get-rich-in-2020.html